Earth and Artistry, Inc. provides commercial landscaping services. Sasha Cairns, the firm’s owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing the firm’s costs, Cairns has developed the following preliminary cost estimates for each 1,000 square feet of landscaping.
Direct material | $ | 440 | |
Direct labor (5 direct-labor hours at $10 per hour) | 50 | ||
Overhead (at $16 per direct-labor hour) | 80 | ||
Total cost per 1,000 square feet | $ | 570 | |
Cairns is quite certain about the estimates for direct material and direct labor. However, she is not as comfortable with the overhead estimate. The estimate for overhead is based on the overhead costs that were incurred during the past 12 months as presented in the following schedule. The estimate of $16 per direct-labor hour was determined by dividing the total overhead costs for the 12-month period ($632,000) by the total direct-labor hours (39,500).
Regular Direct- | Overtime Direct- | Total Direct- | |||||||
Total Overhead | Labor Hours | Labor Hours* | Labor Hours | ||||||
January | $ | 56,000 | 3,460 | 160 | 3,620 | ||||
February | 50,000 | 3,380 | 30 | 3,410 | |||||
March | 47,000 | 3,380 | 60 | 3,440 | |||||
April | 53,000 | 2,460 | 220 | 2,680 | |||||
May | 55,000 | 3,030 | 400 | 3,430 | |||||
June | 55,000 | 2,860 | 770 | 3,630 | |||||
July | 49,000 | 2,450 | 670 | 3,120 | |||||
August | 47,000 | 2,710 | 330 | 3,040 | |||||
September | 57,000 | 3,170 | 70 | 3,240 | |||||
October | 54,000 | 3,450 | 40 | 3,490 | |||||
November | 60,000 | 3,120 | 40 | 3,160 | |||||
December | 49,000 | 2,980 | 260 | 3,240 | |||||
Total | $ | 632,000 | 36,450 | 3,050 | 39,500 | ||||
*The overtime premium is 50 percent of the direct-labor wage rate.
Cairns believes that overhead is affected by total monthly
direct-labor hours. Cairns decided to perform a least-squares
regression of overhead (OH) on total direct-labor hours (DLH). The
following regression formula was obtained.
OH = $43,822 + $2.69 DLH
Required:
3. Cairns has been asked to submit a bid on a landscaping project for the city government consisting of 56,000 square feet. Cairns estimates that 60 percent of the direct-labor hours required for the project will be on overtime. Calculate the incremental costs that should be included in any bid that Cairns would submit on this project. Use the overhead formula derived from the least-squares regression.
After attending a seminar on activity-based costing, Cairns decided to further analyze the company’s activities and costs. She discovered that a more accurate portrayal of the firm’s cost behavior could be achieved by dividing overhead into three separate pools, each with its own cost driver. Separate regression equations were estimated for each of the cost pools, with the following results.
OH1 = $10,700 + $4.00 DLH,
where DLH denotes direct-labor hours
OH2= $9,100 + $13.50 SFS,
where SFS denotes the number of square feet of turf seeded (in
thousands)
OH3 = $8,600 + $6.30 PL,
where PL denotes the number of individual plantings (e.g., trees
and shrubs)
Assume that 5 direct-labor hours will be needed to landscape each
1,000 square feet, regardless of the specific planting material
used.
b. Recompute the incremental variable overhead cost for the city’s landscaping project assuming half of the 56,000-square-foot landscaping area will be seeded and there will be 250 individual plantings. The plantings will cover the entire 56,000-square-foot area.
3 | Landscape in thousands of square feet=56000/1000=56 | ||||
Incremental cost: | |||||
$ | |||||
Direct material | (56*440) | 24640 | |||
Direct labor | (56*50) | 2800 | |||
Variable overhead | (56*2.69) | 150.64 | |||
Overtime | (Note:1) | 840 | |||
Total | 28430.64 | ||||
Note:1 | |||||
Overtime in hours=Total DLH*60%=56*5*60%=168 DLH | |||||
Overtime rate per hour=DL wage rate*50%=10*50%=$ 5 | |||||
Overtime cost=Overtime in hours*Overtime rate per hour=168*5=$ 840 |
b. | Number of square feet of turf seeded (in thousands)=(56000*50%)/1000=28 | |||||
Incremental variable overhead cost: | ||||||
$ | ||||||
OH1 | (28*5*4) | 560 | ||||
(Landscape in 1000 sq ft*DLH per 1000 sq ft*4) | ||||||
OH2 | (28*13.50) | 378 | ||||
(Landscape in 1000 sq ft*13.50) | ||||||
OH3 | (250*6.30) | 1575 | ||||
(Number of individual plantings*6.30) | ||||||
Total | 2513 | |||||
Earth and Artistry, Inc. provides commercial landscaping services. Sasha Cairns, the firm’s owner, wants to develop...
Earth and Artistry, Inc. provides commercial landscaping services. Sasha Cairns, the firm’s owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing the firm’s costs, Cairns has developed the following preliminary cost estimates for each 1,000 square feet of landscaping. Direct material $ 440 Direct labor (5 direct-labor hours at $10 per hour) 50 Overhead (at $16 per direct-labor hour) 80 Total cost per 1,000 square feet $ 570 Cairns is quite...
Earth and Artistry, Inc. provides commercial landscaping services. Sasha Cairns, the firm’s owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing the firm’s costs, Cairns has developed the following preliminary cost estimates for each 1,000 square feet of landscaping. Direct material $ 460 Direct labor (5 direct-labor hours at $10 per hour) 50 Overhead (at $16 per direct-labor hour) 80 Total cost per 1,000 square feet $ 590 Cairns is quite...
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following quarter’s budgeted sales. Waterway has been following
this inventory policy for several years. The company ended 2017
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