Question

Use of a plantwide factory overhead rate assumes that the activities causing overhead costs are the same across all departments and products.

a)True
b)False

Answer 1

The use of a plantwide factory overhead rate assumes that the activities causing overhead costs are the same across all departments and products. However, in reality, this assumption may not hold true.

Step-by-step explanation:

The use of a plantwide factory overhead rate assumes that the activities causing overhead costs are the same across all departments and products. This assumption allows for easier calculation and allocation of overhead costs throughout the organization.

For example, if a company uses a single plantwide factory overhead rate of $10 per direct labor hour, they will allocate $10 of overhead costs to each product for every hour of direct labor used in the production process.

However, in reality, the activities causing overhead costs may vary across departments and products. Some products may require more machine setups or use more machine hours than others, resulting in different overhead cost drivers. In such cases, using a plantwide factory overhead rate may not accurately allocate costs and may lead to distorted product costs.