Question

Compared to a plantwide overhead rate system, a multiple predetermined overhead rate system is ________?

1) More accurate
2) Less accurate
3) Equally accurate
4) Cannot be determined

Answer 1

A multiple predetermined overhead rate system is more accurate than a plantwide overhead rate system because it allocates overhead costs based on several different allocation bases that better reflect the actual consumption of resources by different products or departments.

Step-by-step explanation:

Compared to a plantwide overhead rate system, a multiple predetermined overhead rate system is considered to be more accurate. This is because a plantwide overhead rate system allocates all overhead costs based on a single base, typically direct labor hours or machine hours, without considering the different activities that incur costs. On the other hand, a multiple predetermined overhead rate system divides the total overhead into different pools, each one with its own allocation base that better represents the actual consumption of overhead resources by different products or departments.

In practice, a multiple predetermined overhead rate system provides a more nuanced approach to allocating overhead costs. For example, in a manufacturing company, one department may use a lot of machine time but little direct labor, while another might be the opposite. Having separate overhead rates for each department or activity allows for a better allocation of actual overhead costs, thus providing more accurate product costing.