Question

Obj. 2, 3 diesel engines through needs accurate product EX 18-7 Single plantwide and multiple production department factory overhead rate methods and product cost distortion ✓ B. Diesel engine. The management of Firebolt Industries Inc. manufactures gasoline and diesel engi $370 per unit two production departments, Fabrication and Assembly. Management needs accur cost information in order to guide product strategy. Presently, the company uses plantwide factory overhead rate for allocating factory overhead to the two products management is considering the multiple production department factory overhead rat The following factory overhead was budgeted for Firebolt: products. However, y overhead rate method. Fabrication Department factory overhead Assembly Department factory overhead Total $550,000 250,000 $800,000 Direct labor hours were estimated as follows: Fabrication Department Assembly Department Total 5,000 hours 5,000 10,000 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:

Answer 1

ICASE A: calculation of plant wide overhead rate TOTAL OVERHEAD TOTAL HOURS PLANT WIDE OVERHEAD RATE (A/B) 800000 10000 80 00 PER HOUR S GASOLINE DEPARTMENT TOTAL LABOR HOURS IN GASOLINE DEPARTMENT PLANT WIDE OVERHEAD RATE (A/B) OVERHEAD ALLOCATED TO GASOLINE DEPARTMENT (D'E) $ $ 80,00 PER HOUR 400.00 DIESEL DEPARTMENT TOTAL LABOR HOURS IN DIESEL DEPARTMENT PLANT WIDE OVERHEAD RATE (AB) OVERHEAD ALLOCATED TO GASOLINE DEPARTMENT (D'E) $ $ 80,00 PER HOUR 400.00

CASEB: CALCULATION OF OVERHEAD RATE ON DEPARTMENT BASIS OVERHEAD RATE FOR FABRICATION OVERHEADS IN FABRICATION DEPARTMENT HOURS IN FABRICATION DEPARTMENT OVERHEAD PER HOUR IN THIS DEPARTMENT $550,000.00 5000 HOURS $ 110.00 PER HOUR OVERHEAD RATE FOR ASSEMBLY DE OVERHEADS IN ASSEMBLY DEPARTMENT HOURS IN ASSEMBLY DEPARTMENT OVERHEAD PER HOUR IN THIS DEPARTMENT $ 250,000.00 5000 HOURS $ 50,00 PER HOUR

ALLOCATION OF OVERHEAD TO GASOLINE AND DIESEL ENGINE GASOLINE ENGINE FABRICATION DEPARTMENT $ FABRICATION DEPARTMENT RATE HOURS IN FABRICATION DEPARTMENT OVERHEAD IN FABRATION DEPARTMENT 110.00 PER HOUR 3 LABOR HOURS 330.00 ($110 * 3) $ ASSEMBLY DEPARTMENT $ ASSEMBLY DEPARTMENT RATE HOURS IN ASSEMBLY DEPARTMENT OVERHEAD IN ASSEMBLY DEPARTMENT 50,00 PER HOUR 2 LABOR HOURS 100.00 ($50* 2) $ TOTAL OVER HEAD IN GASOLINE ENGINE 430.00 ($330 + $100)

DIESEL ENGINE FABRICATION DEPARTMENT $ FABRICATION DEPARTMENT RATE HOURS IN FABRICATION DEPARTMENT OVERHEAD IN FABRIATION DEPARTMENT 110.00 PER HOUR 2 LABOR HOURS 220.00 ($110*2) $ ASSEMBLY DEPARTMENT $ ASSEMBLY DEPARTMENT RATE HOURS IN ASSEMBLY DEPARTMENT OVERHEAD IN ASSEMBLY DEPARTMENT 50,00 PER HOUR 3 LABOR HOURS 150.00 ($50*3) $ TOTAL OVER HEAD IN DIESEL ENGINE $ 370.00 ($220 + $150) CASE C: RECOMMENDATION Option B should be opted as it gives more detailed view as how the total 5 hours of labor has been used in both the fabrication and assembly department. Since, the direct labor in fabrication department is costly ($110 ) than in assembly department ($50), the mix of usage of both direct labor should be considered for allocation of overhead as done in case b.