Example of Improving a Simple Costing System The Company - A car garage, Three regular & Two expert mechanics, Performs from simple to complex repair jobs b. Cost of Engine repair - 412 +41 X (40LH + 2DH) = $658 - Does the method reflect the different cost requirements of the two dasses of mechanics? (Total 3.3 Salaries for two expert mechanics (Total 3,600 DLHours) $120,000 Salaries for three regular mechanics (Total 5,400 DLH's) 105,000 General & Administrative costs (Rent, phones, etc) 26,000 Depreciation & maintenance on Equipment, bays 64,000 Depreciation & maintenance for special tools (expert) 54,000 And, parts costs & Adminidegular mech ance on Rent phe 5.100 Competition from Carex Mufflers - No complex repairs, Only simple muffler repairs at the price lower than ours, ($130 - We lost considerable business to Carex Two repair jobs Muffler change Engine repair Parts cost $ 53 $ 412 DL Hours Experts Regulars New improved costing method 1. Correctly assigning the mechanic's rate: Expert DLH rate = $120,000/3,600DUH $33.33/DLH Regular DLH rate = $105,000/5,400DH = $19.44/DLH 2. 2. Better allocation of OH: Common OH for both expert & regular DLH ret el -($26,000+64,000) + (3,600+5,400)DLH - $10/DLH OH exclusively for expert DL (costs of special tools) Soul tool = $54,000/3,600 DLH - $15/DLH Special tools Hours 0 Current costing for the jobs All the indirect costs (Gen & Adm and MOH) are allocated based on DLH'S Simple method which assumes the expert and the regular mechanics use the same level of indirect costs a. Cost of Muffler change = DM + DL (regular) + Common OH = $53 + $19.44X2DLH + $10X2DH - 111.88 Costs per DLH (excluding the parts cost (DM), i.e., DL costs + OH) = ($120,000+105,000+26,000+64,000+54,000) + (3,600DLH + 5,400 Hours) = $369,000/9,000DLH - $41/DLH b. Cost of Engine repair =DM + DL (regular + expert) + Common OH + Expert OH -$412+ $19.44X2DLH+33.33X4DLH+10X6DUH+15XADUH 704.2 Muffler change Engine repair Simple method $135 "Current Price $150" $658 "$700" New method 111.88 704.2 Problems of the Simple repair Complex repair simple method is overcosted is undercosted a. Cost of Muffler change - DM + other costs (DL+OH) - $53+ $41 X 2DLH'S = $135, - 21 - HW: Case at the end of Ch 8 Lecture note: Q1. What are the limitations of the current costing system? Q2. How did the company (garage) overcome the limitations you identified above in designing the new system? Q3. What can be the company's choice under the current costing system for the muffler jobs in response to the low price offered by Carex Mufflers? What recommendation can you make regarding the pricing strategy of the company for muffler jobs and engine repairs upon reviewing cost data from the new system