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	$330,000.00
2	Testing Department	750,000.00
3	Total	$1,080,000.00

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	1.4 dmh	0.9 dmh
Testing Department	2.8	1.8
Total machine hours per unit	4.2 dmh	2.7 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

Requirement a :
Overhead Rate per machine hour = Total Overhead / Total number of Machine hours
			1080000/9000 Hours
			$         120.00	Per Machine hour
Department		Commercial		Residential
Assembly	1.4*120	$                 168.00	0.9*120	$     108.00
Testing	2.8*120	$                 336.00	1.8*120	$     216.00
Per Unit Overhead cost	4.2*120	$                   504.00	2.7*120	$    324.00
Requirement b :
Calculation of overhead rate per Department :
Department	Overhead cost	Direct labour hours	overhead rate
Assembly	330000	3000	110
Testing	750000	6000	125
Allocation :
Department		Commercial		Residential
Assembly	1.4*110	$                 154.00	0.9*110	$       99.00
Testing	2.8*125	$                 350.00	1.8*125	$     225.00
Per Unit Overhead cost		$                   504.00		$    324.00
Requirement C
The factory overhead determined under the single plantwide overhead rate and multiple production department factory overhead rate methods were same.
This is because ratio of machine hours used by each product from two departments is same.
The commercial wing uses 1.4 direct machine hour in assembly department and 2.8 hours in testing department
Ratio of 1:0.50
The Residential wing uses 0.9 direct machine hour in assembly department and 1.8 hours in testing department
Ratio of 1:0.50
Thus even tjough two production department overhead rates are different this is not sufficient for the plantwide overhead rate to cause product cost distortion.
Therefore it should consider remaining with easier single plantwide rate method in this situation