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:

1	Fabrication Department factory overhead	$561,600.00
2	Assembly Department factory overhead	241,500.00
3	Total	$803,100.00

Direct labor hours were estimated as follows:

Fabrication Department	4,800	hours
Assembly Department	5,250
Total	10,050	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

3.1 dlh

1.8 dlh

Assembly Department

1.8

3.1

Direct labor hours per unit

4.9 dlh

4.9 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 . If required, round all per-direct labor hours and per-unit answers to the nearest cent.

Gasoline engine	per unit
Diesel engine	per

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. If required, round all per-unit answers to the nearest cent.

Gasoline engine	per unit
Diesel engine	per unit

c. (1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer.

(1)

Management is indifferent, since either method yields the same result.

Management should change to the multiple production department factory overhead rate method.

Management should continue to use the single plantwide overhead rate method.

(2)

In this case, the single plantwide method causes cost distortion, so the multiple production department method should be used.

In this case, the factory overhead rates for each product are the same under either method; therefore, the company should choose single plantwide method since it’s easier to implement.

In this case, the multiple production department method causes cost distortion, so the single plantwide method should be used.

Answer 1

a.

Single plantwide factory overhead rate = Estimated total factory overhead / Estimated total direct labor hours

Single plantwide factory overhead rate = $803,100 / 10,050 = $79.91 per direct labor hour

Gasoline engine (4.9*$79.91)	$391.56
Diesel engine (4.9*$79.91)	391.56

b.

Multiple production department factory overhead rate:

Fabrication = $561,600 / 4,800 = $117 per direct labor hour

Assembly = $241,500 / 5,250 = $46 per direct labor hour

Gasoline engine [$362.7 (3.1*$117) + $82.8 (1.8*$46)]	$445.5
Diesel engine [$210.6 (1.8*$117) + $142.6 (3.1*$46)]	353.2

c.

1. Management should change to the multiple production department factory overhead rate method.

2. In this case, the single plantwide method causes cost distortion, so the multiple production department method should be used.