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28 Sep 2019
Please help answer for Required #1-4 at bottom: Please show methodsand formulas in explanation. I am totally lost on thissubject.
Kelvin Aerospace, Inc., manufactures parts such as rudder hingesfor the aerospace industry. The company uses a job-order costingsystem with a predetermined plantwide overhead rate based on directlabor-hours. On December 16, 2008, the company's controller made apreliminary estimate of the predetermined overhead rate for theyear 2009. The new rate was based on the estimated totalmanufacturing overhead cost of $3,402,000 and the estimated 63,000total direct labor-hours for 2009:
Predetermined overhead rate= $3,402,000 /63,000 hours = $54 perdirect labor-hour
This new predetermined overhead rate was communicated to topmanagers in a meeting on December 19. The rate did not cause anycomment because it was within a few pennies of the overhead ratethat had been used during 2008. One of the subjects discussed atthe meeting was a proposal by the production manager to purchase anautomated milling machine built by Sunghi Industries. The presidentof Kelvin Aerospace, Harry Arcany, agreed to meet with the salesrepresentative from Sunghi Industries to discuss theproposal.
On the day following the meeting, Mr. Arcany met with JasmineChang, Sunghi Industries' sales representative. The followingdiscussion took place:
Arcany: Wally, our production manager, asked me to meet with youbecause he is interested in installing an automated millingmachine. Frankly, I'm skeptical. You're going to have to show methis isn't just another expensive toy for Wally's people to playwith.
Chang: This is a great machine with direct bottom-line benefits.The automated milling machine has three major advantages. First, itis much faster than the manual methods you are using. It canprocess about twice as many parts per hour as your present millingmachines. Second, it is much more flexible. There are some up-frontprogramming costs, but once those have been incurred, almost nosetup is required to run a standard operation. You just punch inthe code for the standard operation, load the machine's hopper withraw material, and the machine does the rest.
Arcany: What about cost? Having twice the capacity in the millingmachine area won't do us much good. That center is idle much of thetime anyway.
Chang: I was getting there. The third advantage of the automatedmilling machine is lower cost. Wally and I looked over your presentoperations, and we estimated that the automated equipment wouldeliminate the need for about 6,000 direct labor-hours a year. Whatis your direct labor cost per hour?
Arcany: The wage rate in the milling area averages about $32 perhour. Fringe benefits raise that figure to about $41 perhour.
Chang: Don't forget your overhead.
Arcany: Next year the overhead rate will be $54 per hour.
Chang: So including fringe benefits and overhead, the cost perdirect labor-hour is about $95.
Arcany: That's right.
Chang: Since you can save 6,000 direct labor-hours per year, thecost savings would amount to about $570,000 a year. And our60-month lease plan would require payments of only $348,000 peryear.
Arcany: That sounds like a no-brainer. When can you install theequipment?
Shortly after this meeting, Mr. Arcany informed the company'scontroller of the decision to lease the new equipment, which wouldbe installed over the Christmas vacation period. The controllerrealized that this decision would require a recomputation of thepredetermined overhead rate for the year 2009 because the decisionwould affect both the manufacturing overhead and the directlabor-hours for the year. After talking with both the productionmanager and the sales representative from Sunghi Industries, thecontroller discovered that in addition to the annual lease cost of$348,000, the new machine would also require a skilledtechnician/programmer who would have to be hired at a cost of$50,000 per year to maintain and program the equipment. Both ofthese costs would be included in factory overhead. There would beno other changes in total manufacturing overhead cost, which isalmost entirely fixed. The controller assumed that the new machinewould result in a reduction of 6,000 direct labor-hours for theyear from the levels that had initially been planned.
p. 140
When the revised predetermined overhead rate for the year 2009 wascirculated among the company's top managers, there was considerabledismay.
Required:
1. Recompute the predetermined rate assuming that the new machinewill be installed. Explain why the new predetermined overhead rateis higher (or lower) than the rate that was originally estimatedfor the year 2009.
2. What effect (if any) would this new rate have on the cost ofjobs that do not use the new automated milling machine?
3.Why would managers be concerned about the new overheadrate?
4.After seeing the new predetermined overhead rate, the productionmanager admitted that he probably wouldn't be able to eliminate allof the 6,000 direct labor-hours. He had been hoping to accomplishthe reduction by not replacing workers who retire or quit, but thathad not been possible. As a result, the real labor savings would beonly about 2,000 hoursâone worker. Given this additionalinformation, evaluate the original decision to acquire theautomated milling machine from Sunghi Industries.
