COMPREHENSIVE PROBLEM 5

The Gilster Company

The Gilster Company, a machine tooling firm, has several plants. One plant, located in St. Cloud, Minnesota, uses a job order costing system for its batch production processes. The St. Cloud plant has two departments through which most jobs pass. Plant-wide overhead, which includes the plant managers salary, accounting personnel, cafeteria, and human resources, is budgeted at $250,000. During the past year, actual plantwide overhead was $240,000. Each departments overhead consists primarily of depreciation and other machine-related expenses. Selected budgeted and actual data from the St. Cloud plant for the past year are as follows.

Department A Department B

Budgeted department overhead (excludes plantwide overhead) . . . . . . . . . . . . . . . . . . . . $150,000 $600,000

Actual department overhead . . . . . . . . . . . . . . . . . . . . . . . 160,000 620,000

Expected total activity: Direct labor hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 15,000

Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 40,000

Actual activity: Direct labor hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,000 9,000

Machine-hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500 42,000

For the coming year, the accountants at the St. Cloud plant are in the process of helping the sales force create bids for several jobs. Projected data pertaining only to job no. 110 are as follows.

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000

Direct labor cost:

Department A (2,200 hr) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000

Department B (800 hr) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000

Machine-hours projected:

Department A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

Department B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200

Units produced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000

Instructions

a. Assume the St. Cloud plant uses a single plantwide overhead rate to assign all overhead (plantwide and department) costs to jobs. Use expected total direct labor hours to compute the overhead rate. What is the expected cost per unit produced for 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 the St. Cloud plant dictates that job bids be calculated by adding 40 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 overhead allocation methods would you recommend and why?

d. Using the allocation rates in part b, compute the under- or overapplied overhead for the St. Cloud 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.

e. A St. Cloud subcontractor has offered to produce the parts for job no. 110 for a price of $12 per unit. Assume the St. Cloud sales force has already committed to the bid price based on the calculations in part b. Should the St. Cloud plant buy the $12 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. Cloud plant could use the facilities necessary to produce parts for job no. 110 for another job that could earn an incremental profit of $20,000?

g. If the subcontractor mentioned in part e is located in Mexico, what additional international environmental issues, other than price, will management at the St. Cloud plant 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 be successful?