cost analysis and estimating - anvari.net · pearson prentice hall, pearson education, upper saddle...
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![Page 1: Cost Analysis and Estimating - Anvari.Net · Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering](https://reader030.vdocument.in/reader030/viewer/2022040112/5e9937725361dd34013c6243/html5/thumbnails/1.jpg)
Ch 4-1© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Cost Analysis and Estimatingfor Engineering and Management
Chapter 4
Accounting Analysis
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Ch 4-2© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Overview
�Accounting−Records, Transactions, Reports
�Depreciation−What It Is, Uses, Calculations
�Budgeting�Overhead
−Calculations and Application
�Variance
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Ch 4-3© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Accounting
�Analyzes Money Transactions
�Multiple Disciplines
�Cost Accounting−Cost of Using Productive Assets
�Tax Accounting−Tax Consequences on Business
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Ch 4-4© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Accounting & Engineering
�Engineering−Looks Ahead−Cost Estimates BEFORE Things Happen
�Accounting−Money Transactions That Have Happened−Historical Records−Incompatible Data Formats
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Ch 4-5© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Transactions
�Money (or Something of Value) ComesIn or Goes Out of the Company
�Recorded Twice (In 2 Accounts)
�Double-Entry Bookkeeping
�Accounts - Records of LikeTransactions
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Ch 4-6© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
“T” Accounts�2 Columns
�Left Hand Column - Called “Debit”
�Right Hand Column - Called “Credit”
�Each Transaction Has a Debit In OneAccount and a Credit In Another
�Note: Debit or Credit Have NO ValueMeaning - Credit Is Not Always Good
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Ch 4-7© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
“T” Account Illustration
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Ch 4-8© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
“T” Account In Practice
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Ch 4-9© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Records
� Journals−Chronological Record of Transaction
�Transaction “Posted” to Ledgers
�Ledger−Group of Accounts
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Ch 4-10© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
TransactionRecord Flow
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Ch 4-11© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Accounting Conventions�Money Measurement
−All Transactions Recorded in Money
�Accounting Equivalence−Double Entry
−Assets = Liabilities + Net Worth
�Conservatism−Record the Lesser Value
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Ch 4-12© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
More Accounting Conventions
�Consistency−Always Record Transactions the SameWay
�Business Perspective−“Going Concern”−Transactions for the Sake of the Business
�Use Cost Not Value
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Ch 4-13© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Cash vs. Accrual
�Cash−Transaction When Money Exchanged
−Individuals and Very Small Businesses
�Accrual−Transaction When Earned
−Receipts at Shipment
−Payables When Material Received
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Ch 4-14© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Revenue vs. Expense
�Revenue−Money Received
−Increases to Net Worth
�Expense−Costs Incurred
−Decreases to Net Worth
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Ch 4-15© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Account Categories
�Asset
�Liability
�Net Worth
�Revenue
�Expense
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Ch 4-16© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Assets
�Things with Dollar Value
�Company Owns
�Current−For Short Period
�Fixed−Longer Than 1 Year
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Ch 4-17© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Liabilities�Debts the Company Owes
�Short Term−Accounts Payable
−Short Term Loans
�Long Term−Over 1 Year
−Mortgages, Long Term Loans
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Ch 4-18© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Net Worth
�Ownership Interest
�Capital Stock−Portion Paid In By Owners
�Retained Earnings−Accumulation of Profits and Losses
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Ch 4-19© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Revenues & Expenses
�Revenue−Sales Income Before Deduction of Costs
�Expenses−Costs of Doing Business
�Gross IncomeRevenue – Expense
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Ch 4-20© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Profit
�Gross Income – Taxes
�Recorded on Profit and LossStatement
�Contributes to Net Worth
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Ch 4-21© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Financial and Operating Equation
Eq 4.2
Debit Indicates: Credit Indicates:
Asset increase Asset decrease
Liability decrease Liability increase
Net worth decrease Net worth increase
Revenue decrease Revenue increase
Expense increase Expense decrease
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Ch 4-22© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Example of TransactionsTransaction Accounts
AffectedType ofAccount
OnAccount
Debit($)
Credit($)
1. Company founded$50,000 capital stock
Cash Asset Increase 50,000
Stock N-W Increase 50,000
2. Buy materialson account, $10,000
Inventory Asset Increase 10,000
Acct pay Liability Increase 10,000
3. Pay monthly renton shop, $1500
Rent Expense Increase 1,500
Cash Asset Decrease 1,500
Total 61,500 61,500
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Ch 4-23© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Example of T-Accounts
