Which of the overhead allocation methods would you recommend

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

	Department A			Department B
Budgeted department overhead
(excludes plantwide overhead)	$	100,000		$	500,000
Actual department overhead		110,000			520,000
Expected activity:
Direct labor hours		50,000			10,000
Machine-hours		10,000			50,000
Actual activity:
Direct labor hours		51,000			9,000
Machine-hours		10,500			52,000

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	$	20,000
Direct labor cost:
Department A (2,000 hr)		30,000
Department B (500 hr)		6,000
Machine-hours projected:
Department A		100
Department B		1,200
Units produced		10,000

1.

a.1	Assume the St. Falls plant uses a single plantwide overhead rate to assign all overhead (plantwide and department) costs to jobs. Find the overhead rate by using expected direct labor hours. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Overhead rate?

$  per direct labor hour

a.2	Determine the projected amount of total manufacturing costs per unit for the units in job no. 110.(Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Manufacturing costs for Job 110

$  per unit

2.

b.1	Calculate plantwide overhead rate using Machine Hours on projected manufacturing costs for job no. 110. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Plantwide overhead rate

$  per machine hour

b.2	Calculate two separate department overhead rates using Machine Hours on projected manufacturing costs for job no. 110. (Omit the "$" sign in your response.)

Overhead rate-Department A	$  per machine hour
Overhead rate-Department B	$  per machine hour

b.3

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.(Round your intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.)

Total cost

$  per unit

3.

c.1	The sales policy at St. Falls dictates that job bids be calculated by adding 30 percent to total manufacturing costs. What would be the bid for job no. 110 using the overhead rate from part a ? (Omit the "$" sign in your response.)

Bid price

$

c.2	The sales policy at St. Falls dictates that job bids be calculated by adding 30 percent to total manufacturing costs. What would be the bid for job no. 110 using the overhead rate from part b ? (Omit the "$" sign in your response.)

Bid price

$

c.3	Which of the overhead allocation methods would you recommend ?
	Overhead rate by direct labor hours Overhead rate by machine Hours

4.

d.	Using the allocation rates in part b, compute the under- or overapplied overhead for the St. Falls plant for the year. (Round your intermediate calculations to 2 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

(Click to select)OverappliedUnderapplied

$

5.

e.

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. Should St. Falls buy the $8 per unit part from the subcontractor or continue to make the parts for job no. 110 itself?

	Continue to make the part
	Subcontractor

6.

f.	Would your response to part e 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?

	Yes
	No