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)

Per-unit factory overhead allocated to the commercial

Assembly department= ($360,000/3000hours)*1.4dmh = $120*1.4dmh = $168

Testing department = ($900,000/6000hours)*2.8dmh = $150*2.8dmh = $420

Total per unit = $168+$420 = $588

Per-unit factory overhead allocated to the residential

    Assembly department= ($360,000/3000hours)*1.1dmh = $120*1.1dmh = $132

  Testing department = ($900,000/6000hours)*2.2dmh = $150*2.2dmh = $330

Total per unit = $132+$330 = $462

B) Production Department Factory Overhead Rate = Budgeted Department Factory Overhead/ Budgeted Department Allocation Base

Assembly Department Factory Overhead Rate = $360,000/3000direct machine hours = $120

Testing Department Factory Overhead Rate = $900,000/3000direct machine hours = $300

Commercial

   Assembly Department = $120*1.4dmh = $168

   Testing Department = $300*2.8dmh = $840

Total = $168+$840 = $1008

Residential

    Assembly Department = $120*1.1dmh = $132

Testing Department = $300*2.2dmh = $660

Total = $132+$660 = $792

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 rate of direct cost of two departments is the same. However, the two production department overhead rates are different.Thus, Pineapple should consider remaining with single plantwide factory overhead rate.