Question

The management of Firebolt 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 Firebolt:

1	Fabrication Department factory overhead	$636,650.00
2	Assembly Department factory overhead	243,000.00
3	Total	$879,650.00

Direct labor hours were estimated as follows:

Fabrication Department	5,350	hours
Assembly Department	5,400
Total	10,750	hours

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	2.9 dlh	1.9 dlh
Assembly Department	1.9	2.9
Direct labor hours per unit	4.8 dlh	4.8 dlh

	Required:
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.	(1) Recommend to management a product costing approach, based on your analyses in (a) and (b). (2) Give a reason for your answer.
	*If required, round all per-unit answers to the nearest cent.

Answer 1

a singe plantwide.

Total factory overhead	879650
Total hours	10750
ovrhead rate per direct labor hour	81.83	[879650/10750]

cost allocated

	gasoline engine	Gasoline engine	diesel engine
A	81.83	81.83	81.83
b	direct labor hour per unit	4.8	4.8
	per-unit factory overhead allocated	392.80[81.83*4.8]	392.80[81.83*4.8]

b.multiple rate

	fabrication	Assembly
factory overhead	636650	243000
direct labor hours	5350	5400
rate per direct labor hour	119$[636650/5350]	45$

COST ALLOCATED

	GASOLINE	DIESEL
Fabricating department
direct labor hour per unit	2.9	1.9
cost per hour	119	119
cost allocated to units	345.1	226.1
Assembly department
direct labor hour	1.9	2.9
cost per hour	45	45
cost allocated	85.5 [1.9*45]	130.5[2.9*45]
Total cost allocated	430.6[345.1+85.5]	356.6[226.1+130.5]

c.as the hours consumed by both the products differ for each department the firm should use muliiple rate to assign cost.

.even though the total hours consumed are same cost will differ in multiple production department factory overhead rate method,

therefore (B) method should be used.