Question

The management of Nova 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 Nova:

Answer 1

Answer:

a.Calculation of per unit factory overhead allocated to the Gasoline and Diesel Under the single plantwide overhead Rate method ,using Direct labour hours as the activity base:

Gasoline Engine $280 per unit

Diesel Engine $280 per unit

Explanation:

Single Plantwide factory overhead Rate:

= Total Estimated factory overhead Rate / Estimated direct labour hours

= $588,000 / 8,400 hours

= $70 per direct labour hour

Gasoline Engine = 4 hours *70 = $280 per unit

Diesel Engine = 4 hours *70 = $280 per unit

b.Calculation of per unit factory overhead allocated to the Gasoline and Diesel Under the Multiple production Department  overhead Rate method ,using Direct labour hours as the activity base per each department:

Gasoline Engine $238per unit

Diesel Engine $322 per unit

Explanation:

Department Factory overhead Rate :

= Department Factory overhead cost / Estimated direct labour hours

Fabrication department = $420,000 / 4,200 hours

= $100 per direct labour hour

Assembly department = $168,000 / 4,200 hours

= $40 per Direct labour hour

Gasoline Engine = (1.30 * $100) + (2.70 * $40)

= $130 + $108

= $238 per unit

Diesel Engine = (2.70 * $100 ) + (1.30 * $40)

= ($270 + $52)

= $322 per unit