CASE STUDY: MACHINE SHOP Dennis Schultz is the engineer-owner of Precision Job Shop. PJS prides itself on its ability to maintain + 0.00005 in. tolerances and surface finishes of 4 u in. The factory layout is shown in Fig. C4.1, and the 200 x 150 ft are equally spaced into ten cost centers. Figure C4.1. Plant layout for Precision Job Shop. Shipping department O Raw stores ooooo 1 Apection department E 5- Bench department Inspection department L L L L Lathe department Threading machines Grinding machines Milling machines Drilling machines Heat treatment department The machine shop is more advanced than its competitors. Engineering design uses the popular Pro-E software, and is able to load the computer numerical equipment with the files ready for manufacturing, without any intervening attention. The company is connected to customers via business-to-business servers and Internet links, and a customer will couple its designs for quotation directly to Dennis without any in-between handling. Dennis counts as his customers the well- known aerospace and gas turbine companies. The shop, if it wins the competitive bidding, is able to deliver product on a just- in-time schedule, often within a month of the receipt of the order. He is making more estimates in recent years, and the "capture" percentage of estimates-won to estimates-made is also falling. Equally bad, he is able to keep his lower-priced equipment loaded, but the more expensive equipment is operating at lower capacity. Dennis has said, "I know my direct labor costs are competitive," but he is suspicious of his overhead computation, which is a general plant-wide rate based on direct labor hours. Thus, the spreading of overhead costs is relatively greater to the inexpensive equipment, as they are being loaded more cost-wise than the more expensive machinery With this developing e-to-e business opportunity and the recognition of the overhead distribution problem, Dennis' accountants have developed a system that is activity based, and overhead costs are mapped to the producing cost centers on these new principles. The accounting system is reconfigured to give the overhead budget in the following way: Table 4C.1. Budget forecast for machine centers. Machine Center Monthly Monthly Machine Center Horsepower Hours Hours Direct Gross Labor Hourly Workers Wages, $/Hr Total Annual Undepreciated Dollars Life, Years 1. Lathe 2. Threading 3. Milling 4. Drilling 5. Bench 6. Grinding Horizontal Rotary 7. Heat treating 13,328 6,664 6,664 19,992 26,656 160,000 66,000 53,000 100,000 23.45 21.04 26.75 20.50 15.75 Monthly Direct Labor Hours 15,680 7,840 7,840 23,520 31,360 30,000 120,000 110,000 4,000 2,000 3,332 50,000 13,000 28.52 24.53 1,666 6,664 3,920 1,960 7,840 50,000 90,000 15,000 19.20 The plant is organized into seven producing machine centers as shown in Fig. 4C.1 and Table 4C.1. Because of product demand, some of the machine centers are more fully loaded than others, and a partial second shift is used. This is reflected in the budget hours and the direct labor workers, as in some centers the number of workers exceeds the number of machines in that center. The direct labor hours are larger than the machine center hours, because of the machine downtime. The machine may be down for maintenance, but the direct labor worker continues to consume time. The machine center has its undepreciated amount known, and a remaining yearly life is matched to the amount, as seen in Table 4C.1. The plant-layout shows three indirect centers, raw stores, inspection, and shipping. These centers along with engineering and administration provide the additional overhead costs that are now mapped according to activity based costing principles, and listed in Table 4C.2. Table 4C.2. Budget forecast for indirect cost centers, engineering and administration, and plant overheads. Overhead Costs Monthly Amount, $ Overhead Basis Wages, indirect centers 575,000 Direct labor hours Supplies 265,000 Horsepower hours Plant supervision 174,000 Direct labor hours Tooling 1,188,000 Horsepower hours Utilities 123,970 Horsepower hours Maintenance 136,480 Machine center hours Engineering & Administration. 