Question

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

Eclipse 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 Eclipse:

Assembly Department		$280,000
Testing Department		800,000
	Total	$1,080,000

Direct machine hours were estimated as follows:

Assembly Department		4,000	hours
Testing Department		5,000
	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	2.0	dmh	3.0	dmh
Testing Department	6.0		1.5
Total machine hours per unit	8.0	dmh	4.5	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	$ per unit
Residential	$ 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	$ per unit
Residential	$ per unit

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

1. The management should consider multiple production department factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that commercial products use more costly overheads than residential products.

2. The management should consider single plantwide factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that the overheads are applied evenly based on the direct labor hours.

3. The management could consider either multiple production department factory overhead rate method or the single plantwide rate, as both these methods have the same effect on the final costs.

1

Answer 1

(a)
Single Plantwide overhead rate        = Total Budgeted Factory overhead / Estimated Direct Machine hours          =   $ 1,080,000 / 9,000 hours          = $ 120 per MH	$ 120 per MH
	Commercial	Residential
Allocated per-unit factory overhead         = Machine Hours x Single Plantwide overhead rate	$ 960 ( 8 x $ 120 )	$ 540 (4.5 x $ 120 )
Commercial	$ 960 Per Unit
Residential	$ 540 Per Unit
(b)
	Assembly Department	Testing Department
Departmental overhead rate    = Budgeted Factory overhead / Estimated Direct Machine hours	$ 70 ( $ 280,000 / 4,000 MH )	$ 160 ( $ 800,000 / 5,000 MH )
Department	Commercial	Residential
Assembly Department	$ 140 ( 2 DMH x $ 70)	$ 210 ( 3 DMH x $ 70)
Testing Department	$ 960 ( 6 DMH x $ 160)	$ 240 ( 1.50 DMH x $ 160)
Total	$ 1,100	$ 450
Commercial	$ 1,100 Per Unit
Residential	$ 450 Per Unit
(c )
(1 ) The management should consider multiple production department factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that commercial products use more costly overheads than residential products