Question
Earth and Artistry, Inc., provides commercial landscaping services. Sasha Cairns, the firms owner, wants to develop cost estimates that she can use to prepare bids
Earth and Artistry, Inc., provides commercial landscaping services. Sasha Cairns, the firms owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing the firms costs, Cairns has developed the following preliminary cost estimates for each 1,000 square feet of landscaping.
Direct material | $ | 380 | |
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 | $ | 510 | |
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 ($660,000) by the total direct-labor hours (41,250).
Total Overhead | Regular Direct- Labor Hours | Overtime Direct- Labor Hours* | Total Direct- Labor Hours | |||||||||||||
January | $ | 60,000 | 2,980 | 200 | 3,180 | |||||||||||
February | 49,000 | 2,700 | 40 | 2,740 | ||||||||||||
March | 48,000 | 3,070 | 40 | 3,110 | ||||||||||||
April | 51,000 | 3,150 | 260 | 3,410 | ||||||||||||
May | 59,000 | 2,910 | 410 | 3,320 | ||||||||||||
June | 56,000 | 3,330 | 790 | 4,120 | ||||||||||||
July | 60,000 | 3,460 | 620 | 4,080 | ||||||||||||
August | 58,000 | 3,470 | 360 | 3,830 | ||||||||||||
September | 58,000 | 3,140 | 40 | 3,180 | ||||||||||||
October | 59,000 | 3,280 | 40 | 3,320 | ||||||||||||
November | 54,000 | 3,440 | 20 | 3,460 | ||||||||||||
December | 48,000 | 3,240 | 260 | 3,500 | ||||||||||||
Total | $ | 660,000 | 38,170 | 3,080 | 41,250 | |||||||||||
*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 = $39,269 + $4.58 DLH Required: 2. Using the overhead formula that was derived from the least-squares regression, determine a total variable-cost estimate for each 1,000 square feet of landscaping. 3. Cairns has been asked to submit a bid on a landscaping project for the city government consisting of 54,000 square feet. Cairns estimates that 40 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. 5. After attending a seminar on activity-based costing, Cairns decided to further analyze the companys activities and costs. She discovered that a more accurate portrayal of the firms 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 = $10,400 + $3.50 DLH, where DLH denotes direct-labor hours OH2= $9,500 + $12.00 SFS, where SFS denotes the number of square feet of turf seeded (in thousands) OH3 = $8,400 + $6.70 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. a. Suppose the landscaping project for the city will involve seeding all 54,000 square feet of turf and planting 70 trees and shrubs. Calculate the incremental variable overhead cost that Cairns should include in the bid. b. Recompute the incremental variable overhead cost for the citys landscaping project assuming half of the 54,000-square-foot landscaping area will be seeded and there will be 280 individual plantings. The plantings will cover the entire 54,000-square-foot area.
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