700,000 Direct labor dollars Plant undepreciated amount 1,600,000 Horsepower hours and 240 months 1. Annual amount. An overhead basis is given, which follows the principle of activity based costing, and is the dominant cost driver that linearly connects the overhead cost to the producing centers. Help Dennis compute a productive hour rate for his seven producing machine centers. (Hints: Each machine center has its book value of depreciation that is an undepreciated amount divided by the remaining years and 12 months. For instance, the lathe center will allocate to its own monthly depreciation an amount of $500 (= 30,000 x 175 x 1/12). The indirect wages $575,000, for example, is prorated to the lathe machine center by the ratio of the direct labor hours used in the lathe center to the total for the plant and month, or $90,196 (=575,000 x 15,680/99,960). Ordinary straight-line methods of depreciation are satisfactory for the plant amount of $1.6 million. For instance, the plant undepreciated amount is distributed monthly over the remaining 20 years, and the horsepower hours simultaneously. The total activity based overhead is the sum of those overheads that are directly connected to the machine center, plus the overhead accounts that are adjusted and related to the machine center by the basis.) 1. PSB receives a request-for-quote to machine the Christmas-tree roots of cast high-temperature-material turbine blades, and its computer estimating system establishes the following lot hours for 471 units. Machine Center Lot hours 1. Lathe 26.15 2. Threading 15.23 3. Milling 219.26 4. Drilling 15.11 6. Grinding 11.79 7. Heat treating 2.31 Material cost per unit is found to be $113.63. What is the job cost with the new productive hour cost rates? 2. Using the PHC rates determined from the case, estimate the following jobs. For each job get the total cost and then the per unit cost. Note: Material costs remain the same from the case. Job A-652 Units Department Hours Lathe 32.15 Threading 18.24 Milling 319.54 Drilling 16.15 Bench 22.0 Grinding Horizontal | 12.58 Grinding Rotary 13.56 Heat Treating 3.51 2. Job B-822 Units Department Hours Lathe 52.15 Threading 39.24 Milling 422.54 Drilling 21.51 Bench 32.0 Grinding Horizontal 19.68 Grinding Rotary 18.56 Heat Treating 10.51 CASE STUDY: MACHINE SHOP Dennis Schultz is the engineer-owner of Precision Job Shop. PJS prides itself on its ability to maintain + 0.00005 in. tolerances and surface finishes of 4 u in. The factory layout is shown in Fig. C4.1, and the 200 x 150 ft are equally spaced into ten cost centers. Figure C4.1. Plant layout for Precision Job Shop. Shipping department O Raw stores ooooo 1 Apection department E 5- Bench department Inspection department L L L L Lathe department Threading machines Grinding machines Milling machines Drilling machines Heat treatment department The machine shop is more advanced than its competitors. Engineering design uses the popular Pro-E software, and is able to load the computer numerical equipment with the files ready for manufacturing, without any intervening attention. The company is connected to customers via business-to-business servers and Internet links, and a customer will couple its designs for quotation directly to Dennis without any in-between handling. Dennis counts as his customers the well- known aerospace and gas turbine companies. The shop, if it wins the competitive bidding, is able to deliver product on a just- in-time schedule, often within a month of the receipt of the order. He is making more estimates in recent years, and the "capture" percentage of estimates-won to estimates-made is also falling. Equally bad, he is able to keep his lower-priced equipment loaded, but the more expensive equipment is operating at lower capacity. Dennis has said, "I know my direct labor costs are competitive," but he is suspicious of his overhead computation, which is a general plant-wide rate based on direct labor hours. Thus, the spreading of overhead costs is relatively greater to the inexpensive equipment, as they are being loaded more cost-wise than the more expensive machinery With this developing e-to-e business opportunity and the recognition of the overhead distribution problem, Dennis' accountants have developed a system that is activity based, and overhead costs are mapped to the producing cost centers on these new principles. The accounting system is reconfigured to give the overhead