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Homework answers / question archive / Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion Eclipse Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing
Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion
Eclipse Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Eclipse:
Assembly Department Testing Department Total
$280,000
800,000
$1,080,000
Direct machine hours were estimated as follows:
Assembly Department ) Testing Department Total
4,000 hours
5,000
9,000 hours
In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows:
Commercial Residential
Assembly Department Testing Department Total machine hours per unit
2.0 dmh 3.0 dmh
6.0 1.5
8.0 dmh 4.5 dmh
a. Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base.
Commercial $
Residential $
per unit
per unit
b. Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department.
Commercial $ Residential $
per unit per unit
c. Recommend to management a product costing approach, based on your analyses in (a) and (b).
1. The management should consider multiple production department factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that commercial products use more costly overheads than residential products.
2. The management should consider single plantwide factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that the overheads are applied evenly based on the direct labor hours.
3. The management could consider either multiple production department factory overhead rate method or the single plantwide rate, as both these methods have the same effect on the final costs.
a) Computation of Plantwide Overhead Rate:
Plantwide Overhead Rate = Estimated Overhead /Estimated Machine Hours
= $1,080,000/9,000
= $120 per MH
Computation of Per Unit Factory Overhead allocated to the Commercial and Residential Motors under the Single Plantwide Overhead Rate:
| Commercial | Residential | |
| Actual Machine Hour per Unit (a) | 8 | 4.5 |
| Plantwide Overhead Rate (b) | 120 | 120 |
| Per Unit Factory Overhead Allocated (a*b) | 960 | 540 |
b)
Computation of Departmental Overhead Rate :
| Assembly | Testing | |
| Estimated Overhead (a) | 280000 | 800000 |
| Estimated Machine Hours Each Department (b) | 4000 | 5000 |
| Departmental Overhead Rate (a/b) | 70 | 160 |
Computation of Per Unit Factory Overhead allocated to the Commercial and Residential Motors under the Multiple Production Department Factory Overhead Rate:
| Commercial | Residential | |
| Assembly | 2*70=140 | 3*70=210 |
| Testing | 6*160= 960 | 1.5*160= 240 |
| Per Unit Factory Overhead Allocated | 1100 |
450 |
C) The factory overhead determined under the single plantwide factory overhead rate and multiple production department factory overhead rate methods are same. This is because the ratio of direct machine hours used by each product from the two departments is same. However, the two production department overhead rates are different. Thus, Peach should consider the easier rate method in this situation which is single plantwide rate method.
