4.1.2 Set Exercise 2
The Gilster Company
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:
Department A
Department B
Budgeted Department Overhead (excludes plantwide overhead)
Actual Department Overhead
110,000
520,000
Expected Activity: Direct Labour Hours Machine Hours
50,000
10,000
Actual Activity:
10,000
50,000

Direct Labour Hours
51,000
9,000
Machine Hours
10,500
52,000
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 Labour 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.)
Based on your previous findings in Formative Assessment 1 answer the following;
a. Using the allocation rates in part b (Formative Assessment 1), 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 overapplied overhead to cost of goods sold rather than prorating the amount between inventories and cost of goods sold. (20 marks)

b. 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 calculations in part b. Explain if St. Falls buy the $8 per unit part from the subcontractor or continue to make the parts for job no. 110 itself? (40 marks)
c. Would your response to part b 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? (40 marks)