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:

Fabrication Department factory overhead.    $481,000 

Assembly Department factory overhead185,000 

 Total               $666,000 

Direct labor hours were estimated as follows:

Fabrication Department          3,700hours

Assembly Department              3,700  

Total                                         7,400hours

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:

Production Departments     Gasoline Engine     Diesel Engine

Fabrication Department        1.20dlh                          2.80dlh                            

 Assembly Department           2.80                               1 .20 

Direct labor hours per unit    4.00dlh                        4.00dlh

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.

Gasoline engine_________________per unit

Diesel engine____________________per unit

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.

Gasoline engine_____________ per unit

Diesel engine_______________ per unit

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

Management should select the (multiple department/single plantwide) factory overhead rate method of allocating overhead costs. The(multiple department/singleplantwide) factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours(equally/differently). 

Thus, the(multiple department/single plantwide) rate method avoids the cost distortions by accounting for the overhead( plantwide/ in each production department separately).