Please help answer for Required #1-4 at bottom: Please show methodsand formulas in explanation. I am totally lost on thissubject.
Kelvin Aerospace, Inc., manufactures parts such as rudder hingesfor the aerospace industry. The company uses a job-order costingsystem with a predetermined plantwide overhead rate based on directlabor-hours. On December 16, 2008, the company's controller made apreliminary estimate of the predetermined overhead rate for theyear 2009. The new rate was based on the estimated totalmanufacturing overhead cost of $3,402,000 and the estimated 63,000total direct labor-hours for 2009:
Predetermined overhead rate= $3,402,000 /63,000 hours = $54 perdirect labor-hour
This new predetermined overhead rate was communicated to topmanagers in a meeting on December 19. The rate did not cause anycomment because it was within a few pennies of the overhead ratethat had been used during 2008. One of the subjects discussed atthe meeting was a proposal by the production manager to purchase anautomated milling machine built by Sunghi Industries. The presidentof Kelvin Aerospace, Harry Arcany, agreed to meet with the salesrepresentative from Sunghi Industries to discuss theproposal.
On the day following the meeting, Mr. Arcany met with JasmineChang, Sunghi Industries' sales representative. The followingdiscussion took place:
Arcany: Wally, our production manager, asked me to meet with youbecause he is interested in installing an automated millingmachine. Frankly, I'm skeptical. You're going to have to show methis isn't just another expensive toy for Wally's people to playwith.
Chang: This is a great machine with direct bottom-line benefits.The automated milling machine has three major advantages. First, itis much faster than the manual methods you are using. It canprocess about twice as many parts per hour as your present millingmachines. Second, it is much more flexible. There are some up-frontprogramming costs, but once those have been incurred, almost nosetup is required to run a standard operation. You just punch inthe code for the standard operation, load the machine's hopper withraw material, and the machine does the rest.
Arcany: What about cost? Having twice the capacity in the millingmachine area won't do us much good. That center is idle much of thetime anyway.
Chang: I was getting there. The third advantage of the automatedmilling machine is lower cost. Wally and I looked over your presentoperations, and we estimated that the automated equipment wouldeliminate the need for about 6,000 direct labor-hours a year. Whatis your direct labor cost per hour?
Arcany: The wage rate in the milling area averages about $32 perhour. Fringe benefits raise that figure to about $41 perhour.
Chang: Don't forget your overhead.
Arcany: Next year the overhead rate will be $54 per hour.
Chang: So including fringe benefits and overhead, the cost perdirect labor-hour is about $95.
Arcany: That's right.
Chang: Since you can save 6,000 direct labor-hours per year, thecost savings would amount to about $570,000 a year. And our60-month lease plan would require payments of only $348,000 peryear.
Arcany: That sounds like a no-brainer. When can you install theequipment?
Shortly after this meeting, Mr. Arcany informed the company'scontroller of the decision to lease the new equipment, which wouldbe installed over the Christmas vacation period. The controllerrealized that this decision would require a recomputation of thepredetermined overhead rate for the year 2009 because the decisionwould affect both the manufacturing overhead and the directlabor-hours for the year. After talking with both the productionmanager and the sales representative from Sunghi Industries, thecontroller discovered that in addition to the annual lease cost of$348,000, the new machine would also require a skilledtechnician/programmer who would have to be hired at a cost of$50,000 per year to maintain and program the equipment. Both ofthese costs would be included in factory overhead. There would beno other changes in total manufacturing overhead cost, which isalmost entirely fixed. The controller assumed that the new machinewould result in a reduction of 6,000 direct labor-hours for theyear from the levels that had initially been planned.
p. 140
When the revised predetermined overhead rate for the year 2009 wascirculated among the company's top managers, there was considerabledismay.
Required:
1. Recompute the predetermined rate assuming that the new machinewill be installed. Explain why the new predetermined overhead rateis higher (or lower) than the rate that was originally estimatedfor the year 2009.
2. What effect (if any) would this new rate have on the cost ofjobs that do not use the new automated milling machine?
3.Why would managers be concerned about the new overheadrate?
4.After seeing the new predetermined overhead rate, the productionmanager admitted that he probably wouldn't be able to eliminate allof the 6,000 direct labor-hours. He had been hoping to accomplishthe reduction by not replacing workers who retire or quit, but thathad not been possible. As a result, the real labor savings would beonly about 2,000 hoursâone worker. Given this additionalinformation, evaluate the original decision to acquire theautomated milling machine from Sunghi Industries.
