Chapter 4, Problem 4E

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	5,000 units	×	0.50 DLH	=	2,500 DLH
Valves	12,500 units	×	0.30 DLH	=	3,750 DLH
Cams	1,500 units	×	0.20 DLH	=	300 DLH
Total number of budgeted DLH					6,550 DLH

Table (1)

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

$\begin{array}{c}\begin{array}{l}\text{Single plant-wide }\\ \text{overhead rate}\end{array}\}\text{ = }\frac{\text{Total budgeted factory overhead}}{\text{Total budgeted plant-wide allocation base}}\\ \text{= }\frac{\text{\$163,750}}{\text{6,550 DLH}}\\ \text{= \$25 per DLH}\end{array}$

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	$25 per DLH	×	0.50 DLH	=	$12.50 per unit
Valves	$25 per DLH	×	0.30 DLH	=	$7.50 per unit
Cams	$25 per DLH	×	0.20 DLH	=	$5.00 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	$30 per DLH	×	0.50 DLH	=	$15 per unit
Valves	$30 per DLH	×	0.30 DLH	=	$9 per unit
Cams	$30 per DLH	×	0.20 DLH	=	$60 per unit

Table (3)

C.

To determine

To draft: Budgeted gross profit report of E Engines for the year ended December 31, 20Y2

Explanation of Solution

Prepare a budgeted gross profit report of E Engines, by product line, for the year ended December 31, 20Y2.

E Engines
Budgeted Gross Profit Report
December 31, 20Y2
	Pistons	Valves	Cams
Revenues	$225,000	$212,500	$90,000
Direct materials cost	40,000	37,500	60,000
Direct labor cost	75,000	112,500	9,000
Factory overhead	62,500	93,750	7,500
Total product costs	177,500	243,750	76,500
Gross profit	$47,500	$(31,250)	$13,500
Gross profit as a percent of sales	21.1%	(14.7)%	15.0%

Table (4)

Working Notes:

Compute sales revenues for each product.

Types of Products	Number of Budgeted Units	×	Price Per Unit	=	Sales Revenue
Pistons	5,000 units	×	$45	=	$225,000
Valves	12,500 units	×	17	=	212,500
Cams	1,500 units	×	60	=	90,000

Table (5)

Compute direct material cost for each product.

Types of Products	Number of Budgeted Units	×	Cost Per Unit	=	Direct Material Cost
Pistons	5,000 units	×	$8	=	$40,000
Valves	12,500 units	×	3	=	37,500
Cams	1,500 units	×	40	=	60,000

Table (6)

Compute direct labor cost for each product.

Types of Products	Number of Budgeted Units	×	Cost Per Unit	=	Direct Labor Cost
Pistons	5,000 units	×	$30	=	$150,000
Valves	12,500 units	×	30	=	375,000
Cams	1,500 units	×	30	=	45,000

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	5,000 units	×	$12.50 per unit	=	$62,500
Valves	12,500 units	×	7.50 per unit	=	93,750
Cams	1,500 units	×	5.00 per unit	=	7,500

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	$47,500	÷	$225,000	×	100	=	21.1%
Valves	(31,250)	÷	212,500	×	100	=	(14.7)%
Cams	13,500	÷	90,000	×	100	=	15%

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 also profitable as well. But valves are at loss. The sales price per unit should be increased or the cost price should be cut down to increase the profitability of valves.