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. Fall 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 $250,000. During the past year, actual plantwide overhead was $240,000. Each department's overhead

consists primarily of depreciation and other machine-related expenses. Selected budge 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) $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 St. Falls are in the process of helping the sales force create bids for several jobs. Projected data pertaining only to job no. 110 are as follow

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

A. Assume the St. Falls 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 St. Falls dictates that job bids be calculated by adding 40 percent to total manufacturing costs. What would be the bid for job no. 110 using the overhead rate from part a and 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 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 costs of goods sold.

E. A St. Falls subcontractor has offer to produce the parts for job no 110 for a price of $12 per unit. Assume the St. Falls sales force has already committed to the bid price based on the calculations in part b. Should St. Falls 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. Falls 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 mention 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 be successful.