Question

e management of Firebolt Industries Inc. manufactures gasoline and diesel engines through two production departments, Fabrication and Assembly. Management needs accurate product cost information in order to guide product strategy. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering the multiple production department factory overhead rate method. The following factory overhead was budgeted for Firebolt: 1 Fabrication Department factory overhead $614,800.00 2 Assembly Department factory overhead 246,750.00 3 Total $861,550.00 Direct labor hours were estimated as follows: Fabrication Department 5,300 hours Assembly Department 5,250 Total 10,550 hours In addition, the direct labor hours (dlh) used to produce a unit of each product in each department were determined from engineering records, as follows: Production Departments Gasoline Engine Diesel Engine Fabrication Department 2.9 dlh 1.8 dlh Assembly Department 1.8 2.9 Direct labor hours per unit 4.7 dlh 4.7 dlh Required: a. Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead rate method, using direct labor hours as the activity base.* b. Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the multiple production department factory overhead rate method, using direct labor hours as the activity base for each department.* c. (1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer. *If required, round all per-unit answers to the nearest cent.

Answer 1

Answer-a:

Single plantwide factory overhead rate = Budgeted Factory Overhead / Plantwide Allocation Base(i.e. direct labour hours)

                                                             = $861,550 / 10,550

                                                             = $81.66

Answer-b:

Multiple production department factory overhead rate = Budgeted department Factory Overhead / Budgeted department allocation base (i.e. direct labour hours)

Fabrication Department factory overhead rate = $614,800 / 5,300 = $116

Assembly Department factory overhead rate = $246,750 / 5,250 = $47

Answer-c

Product Single rate Difference in OH Gasoline Engine 4.7 hrs $81.66 = $384 (37) Multiple rate Fabrication Dept: 2.9 hrs $116 = $336 Assembly Dept: 1.8 hrs x $47 = $85 Fabrication Dept: 1.8 hrs x $116 = $209 Assembly Dept: 2.9 hrs $47 = $136 $ 766 Diesel engine 4.7 hrs $81.66 = $384 39 Total 768 $

Comment: From the above, it can be noticed that there is no difference of using either of the above two method. The difference of $2 has arisen due to rounding off.

So, management can use any of the two methods.