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 vas budgeted for Nova: Fabrication Department factory overhead $630,000 Assembly Department factory overhead 294,000 Total $924,000 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 (dih) used to produce a unit of each product in each department were determined from engineering records, as follows: Gasoline Diesel Production Departments Engine Engine Fabrication Department 1.30 dlh 2.70 dlh Assembly Department 2.70 1.30 Direct labor hours per unit 4.00 dih 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. per Gasoline engine unit $ per Diesel engine 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. $ per Gasoline engine unit $ per Diesel engine unit C. Recommend to management a product costing approach, based on your analyses in (a) and (b). Management should select the multiple department factory overhead rate method of allocating overhead costs. The single plantwide factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours differently . Thus, the multiple department rate method avoids the cost distortions by accounting for the overhead in each production department separately Feedback Single Plantvide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion Eclipse Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantvide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Eclipse: $280,000 Assembly Department Testing Department 800,000 Total $1,080,000 Direct machine hours were estimated as follows: 4,000 hours Assembly Department Testing Department 5,000 Total 9,000 hours In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows: Commercial Residential 2.0 dmh 3.0 dmh Assembly Department Testing Department 6.0 1.5 Total machine hours per unit 8.0 dmh 4.5 dmh a. Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base. Commercial $ per unit Residential $ per unit b. Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department. Commercial $ per unit Residential $ per unit C. Recommend to management a product costing approach, based on your analyses in (a) and (b). 1. The management should consider multiple production department factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that commercial products use more costly overheads than residential products. 2. The management should consider single plantvide factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that the overheads are applied evenly based on the direct labor hours. 3. The management could consider either multiple production department factory overhead rate method or the single plantwide rate, as both these methods have the same effect on the final costs. 1
