The management of Firebolt Industries Inc. manufactures gasoline and diesel engi
ID: 2408437 • Letter: T
Question
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:
1
Fabrication Department factory overhead
$614,800.00
2
Assembly Department factory overhead
246,750.00
3
Total
$861,550.00
Direct labor hours were estimated as follows:
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:
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 . If required, round all per-direct labor hours and per-unit answers to the nearest cent.
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. If required, round all per-unit answers to the nearest cent.
PLEASE MAKE THE ANSWERS UNDERSTANDABLE. THANKS
1
Fabrication Department factory overhead
$614,800.00
2
Assembly Department factory overhead
246,750.00
3
Total
$861,550.00
Explanation / Answer
Answers
A
Total factory Overhead
$ 8,61,550.00
B
Total Direct labor Hours
10550
C=A/B
Single Plantwide Overhead rate per direct labor hour
$ 81.66 [861550/10550]
Gasoline Engine
Diesel Engine
A
Single Plantwide Overhead rate per direct labor hour [calculated above]
$ 81.66
$ 81.66
B
No. of direct labor hours per unit
4.7
4.7
C = A x B
Factory Overhead allocated per unit
$ 383.80
$ 383.80
Answer
Gasoline engine
$ 383.80 per unit
Diesel engine
$ 383.80 per unit
Fabricating Department
Assembly Department
A
Factory Overhead
$ 6,14,800.00
$ 2,46,750.00
B
No. of direct labor hours
5300
5250
C=A/B
Overhead rate per direct labor hour
$ 116.00
$ 47.00
Gasoline Engine
Diesel Engine
Fabricating Department
A
Direct labor Hours per unit
2.9
1.8
B
Overhead rate per direct labor hour
$ 116.00
$ 116.00
C=A x B
Overhead allocated per unit
$ 336.40
$ 208.80
Assembly Department
D
Direct labor Hours per unit
1.8
2.9
E
Overhead rate per direct labor hour
$ 47.00
$ 47.00
F= D x E
Overhead allocated per unit
$ 84.60
$ 136.30
C + F
Total Overhead allocated per unit
$ 421.00
$ 345.10
Answer
Gasoline engine
$ 421 per unit
Diesel engine
$ 345.10 per unit
Recommendation: Product Costing Approach should be ‘Multiple department overhead rate’ as used in Requirement (b)
This is because even though both the products use same number of ‘total’ direct labor hours, each of them consume different number of direct labor hours in different department. Hence, using one single plant wide overhead rate is NOT recommended. Each department should have its own Department allocation overhead rate. Approach used in requirement (b) is hence recommended.
A
Total factory Overhead
$ 8,61,550.00
B
Total Direct labor Hours
10550
C=A/B
Single Plantwide Overhead rate per direct labor hour
$ 81.66 [861550/10550]
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