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Multiple predetermined overhead rates versus a single predetermined overhead rate - Term Paper Example
Author : damaris16
Finance & Accounting
Pages 4 (1004 words)
Predetermined overhead rates are rates that are used in the determination and application of manufacturing overheads in the inventory process. They are determined before the beginning of the period thorough firstly the activity base amount that the upcoming period will require in terms of support of the operational activities. …
A multiple predetermined overhead rate is a system through which the product cost is estimated. This is where in every single different department in the company a single separate predetermined overhead rate is calculated and then they are summed together. This means that though if they are summed up they produce a single predetermined overhead rate they are present as independent multiple overhead rates of the company’s different departments. This type of estimation of the predetermined overhead rate is important especially in the instance where the products are heterogeneous. This is because as the products move along the various departments they receive uneven effort and attention therefore calling for the different departmental rates in the achieving of equitable and even product costs estimations. The calculation of the single predetermined overhead rate is more common in most companies’ than the multiple predetermined overhead rates. This is largely attributed to the fact tat the single overhead rate is much simpler to estimate than the multiple overhead rates. This is due to the fact that it involves a single calculation of the overheard rate of the whole company’s departments as one while the multiple overhead rates involve calculation of the rates in the different departments separately (Sherman 43). In this reason also it is thus estimated to be less of a cost in resources and time to use the single overhead rate than the multiple overhead rates. Taking for instance a survey conducted on the popularity of the use of the single overhead rate and the multiple overhead rate established that an approximate 50% of companies use both types. This can be attributed to the fact that the multiple overhead rates are more detailed and informative especially the fact that most companies conduct heterogeneous production.