Question

Elliott Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Elliott Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:

	Budgeted Volume	Direct Labor Hours	Price	Direct Materials
	(Units)	per Unit	per Unit	per Unit
Pistons	7,400	0.18	$52.0	$24.9
Valves	27,000	0.16	10.0	4.0
Cams	1,200	0.30	70.8	28.7

The estimated direct labor rate is $19 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Elliott Engines is $186,372.

	Required:
a.	Determine the plantwide factory overhead rate.
b.	Determine the factory overhead and direct labor cost per unit for each product. If required, round all per-unit answers to the nearest cent.
c.	Use the information provided to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. Enter all amounts as positive numbers, except for a negative gross profit/gross profit percentage of sales.
d.	What does the report in (c) indicate to you?

Answer 1

a)	Total factory overhead budgeted				$    1,86,372.00
	Total budgeted labor hours = 7400*0.18+27000*0.16+1200*0.30 =				6012
	Plant wide factory overhead rate = 186372/6012 =				$                31.00
b)		Pistons	Valves	Cams
	Direct labor	3.42	3.04	5.70
	Factory overhead cost	5.58	4.96	9.30
c)	Sales units	7400	27000	1200	`
	Sales	384800	270000	84960
	Cost of production:
	Direct material cost	184260	108000	34440
	Direct labor cost	25308	82080	6840
	Factory overhead cost	41292	133920	11160
	Total cost	250860	324000	52440
	Gross profit	133940	-54000	32520
	Gross profit %	34.81%	-20.00%	38.28%
d)	Valves give 20% gross loss. Hence, may be dropped after further
	detailed study.