OBJ. 2, 3 The management of Firebolt Industries Inc. manufactures gasoline and d

Question

OBJ. 2, 3 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: Fabrication Department factory overhead Assembly Department factory overhead $550,000 250,000 $800,000 Total Direct labor hours were estimated as follows Fabrication Department Assembly Department 5,000 hours 5,000 Total 10,000 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

Explanation / Answer

A) Plantwide factory overhead rate:Budgeted Factory Overhead/Plant wide Allocation Base Plantwide factory overhead rate = $800,000/10,000 Direct Labour Hours $80.00 Product costs Gasoline engine $80 per direct labor hr x 5 dlh $400.00 Diesel engine $80 per direct labor hr. x 5 dlh $400.00 B) Department factory overhead rates Fabrication Department Assembly Department Total production department factory overhead $550,000.00 $250,000.00 Direct labor hours ÷ 5,000 dlh ÷ 5,000 dlh Production department overhead rate $110.00 $50.00 Production Departments Gasoline Engine Department factory overhead rates per dlh Total factory overhead per DLH Fabrication Department 3 $110.00 $330.00 Assembly Department 2 $50.00 $100.00 Total factory overhead per Gasoline Engine 5 $430.00 Production Departments Diesel engine Department factory overhead rates per dlh Total factory overhead per DLH Fabrication Department 2 $110.00 $220.00 Assembly Department 3 $50.00 $150.00 Total factory overhead per Diesel engine 5 $370.00 c. Management should select the multiple department factory overhead rate method of allocating overhead costs. The single plantwide factory overhead rate method indicates that both products have the same factory overhead of $400 per unit

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