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 $557,750.00 2 Assembly Department factory overhead 257,550.00 3 Total $815,300.00 Direct labor hours were estimated as follows: Fabrication Department 4,850 hours Assembly Department 5,050 Total 9,900 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 3.1 dlh 2.1 dlh Assembly Department 2.1 3.1 Direct labor hours per unit 5.2 dlh 5.2 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.

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. If required, round all per-unit answers to the nearest cent. Gasoline engine per unit Diesel engine per unit

Part#2 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 . If required, round all per-direct labor hours and per-unit answers to the nearest cent. Gasoline engine per unit Diesel engine per unit Multi Chose c. (1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer. (1) Management should change to the multiple production department factory overhead rate method. Management should continue to use the single plantwide overhead rate method. Management is indifferent, since either method yields the same result. (2) In this case, the single plantwide method causes cost distortion, so the multiple production department method should be used. In this case, the factory overhead rates for each product are the same under either method; therefore, the company should choose single plantwide method since it’s easier to implement. In this case, the multiple production department method causes cost distortion, so the single plantwide method should be used.

Answer 1

Calculation of per unit factory overhead to 2 products using single plantwide factory overhead rate and multiple production department factory overhead rate

Firebolt Industries Inc 2 3 Given information in the problem 4 5 Fabrication department factory overhead 6 Assembly department factory overhead 7 Total factory overhead 557750 257550 815300 9 Direct labour hours used in Fabrication Dept 4850 hrs 10 Direct labour hours used in Assembly Dept 5050 hrs 11 Total Direct labour hours 9900 hrs 12 13 Direct labour hours used to produce a unit of each product in each of department are as follows: 14 Gasoline Diesel 15 Engine Engine 16 Fabrication dept. 3.1 dlh 2.1 dih * dlh = direct labour hour 17 Assembly dept. 2.1 dlh 3.1 dlh 18 Total 5.2 dlh 5.2 dlh

20 a) Calculation of per unit factory overhead allocated to gasoline and diesel engines under single plantwide 21 factory overhead rate method 22 23 Pre determined factory overhead rate= Total factory overhead 24 Total Direct labour hours 25 815300 26 9900 27 82.35 per dlh 28 428.24 29 per unit factory overhead allocated to Gasoline engine: 30 Pre determined factory overhead rate * Actual direct labour hours 82.35* 5.2 dlh 31 32 per unit factory overhead allocated to Diesel engine: 33 Pre determined factory overhead rate * Actual direct labour hours 82.35* 5.2 dlh 428.24

40 35 b) Calculation of per unit factory overhead allocated to gasoline and diesel engines under 36 multiple production department factory overhead rate 37 38 Fabrication department pre determined Fabrication dept factory overhead 39 factory overhead rate: Direct labour hours used in fabrication dept = 557750 = 115 per dlh 4850 42 43 Assembly department pre determined Assembly dept factory overhead 44 factory overhead rate: Direct labour hours used in assembly dept 45 = 257550 51 per dlh 5050 41 46 47 48 per unit factory overhead allocated to Gasoline engine: 49 Pre determined factory overhead rate * Actual direct labour hours 50 51 Fabrication Dept: 115* 3.1 dlh 356.5 52 Assembly Dept: 51* 2.1 dlh 107.1 53 per unit factory overhead allocated: 463.6 54 55 per unit factory overhead allocated to Diesel engine: 56 Pre determined factory overhead rate * Actual direct labour hours 57 58 Fabrication Dept: 115* 2.1 dlh 59 Assembly Dept: 51* 3.1 dlh 60 per unit factory overhead allocated: 241.5 158.1 399.6

IN 1 Factory overhead allocated to 2 products based on single plantwide factory overhead 2 and multiple production department factory overhead are as follows 3 Gasoline Diesel Engine Engine 6 Single plantwide factory overhead 428.24 428.24 7 Multiple production department factory overhead 463.6 399.6 9 From the above information Factory overhead allocated to 2 products based on single plantwide factory overhead 10 is same whereas under multiple production department factory overhead rate method factory overhead allocated 11 to Gasoline engine is more than diesel engine as Fabrication department pre determined factory overhead rate is 12 more than Assembly department pre determined factory overhead rate, hence the difference. 13 Trecommend to management to use Multiple production department factory overhead rate method as it provides 14 accurate product cost information in order to guide product stategy.