Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortio
Single 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:
Fabrication Department factory overhead | $570,000 | ||
Assembly Department factory overhead | 266,000 | ||
Total | $836,000 |
Direct labor hours were estimated as follows:
Fabrication Department | 3,800 | hours | |
Assembly Department | 3,800 | ||
Total | 7,600 | 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 | 1.30 | dlh | 2.70 | dlh |
Assembly Department | 2.70 | 1.30 | ||
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 | $ 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 | $ 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
factory overhead rate method indicates that both products have the same
factory overhead per unit. Each product uses the direct labor hours . Thus, the rate method avoids the cost distortions by accounting for the overhead .
Multiple Production Department Factory Overhead Rate Method
Handy Leather, Inc., produces three sizes of sports gloves: small, medium, and large. A glove pattern is first stenciled onto leather in the Pattern Department. The stenciled patterns are then sent to the Cut and Sew Department, where the glove is cut and sewed together. Handy Leather uses the multiple production department factory overhead rate method of allocating factory overhead costs. Its factory overhead costs were budgeted as follows:
Pattern Department overhead | $125,400 | ||
Cut and Sew Department overhead | 212,800 | ||
Total | $338,200 |
The direct labor estimated for each production department was as follows:
Pattern Department | 2,200 | direct labor hours | |
Cut and Sew Department | 2,800 | ||
Total | 5,000 | direct labor hours |
Direct labor hours are used to allocate the production department overhead to the products. The direct labor hours per unit for each product for each production department were obtained from the engineering records as follows:
Production Departments | Small Glove | Medium Glove | Large Glove | |||
Pattern Department | 0.05 | 0.06 | 0.07 | |||
Cut and Sew Department | 0.08 | 0.10 | 0.12 | |||
Direct labor hours per unit | 0.13 | 0.16 | 0.19 |
If required, round all per unit answers to the nearest cent.
a. Determine the two production department factory overhead rates.
Pattern Department | $per dlh |
Cut and Sew Department | $per dlh |
b. Use the two production department factory overhead rates to determine the factory overhead per unit for each product.
Small glove | $ per unit |
Medium glove | $ per unit |
Large glove | $ per unit |
Single Plantwide Factory Overhead Rate
Scrumptious Snacks Inc. manufactures three types of snack foods: tortilla chips, potato chips, and pretzels. The company has budgeted the following costs for the upcoming period:
Factory depreciation | $20,804 | ||
Indirect labor | 51,556 | ||
Factory electricity | 5,879 | ||
Indirect materials | 12,211 | ||
Selling expenses | 28,944 | ||
Administrative expenses | 16,281 | ||
Total costs | $135,675 |
Factory overhead is allocated to the three products on the basis of processing hours. The products had the following production budget and processing hours per case:
Budgeted Volume (Cases) |
Processing Hours Per Case |
|||||||
Tortilla chips | 5,700 | 0.12 | ||||||
Potato chips | 7,200 | 0.10 | ||||||
Pretzels | 2,700 | 0.15 | ||||||
Total | 15,600 |
If required, round all per-case answers to the nearest cent.
a. Determine the single plantwide factory overhead rate.
$ per processing hour
b. Use the overhead rate in (a) to determine the amount of total and per-case overhead allocated to each of the three products under generally accepted accounting principles.
Total Factory Overhead |
Per-Case Factory Overhead |
|
Tortilla chips | $ | $ |
Potato chips | ||
Pretzels | ||
Total | $ |
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