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		$240,800
Testing Department		920,200
	Total	$1,161,000

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 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 remaining with the easier single plantwide factory overhead rate method in this situation.

Answer 1

Req a:
Single Plantwide Factory Overheads rate: Estimated Overheads / Estimated Machine Hours
			$ 1161000 /12900 MH = $90 per MH
Per-unit OH cost
			Commercial		Residential
Assembly Department			0.5		1
Testing Department			1		2
Total MH per unit			1.5		3
OH rate per hour			90		90
OH cost per unit			135		270
Req b:
Departmental OH rate: Estimated Deptt OH / Estimated MH
Assembly Deptt: $ 240800 /4300 = $56 per hour
Testing Deptt: $ 920,200 /8600 = $ 107 per Hour
Per-unit OH cost
			Commercial		Residential
Assembly Department MH			0.5		1
Testing DepartmentMH			1		2
OH per unit
Assembly Deptt. OH (@56)			28		56
Testing deptt (@107)			107		214
OH cost per unit			135		270
Req C:
The factory OH deytermined using both the methods are the same.
This is because the ratio of direct machine hourrs is the same.
However, two production deptt overheads rate are different.
The Peach shouuld consider remaining with the easier Single Plantwide Factory overheads rate method.