Single Plantwide and Multiple Production Department Factory Overhead Rate Method
ID: 2551249 • Letter: S
Question
Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion
Pineapple 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 Pineapple:
Direct machine hours were estimated as follows:
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:
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.
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.
c. Recommend to management a product costing approach, based on your analyses in (a) and (b).
The factory overhead determined under the single plantwide factory overhead rate and multiple production department factory overhead rate methods are the same . This is because the ratio of direct machine hours used by each product from the two departments is the same . However, the two production department overhead rates are different . Thus, Peach should consider remaining with the easier single plantwide factory overhead rate method in this situation.
Assembly Department $240,800 Testing Department 920,200 Total $1,161,000Explanation / Answer
Req a: Single Plantwide Factory Overheads rate: Estimated Overheads / Estimated Machine Hours $ 1161000 /12900 MH = $90 per MH Per-unit OH cost Commercial Residential Assembly Department 0.5 1 Testing Department 1 2 Total MH per unit 1.5 3 OH rate per hour 90 90 OH cost per unit 135 270 Req b: Departmental OH rate: Estimated Deptt OH / Estimated MH Assembly Deptt: $ 240800 /4300 = $56 per hour Testing Deptt: $ 920,200 /8600 = $ 107 per Hour Per-unit OH cost Commercial Residential Assembly Department MH 0.5 1 Testing DepartmentMH 1 2 OH per unit Assembly Deptt. OH (@56) 28 56 Testing deptt (@107) 107 214 OH cost per unit 135 270 Req C: The factory OH deytermined using both the methods are the same. This is because the ratio of direct machine hourrs is the same. However, two production deptt overheads rate are different. The Peach shouuld consider remaining with the easier Single Plantwide Factory overheads rate method.