Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion Eclipse Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Eclipse: Assembly Department $280,000 Testing Department 800,000 Total $1,080,000 Direct machine hours were estimated as follows: Assembly Department 4,000 hours Testing Department 5,000 Total 9,000 hours In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows: Commercial Residential Assembly Department 2.0 dmh 3.0 dmh Testing Department 6.0 1.5 Total machine hours per unit 8.0 dmh 4.5 dmh a. Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base. Commercial $ per unit Residential $ per unit b. Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department. Commercial $ per unit Residential $ per unit c. Recommend to management a product costing approach, based on your analyses in (a) and (b). 1. The management should consider multiple production department factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that commercial products use more costly overheads than residential products. 2. The management should consider single plantwide factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that the overheads are applied evenly based on the direct labor hours. 3. The management could consider either multiple production department factory overhead rate method or the single plantwide rate, as both these methods have the same effect on the final costs.
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.
Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion
Eclipse Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Eclipse:
| Assembly Department | $280,000 | ||
| Testing Department | 800,000 | ||
| Total | $1,080,000 |
Direct machine hours were estimated as follows:
| Assembly Department | 4,000 | hours | |
| Testing Department | 5,000 | ||
| Total | 9,000 | hours |
In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows:
| Commercial | Residential | |||
| Assembly Department | 2.0 | dmh | 3.0 | dmh |
| Testing Department | 6.0 | 1.5 | ||
| Total machine hours per unit | 8.0 | dmh | 4.5 | dmh |
a. Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base.
| Commercial | $ per unit |
| Residential | $ per unit |
b. Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department.
| Commercial | $ per unit |
| Residential | $ per unit |
c. Recommend to management a product costing approach, based on your analyses in (a) and (b).
1. The management should consider multiple production department factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that commercial products use more costly
2. The management should consider single plantwide factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that the overheads are applied evenly based on the direct labor hours.
3. The management could consider either multiple production department factory overhead rate method or the single plantwide rate, as both these methods have the same effect on the final costs.
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