Question

(PLEASE ONLY ANSWER INSTRUCTIONS E-H IN BOLD)

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:

	Dept. A	Dept. B
Budgeted dept. overhead
(excludes plantwide overhead)	$150,000	$600,000
actual dept. 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 to job no. 110 are as follows:

direct materials	$25,000
direct labor cost
dept. A (2,200 hr)	45,000
dept. B (800 hr)	10,000
Machine hours projected
dept. A	200
dept. 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?

Answer 1

E. Based on the calculation inPart B, the per unit cost will be as below:

The contractor has offered to produce the parts for 12 per unit which is higher that the per unit cost calculated. Therefore, it should not buy the parts from the sub contractor.

F. If the facilities can be used for another job and earn an incremental profit of 20,000, and the parts be bought from the supplier at 12 per unit, the net incremental profit would be

Incremental profit = 20,000

Incremental cost = 1.2*10,000 = 12,000

Net incremental profit = 8,000

Therefore, in this case, it should be bought from the supplier.

G. Additional environmental issues that the management would need to evaluate include the following:

a. Imports are likely to cause an increase in pollution, both air and water as a lot of diesel is used in running the ships which are used for import.

b. Buying the parts from the supplier will in turn result in a lot of traffic jams(by either sea routes/air traffic), resulting in further air pollution

c. It would also mean that the labour currently employed with the company will have to be laid off, meaning people in the country become unemployed.

H. Target Costing Approach

For this approach to be successful, the business needs to set a maximum amount of cost at which it will operate in order to get the desired profit. This can be done by setting the right price for the job. This is done by analysing the competitor's prices carefully and accordingly setting its own price after taking into consideration demand-price combinations as well.