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Homework answers / question archive / Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion The management of Nova Industries Inc
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: $559,000 Fabrication Department factory overhead Assembly Department factory overhead 215,000 Total $774,000 Direct labor hours were estimated as follows: Fabrication Department 4,300 hours Assembly Department 4,300 Total 8,600 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 1.20 dlh 2.80 dlh Assembly Department 2.80 1.20 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 $ per unit Diesel engine S 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 $ per unit Diesel engine S per unit 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 both products have the same factory overhead per unit. Each product uses the direct labor hours distortions by accounting for the overhead factory overhead rate method indicates that rate method avoids the cost Thus, the
Plantwide overhead rate = Total overhead / Total direct labor hours = 774,000 / 8,600 = $90 per direct labor hour
| Particulars | Gasoline | Diesel |
| Total Direct labor hours per unit (a) | 4 | 4 |
| Plantwide overhead rate (b) | $ 90 | $ 90 |
| Factory overhead cost (a) X (b) | $ 360 | $ 360 |
b
| Particulars | Fabrication | Assembly |
| Total department overhead cost | $ 559,000 | $ 215,000 |
| Direct labor hours | 4300 | 4300 |
| Department overhead rate | $ 130.00 | $ 50.00 |
| Particulars | Gasoline | Diesel | ||||
| DLH per unit | Overhead rate | Overhead | DLH per unit | Overhead rate | Overhead | |
| Fabrication | 1.20 | $ 130.00 | $ 156.00 | 2.8 | $ 130.00 | $ 364.00 |
| Assembly | 2.80 | $ 50.00 | $ 140.00 | 1.2 | $ 50.00 | $ 60.00 |
| Overhead per unit | $ 296.00 | $ 424.00 |
c
Management should select the multiple department factory overhead rate. The single plantwide factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the differential direct labor hours. Thus the multiple department rate method avoids the cost distortions by accounting for overhead.
