Question

4.

1. 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		$546,000
   Assembly Department factory overhead		210,000
   	Total	$756,000

   Direct labor hours were estimated as follows:

   Fabrication Department		4,200	hours
   Assembly Department		4,200
   	Total	8,400	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	1.00	dlh	2.80	dlh
   Assembly Department	3.00		1.20
   Direct labor hours per unit	4.00	dlh	4.00	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

Answer 1

Solution Requirement 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 Step-1: Compute the plantwide single overhead rate Budgeted total factory overhead cost $756,000 Estimated total direct labor hours available 8400 Total factory overhead cost Plantwide factory overhead rate= Estimated total direct labor hours available $756,000 8400 $90.00 Step-2: Determine per unit factory overhead cost allocated to each product Gasoline Diesel Engine Engine (i) Total Direct labor hours required per unit 4 4 (ii) Plantwide single Factory overhead rate $90.00 $90.00 (iii) Factory overhead cost per unit (i) x (ii) $360.00 $360.00 $360.00 per unit Gasoline Engine Diesel Engine $360.00 per unit Requirement 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

Step-1: Compute the multiple production department overhaed rate Assembly Department Department Fabrication (i) Budgeted factory overhead cost $546,000 $210,000 (ii) Estimated direct labor hours available 4200 4200 (ii) Factory overhead rate for each department {(i)/ (ii)} $130.00 $50.00 Step -2 : Determine per unit factory overhead cost allocated to each product Diesel Gasoline Engine Engine Fabrication Department (i) Direct labor hours required per unit 1.0 2.8 (ii) Factory overhead rate $130.00 $130.00 (iii) Factory overhead per unit (i) x (ii) $130.00 $364.00 Assembly Department (iv) Direct labor hours required per unit 1.2 3.0 (v) Factory overhead rate $50.00 $50.00 (vi) Factory overhead per unit (iv) x (v) $150.00 $60.00 (vii) Total factory overhead cost per unit (iii) + (vi) $280.00 $424.00 $280.00 per unit Gasoline Engine Diesel Engine $424.00 per unit