What is a plant-wide overhead rate?

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).