Question

Which of the following statements is true with regard to the plantwide overhead rate method?

a.The rate is determined using volume-related measures.
b.It is logical to use this method when overhead costs are not closely tied to volume-related measures.
c.This method uses multiple overhead rates.
d.The rate is determined using measures that are not closely related to volume.
e.The method provides the most accurate means of allocating overhead costs.

Answer 1

The plantwide overhead rate is calculated using volume-related measures, making it suitable when overhead costs are correlated with these measures. It's most accurate when the relationship between overhead and volume is clear.

Step-by-step explanation:

The accuracy of allocating overhead costs using the plantwide overhead rate method is dependent on the firm's cost structure and activities. When opting for this method, answer choice a is correct: The rate is determined using volume-related measures. The rate is usually established based on a single measure like labor hours or machine hours, which are related to volume. Using the plantwide overhead rate is most appropriate when overhead costs have a clear correlation to these volume-related bases. In the case where overhead costs are not closely tied to such volume-related measures, using a plantwide rate might not be the most accurate approach and other methods, such as activity-based costing, could provide better cost allocation.