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 $$200,000.$ During the past year, actual plantwide overhesd was $$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:

$\backslash$table$[[,$Department A$,$Department B$],[\backslash$table$[[$Budgeted Department$],[$Overhead$],[($excludes plantwide$],[$overhead$)]],100,000,500,000],[$Actual Department Overhead,$110,000,520,000],[,,],[\backslash$table$[[$Expected Activity:$],[$Direct Labour Hours$],[$Machine Hours$]],50,000,10,000],[,10,000,50,000],[$Actual Activity:,,$]]$

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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:

$\backslash$table$[[$Direct Materials,$20,000],[$Direct Labour Cost:,$],[$Department A $(2,000$ hr$),30,000],[$Department B $(500$ hr$),6,000],[,],[$Machine Hours Projected:,$100],[$Department A$,1,200],[$Department B$,],[,10,000],[$Units Produced,$]]$

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$)$