Question

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: $666,000 Fabrication Department factory overhead Assembly Department factory overhead 296,000 Total $962,000 Direct labor hours were estimated as follows: Fabrication Department 3,700 hours Assembly Department 3,700 Total 7,400 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: Production Departments Gasoline Engine Diesel Engine Fabrication Department 0.80 dih 2.20 dlh Assembly Department 2.20 0.80 Direct labor hours per unit 3.00 dih 3.00 dih 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. per Gasoline engine unit per Diesel engine $ 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 per engine unit per Diesel engine $ unit

Answer 1

Answer

· Working

		Fabrication	Assembly	Total
A	Total Overhead cost	$666,000	$296,000	$962,000
B	Total machine hours	3700	3700	7400
C = A/B	Overhead rates	$180	$80	$130

· [a]

gasoline engine	$390	[3 DMH x $ 130]
Diesel Engine	$390	[3 DMH x $ 130]

· [b]

gasoline engine	$320	(0.8 hours x $180)+(2.2 x $ 80)
Diesel Engine	$460	(2.2 hours x $180)+(0.8 x $ 80)