Overhead Allocation: Plant-wide vs Departmental Rates – Mason Company Examples

Plant-wide predetermined overhead rate (PWOR)

Concept: All manufacturing overhead costs are treated as fixed in these examples, so you don’t use the A + Bx (variable/absorbed) formula. Instead, you allocate all MOH with a single plant-wide rate based on a chosen cost driver.
Key idea: Compute one rate for the entire plant, then apply that rate to each job using the same allocation base.
How to compute PWOR:
- Formula: POHR_{PW} = rac{\text{Estimated MOH}}{\text{Estimated allocation base}}
- Example numbers from the transcript: estimated MOH = $1{,}400{,}000$ ; estimated allocation base (DL hours) = $80{,}000\,\text{hours}$ .
- Resulting plant-wide rate: $POHR_{PW} = \frac{1{,}400{,}000}{80{,}000} = 17.50 \, \text{per DL hour}$
Applying PWOR to a job (example: Job Bravo)
- Actual direct labor hours for the job: $14\,\text{DL hours}$
- Manufacturing overhead applied to Job Bravo: $MOH_{Bravo} = 14 \times 17.50 = 245$
Observations from the example
- The $17.50$ per hour rate would be applied to every job based on its actual DL hours.
- To get total manufacturing cost for a job, you would add Direct Materials (DM) and Direct Labor (DL) to the MOH applied: $TMC = DM + DL + MOH$ (for the specific job).
- For Job Bravo in this PWOR setup, if you had DM and DL numbers (from the transcript context): DM and DL would be added to the $245$ MOH to obtain the total manufacturing cost for that job.
Practical note
- PWOR is simple and easy to implement, especially when the production process is relatively uniform across the plant.
- Less accurate when substantial differences exist among departments or products in how they consume MOH.
- In the transcript, a comparison is made later to departmental rates to show potential accuracy differences.

Departmental predetermined overhead rates

Concept: Use separate POHRs for each department (e.g., Assembly, Fabrication). Each department uses its own allocation base (DL hours for some, machine hours for others).
Why use departmental rates? To better match overhead costs to where they are actually incurred, improving accuracy when departments differ in resource use.
How to compute departmental POHRs (two-department example in the transcript):
- Assembly department (allocation base: Direct Labor hours)
- Overhead in assembly: $MOH_{A} = 600{,}000$
- Estimated DL hours in assembly: $50{,}000\,\text{hours}$
- POHR for assembly: $POHR_{A} = \frac{600{,}000}{50{,}000} = 12\;\$/\text{DL hour}$
- Fabrication department (allocation base: Machine hours)
- Overhead in fabrication: $MOH_{F} = 800{,}000$
- Estimated machine hours in fabrication: $100{,}000\,\text{hours}$
- POHR for fabrication: $POHR_{F} = \frac{800{,}000}{100{,}000} = 8\;\$/\text{machine hour}$
Applying departmental POHRs to Job Bravo (two parts: assembly and fabrication)
- Assembly part: actual DL hours = $11\,\text{hours}$ → MOH from assembly: $MOH_A = 12 \times 11 = 132$
- Fabrication part: actual machine hours = $6\,\text{hours}$ → MOH from fabrication: $MOH_F = 8 \times 6 = 48$
- Total MOH with departmental rates: $MOH_{Bravo} = 132 + 48 = 180$
Comparison to plant-wide result for Job Bravo
- PWOR MOH for Job Bravo (from the PWOR example): $MOH_{Bravo} = 245$
- Departmental MOH for Job Bravo: $180$
- Why the difference? Departmental rates allocate more or less MOH depending on the actual consumption of drivers in each department, which can be more accurate if the cost structure differs by department.
Additional notes from the transcript on when to use per-department rates
- If a process is highly automated and machine-driven, a department with machine-hours as the driver can be very efficient (lower rates).
- If a process has a heavy labor component (e.g., embroidery), allocating via labor hours or a mixed driver may better reflect costs.
- The choice of cost driver should reflect the underlying production process and where overhead resources are consumed.
- Some firms use many departmental rates to reflect distinct processes; others use fewer rates for simplicity. The decision is a balance between accuracy and simplicity.
Summary takeaway
- PWOR is simple but can distort costs when departments consume MOH differently.
- Departmental POHRs, while more complex, can provide a more accurate picture of cost by department and product mix.

