Explain why a costing system that uses either a plantwide or a departmental overhead rate is likely to produce distorted product costs.

Explain why a costing system that uses either a plantwide or a departmental overhead rate is likely to produce distorted product costs.

Answer
Plant wide or a departmental overhead rate is calculated on the basis of a single cost allocation base i.e. direct labor hours or direct labor cost. This predetermined rate is then used to allocate the overhead cost to allocate the cost to the products. So, the product using the higher amount of allocation base units i.e. direct labor hours or direct labor cost will be charged with more overhead cost. All this cost allocation process is ignoring the actual overhead bases used by the different products in the different production processes.
So, it will not be possible to get the accurate production cost of the units produced based on the plant wide or a departmental overhead rate.