Assignment Q1. Read the below case and answer the questions mentioned below: Terri Ronsin has recently been transferred to the Appliances Division of Solequin Corporation. Shortly after taking over her new position as divisional controller, she was asked to develop the division's predetermined overhead rate for the upcoming year. The accuracy of the rate is important because it is used throughout the year and any overapplied or underapplied overhead is closed out to Cost of Goods Sold at the end of the year. Solequin Corporation uses direct labor-hours in all of its divisions as the allocation base for manufacturing overhead. To compute the predetermined overhead rate, Terri divided her estimate of the total manufacturing overhead for the coming year by the production manager's estimate of the total direct labor-hours for the coming year. She took her computations to the division's general manager for approval but was quite surprised when he suggested a modification in the base. Her conversation with the general manager of the Appliances Division, Harry Irvin, went like this: Ronsin: Here are my calculations for next year's predetermined overhead rate. If you approve, we can enter the rate into the computer on January 1 and be up and running in the job-order costing system right away this year. Irvin: Thanks for coming up with the calculations so quickly, and they look just fine. There is, however, one slight modification I would like to see. Your estimate of the total direct labor-hours for the year is 110,000 hours. How about cutting that to about 105,000 hours? Ronsin: I don't know if I can do that. The production manager says she will need about 110,000 direct labor-hours to meet the sales projections for next year. Besides, there are going to be over 108,000 direct labor-hours during the current year and sales are projected to be higher next year. Irvin: Cristin, I know all of that. I would still like to reduce the direct labor-hours in the base to something like 105,000 hours. You probably don't know that I had an agreement with your predecessor as divisional controller to shave 5% or so off the estimated direct labor-hours every year. That way, we kept a reserve that usually resulted in a big boost to net operating income at the end of the fiscal year in December. We called it our Christmas bonus. Corporate headquarters always seemed as pleased as punch that we could pull off such a miracle at the end of the year. This system has worked well for many years, and I don't want to change it now. 1. Explain how shaving 5% off the estimated direct labor-hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the end of the fiscal year. 2. Should Terri Ronsin go along with the general manager's request to reduce the direct labor hours in the predetermined overhead rate computation to 105,000 direct labor-hours? American College of Dubai Page 1 2. The Ramon Company is a manufacturer that is interested in developing a cost formula to estimate the fixed and variable components of its monthly manufacturing overhead costs. The company wishes to use machine-hours as its measure of activity and has gathered the data below for this year and last year: Last Year Current Year Months Machine Hours Overhead Cost Machine Hours Overhead Cost January 21000 $84000 21000 $86000 February 25000 $99000 24000 $93000 March 22000 $89500 23000 $93000 April 23000 $90000 22000 $87000 May 20500 $81500 20000 $80000 June 19000 $75500 18000 $76500 July 14000 $70500 12000 $67500 August 10000 $64500 13000 $71000 September 12000 $69000 15000 $73500 October 17000 $75000 17000 $72500 November 16000 $71500 15000 $71000 December 19000 $78000 18000 $75000 The company leases all of its manufacturing equipment. The lease arrangement calls for a flat monthly fee up to 19,500 machine-hours. If the machine-hours used exceeds 19,500, then the fee becomes strictly variable with respect to the total number of machine-hours consumed during the month. Lease expense is a major element of overhead cost. 1. Using the high-low method, estimate a manufacturing overhead cost formula. 2. Assume a least-squares regression analysis using all of the given data points estimated the total fixed costs to be $40,102 and the variable costs to be $2.13 per machine-hour. Do you have any concerns about the accuracy of the high-low estimates that you have computed or the least-squares regression estimates that have been provided? 3. Assume that the company consumes 22,500 machine-hours during a month. Using the high low method, estimate the total overhead cost that would be incurred at this level of activity. Be sure to consider only the data points contained in the relevant range of activity when performing your computations. 