The departmental overhead rate method allows individual departments to have
The departmental overhead rate method allows individual departments to have
The departmental overhead rate (DOH) method is a system of allocating overhead costs to individual departments within a company. This method is based on the idea that each department uses a different amount of overhead resources, such as utilities, rent, and administrative salaries. By allocating overhead costs based on usage, the DOH method helps to ensure that each department bears its fair share of the company's total overhead costs.
How the DOH Method Works
The DOH method is a relatively simple and straightforward process. To use this method, you first need to identify all of the overhead costs that your company incurs. These costs can be divided into two categories:
- Direct overhead costs: These costs can be directly traced to a specific department or activity. For example, the cost of raw materials used in production is a direct overhead cost.
- Indirect overhead costs: These costs cannot be directly traced to a specific department or activity. For example, the cost of rent is an indirect overhead cost.
Once you have identified all of your overhead costs, you need to determine how much of each cost is used by each department. This can be done by using a variety of methods, such as:
- Activity-based costing: This method assigns overhead costs to departments based on the activities that they perform. For example, the cost of utilities might be assigned to departments based on the number of square feet of space that they occupy.
- Percentage of sales: This method assigns overhead costs to departments based on their percentage of total sales. For example, the cost of administrative salaries might be assigned to departments based on their percentage of total sales.
Once you have determined how much of each overhead cost is used by each department, you can calculate the DOH rate for each department. The DOH rate is simply the total amount of overhead costs allocated to a department divided by the total amount of direct labor hours worked in that department.
Benefits of the DOH Method
The DOH method offers a number of benefits, including:
- Accuracy: The DOH method is a relatively accurate way to allocate overhead costs. This is because it takes into account the actual usage of overhead resources by each department.
- Fairness: The DOH method is a fair way to allocate overhead costs. This is because it ensures that each department bears its fair share of the company's total overhead costs.
- Simplicity: The DOH method is a relatively simple and straightforward process to use. This makes it a good choice for companies of all sizes.
Drawbacks of the DOH Method
The DOH method also has some drawbacks, including:
- Complexity: The DOH method can be complex to implement, especially for companies with a large number of departments or activities.
- Accuracy: The DOH method is only as accurate as the data that is used to calculate the DOH rates. If the data is inaccurate, the DOH rates will also be inaccurate.
- Fairness: The DOH method can be unfair to departments that have a high proportion of indirect overhead costs. This is because these departments will be charged more overhead costs than departments that have a low proportion of indirect overhead costs.
Success Stories
The DOH method has been successfully used by a number of companies, including:
- Microsoft: Microsoft uses the DOH method to allocate overhead costs to its various business units. This has helped Microsoft to improve its profitability and efficiency.
- General Electric: General Electric uses the DOH method to allocate overhead costs to its various manufacturing plants. This has helped General Electric to reduce its costs and improve its productivity.
- Toyota: Toyota uses the DOH method to allocate overhead costs to its various assembly lines. This has helped Toyota to improve its quality and efficiency.
Conclusion
The departmental overhead rate method is a powerful tool that can help companies to allocate overhead costs accurately and fairly. The DOH method is a relatively simple and straightforward process to use, and it offers a number of benefits, including accuracy, fairness, and simplicity. If you are looking for a way to improve your company's profitability and efficiency, the DOH method is a great option to consider.
Tables
| Benefit | Description |
|---|---|
| Accuracy | The DOH method is a relatively accurate way to allocate overhead costs. This is because it takes into account the actual usage of overhead resources by each department. |
| Fairness | The DOH method is a fair way to allocate overhead costs. This is because it ensures that each department bears its fair share of the company's total overhead costs. |
| Simplicity | The DOH method is a relatively simple and straightforward process to use. This makes it a good choice for companies of all sizes. |
| Drawback | Description |
|---|---|
| Complexity | The DOH method can be complex to implement, especially for companies with a large number of departments or activities. |
| Accuracy | The DOH method is only as accurate as the data that is used to calculate the DOH rates. If the data is inaccurate, the DOH rates will also be inaccurate. |
| Fairness | The DOH method can be unfair to departments that have a high proportion of indirect overhead costs. This is because these departments will be charged more overhead costs than departments that have a low proportion of indirect overhead costs. |
Success Stories
| Company | Industry | Benefits |
|---|---|---|
| Microsoft | Software | Improved profitability and efficiency |
| General Electric | Manufacturing | Reduced costs and improved productivity |
| Toyota | Automotive | Improved quality and efficiency |
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