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	$240,000.00
2	Testing Department	750,000.00
3	Total	$990,000.00

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	1.5 dmh	1.0 dmh
Testing Department	3.0	2.0
Total machine hours per unit	4.5 dmh	3.0 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.	Single Plant wide factory overhead rate method:
	Pre - determined factory overhead rate	=	Total estimated overheads / Total direct machine hours
		=	$990000 / 9000 hours
		=	$        110
	Per unit factory overhead rate allocated to:
	Commercial	=	Pre - determined factory overhead rate X Total machine hours per unit
		=	$110 X 4.5 dmh
		=	$        495
	Residential	=	Pre - determined factory overhead rate X Total machine hours per unit
		=	$110 X 3 dmh
		=	$        330
b.	Multiple production department factory overhead rate method:
	Per hour factory overhead of:
	Commercial	=	Estimated overheads / Direct machine hours
		=	$240000 / 3000 hours
		=	$          80
	Residential	=	Estimated overheads / Direct machine hours
		=	$750000 / 6000 hours
		=	$        125
	Per unit factory overhead rate allocated to:
	Commercial	=	(1.5 dmh X $80) + (3 X $125)
		=	$        495
	Residential	=	(1 dmh X $80) + (2 X $125)
		=	$        330
c.	Recommendation: Multiple production department factory overhead rate method
	As both the methods are correct but it is more reasonable to allocate factory overheads according to multiple production department as it did not extra charge and it is more logical and reasonable method.