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: $765,000 315,000 $1,080,000 Fabrication Department factory overhead Assembly Department factory overhead Total Direct labor hours were estimated as follows: Fabrication Department Assembly Department Total 4,500 hours 4,500 9,000 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 1.20 dlh 2.80 dlh Assembly Department 2.80 1.20

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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:
$765,000
315,000
$1,080,000
Fabrication Department factory overhead
Assembly Department factory overhead
Total
Direct labor hours were estimated as follows:
Fabrication Department
Assembly Department
Total
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
1.20 dlh
2.80 dlh
Assembly Department
1.20
Direct labor hours per unit
2.80
4,500 hours
4,500
9,000 hours
4.00 dlh
4.00 dlh
Transcribed Image Text: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: $765,000 315,000 $1,080,000 Fabrication Department factory overhead Assembly Department factory overhead Total Direct labor hours were estimated as follows: Fabrication Department Assembly Department Total 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 1.20 dlh 2.80 dlh Assembly Department 1.20 Direct labor hours per unit 2.80 4,500 hours 4,500 9,000 hours 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
per unit
Diesel engine
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 $
Diesel engine $
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
indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours
method avoids the cost distortions by accounting for the overhead
per unit
per unit
factory overhead rate method
. Thus, the
rate
Transcribed Image Text: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 per unit Diesel engine 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 $ Diesel engine $ 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 indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours method avoids the cost distortions by accounting for the overhead per unit per unit factory overhead rate method . Thus, the rate
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