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	$636,650.00
2	Assembly Department factory overhead	243,000.00
3	Total	$879,650.00

Direct labor hours were estimated as follows:

Fabrication Department	5,350	hours
Assembly Department	5,400
Total	10,750	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:

	Required:
Production Departments	Gasoline Engine	Diesel Engine
Fabrication Department	2.9 dlh	1.9 dlh
Assembly Department	1.9	2.9
Direct labor hours per unit	4.8 dlh	4.8 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.*
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

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.

Multiple Production Department Method

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.

Final Questions

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)

Calculation for the per unit Overhead rate under Single plantwide method :

Total Factory Overhead-

Fabrication Department = $636650

Assembly Department = $243000

Total Overhead = $879650

Total Direct Labour Hours = (5350+5400) = 10750 hrs.

So, the Overhead rate under single plantwide method per direct labour hours = $879650 ÷ 10750 hrs.

= $ 81.83/dlh

Dircet labour hours reqired per unit of engine

Gasoline = 4.8 dlh/ unit

Deisel = 4.8 dlh/unit

So, the overhead per unit of production:

Gasoline = ( 4.8 dlh/unit x $81.83) = $392.78/unit

Diesel = (4.8 dlh/unit x $81.83) = $392.78/unit

(b) Calculation of per unit overhead under Multiple Production Department Factory Overhead rate method.

This is an ABC method where activity cost pool and cost driver require to find.

Activity cost pool = Departmental overhead cost

Activity cost driver = Direct labour hours

Overhead rate of each departments are-

Formula = Departmental overhead ÷ Direct labour hrs.

So, the overhead rates are-

Fabrication department = $636650/5350dlh

= $119/dlh

Assembly department = $243000/5400dlh

= $ 45/dlh

So, per unit overhead cost as per the Multiple production overhead rate are-

Gasoline engine

Fabrication Dept. = (2.9 dlh/unit x $119) = $345.10

Assembly Dept. = (1.9dlh/unit x $45) = $ 85.50

Total overhead per unit = $430.60

Diesel Engine

Fabrication Dept. = (1.9 dlh/unit x $119) = $226.10

Assembly Dept. = (2.9 dlh/unit x $45 ) = $130.50

Total Overhead cost per unit = $ 356.60

(c)

(1) From the above it is clearly seen that multiple production department factory overhead rate is giving the accurate overhead cost of each product. So, it is recommend to the management to follow the multiple production factory overhead rate.

(2) Multiple production factory overhead rate is based on the activity in the production facility. The overhead rate of the facilities per direct labour hours for fabrication and assembly are $119/dlh and $45/dlh. The overhead rate of fabrication department activity is costly than the assembly department activity and gasoline engine takes 2.9dlh/unit as compared to the diesel engine 1.9dlh/unit in the fabrication department. On the outher hand diesel engine takes less time in fabrication department and more time assembly department. So, the overhead costs per unit of Gasoline engine must have to be greater than the diesel engine. That's why overhead rate per dlh comes for gasoline engine $430.60/unit and for diesel engine $356.60/unit.

But in the case of single factory over rate a single overhead rate which of $81.83/dlh is applied to the products. For which the per unit overhead rate is same for both the products which is $392.78/unit which is illogical in the present context. That's why multiple factory overhead rate is superior than single factory overhead and the management must have to adopt the multiple factory overhead rate.