Question

DeLoan Corporation uses a six-month moving average to calculate material scrap rate. Both the auditor and technical analyst concur with the use of this procedure. Both have also validated the available data.

Month January February March April May June July

Scrap $6,000 $5,500 $4,200 $6,500 $5,800 $5,300 $5,700

Material Req $100,000 $100,000 $69,000 $105,000 $89,000 $88,000 $99,000

1. What would you estimate the scrap rate to be using a 6-month moving average? 2. Using that scrap rate, what would be your material estimate for a new contract for the item when the material required for the finished product is $90,000? 3. Is your estimate in Question 2 reasonable?

Answer 1

1. What would you estimate the scrap rate to be using a 6-month moving average?

Estimate of the Scrap rate usingg a six month moving average can be calculated by the following method:

Last six months would be from February till July, ie., February, March, April, May, June and July

Scrap rate = (5,500+4,200+6,500+5,800+5,300+5,700)/6 = $5,500

2. Using that scrap rate, what would be your material estimate for a new contract for the item when the material required for the finished product is $90,000?

Based on the scrap rate calculated in the above question number 1, of $5,500, the material estimate for the new contract will be $90,000 + $5,000 = $95,000.

3. Is your estimate in Question 2 reasonable?

Taking into consideration the of the materials requirement in the month of February, the scrap rate was $5,500 but the materials required was $100,000. So our estimate of $95,000 is close and within the specified limit.

I do say that "Yes" it is reasonable.