Case 5-27

1.

In order to determine the Revised Total Estimated Manufacturing Overhead Cost, the additional annual costs associated with leasing the automated milling machine and hiring a skilled technician/programmer were added to the previous estimated manufacturing overhead cost.

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Based on the Revised Total Estimated Manufacturing Overhead Cost for 2009, the Revised Predetermined Overhead Rate was calculated using the estimated total direct labor-hours figure of 57,000 hours. This estimate takes into account the 6,000 direct labor-hours that would eliminated with the implementation of the automated equipment.

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The new predetermined overhead rate is considerably higher due to the increase in expenditures for manufacturing overhead that is allocated to fewer hours of direct labor. The allocation base is essentially decreased, resulting in a greater percentage of costs assigned to each hour. The previous figures for manufacturing overhead cost had associated a fixed overhead cost with a larger number of direct labor hours. With the automation process eliminated a portion of direct labor hours, the costs are spread over the remaining labor hours therefore increasing the incremental cost per direct labor-hour. With the increasing reliance on automated equipment, direct labor hours become a less appropriate allocation base for manufacturing overhead costing.

2.

The Revised Predetermined Overhead Rate which takes into account the additional costs associated with leasing and maintaining the automated milling machine will have a significant effect on the cost of jobs that do not use the new automated milling machine. The cost of these jobs that do not use the new automated milling machine will be increased. Due the use of direct labor hours as the allocation base, the increased costs per direct labor-hour will be felt across all projects regardless of whether or not the automated milling machine is used on a particular project.

3.

Managers...