Hi! I was looking for a walkthrough for the following question, Case #4-27 fom N

Question

Hi! I was looking for a walkthrough for the following question, Case #4-27 fom Noreen's Managerial Acounnting for Managers, 3rd edition.

Recompute the predetermined overhead rate assuming that the new machine will be installed. Explain why the new predetermined overhead rate is higher (or lower) than the rate that was originally estimated for the year 2013.
2. What effect (if any) would this new rate have on the cost of jobs that do not use the new automated milling machine?
3. Why would managers be concerned about the new overhead rate? 4. After seeing the new predetermined overhead rate, the production manager admitted that he probably wouldn’t be able to eliminate all of the 6,000 direct labor-hours. He had been hoping to accomplish the reduction by not replacing workers who retire or quit, but that would not be possible. As a result, the real labor savings would be only about 2,000 hours—one worker. Given this additional information, evaluate the original decision to acquire the automated milling machine from Central Robotics.

Predetermined Overhead Rate for 2013 $47.60 Total manufacturing overhead $2,475,000 estimated total direct labor hours for 2013 52000 direct labor cost / hour 21 direct labor costs + fringe / hour 30 overhead rate/hour $48 cost per direct labor hour $78 Director Labor Costs - pre machine $4,056,000 Direct Labor Costs - after machine $3,588,000 Savings $468,000 Machine Costs Lease 300000 Programmer 45000

Explanation / Answer

1. Annual Lease cost                                  $ 300,000

     Programmer cost                                         45,000

    Saved hours                                                   6000

    New estimated Overhaed = Total manufacturing overhead  + lease cost + programmer cost = $ 2,475,000+ $ 300,000 + $ 45,000 = $ 2,820,000

New estiated direct labour hours = 52,000 - 6000 = 46,000 hours

New Predetermined Overhead rate = New estimated overhead / New estimated labour hours = 2,820,000/46,000 = 61.30. Hence, new overhead rate is $ 61.30.

The increase in Overhaead rate is due ot adding of the factory overhead in the form of lease cost i.e $ 300,000 and programmer cost $ 45,000.

2. Since thh company uses a plant wide predeermined overhead rate, it results in an increased price for those jobs which do not use teh machine. This is because cost of the annual lease for the machine and skilled programmer is added to the factory overhead.

It would not have an effect if they used area specific predetermined overhead rates.

3. After seeing the new predetermined overhed rate, teh production manager admittd that he rbably wouldn't be abel to eliminate all on the 6000 direct labour hours. He ahd been hoping to accomplish the reduction by not replacing workers who retire or qut, but that had not been possible. As a result, the real labour savings would be only abour 2000 hours per worker.

4. Evaluation of original decision :

    Adjusted saved hours                  2000 hours

     Workers with fringe benefits      $ 30

    New savings per worker = 2000 hour x $30 = $ 60,000

    Annual lease cost per machie $c 300,000

     Programmer cost = $ 45,000

     Profit or loss when leasing the machine = Savings - Lease & programmer cost = $ 60,000 - (300,000+45,000) =$ 285,000. Hence, loss on leasing new machine is $ 285,000

            

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.