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What is a plant-wide overhead rate?

Author:
Harold Averkamp, CPA, MBA

Definition of Plant-wide Overhead Rate

A plant-wide overhead rate is often a single rate per hour or a percentage of some cost that is used to allocate or assign a company’s manufacturing overhead costs to the goods produced.

A plant-wide rate could be adequate in the following situations:

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).

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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