Question

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.

Answer 1