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Salvo Inc., a specialized equipment manufacturer, uses a
Our accounting system doesn’t make any sense to me. It tells me that every labor hour carries an additional burden of$ 1,500. This means that direct labor makes up only 6% of our total product cost, yet it drives all our costs.
In addition, these rates give my design engineers incentives to “design out” direct labor by using machine technology. Yet, over the past years as we have had less and less direct labor, the overhead rate keeps going up and up. I won’t be surprised if next year the rate is $2,000 per direct labor hour. I’m also concerned because small errors in our estimates of the direct labor content can have a large impact on our estimated costs. Just a 30-minute error in our estimate of assembly time is worth $750. Small mistakes in our direct labor time estimates really swing our bids around. I think this puts us at a disadvantage when we are going after business.
1. What is the engineer's concern about the overhead rate going “up and up”?
2. What did the engineer mean about the large overhead rate being a disadvantage when placing bids and seeking new business?
3. What do you think is a possible solution?
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Chapter 19 Solutions
Bundle: Accounting, Loose-Leaf Version, 26th + CengageNOWv2, 2 term Printed Access Card
- Required information Use the following information for the Exercises below. (Algo) [The following information applies to the questions displayed below.] On December 1, Jasmin Ernst organized Ernst Consulting. On December 3, the owner contributed $84,310 in assets to launch the business. On December 31, the company's records show the following items and amounts. Cash Accounts receivable $ 10,200 15,200 Office supplies 3,550 Land 45,990 Office equipment 18,310 Accounts payable Owner investments 84,310 8,740 Cash withdrawals by owner Consulting revenue Rent expense Salaries expense Telephone expense Miscellaneous expenses $ 2,340 15,200 3,910 7,350 790 610 Exercise 1-19 (Algo) Preparing a statement of owner's equity LO P2 Frnst Genculting Hint Jasmin Ernst Capitalonarrow_forwardHelparrow_forwardcan you please solve this answerarrow_forward
- What is the value of ending long term debt? Accounting questionarrow_forwardCompany B had an estimated 230,000 direct labor hours, $486,000 manufacturing overhead, and 27,000 machine hours. The actual were 220,700 direct labor hours, 38,600 machine hours, and $505,000 manufacturing overhead. They determine overhead based upon machine hours. Calculate the predetermined overhead rate.arrow_forwardWhat is the value of ending long term debt? Answer pleasearrow_forward
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning