Which of the following is a disadvantage to using a single plantwide factory overhead rate? a. The rate is complicated to use. b. The rate assumes that factory overhead costs are consumed in the same way by all products. c. The rate does not take total factory overhead into consideration. d. The rate is expensive to calculate and to use.
The Correct Answer and Explanation is:
Correct Answer: b. The rate assumes that factory overhead costs are consumed in the same way by all products.
Explanation:
A single plantwide factory overhead rate is a method used in traditional cost accounting to allocate overhead costs across all products using one average rate. This method usually applies overhead based on a common measure such as direct labor hours or machine hours. While this approach is simple and easy to implement, it has a major disadvantage: it assumes that all products use overhead resources in the same way.
This assumption can be misleading, especially in companies that manufacture a diverse range of products. Different products may require varying amounts of machine time, setup time, quality inspections, or other indirect resources. Using just one rate ignores these differences. As a result, some products may be overcosted while others are undercosted. This can lead to poor pricing decisions, inaccurate profitability analysis, and even misguided strategic choices.
For example, if one product is labor-intensive and another is machine-intensive, applying the same overhead rate based only on labor hours will not reflect the true cost of producing each item. The labor-intensive product may appear too expensive while the machine-intensive product may appear more profitable than it actually is.
Activity-based costing (ABC) was developed to address this weakness. ABC uses multiple overhead rates based on different cost drivers that better match the way overhead resources are actually used. While more complex and expensive to implement, ABC provides more accurate product cost information.
Therefore, the main disadvantage of using a single plantwide overhead rate is not that it is complicated or costly, but that it oversimplifies the allocation of overhead. It fails to reflect the actual resource consumption patterns of different products. Thus, option b is the most accurate answe
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