The Gilster Company, a machine tooling firm, has several plants. One plant, loca

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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 $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. 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 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 to job no. 110 are as follows: Direct materials $ 25,000 Direct labor cost: Department A (2,000 hr) 45,000 Department B (500 hr) 10,000 Machine-hours projected: Department A 200 Department B 1,200 Units produced 10,000 Instructions: a. assume tha St. falls plant uses a single plantwide overhead rate to assign all overhead (plant-wide and department) costs to jobs. Use exceeded total direct labor hours to compute the overhead rate. b. Recalculate the projected manfacturing costs for job no. 110 using three separate rates: one rate for plantwide overhead and two deparate 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 manfacturing costs. What would be the bif for job no. 110 using (1) the overhead rate from part a (2) the overhead rate from part b? explain why the bids differ. Whixh 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, Falls plant for the year. Explain the impact on net income of assigning the under or overlapped overhead to cost of goods sold rather than prorating the amount between inventories and cost of goods sold. e. A st. falls contractor has offered 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 bidprice based on the calculation in part b. Should St. Fall's 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 necessary 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 Wilster 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?

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Requirement a Calculation of single plantwide overhead rate based on expected direct labor hours Budgeted Plant overhead 250000 Budgeted department overhead Department A 150000 Department B 600000 Total Overhead 1000000 A Total expected direct labor hours 50000 B (35000+15000) Single plantwide overhead rate 20 A/B Allocation of overhead to Job no. 110 50000 (2000 hours+500 hours)*20 Projected manufacturing cost using single plantwide overhead rate for Job no. 110 Direct Materials 25000 Direct Labor Department A   45000 Department B 10000 Manufacturing overhead 50000 (As calculated above) Total Projected manufacturing costs 130000 Total units produced 10000 Cost per unit 13 Requirement b Calculation of three separate overhead rates Plant overhead 250000 Total machine hours in plant 50000 (10000+40000) machine hours Plantwide overhead rate 5 Department A Overhead 150000 Total machine hours in Department A 10000 Department A Overhead rate 15 Department B Overhead 600000 Total machine hours in Department B 40000 Department B Overhead rate 15 Requirement b Recalculation of projected manufacturing costs using above three overhead rate Direct Materials 25000 Direct Labor Department A   45000 Department B 10000 Manufacturing overhead Plant =(200+1200)*5 7000 Department A =200*15 3000 Department B =1200*15 18000 Total Projected manufacturing costs 108000 Total units produced 10000 Cost per unit 10.8 Requirement c Calculation of Job bid using part a(Requirement a) Total Projected manufacturing costs 130000 Add : 40% addition 52000 Total bid price to be made 182000 Total units produced 10000 Bid price per unit 18.2 Calculation of Job bid using part b(Requirement b) Total Projected manufacturing costs 108000 Add : 40% addition 43200 Total bid price to be made 151200 Total units produced 10000 Bid price per unit 15.12 Requirement as to explanation The Bid differs due to differnet overhead rate applied in part a & part b We have used signle overhead rate while calculating manufacturing costs for part a And we have used three separate rate while calculating manufacturing costs for part b We will recommend the overhead allocation method of three separate overhead to be applied for calculation of manufacturing overhead as it gives more pragmatic scenerio for calculation of overall bid price Requirement d Calculation of under or overapplied overhead used in part b department A Department B Total Projected manufacturing overhead Total number of machine hours 35000 15000 Plantwide overhead rate 5 5 Plantwide overhead 175000 75000 250000 Departmental overhead rate 15 15 Departmental overhead 525000 225000 750000 Total Projected manufacturing costs A 1000000 Actual Manufacturing overhead Total number of machine hours 10500 42000 Plantwide overhead rate 4.57 4.57 Plantwide overhead 48000 192000 240000 Departmental overhead rate 15.24 14.76 Departmental overhead 160000 620000 780000 Total actual manufacturing overhead B 1020000 Overhead are under applied by B-A 20000 Working Notes : Calculation of actual overhead rates Calculation of three separate overhead rates Plant overhead 240000.00 Total machine hours in plant 52500.00 (10500+42000) machine hours Plantwide overhead rate 4.57 Department A Overhead 160000.00 Total machine hours in Department A 10500.00 Department A Overhead rate 15.24 Department B Overhead 620000.00 Total machine hours in Department B 42000.00 Department B Overhead rate 14.76 Requirement as to explanation The impact on net income of over(under) applied overhead Net Income Overhead over applied to cost of goods sold rather than prorating the amount between cost of goods sold and inventories understated Overhead under applied to cost of goods sold rather than prorating the amount between cost of goods sold and inventories Overstated

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