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 $430,000

Assembly Department factory overhead 172,000

Total $602,000

Direct labor hours were estimated as follows:

Fabrication Department 4,300hours

Assembly Department 4,300

Total 8,600hours

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 1.30dlh 2.70dlh

Assembly Department 2.70 1.30

Direct labor hours per unit 4.00dlh 4.00dlh

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.

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.