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. It is most commonly used in smaller entities with simple cost structures.
Using a plantwide overhead rate is acceptable 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.
Conversely, 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.
In reality, the typical company avoids the use of a single plantwide overhead rate, and instead uses 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.