CTC 475 Review CTC 475 Review
Cost EstimatesCost Estimates Balance StatementBalance Statement
Snapshot in timeSnapshot in time Income StatementIncome Statement
Over a time periodOver a time period
ObjectivesObjectives
Know how to give job quotesKnow how to give job quotes Understand how to identify a present Understand how to identify a present
economy problemeconomy problem Know how to work present economy Know how to work present economy
problemsproblems
Job Quotes Job Quotes
Rate per Direct Labor HourRate per Direct Labor Hour
Percentage of Direct Labor CostPercentage of Direct Labor Cost
Percentage of Prime (Labor+Matl) Percentage of Prime (Labor+Matl) CostCost
Job Quotes Example – Historical Job Quotes Example – Historical DataData
Direct Labor HoursDirect Labor Hours 48,00048,000
Direct Labor CostsDirect Labor Costs
Direct Labor RateDirect Labor Rate$480,000$480,000
$10 per hour$10 per hour
Direct Material CostDirect Material Cost $600,000$600,000
Total Overhead CostTotal Overhead Cost $360,000$360,000
Job Quotes ExampleJob Quotes Example
Determine quote using all 3 methods Determine quote using all 3 methods for a job that will need:for a job that will need: 40 hours of direct labor and 40 hours of direct labor and $850 of direct material$850 of direct material
Method 1: Rate per Direct Labor Method 1: Rate per Direct Labor HourHour
Distribute overhead by labor hours:Distribute overhead by labor hours:
Rate = Ovhd/Labor Hrs. = Rate = Ovhd/Labor Hrs. = $360,000/48,000$360,000/48,000
=$7.50 per direct labor hour=$7.50 per direct labor hour
Method 1: Rate per Direct Labor Method 1: Rate per Direct Labor Hour – Job QuoteHour – Job Quote
Direct MaterialDirect Material $850$850
Direct Labor:Direct Labor:
40 hrs * $10/hr40 hrs * $10/hr$400$400
Overhead:Overhead:
40 hrs * $7.50 per hr40 hrs * $7.50 per hr$300$300
TotalTotal $1,550$1,550
Method 2: Rate per Direct Labor Method 2: Rate per Direct Labor CostCost
Distribute overhead by labor cost:Distribute overhead by labor cost:
Rate = Ovhd/Labor Cost = Rate = Ovhd/Labor Cost = $360,000/$480,000$360,000/$480,000
=75% =75%
Method 2: Rate per Direct Labor Method 2: Rate per Direct Labor Cost – Job QuoteCost – Job Quote
Direct MaterialDirect Material $850$850
Direct Labor:Direct Labor:
40 hrs * $10/hr40 hrs * $10/hr$400$400
Overhead:Overhead:
$400 * 75%$400 * 75%$300$300
TotalTotal $1,550$1,550
Methods 1 & 2Methods 1 & 2
Yield same result if the rate per Yield same result if the rate per direct labor hour is average labor direct labor hour is average labor raterate
Method 3: % of Prime CostMethod 3: % of Prime Cost
Distribute overhead by prime cost:Distribute overhead by prime cost:
Rate = Ovhd / Direct Labor + Direct Rate = Ovhd / Direct Labor + Direct Material Cost = $360,000/($480,000+Material Cost = $360,000/($480,000+$600,000)$600,000)
=33.3% =33.3%
Method 3: Rate per Prime Cost – Method 3: Rate per Prime Cost – Job QuoteJob Quote
Direct MaterialDirect Material $850$850
Direct Labor:Direct Labor:
40 hrs * $10/hr40 hrs * $10/hr$400$400
Overhead:Overhead:
$1250* 33.3%$1250* 33.3%$420$420
TotalTotal $1,670$1,670
Different companies use different Different companies use different methodsmethods
Most common is method 1Most common is method 1 Consulting firm I worked at– similar Consulting firm I worked at– similar
to method 2to method 2
Cost CentersCost Centers
Average overhead rates may not Average overhead rates may not work if you make products that are work if you make products that are very differentvery different
Can split costs among departmentsCan split costs among departments
i.e. architect dept., engineering dept.i.e. architect dept., engineering dept.
