Plantwide overhead rate

Plantwide overhead rate is a single absorption rate applied across an entire factory using one activity base such as total labour hours. Simple to operate, it can distort product costs when departments consume resources very differently.

ByHoang TruongUpdated June 30, 2026

FrameworkOverhead absorption

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A factory budgets €600,000 of total overhead against 120,000 direct labour hours, giving a plantwide rate of €600,000 ÷ 120,000 = €5.00 per hour. A product needing 3 hours absorbs 3 × €5.00 = €15.00 of overhead under this single rate. The method is simple, but it overcharges labour-light products and undercharges labour-intensive ones whenever product lines consume resources very differently.

Where it fits

SubjectCost AccountingCoreTopicOverhead Allocation & ABCCore

The formula

LaTeX

\text{Plantwide OAR} = \frac{\text{Total Budgeted Overhead}}{\text{Total Budgeted Activity}}

Variables

$O A R$: Overhead absorption rate — the amount of overhead charged per unit of the activity base (€/hour)
$T o t a l B u d g e t e d O v er h e a d$: All factory indirect costs pooled across the whole plant (€)
$T o t a l B u d g e t e d A c t i v i t y$: Planned units of the chosen activity base (e.g. direct labour hours) across the whole plant (hours)

OAR = overhead absorption rate; the activity base is typically direct labour hours or machine hours

LaTeX

\text{Overhead Absorbed by a Product} = \text{OAR} \times \text{Actual Activity Used by Product}

Variables

$O A R$: Plantwide overhead absorption rate (€/hour)
$A c t u a l A c t i v i t y$: Actual hours (or other base) the product consumed (hours)

Overhead charged to each unit of output

Check yourself

PracticeCORE

The main weakness of using a single plantwide overhead absorption rate, compared with departmental rates, is that it:

Select an answer to check your understanding.