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:

Fabrication Department factory overhead		$570,000
Assembly Department factory overhead		266,000
	Total	$836,000

Direct labor hours were estimated as follows:

Fabrication Department		3,800	hours
Assembly Department		3,800
	Total	7,600	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	0.80	dlh	2.30	dlh
Assembly Department	2.20		0.70
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

Solution a:

Predetermined factory overhead rate = Estimated overhead / Estimated direct labor hours

= $836,000 / 7600 = $110 per direct labor hour

Computation of per unit factory overhead - Firebolt Industries Inc.
Particulars	Gasoline Engine	Diesel Engine
Direct labor hour per unit	3	3
Overhead rate per direct labor hour	$110.00	$110.00
Per unit factory overhead	$330.00	$330.00

Solution b:

Compuation of departmental overhead rate - Firebolt industries inc.
Particulars	Fabrication	Assembly
Estimated overhead	$570,000.00	$266,000.00
Direct labor hours	3800	3800
Departmental overhead rates (per direct labor hour)	$150.00	$70.00

Computation of per unit factory overhead - Firebolt Industries Inc.
Particulars	Gasoline Engine	Diesel Engine
Direct labor hours per unit - Fabrication	0.8	2.3
Overhead rate per direct labor hour - Fabrication	$150.00	$150.00
Per unit factory overhead - Fabrication (A)	$120.00	$345.00
Direct labor hours per unit - Assembly	2.2	0.7
Overhead rate per direct labor hour - Assembly	$70.00	$70.00
Per unit factory overhead - Assembly (B)	$154.00	$49.00
Per unit factory overhead (A+B)	$274.00	$394.00