Question

Labor costs of an auto repair mechanic are seldom based on actual hours worked. Instead, this labor cost is based on an industry average of time estimated to complete a repair job. This means a customer can pay, for example, $120 for two hours of work, on a car when the actual time worked was only one hour. Many experienced mechanics and complete repair jobs faster than the industry average. Assume that you are asked to complete such a survey for a repair center. The survey calls for objective input, and many questions require detailed cost data and analysis.  The mechanics and owners know that you have the survey and encourage you to complete it in a way that increases the average billable hours for repair work.

Required:

Prepare the sections in a one-page memorandum to the mechanics and owners that describes the direct labor analysis you will undertake in completing this survey.

MEMORANDUM TEMPLATE

OBJECTIVE:

A statement about the need to be objective in the analysis. Both ethical and professional concerns should motivate the preparer’s desire for objectivity.

COST ACCOUNTING ESTIMATION:

The memorandum should outline how cost estimation is conducted. For example, you might describe how regression analysis was used to estimate the average time to complete the most common jobs. Explain why such an objective estimate is the time value that must be reported.   Reporting a greater time value would be in violation of the code of professional ethics.

BUSINESS CONCERNS:

The memorandum should point out that the repair business should follow established business practices for setting cost estimates. There should also be an expressed concern of fairness for the customer in getting a fair value for the amount paid. Another concern will be a possible perception that the repair business typically overcharges the customer and something must be done about it. It is not fair to the customer to pay for time never received, and it is not fair to the mechanic to be paid on a jobs completed basis. Perhaps the compensation structure of the mechanic should be changed.

MECHANIC-RELATED ISSUES:

The memorandum should also be concerned about the quality of mechanical work. Is the work being done correctly and is customer safety in jeopardy by paying the mechanic on a job-by-job basis?   Who is responsible for establishing a fair compensation system? These issues are likely topics for the memorandum.

Answer 1

Answer:

I am conducting a survey to analyze the labor cost for a repair centre. There are different methods to estimate such cost based on the past data. Scatter diagram. high low method and least square regression method are the tools to estimate the cost. based on the past behavior of data.

Among these three methods, the least square method yields the most precise estimate of cost behavior. It is a statistical and spreadsheet method. It uses all data points and so it provides more accuracy as compared to other methods.

In this survey, it is very possible that the survey will show the varied timing to repair a car that covers a wide range. This in turn tends the cost for repairing to be varied. In such scenario, it is a big challenge to estimate the labor cost.

For this, the least square method is appropriate. In this method, I assume two variables; timing required to repair certain problem in car and the cost for that one. For this I collect data and regret those data using spreadsheet.

And through this method, I will get a relationship between these two variables. It will facilitate to analyze and estimate the direct labor cost.

Since this method is based on past data. so accuracy of the cost estimation depends on the reliability and the accuracy of the provided data.

So, I request all of you to provide the genuine and true information so that I will come up with the reasonable cost that the mechanics should get. It must reflect the value that mechanics deserve.

MEMORANDUM

To: “Mechanics†and “Ownersâ€

From: Your name

RE: Analysis of labor costs for survey

Date: Current date

The memorandum should include many of the following points:

Objectivity: A statement about the need to be objective in the analysis. Both ethical and professional concerns should motivate the preparer's desire for objectivity.

Cost Accounting Estimation: The memorandum should outline how cost estimation is conducted. For example, you might describe how regression analysis was used to estimate the average time to complete the most common jobs. Explain why such an objective estimate is the time value that must be reported. Reporting a greater time value would be in violation of the code of professional ethics.

Business Concerns: The memorandum should point out that the repair business should follow established business practices for setting cost estimates. There should also be an expressed concern of fairness for the customer in getting a fair value for the amount paid. Another concern will be a possible perception that the repair business typically overcharges the customer and something must be done about it. It is not fair to the customer to pay for time never received, and it is not fair to the mechanic to be paid on a jobs completed basis. Perhaps the compensation structure of the mechanic should be changed.

Mechanic-Related Issues: The memorandum should also be concerned about the quality of mechanical work. Is the work being done correctly and is customer safety in jeopardy by paying the mechanic on a job-by-job basis? Who is responsible for establishing a fair compensation system? These issues are likely topics for the memorandum.