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	$507,000
Assembly Department factory overhead	195,000
	Total	$702,000

Direct labor hours were estimated as follows:

Fabrication Department	3,900	hours
Assembly Department	3,900
	Total	7,800	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

Product Costs using Activity Rates

Hercules Inc. manufactures elliptical exercise machines and treadmills. The products are produced in its Fabrication and Assembly production departments. In addition to production activities, several other activities are required to produce the two products. These activities and their associated activity rates are as follows:

Activity	Activity Rate
Fabrication	$28	per machine hour
Assembly	$14	per direct labor hour
Setup	$55	per setup
Inspecting	$32	per inspection
Production scheduling	$15	per production order
Purchasing	$12	per purchase order

The activity-base usage quantities and units produced for each product were as follows:

Activity Base	Elliptical Machines	Treadmill
Machine hours	1,744		1,029
Direct labor hours	498		194
Setups	53		16
Inspections	695		417
Production orders	74		15
Purchase orders	176		107
Units produced	285		191

Use the activity rate and usage information to determine the total activity cost and activity cost per unit for each product. If required, round the per unit answers to the nearest cent.

	Total Activity Cost	Activity Cost Per Unit
Elliptical Machines	$fill in the blank 1	$fill in the blank 2
Treadmill	$fill in the blank 3	$fill in the blank 4

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	$287,680		Machine hours
Assembly	190,440		Direct labor hours
Inspecting	31,950		Number of inspections
Setup	52,540		Number of setups
Materials handling	54,570		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	4,920		4,360		9,280
Direct labor hours	4,230		6,350		10,580
Number of inspections	1,620		510		2,130
Number of setups	300		70		370
Number of loads	850		220		1,070
Units produced	9,800		4,900		14,700

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

Multiple Production Department Factory Overhead Rate Method

Handy Leather, 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. Handy Leather 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	$93,100
Cut and Sew Department overhead	156,000
	Total	$249,100

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

Pattern Department	1,900	direct labor hours
Cut and Sew Department	2,400
	Total	4,300	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	0.08		0.10		0.12
Direct labor hours per unit	0.12		0.15		0.18

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

a. Determine the two production department factory overhead rates.

Pattern Department	$fill in the blank 1per dlh
Cut and Sew Department	$fill in the blank 2per dlh

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

Small glove	$fill in the blank 3 per unit
Medium glove	$fill in the blank 4 per unit
Large glove	$fill in the blank 5 per unit