4. Comment on the accuracy of your high-low estimates assuming a least squares regression analysis using only the data points in the relevant range of activity estimated the total fixed costs to be $10,090 and the variable costs to be $3.53 per machine-hour. American College of Dubai Page 12 Assignment Q1. Read the below case and answer the questions mentioned below: Terri Ronsin has recently been transferred to the Appliances Division of Solequin Corporation. Shortly after taking over her new position as divisional controller, she was asked to develop the division's predetermined overhead rate for the upcoming year. The accuracy of the rate is important because it is used throughout the year and any overapplied or underapplied overhead is closed out to Cost of Goods Sold at the end of the year. Solequin Corporation uses direct labor-hours in all of its divisions as the allocation base for manufacturing overhead. To compute the predetermined overhead rate, Terri divided her estimate of the total manufacturing overhead for the coming year by the production manager's estimate of the total direct labor-hours for the coming year. She took her computations to the division's general manager for approval but was quite surprised when he suggested a modification in the base. Her conversation with the general manager of the Appliances Division, Harry Irvin, went like this: Ronsin: Here are my calculations for next year's predetermined overhead rate. If you approve, we can enter the rate into the computer on January 1 and be up and running in the job-order costing system right away this year. Irvin: Thanks for coming up with the calculations so quickly, and they look just fine. There is, however, one slight modification I would like to see. Your estimate of the total direct labor-hours for the year is 110,000 hours. How about cutting that to about 105,000 hours? Ronsin: I don't know if I can do that. The production manager says she will need about 110,000 direct labor-hours to meet the sales projections for next year. Besides, there are going to be over 108,000 direct labor-hours during the current year and sales are projected to be higher next year. Irvin: Cristin, I know all of that. I would still like to reduce the direct labor-hours in the base to something like 105,000 hours. You probably don't know that I had an agreement with your predecessor as divisional controller to shave 5% or so off the estimated direct labor-hours every year. That way, we kept a reserve that usually resulted in a big boost to net operating income at the end of the fiscal year in December. We called it our Christmas bonus. Corporate headquarters always seemed as pleased as punch that we could pull off such a miracle at the end of the year. This system has worked well for many years, and I don't want to change it now. 1. Explain how shaving 5% off the estimated direct labor-hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the end of the fiscal year. 2. Should Terri Ronsin go along with the general manager's request to reduce the direct labor hours in the predetermined overhead rate computation to 105,000 direct labor-hours? American College of Dubai Page 1 2. The Ramon Company is a manufacturer that is interested in developing a cost formula to estimate the fixed and variable components of its monthly manufacturing overhead costs. The company wishes to use machine-hours as its measure of activity and has gathered the data below for this year and last year: Last Year Current Year Months Machine Hours Overhead Cost Machine Hours Overhead Cost January 21000 $84000 21000 $86000 February 25000 $99000 24000 $93000 March 22000 $89500 23000 $93000 April 23000 $90000 22000 $87000 May 20500 $81500 20000 $80000 June 19000 $75500 18000 $76500 July 14000 $70500 12000 $67500 August 10000 $64500 13000 $71000 September 12000 $69000 15000 $73500 October 17000 $75000 17000 $72500 November 16000 $71500 15000 $71000 December 19000 $78000 18000 $75000 The company leases all of its manufacturing equipment. The lease arrangement calls for a flat monthly fee up to 19,500 machine-hours. If the machine-hours used exceeds 19,500, then the fee becomes strictly variable with respect to the total number of machine-hours consumed during the month. Lease expense is a major element of overhead cost. 1. Using the high-low method, estimate a manufacturing overhead cost formula. 2. Assume a least-squares regression analysis using all of the given data points estimated the total fixed costs to be $40,102 and the variable costs to be $2.13 per machine-hour. Do you have any concerns about the accuracy of the high-low estimates that you have computed or the least-squares regression estimates that have been provided? 3. Assume that the company consumes 22,500 machine-hours during a month. Using the high low method, estimate the total overhead cost that would be incurred at this level of activity. Be sure to consider only the data points contained in the relevant range of activity when performing your computations. 4. Comment on the accuracy of your high-low estimates assuming a least squares regression analysis using only the data points in the relevant range of activity estimated the total fixed costs to be $10,090 and the variable costs to be $3.53 per machine-hour. American College of Dubai Page 12