Question

Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion 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 $407,000 Assembly Department factory overhead 185,000 Total $592,000 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 1.00 dlh 2.10 dlh Assembly Department 2.00 0.90 Direct labor hours per unit 3.00 dlh 3.00 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

Answer 1

1)Plantwide factory overhead rate: = 592,000/7,400 =80 Per Direct Labour Hour

Gasoline Engine= 80*3 =240

Diesel Engine = 80*3 = 240

2)

	Fabrication	Assembly
Total production department factory overhead	$ 407,000.00	$ 185,000.00
Direct labor hours	3,700.00	3,700.00
Production department overhead rate	$          110.00	$            50.00

Product Allocation

Gasoline engine
Fabrication Department	1	$ 110.00	$ 110.00
Assembly Department	2	$    50.00	$ 100.00
			$ 210.00
Diesel engine
Fabrication Department	2.1	$ 110.00	$ 231.00
Assembly Department	0.9	$    50.00	$    45.00
			$ 276.00