What is a Plantwide Overhead Rate?

The plantwide overhead rate is a single overhead rate that a company uses to allocate all of its manufacturing overhead costs to products or cost objects. This is a simplified approach to cost allocation that works well in smaller and simpler businesses.

When to Use a Plantwide Overhead Rate

A plantwide overhead rate is most commonly used in smaller entities with simple cost structures. In this situation, the level of complexity is so low that spreading overhead costs with a single overhead rate for the entire business is likely to be entirely acceptable. More specifically, using a plantwide overhead rate works well in the following circumstances:

The total amount of overhead to be allocated is so small that using multiple allocation rates to achieve a higher level of allocation accuracy is unnecessary;
The services provided by the various company departments are relatively similar (a rarity); or
The single allocation base used is acceptable for allocating all of the overhead costs.

When Not to Use a Plantwide Overhead Rate

A single plantwide overhead rate is not acceptable if a company has a large amount of overhead to allocate, services provided by the various departments are highly differentiated, or it is apparent that a number of different allocation bases should be used. Under these circumstances, it makes more sense to use a small number of cost pools that are separately allocated with different overhead rates. Doing so improves the accuracy of overhead allocation, but increases the amount of time required to close the books. Thus, there is a trade-off between more accounting effort to track and allocate multiple cost pools, and the enhanced financial statement accuracy associated with this additional effort.

Example of a Plantwide Overhead Rate

Nimble Corporation uses 10,000 direct labor hours in its main production facility in a typical month. During this period, it incurs $800,000 of production overhead costs. Since the factory has a relatively simple production process, the controller decides to implement a plantwide overhead rate that is allocated based on the number of direct labor hours. Based on the preceding information, the plantwide overhead rate is $80 per direct labor hour.

Nimble manufactures several thousand units of its Sprightly product, which consumes 8,000 direct labor hours during the month. Based on its plantwide overhead rate, Nimble’s controller assigns $640,000 of the total factory overhead to this product (calculated as 8,000 hours x $80 plantwide rate). In addition, the company manufactures several hundred of its Spry product, which requires another 2,000 direct labor hours. The controller assigns $160,000 of factory overhead to this product (calculated as 2,000 hours x $80 plantwide rate). Thus, all factory overhead is allocated to the two products using a single plantwide overhead rate.