The management of Firebolt 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 Firebolt: Fabrication Department factory overhead $550,000 Assembly Department factory overhead 250,000 Total $800,000 Direct labor hours were estimated as follows: Fabrication Department 5,000 hours Assembly Department 5,000 Total 10,000 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 3.0 dlh 2.0 dlh Assembly Department 2.0 3.0 Direct labor hours per unit 5.0 dlh 5.0 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. B. Determine the per-unit factor)' 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). Support your recommendation.
Single plantwide and multiple production department factory
rate methods and product cost distortion
The management of Firebolt 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 Firebolt:
| Fabrication Department factory overhead | $550,000 |
| Assembly Department factory overhead | 250,000 |
| Total | $800,000 |
Direct labor hours were estimated as follows:
| Fabrication Department | 5,000 hours |
| Assembly Department | 5,000 |
| Total | 10,000 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 | 3.0 dlh | 2.0 dlh |
| Assembly Department | 2.0 | 3.0 |
| Direct labor hours per unit | 5.0 dlh | 5.0 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.
B. Determine the per-unit factor)' 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). Support your recommendation.
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