Overhead Application and Inventory Management Costs: Pointer Furniture Company manufactures and sells several brands of office furniture.
Question:
Overhead Application and Inventory Management Costs:
Pointer Furniture Company manufactures and sells several brands of office furniture. The manufacturing operation is organized by the item produced rather than by the furniture line. Thus, the desks for all brands are manufactured on the same production line. The desks are manufactured in batches. For example, 10 high-quality desks might be manufactured during the first two weeks in October and 50 units of a lowerquality desk during the last two weeks. Because each model has its own unique manufacturing requirement, the change from one model to another requires the factory's equipment to be adjusted. Management of Pointer wants to determine the most economical production run for each of the items in its product lines. One of the costs that must be estimated is the setup cost incurred when there is a change to a different furniture model. The accounting department has been asked to determine the setup cost for the desk model JE 40 as an example.
The equipment maintenance department is responsible for all of the changeover adjustments on production lines in addition to the preventive and regular mainte- nance of all the production equipment. The equipment maintenance staff has a 40- hour workweek; the size of the staff is changed only if there is a change in the workload that is expected to persist for an extended period of time. The equipment maintenance department had 10 employees last year, and they each averaged 2,000 hours for the year. They are paid $9 an hour, and employee benefits average 20 percent of wage costs. The other departmental costs, which include such items as supervision, depreciation, insurance, and so forth, total $50,000 per year.
Two workers from the equipment maintenance department are required to make the change on the desk line for model JE 40. They spend an estimated five hours in setting up the equipment. The desk production line on which model JE 40 is manufactured is operated by five workers. During the changeover, these workers assist the maintenance workers when needed and operate the line during the one-hour test run. However, they are idle for approximately 40 percent of the time required for the changeover.
The production workers are paid a basic wage rate of $7.50 an hour. Two overhead bases are used to apply the overhead costs of this production line because some of the costs vary in proportion to direct labor-hours while others vary with machine-hours. The overhead rates applicable for the current year are as follows:
These department overhead rates are based on an expected activity of 10,000 direct labor-hours and 1,500 machine-hours for the current year. This department is not scheduled to operate at full capacity because production capability currently exceeds sales potential at this time. The estimated cost of the direct materials used in the test run totals $200. Salvage material from the test run should total $50. Pointer's cost of capital is 20 percent.
Required:
a. Prepare an estimate of Pointer Furniture Company's setup cost for desk model JE 40 for use in the economic production run model. For each cost item identified in the problem, justify the amount and the reason for including the cost item in your estimate. Explain the reason for excluding any cost item from your esti- mate.
b. Identify the cost items that would be included in an estimate of Pointer Furniture Company's cost of carrying the desks in inventory.
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