What is Blanket Rate?
The term “Blanket Rate” refers to a production overhead absorption rate that is applied uniformly across a factory instead of calculating separate rates for each individual cost centre. This method simplifies the process of overhead allocation by applying a single rate to all production activities, thereby providing a streamlined approach to cost accounting and budgeting.
Examples
-
Small Manufacturing Plant: In a small manufacturing plant that produces various items but has consistent overhead costs like utilities and maintenance, a blanket rate can be used to allocate overhead evenly across all products. If the total overhead cost for the plant for a year is $120,000 and the plant operates for 10,000 machine hours, the blanket rate would be $12 per machine hour.
-
Textile Factory: A textile factory uses a blanket rate to allocate overhead costs to different types of fabric produced. Instead of calculating separate overhead rates for different sections (e.g., weaving, dyeing), a single blanket rate based on total factory hours is used to simplify cost allocation.
-
Assembly Line Production: In an automotive assembly line, a blanket rate can be applied if the overhead costs such as electricity, labor, and machine depreciation are uniformly experienced across the production process. This rate is then applied across all stages of the production line.
Frequently Asked Questions
Q1: Why use a blanket rate instead of individual cost centre rates?
- A: The use of a blanket rate simplifies the overhead allocation process and is beneficial when overhead costs are broadly similar across a factory. This approach can save time and reduce complexity in the cost accounting system.
Q2: What are the limitations of using a blanket rate?
- A: The main limitation of using a blanket rate is that it may not accurately reflect the differences in overhead costs associated with different cost centres. This can lead to cost distortions and potential inefficiencies.
Q3: How is a blanket rate calculated?
- A: A blanket rate is calculated by totaling all the overhead costs and dividing by the total productive activity such as machine hours, labor hours, or units produced.
Q4: In what scenarios is a blanket rate most effective?
- A: Blanket rates are most effective in smaller factories or production environments where overhead costs are relatively uniform and consistent across all production activities.
Q5: Can a blanket rate be adjusted periodically?
- A: Yes, a blanket rate can be adjusted at regular intervals (e.g., quarterly or annually) to reflect changes in overhead costs and production levels.
Related Terms
- Absorption Rate: The rate at which overhead costs are allocated to products or cost centres based on a specific activity driver, such as machine hours or labor hours.
- Cost Centre: A distinct section or department within a factory or organization where costs are incurred and can be tracked separately.
- Overhead Costs: Indirect costs associated with production, such as utilities, rent, and maintenance, which are not directly attributable to specific products.
- Variable Overhead: Costs that vary directly with the level of production activity, such as utility bills or raw material usage.
- Fixed Overhead: Costs that remain constant regardless of the level of production activity, such as rent or salaries of permanent staff.
Online References
- Investopedia: Overhead Absorption
- AccountingTools: Blanket Overhead Rate
- Wikipedia: Absorption Costing
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan - This comprehensive book covers cost accounting principles including overhead allocation methods.
- “Fundamentals of Cost Accounting” by William N. Lanen, Shannon W. Anderson, and Michael W. Maher - This text provides a deep dive into various costing techniques, including the application of blanket rates.
- “Cost Management: A Strategic Emphasis” by Edward Blocher, David Stout, Paul Juras, and Steven Smith - Covers strategic approaches to cost management, including how to efficiently allocate overhead costs.
- “Managerial Accounting” by Ray H. Garrison, Eric Noreen, Peter C. Brewer - Provides insights into overhead allocation and the use of blanket rates in managerial decision-making.
- “Advanced Management Accounting” by Robert S. Kaplan and Anthony A. Atkinson - Explores complex topics in management accounting, including overhead absorption.
Accounting Basics: “Blanket Rate” Fundamentals Quiz
### What does a blanket rate pertain to in cost accounting?
- [x] A single overhead absorption rate for the entire factory.
- [ ] Individual variance rates for each product line.
- [ ] Custom rates for different departmental overheads.
- [ ] Variable rates depending on output quantity.
> **Explanation:** A blanket rate involves applying a single overhead absorption rate uniformly across all production activities in a factory rather than having different rates for each cost centre.
### What is an advantage of using a blanket rate?
- [x] Simplifies the overhead allocation process.
- [ ] Guarantees precision in cost allocation.
- [ ] Minimizes total overhead costs.
- [ ] Personalizes cost allocation for departments.
> **Explanation:** A blanket rate simplifies the overhead allocation process by using a uniform rate for all production activities, making it easier to use and calculate.
### When might a blanket rate be less effective?
- [ ] When overhead costs are the same across all departments.
- [x] When there are significant differences in overhead costs between cost centres.
- [ ] When production volume is consistent.
- [ ] When the factory size is small.
> **Explanation:** A blanket rate may be less effective when there are significant differences in overhead costs between various cost centres, as it may not accurately reflect the true costs of production activities.
### Which of the following is a method to calculate a blanket rate?
- [x] Total overhead costs divided by total productive activity.
- [ ] Product price times the number of units produced.
- [ ] Direct material costs multiplied by the number of employees.
- [ ] General administrative expenses divided by total sales.
> **Explanation:** The blanket rate is typically calculated by dividing total overhead costs by the total productive activity within the factory, such as machine hours or labor hours.
### Why might a company prefer a blanket rate over individual cost centre rates?
- [ ] To increase the accuracy of overhead allocation.
- [ ] To reduce the cost control measures.
- [x] To simplify the cost accounting process.
- [ ] To segregate costs more granule.
> **Explanation:** Companies might opt for a blanket rate over individual cost centre rates to simplify the cost accounting process, making overhead allocation straightforward.
### Can blanket rates be adjusted periodically?
- [x] Yes, they can be adjusted.
- [ ] No, once set they remain fixed.
- [ ] They can only be adjusted annually.
- [ ] Changes are restricted by tax laws.
> **Explanation:** Blanket rates can be periodically adjusted to reflect changes in overhead costs and production activities, ensuring that the rate remains accurate and relevant.
### What is a primary component used to calculate the blanket rate?
- [ ] Direct cost only.
- [x] Overhead cost.
- [ ] Sales revenue.
- [ ] Marketing expense.
> **Explanation:** Overhead costs are the primary component used to calculate the blanket rate, which is then applied evenly across all production activities within the factory.
### What is an implication of using a blanket rate in cost accounting?
- [x] Simplified administrative process.
- [ ] Improved precision in cost tracking.
- [ ] Guaranteed cost reduction.
- [ ] Enhanced profitability.
> **Explanation:** The implication of using a blanket rate is that it simplifies the administrative process by providing a uniform method to allocate overhead costs across various production activities.
### Who might find blanket rates most useful?
- [ ] Highly specialized departments.
- [x] Small to medium-sized factories with uniform overhead.
- [ ] Large corporations with diversified operations.
- [ ] Retail operations.
> **Explanation:** Small to medium-sized factories with relatively uniform overhead costs might find blanket rates most useful as it simplifies their cost accounting.
### What aspect does a blanket rate not accurately reflect?
- [ ] Total overhead costs.
- [ ] Number of hours worked.
- [x] Differences in departmental overhead costs.
- [ ] Total number of units produced.
> **Explanation:** A blanket rate does not accurately reflect the differences in departmental overhead costs, which might lead to inaccurate cost allocation between different cost centres.
Thank you for learning with us! Stay competitive and keep expanding your financial and accounting knowledge.
