# Comprehensive problem Essay - Part 2

COMPREHENSIVE PROBLEM

a.

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Manufacturing Costs for Job 110:

Direct Materials                                                         \$20,000

Direct Labor (Dept - Comprehensive problem Essay introduction. A)                                             \$30,000

Direct Labor (Dept. B)                                              \$6,000

Manufacturing Overhead (\$13.33 x 2,500)              \$33,325

Total Manufacturing Costs                                        \$89,325

b.

Manufacturing Costs for Job 110:

Direct Materials                                                         \$20,000

Direct Labor (Dept. A)                                             \$30,000

Direct Labor (Dept. B)                                              \$6,000

Manufacturing Overhead Plant (\$3.33 x 1,300)       \$4,329

Overheads Dept. A (\$10 x 100)                                \$1,000

Overheads Dept. B (\$10 x 1,200)                             \$12,000

Total Manufacturing Costs                                       \$73,329

c. Total Manufacturing Costs under part (a) overhead                     \$89,325

Added Mark-Up (89,325 x 30%)                                                     \$26,798

Bid Price for Job 110                                                                       \$116,123

Total Manufacturing Costs under part (a) overhead                        \$73,329

Added Mark-Up (73,329 x 30%)                                                     \$21,999

Bid Price for Job 110                                                                        \$95,328

There is a substantial difference in the bid price for job 110 due to the varying total manufacturing costs.  Such discrepancy in manufacturing costs is the result of the differing methods of determining the pre-determined overhead rate.  In part (a) a plantwide rate was adopted, while in part (b) the overhead rate is based upon the respective departments.  The plantwide method is not advisable, especially when a cost-plus pricing method is adopted.  This is due to the fact that such technique is not accurate in allocating overheads to jobs especially when the factory consists of a number of different production centers like the case at hand.  Therefore the overhead method computed in part (b) is suggested.

d.

Actual Plantwide Overhead Rate                                         \$3.04

Budgeted Plantwide Overhead Rate                                    \$3.33

Over-Recovery                                                                      \$0.29

Effect on Income (\$0.29 x 62,500)                                      \$18,125

Actual Dept. A Overhead Rate                                            \$10.48

Budgeted Dept. A Overhead Rate                                       \$10.00

Under-Recovery                                                                   \$0.48

Effect on Income (\$0.48 x 10,500)                                      \$5,040

Actual Dept. B Overhead Rate                                            \$10.00

Budgeted Dept. B Overhead Rate                                       \$10.00

No under/over recovery                                                        \$0.00

Effect on Income                                                                  Nil

Any under or over recovery of overhead expenditure is not allocated to products.  Its effect is on the net income of the current accounting period.  Under under-recovery, as applicable for Department A overheads the under-recovery is recorded as expenditure and deducted from net income, because the actual overheads were higher than budgeted.  The reversal occurs for over-recovery, because the actual overheads were less than budgeted.

e.

Cost per unit if manufactured                                               \$7.33

Cost per unit if bought from an outside supplier      \$8.00

Excess Price                                                              \$0.67

The company should not buy the product from an outside supplier, because it would cost \$0.67 more on a per unit basis.

f. Excessive Price from bought decision (\$0.67 x 10,000)               \$6,700

Lost profits from another job on manufacture decision                   \$15,000

Incremental Loss if job is manufactured                                          \$(8,300)

In case the resources can be employed in the manufacture of another job, the subcontracting transaction is financially viable.  This is mainly due to the losses foregone if the product is manufactured.

g. In such a stance qualitative variables should be taken into account:

Reliability of supplier in meeting production requirements.
Quality of the product supplied.
Quality perceived by customers of the company.  If clients perceive a lesser quality there is the risk that it adversely affects the reputation of the Gilster Company.
Tariffs and quotas that may be imposed on the goods imported, which may lead to higher expenditure pertinent to the buy decision.
The organization may also be vulnerable to losses arising from fluctuations in exchange rate, since the Mexican Currency (the Peso) differs from the American Dollar.

Reference:

Drury C. (1996). Management and Cost Accounting. Fourth Edition. New York: International Thomson Business Press.

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