overlime and overhead Ralph now works for a manufaeturing firm that produces ehassis eomponents for the autornobile
Question:
overlime and overhead Ralph now works for a manufaeturing firm that produces ehassis eomponents for the autornobile industry. A debate has broken out about the direet labor cost of overtime produetion. The industrial engineering group eontends that overtime produetion costs about $20 extra per direet labor hour. This datum is based on an analysis ofwage rates, overtime pay differentials, and so on. The accounting group has verified the above ealeulation but has also decided to look at the past 14 months
(during whieh wage rates were eonstant). They colleet the data displayed below.
a] Suppose, exdusive of overtime premiums, the correet overhead generating model is given by av = F + v·DLH + E. Overtime premiums, though, are debited to overhead. When you regress overhead on total direet labor hours, have you produced a misspecified regression? (Try it.) Explain.
b] We now drop the assumption that the correet overhead generating model is given by av = F + v -DLH + E. Regress overhead on total direet labor hours and overtime hours. Interpret your results. Is this a misspeeified regression? Explain.
e] This exereise, in turn, leads to suspieion, sinee a common pattem is for a worker who is forced to work overtime to have a high absentee rate in the following period.
When this happens, the firm must hire temporary workerso The aecounting group notes that payments to temporary workers are debited to overhead. Are the data consistent with this daim?
d] Now consider a regression of overhead on total direet labor hours, overtime hours, and lagged overtime hours. Is this eonsistent with the claimed story?
e] What is the eost of overtime? You don't have enough information to give a reliable numerical answer, but you do know enough to state what information you would gather.AppendixLO1
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