Question

Pineapple Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Pineapple:

1	Assembly Department	$330,000.00
2	Testing Department	1,200,000.00
3	Total	$1,530,000.00

Direct machine hours were estimated as follows:

Assembly Department	3,000	hours
Testing Department	6,000
Total	9,000	hours

In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows:

	Commercial	Residential
Assembly Department	1.2 dmh	0.9 dmh
Testing Department	2.4	1.8
Total machine hours per unit	3.6 dmh	2.7 dmh

	Required:
a.	Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base.
b.	Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation 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.

Answer 1

A)

Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plant wide factory overhead rate method, using direct machine hours as the allocation base.

budgeted factory overhead = $1,530,000

plantwide allocation base = 9000 direct machine hrs

Overhead rate per machine hour

=Total Overhead / Total Number of machine Hour

=$1,530,000 / 9,0000

=$170 per machine Hour

Department	commercial		Residential
Assembly	1.2 dmh * $170 per dmh	$ 204 per unit	0.9 dmh * $170 per dmh	$ 153 per unit
Testing	2.4 dmh * 170 per dmh	$ 408 per unit	1.8 dmh * 170 per dmh	$ 306 per unit
Per unit overhead cost		612		459

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b)

Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department

Department	Overhead cost	Direct labor Hour	Overhead rate
Assembly Department	330000	3000	110
Testing Department	1200000	6000	200

Now we will make allocation as under

Department	commercial		residential
Assembly	1.2 dmh * $110 per dmh	$ 132 per unit	0.9 dmh * $110 per dmh	$ 99 per unit
Testing	2.4 dmh * 200 per dmh	$480 per unit	1.8 dmh * 200 per dmh	$ 360 per unit
Per unit overhead cost		612		459

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C)

Here management is indifferent because in two methods result are same because we can see from the above calculation that in both the methods per unit cost is same.

management should choose single plant wide method because this method is easier to implement