Question
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
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 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 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
Expectedtotalactivity:
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
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
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 pertainingonly to job no. 110 are as follows.
Instructions
a.Assume the St. Cloud plant uses a single plantwide overhead rate to assignall overhead
(plantwide and department) costs to jobs. Use expectedtotaldirect 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 partaand (2) the overhead rate from partb?Explain why the bids differ. Which of the
overhead allocation methods would you recommend and why?
d.Using the allocation rates in partb,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 partb.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 partechange 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 parteis 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?
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