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	$455,000.00
2	Assembly Department factory overhead	286,200.00
3	Total	$741,200.00

Direct labor hours were estimated as follows:

Fabrication Department	4,550	hours
Assembly Department	5,400
Total	9,950	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	2.9 dlh	2.2 dlh
Assembly Department	2.2	2.9
Direct labor hours per unit	5.1 dlh	5.1 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. 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 . If required, round all per-direct labor hours and per-unit answers to the nearest cent. Gasoline engine per unit Diesel engine per unit 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. If required, round all per-unit answers to the nearest cent. Gasoline engine per unit Diesel engine per unit

Answer 1

a)	Plant wide factory overhead rate = 741200/9950 =	$         74.49	per dlh
	Per unit factory overhead allocation:
	Gasoline engine = 5.1*74.49 =	$      379.90	per unit
	Diesel engine = 5.1*74.49 =	$      379.90	per unit
b)	Departmental factory overhead rate:
	Fabrication department = 455000/4550 =	$      100.00	per dlh
	Assembly department = 286200/5400 =	$         53.00	per dlh
	Per unit factory overhead allocation:
	Gasoline engine = 2.9*100+2.2*53 =	$      406.60	per unit
	Diesel engine = 2.2*100+2.9*53 =	$      373.70	per unit
c)	Recommended approach is, the use of multiple departmental factory overhead
	rates for assigning overhead costs.
	A single overhead rate would result in a broad averaging. It will not result
	in allocation of overhead costs of each department according to the use of that
	departments resources by the products. Such an allocation will result in wrong
	costing of products leading to inappropriate decisions.