HOC Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion The management of Nava 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 factor overhead to the two products. However, management is considering the multiple production department factory overhead rate method. The following factory overhead was budgeted for Nova: Fabrication Department factory overhead $748,000 Assembly Department factory overhead 308,000 Total $1,056,000 Direct labor hours were estimated as follows: 4,400 hours Fabrication Department Assembly Department 4,400 8,800 hours Total In addition, the direct obor hours (dih) 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 1.30 din 2.70 din Assembly Department 2.70 1.30 Direct labor hours per unit 4.00 h 4.00 h a. Determine the per un factory overhead located to the gasoline and diesel engines under the single plantwide factory overhead rate method, using direct labor hours as the city base. Readin sembly Department 4,400 Total 8,800 hours addition, the direct labor hours (dih) 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 1.30 dth 2.70 dih Assembly Department 2.70 1.30 Direct labor hours per unit 4.00 din 4.00 dih 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 Gasoline engine per unit Diesel engine per unit b. Determine the per unit factory overhead alocated to the gasoline and diesel engines under the multiple production department factory overhead rate method, using Orect labor bours as the activity base for each department Gasoline engine per unit Diesel engine per c. Recommend to management a product costing approach, based on your analyses in (a) and (b) Management should select the factory overload rate method of locating overhead costs. The factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours Thus, the rate method avoids the cost distortions by accounting for the overhead Reade Total 8,800 hours addition, the direct labor hours (dih) used to produce a unit of each product in each department were determined from engineering records, as follows: roduction Departments Gasoline Engine Diesel Engine Fabrication Department 1.30 dth 2.70 din Assembly Department 2.70 1.30 Direct labor hours per unit 4.00 din 4.00 din a. Determine the par-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 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. Der unit Gasoline engine Diesel engine per unit c. Recommend to management a product coating approach, based on your analyses in (a) and (b) Management should select the tactory overhead rate method of allocating overhead costs. The method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours rate method avoids the cost distortions by accounting for the overhead factory overhead rate Thus, the
