Question

Which of the following is a disadvantage of the departmental overhead rate method? Multiple Choice It may fail to accurately assign many overhead costs that are not driven by production volume. Allows each department to have its own overhead rate. Allows each department to have its own allocation base. The departmental overhead rate is usually more accurate in overhead allocations than the plantwide overhead rate. The departmental overhead rate is consistent with GAAP and can be used for external reporting.

Answer 1

Answer:

The departmental overhead rate is usually more accurate in overhead allocations than the plantwide overhead rate.

Explanation:

Departmental overhead rate is defines as a cost that is charged according to the level of activity in a department. This is used when there is need to apply cost as accurately as possible. For example if Unit A does 15 activities while Unit B does only 2 activities, Unit A will be charged more.

There is usually a standard amount per unit of activity, let's say $5 per unit.

O. The other hand plantwide allocation of overhead entails cost allocation to all departments regardless of activity. This has disadvantage of misrepresentation of cost. There will be underallocation and overallocation of cost between departments.