Reference no: EM132690681
Problem - Single plantwide and multiple production department factory overhead rate methods and product cost distortion
The management of Cobalt Engines 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 Cobalt:
Fabrication Department factory overhead $576,000
Assembly Department factory overhead 224,000
Total $800,000
Direct labor hours were estimated as follows:
Fabrication Department 3,200 hours
Assembly Department 3,200
Total 6,400 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
|
0.8 dlh
|
2.2 dlh
|
|
Assembly Department
|
2.2
|
0.8
|
|
Direct labor hours per unit
|
3.0 dlh
|
3.0 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. Recommend to management a product costing approach, based on your analyses in (a) and (b). Support your recommendation.