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		$197,800
Testing Department		756,800
	Total	$954,600

Direct machine hours were estimated as follows:

Assembly Department		4,300	hours
Testing Department		8,600
	Total	12,900	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

Predetermined overhead rate = 954600/12900= $74 per DMH

Commercial Motor

111

per unit

=1.5*74

Residential Motor

222

per unit

=3*74

b

Predetermined overhead rate:

Assembly Department

46

=197800/4300

Testing Department

88

=756800/8600

Commercial Motor

111

per unit

=(0.5*46)+(1*88)

Residential Motor

222

per unit

=(1*46)+(2*88)

c

The factory overhead determined under the single plantwide factory overhead rate and multiple production department factory overhead rate methods are the same. This is because the ratio of direct machine hours used by each product from the two departments is the same.

However, the two production department overhead rates are different . Thus, Peach should consider the easier rate method in this situation.