1. 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		$546,000
   Assembly Department factory overhead		210,000
   	Total	$756,000

   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	1.30	dlh	2.70	dlh
   Assembly Department	2.70		1.30
   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

   .

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