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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 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  .

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Answer #1

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.

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