Question

The company has two departments – Cutting and Sewing. The company uses the multiple production department factory overhead rate method using direct labor hours. The budgeted factory overhead is $900,000 for the Cutting Department and $500,000 for the Sewing Department. The company plans to make 100,000 shirts and 50,000 pairs of pants. It takes 1 hour to cut and one hour to sew a shirt. It takes 1 hour to cut and 2 hours to sew a pair of pants. How many direct labor hours are being worked in each department? What is the factory overhead rate per direct labor hour for each department?   Is it a better decision for the company to use the multiple production department factory overhead rate method rather than the single plantwide factory overhead rate?

Answers should be entered to a single decimal place

Direct labor hours Cutting Dept:

Direct Labor hours Sewing Dept:

Factory Overhead Rate for the Cutting Dept:

Factory Overhead Rate for the Sewing Dept:

How much FOH is allocated to a shirt:

How much FOH is allocated to a pair of pants:

Answer 1

Solutions:

Particulars	Cutting	Sewing
Factory Overhead	900000	500000
Labour hour per shirt	1	1
Labour Hour per pant	1	2
No of Shirts	100000	100000
No of Pants	50000	50000
Direct Labor Hours
Shirt (100000*1 and 100000*1)	100000	100000
Pant (50000*1 and 50000*2)	50000	100000
Total Direct Labor Hours	150000	200000
Factory Overhead Rate per direct labor hour	6	2.5
Factory Overhead / Total Labor Hours	(900000/150000)	(500000/200000)
Factory Overhead allocated to Shirt	600000	250000
Labor hours for Shirt * Rate per hour	(100000*6)	(100000*2.5)
Factory Overhead allocated to Pant	300000	250000
Labor hours for Pant * Rate per hour	(50000*6)	(100000*2.5)

The multiple production department factory overhead rate method would provide more accurate product costs than the single plantwide factory overhead method when there are significant differences in the factory overhead rates across different production departments, and when the products require different proportions of allocation-base usage in each production department. Hence in this case it is a better decision for the company to use multiple production department overhead rate method.