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Answer 1

(a)

The single factory overhead rate =

Budgeted Factory Overhead / Direct Labour Hours Worked

= (Fabrication Dept. Factory Overhead + Assembly Dept. Factory Overhead) / (Fabrication Dept. Direct Labour Hours + Assembly Dept. Direct Labour Hours)

= $ (577200+235200) / (5200 + 4900) DLH

= $ 80.44/ dlh

Per unit factory overhead will be = ( Direct labour hrs. Per unit x Overhead rate per per direct labour hours)

Gasoline Engine = ( 4.7 dlh x $ 80.44) = $ 378.07

Diesel Engine = ( 4.7 dlh x $ 80.44) = $ 378.07

(b) This is an activity based cost accounting. Here two activities are identified Fabrication and Assembly. Two different activity rates must have to be calculated to implement this method.

Multiple Factory Overhead rate = Activity Cost Pool/ Cost driver

Fabrication dept. overhead rate = $577200 / 5200dlh  = $ 111/dlh

Assembly dept. Overhead rate = $235200/ 4900dlh = $ 48/ dlh

So, the allocated overhead to the products will be -

Gasoline engine -

Fabrication Dept. = ($111 x 2.8 dlh) = $ 310.80

Assembly Dept. = ($ 48 x 1.9 dlh) = $ 91.20

Total Overhead cost per unit = $ 402.00

​​​​​​Diesel Engine -

Fabrication Dept. = ($ 111 x 1.9 dlh) = $ 210.90

Assembly Dept. = ( $ 48 x 2.8 dlh) = $ 134.40

​​​​​​Overhead per unit = $ 345.30

(c) Management should adopt the multiple factory overhead rate over single factory overhead rate cause multiple factory overhead rate gives the more accurate cost of the products. It can be seen from the calculations that fabrication dept has $111/dlh and the assembly Dept has $ 48 /dlh. So fabrication Dept is expensive than assembly dept and overhead must have to be allocated higher for gasoline engine than diesel engine cause gasoline engine takes more time in fabrication dept. While on the other hand it is seen from the single factory overhead rate that the overhead is allocated equally for the two engine by applying an uniform single overhead rate. So, the management should adapt the multiple factory overhead rate.