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:

Direct labor hours were estimated as follows:

Fabrication Department

Assembly Department

Total

$[3,900$ hours $],[\frac{3,900}{7,800}$ 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:

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 $

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.

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