budget in the following way: Table 4C.1. Budget forecast for machine centers. Machine Center Monthly Monthly Machine Center Horsepower Hours Hours Direct Gross Labor Hourly Workers Wages, $/Hr Total Annual Undepreciated Dollars Life, Years 1. Lathe 2. Threading 3. Milling 4. Drilling 5. Bench 6. Grinding Horizontal Rotary 7. Heat treating 13,328 6,664 6,664 19,992 26,656 160,000 66,000 53,000 100,000 23.45 21.04 26.75 20.50 15.75 Monthly Direct Labor Hours 15,680 7,840 7,840 23,520 31,360 30,000 120,000 110,000 4,000 2,000 3,332 50,000 13,000 28.52 24.53 1,666 6,664 3,920 1,960 7,840 50,000 90,000 15,000 19.20 The plant is organized into seven producing machine centers as shown in Fig. 4C.1 and Table 4C.1. Because of product demand, some of the machine centers are more fully loaded than others, and a partial second shift is used. This is reflected in the budget hours and the direct labor workers, as in some centers the number of workers exceeds the number of machines in that center. The direct labor hours are larger than the machine center hours, because of the machine downtime. The machine may be down for maintenance, but the direct labor worker continues to consume time. The machine center has its undepreciated amount known, and a remaining yearly life is matched to the amount, as seen in Table 4C.1. The plant-layout shows three indirect centers, raw stores, inspection, and shipping. These centers along with engineering and administration provide the additional overhead costs that are now mapped according to activity based costing principles, and listed in Table 4C.2. Table 4C.2. Budget forecast for indirect cost centers, engineering and administration, and plant overheads. Overhead Costs Monthly Amount, $ Overhead Basis Wages, indirect centers 575,000 Direct labor hours Supplies 265,000 Horsepower hours Plant supervision 174,000 Direct labor hours Tooling 1,188,000 Horsepower hours Utilities 123,970 Horsepower hours Maintenance 136,480 Machine center hours Engineering & Administration. 700,000 Direct labor dollars Plant undepreciated amount 1,600,000 Horsepower hours and 240 months 1. Annual amount. An overhead basis is given, which follows the principle of activity based costing, and is the dominant cost driver that linearly connects the overhead cost to the producing centers. Help Dennis compute a productive hour rate for his seven producing machine centers. (Hints: Each machine center has its book value of depreciation that is an undepreciated amount divided by the remaining years and 12 months. For instance, the lathe center will allocate to its own monthly depreciation an amount of $500 (= 30,000 x 175 x 1/12). The indirect wages $575,000, for example, is prorated to the lathe machine center by the ratio of the direct labor hours used in the lathe center to the total for the plant and month, or $90,196 (=575,000 x 15,680/99,960). Ordinary straight-line methods of depreciation are satisfactory for the plant amount of $1.6 million. For instance, the plant undepreciated amount is distributed monthly over the remaining 20 years, and the horsepower hours simultaneously. The total activity based overhead is the sum of those overheads that are directly connected to the machine center, plus the overhead accounts that are adjusted and related to the machine center by the basis.) 1. PSB receives a request-for-quote to machine the Christmas-tree roots of cast high-temperature-material turbine blades, and its computer estimating system establishes the following lot hours for 471 units. Machine Center Lot hours 1. Lathe 26.15 2. Threading 15.23 3. Milling 219.26 4. Drilling 15.11 6. Grinding 11.79 7. Heat treating 2.31 Material cost per unit is found to be $113.63. What is the job cost with the new productive hour cost rates? 2. Using the PHC rates determined from the case, estimate the following jobs. For each job get the total cost and then the per unit cost. Note: Material costs remain the same from the case. Job A-652 Units Department Hours Lathe 32.15 Threading 18.24 Milling 319.54 Drilling 16.15 Bench 22.0 Grinding Horizontal | 12.58 Grinding Rotary 13.56 Heat Treating 3.51 2. Job B-822 Units Department Hours Lathe 52.15 Threading 39.24 Milling 422.54 Drilling 21.51 Bench 32.0 Grinding Horizontal 19.68 Grinding Rotary 18.56 Heat Treating 10.51