CTC 475 Review Cost Estimates Cost Estimates Balance Statement Balance Statement Snapshot in time Snapshot in time Income Statement Income Statement Over a time period Over a time period

CTC 475 Job Quotes & Present Economy Problems

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

Job Quotes Rate per Direct Labor Hour Rate per Direct Labor Hour Percentage of Direct Labor Cost Percentage of Direct Labor Cost Percentage of Prime (Labor+Matl) Cost Percentage of Prime (Labor+Matl) Cost

Job Quotes Must Prorate: Labor Labor Material Material Overhead Overhead

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

Job Quotes Example Determine quote using all 3 methods for a job that will need: Determine quote using all 3 methods for a job that will need: 40 hours of direct labor and 40 hours of direct labor and $850 of direct material $850 of direct material

Method 1: Rate per Direct Labor Hour Distribute overhead by labor hours: Distribute overhead by labor hours: Rate = Ovhd/Labor Hrs. = $360,000/48,000 Rate = Ovhd/Labor Hrs. = $360,000/48,000 =$7.50 per direct labor hour =$7.50 per direct labor hour

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

Method 2: Rate per Direct Labor Cost Distribute overhead by labor cost: Distribute overhead by labor cost: Rate = Ovhd/Labor Cost = $360,000/$480,000 Rate = Ovhd/Labor Cost = $360,000/$480,000 =75% =75%

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

Methods 1 & 2 Yield same result if the rate per direct labor hour is average labor rate Yield same result if the rate per direct labor hour is average labor rate

Method 3: % of Prime Cost Distribute overhead by prime cost: Distribute overhead by prime cost: Rate = Ovhd / Direct Labor + Direct Material Cost = $360,000/($480,000+$600,000) Rate = Ovhd / Direct Labor + Direct Material Cost = $360,000/($480,000+$600,000) =33.3% =33.3%

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

Method 3 Gives different answer than method 1/2 Gives different answer than method 1/2

Different companies use different methods Most common is method 1 Most common is method 1 Consulting firm I worked at– similar to method 2 Consulting firm I worked at– similar to method 2

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

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

Job Quote Example (w/profit) Direct Material $500 Direct Labor: 30 hrs * $6/hr $180 Overhead: $3*30 hours $90 Total$770 Profit:20%*$770$154 Final Job Quote $924

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

Present Economy Problems Time is not a significant factor Time is not a significant factor

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

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. 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 customer’s order Parts are produced in batches according to the customer’s order Based on the following cost data, what machine should be used for order sizes of 25, 100 and 500 units? Based on the following cost data, what machine should be used for order sizes of 25, 100 and 500 units?

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

Turret Lathe Costs Direct Labor Cost per Unit $9.00 per hr=$0.15 per minute * 5 minutes per unit = $0.75 per unit Machine Cost per unit $15.00 per hr=$0.25 per minute * 5 minutes per unit = $1.25 per unit Cutting Tool Cost per unit $0.10 per unit Setup Cost 2 hours/setup * ($9+$15/hr)= $48N (where N is number of setups) Total Cost per Order $2.10x+$48N (where x is the number of units and N is the number of setups)

Engine Lathe Costs Direct Labor Cost per Unit $7.50 per hr=$0.125 per minute * 10 minutes per unit = $1.25 per unit Machine Cost per unit $12.00 per hr=$0.20 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)

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

Comparison Costs Units Engine Lathe Turret Lathe 25$86.25$ $345.00$ $1,725.00$ Switchover occurs somewhere between 25 and 100 units (n=1 setup)

Determine breakeven point-Math 2.10x+48=3.45x 2.10x+48=3.45x x=35 units (assumes N=1 setup) x=35 units (assumes N=1 setup)

Determine breakeven-graphically

Next lecture Time value of $ Time value of $ Simple vs. Compound Interest Simple vs. Compound Interest Single Sum-Future Worth Single Sum-Future Worth Single Sum-Present Worth Single Sum-Present Worth