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Product Costs and Product Profitability Reports, using a Single Plantwide Factory Overhead Rate

Elliott Engines Inc. produces three productspistons, valves, and camsfor the heavy equipment industry. Elliott Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:

	Budgeted Volume (Units)		Direct Labor Hours Per Unit		Price Per Unit		Direct Materials Per Unit
Pistons	8,000		0.30		$42		$20
Valves	22,000		0.15		11		3
Cams	1,000		0.20		56		24

The estimated direct labor rate is $24 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Elliott Engines is $118,000.

If required, round all per unit answers to the nearest cent.

a. Determine the plantwide factory overhead rate. $ per dlh

b. Determine the factory overhead and direct labor cost per unit for each product.

	Direct Labor Hours Per Unit	Factory Overhead Cost Per Unit	Direct Labor Cost Per Unit
Pistons	dlh	$	$
Valves	dlh	$	$
Cams	dlh	$	$

Feedback

a. First calculate: Volume x direct labor hours per unit = direct labor hours per product. Add all product hours for total direct labor hours. Next: Budgeted factory overhead cost total hours = Rate per direct labor hour

b. Calculate: Factory overhead cost per unit = Rate from Req. (a) x Direct labor hours per unit Direct labor cost per unit = Direct labor rate x Direct labor hours per unit

Learning Objective 2.

c. Use the information above to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place. Enter all amounts as positive numbers, except for a negative gross profit/gross profit percentage of sales.

Elliot Engines Inc.
Product Line Budgeted Gross Profit Reports
For the Year Ended December 31, 20Y2
	Pistons	Valves	Cams
Revenues	$	$	$
Product Costs
Direct materials	$	$	$
Direct labor
Factory overhead
Total Product Costs	$	$	$
Gross profit	$	$	$
Gross profit percentage of sales	%	%	%

Feedback

c. Construct your report for each product as: Revenues - Direct materials - Direct labor - Factory overhead = Gross profit Revenues = Price x Unit Volume Direct Materials = Direct Material cost per unit x Unit Volume Direct labor = Direct labor cost per unit from Req. (b) x Unit Volume Factory overhead = Factory overhead cost per unit from Req. (b) x Unit Volume Gross profit percentage of sales = Gross profit Sales

Learning Objective 2.

d. What does the report in (c) indicate to you?

Valves have the lowest gross profit as a percent of sales. Valves may require a higher price or lower cost to manufacture in order to achieve the same profitability as the other two products.

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