5: Overhead Allocation - Blanket Rate Flashcards
What is Blanket Rate?
A way of absorbing overhead costs in which the same absorption rate is used throughout the whole of the organisation, regardless of the product or department
One rate for all units in the organisations
Calculated using - units, machine hours, labour hours etc
Also called Overhead Absorption Rate (OAR)
What is Departmental Rate?
Rates for all departments
What is a Cost Centre?
A department or a section of a department that is responsible for the costs within their control - costs are collected and analysed
Main function - to track expenses/costs
There is a manger assigned to every cost centre
Allocation Base Concept
The basis that is used to allocate costs (overhead costs) to cost objects
This is a measure of activity
Example: machine hours
How to select an Allocation Base?
Theallocation baseshould bear causal relationship between the incurrence of the cost and the basis used for cost assignment
It should reflect in a reasonable manner how the cost object consumes the resources being allocated.
Blanket Rate Equation
Overhead Absorption Rate (OAR)
Manufacturing Overhead (divided by) Allocation Base
Manufacturing Cost Equation
DM + DL + MOH
DM = Direct Material
DL = Direct Labour
MOH = Manufacturing Overhead
What is Cost Allocation?
The process of identifying, accumulating and assigning costs to costs centres
Examples; Departments, Programs, and a branch of a compnay by using a parameter called allocation base
The process of Cost Allocation, the process of cost allocation differs across organisations, departments & cost centres
Blanket Rate (II)
Traditionally - Costs incurred across all cost centres in the firm are accumulated, & a rate is developed based on an allocation base
How to Allocate?
Recent times, activity based costing method is used to allocate overhead
A rate for each activity pool are calculated and applied to allocate overhead cost
