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: 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 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.

Answer 1

1)	Break even point in sales dollars = Fixed costs/CM Ratio
	Fixed costs = 542000+217600 =	$      7,59,600
	Variable expenses per unit = 13.00+4.92 =	$            17.92
	Contribution margin per unit = 32 - 17.92 =	$            14.08
	CM ratio = Contribution margin/Sales = 14.08/32 =	44.00%
	BEP in sales dollars = 759600/44% =	$    17,26,364
2)	Fixed costs = 542000+217600 =	$      7,59,600
	Variable expenses per unit = 13.00*110%+4.92 =	$            19.22
	Contribution margin per unit = 32 - 19.22 =	$            12.78
	CM ratio = Contribution margin/Sales = 12.78/32 =	39.94%
	BEP in sales dollars = 759600/44% =	$    19,01,972
3)	CM Ratio = Revised Contribution margin per unit/Sales price per unit
	Sales price to yield 44% CM Ratio = 12.78/44% =	$            29.05
	Tabulation of the given data:	Fabrication	Assembly	Total
	Estimated factory overhead	$      6,36,650	$   2,43,000	$ 8,79,650
	Estimated direct labour hours	5350	5400	10750
	Predetermined OH rate	$          119.00	$         45.00	$        81.83
	Direct labor hours used per unit:
	Gasoline engine	2.9	1.9	4.8
	Diesel engine	1.9	2.9	4.8
a)	Per-unit factory overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead rate method
	Gasoline engine (4.8*81.83)	$          392.78
	Diesel engine (4.8*81.83)	$          392.78
b)	Per-unit factory overhead allocated to the gasoline and diesel engines under the multiple production department factory overhead rate method.
	Gasoline engine (2.9*119+1.9*45)	$          430.60
	Diesel engine (1.9*119+2.9*45)	$          356.60
C-1)	The Multiple production department FOH rate is recommended.
C-2)	The reason is that it makes a better allocation of the departmental OH.
	Firstly, it considers that the overhead cost per direct labor hour is different
	for the departments. It is higher for fabrication.
	Secondly, OH is assigned to products on the basis of the direct labor hours
	used by the two products in each department separately. This only
	proper as the DLH used up by the products in each department is different.
	For the reasons mentioned above, the OH is assigned at a more rational
	basis.
	In contrast, the plant wide OH rate makes use of a broad OH rate which, is
	a broad averaging of the total OH. It does not consider that the OH rate is
	different for the two departments. It also does not take into account the
	different processing time required for the products in the the two
	departments.