Single plantwide and multiple production department factory overhead rate methods and product cost distortion

The management of Nova 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 Nova:

Direct labor hours were estimated as follows:

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:

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.

Gasoline engine $

per unit

Diesel engine $

per unitb. 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.

Gasoline engine $

per unit

Diesel engine $

per unit

c$.$ Recommend to management a product costing approach, based on your analyses in $($a$)$ and $($b$).$

Management should select the

factory overhead rate method of allocating overhead costs. The

factory overhead rate method indicates that both products have the

same factory overhead per unit. Each product uses the direct labor hours

$.$ Thus, the

: rate method avoids the cost distortions by accounting for the overhead