Question

Which of the following condition(s) favors using departmental overhead rates in place of a plantwide overhead rate?

A) Manufacturing overhead represents a small proportion of total cost.
B) Different jobs or products use the departments to a different extent.
C) Departments use a similar amount of indirect costs.
D) Products spend the same amount of time in each department.

Answer 1

Departmental overhead rates are preferable when different jobs or products use the departments to varying extents, providing a more precise allocation of indirect costs.

Step-by-step explanation:

Departmental overhead rates are favored over plantwide overhead rates when different jobs or products use the departments to a different extent (B). This is because using departmental rates allows for a more accurate allocation of overhead costs to products based on the specific activities they use within each department. If a plant has departments that incur varying amounts of indirect costs, allocating overhead on a departmental basis ensures that each product is charged for the resources it consumes. In contrast, a plantwide overhead rate would spread costs uniformly across all products, regardless of the actual usage, potentially leading to cost distortions and misleading information for decision-making.

Answer: B) Different jobs or products use the departments to a different extent.