Question

The Gilster Company, a machine tooling firm, has several plants. One plant, located in St. Falls, Minnesota, uses a job order costing system for its batch production processes. The St. Falls plant has two departments through which most jobs pass. Plantwide overhead, which includes the plant manager’s salary, accounting personnel, cafeteria, and human resources, is budgeted at $200,000. During the past year, actual plantwide overhead was $190,000. Each department’s overhead consists primarily of depreciation and other machine-related expenses. Selected budgeted and actual data from the St. Falls plant for the past year are as follows:


For the coming year, the accountants at St. Falls are in the process of helping the sales force create bids for several jobs. Projected data pertaining to job no. 110 are as follows:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000
Direct labor cost:
Department A (2,000 hr) . . . . . . . . . . . . . . . . . . . . . 30,000
Department B (500 hr) . . . . . . . . . . . . . . . . . . . . . . 6,000
Machine-hours projected:
Department A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Department B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Units produced . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000

Instructions
(Round overhead rates and unit costs to 2 decimal places and round other cost calculations to the nearest dollar.)
a. Assume the St. Falls plant uses a single plantwide overhead rate to assign all overhead (plant-wide and department) costs to jobs. Use expected direct labor hours to compute the overhead rate. Find the overhead rate and determine the projected amount of total manufacturing costs per unit for the units in job no. 110.
b. Recalculate the projected manufacturing costs for job no. 110 using three separate rates: one rate for plantwide overhead and two separate department overhead rates, all based on machine-hours.
c. The sales policy at St. Falls dictates that job bids be calculated by adding 30 percent to total manufacturing costs. What would be the bid for job no. 110 using (1) the overhead rate from part a and (2) the overhead rate from part b? Explain why the bids differ. Which of the over-head allocation methods would you recommend and why?
d. Using the allocation rates in part b, compute the under- or overapplied overhead for the St. Falls plant for the year. Explain the impact on net income of assigning the under- or over applied overhead to cost of goods sold rather than prorating the amount between inventories and cost of goods sold. e. A St. Falls subcontractor has offered to produce the parts for job no. 110 for a price of $8 per unit. Assume the St. Falls sales force has already committed to the bid price based on the cal-culations in part b. Should St. Falls buy the $8 per unit part from the subcontractor or continue to make the parts for job no. 110 itself?
f. Would your response to part e change if the St. Falls plant could use the facilities necessary to produce parts for job no. 110 for another job that could earn an incremental profit of $15,000?
g. If the subcontractor mentioned in part e is located in Mexico, what additional international environmental issues, other than price, will Gilster and St. Falls management need to evaluate?
h. If Gilster Company management decides to undertake a target costing approach to pricing its jobs, what types of changes will it need to make for such an approach to besuccessful?


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  • CreatedApril 17, 2014
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