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	$577,200.00
2	Assembly Department factory overhead	235,200.00
3	Total	$812,400.00

Direct labor hours were estimated as follows:

Fabrication Department	5,200	hours
Assembly Department	4,900
Total	10,100	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	2.8 dlh	1.9 dlh
Assembly Department	1.9	2.8
Direct labor hours per unit	4.7 dlh	4.7 dlh

	Required:
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.*
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.*
c.	(1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer.
	*If required, round all per-unit answers to the nearest cent.

Single Plantwide Method

Shaded cells have feedback.

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 unit

Points:

0 / 2

Feedback

Multiple Production Department Method

Shaded cells have feedback.

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.

Answer 1

Solution a:

Predetermined overhead rate = Estimated overhead / Estimated direct labor hours

= $812,400 / 10100 = $80.44 per direct labor hour

Computation of per unit factory overhead - Firebolt Industries Inc.
Particulars	Gasoline Engine	Diesel Engine
Direct labor hour per unit	4.7	4.7
Overhead rate per direct labor hour	$80.44	$80.44
Per unit factory overhead	$378.07	$378.07

Solution b:

Compuation of departmental overhead rate - Firebolt industries inc.
Particulars	Fabrication	Assembly
Estimated overhead	$577,200.00	$235,200.00
Direct labor hours	5200	4900
Departmental overhead rates (per direct labor hour)	$111.00	$48.00

Computation of per unit factory overhead - Firebolt Industries Inc.
Particulars	Gasoline Engine	Diesel Engine
Direct labor hours per unit - Fabrication	2.8	1.9
Overhead rate per direct labor hour - Fabrication	$111.00	$111.00
Per unit factory overhead - Fabrication (A)	$310.80	$210.90
Direct labor hours per unit - Assembly	1.9	2.8
Overhead rate per direct labor hour - Assembly	$48.00	$48.00
Per unit factory overhead - Assembly (B)	$91.20	$134.40
Per unit factory overhead (A+B)	$402.00	$345.30

Solution c:

Multiple department overhead rate should be used for product costing purpose because different department have different overhead and usage of activities in product. Therefore multiple department overhead allocation will provide actual cost of the product in comparison of using single plantwide overhead rate.