Single PlantwideandMultiple Production Department Factory Overhead Rate Methodsand 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$507,000Assembly Department factory overhead195,000Total$702,000

Direct labor hours were estimated as follows:

Fabrication Department3,900hoursAssembly Department3,900Total7,800hours

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 DepartmentsGasoline EngineDiesel EngineFabrication Department1.20dlh2.80dlhAssembly Department2.801.20Direct labor hours per unit4.00dlh4.00dlh

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 theactivity base.

Gasoline engine$

per unitDiesel 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.

Gasoline engine$

per unitDiesel engine$

per unit