Question

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 $360,000. During the past year, actual plantwide overhead was $348,000. 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) $ 149,500 $ 591,600 Actual department overhead 170,000 611,600 Expected total activity: Direct labor hours 46,000 25,000 Machine-hours 13,000 51,000 Actual activity: Direct labor hours 48,000 23,700 Machine-hours 13,800 53,000 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 follows. Direct materials $ 20,800 Direct labor cost: Department A (3,000 hr) 45,000 Department B (1,100 hr) 10,400 Machine-hours projected: Department A 210 Department B 1,200 Units produced 13,000 c-1. The sales policy at St. Falls dictates that job bids be calculated by adding 25 percent to total manufacturing costs. What would be the bid for job no. 110 using the overhead rate from part a? c-2. The sales policy at St. Falls dictates that job bids be calculated by adding 25 percent to total manufacturing costs. What would be the bid for job no. 110 using the overhead rate from part b? c-3. Which of the overhead allocation methods would you recommend?

Answer 1

Working Notes	Calculation of single plantwide overhead rate based on expected direct labor hours
	Budgeted Plant overhead		360000
	Budgeted department overhead
		Department A	149500
		Department B	591600
	Total Overhead		1101100	A
	Total expected direct labor hours		71000	B
	(46000+25000)
	Single plantwide overhead rate		15.5084507	A/B
	Allocation of overhead to Job no. 110		63585
	(3000 hours+1100 hours)*15.51
	Projected manufacturing cost using single plantwide overhead rate for Job no. 110
	Direct Materials		20800
	Direct Labor
	Department A		45000
	Department B		10400
	Manufacturing overhead		63585
	(As calculated above)
	Total Projected manufacturing costs		139785
	Total units produced		13000
	Cost per unit		10.75
Working Notes	Calculation of three separate overhead rates
	Plant overhead		360000
	Total machine hours in plant		64000
	(13000+51000) machine hours
	Plantwide overhead rate		5.625
	Department A Overhead		149500
	Total machine hours in Department A		13000
	Department A Overhead rate		11.5
	Department B Overhead		591600
	Total machine hours in Department B		51000
	Department B Overhead rate		11.6
	Recalculation of projected manufacturing costs using above three overhead rate
	Direct Materials		20800
	Direct Labor
	Department A		45000
	Department B		10400
	Manufacturing overhead
	Plant	=(210+1200)*5.625	7931.25
	Department A =210*11.5		2415
	Department B =1200*11.6		13920
	Total Projected manufacturing costs		100466.25
	Total units produced		13000
	Cost per unit		7.73
Requirement c1	Calculation of Job bid using part a(Requirement a)
	Total Projected manufacturing costs		139785
	Add : 25% addition		34946
	Total bid price to be made		174731
	Total units produced		13000
	Bid price per unit		13.44
Requirement c2	Calculation of Job bid using part b(Requirement b)
	Total Projected manufacturing costs		100466
	Add : 25% addition		25117
	Total bid price to be made		125583
	Total units produced		13000
	Bid price per unit		9.66
Requirement c3	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