Question:10-24 Linear cost approximation. Terry Lawler, managing director of the Memphis Consulting Group, is
examining how overhead costs behave with changes in monthly professional labor-hours billed to clients.
Assume the following historical data:
Professional Labor-Hours
Total Overhead Costs Billed to Clients
$340,000 3,000
400,000 4,000
435,000 5,000
477,000 6,000
529,000 7,000
587,000 8,000
required:
1. Compute the linear cost function, relating total overhead cost to professional labor-hours, using the representative
observations of 4,000 and 7,000 hours. Plot the linear cost function. Does the constant component
of the cost function represent the fixed overhead costs of the Memphis Consulting Group? Why?
2. What would be the predicted total overhead costs for (a) 5,000 hours and (b) 8,000 hours using the cost
function estimated in requirement 1? Plot the predicted costs and actual costs for 5,000 and 8,000 hours.
3. Lawler had a chance to accept a special job that would have boosted professional labor-hours from
4,000 to 5,000 hours. Suppose Lawler, guided by the linear cost function, rejected this job because it
would have brought a total increase in contribution margin of $38,000, before deducting the predicted
increase in total overhead cost, $43,000. What is the total contribution margin actually forgone?
Please provide correct answer. Attend only you are sure about the answer.
1. Let y be the fixed overhead component and x be the variable component of the overheads. So, for 4000 and 7000 hrs we get below two equations:
4000x + y = 400,000 (Eq1)
7000x + y = 529,000 (Eq 2)
Subtracting Eq1 from Eq2, we get
3000x = 129,000 i.e. x = $43
Substituting x = 43 in Eq 1 or Eq 2, we get , y = $228,000.
Therefore, we get the variable overhead rate at $43/ hr and fixed overhead is equal to $228,000.
The linear cost function using representative observations of 4000 and 7000 labour hours is given by:
Overhead Cost (OC) = 228,000 + 43h, where h= no. of labour hours. This can be plotted on a graph as follows:
Refer Graph 1 in image.
The constant component here represents fixed overhead costs because it remains same irrespective of number of labour hours. It means that $228k of costs will need to be borne irrespective of level of activity.
2. a) For 5000 hours, From part 1 answer, we know that our overhead cost function is given by:
OC = 228,000 + 43h, Substituting h = 5000 in this equation we get
OC = $443,000. Therefore, predicted cost at 5000 hours is equal to $443,000
b) For 8000 hours,
OC = 228,000 + 43h, Substituting h = 8000,
OC = $572,000. Therefore, predicted cost at 8000 hours is equal to $572,000.
The predicted and actual costs are plotted on graph as follows:
Refer Graph 2 in image
3. From the information given in the question, we know that actual costs at 4000 hours = $400,000 and actual costs for 5000 hours = $435,000. Therefore for additional 1000 increase in labour hours, the cost would have increased by $35,000 (435000-400000).
The poposed order would have brought additional contribution of $38,000.
Hence, contribution margin actually foregone = Increased contribution - Increased costs i.e. $38,000 - $35,000 = $3,000
Question:10-24 Linear cost approximation. Terry Lawler, managing director of the Memphis Consulting Group, is examining how...
Bailey Nickles, managing director of the Vancouver Consulting Group, is examining how overhead costs behave with changes in monthly professional labour-hours billed to clients. Assume the following historical data: :: (Click the icon to view the data.) Required Requirement 1. Compute the linear cost function, relating total overhead cost to professional labour-hours, using the representative observations of 5,000 and 7,500 hours. Plot the linear cost function. Does the constant component of the cost function represent the fixed overhead costs of...
Problem 3 (Cost Flows in a service organization) For the month of March CBL Consulting Group worked 400 hours for Dynasty Manufacturing, 100 hours for Golden Manufacturing and 200 hours for Commissions, Inc. CBL bills clients at the rate of P100 per hour, while labor cost is P40 per hour. A total of 800 hours were worked in March, with 100 hours not billable to clients. Overhead costs of P12,000 were assigned to jobs (that is, clients) on the basis...
Robin Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing system in which each client is a different job. Robin Design assigns direct labor, licensing costs, and travel costs directly to each job. It allocates indirect costs to jobs based on a predetermined overhead allocation rate, computed as a percentage of direct labor costs. At the beginning of 2018, managing partner Janie Eaton prepared the following budget estimates: (Click the icon to...
Exercise 7-41 (Algo) Job Costing in a Service Organization (LO 7-4) For August. Royal Consulting and Mediation Practice (RCMP) worked 1,050 hours for Alberta Company and 2,250 hours for Ontario Corporation. RCMP bills clients at the rate of $480 per hour; labor cost for its consulting staff is $280 per hour. The total number of hours worked in August was 3,300, and overhead costs were $68,000. Overhead is applied to clients at $25 per labor-hour. In addition, RCMP had $280,000...
Dove Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing system in which each client Al the beginning of 2018, managing partner Holly Harrison prepared the following budget estimates (Click the icon to view the prepared budget.) indirect costs to iobs based on a predelermined overhead allocation rate, computed as a percentage of direct labor costs In November 2018, Dove Design served several clients. Repords for two clients appear here: Read erecuirements...
Pelican Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing system in which each At the beginning of 2018, managing partner Abby Bickers prepared the following budget estimates: client is a different job. Pelican Design assigns direct labor, licensing costs, and travel costs directly to each job. It B(Click the icon to view the prepared budget.) allocates indirect costs to jobs based on a predetermined overhead allocation rate, computed as a percentage...
Hummingbird Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing At the beginning of 2018, managing partner Charlotte Adessa prepared the following budget estimates: system in which each client is a different job. Hummingbird Design assigns direct labor, licensing costs, and (Click the icon to view the prepared budget.) travel costs directly to each job. It allocates indirect costs to jobs based on a predetermined overhead In November 2018, Hummingbird Design served...
skylark design, inc is a web site design and consulting firm Skylark Design, Inc. is a Web site design and consulting firm. The firm uses a order costing system in which each client is a different job. Skylark Design assigns direct labor, licensing costs, and travel costs directly to each job. It allocates indirect costs to jobs based on a predetermined overhead allocation rate, computed as a percentage of direct labor costs. At the beginning of 2018, managing partner Erica...
Swinger’s Porch Swings Swinger’s Porch Swings makes custom porch swings The standard swing requires 10 linear feet of wood and 5 hours of labor Customers can add cup holders and/or a stain before the swing is finished with a clear coat. Adding cup holders requires 1 additional hour of labor and no additional direct materials Adding stain requires $25 of stain per swing and 2 additional hour of labor. Swings can be made of pine, oak or teak Pine costs...
Help me finish the remaining sections. It's pretty self explanatory on here but i am busy with work so i am unable to finish it. The requirements and needed information are included on the pictures. I answered most of the sections but i need requirement 2 and requirement 3 still Cardinal Design, Inc. is a Web site design and consulting firm. The firm uses a job order costing system in which each client is a different job. Cardinal Design assigns...