Chapter 4, Problem 7E

Single plantwide and multiple production department factory overhead 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.