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	$561,600.00
2	Assembly Department factory overhead	241,500.00
3	Total	$803,100.00

Direct labor hours were estimated as follows:

Fabrication Department	4,800	hours
Assembly Department	5,250
Total	10,050	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	3.1 dlh	1.8 dlh
Assembly Department	1.8	3.1
Direct labor hours per unit	4.9 dlh	4.9 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 c. (1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer. (1) Management should change to the multiple production department factory overhead rate method. Management is indifferent, since either method yields the same result. Management should continue to use the single plantwide overhead rate method. (2) In this case, the factory overhead rates for each product are the same under either method; therefore, the company should choose single plantwide method since it’s easier to implement. In this case, the multiple production department method causes cost distortion, so the single plantwide method should be used. In this case, the single plantwide method causes cost distortion, so the multiple production department method should be used.

Answer 1

Solution a:

Single plantwide factory overhead rate = Estimated factory overhead / Estimated direct labor hours

= $803,100 / 10050 = $79.91 per direct labor hour

Computation of per unit factory overhead - Firebolt Industries Inc.
Particulars	Gasoline Engine	Diesel Engine
Direct labor hour per unit	4.9	4.9
Overhead rate per direct labor hour	$79.91	$79.91
Per unit factory overhead	$391.56	$391.56

Solution b:

Compuation of departmental overhead rate - Firebolt industries inc.
Particulars	Fabrication	Assembly
Estimated overhead	$561,600.00	$241,500.00
Direct labor hours	4800	5250
Departmental overhead rates (per direct labor hour)	$117.00	$46.00

Computation of per unit factory overhead - Firebolt Industries Inc.
Particulars	Gasoline Engine	Diesel Engine
Direct labor hours per unit - Fabrication	3.1	1.8
Overhead rate per direct labor hour - Fabrication	$117.00	$117.00
Per unit factory overhead - Fabrication (A)	$362.70	$210.60
Direct labor hours per unit - Assembly	1.8	3.1
Overhead rate per direct labor hour - Assembly	$46.00	$46.00
Per unit factory overhead - Assembly (B)	$82.80	$142.60
Per unit factory overhead (A+B)	$445.50	$353.20

Solution c:

Management should change to the multiple production department factory overhead rate method. In this case, the single plantwide method causes cost distortion, so the multiple production department method should be used.