CTC 475 Review

1
CTC 475 Review

• Cost Estimates
• Balance Statement
• Snapshot in time
• Income Statement
• Over a time period

2
CTC 475

• Job Quotes Present Economy Problems

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Objectives

• Know how to give job quotes
• Understand how to identify a present economy
  problem
• Know how to work present economy problems

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Job Quotes

• Rate per Direct Labor Hour
• Percentage of Direct Labor Cost
• Percentage of Prime (LaborMatl) Cost

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Job Quotes

• Must Prorate
• Labor
• Material
• Overhead

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Job Quotes Example Historical Data
Direct Labor Hours 48,000
Direct Labor Costs Direct Labor Rate 480,000 10 per hour
Direct Material Cost 600,000
Total Overhead Cost 360,000
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Job Quotes Example

• Determine quote using all 3 methods for a job
  that will need
• 40 hours of direct labor and
• 850 of direct material

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Method 1 Rate per Direct Labor Hour

• Distribute overhead by labor hours
• Rate Ovhd/Labor Hrs. 360,000/48,000
• 7.50 per direct labor hour

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Method 1 Rate per Direct Labor Hour Job Quote
Direct Material 850
Direct Labor 40 hrs 10/hr 400
Overhead 40 hrs 7.50 per hr 300
Total 1,550
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Method 2 Rate per Direct Labor Cost

• Distribute overhead by labor cost
• Rate Ovhd/Labor Cost 360,000/480,000
• 75

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Method 2 Rate per Direct Labor Cost Job Quote
Direct Material 850
Direct Labor 40 hrs 10/hr 400
Overhead 400 75 300
Total 1,550
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Methods 1 2

• Yield same result if the rate per direct labor
  hour is average labor rate

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Method 3 of Prime Cost

• Distribute overhead by prime cost
• Rate Ovhd / Direct Labor Direct Material Cost
  360,000/(480,000600,000)
• 33.3

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Method 3 Rate per Prime Cost Job Quote
Direct Material 850
Direct Labor 40 hrs 10/hr 400
Overhead 1250 33.3 420
Total 1,670
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Method 3

• Gives different answer than method 1/2

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Different companies use different methods

• Most common is method 1
• Consulting firm I worked at similar to method 2

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Cost Centers

• Average overhead rates may not work if you make
  products that are very different
• Can split costs among departments
• i.e. architect dept., engineering dept.

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Job Quotes (w/ profit)

• Our previous examples did not include profit
• Profit must be added
• Assume a job requires 500 worth of material and
  30 direct labor hours (_at_ 6/hr). Using a 3/hour
  overhead rate and a profit margin of 20,
  determine the job quote

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Job Quote Example (w/profit)
Direct Material 500
Direct Labor 30 hrs 6/hr 180
Overhead 330 hours 90
Total 770
Profit 20770 154
Final Job Quote 924
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Time Value of Money

• Most of this course is based on the fundamental
  concept that money has a time value
• Must take this concept into account since
  projects have different cash flow patterns at
  different times

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Present Economy Problems

• Time is not a significant factor

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Conditions

• No investment of capital
• Long-term costs are the same for all alternatives
• Alternatives have identical results

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Example-Present Economy

• A metal part can be machined on an engine lathe
  (one at a time) or turret lathe (many at a time)
  Material costs are the same regardless of the
  machine used.
• Parts are produced in batches according to the
  customers order
• Based on the following cost data, what machine
  should be used for order sizes of 25, 100 and 500
  units?

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Cost Data
Turret Lathe Engine Lathe
Set-Up Time per Order 2 hours (every 300 units) negligible
Direct Labor and Machine time per part 5 minutes 10 minutes
Direct Labor Rate 9.00 per hour 7.50 per hour
Machine Rate 15.00 per hour 12.00 per hour
Cutting Tool Cost per Part 0.10 per unit 0.20 per unit
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Turret Lathe Costs
Direct Labor Cost per Unit 9.00 per hr0.15 per minute 5 minutes per unit 0.75 per unit
Machine Cost per unit 15.00 per hr0.25 per minute 5 minutes per unit 1.25 per unit
Cutting Tool Cost per unit 0.10 per unit
Setup Cost 2 hours/setup (915/hr) 48N (where N is number of setups)
Total Cost per Order 2.10x48N (where x is the number of units and N is the number of setups)
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Engine Lathe Costs
Direct Labor Cost per Unit 7.50 per hr0.125 per minute 10 minutes per unit 1.25 per unit
Machine Cost per unit 12.00 per hr0.20 per minute 10 minutes per unit 2.00 per unit
Cutting Tool Cost per unit 0.20 per unit
Total Cost per Order 3.45x (where x is the number of units)
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Summary

• Turret lathe costs less per unit but has a high
  setup cost
• Engine lathe costs more per unit but has no setup
  costs
• When do I use which machine?

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Comparison Costs
Units Engine Lathe Turret Lathe
25 86.25 100.50
100 345.00 258.00
500 1,725.00 1146.00
Switchover occurs somewhere between 25 and 100
units (n1 setup)
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Determine breakeven point-Math

• 2.10x483.45x
• x35 units (assumes N1 setup)

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Determine breakeven-graphically
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Next lecture

• Time value of
• Simple vs. Compound Interest
• Single Sum-Future Worth
• Single Sum-Present Worth