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 $636,650.00 2 Assembly Department factory overhead 243,000.00 3 Total $879,650.00 Direct labor hours were estimated as follows: Fabrication Department 5,350 hours Assembly Department 5,400 Total 10,750 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 2.9 dlh 1.9 dlh Assembly Department 1.9 2.9 Direct labor hours per unit 4.8 dlh 4.8 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.

Answer 1

A)
Plantwide factory overhead rate:Budgeted Factory Overhead/Plant wide Allocation Base
Plantwide factory overhead rate = $879650 /10,750 Direct Labour Hours	$81.83
Product costs
Gasoline engine $81.83 per direct labor hr x 4.8 dlh	$392.784
Diesel engine $81.83 per direct labor hr. x 4.8 dlh	$392.784

B)
Department factory overhead rates
	Fabrication Department	Assembly Department
Total production department factory overhead	$636650	$243000
Direct labor hours	÷ 5350 dlh	÷ 5,400 dlh
Production department overhead rate	$119	$45
Production Departments	Gasoline Engine	Department factory overhead rates per dlh	Total factory overhead per DLH
Fabrication Department	2.9	$119	$345.10
Assembly Department	1.9	$45	$85.50
Total factory overhead per Gasoline Engine			$430.60
Production Departments	Diesel engine	Department factory overhead rates per dlh	Total factory overhead per DLH
Fabrication Department	1.9	$119	$226.10
Assembly Department	2.9	$45	$130.50
Total factory overhead per Diesel engine			$356.60

C.

Management should select the multiple department factory overhead rate method of allocating overhead costs. The single plantwide factory overhead rate method indicates that both products have the same factory overhead