Target cost – Exercise 1 Dec 2007

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    Exercise 1) d)
    Selling price $ 44 with 20% margim
    Component 1 (Circuit Board)costs 4.1 each. They are bought in batches of 4000, additional costs for delivering of $ 2400.
    Component 2 (wiring) need 25 cem of wiring to complete the radio. Waste of 2%. Wire costs $ 0.50 per metre to buy.
    Other Material cost $ 8.10 per radio
    Assembly labour – skilled people. Takes 30 min to assemble a radio, the assembly workers are paid $ 12.60 per hour. Estimated that 10% of hours to que assembly workes is for idle time.
    Production overheads
    Month one – Total production overhead $ 620000 total of 19000 assembly labor hours
    Month two – Total production overhear $ 700000 toal of 23000 assembly labor hours
    Fixed Production overheads are absorbed on an assembly hour basis based on normal annual activity levels. In a typical year 240000 assembly hour will be worked.

    Calculate the expected cost per unit for a radio and identify any cost gap tht might exist.

    1)May you help me to interprete the information necessary for the production overhead cost workings?
    2)How should I know that the high low method sould be use, i.e: wheighted averaging?
    3)Why I do not see in the calculations (in the answers)the 10% idle time paid to assembly?
    4)Please help me how to see that I need to segregate and identify variable and fixed overheads!!!???

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    John Moffat

    The overheads are clearly not fixed, otherwise they would be the same in total each month.
    However neither are they linearly variable (otherwise the overhead per hour would be the same each month).
    So….they must be semi-variable (part fixed and part variable).

    To separate the fixed and variable elements, there are only two methods in F5 – either using regression or using high-low. Since there are only two months given, either approach would give the same answer, but high-low is much much quicker.

    When you have got the variable cost per hour, then that it easy to deal with. With regard to the fixed cost per month, that is charged on a labour hour basis also. The expected/average is 20000 hours per month and so dividing by 20000 gives the charge(absorption) rate per hour.

    The idle time is in his working for the labour cost. The time is 30 minutes (or 30/60 hours). He has multiplied by 100/90 because for every 100 hours paid, 10% is idle and therefore only 90 hours or worked. (Or to put it the other way round, for every 90 hours worked they will pay for 100 hours).

    Idle time does not affect the overheads – overheads are only incurred during hours worked – i.e. 30 minutes, or 30/60 hours.

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