Question

Hamilton Printing Company prints specialty calendars, diaries, stationery, etc. to customer order. Each order is unique and therefore each order received is costed as a separate job. The company’s business exhibits a strong seasonal pattern. The four months of September through December are extremely busy months, while business is usually slack during the remaining eight months of the year. Production activity is measured in terms of direct labor hours. During a typical busy month production activity is 20,000 direct labor hours, while during a slack month it is 10,000 labor hours. ​The company maintains a permanent work force of 10,000 direct labor hours a month, at a wage rate of $10 per hour. During the busy months of September through December, it supplements its work force by hiring 5,000 hours per month of temporary help, and by allowing its permanent workforce to work 5,000 hours overtime. The temporary workers are paid $12 per hour, and overtime work is paid $15 per hour. ​Typical overhead costs are as follows: ​Slack Month​Busy Month ​Utilities​$20,000​$30,000 ​Materials handling​ 30,000​ 50,000 ​Supervision​ 45,000​ 60,000 ​Rent on factory premises​ 6,000​ 6,000 ​Repairs & maintenance​ 30,000​ 40,000 ​Depreciation​ 10,000​ 10,000 ​Totals​$141,000​$196,000 ​The company has an elaborate record keeping system which traces various prime costs to each job. Work done by temporary and overtime workers is also traced to specific jobs and costed at their higher rates. The overhead costs listed above are allocated to various jobs on the basis of direct labor hours, via overhead rates calculated at the end of each month using the actual overhead cost and the actual labor hours for that month. ​The company relies upon its costing system to submit quotations for potential jobs by adding a markup of 40% to the job’s estimated cost. It also assesses the efficiency with which each job is executed by comparing the actual costs recorded on the job’s cost sheet to the ex ante estimated cost. Required: Critique the company’s treatment of labor and overhead costs, and suggest a better costing system. Assume that using direct labor hours as the allocation base is appropriate. Once again, you will find it instructive to create an imaginary job and allocate costs to it to understand both the current system and your proposed system. The two major issues you need to focus on are the overtime and temp worker costs and the variations between the slack and the busy months.

Answer 1

Hi there

Direct Labour cost:
Permanent	$ 100,000.00	$ 100,000.00	$                   -
Temporary	$    60,000.00	$ 120,000.00	$   60,000.00
Overtime	$    75,000.00	$                   -	$ (75,000.00)
Total Direct Labour cost	$ 235,000.00	$ 220,000.00	$ (15,000.00)
Labour cost per hour	$            11.75	$            11.00
Example:
Job 1.	Suggested		Existing
	Total	Per Hour	Total	Per Hour
Direct Labour Hour	250		250
Labour cost	$      2,750.00	$            11.00	$      2,937.50	$    11.75
Utilities	$          375.00	$               1.50	$         375.00	$       1.50
Material Handling	$          625.00	$               2.50	$         625.00	$       2.50
Supervision	$          750.00	$               3.00	$         750.00	$       3.00
Rent on Factory	$            75.00	$               0.30	$            75.00	$       0.30
Repair and Maintenance	$          500.00	$               2.00	$         500.00	$       2.00
Depreciation	$          125.00	$               0.50	$         125.00	$       0.50
Total Cost	$      5,200.00	$            20.80	$      5,387.50	$    21.55
Add: Markup	$      2,080.00	$               8.32	$      2,155.00	$       8.62
Sales Price	$      7,280.00	$            29.12	$      7,542.50	$    30.17