Question

Product Costs and Product Profitability Reports, using a Single Plantwide Factory Overhead Rate

Elliott Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Elliott Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:

	Budgeted Volume (Units)		Direct Labor Hours Per Unit		Price Per Unit		Direct Materials Per Unit
Pistons	8,000		0.30		$46		$22
Valves	19,000		0.15		11		4
Cams	4,000		0.20		61		26

The estimated direct labor rate is $26 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Elliott Engines is $175,450.

If required, round all per unit answers to the nearest cent.

a. Determine the plantwide factory overhead rate.
$ ___________per dlh

b. Determine the factory overhead and direct labor cost per unit for each product.

	Direct Labor Hours Per Unit	Factory Overhead Cost Per Unit	Direct Labor Cost Per Unit
Pistons		$	$
Valves		$	$
Cams		$	$

c. Use the information above to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place. Enter all amounts as positive numbers, except for a negative gross profit/gross profit percentage of sales.

Elliot Engines Inc.
Product Line Budgeted Gross Profit Reports
For the Year Ended December 31, 20Y2
	Pistons	Valves	Cams
	$	$	$
Product Costs
	$	$	$
Total Product Costs	$	$	$
Gross profit	$	$	$
Gross profit percentage of sales	%	%	%

d. What does the report in (c) indicate to you?

Valves have the __________ gross profit as a percent of sales. Valves may require a__________ price or___________ cost to manufacture in order to achieve the same profitability as the other two products.

Answer 1

Solution a:

	Units	Direct Labor Hours Per Unit	Direct labor hours
Pistons	8000	0.30	2400
Valves	19000	0.15	2850
Cams	4000	0.20	800
Total Direct labor hours			6050
Plantwide overhead rate
Factory Overhead	175450
Total direct labor hours	6050
Overhead rate	29.00	per dlh

Solution b:

	Direct Labor Hours per unit	Factory Overhead Cost per unit (Hour per unit*$29)	Direct Labor Cost per unit (Hours per unit* $26)
Pistons	0.30	$8.70	$7.80
Valves	0.15	$4.35	$3.90
Cams	0.20	$5.80	$5.20

Solution c:

Elliot Engines Inc.
Product Line budgeted Gross Profit reports
For the year ended December 31, 20Y2
	Pistons	Valves	Cams
Sales Revenue	$3,68,000	$2,09,000	$2,44,000
Product Costs:
Direct Materials	$1,76,000	$76,000	$1,04,000
Direct Labor Cost	$62,400	$74,100	$20,800
Factory Overhead Cost	$69,600	$82,650	$23,200
Total Product costs	$3,08,000	$2,32,750	$1,48,000
Gross Profit	$60,000	-$23,750	$96,000
Gross Profit as a percentage	16.3%	-11.4%	39.3%

Solution d:

Valves have the Negative gross profit as a percent of sales. Valves may require a Higher price or Lower cost to manufacture in order to achieve the same profitability as the other two products.