Interpreting regression analysis; activity-based costing: service firm Greenscape Pty Ltd provides commercial landscaping services. Linda Drake, the firm's owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analysing the firm's costs, Drake has developed the following preliminary cost estimates for each 1 000 square metres of landscaping Direct materials Direct labour (5 direct labour hours @ $19 per hour) Overhead (@ $18 per direct labour hour) Total cost per 1000 square metres 95 90 $585 Drake is quite certain about the estimates for direct materials and direct labour, but she is not as comfortable with the overhead estimate. As indirect costs, overhead costs cannot be traced directly to landscaping Instead, Drake has used a common method of estimating an overhead rate per direct labour hour. However, 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 $18 per direct labour hour was determined by dividing the total overhead costs for the 12-month period ($648 000) by the total direct labour hours (36 000) Regular direct labour hours 2910 2380 2210 2590 3030 3240 3380 3050 2760 2770 2120 2560 33000 Overtime direct Total direct labour hours 3 100 2400 2250 2800 3500 4000 4000 3400 2800 2800 2150 2800 36000 Month Total overhead labour hours $ 54000 47000 48000 56000 57000 65000 64000 56000 53000 47000 47000 54000 $648000 190 20 40 210 470 760 620 350 40 30 anuary March April une July August September October December 240 Total 3000 The overtime premium is 50 per cent of the direct labour wage rate. Drake believes that overhead is affected by total monthly direct labour hours. She decided to perform a regression analysis of overhead (OH) on total direct labour hours (DLH). The following regression formula was obtained: OH- $26201$9.27DLH 1. The overhead rate developed from the regression analysis is different from Linda Drake's preliminary estimate of $18 per direct labour hour. Explain the difference in the two overhead rates. Using the overhead formula that was derived from the regression analysis, determine a total variable cost estimate for each 1000 square metres of landscaping. Linda Drake has been asked to submit a bid on a landscaping project for Melbourne City Council, consisting of 50000 square metres. Drake estimates that 30 per cent of the direct labour hours required for the project will be on overtime. Calculate the variable costs per 1000 metres of landscaping that should be included in any bid that Drake would submit on this project. Use the overhead formula derived from the regression analysis. 2. 3. 5. After attending a seminar on activity-based costing, Drake decided on a further analysis of Greenscape's activities and costs. She discovered that a more accurate portrayal of the firm's cost behaviour could be achieved by dividing overhead into three separate cost pools-administration, seeding and individual planting-each with its own cost driver. After discussions with some of the landscapers who work within the firm, Drake came to the conclusion that possible cost drivers for each of these cost pools were direct labour hours, the number of square metres of turf seeded, and the number of individual trees and shrubs planted, respectively. A separate regression equation was estimated for each overhead cost pool, with the following results Administration OH, $ 1 0 000 + $4.1 ODLH where DLH denotes direct labour hours Seeding OH2 $9 100$13.50STS where STS denotes the number of square metres of turf seeded (in thousands); Planting OH3 $8000+$6.60TSP where TSP denotes the number of individual plantings (such as trees and shrubs) Assume that 5 direct labour hours are needed to landscape each 1000 square metres, regardless of the specific planting material that is used. (a) Suppose the landscaping project for the city will involve seeding all 50000 square metres of turf and planting 70 trees and shrubs. Calculate the variable overhead cost that Drake should include in the bid. (b) Recalculate the variable overhead cost for the city's landscaping project, assuming that half of the 50000 square metre landscaping area will be seeded and there will be 230 individual plantings (c) Explain why the costs differ in parts (a) and (b). Interpreting regression analysis; activity-based costing: service firm Greenscape Pty Ltd provides commercial landscaping services. Linda Drake, the firm's owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analysing the firm's costs, Drake has developed the following preliminary cost estimates for each 1 000 square metres of landscaping Direct materials Direct labour (5 direct labour hours @ $19 per hour) Overhead (@ $18 per direct labour hour) Total cost per 1000 square metres 95 90 $585 Drake is quite certain about the estimates for direct materials and direct labour, but she is not as comfortable with the overhead estimate. As indirect costs, overhead costs cannot be traced directly to landscaping Instead, Drake has used a common method of estimating an overhead rate per direct labour hour. However, 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 $18 per direct labour hour was determined by dividing the total overhead costs for the 12-month period ($648 000) by the total direct labour hours (36 000) Regular direct labour hours 2910 2380 2210 2590 3030 3240 3380 3050 2760 2770 2120 2560 33000 Overtime direct Total direct labour hours 3 100 2400 2250 2800 3500 4000 4000 3400 2800 2800 2150 2800 36000 Month Total overhead labour hours $ 54000 47000 48000 56000 57000 65000 64000 56000 53000 47000 47000 54000 $648000 190 20 40 210 470 760 620 350 40 30 anuary March April une July August September October December 240 Total 3000 The overtime premium is 50 per cent of the direct labour wage rate. Drake believes that overhead is affected by total monthly direct labour hours. She decided to perform a regression analysis of overhead (OH) on total direct labour hours (DLH). The following regression formula was obtained: OH- $26201$9.27DLH 1. The overhead rate developed from the regression analysis is different from Linda Drake's preliminary estimate of $18 per direct labour hour. Explain the difference in the two overhead rates. Using the overhead formula that was derived from the regression analysis, determine a total variable cost estimate for each 1000 square metres of landscaping. Linda Drake has been asked to submit a bid on a landscaping project for Melbourne City Council, consisting of 50000 square metres. Drake estimates that 30 per cent of the direct labour hours required for the project will be on overtime. Calculate the variable costs per 1000 metres of landscaping that should be included in any bid that Drake would submit on this project. Use the overhead formula derived from the regression analysis. 2. 3. 5. After attending a seminar on activity-based costing, Drake decided on a further analysis of Greenscape's activities and costs. She discovered that a more accurate portrayal of the firm's cost behaviour could be achieved by dividing overhead into three separate cost pools-administration, seeding and individual planting-each with its own cost driver. After discussions with some of the landscapers who work within the firm, Drake came to the conclusion that possible cost drivers for each of these cost pools were direct labour hours, the number of square metres of turf seeded, and the number of individual trees and shrubs planted, respectively. A separate regression equation was estimated for each overhead cost pool, with the following results Administration OH, $ 1 0 000 + $4.1 ODLH where DLH denotes direct labour hours Seeding OH2 $9 100$13.50STS where STS denotes the number of square metres of turf seeded (in thousands); Planting OH3 $8000+$6.60TSP where TSP denotes the number of individual plantings (such as trees and shrubs) Assume that 5 direct labour hours are needed to landscape each 1000 square metres, regardless of the specific planting material that is used. (a) Suppose the landscaping project for the city will involve seeding all 50000 square metres of turf and planting 70 trees and shrubs. Calculate the variable overhead cost that Drake should include in the bid. (b) Recalculate the variable overhead cost for the city's landscaping project, assuming that half of the 50000 square metre landscaping area will be seeded and there will be 230 individual plantings (c) Explain why the costs differ in parts (a) and (b)