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Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion Eclipse Motor...

Question:

Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion Eclipse Motor Ca. Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide fact

Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion Eclipse Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Eclipse: Assembly Department Testing Department $280,000 800,000 Total $1,080,000 Direct machine hours were estimated as follows: Assembly Department Testing Department 4,000 hours 5,000 Total 9,000 hours In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows: Commercial Residential Assembly Department 3.0 dmh 2.0 dmh 6.0 Testing Department 1.5 Total machine hours per unit 8.0 dmh 4.5 dmh
a. Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base. per unit Commercial $ Residential $ per unit b. Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department. per unit Commercial $ Residential $ per unit c. Recommend to management a product costing approach, based on your analyses in (a) and (b). 1. The management should consider multiple production department factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that commercial products use more costly overheads than residential products. 2. The management should consider single plantwide factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that the overheads are applied evenly based on the direct labor hours. 3. The management could consider either multiple production department factory overhead rate method or the single plantwide rate, as both these methods have the same effect on the final costs.

Answers

a.

Plantwide overhead rate = 1,080,000 / 9,000 = $120 per machine hour

Per unit overhead allocated to Commercial = 120 x 8 = $960

Per unit overhead allocated to Residential = 120 x 4.5 = $540

b.

Departmental overhead rate in Assembly = 280,000 / 4,000 = $70 per machine hour

Departmental overhead rate in Testing = 800,000 / 5,000 = $160 per machine hour

Costs Allocated to Product using Department overhead rate:

Commercial

Residential

Assembly Department

140 (2 x 70)

210 (3 X 70)

Testing Department

960 (160 X6)

240 (160 X 1.5)

Total Costs

$1,100

$450

c.

In this case, the management shall consider single plantwide factory overhead rate methods, because this method calculates cost very accurately taking into factor that overheads are evenly applied on basis of direct labor hours.

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