Cost Estimation Question

Dr. Mojahid F. Saeed Osman/ISE304.01/Term132/HW3/March 17, 2014

ISE304.01 Principles of Industrial Costing

Term: Second Semester 2013-14 (132)

Homework Assignment 3 Due on Monday March 31 April 7, 2014

Submission Instructions:

• Make sure your name is listed on a cover sheet as the first page of the document.

• Each question should be numbered. • Hand written homework will be accepted. However, you will have a credit of 5% of the total

possible points for typing the entire homework in MS word.

Read Chapter 5 in your Textbook

1. CCC Engineering Company is analyzing the costs of its production. The cost data and activity level for the past 12 month are given below:

Month

Overhead

Cost

Maintenance

Hours

Set-up

Hours

February 123,920 173 555

January 342,870 2,088 795

December 324,591 1,500 675

November 387,395 1,964 585

October 276,674 1,668 915

September 328,706 2,009 705

August 367,500 2,060 660

July 314,463 1,596 720

June 287,888 1,685 825

May 374,967 2,040 600

April 255,627 630 630

March 192,251 473 615

a. Use the high-low method to estimate next month's overhead costs, assuming the company is planning

to operate 1650 maintenance hours. (3 points)

b. Use the high-low method to estimate next month's overhead costs, assuming the company is planning

to complete 840 set-up hours. (3 points) c. Using MS Excel,

(i) Prepare a scattergraph showing overhead costs plotted against maintenance hours. (2 points)

(ii) Prepare a scattergraph showing the overhead costs plotted against the monthly set-up hours.

(2 points)

(iii)

If linear regression is to be employed to derive a regression equation for estimating costs.

d. Considering the maintenance as predictor (i) show the summary output of the simple regression

analysis (ii) what is the simple regression equation? (3 points)

e. Estimate the overhead if the company expects to have 1820 maintenance hours next month. (2

points)

KING FAHD UNIVERSITY OF PETROLEUM & MINERALS Systems Engineering Department

ISE304.02 Principles of Industrial Costing 1 st Semester 2013-14

Dr. Mojahid F. Saeed Osman/ISE304.01/Term132/HW3/March 17, 2014 2

f. Considering the set-up hours as predictor (i) show the summary output of the simple regression

analysis (ii) what is the simple regression equation? (3 points)

g. Estimate overhead if the company expects to complete 720 set-up hours next month. (2 points)

h. Considering both maintenance hours and set-up hours as predictors (i) show the summary output of

the multiple regression analysis (ii) what is the multiple regression equation? (3 points)

i. Estimate the overhead if the company expects to produce complete 1780 maintenance hours and

740 set-up hours next month. (2 points)

Read Chapter 6 in your Textbook

2. BBM manufacturing company produces two products, BBM-X and BBM-XL. Data on operations and costs for February 2014 are:

BBM-X BBM-XL

Direct labor costs per unit 2,250 1,500

Direct material costs per unit 3,000 6,000

Total machine hours 3,375 2,700

Units produced 600 900

Total Manufacturing overhead costs 6,600,000

i) Compute the predetermined overhead rate and the overhead cost for each model, assuming the company uses:

(a) Direct number of machine hours to allocate overhead costs. (3 points) (b) Direct labor costs to allocate overhead costs. (3 points)

ii) Compute the unit cost for each product considering the predetermined overhead rates obtained in (a) and (b). (10 points)

iii) BBM manufacturing prefers to use two allocation bases (two-stage allocation) to allocate overhead to the products. First the overhead cost pool of 6,600,000 is assigned to the intermediate cost

pools. 35% of overhead is labor-related, 50% of overhead is material-related, and 15% of

overhead is machine-related. BBM will use labor-cost to allocate labor-related overhead costs,

material costs to allocate material-related overhead costs, and machine hours to allocate

machine-related overhead costs:

(c) Compute the predetermined overhead rates (2 points)

(d) Calculate the total costs of production and the cost per unit for each of the two products. (7

points)

Show your work

Total Possible Points: 50