Question

Kindly provide a detailed explanation to the solution of the various questions. Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavez’s business is seasonal, with a heavy schedule during the summer months and holidays and a lighter schedule at other time. One of the major events, Chavez’s c customers request is a cocktail party. She offers a standard cocktail party Prand has estimated the cost per guests follows: Food and beverages DH 15 Labor (0.5 hrs @ Dh 10 per hr) 5.00 Overheads (0.5 hrs @ Dh 13.98 per hr) 6.99 Total cost per guest beverages and la DH 26.99 The standard cocktail party last three hours and Chavez hires one worker for every six guests, so that workers out to half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually worked. When bidding on cocktail parties, Chavez adds 15% markup to yield a price of about DH31 per guest. She is confident about her estimates of the cost of the food and beverages but is not as comfortable with the estimates of overhead costs. The DH 13.96 overhead costs per labor hours was determined by dividing total overhead expenses to the las 12 months by total labor hours for the same period. Monthly data concerning overhead costs and labor hours follows: Month Labor Hours Overhead Expense January 2,500 DH 55,000 February 2,800 59,000 March 3,000 60,000 April 4,200 64,000 May 4,500 67,000 June 5,500 71,000 July 6,500 74,000 August 7,500 77,000 September 7,000 75,000 October 4,500 68,000 November 3,100 62,000 December 6,500 73,000 Total 57,600 DH 805,000 Chavez has received a request to bid on a 180-guest fund raising cocktail party to be given next month by an important local charity. The party would last the usual tree hours. She would like to win this contract because her guest list for this charity event includes many prominent individuals that she would like to land as future clients. Maria is confident lent event. Required: 1. Prepare a Chavez Scatter graph plot that puts the labor-hours on the x-axis and the overhead expenditure on the Y-axis. What insights are reveals by your scatter graph? 2. Use the least squares regression method to estimate the fixed and variable components of the overhead expenses. Express theses estimates in the form Y = a + bX. 3. Estimate the contribution to profit of a standard 180 guest cocktail party of Chavez charges her usual price of DH 31 per guest. (In other words, by how much would her overall profit increase?) 4. How low could Chavez bill for the charity event in terms of price per guest and still not lose money on the event itself? 5. The individual who is organizing the client’s fund-raising event has indicated that he has already received a bid under DH30 from another catering company. Do you think Chavez should bid below her normal DH 31 per guest price for the charity event? Why? QUESTION 2: Ethics and the Manager Terri Ronsin had recently been transferred to the House Security Division of National Home products. Shortly after taking over her new position as individual controller, she was asked to develop the divisions’ predetermined overhead rate for the upcoming year. The accuracy of the rate is important because it is used throughout the year and any over applied or under applied overhead is closed out to Cost of Goods Sold at the end of the year. National Home Products uses direct labor –hours in all of its divisions as the allocation base for manufacturing overhead. To compute the pretermined overhead rate, Terri divided her estimate of the total manufacturing overhead for the coming year by the production manager’s estimate of the total direct labor hours for the coming year. She took her computations to the division’s general manager for approval but was quite surprised when he suggested a modification in the base. Her conversation with the general manager of Home Security Systems Division, Harry Irving, went like this: Ronsin: Here are my calculations for the next year’s predetermined overhead rate. If you approve, we can enter the rate into the computer on January 1 and be up running in the job-order coming system right away this year. Irving: Thanks for the coming up with the calculations so quickly, and they look just fine. There is, however, one slight modification I would like to see. Your estimate of the total direct labor-hours for the year is 440,000 hours. How about cutting that to about 420,000 hours? Ronsin: I don’t know if I can do that. The production manager says she will need about 440,000 direct labor-hours to meet the sales projections for the year. Besides, there are going to be over 430,000 labor-hours during the current year and sales are projected to be higher next year. Irving: Teri, I know all of that. I would still like to reduce the direct labor hours in the base to something like 420,000 hours. You probably don’t know that I had an agreement with your predecessor as divisional controller to shave 5% or so off the estimated direct labor hours every year. That way, we kept a reserve that usually resulted in a big boost to net operating income at the end of the fiscal year in December. W called it our Christmas bonus. Corporate headquarters always seemed as pleased as punch that we could pull off such a miracle at the end of the year. This system has worked well for many years, and I don’t want to change it now. Required: 1. Explain how shaving 5% off the estimated direct labor hours in the base for predetermined overhead rate usually results in a big boost in new operating income at the end of the fiscal year. 2. Should Terri Ronsin go along with the general manager’s request to reduce the direct labor hors in the predetermined overhead rate computation to 420,000 direct labor hours? QUESTION 3: “Blast it” Said David Wilson, President of Teledex Company. “We’ve just lost the bid on the Koopers job by $2,000. It seems we’re either too high to get the job or too low to make any money on half the jobs we bid”. Teledex Company manufactures products to customers’ specification and operates a job order system. Manufacturing overhead cost is applied to jobs on the basis of direct labor cost. The following estimates were made were made at the beginning of the year: Department Fabrication Machining Assembly Total Plant Direct Labor $200,000 $100,000 $300,000 $600,000 Manufacturing Overhead $350,000 $400,000 $90,000 $840,000 Jobs require varying amounts of work in the three departments. The Koopers job for example, would have required manufacturing costs in the three departments as follows: Department Fabrication Machining Assembly Total Plant Direct Materials $3,000 $200 $1,400 $4,600 Direct Labor $2,800 $500 $6,200 $9,500 Manufacturing Overhead ? ? ? ? The company uses a plant wide overhead rate to apply manufacturing overhead cost to jobs. Required: 1. Assuming use of a plant wide overhead rate: a. Compute the rate for the current year. b. Determine the amount of manufacturing overhead cost that would have been applied to Koopers job. 2. Suppose that instead of using plantwide overhead rate, the company had used a separate predetermined overhead rate in each department. Under these conditions: a. Compute the rate for each department for the current year. b. Determine the amount of manufacturing overhead cost that would have been applied to the Koopers job. 3. Explain the difference between the manufacturing overhead that would have been applied to the Koopers job using plantwide rate in question 1 (b) and using the departmental rates in question 2 (b). 4. Assume that it is customary in the industry to bid jobs at 150% of the total manufacturing cost (direct materials, direct labor, and applied overhead). What was the company’s bid price on the Koopes job? What would the bid price have been if departmental overhead rates had been used to apply overhead cost? 5. At the end of the year, the company estimated the following actual data relating to all job worked on during the year: Department Fabrication Machining Assembly Total Plant Direct Materials $190,000 $16,000 $114,000 $320,000 Direct Labor $210,000 $108,000 $262,000 $580,000 Manufacturing Overhead $360,000 $420,000 $84,000 $864,000 Compute the underapplied or overapplied overhead for the year (a) assuming that a plantwide overhead rate rates are used and (b) assuming that departmental overhead rates is used.

Answer 1