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	$571,200.00
2	Assembly Department factory overhead	253,000.00
3	Total	$824,200.00

Direct labor hours were estimated as follows:

Fabrication Department	5,100	hours
Assembly Department	4,600
Total	9,700	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	2.8 dlh	2.2 dlh
Assembly Department	2.2	2.8
Direct labor hours per unit	5.0 dlh	5.0 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

Input	Fabrication department factory overhead	$ 571,200.00
	Assembly department factory overhead	$ 253,000.00
	Total	$ 824,200.00
	DLH
	Fabrication department	5,100	hours
	Assemby department	4,600
	Total	9,700
	Production Department	Gasoline Engine	Diesel Engne
	Fabrication Department	2.8	2.2
	Assembly Department	2.2	2.8
	Direct labor hours per unit	5.0	5.0
a	Single plantwide overhead rate = Total overhead cost ÷ Total Direct labor hours
	Single plantwide overhead rate = $824,200 ÷ 9,700 = $84.96 per DLH
	Gasoline Engine =	DLH x Overhead Rate
		5.0 x $84.96
		$          428.84	per unit
	Diesel Engine =	5.0 x $84.96
		$          428.84	per unit
b	Fabrication department overhead rate =	571,200 ÷ 5100
		112	per dlh
	Assembly department overhead rate =	253,000 ÷ 4600
		55	per dlh
	Gasoline Engine:
	Fabrication	2.8 x 112 =	313.6
	Assembly	2.2 x 55 =	121
			$ 434.6	per unit
	Diesel Engine:
	Fabrication	2.2 x 112 =	313.6
	Assembly	2.8 x 55 =	121
			$ 400.4	per unit
c	Management should change to multiple production department factory overhead rate. As the single plantwide rate causes distortion, Actual real cost is determined by using multiple departmental rate.

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