Multiple Production Department Factory Overhead Rate Method

Performance Gloves, Inc. produces three sizes of sports gloves: small, medium, and large. A glove pattern is first stenciled onto leather in the Pattern Department. The stenciled patterns are then sent to the Cut and Sew Department, where the glove is cut and sewed together. Performance Gloves uses the multiple production department factory overhead rate method of allocating factory overhead costs. Its factory overhead costs were budgeted as follows:

Pattern Department overhead		$125,400
Cut and Sew Department overhead		212,800
	Total	$338,200

The direct labor estimated for each production department was as follows:

Pattern Department		2,200	direct labor hours
Cut and Sew Department		2,800
	Total	5,000	direct labor hours

Direct labor hours are used to allocate the production department overhead to the products. The direct labor hours per unit for each product for each production department were obtained from the engineering records as follows:

Production Departments	Small Glove		Medium Glove		Large Glove
Pattern Department	0.04		0.05		0.06
Cut and Sew Department	0.07		0.09		0.11
Direct labor hours per unit	0.11		0.14		0.17

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

a. Determine the two production department factory overhead rates.

Pattern Department	$per dlh
Cut and Sew Department	$per dlh

b. Use the two production department factory overhead rates to determine the factory overhead per unit for each product.

Small glove	$ per unit
Medium glove	$ per unit
Large glove	$ per unit

Instructions:

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:

1	Fabrication Department factory overhead	$455,000.00
2	Assembly Department factory overhead	286,200.00
3	Total	$741,200.00

Direct labor hours were estimated as follows:

Fabrication Department	4,550	hours
Assembly Department	5,400
Total	9,950	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	2.9 dlh	2.2 dlh
Assembly Department	2.2	2.9
Direct labor hours per unit	5.1 dlh	5.1 dlh

	Required:
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.	(1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer.
	*If required, round all per-unit answers to the nearest cent.

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 . If required, round all per-direct labor hours and per-unit answers to the nearest cent.

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

Gasoline engine	per unit
Diesel engine	per unit

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:

1	Fabrication Department factory overhead	$455,000.00
2	Assembly Department factory overhead	286,200.00
3	Total	$741,200.00

Direct labor hours were estimated as follows:

Fabrication Department	4,550	hours
Assembly Department	5,400
Total	9,950	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	2.9 dlh	2.2 dlh
Assembly Department	2.2	2.9
Direct labor hours per unit	5.1 dlh	5.1 dlh

	Required:
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.	(1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer.
	*If required, round all per-unit answers to the nearest cent.

X

Single Plantwide Method

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 . If required, round all per-direct labor hours and per-unit answers to the nearest cent.

Gasoline engine	per unit
Diesel engine	per unit

X

Multiple Production Department Method

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

Gasoline engine	per unit
Diesel engine	per unit

X

Final Questions

c. (1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer.

(1)

a. Management is indifferent, since either method yields the same result.

b. Management should continue to use the single plantwide overhead rate method.

c. Management should change to the multiple production department factory overhead rate method.

(2)

a. In this case, the single plantwide method causes cost distortion, so the multiple production department method should be used.

b. In this case, the multiple production department method causes cost distortion, so the single plantwide method should be used.

c. In this case, the factory overhead rates for each product are the same under either method; therefore, the company should choose single plantwide method since its easier to implement.