Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion
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:
Fabrication Department factory overhead | $550,000 | ||
Assembly Department factory overhead | 250,000 | ||
Total | $800,000 |
Direct labor hours were estimated as follows:
Fabrication Department | 5,000 | hours | |
Assembly Department | 5,000 | ||
Total | 10,000 | 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 | 3.0 | dlh | 2.0 | dlh |
Assembly Department | 2.0 | 3.0 | ||
Direct labor hours per unit | 5.0 | dlh | 5.0 | dlh |
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.
Gasoline engine | $ per unit |
Diesel engine | $ per unit |
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.
Gasoline engine | $ per unit |
Diesel engine | $ per unit |
c. Recommend to management a product costing approach, based on your analyses in (a) and (b).
Management should select the factory overhead rate method of allocating overhead costs. The factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours . Thus, the rate method avoids the cost distortions by accounting for the overhead .
Solution a:
Computation of Predetermined overhead rate | |
Particulars | Amount |
Estimated overhead | $800,000.00 |
Estimated direct labor hours | $10,000.00 |
Predetermined overhead rate per DLH | $80.00 |
Computation of per unit factory overhead allocated | ||
Particulars | Gasoline Engine | Diesel Engine |
DLH per unit | 5 | 5 |
Overhead rate per DLH | $80.00 | $80.00 |
Factory overhead per unit | $400.00 | $400.00 |
Solution b:
Computation of Departmental Overhead Rate | ||
Particulars | Fabrication | Assembly |
Estimated overhead | $550,000.00 | $250,000.00 |
Estimated DL hours | 5000 | 5000 |
Departmental overhead rate per DLH | $110.00 | $50.00 |
Computation of per unit factory overhead allocated | ||
Particulars | Gasoline Engine | Diesel Engine |
Fabrication | $330.00 | $220.00 |
Assembly | $100.00 | $150.00 |
Factory overhead per unit | $430.00 | $370.00 |
Solution c:
Management should select the factory overhead rate method of allocating overhead costs. The factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours . Thus, the rate method avoids the cost distortions by accounting for the overhead.
Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion The management...
Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion 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...
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