Question

Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide predetermined overhead rate based on direct laborhours, rather than using departmental rates? Explain. No computations are necessary.

Answer 1

Yes, I can expect this because in the real world different products utilize the quantity of overheads differently. Furthermore if the overhead rate is based on plant-wide predetermined OH rate then it more preferable to departmental rates because these plant-wide predetermined OH rate is based on multiple cost drivers not on a single basis for assignment of overheads. The question is basically asking about which costing method must be adopted and as we know that activity based costing (plant-wide predetermined overhead rate) is more preferable than absorption costing (departmental rates).