Management Accounting Case Study: Gibson Fabricators Corporation

This case study analyzes the accounting practices of Gibson Fabricators Corporation, focusing on the calculation and application of predetermined overhead rates. The solution addresses the computation of overhead recovery rates, the impact of these rates on job costing, and the importance of overhead costs in overall cost management. The analysis includes a comparison of different overhead rates and their effects. Furthermore, the case study evaluates the decision-making process regarding the installation of a new machine, considering the potential cost savings from reduced direct labor hours and the associated expenses. The solution emphasizes the significance of careful management of indirect costs to minimize overall costs. The case study solution submitted on Desklib offers insights into accounting principles and practical application of overhead costs.

ACCOUNTING
Name of the Student:
Name of the University:

RECALCULATION OF OVERHEAD RATE
 Predetermined overhead rate is a method of
allocation of overhead expenses or indirect
ex
 Based on the revised total manufacturing
overhead and labour, the overhead recovery
rate has been recalculated as belowpenses
to the cost centre or cot unit.

COMPUTATION OF THE COST OF JOB
 The total cost of production of a job is
calculated by adding overheads to the prime
cost of the job.
 Based on that recalculated overhead rate
and taking the given direct labour costs and
direct materials costs, the total cost of
production of the job has been calculated as
below

EFFECT OF OVERHEAD RATE
 The overhead recovery rate has been
calculated based on the estimated total
overhead expenses for the coming year and
the estimate use of total labour hour.
 Following table shows a comparative analysis
of the two overhead rates.

IMPORTANCE OF OVERHEAD COSTS
 Overhead cost is one of the most important
parts of the total costs of a product or
service.
 Overhead costs include costs of indirect
materials, cost of indirect labour and other
indirect expenses which cannot be allocated
or linked with a cost centre or cost unit.
 On the other hand, as the manufacturing
overhead costs constitutes a significant part
of the total cost of the product, managers
must be very much careful in managing the
indirect costs or overhead costs, thereby
achieving the objective of overall cost
minimisation.

DECISION MAKING ON INSTALLATION
OF THE NEW MACHINE
 If the new and automated milling machine is
installed then there would be a cost savings
of $468,000 in the form of reduced direct
labour hour. To install the machine there will
be an additional $345,000 expenses per
annum.
 Now, if the savings in direct labour is only
2,000 hours which implies a cost savings of
only $156,000, the company will be
ultimately incurring a loss as the additional
expenses on installation of the machine will
be higher. Hence, it can be recommended
not to install the machine if the savings in
direct labour is only 2,000 hours.

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