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 $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. 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
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
(1)
Single Plantwide and Multiple Production Department Factory
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.
| 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 |
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(2)
Product Costs and Product Profitability Reports, using a Single Plantwide Factory Overhead Rate
Isaac Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Isaac 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:
| Budgeted Volume (Units) |
Direct Labor Hours Per Unit |
Price Per Unit |
Direct Materials Per Unit |
|||||
| Pistons | 6,000 | 0.30 | $40 | $ 9 | ||||
| Valves | 13,000 | 0.50 | 21 | 5 | ||||
| Cams | 1,000 | 0.10 | 55 | 20 |
The estimated direct labor rate is $20 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Isaac Engines is $235,200.
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.
| Direct Labor Hours Per Unit |
Factory Overhead Cost Per Unit |
Direct Labor Cost Per Unit |
|
| Pistons | dlh | $ | $ |
| Valves | dlh | $ | $ |
| Cams | dlh | $ | $ |
a. First calculate:
Volume x Direct Labor Hours per Unit = Direct Labor Hours per Product. Add all product hours for total direct labor hours.
Next:
Total Budgeted Factory Overhead ÷ Total Budgeted Plantwide Allocation Base = Single Plantwide Factory Overhead Rate
b. Calculate:
Factory Overhead Cost per Unit = Rate from Req. (a) x Direct Labor Hours per Unit
Direct Labor Cost per Unit = Direct Labor Rate x Direct Labor Hours per Unit
c. Use the information provided 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.
| Isaac Engines Inc. | |||
| Product Line Budgeted Gross Profit Reports | |||
| For the Year Ended December 31, 20Y2 | |||
| Pistons | Valves | Cams | |
| Revenues | $ | $ | $ |
| Product Costs | |||
| Direct materials | $ | $ | $ |
| Direct labor | |||
| Factory overhead | |||
| Total Product Costs | $ | $ | $ |
| Gross |
$ | $ | $ |
| Gross profit percentage of sales | % | % | % |
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