Outside Environment, Inc. provides commercial landscaping services in San Diego. Sasha Cairns, the firm's owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing the firm's costs, Cairns has developed the following preliminary cost estimates for each 1,000 square feet of landscaping. Direct material $390 Direct labor (5 direct-labor hours at $11 per hour) 56 Overhead (at $18 per direct-labor hour) ......... 90 Total cost per 1,000 square feet.... $535 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 $18 per direct-labor hour was determined by dividing the total overhead costs for the 12-month period ($1,296,000) by the total direct-labor hours (72,000). Regular Direct Overtime Direct Total Direct Total Overhead Labor Hours Labor Hours Labor Hours January $ 108,000 5,820 380 6,200 February 94,000 4,760 40 4,800 March ... 96,000 4,420 80 4500 April.. 112,000 5,180 420 5,600 114,000 6,060 940 7,000 June 130,000 6,480 1,520 8,000 July 128,000 6,760 1,240 8,000 August 112,000 6,100 700 6,800 September 106,000 5,520 80 5,600 October 94,000 5,540 60 November 94,000 4,240 60 4,300 December 106,000 5,120 480 5,600 Total $1,296,000 66,000 6,000 72,000 The overtime premium s 50 percent of the Great-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). May 5,600 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). Required: 1. Develop cost formula for overhead cost using least square regression method by constructing excel spreadsheet. 2. The overhead rate developed from the least-squares regression is different from Cairns' preliminary estimate of $18 per direct-labor hour. Explain the difference in the two overhead rates. 3. 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. 4. Cairns has been asked to submit a bid on a landscaping project for the city government consisting of 50,000 square feet. Cairns estimates that 30 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. Should management rely on the overhead formula derived from the least-squares regression as the basis for the variable overhead component of its cost estimate? Explain your
