Plant-wide and Departmental Overheads

 Manufacturing overheads are costs that are indirect, as amount incurred is

not traceable to each unit of production in a direct manner.

 Plant-wide overhead
A typical business would normally prefer a simple and single rate of
overhead absorption (OAR) for entire business (termed ‘plant-wide’). This
rate incorporates all overheads chargeable and consumed by the production.

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 Plant-wide and Departmental Overheads

Parts Department Assembly Department Paint Department

CNG Kit Installation AC Installation Quality Control

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 Plant-wide and Departmental Overheads (cont.)

 Departmental overhead

 This means that a product that goes through and uses only certain
departments will be charged with associated costs of those departments.
 E.g. non-a.c. cars may not be charged air conditioning dept. overheads

 To calculate departmental overhead rate, production is traced first to

department concerned.

© 2009 Prentice-Hall, Inc. 6–3

 Advantages and Disadvantages of
Plant-wide Rate and Departmental Overhead Rate

Plant-wide:
Advantages Disadvantages
• A flat rate is simple to • Different units of production may use different
understand amounts of overheads which plant-wide does not
cater for.

• Required data is easily • Overheads may not be related to just one basis of
accessible apportionment, e.g. direct labour hours

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 Advantages and Disadvantages of
Plant-wide Rate and Departmental Overhead Rate (cont.)

Departmental Overhead:
Advantages Disadvantages
• Allows for more accurate • Complex: overheads for each department is
allocation of overheads calculated and appropriate basis identified

• Makes assumption that departmental overheads

can be proportionate to basis of allocation

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 Plant-wide and Departmental Overheads (cont.)

 Usually in exam & textbook question, plant wise overhead rate are given.

 Plant wise overhead rate = blanket overhead rate

 Apportionment of overhead based on departmental basis or factory basis can

be further extended to nature of individual overhead expense. E.g.

Paint Dept Overheads: apportion basis:?

Assembly Dept Overheads: apportion basis:?
QC Dept Overheads: apportion basis:?
General Overheads (rent, electricity): apportion basis?
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 Plant-wide and Departmental Overheads (cont.)
Overheads can be apportioned based on:

Plant wide basis

Department wide basis

Individual Expense wise basis

= Individual Activity Wise = Activity Based Costing (ABC)

Overheads apportionment is a generalization. We seek to adopt the basis which

is most efficient.
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 Allocation
When items of cost are identifiable directly with some products or departments
such costs are charged to cost centres.

This process is known as cost allocation.

• It is charging of discrete, identifiable items of cost to cost centres or cost units.

• Where a cost can be clearly identified with a cost centre or cost unit, then it can
be allocated to that particular cost centre or unit.

• Cost allocation calls for – Concerned department/product should have caused

the cost to be incurred.

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 Allocation - Examples
 Electricity charges can be allocated to various departments if separate meters are
installed.

 Depreciation of machinery can be allocated to various departments as the machines

can be identified.

 Salary of stores clerk can be allocated to stores department

 Cost of coal used in boiler can be directly allocated to boiler house division.

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 Apportionment
 When cost can not directly be charged to or accurately identifiable with any cost
centres, they are portioned or distributed amongst cost centres on some
predetermined basis.

 This method is known as cost apportionment.

 Wherever possible, overheads are to be allocated.

 However, if it is not possible to charge overheads to a particular cost centre or cost

unit, they are to be apportioned on some suitable basis.

 This process is called as ‘Apportionment’ of overheads.

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