Pineapple Motor Company manufactures two types of specialty

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:

1

Assembly Department

$360,000.00

2

Testing Department

900,000.00

3

Total

$1,260,000.00

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:

Solution

(a) Single plantwide factory overhead rate method

Single plantwide factory overhead rate = Factory overhead/ Direct machine hours

= 1,260,000/9,000

= $140 per direct machine hour

(b) Multiple production department factory overhead rate method

(c) Factory overhead rate per unit is same in case of both the methods of recovery of overheads. However, the multiple production department factory overhead rate method provides more accurate product costs than the single plantwide factory overhead rate method when there are significant differences in the factory overhead rates across different production departmentsand when the products require different proportions of allocation base usage in each production department. Hence multiple production department factory overhead rate method is suggested.