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Exhibit 6-2: Applicability of Overhead Allocation Methods

From Management Accounting: Concepts, Techniques & Controversial Issues Chapter 6

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Chapter 6 | MAAW's Textbook Table of Contents

Exhibit 6-2
Applicability of Overhead Allocation Methods
Method of
Assigning
Overhead
Number of
Stages
Type of
Allocations
Basis of
Overhead Rates
When
Applicable
Single Plant
Wide Rate
1 From a single
aggregated cost
pool to products.
A production
volume related
activity measure,
e.g., direct labor
hours, machine
hours etc.
Plant produces only one, or a few similar products that consume all indirect resources in the same proportions, e.g., Product X consumes 10% of each indirect resource in the plant.
Single Rate Per Department 2 From service departments to producing departments' single cost pools (overhead accounts), to products. A production volume related activity measure. These may be different for each department. Each department produces only one, or a few similar products that consume all of a department's indirect resources in the same proportions, e.g., Product X consumes 20% of all indirect resources in Department A, 10% of all indirect resources in Department B, etc.
Multiple Activity Based Rates Per Department 2 or More From service departments, to producing departments' activity cost pools, to products. Both production volume related and non-production volume related activity measures, e.g., number of purchase orders, number of setups, etc. Each department produces many products that consume resources within each department in different proportions, e.g., Product X consumes 30% of the power, 15% of the engineering work and 20% of the repair in Department A. Multiple rates are needed in Department A.