Chapter 26, Problem 26.4EX

(a)

To determine

Single plant-wide factory overhead rate: The rate at which the factory or manufacturing overheads are allocated to products is referred to as single plant-wide factory overhead rate.

Formula to compute single plant-wide overhead rate:

$\begin{array}{l}\text{Single plant-wide }\\ \text{overhead rate}\end{array}\}\text{ = }\frac{\text{Total budgeted factory overhead}}{\text{Total budgeted plant-wide allocation base}}$

To compute: The single plant-wide overhead rate using direct labor hours (DLH) as the allocation base

Explanation of Solution

Compute single plant-wide overhead rate using DLH as the allocation base.

Step 1: Compute the total number of direct labor hours (DLH) budgeted.

Types of Products	Number of Budgeted Units	×	Number of DLH Per Unit	=	Total Number of Budgeted DLH
Pistons	7,200 units	×	0.20 DLH	=	1,440 DLH
Valves	28,800 units	×	0.15 DLH	=	4,320 DLH
Cams	1,200 units	×	0.32 DLH	=	384 DLH
Total number of budgeted DLH					6,144 DLH

Table (1)

Step 2: Compute single plant-wide overhead rate using DLH as the allocation base.

$\begin{array}{c}\begin{array}{l}\text{Single plant-wide }\\ \text{overhead rate}\end{array}\}\text{ = }\frac{\text{Total budgeted factory overhead}}{\text{Total budgeted plant-wide allocation base}}\\ \text{= }\frac{\text{\$184,320}}{\text{6,144 DLH}}\\ \text{= \$30 per DLH}\end{array}$

Note: Refer to Table (1) for value and computation of total number of budgeted DLH.

(b)

To determine

To compute: The factory overhead allocated per unit of each product, and direct labor cost per unit.

Explanation of Solution

Compute the factory overhead allocated per unit for each product.

Types of Products	Single Plant-Wide Overhead Rate	×	Number of DLH Per Unit of Each Product	=	Factory Overhead Per Unit
Pistons	$30 per DLH	×	0.20 DLH	=	$6.00 per unit
Valves	$30 per DLH	×	0.15 DLH	=	$4.50 per unit
Cams	$30 per DLH	×	0.32 DLH	=	$9.60 per unit

Table (2)

Note: Refer to Step 2 of part (a) for value and computation of single plant-wide overhead rate.

Compute direct labor cost per unit for each product.

Types of Products	Estimated Direct Labor Rate	×	Number of DLH Per Unit of Each Product	=	Direct Labor Cost Per Unit
Pistons	$20 per DLH	×	0.20 DLH	=	$4.00 per unit
Valves	$20 per DLH	×	0.15 DLH	=	$3.00 per unit
Cams	$20 per DLH	×	0.32 DLH	=	$6.40 per unit

Table (3)

(c)

To determine

To draft: Budgeted gross profit report of OC Engines for the year ended December 31, 2016

Explanation of Solution

Prepare a budgeted gross profit report of OC Engines, by product line, for the year ended December 31, 2016.

OC Engines
Budgeted Gross Profit Report
December 31, 2016
	Pistons	Valves	Cams
Revenues	$360,000	$288,000	$84,000
Direct materials cost	180,000	115,200	34,800
Direct labor cost	28,800	86,400	7,680
Factory overhead	43,200	129,600	11,520
Total product costs	252,000	331,200	54,000
Gross profit	$108,000	$(43,200)	$30,000
Gross profit as a percent of sales	30.0%	(15.0)%	35.7%

Table (4)

Working Notes:

Compute sales revenues for each product.

Types of Products	Number of Budgeted Units	×	Price Per Unit	=	Sales Revenue
Pistons	7,200 units	×	$50	=	$360,000
Valves	28,800 units	×	10	=	288,000
Cams	1,200 units	×	70	=	84,000

Table (5)

Compute direct material cost for each product.

Types of Products	Number of Budgeted Units	×	Direct Material Cost Per Unit	=	Direct Material Cost
Pistons	7,200 units	×	$25	=	$180,000
Valves	28,800 units	×	4	=	115,200
Cams	1,200 units	×	29	=	34,800

Table (6)

Compute direct labor cost for each product.

Types of Products	Number of Budgeted Units	×	Direct Labor Cost Per Unit	=	Direct Labor Cost
Pistons	7,200 units	×	$4.00	=	$28,800
Valves	28,800 units	×	3.00	=	86,400
Cams	1,200 units	×	6.40	=	7,680

Table (7)

Compute total factory overhead allocated for each product.

Types of Products	Number of Budgeted Units	×	Factory Overhead Per Unit	=	Total Factory Overhead
Pistons	7,200 units	×	$6.00 per unit	=	$43,200
Valves	28,800 units	×	4.50 per unit	=	129,600
Cams	1,200 units	×	9.60 per unit	=	11,520

Table (8)

Note: Refer to Table (2) for value and computation of factory overhead per unit.

Compute gross profit as a percent of sales for each product.

Types of Products	Gross Profit	÷	Sales Revenues	×	100	=	Gross Profit Percentage
Pistons	$108,000	÷	$360,000	×	100	=	30.0%
Valves	(43,200)	÷	288,000	×	100	=	(15.0)%
Cams	30,000	÷	84,000	×	100	=	35.7%

Table (9)

Note: Refer to Table (5) for value and computation of sales revenues.

(d)

To determine

To discuss: The inferences from the gross profit report.

Explanation of Solution

Of the three products, pistons are highly profitable, and cams are profitable as well. But valves are at loss. The sales price per unit should either be increased, or the cost price should be cut down to increase the profitability of valves.