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 Assembly Department factory overhead Total Direct labor hours were estimated as follows: Fabrication Department Assembly Department Total $370,000 148,000 $518,000 3,700 hours 3,700 7,400 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: Gasoline Engine 1.20 dlh 2.80 Production Departments Fabrication epartment Assembly Department Direct labor hours per unit a. Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead 4.00 dlh Diesel Engine 2.80 dlh 1.20 4.00 dlh

Single plantwide and multiple production department factory overhead rate methods and product cost distortion The management of Nova Industries Inc. manufactures gasoline and dlesel 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 labgr hours were estimated as follows: 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: 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: 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 s per unit Diesel engine 5 per unit b. Determine the per-unit foctory 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 s per unit Diesel engine 1 per unit C. Recommend to management a product costing approach, based on your analyses in (a) and (b). Management should select the factory overhead rate method of allocating overhead costs. The factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours Thus, the rate method avoids the cost distortions by accounting for the overhead