Question

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:

1	Assembly Department	$360,000.00
2	Testing Department	900,000.00
3	Total	$1,260,000.00

Direct machine hours were estimated as follows:

Assembly Department	3,000	hours
Testing Department	6,000
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	1.4 dmh	1.1 dmh
Testing Department	2.8	2.2
Total machine hours per unit	4.2 dmh	3.3 dmh

	Required:
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.
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.
c.	(1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer.

Answer 1

(a) Single plantwide factory overhead rate method

	Factory overhead	Direct machine hours
Assembly department	$360,000	3,000 hours
Testing department	$900,000	6,000 hours
Total	$1,260,000	9,000 hours

Single plantwide factory overhead rate = Factory overhead/ Direct machine hours

= 1,260,000/9,000

= $140 per direct machine hour

	Commercial	Residential
Assembly department	1.4 dmh	1.1 dmh
Testing department	2.8 dmh	2.2 dmh
Total machine hours per unit (i)	4.2 dmh	3.3 dmh
Single plantwide factory overhead rate (ii)	$140/ dmh	$140/ dmh
Hence, per unit factory overhead (i) x (ii)	$588	$462

(b) Multiple production department factory overhead rate method

	Factory overhead (i)	Direct machine hours (ii)	Factory overhead rate (i)/(ii)
Assembly department	$360,000	3,000 hours	$120/dmh
Testing department	$900,000	6,000 hours	$150/dmh

	Commercial			Residential
	dmh	Overhead rate	Overhead/unit	dmh	Overhead rate	Overhead/unit
Assembly Dept.	1.4	$120/dmh	$168	1.1	$120/dmh	$132
Testing Dept.	2.8	$150/dmh	$420	2.2	$150/dmh	$330
Total			$588			$462

(c) Factory overhead rate per unit is same in case of both the methods of recovery of overheads. However, the multiple production department factory overhead rate method provides more accurate product costs than the single plantwide factory overhead rate method when there are significant differences in the factory overhead rates across different production departmentsand when the products require different proportions of allocation base usage in each production department. Hence multiple production department factory overhead rate method is suggested.