10 out of 10.

00 points

A consulting firm's accounting records show the following costs for year 1:

Direct materials (supplies) Direct labor Total overhead

$ 360,000 2,580,000 1,140,000

Production was 150,000 billable hours. Fixed overhead was $600,000. For year 2, direct materials costs are expected to increase by 10 percent per unit. Direct labor costs are expected to increase by 15 percent. Variable overhead per billable hour is expected to remain the same, but fixed overhead is expected to increase by 5 percent. Required: (a) Year 2 production is expected to be 195,000 billable hours. What are the estimated direct materials, direct labor, variable overhead, and fixed overhead costs for year 2? (Do not round intermediate calculations. Omit the "$" sign in your response.) Cost item Direct materials (supplies) Direct labor Variable overhead Fixed overhead Total costs This year's cost $
514,800 .01% 3,857,100 .01% 702,000 .01% 630,000

5,703,900 .01%

(b) Determine the total costs per billable hour for year 1 and year 2. (Round your answers to 2 decimal places. Omit the "$" sign in your response.) Costs per billable hour Last year This year $ $
27.20

29.25 1%

Explanation:

(a) Cost estimate with new costs and volume.

Year 1 Cost Cost Item Direct material s sup plies Direct labor Variabl e overhea d Fixed overhea d Total costs (1)

Cost Chan ge (1+Co st Increa se) (2)

Year 2 Cost (at last year's volume) (1) (2) = (3)

Growth in Volume (4) 195,000

Year 2 Cost (3) (4) = (5)

360,000

396,00 110 % =$ = 0 150,000 2,967, 195,000 = 000 150,000 195,000 540,00 100 % = = 0 150,000 115 % =
a

514,800

2,580,000

3,857,100

540,000

702,000

600,000

105 % =

630,00 (fixed) 0

630,000

$ 4,080,000

$ 5,703,900

$540,000 = $1,140,000 total overhead $600,000 fixed overhead.

(b) Costs per billable hour:

Last year: $27.20 = ($4,080,000 150,000) This year: $29.25 = ($5,703,900 195,000)

Month 1 2 3 4 5 6 7 8 9 10 11 12

Labor-Hours 3,625 3,575 3,400 3,700 3,900 3,775 3,700 3,625 3,550 3,975 3,375 3,550

Machine-Hours 6,775 7,035 7,600 7,265 7,955 7,895 6,950 6,530 7,270 7,725 6,490 8,020

Overhead Costs $513,435 518,960 549,575 541,400 581,145 572,320 535,110 510,470 532,195 565,335 503,775 564,210

Required: (a) Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours. (Round your variable cost answer to 2 decimal places. Omit the "$" sign in your response.) Variable cost (per machine hour) Fixed cost $ $
39.50 247,420

(b) Managers expect the plant to operate at a monthly average of 7,500 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation? (Use rounded variable cost. Omit the "$" sign in your response.) Overhead costs $
543,670

Explanation: (a)

High-low estimate Highest activity (month 12) Lowest activity (month 11) Machine Hours 8,020 6,490 Overhead Costs $564,210 $503,775

Variable cost =

Cost at highest activity cost at lowest activity Highest activity lowest activity $564,210 $503,775 8,020 6,490 = $39.50

= Fixed costs = = = or Fixed costs = =

Total costs variable costs $564,210 ($39.50 8,020) $247,420 $503,775 ($39.50 6,490) $247,420

The cost equation then is: Overhead costs = $247,420 + ($39.50 per MH Machine hours)
(b)

For 7,500 MH: Overhead costs = $247,420 + ($39.50 7,500) = $247,420 + $296,250 = $543,670

Krylon Company purchases eight special tools annually from CO., Inc. The price of these tools has increased each year, reaching $100,000 per unit last year. Because the purchase price has increased significantly, Krylon management has asked for a cost estimate to produce the tools in its own facilities. A team of employees from the engineering, manufacturing, and accounting departments has prepared a report for management that includes the following estimate to produce the first unit. Additional production employees will be hired to manufacture the tools. However, no additional equipment or space will be needed. The report states that total incremental costs for the first unit are estimated to be $120,000, as shown here. Materials Direct labor, consisting entirely of hourly production workers (varies with production volume) $40,000 80,000

Overhead and administrative costs are not affected by producing this tool. The current purchase price is $100,000 per unit, so the report recommends that Krylon continue to purchase the product from CO., Inc. Required: (a) Calculate the average cost of a tool for 8 tools? Assume that Krylon could experience labor-cost improvements on the tool production consistent with an 80 percent learning curve. (Note that the 80 percent learning rate coefficient is 0.3219.) (Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.) Average cost of a tool for 8 tools $
93,461 2

(b) Should Krylon produce or purchase its annual requirement of eight tools? Krylon should produce the tool itself.
Explanation:

Krylon should produce the tool itself. With an 80 percent learning rate (learning rate coefficient of 0.3219), the average cost of a tool for 8 tools is $93,461, which is less than the supplier cost. This is shown in the table below: Unit Produced (X) 1 2 3 4 5 6 7 8 Learning 1 Factor (Y) 1.00 0.80 0.70 0.64 0.60 0.56 0.53 0.51 Total Labor 2 Cost $ 80,000.00 144,001.25 200,171.28 251,373.27 299,026.41 343,963.31 386,724.81 427,687.20 Average Labor Cost 3 Per Unit $80,000.00 72,000.62 66,723.76 62,843.32 59,805.28 57,327.22 55,246.40 53,460.90 Materials Cost $40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 40,000.00 Total Average Cost $120,000.00 112,000.62 106,723.76 102,843.32 99,805.28 97,327.22 95,246.40 93,460.90

1. This is the ratio of the labor time it takes to produce unit X relative to the first unit and is equal to 0.3219 X 2. The total labor cost is $80,000 (the labor cost to produce the first unit) multiplied by the cumulative learning factor. 3. The average cost is the total cost divided by the number of units produced.