Question
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:
Department Amount
Fabrication Department factory overhead $481,000
Assembly Department factory overhead 185,000
Total $666,000
Direct labor hours were estimated as follows:
Department Amount
Fabrication Department 3,700 hours
Assembly Department 3,700
Total 7,400 hours
In addition, the direct labor hours (dlh) used to produce a unit of each product in each department were determined from engineering records, as follows:
Production Departments Gasoline Engine Diesel Engine
Fabrication Department 1.30 dlh 2.70 dlh
Assembly Department 2.70 1.30
Direct labor hours per unit 4.00 dlh 4.00 dlh
a. Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead rate method, using direct labor hours as the activity base.
Gasoline engine fill in the blank 1 of 2$
per unit
Diesel engine fill in the blank 2 of 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 1 of 2$
per unit
Diesel engine fill in the blank 2 of 2$
per unit
c. Recommend to management a product costing approach, based on your analyses in (a) and (b).
Management should select the fill in the blank 1 of 5
factory overhead rate method of allocating overhead costs. The fill in the blank 2 of 5
factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours fill in the blank 3 of 5
. Thus, the fill in the blank 4 of 5
rate method avoids the cost distortions by accounting for the overhead fill in the blank 5 of 5
.
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:
Department Amount
Fabrication Department factory overhead $481,000
Assembly Department factory overhead 185,000
Total $666,000
Direct labor hours were estimated as follows:
Department Amount
Fabrication Department 3,700 hours
Assembly Department 3,700
Total 7,400 hours
In addition, the direct labor hours (dlh) used to produce a unit of each product in each department were determined from engineering records, as follows:
Production Departments Gasoline Engine Diesel Engine
Fabrication Department 1.30 dlh 2.70 dlh
Assembly Department 2.70 1.30
Direct labor hours per unit 4.00 dlh 4.00 dlh
a. Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead rate method, using direct labor hours as the activity base.
Gasoline engine fill in the blank 1 of 2$
per unit
Diesel engine fill in the blank 2 of 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 1 of 2$
per unit
Diesel engine fill in the blank 2 of 2$
per unit
c. Recommend to management a product costing approach, based on your analyses in (a) and (b).
Management should select the fill in the blank 1 of 5
factory overhead rate method of allocating overhead costs. The fill in the blank 2 of 5
factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours fill in the blank 3 of 5
. Thus, the fill in the blank 4 of 5
rate method avoids the cost distortions by accounting for the overhead fill in the blank 5 of 5
.
Answers
GPT-4o mini
To solve the problem, let's begin by calculating the factory overhead rates and the per-unit overhead allocated for both the gasoline and diesel engines using both the single plantwide method and the multiple production department method.
### a. Single Plantwide Factory Overhead Rate Method
1. **Calculate the Plantwide Overhead Rate**:
\[
\text{Plantwide Overhead Rate} = \frac{\text{Total Factory Overhead}}{\text{Total Direct Labor Hours}} = \frac{666,000}{7,400} = 90
\]
Thus, the plantwide overhead rate is $90 per direct labor hour.
2. **Calculate per-unit factory overhead for each product**:
- **Gasoline Engine**:
Direct Labor Hours per unit = 4.00 hours
\[
\text{Overhead Allocated to Gasoline Engine} = 4 \times 90 = 360 \, \text{per unit}
\]
- **Diesel Engine**:
Direct Labor Hours per unit = 4.00 hours
\[
\text{Overhead Allocated to Diesel Engine} = 4 \times 90 = 360 \, \text{per unit}
\]
**Results for Part (a)**:
- Gasoline Engine: $360 per unit
- Diesel Engine: $360 per unit
### b. Multiple Production Department Factory Overhead Rate Method
1. **Calculate the Overhead Rate for Each Department**:
- **Fabrication Department**:
\[
\text{Fabrication Overhead Rate} = \frac{481,000}{3,700} = 130
\]
- **Assembly Department**:
\[
\text{Assembly Overhead Rate} = \frac{185,000}{3,700} = 50
\]
2. **Calculate per unit factory overhead for each product**:
- **Gasoline Engine**:
- Fabrication Department:
\[
1.30 \, \text{dlh} \times 130 = 169
\]
- Assembly Department:
\[
2.70 \, \text{dlh} \times 50 = 135
\]
- Total Overhead for Gasoline Engine:
\[
169 + 135 = 304
\]
- **Diesel Engine**:
- Fabrication Department:
\[
2.70 \, \text{dlh} \times 130 = 351
\]
- Assembly Department:
\[
1.30 \, \text{dlh} \times 50 = 65
\]
- Total Overhead for Diesel Engine:
\[
351 + 65 = 416
\]
**Results for Part (b)**:
- Gasoline Engine: $304 per unit
- Diesel Engine: $416 per unit
### c. Recommendation to Management
Management should select the **multiple production department** factory overhead rate method of allocating overhead costs. The **single plantwide** factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours **differently**. Thus, the **multiple production department** rate method avoids the cost distortions by accounting for the overhead **in each department separately**.
To summarize the filled blanks:
1. **multiple production department**
2. **single plantwide**
3. **differently**
4. **multiple production department**
5. **in each department separately**
### a. Single Plantwide Factory Overhead Rate Method
1. **Calculate the Plantwide Overhead Rate**:
\[
\text{Plantwide Overhead Rate} = \frac{\text{Total Factory Overhead}}{\text{Total Direct Labor Hours}} = \frac{666,000}{7,400} = 90
\]
Thus, the plantwide overhead rate is $90 per direct labor hour.
2. **Calculate per-unit factory overhead for each product**:
- **Gasoline Engine**:
Direct Labor Hours per unit = 4.00 hours
\[
\text{Overhead Allocated to Gasoline Engine} = 4 \times 90 = 360 \, \text{per unit}
\]
- **Diesel Engine**:
Direct Labor Hours per unit = 4.00 hours
\[
\text{Overhead Allocated to Diesel Engine} = 4 \times 90 = 360 \, \text{per unit}
\]
**Results for Part (a)**:
- Gasoline Engine: $360 per unit
- Diesel Engine: $360 per unit
### b. Multiple Production Department Factory Overhead Rate Method
1. **Calculate the Overhead Rate for Each Department**:
- **Fabrication Department**:
\[
\text{Fabrication Overhead Rate} = \frac{481,000}{3,700} = 130
\]
- **Assembly Department**:
\[
\text{Assembly Overhead Rate} = \frac{185,000}{3,700} = 50
\]
2. **Calculate per unit factory overhead for each product**:
- **Gasoline Engine**:
- Fabrication Department:
\[
1.30 \, \text{dlh} \times 130 = 169
\]
- Assembly Department:
\[
2.70 \, \text{dlh} \times 50 = 135
\]
- Total Overhead for Gasoline Engine:
\[
169 + 135 = 304
\]
- **Diesel Engine**:
- Fabrication Department:
\[
2.70 \, \text{dlh} \times 130 = 351
\]
- Assembly Department:
\[
1.30 \, \text{dlh} \times 50 = 65
\]
- Total Overhead for Diesel Engine:
\[
351 + 65 = 416
\]
**Results for Part (b)**:
- Gasoline Engine: $304 per unit
- Diesel Engine: $416 per unit
### c. Recommendation to Management
Management should select the **multiple production department** factory overhead rate method of allocating overhead costs. The **single plantwide** factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours **differently**. Thus, the **multiple production department** rate method avoids the cost distortions by accounting for the overhead **in each department separately**.
To summarize the filled blanks:
1. **multiple production department**
2. **single plantwide**
3. **differently**
4. **multiple production department**
5. **in each department separately**