Chapter 24, Problem 1QC

To determine

The Plant-wide overhead allocation rate is computed on the basis of estimated overheads and estimated level of activity for the plant as a whole (which may be labour hours, machine hours, etc). The departmental overhead rate is computed in the way similar to plant-wide overhead rate. The only difference being the different rate computed for separate department (base may be different for each department).

The Correct Statement based on facts of overhead allocation rate both plant-wide and departmental need to be determined.

Answer to Problem 1QC

Solution: d. The Pre-determined overhead allocation rate is based on actual costs.

Explanation of Solution

The Following statements hold true for the plant-wide and departmental overhead allocation rate:

-The Single Plant-wide overhead rate is computed for the plant by dividing the estimated overheads by the estimated activity level (single activity base must be taken for total estimated overheads). This is the simplest method of overhead allocation to various jobs.

-The departmental overhead allocation rate is computed the same way with the difference being instead of single rate, the different departmental overhead rates must be computed taking activity base of departments (which are primary in each department and vary from department to department). This is refined form of allocation of overheads as each department is having different primary activity base.

Based on above explanation, in the given problem, the following statement regarding the overheads allocation rate shall not hold true:

d. The Pre-determined overhead allocation rate is based on actual costs.

Conclusion

To conclude, it must be said that the Statement (d) does not hold true as the pre-determined overhead rate is based on estimated overheads rather than on actual overhead incurred.