Final answer:
The use of multiple predetermined overhead rates is justified as different departments within larger companies may vary in their labor and machinery intensity, leading to distinct overhead costs.
Step-by-step explanation:
The statement that one department may be labor intensive while another department is machine intensive does explain why multiple predetermined overhead rates are often used in larger companies; hence, the statement is True. Companies use different production methods and technologies, and the overhead costs can vary significantly between departments. It is common for a labor-intensive department to have higher overhead costs related to wages and benefits, while a machine-intensive department may have higher costs related to equipment depreciation, maintenance, and energy consumption.
When unions negotiate higher wages, firms may choose production methods that involve more physical capital and less labour to increase labour productivity. For instance, if the cost of labor increases from $16 to $20 an hour, a firm might find it cost-effective to use more machinery and fewer labor hours, regardless of the exact mix, to minimize the total cost of production.
This adjustment in response to labour costs is an example of how companies react to market changes by choosing different combinations of labour and capital, which is why using multiple overhead rates can more accurately reflect the varying costs in different parts of the company. Therefore, using a single overhead rate for the entire company could distort product costs, leading to incorrect pricing decisions and potentially harming profitability.