Question

Product Costs and Product Profitability Reports, using a Single Plantwide Factory Overhead Rate

Isaac Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Isaac Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:

	Budgeted Volume (Units)		Direct Labor Hours Per Unit		Price Per Unit		Direct Materials Per Unit
Pistons	6,000		0.30		$40		$ 9
Valves	13,000		0.50		21		5
Cams	1,000		0.10		55		20

The estimated direct labor rate is $20 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Isaac Engines is $235,200.

If required, round all per unit answers to the nearest cent.

a. Determine the plantwide factory overhead rate.
$ per dlh

b. Determine the factory overhead and direct labor cost per unit for each product.

	Direct Labor Hours Per Unit	Factory Overhead Cost Per Unit	Direct Labor Cost Per Unit
Pistons	dlh	$	$
Valves	dlh	$	$
Cams	dlh	$	$

c. Use the information provided to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place.

Isaac Engines Inc.
Product Line Budgeted Gross Profit Reports
For the Year Ended December 31, 20Y2
	Pistons	Valves	Cams
	$	$	$
Product Costs
	$	$	$
Total Product Costs	$	$	$
Gross profit (loss)	$	$	$
Gross profit percentage of sales	%	%	%

d. What does the report in (c) indicate to you?

Valves have the   gross profit as a percent of sales. Valves may require a   price or   cost to manufacture in order to achieve a higher profitability similar to the other two products.

Answer 1

a) Calculation of Direct labor hours

	Budgeted Volume (units)	Direct labor hour per unit	Direct labor hours
Pistons	6000	0.30	1800
Valves	13000	0.50	6500
Cams	1000	0.10	100
Total			8400

Predetermined overhead rate= Budgeted factory overhead/Direct labor hours

= $235200/8400= $28 per dlh

b)

	Direct Labor Hours Per Unit	Factory Overhead Cost Per Unit	Direct Labor Cost Per Unit
Pistons	0.30 dlh	(0.30*$28)= $8.4	(0.30*$20)= $6
Valves	0.50 dlh	(0.50*$28)= $14	(0.50*$20)= $10
Cams	0.10 dlh	(0.10*$28)= $2.8	(0.10*$20)= $2

c)

Isaac Engines Inc.
Product Line Budgeted Gross Profit Reports
For the Year Ended December 31, 20Y2
	Pistons	Valves	Cams
Revenue	(6000*$40)= $240000	(13000*$21)= $273000	(1000*$55)= $55000
Product Costs
Direct materials	(6000*$9)= $54000	(13000*$5)= $65000	(1000*$20)= $20000
Direct labor	(6000*$6)= 36000	(13000*$10)= 130000	(1000*$2)= 2000
Factory overhead	(6000*$8.4)= 50400	(13000*$14)= 182000	(1000*$2.8)= 2800
Total Product Costs	$140400	$377000	$24800
Gross profit (loss)	$99600	$-104000	$30200
Gross profit percentage of sales	(99600/240000)= 41.5%	(-104000/273000)= -38.1%	(30200/55000)= 54.9%

d) Valves have the negative gross profit as a percent of sales. Valves may require a increase in price  price or reduction in cost to manufacture in order to achieve a higher profitability similar to the other two products.

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