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	$614,800.00
2	Assembly Department factory overhead	246,750.00
3	Total	$861,550.00

Direct labor hours were estimated as follows:

Fabrication Department	5,300	hours
Assembly Department	5,250
Total	10,550	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	1.8 dlh
Assembly Department	1.8	2.9
Direct labor hours per unit	4.7 dlh	4.7 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

Answer :

(a) Plantwide Factory overhead rate = Budgeted Factory overhead / Budgeted Allocation Base

= $ 861550 / 10550 Hour

= $ 81.66 Per hour

factory overhead allocated to the gasoline and diesel engines

Product	Direct Labor hour per unit	Plantwide Factory overhead rate	Factory overhead per unit
Gasoline Engine	4.70	$ 81.66	$ 383.80
Diesel Engine	4.70	$ 81.66	$ 383.80

(b)

Factory overhead rate in Fabrication Deparment

= $ 614800 / 5300 Hour

= $ 116 per hour

Factory overhead rate in Assembly Department

= $ 246750 / 5250

= $ 47 per hour

Gasoline Engine
	Direct Labor hour (a)	Departmental Factory overhead rate per hour (b)	Factory overhead rate per unit
Production Department	2.90	$ 116	$ 336.40
Fabrication Department	1.80	$ 47	$ 84.60
			$ 421

Diesel Engine
	Direct Labor hour (a)	Departmental Factory overhead rate per hour (b)	Factory overhead rate per unit
Production Department	1.80	$ 116	$ 208.80
Fabrication Department	2.90	$ 47	$ 136.30
			$ 345.10

( c) Management should Select Multiple Department factory overhead rate method.

Since Multiple Department factory overhead rate method.allocates factory overhead to products based on thier actual uses of direct labor hours and therefore provides a more realistic and genuine overhead cost allocation to product.

The single plantwide overhead rate method indicates that both product have the same factory overhead ...ie $ 383.80 per unit because each product uses 4.70 Labor hour per unit.However each product uses these 4.70 Direct labor hour much differently.