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........................................................$440,000
Assembly Department factory overhead............................................................200,000
Total.........................................................................................................................$640,000
Direct labor hours were estimated as follows:.
Fabrication Department................................................................4,000 hours
Assembly Department....................................................................4,000
Total..................................................................................................8,000 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 6.0 dlh 4.0 dlh
Assembly Department 4.0 6.0
Direct labor hours per unit 10.0 dlh 10.0 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.
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.
c. Recommend to management a product costing approach, based on your analyses in (a) and (b). Support your recommendation.

c. The multiple production department overhead rate method is recommended. It takes into account the activity usage by each department and looks fairer.

Explanation:

a) Data and Calculations:

factory overhead was budgeted for Nova:

Fabrication Department factory overhead $440,000

Assembly Department factory overhead 200,000

Total $640,000

Direct labor hours were estimated as follows:______.

Fabrication Department 4,000 hours

Assembly Department 4,000 hours

Total 8,000 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 6.0 dlh 4.0 dlh

Assembly Department 4.0 6.0

Direct labor hours per unit 10.0 dlh 10.0 dlh

Plantwide per unit factory overhead = Total overhead costs/Total direct labor hours

= $640,000/8,000 = $80

a. Overhead allocated to Gasoline Engine Diesel Engine

Direct labor hours (10 each) $800 ($80 * 10) $800 ($80 * 10)

Multiple production department per unit factory overhead:

Fabrication Department factory overhead $440,000/4,000 = $110

Assembly Department factory overhead 200,000/4,000 = $50

b. Overhead allocated to Gasoline Engine Diesel Engine

Fabrication Department $660 (6.0 * $110) $440 (4.0 * $110)

Assembly Department 200 (4.0 * $50) 300 (6.0 * $50)

Total overhead allocated $860 $740

codiepienagoya codiepienagoya · Answer 2 · 2022-01-21T08:02:26+01:00

Following are the solution to the given points:

For point a:

[tex]\text{Plantwide overhead rate} = \frac{\text{Total factory overhead}}{\text{Total direct labor hours}}[/tex]

[tex] = \frac{\$560,000}{ 8,000}\\\\= \$70 \ / DLH [/tex]

Calculating the value of gasoline engine[tex]= (4 \times \$70)=\$280\ / unit [/tex]

Calculating the value of diesel engine[tex]= (4 \times \$70)= \$280 / unit[/tex]

For point b:

Calculating the value of gasoline engine:

[tex]=[(1.20\times 100) + (2.80 \times \$40)] \\\\ =\$232 / unit [/tex]

Calculating the value of diesel engines:

[tex]=[(2.80\times \$100) + (1.20 \times \$40)]\\\\ =\$328 / unit [/tex]

Calculating the value of departmental overhead rate:

Calculating the value of fabrication:

[tex]= (\frac{\$400,000}{ 4,000}) \\\\ = \$100 / DLH [/tex]

Calculating the value of assembly:

[tex] = (\frac{\$160,000}{ 4,000}) \\\\ = \$40 / DLH[/tex]

For point c:

The Multiple department factory overhead rate method of allocating overhead costs should be chosen by management.
Per the Single plantwide factory overhead rate technique, both items have the same manufacturing cost per unit.
The direct work hours are now used differently with each product.
Hence, by accounting for overhead in every production department independently, this multiple department price method avoids cost distortions.

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