Question

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 $481,000, assembly department factory overhead $185,000, total $666,000. Direct labor hours were estimated as follows: fabrication department 3,700 hours, assembly department 3,700 hours, 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 and diesel engine, fabrication department - 1.20 dlh and 2.80 dlh, assembly department - 2.80 dlh and 1.20 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.

A) $___ per unit for gasoline engine
B) $___ per unit for diesel engine

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.

A) $___ per unit for gasoline engine
B) $___ per unit for diesel engine

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.
1) $___ per unit for gasoline engine
2) $___ per unit for diesel engine
3) $___ per unit for gasoline engine
4) $___ per unit for diesel engine
5) Management should select the factory overhead rate method of allocating overhead costs.

Answer 1

To determine the per-unit factory overhead allocated to the gasoline and diesel engines, we calculate the allocation using the single plantwide factory overhead rate method and the multiple production department factory overhead rate method. Using direct labor hours as the activity base, the per-unit factory overhead allocated to the gasoline and diesel engines is determined for each method. Based on the analysis, the recommendation is to use the multiple production department factory overhead rate method as it provides a more accurate representation of the actual factory overhead costs incurred in each department.

Step-by-step explanation:

To determine the per-unit factory overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead rate method, we need to calculate the total direct labor hours for each product in both departments. The total direct labor hours for the gasoline engine in the fabrication department is:

1. Number of Units x Direct Labor Hours per Unit = 50 x 1.20 = 60

And the total direct labor hours for the gasoline engine in the assembly department:

1. Number of Units x Direct Labor Hours per Unit = 50 x 2.80 = 140

To calculate the allocation of factory overhead, we divide the total budgeted factory overhead by the total direct labor hours:

1. Fabrication Department Factory Overhead / Total Direct Labor Hours = $481,000 / (60 + 140) = $1600
2. Assembly Department Factory Overhead / Total Direct Labor Hours = $185,000 / (60 + 140) = $616

Therefore, the per-unit factory overhead allocated to the gasoline engine under the single plantwide factory overhead rate method is $1600 for the fabrication department and $616 for the assembly department.

For the diesel engine:

1. Number of Units x Direct Labor Hours per Unit = 50 x 2.80 = 140

1. Fabrication Department Factory Overhead / Total Direct Labor Hours = $481,000 / 140 = $3436
2. Assembly Department Factory Overhead / Total Direct Labor Hours = $185,000 / 140 = $1321.43

Therefore, the per-unit factory overhead allocated to the diesel engine under the single plantwide factory overhead rate method is $3436 for the fabrication department and $1321.43 for the assembly department.

For the multiple production department factory overhead rate method, we allocate factory overhead to each department based on the direct labor hours in that department. The per-unit factory overhead allocated to the gasoline engine under this method is $1600 for the fabrication department and $616 for the assembly department. The per-unit factory overhead allocated to the diesel engine is $3436 for the fabrication department and $1321.43 for the assembly department.

Based on the analysis, I recommend that management should select the multiple production department factory overhead rate method of allocating overhead costs, as it provides a more accurate representation of the actual factory overhead costs incurred in each department.