Product Costs and Product Profitability Reports, using a Single Plantwide Factor
ID: 2550920 • Letter: P
Question
Product Costs and Product Profitability Reports, using a Single Plantwide Factory Overhead Rate
Elliott Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Elliott Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:
The estimated direct labor rate is $26 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Elliott Engines is $269,800.
If required, round all per unit answers to the nearest cent.
a. Determine the plantwide factory overhead rate.
$ per dlh
b. Determine the factory overhead and direct labor cost per unit for each product.
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c. Use the information above to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place. Enter all amounts as positive numbers, except for a negative gross profit/gross profit percentage of sales.
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d. What does the report in (c) indicate to you?
Valves have the lowest gross profit as a percent of sales. Valves may require a higher price or lower cost to manufacture in order to achieve the same profitability as the other two products.
Budgeted Volume(Units) Direct Labor
Hours Per Unit Price Per
Unit Direct Materials
Per Unit Pistons 12,000 0.30 $46 $22 Valves 18,000 0.15 11 4 Cams 4,000 0.20 61 26
Explanation / Answer
a. Plantwide factory overhead rate : $ 38 per DLH
Total direct labor hours = 12,000 x 0.30 + 18,000 x 0.15 + 4,000 x 0.20 = 7,100
Plantwide factory overhead rate = Budgeted Factory Overhead / Direct Labor Hours = $ 269,800 / 7,100 = $ 38 per DLH
b.
c. Elliot Engines Inc.
Product Line Budgeted Gross Profit Reports
d. Cams are the most profitable, while valves are the least profitable. Valves have a negative gross profit margin. Either selling price of valves are needed to be increased, or manufacturing costs are needed to be decreased. Allocation of factory overhead under traditional costing and the prudence in using a plantwide overhead rate may need to be looked at.
Direct Labor Hours per Unit Factory Overhead Cost per Unit Direct Labor Cost per Unit Pistons 0.30 $ 11.40 $ 7.80 Valves 0.15 5.70 3.90 Cams 0.20 7.60 5.20Related Questions
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