Chapter 4, Problem 4E

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:

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.

a. Determine the plantwide factory overhead rate.

b. Determine the factory overhead and direct labor cost per unit for each product.

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.

d. What does the report in (c) indicate to you?

To determine

Compute the plant-wide overhead rate using direct labor hours (DLH) as the allocation base.

Explanation of Solution

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:

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

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

$\begin{array}{c}\begin{array}{l}\text{Single plant-wide }\\ \text{overhead rate}\end{array}\}\text{ = }\frac{\text{Total budgeted factory overhead}}{\text{Total budgeted plant-wide allocation base}}\\ \text{= }\frac{\text{\$235,200}}{\text{8,400 DLH (1)}}\\ \text{= \$28 per DLH}\end{array}$

Working note (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	6,000 units	×	0.30 DLH	=	1,800 DLH
Valves	13,000 units	×	0.50 DLH	=	6,500 DLH
Cams	1,000 units	×	0.10 DLH	=	100 DLH
Total number of budgeted DLH					8,400 DLH

Table (1)

To determine

Calculate 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	$28 per DLH	×	0.30 DLH	=	$8.40 per unit
Valves	$28 per DLH	×	0.50 DLH	=	$14.00 per unit
Cams	$28 per DLH	×	0.10 DLH	=	$2.80 per unit

Table (2)

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	×	0.30 DLH	=	$6 per unit
Valves	$20 per DLH	×	0.50 DLH	=	$10 per unit
Cams	$20 per DLH	×	0.10 DLH	=	$2 per unit

Table (3)

To determine

Prepare a budgeted gross profit report of Company I for the year ended December 31, 20Y2.

Explanation of Solution

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

Company I
Budgeted Gross Profit Report
December 31, 20Y2
	Pistons	Valves	Cams
Revenues (2)	$240,000	$273,000	$55,000
Direct materials cost (3)	(54,000)	(65,000)	(20,000)
Direct labor cost (4)	(36,000)	(130,000)	(2,000)
Factory overhead (5)	(50,400)	(182,000)	(2,800)
Gross profit	$99,600	$(104,000)	$30,200
Gross profit as a percent of sales (6)	41.5%	(38.1)%	54.9%

Table (4)

Working note (2):

Compute the sales revenues for each product.

Types of Products	Number of Budgeted Units	×	Price Per Unit	=	Sales Revenue
Pistons	6,000 units	×	$40	=	$240,000
Valves	13,000 units	×	21	=	273,000
Cams	1,000 units	×	55	=	55,000

Table (5)

Working note (3):

Compute the direct material cost for each product.

Types of Products	Number of Budgeted Units	×	Cost Per Unit	=	Direct material Cost
Pistons	6,000 units	×	$9.00	=	$54,000
Valves	13,000 units	×	5.00	=	65,000
Cams	1,000 units	×	20.00	=	20,000

Table (6)

Working note (4):

Compute the direct labor cost for each product.

Types of Products	Number of Budgeted Units	×	Cost Per Unit	=	Direct labor Cost
Pistons	6,000 units	×	$6.00	=	$36,000
Valves	13,000 units	×	10.00	=	130,000
Cams	1,000 units	×	2.00	=	2,000

Table (7)

Working note (5):

Compute the total factory overhead allocated for each product.

Types of Products	Number of Budgeted Units	×	Factory Overhead Per Unit	=	Total Factory Overhead
Pistons	6,000 units	×	$8.40 per unit	=	$50,400
Valves	13,000 units	×	14.00 per unit	=	182,000
Cams	1,000 units	×	2.80 per unit	=	2,800

Table (8)

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

Working note (6):

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

Types of Products	Gross Profit (A)	Sales Revenues (B)	Gross Profit Percentage $\left(\frac{\text{A}}{\text{B}}\text{×100}\right)$
Pistons	$99,600	$240,000	41.5%
Valves	(104,000)	273,000	(38.1)%
Cams	30,200	55,000	54.9%

Table (9)

Note: Refer to Table (4) for value and computation of sales revenues.

To determine

Discuss the interpretations from the gross profit report.

Explanation of Solution

Of the three products, cams are highly profitable, and pistons 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.