accounting Module 3 problem 1

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 $572,000 Assembly Department factory overhead 220,000 Total $792,000 Direct labor hours were estimated as follows: Fabrication Department 4,400 hours Assembly Department 4,400 Total 8,800 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 dih 4.00 dih 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 v per unit Diesel engine v’ 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 v per unit Diesel engine v per unit c. Recommend to management a product costing approach, based on your analyses in (a) and (b). Management should select the multiple department ~ « factory overhead rate method of allocating overhead costs. The single plantwide ~ factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours differently v + . Thus, the multiple department ~ ' rate method avoids the cost distortions by accounting for the overhead in each production department separately v .