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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: Direct labor hours were estimated as follows: 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: 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 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. c. Recommend to management a product costing approach, based on your analyses in (a) and (b). Support your recommendation.

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

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Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 18, Problem 7E
Textbook Problem
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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:

Chapter 18, Problem 7E, The management of Nova Industries Inc. manufactures gasoline and diesel engines through two , example  1

Direct labor hours were estimated as follows:

Chapter 18, Problem 7E, The management of Nova Industries Inc. manufactures gasoline and diesel engines through two , example  2

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:

Chapter 18, Problem 7E, The management of Nova Industries Inc. manufactures gasoline and diesel engines through two , example  3

  1. 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.
  2. 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.
  3. c. Recommend to management a product costing approach, based on your analyses in (a) and (b). Support your recommendation.

a.

To determine

Calculate the single plant-wide overhead rate using direct labor hours (DLH) as the allocation base, and compute factory overhead allocated per unit.

Explanation of Solution

Single plant-wide factory overhead rate: The rate at which the factory or manufacturing overheads are allocated to products is referred to as single plant-wide factory overhead rate.

Formula to compute single plant-wide overhead rate:

Single plant-wide overhead rate} = Total budgeted factory overheadTotal budgeted plant-wide allocation base 

Multiple production department factory overhead rates: This allocation method identifies different departments in the process of production. The factory overheads are allocated to products based on the overhead rate for each of the production departments.

Formula to compute multiple production department overhead rates:

Multiple production department overhead rate} = Budgeted department factory overheadBudgeted Department allocation base 

Compute single plant-wide overhead rate using DLH as the allocation base

b.

To determine

Compute the multiple production department overhead rate using direct machine hours (DMH) as the allocation base, and compute factory overhead allocated per unit.

c.

To determine

Provide recommendations to the management concerning the product cost based on the two factory overhead rate approaches.

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Chapter 18 Solutions

Financial And Managerial Accounting
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