Kelvin Aerospace, Inc., manufactures parts such as rudder hingesfor the aerospace industry. The company uses a job-order costingsystem with a predetermined plantwide overhead rate based on directlabor-hours. On December 16, 2008, the company's controller made apreliminary estimate of the predetermined overhead rate for theyear 2009. The new rate was based on the estimated totalmanufacturing overhead cost of $3,402,000 and the estimated 63,000total direct labor-hours for 2009:
Predetermined overhead rate= $3,402,000 /63,000 hours = $54 perdirect labor-hour
This new predetermined overhead rate was communicated to topmanagers in a meeting on December 19. The rate did not cause anycomment because it was within a few pennies of the overhead ratethat had been used during 2008. One of the subjects discussed atthe meeting was a proposal by the production manager to purchase anautomated milling machine built by Sunghi Industries. The presidentof Kelvin Aerospace, Harry Arcany, agreed to meet with the salesrepresentative from Sunghi Industries to discuss theproposal.
On the day following the meeting, Mr. Arcany met with JasmineChang, Sunghi Industries' sales representative. The followingdiscussion took place:
Arcany: Wally, our production manager, asked me to meet with youbecause he is interested in installing an automated millingmachine. Frankly, I'm skeptical. You're going to have to show methis isn't just another expensive toy for Wally's people to playwith.
Chang: This is a great machine with direct bottom-line benefits.The automated milling machine has three major advantages. First, itis much faster than the manual methods you are using. It canprocess about twice as many parts per hour as your present millingmachines. Second, it is much more flexible. There are some up-frontprogramming costs, but once those have been incurred, almost nosetup is required to run a standard operation. You just punch inthe code for the standard operation, load the machine's hopper withraw material, and the machine does the rest.
Arcany: What about cost? Having twice the capacity in the millingmachine area won't do us much good. That center is idle much of thetime anyway.
Chang: I was getting there. The third advantage of the automatedmilling machine is lower cost. Wally and I looked over your presentoperations, and we estimated that the automated equipment wouldeliminate the need for about 6,000 direct labor-hours a year. Whatis your direct labor cost per hour?
Arcany: The wage rate in the milling area averages about $32 perhour. Fringe benefits raise that figure to about $41 perhour.
Chang: Don't forget your overhead.
Arcany: Next year the overhead rate will be $54 per hour.
Chang: So including fringe benefits and overhead, the cost perdirect labor-hour is about $95.
Arcany: That's right.
Chang: Since you can save 6,000 direct labor-hours per year, thecost savings would amount to about $570,000 a year. And our60-month lease plan would require payments of only $348,000 peryear.
Arcany: That sounds like a no-brainer. When can you install theequipment?
Shortly after this meeting, Mr. Arcany informed the company'scontroller of the decision to lease the new equipment, which wouldbe installed over the Christmas vacation period. The controllerrealized that this decision would require a recomputation of thepredetermined overhead rate for the year 2009 because the decisionwould affect both the manufacturing overhead and the directlabor-hours for the year. After talking with both the productionmanager and the sales representative from Sunghi Industries, thecontroller discovered that in addition to the annual lease cost of$348,000, the new machine would also require a skilledtechnician/programmer who would have to be hired at a cost of$50,000 per year to maintain and program the equipment. Both ofthese costs would be included in factory overhead. There would beno other changes in total manufacturing overhead cost, which isalmost entirely fixed. The controller assumed that the new machinewould result in a reduction of 6,000 direct labor-hours for theyear from the levels that had initially been planned.
p. 140
When the revised predetermined overhead rate for the year 2009 wascirculated among the company's top managers, there was considerabledismay.
Required:
1. Recompute the predetermined rate assuming that the new machinewill be installed. Explain why the new predetermined overhead rateis higher (or lower) than the rate that was originally estimatedfor the year 2009.
2. What effect (if any) would this new rate have on the cost ofjobs that do not use the new automated milling machine?
3.Why would managers be concerned about the new overheadrate?
4.After seeing the new predetermined overhead rate, the productionmanager admitted that he probably wouldn't be able to eliminate allof the 6,000 direct labor-hours. He had been hoping to accomplishthe reduction by not replacing workers who retire or quit, but thathad not been possible. As a result, the real labor savings would beonly about 2,000 hoursâone worker. Given this additionalinformation, evaluate the original decision to acquire theautomated milling machine from Sunghi Industries.
Casey DurganLv2
28 Sep 2019
