Definition of Plant-wide Overhead Rate
A plant-wide rate could be adequate in the following situations:
- There is one root cause of the indirect manufacturing costs
- The company manufactures similar products
- The company has relatively small, consistent amounts of inventory
However, if the company manufactures diverse products, some of which use expensive equipment while some use only inexpensive equipment, or the company wants precise costs for pricing decisions, a plant-wide rate is not appropriate. In response to this situation, manufacturers will use departmental overhead rates and perhaps activity based costing.
Example of Plant-wide Overhead Rate
Let's assume that a company's manufacturing overhead costs (equipment depreciation, electricity, maintenance, supervisors, etc.) is budgeted to be $800,000 for the new year. The company produces similar products and it expects to use 20,000 machine hours. Based on this information, the company's plant-wide overhead rate will be $40 per machine hour. If each product requires 15 minutes of machine time, each product's cost will include $10 of manufacturing overhead (15 minutes = 1/4 hour X $40 per machine hour).