Question

Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion

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:

Assembly Department		$224,000
Testing Department		832,000
	Total	$1,056,000

Direct machine hours were estimated as follows:

Assembly Department		4,000	hours
Testing Department		8,000
	Total	12,000	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	0.50	dmh	1.00	dmh
Testing Department	1.00		2.00
Total machine hours per unit	1.50	dmh	3.00	dmh

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.

Commercial Motor	$ per unit
Residential Motor	$ per unit

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.

Commercial Motor	$ per unit
Residential Motor	$ per unit

c. Recommend to management a product costing approach, based on your analyses in (a) and (b).

The factory overhead determined under the single plantwide factory overhead rate and multiple production department factory overhead rate methods are . This is because the ratio of direct machine hours used by each product from the two departments is . However, the two production department overhead rates are . Thus, Peach should consider the easier rate method in this situation.

Answer 1

a

Single plantwide factory overhead rate = 1056000/12000= $88

Commercial Motor

132

per unit

=1.5*88

Residential Motor

264

per unit

=3*88

b

Department factory overhead rate:

Assembly Department

56

per dmh

=224000/4000

Testing Department

104

per dmh

=832000/8000

Commercial Motor

132

per unit

=(0.5*56)+(1*104)

Residential Motor

264

per unit

=(1*56)+(2*104)

c

The factory overhead determined under the single plantwide factory overhead rate and multiple production department factory overhead rate methods are same.

This is because the ratio of direct machine hours used by each product from the two departments is same.

However, the two production department overhead rates are different.

hus, Peach should consider the easier rate method in this situation which is single plantwide rate method