Milden Company is a subcontractor to local manufacturing companies. The company specializes in precision metal cutting using focused high-pressure water jets and high-energy lasers. The company has a job-order costing system in which direct labor and direct materials costs are assigned directly to jobs, but factory overhead is applied to jobs using a predetermined overhead rate based on direct labor-hours. Management uses this job cost data for valuing cost of goods sold and inventories for external reports. For internal decision making, management has largely ignored this cost data because labor costs are basically fixed and management believes overhead costs actually have little to do with direct labor-hours. Recently, management has become interested in a new costing system to estimate job costs and other costs for decision-making purposes. Management assembled a cross-functional team to design a prototype costing system. ABC. Electrical costs were among the first factory overhead costs investigated by the team. Electricity is used to provide light, to power equipment, and to heat the building in the winter and cool it in the summer. The ABC team proposed allocating electrical costs to jobs based on machine-hours because running the machines consumes significant amounts of electricity. Data assembled by the team concering actual direct labor-hours, machine-hours, and electrical costs over a recent eight-week period appear below. Direct LaborHours Machine Hours Electrical Costs Week 1 8.920 7,200 $ 77,100 Week 2 8,810 8.200 84,400 Week 3 8,950 8,700 80,400 8,990 7,200 75,500 Week 5 8,840 7,400 81.100 Week 6 8,890 8,800 83,300 Week 7 8,950 6,400 79,200 Week 8 8,990 7.700 85,500 Total 71,340 61,600 $646,500 To help assess the effect of the proposed change to machine-hours as the allocation base, the eightweek totals were converted to annual figures by multiplying tem by six. Machine- Electrical Hours Hours Costs Direct Labor- Estimated annual total (eight-week total above - 6)...... 428,040 369,600 $3,879,000 Required: a. Assume that the estimated annual totals from the above table are used compute the company's predetermined overhead rate. What would be predetermined overhead rate for electrical costs if the allocation base is (1) direct labor-hours and (ii) machine-hours? b. Milden Company intends to bid on a job for a shipyard that would require 350 direct labor-hours and 270 machine-hours. How much electrical cost would be charged to this job using the predetermined overhead rate in computed in (A) above if the allocation base is (1) direct labor-hours and (11) machine-hours? Using (1) direct labor-hours and (in) machine-hours as the driver of electrical costs, estimate the fixed and variable components of electrical costs. To answer this, use least-squares regression. d. How much electrical cost do you think would actually be caused by the shipyard job in (B) above? Explain
