The Gilster Company Case Summary

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3. Briefly describe how the current production cost assignment system works. What are the consumption ratios (activity percentages) for assigning manufacturing overhead to each product at present?

Both systems have their advantages and disadvantages, the labor-based allocation method provides a fast straightforward method for businesses with labor intensive processes that in many businesses make up the majority of these costs. For this microbrewery however, especially within overheads the percentage of costs labor attributes towards is relatively minimal. Therefore reducing the effectiveness of such a method. ABC however represents a more in depth look at cost allocation and within such a business where there are a huge variety of factors involved looking at a more segmented form of activity based cost allocation is extremely important.

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In using ABC overhead costs are distributed differently across the three products, but in total they are the same, in total. However, ABC changes the information that managers receive to make effective business decisions, which will ultimately result in improved business results.

This paper needs to read as an in class write that has been taken home, revised once and computer generated: double spaced, 12 point, three pages minimum, four pages maximum. ( see page three of this document, AP Literature and Composition Draft Requirements)

The above cost system was efficient during the 1980s because it split up overhead over three cost pools, adding an additional pool, which has machine hours as its cost driver. This proved efficient because “[w]ith increased usage of automated machines, direct labor run time no longer reflected the amount of processing being performed on parts, particularly when one operator was responsible for several machines.” Packet, pg. 7.

• This cost method does not provide the best system for JDCW’s cost allocation. By using only three overhead rates the present system grossly undermines the true production costs since other activities of the production process are not acknowledged.

This cost system is more accurate since it gives us the cost of each component according to their consumption of machine hours, direct hours… Thus it makes it possible to see where changes can be operated.

The overhead spending is greater than the direct labour costs or the direct material costs for all three product lines- Valves, Pumps and Flow Controllers (Exhibit 2). Overheads are simply charged at 185% constant for three diverse products. The fact that there is huge variance in the number of units produced per production run- it is 375 for valves and 18 for flow controllers per production run. This shows the reason for high overheads cost too. Hence it calls for checking the cost allocation system of the company.

The incremental cost per unit is $2.09 and is determined by adding the direct labor and direct materials per unit to the variable overhead. Variable overhead is determined by multiplying the number of machine hours by the “rule of thumb” for variable overhead, which is stated in the case as $13 per machine hour of “running time,” and dividing the product by the number of units.

Bringing this dissertation to fruition was a long journey accomplished only because of the contributed efforts of many. I thank my committee—Vance Holliday, Jay Quade, Vic Baker, Barbara Mills, and Jeff Dean—for all their help, guidance, and encouragement. I feel lucky to have worked under the supervision of such an eminent group of researchers. I especially appreciate my advisor Vance Holliday, who was supportive of my decision to pursue an independent and initially unfunded project.

1. Define and explain the meaning of a predetermined manufacturing overhead rate that is applied in a job-order costing system?

Answer: To arrive at the cost of $240 there would have been many assumptions as we do not have the actual cost information about the different fixed and variable cost. The allocation of overhead cost based on the usage of