Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion

The management of Nova 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 Nova:

Fabrication Department factory overhead	$714,000
Assembly Department factory overhead	294,000
	Total	$1,008,000

Direct labor hours were estimated as follows:

Fabrication Department	4,200	hours
Assembly Department	4,200
	Total	8,400	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	1.20	dlh	2.80	dlh
Assembly Department	2.80		1.20
Direct labor hours per unit	4.00	dlh	4.00	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.

Gasoline engine	$fill in the blank 1 per unit
Diesel engine	$fill in the blank 2 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.

Gasoline engine	$fill in the blank 3 per unit
Diesel engine	$fill in the blank 4 per unit

c. Recommend to management a product costing approach, based on your analyses in (a) and (b).

Management should select the

multiple departmentsingle plantwide

factory overhead rate method of allocating overhead costs. The

multiple departmentsingle plantwide

factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours

equallydifferently

. Thus, the

multiple departmentsingle plantwide

rate method avoids the cost distortions by accounting for the overhead

plantwidein each production department separately

.

Activity Rates and Product Costs using Activity-Based Costing

Lonsdale Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated budgeted activity costs and activity bases are as follows:

Activity	Budgeted Activity Cost	Activity Base
Casting	$348,250		Machine hours
Assembly	192,780		Direct labor hours
Inspecting	29,680		Number of inspections
Setup	41,100		Number of setups
Materials handling	47,000		Number of loads

Corporate records were obtained to estimate the amount of activity to be used by the two products. The estimated activity-base usage quantities and units produced follow:

Activity Base	Entry	Dining	Total
Machine hours	5,270		4,680		9,950
Direct labor hours	4,540		6,800		11,340
Number of inspections	1,610		510		2,120
Number of setups	240		60		300
Number of loads	740		200		940
Units produced	10,400		5,200		15,600

a. Determine the activity rate for each activity. If required, round the rate to the nearest dollar.

Activity	Activity Rate
Casting	$fill in the blank 1	per machine hour
Assembly	$fill in the blank 2	per direct labor hour
Inspecting	$fill in the blank 3	per inspection
Setup	$fill in the blank 4	per setup
Materials handling	$fill in the blank 5	per load

b. Use the activity rates in (a) to determine the total and per-unit activity costs associated with each product. Round the per unit amounts to the nearest cent.

Product	Total Activity Cost	Activity Cost Per Unit
Entry Lighting Fixtures	$fill in the blank 6	$fill in the blank 7
Dining Room Lighting Fixtures	$fill in the blank 8	$fill in the blank 9