Single plantwide and multiple production department factory OBJ. 2, 3 overhead rate methods and product cost distortion 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:

Fabrication Department factory overhead $550,000 Assembly Department factory overhead 250,000 _______ Total $800,000 _______ _______ Direct labor hours were estimated as follows:

Fabrication Department 5,000 hours Assembly Department 5,000 _____ Total 10,000 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 3.0 dlh 2.0 dlh Assembly Department 2.0 3.0 ___ ___ Direct labor hours per unit 5.0 dlh 5.0 dlh ___ ___ ___ ___

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. Recommend to management a product costing approach, based on your analyses in

(a) and (b). Support your recommendation.