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 $697,000 Assembly Department factory overhead 287,000 Total $984,000 Direct labor hours were estimated as follows: Fabrication Department 4,100 hours Assembly Department 4,100 Total 8,200 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 1.20 dlh 2.80 dlh Assembly Department 2.80 1.20 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 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
3.1 Single Plantwide and Multiple Production Department Factory
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 | $697,000 | ||
| Assembly Department factory overhead | 287,000 | ||
| Total | $984,000 |
Direct labor hours were estimated as follows:
| Fabrication Department | 4,100 | hours | |
| Assembly Department | 4,100 | ||
| Total | 8,200 | 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 | 1.20 | dlh | 2.80 | dlh |
| Assembly Department | 2.80 | 1.20 | ||
| 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
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
.
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