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: Fabrication Department factory overhead $370,000 Assembly Department factory overhead 148,000 Total $518,000 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 (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 1.20 dlh 2.80 dlh Assembly Department 2.80 1.20 Direct labor hours per unit 4.00 dlh 4.00 dlh 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. Gasoline engine $ per unit Diesel engine $ per 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 engine $ per unit Diesel engine $ per unit c. Recommend to management a product costing approach, based on your analyses in (a) and (b). Management should select the factory overhead rate method of allocating overhead costs. The factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours . Thus, the rate method avoids the cost distortions by accounting for the overhead

Answer 1

a	Single plantwide overhead rate = Total overhead cost ÷ Total Direct labor hours
	Single plantwide overhead rate = $518000 ÷ 7400 = $70 per DLH
	Gasoline Engine =	DLH x Overhead Rate
		4 *70
		$ 280	per unit
	Diesel Engine =	4* 70
		$ 280	per unit
b	Fabrication department overhead rate =	370000 ÷ 3700
		100	per dlh
	Assembly department overhead rate =	148000 ÷ 3700
		40	per dlh
	Gasoline Engine:
	Fabrication	1.2 x 100 =	120
	Assembly	2.8 x 40 =	112
			$ 232	per unit
	Diesel Engine:
	Fabrication	2.8 x 100 =	280
	Assembly	1.2 x 40 =	12
			$ 292	per unit