Job Quotes (w/ profit)Job Quotes (w/ profit)
Our previous examples did not include Our previous examples did not include profitprofit
Profit must be addedProfit must be added
Assume a job requires $500 worth of Assume a job requires $500 worth of material and 30 direct labor hours (@ material and 30 direct labor hours (@ $6/hr). Using a $3/hour overhead rate and $6/hr). Using a $3/hour overhead rate and a profit margin of 20%, determine the job a profit margin of 20%, determine the job quotequote
Job Quote Example (w/profit)Job Quote Example (w/profit)
Direct MaterialDirect Material $500$500
Direct Labor:Direct Labor:
30 hrs * $6/hr30 hrs * $6/hr$180$180
Overhead:Overhead:
$3*30 hours$3*30 hours$90$90
TotalTotal $770$770
Profit:Profit:
20%*$77020%*$770$154$154
Final Job QuoteFinal Job Quote $924$924
Time Value of MoneyTime Value of Money
Most of this course is based on the Most of this course is based on the fundamental concept that money has fundamental concept that money has a time valuea time value
Must take this concept into account Must take this concept into account since projects have different cash since projects have different cash flow patterns at different timesflow patterns at different times
Present Economy ProblemsPresent Economy Problems
Time is not a significant factorTime is not a significant factor
Conditions:Conditions:
No investment of capital No investment of capital
Long-term costs are the same for all Long-term costs are the same for all alternativesalternatives
Alternatives have identical resultsAlternatives have identical results
Example-Present EconomyExample-Present Economy A metal part can be machined on an A metal part can be machined on an
engine lathe (one at a time) or turret lathe engine lathe (one at a time) or turret lathe (many at a time) Material costs are the (many at a time) Material costs are the same regardless of the machine used.same regardless of the machine used.
Parts are produced in batches according to Parts are produced in batches according to the customer’s orderthe customer’s order
Based on the following cost data, what Based on the following cost data, what machine should be used for order sizes of machine should be used for order sizes of 25, 100 and 500 units?25, 100 and 500 units?
Cost DataCost Data
Turret LatheTurret Lathe Engine LatheEngine LatheSet-Up Time per Set-Up Time per OrderOrder
2 hours (every 2 hours (every 300 units)300 units)
negligiblenegligible
Direct Labor and Direct Labor and Machine time per Machine time per partpart
5 minutes5 minutes 10 minutes10 minutes
Direct Labor RateDirect Labor Rate $9.00 per $9.00 per hourhour
$7.50 per $7.50 per hourhour
Machine RateMachine Rate $15.00 per $15.00 per hourhour
$12.00 per $12.00 per hourhour
Cutting Tool Cost Cutting Tool Cost per Partper Part
$0.10 per unit$0.10 per unit $0.20 per unit$0.20 per unit
Turret Lathe CostsTurret Lathe CostsDirect Labor Direct Labor Cost per UnitCost per Unit
$9.00 per hr=$0.15 $9.00 per hr=$0.15 per minute * 5 per minute * 5 minutes per unit =minutes per unit =
$0.75 per unit$0.75 per unit
Machine Cost Machine Cost per unitper unit
$15.00 per $15.00 per hr=$0.25 per hr=$0.25 per minute * 5 minutes minute * 5 minutes per unit =per unit =
$1.25 per unit$1.25 per unit
Cutting Tool Cutting Tool Cost per unitCost per unit
$0.10 per unit$0.10 per unit
Setup Cost Setup Cost 2 hours/setup * 2 hours/setup * ($9+$15/hr)=($9+$15/hr)=
$48N $48N (where N is (where N is number of setups)number of setups)
Total Cost per Total Cost per OrderOrder
$2.10x+$48N $2.10x+$48N (where x is the (where x is the number of units and number of units and N is the number of N is the number of setups)setups)
Engine Lathe CostsEngine Lathe Costs
Direct Labor Direct Labor Cost per UnitCost per Unit
$7.50 per $7.50 per hr=$0.125 per hr=$0.125 per minute * 10 minute * 10 minutes per unit =minutes per unit =
$1.25 per unit$1.25 per unit
Machine Cost Machine Cost per unitper unit
$12.00 per $12.00 per hr=$0.20 per hr=$0.20 per minute * 10 minute * 10 minutes per unit =minutes per unit =
$2.00 per unit$2.00 per unit
Cutting Tool Cutting Tool Cost per unitCost per unit
$0.20 per unit$0.20 per unit
Total Cost per Total Cost per OrderOrder
$3.45x $3.45x (where x is (where x is the number of the number of units)units)
SummarySummary
Turret lathe costs less per unit but Turret lathe costs less per unit but has a high setup costhas a high setup cost
Engine lathe costs more per unit but Engine lathe costs more per unit but has no setup costshas no setup costs
When do I use which machine?When do I use which machine?
Comparison Costs Comparison Costs
UnitsUnitsEngine LatheEngine Lathe Turret LatheTurret Lathe
2525 $86.25$86.25 $100.50$100.50
100100 $345.00$345.00 $258.00$258.00
500500 $1,725.00$1,725.00 $1146.00$1146.00
Switchover occurs somewhere between 25 and 100 units (n=1 setup)
Determine breakeven point-MathDetermine breakeven point-Math
2.10x+48=3.45x2.10x+48=3.45x x=35 units (assumes N=1 setup)x=35 units (assumes N=1 setup)
Determine breakeven-graphicallyDetermine breakeven-graphically
Cost Comparison
$0
$100
$200
$300
$400
0 20 40 60 80 100
Units
To
tal
Co
st
Engine
Turret
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