Question

Juur analyses in (A) and (B). Support your recommendation Obi, 2.3 EX 18-7 Single plantwide and multiple production department factory overhead rate methods and product cost distortion ✓ B. Diesel engine, The management of Firebolt Industries Inc. manufactures gasoline and diesel $370 per unit two production departments, Fabrication and Assembly. Management needs cost information in order to guide product strategy. Presently, the com plantwide factory overhead rate for allocating factory overhead to the two management is considering the multiple production department factory overhe The following factory overhead was budgeted for Firebolt: diesel engines through veeds accurate product be company uses a single o products. However, overhead rate method Fabrication Department factory overhead Assembly Department factory overhead Total $550,000 250,000 $800,000 Direct labor hours were estimated as follows: Fabrication Department 5,000 hours Assembly Department 5,000 Total 10,000 hours In addition, the direct labor hours (dih) used to produce a unit of each product in department were determined from engineering records, as follows: Product in each

Answer 1

Total factory overhead (A) = $ 800,000

Total direct labor hours (B) = 10,000

Single Plantwide Overhead rate per direct labor hour = A/B = $ 80.00

a.

	Gasoline Engine	Diesel Engine
Single Plantwide Overhead rate per direct labor hour	80.00	80.00
X     Number of direct labor hours per unit	5.00	5.00
Factory Overhead allocated per unit	$ 400.00	$ 400.00

b.

	Fabricating dept	Assembly dept
Factory overhead (A)	550,000	250,000
Number of direct labor hours (B)	5000	5000
Overhead rate per direct labor hour (A/B)	$ 110.00	$ 50.00
	Gasoline Engine	Diesel Engine
Fabricating department
Direct labor Hours per unit	3	2
Overhead rate per direct labor hour	110	110
Overhead allocated per unit	330	220
	Gasoline Engine	Diesel Engine
Assembly department
Direct labor Hours per unit	2	3
Overhead rate per direct labor hour	50	50
Overhead allocated per unit	100	150
Total overhead allocated per unit	100+330 = 430	220+150 = 370

               

c. Multi dept overhead rate in (B) shall be used.

As products use same number of direct labor hours, though consuming different labor hours in different dept, muti-dept overhead rate becomes useful. Hence, single overhead rate is not preferred. Each department has it own allocation rate. So, approach in requirement (b) shall be preferred.