04 Aug Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortio

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:

Direct labor hours were estimated as follows:

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:

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.

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.

c. Recommend to management a product costing approach, based on your analyses in (a) and (b).

Management should select the

factory overhead rate method of allocating overhead costs. The

factory overhead rate method indicates that both products have the same

factory overhead per unit. Each product uses the direct labor hours . Thus, the rate method avoids the cost distortions by accounting for the overhead .

Multiple Production Department Factory Overhead Rate Method

Handy Leather, Inc., produces three sizes of sports gloves: small, medium, and large. A glove pattern is first stenciled onto leather in the Pattern Department. The stenciled patterns are then sent to the Cut and Sew Department, where the glove is cut and sewed together. Handy Leather uses the multiple production department factory overhead rate method of allocating factory overhead costs. Its factory overhead costs were budgeted as follows:

The direct labor estimated for each production department was as follows:

Direct labor hours are used to allocate the production department overhead to the products. The direct labor hours per unit for each product for each production department were obtained from the engineering records as follows:

If required, round all per unit answers to the nearest cent.

a. Determine the two production department factory overhead rates.

b. Use the two production department factory overhead rates to determine the factory overhead per unit for each product.

Single Plantwide Factory Overhead Rate

Scrumptious Snacks Inc. manufactures three types of snack foods: tortilla chips, potato chips, and pretzels. The company has budgeted the following costs for the upcoming period:

Factory overhead is allocated to the three products on the basis of processing hours. The products had the following production budget and processing hours per case:

If required, round all per-case answers to the nearest cent.

a. Determine the single plantwide factory overhead rate.
$fill in the blank 1 per processing hour

b. Use the overhead rate in (a) to determine the amount of total and per-case overhead allocated to each of the three products under generally accepted accounting principles.