The total overhead cost incurred by a factory producing
screw-machine products last year was
$5,800,000 of which $800,000 was assigned to five automated
screw-machine centres. These
expensive advanced machining centres ran for a total of 20,000
machine-hours. Direct material
consumption during that period cost $9,062,500. Direct labour
was composed of general hands and
tradespeople. The general hands worked a total of 100,000
hours, and the tradespeople worked
50,000 hours. The general hands were paid a total of
$2,700,000, and the tradespeople were paid
$1,800,000.
A new product is estimated to require $3.12 worth of direct
material and components, 6 minutes of
direct labour by a general hand, and 10 minutes of
screw-machine time per unit. The same product
can be produced manually, requiring a total of one hour of
direct labour. A tradesperson would be
required for 40 minutes and a general hand would be needed for
20 minutes.
a) Estimate the factory cost per unit of this new product if
(i) machine made, and (ii) handmade.
For each case, allocate the unassigned overhead by each of the
following methods: (1) direct
labour cost; (2) direct labour hours; (3) direct material
cost; (4) prime cost; and (5) machine
hours. (It is suggested you initially calculate the overhead
factors for each method; and use a
table to show your cost estimates for each method).
b) Which estimates do you think are realistic? Give reasons
for your opinion. What additional
information would be useful to perform more reliable cost
estimation?\
c) Discuss how the cost of the initial set-up of the
screw-machine (estimated to take 8 hours of a
tradesperson’s time) could be incorporated into your estimates
of the proposed product in a).
Discuss whether allowing for the cost of the initial set-up
could impact the decision to produce
the product by machine or by hand.