Example: Mason Company – plant-wide rate vs departmental rates (two manufacturing departments)

Scenario: Mason Company has two departments (Machining and Assembly). All MOH costs are fixed.
Plant-wide rate (using DL hours as the allocation base)
- Given: Total MOH (plant-wide) = $600{,}000$ and total direct labor hours = $60{,}000$ (interpreting the transcript’s numbers; the result is a plant-wide rate of $POHR_{PW} = 10\$/\text{DL hour}$ ).
- Apply to jobs A and B (using DL hours):
- Job A: DL hours = $15$ → MOH applied = $10 \times 15 = 150$
- Job B: DL hours = $9$ → MOH applied = $10 \times 9 = 90$
Two-step total manufacturing cost for PW approach (with example DM/DL values)
- Job A
- Direct Materials (DM): $200$
- Direct Labor (DL): $400$
- MOH (PW): $150$
- Total Manufacturing Cost (TMC): $DM + DL + MOH = 200 + 400 + 150 = 750$
- Job B
- Direct Materials (DM): $350$
- Direct Labor (DL): $400$
- MOH (PW): $90$
- Total Manufacturing Cost (TMC): $350 + 400 + 90 = 840$
Markup to selling price (120% markup, i.e., multiplier 2.20)
- Selling price formula: $SP = TMC \times (1 + 1.20) = TMC \times 2.20$
- Job A selling price: $750 \times 2.20 = 1650$
- Job B selling price: $840 \times 2.20 = 1848$
Departmental rates for Mason Company (Machining and Assembly)
- Machining uses machine hours; Assembly uses DL hours.
- Given departmental POHRs: $POHR{Machining} = 10\$/\text{machine hour}$ ; $POHR{Assembly} = 2\$/\text{DL hour}$
- Job A departmental MOH
- Machining: hours = 11 ⇒ MOH = $10 \times 11 = 110$
- Assembly: DL hours = 10 ⇒ MOH = $2 \times 10 = 20$
- Total MOH (Dept): $130$
- Job B departmental MOH
- Machining: hours = 12 ⇒ MOH = $10 \times 12 = 120$
- Assembly: DL hours = 5 ⇒ MOH = $2 \times 5 = 10$
- Total MOH (Dept): $130$
Departmental cost totals (including DM and DL; values here align with the transcript’s numbers for illustration)
- Job A
- DM: $200$
- DL: $400$
- MOH (Dept): $130$
- TMC: $200 + 400 + 130 = 730$
- Job B
- DM: $350$
- DL: $400$
- MOH (Dept): $130$
- TMC: $350 + 400 + 130 = 880$
Departmental selling prices (with 120% markup)
- Job A selling price: $730 \times 2.20 = 1606$
- Job B selling price: $880 \times 2.20 = 1936$
Observations from Mason’s two approaches
- PW approach yielded higher MOH for Job Bravo in the earlier example (245) than the departmental approach (180), leading to a higher total cost and selling price under PW assumptions in that specific scenario.
- Departmental approach often provides better alignment of MOH with actual resource usage, especially when departments have distinct cost drivers.
- In the department-based example, MOH totals for Job A and Job B end up equal ($130 each) in the two-department scenario, but the distribution across departments differs from the PW approach. The resulting TMCs and selling prices reflect the department-specific drivers.
Practical implications and decision criteria
- If your production process is highly heterogeneous across departments (e.g., one department is machine-intensive and another is labor-intensive), departmental rates are typically more accurate.
- If the process is relatively uniform or the overhead structure is more centralized, a plant-wide rate is simpler and often satisfactory.
- The front-end setup cost of multiple POHRs vs the ongoing simplicity of a single rate is a real consideration in a real business setting.
Quick takeaway on cost drivers and relevance
- Cost drivers should reflect where overhead resources are consumed.
- Examples include Direct Labor Hours (DLH) and Machine Hours (MH).
- In some cases, a mixed approach or multiple drivers per department can provide the best balance between accuracy and complexity.

Key formulas to memorize (summary)

Plant-wide POHR
- $POHR{PW} = \frac{MOH{est}}{DLH_{est}}$
Departmental POHRs (example with two departments)
- Assembly: $POHR{A} = \frac{MOH{A}}{DLH_{A}}$
- Fabrication: $POHR{F} = \frac{MOH{F}}{MH_{F}}$
Applied MOH (departmental)
- $MOH{job} = POHR{A} \cdot DLH{job,A} + POHR{F} \cdot MH_{job,F}$
Total manufacturing cost
- $TMC = DM + DL + MOH$
Selling price with markup
- If markup is 120%, then $SP = TMC \times (1 + 1.20) = TMC \times 2.20$
General cost-driver guidance
- Choose the base so that the driver best reflects the resources consumed by each department or product line.

Practical implications and exam-ready tips

Always start by identifying the correct base for MOH allocation (DL hours for PWOR; DL hours or machine hours per department for departmental rates).
For a given job, stay in the appropriate data silo (plant-wide totals vs. department totals) to avoid mixing data from different purposes.
When comparing PWOR vs departmental rates, check which yields a more accurate reflection of resource consumption (often department rates are more accurate for mixed production processes).
When pricing, apply a consistent markup approach to derive selling prices, and clearly document whether the markup is on cost or selling price.
If you see fixed MOH costs, remember the MOH allocation still uses the chosen POHR; fixed vs variable treatment affects decisions elsewhere, but here the focus is allocation.

Quick recap (student-friendly checkpoints)

What is PWOR and how is it calculated? What is the base? How do you apply it to a job?
How do you compute departmental POHRs and apply them? What are the two example rates used in the transcript?
How do you compute total manufacturing cost and selling price under PWOR and under departmental rates? What are the concrete numbers from the Mason Company examples?
Why might departmental rates be preferred over a single plant-wide rate? What are the trade-offs?