Question

The 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 $577,200.00 2 Assembly Department factory overhead 235,200.00 5 Total $812,400.00 Direct labor hours were estimated as follows: Fabrication Department 5,200 hours Assembly Department 4,900 Total 10,100 hours In addition, the direct labor hours (dih) 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 2.8 dih 1.9 dih Assembly Department 1.9 28 Direct labor hours per unit 4.7 dth 4.7 dih Required: • 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. Check My Work Previous All work saved. Email Instructor Save and Exit Submit Assianment for

Answer 1

Solution

Firebolt Industries Inc

1. Determination of 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:

	per-unit factory overhead
Gasoline engine	$378
Diesel engine	$378

Computations:

Plantwide overhead rate = total overhead/total direct labor hours

Total overhead cost = $812,400

Total direct labor hours = 10,100

Plantwide factor overhead rate = 812,400/10,100 = $80.44 per hour

	Direct labor hours per unit	plantwide overhead rate per hour	plantwide ffactory overhead rate per unit
Gasoline engine	4.7	$80.44	$378	($80.44 x 4.7)
Diesel engine	4.7	$80.44	$378	($80.44 x 4.7)

2. Determination of 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:

	Per-Unit Factory Overhead
Gasoline Engine	$220
Diesel Engine	$334

Computations:

Fabrication Department -
Factory overhead	$577,200
direct labor hours	5,200
factory overhead per hour	$111 per hour
	Hours per unit	rate per hour	assigned cost
Gasoline Engine	2.8 DLH	$111	$311
Diesel Engine	1.9 DLH	$111	$211

Assembly Department -
Factory overhead	$235,200
direct labor hours	4,900
factory overhead per hour	$48 per hour
	Hours per unit	rate per hour	assigned cost
Gasoline Engine	1.9 DLH	$48	$91
Diesel Engine	2.8 DLH	$48	$134

	Fabrication Department per unit factory overhead	Assembly department per unit factory overhead	Total assigned per-unit factory overhead
Gasoline Engine	$311	$91	$402
Diesel Engine	$211	$134	$345

3. Recommendation:

The management should select the activity based overhead allocation. The method allocates factory overhead to products based on their actual usage of direct labor hours and therefore provides a more realistic overhead cost allocation to products.

When compared to the per-unit costs of two products under the traditional and ABC methods,

Gasoline engine is under allocated by $24 (approximately) (402 – 378 =24) under traditional method, while Diesel Engine is over allocated by $33 (378 – 345 = 33) under the traditional method.