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Com Prob 5

Satisfactory Essays
COMPREHENSIVE PROBLEM 5
The Gilster Company
This problem covers various topics from Chapters 15 through 21. The emphasis is on job costing, overhead allocation, target costing, and incremental decision making.

60 Strong

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COMPREHENSIVE PROBLEM 5
THE GILSTER COMPANY

60 Minutes, Strong

a. Plantwide overhead rate using direct labor hours:
Overhead
Rate

=

Total Expected Overhead
Total Expected Direct Labor Hours

=

($250,000 + $150,000 + $600,000)
(35,000 hrs. + 15,000 hrs.)

=

$1,000,000
50,000 hrs.

= $20 per direct labor hr.

Manufacturing costs for Job 110:
Direct materials
…show more content…
Bid price for Job 110 using only the plantwide overhead rate:
Bid price = 1.4 × $140,000 = $196,000
Bid price for Job 110 using separate overhead rates:
Bid price = 1.4 × $108,000 = $151,200
The bids differ due to the differences in manufacturing overhead that are applied to the job using the two allocation methods. The overhead differences are due to (1) the difference in labor vs. machine hours required to complete the job and (2) the application of single vs. multiple overhead rates. The allocation scheme employed in part b would be recommended because the departmental overhead is due mostly to machine-related expenses and the use of multiple overhead rates allows for allocation that more closely resembles the use of resources.

d. Applied overhead using machine hours:
Plantwide [$5 × 52,500 (10,500 + 42,000) mach. hrs.] ……………………………………
Dept. A ($15 × 10,500 mach. hrs.) …………………………………………………………
Dept. B ($15 × 42,000 mach. hrs.) …………………………………………………………
Total overhead applied ………………………………………………………………..

$262,500
157,500
630,000
$1,050,000

Actual overhead was $1,020,000 ($240,000 + $160,000 + $620,000), so the amount overapplied was
$30,000 ($1,050,000 - $1,020,000). Correcting the overapplication by reducing cost of goods sold would increase net income for the current year by more than would have resulted if the correction was prorated between cost of goods sold and inventories.

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