Chapter 2

COST ASSIGNMENT
(Cost Allocation)

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Identify two main methods

used for allocating factory
overhead costs to
products.

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Product Costing
Most companies have accounting
systems that trace revenues to
individual product lines. In
addition, they need to subtract the
cost of manufacturing their product
from revenues in order to
determine the profit from sales.
Determining the cost of the product
11-3
is termed product costing.
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Product Costing
Allocation Methods
Three methods of allocating factory
overhead costs are:
1. Single plantwide factory overhead
rate method
2. Multiple production department
factory overhead rate method

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Product Costing Allocation Methods

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Use a single plantwide

factory overhead rate
for product costing.

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Single Plantwide Factory

Overhead Rate Method
Under the single plantwide
factory overhead rate
method, all of the factory
overhead is allocated to all
products using only one rate.

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REX Company Illustration

REX Company manufactures two
products, snowmobiles and
lawnmowers. Both products are
manufactured in a single factory.
There is $1,600,000 of factory
overhead budgeted for the period.

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REX Company Illustration

Each product is budgeted 10,000 direct
labor hours as shown below:

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Computing Single Plantwide

Factory Overhead Rate
Total budgeted factory overhead costs
Total budgeted plantwide allocation base
$1,600,000 $80 per direct
= labor hour
20,000 direct labor hours

(1,000 × 10 dlh) + (1,000 × 10 dlh)

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Computing Single Plantwide

Factory Overhead
Snowmobile:
$80 per dlh × 10 direct labor hours = $800

Lawnmower:
$80 per dlh × 10 direct labor hours = $800

Factory
Overhead
Cost per Unit
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Single Plantwide Factory Overhead
Exhibit 1
Rate Method—R Company

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The primary advantage of

the single plantwide
overhead rate method is
that it is simple and
inexpensive to apply in
practice.

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Example Exercise 11-1
Single Plantwide Overhead Rate
The total factory overhead for Morris Company is
budgeted for the year at $650,000. Morris
manufactures two office products: a credenza and
desk. The credenza and desk each require 4 direct
labor hours to manufacture. Each product is
budgeted for 5,000 units of production for the year.
Determine (a) the total number of budgeted direct
labor hours for the year, (b) the single plantwide
factory overhead rate and (c) the factory overhead
allocated per unit for each product using the single
plantwide factory overhead rate.
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Example Exercise 11-1 (continued) 2

Follow My Example 11-1

1. Credenza: 5,000 units × 4 direct labor hours =20,000 dlh

Desk: 5,000 units × 4 direct labor hours = 20,000 dlh
40,000 dlh
2. Single plantwide factory overhead rate:
$650,000/40,000 dlh = $16.25 per dlh
3. Credenza: $16.25 per dlh × 4 dlh per unit = $65 per unit
Desk: $16.25 per dlh × 4 dlh per unit = $65 per unit

For Practice: PE 11-1A, PE 11-1B

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Use multiple production

department factory
overhead rates for
product costing.

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Multiple Production Department

Factory Overhead Rate Method
The multiple production
department factory overhead rate
method uses different rates for
each production department to
allocate factory overhead to
products.

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Comparison of Single Plantwide Rate
Exhibit 2 and Multiple Production Department
Rate Methods

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Production Department Factory

Overhead Rates and Allocation
Fabrication Department Overhead Rate:
$1,030,000
= $103 per dlh
10,000 direct labor hours

Assembly Department Overhead Rate:

$570,000
= $57 per dlh
10,000 direct labor hours

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Allocating Factory Overhead

Exhibit 3
to Products—REX Company

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Multiple Production Department
Exhibit 4
Rate Method—REX Company

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Distortion of Product Costs
The differences in factory overhead
for each product using the two
methods are shown below:

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In general, the following conditions may indicate

that a single plantwide factory overhead rate will
lead to distorted product costs.
Condition 1: Differences in production
department factory overhead rates.
Condition 2: Differences among products in
the ratios of allocation base usage within a
department and across departments.

(continued)
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Conditions for Product Cost
Exhibit 5
Distortion—REX Company

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Example Exercise 11-2
Multiple Production Department Overhead Rates
The total factory overhead for Morris Company is budgeted for the
year at $600,000, divided into two departments, which are
Fabrication, $420,000 and Assembly, $180,000. Morris
manufactures two office products: credenzas and desks. Each
credenza requires 1 direct labor hour in Fabrication and 3 direct
labor hours in Assembly. Each desk requires 3 direct labor hours
in Fabrication and 1 direct labor hour in Assembly. Each product
is budgeted for 5,000 units of production for the year. Determine
(a) the total number of budgeted direct labor hours for the year in
each department, (b) the departmental factory overhead rates for
both departments, and (c) the factory overhead allocated per unit
for each product using the departmental factory overhead
allocation rates.

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Example Exercise 11-2 (continued) 3

Follow My Example 11-2

1. Fabrication: (5,000 credenzas × 1 dlh.) + (5,000 desks × 3

dlh.) = 20,000 direct labor hours
Assembly: (5,000 credenzas × 3 dlh.) + (5,000 desks × 1
dlh.) = 20,000 direct labor hours
2. Fabrication Department rate:
$420,000/20,000 direct labor hours = $21.00 per dlh.
Assembly Department rate:
$180,000/20,000 direct labor hours = $9.00 per dlh.

(continued)
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Example Exercise 11-2 (continued) 3

Follow My Example 11-2

c) Credenza:
Fabrication Department: 1 dlh. × $21.00 = $21.00
Assembly Department: 3 dlh. × $9.00 = 27.00
Total factory overhead per credenza……. $48.00
Desk:
Fabrication Department: 3 dlh. × $21.00 =$63.00
Assembly Department: 1 dlh. × $9.00 = 9.00
Total factory overhead per desk………….$72.00

For Practice: PE 11-2A, PE 11-2B

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