Question

Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion Eclipse Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Eclipse: Assembly Department Testing Department $280,000 800,000 Total $1,080,000 Direct machine hours were estimated as follows: Assembly Department Testing Department 4,000 hours 5,000 Total 9,000 hours In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows: Commercial Residential Assembly Department 3.0 dmh 2.0 dmh 6.0 Testing Department 1.5 Total machine hours per unit 8.0 dmh 4.5 dmh

Answer 1

a.

Plantwide overhead rate = 1,080,000 / 9,000 = $120 per machine hour

Per unit overhead allocated to Commercial = 120 x 8 = $960

Per unit overhead allocated to Residential = 120 x 4.5 = $540

b.

Departmental overhead rate in Assembly = 280,000 / 4,000 = $70 per machine hour

Departmental overhead rate in Testing = 800,000 / 5,000 = $160 per machine hour

Costs Allocated to Product using Department overhead rate:

	Commercial	Residential
Assembly Department	140 (2 x 70)	210 (3 X 70)
Testing Department	960 (160 X6)	240 (160 X 1.5)
Total Costs	$1,100	$450

c.

In this case, the management shall consider single plantwide factory overhead rate methods, because this method calculates cost very accurately taking into factor that overheads are evenly applied on basis of direct labor hours.

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