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Ch 4-24© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Balancing
�Number of Entries−Debits MUST EQUALMUST EQUAL Credits−For All Accounts (Not in Each Account)
�Footing−Find Difference Between Credit andDebit Totals In Each Account−Record In Positive Column
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Ch 4-25© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Finish Balancing
�Balance In Each Account−Debit
−Credit
−“Closed” (Debit = Credit)
�Balance the Books−Sum of All Debit Accounts MUSTEQUAL Sum of All Credit Accounts
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Ch 4-26© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Statements
�Balance Sheet−“Snap Shot” at a Point in Time
−Summary of Assets, Liabilities and NW
�Profit and Loss Statement−Income and Expense Summary
−Over a Specified Period of Time
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Ch 4-27© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Balance SheetXYZ Manufacturing Company
Balance SheetMay 31, 20xx
Assets = Liabilities
Cash $15,000 Bank loan $15,000
Inventory 10,000 Mortgage 15,000
Land 15,000
Fixed Assets 40,000 + Net worth
Stock 45,000 ______ Earnings 5,000 $80,000 $80,000
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Ch 4-28© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Profit and Loss Statement�Or Income and Expense Statement
�Profit: Excess of Revenue Over Cost−Including Depreciation and Taxes
�Loss: Excess of Cost Over Revenue−Including Depreciation
−Taxes Are Not Owed In Loss Situation
�Profit/Loss Included In Net Worth
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Ch 4-29© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
General Manufacturing Co.Profit-and-Loss Statement
June 30, 20xx
Income
Product income $11,000Expenses
Salaries $2,850
Rent 1,000
Advertising 800
Insurance 500
Depreciation 600
Total 5,750Gross profits $5,250Taxes @ 23.8% 1,250Profit (to retained earnings) $4,000
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Ch 4-30© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Capital Assets
�Money Spent−Larger Amounts
−Long Period of Use
�Decreasing Value Over Time−Physical Wear for Operation
−Obsolescence
−Regulations
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Ch 4-31© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Depreciation
�Accounting Charge−Provides for Recovery of Capital Costs
−Over Time
�NOT a Cash Expenditure (Transaction)−Money Spent for Initial Acquisition
�Deduction to Income Statement−Largely for Tax Purposes
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Ch 4-32© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Property (Assets)
�Life−Longer Than One Year−Economic Life ≠≠≠≠ Physical Life
�Tangible
� Intangible
�Real−Land Is Not Depreciated
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Ch 4-33© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Annual Depreciation
� In General
�Straight Line−Simplest
( ) PjPD j ×=
( )( )
1
kNjP =
Eq 4.3
( )( ) 1
sj FPkN
D −=Eq 4.4 Eq 4.5
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Ch 4-34© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Definitions
�Salvage Value−Value Left at End of Depreciation Life
−What Asset Could Be Sold for
�Book ValueInvestment – Salvage – Depreciation
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Ch 4-35© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Straight Line Example
Yr Cost –Salv. P(j), % Book Value Dj
0 $90,000 $100,000
1 20 100,000 $18,000
2 20 82,000 18,000
3 20 64,000 18,000
4 20 46,000 18,000
5 20 28,000 18,000 Total: $90,000
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Ch 4-36© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Accelerated Cost Recovery
�Costs Recovered More Quickly
�Allowed by Tax Laws−Certain Methods
−MACRS
�Better Approximates Actual Life Cycle
�Helps Company Profits and Operations
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Ch 4-37© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Accelerated Recovery Rates
Year 3-Year 5-Year 10-Year
1 33 20 102 45 32 183 22 24 164 16 145 8 126 107 88 69 410 2
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Ch 4-38© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Accelerated Recovery Example
Year Cost P(j) Book Value Dj
0 $100,000 $100,000
1 20 100,000 $20,000
2 32 80,000 32,000
3 24 48,000 24,000
4 16 24,000 16,000
5 8 8,000 8,000 Total: $100,000
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Ch 4-39© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Budgeting
�Written Plan
�For a Future Period
�Based On:−Cost Estimating
−Accounting Records
−Conjectures of Future Activity
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Ch 4-40© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Budget Types
�Appropriation−Proposed Expenditures−Usually for Big Items (Building, Equip.)
�Fixed Budget−For Departments
�Variable Budgets−Tied to Activity Levels−Highlights Variations from Planned
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Ch 4-41© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Cost vs.GeneralAccounts
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Ch 4-42© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Overhead
�Collect Costs−Not Tied More Directly to Production−Obtained from Budgets
�Distribute−Rational Apportioning to Products
�Allow Accurate Estimates & Quotes−Along With Direct Costs
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Ch 4-43© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
About Costs�Direct Labor Costs
−Uses Gross Hourly Cost Rate
�Utilization−Attribute of Machines−Percent of Possible Time In Use (≤100%)
�Efficiency−Attribute of Labor
−Level and Amount of Effort
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Ch 4-44© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Budget (Physical Assets)
Center No. ft2 Hours Hp Hours Dep Tooling
Light 20 3,200 49,300 443,000 $52,500 $200,000
Heavy 2 3,400 6,800 748,000 95,000 80,000
Assy 15 1,100 17,000 24,000 10,000
Testing 8 1,700 13,600 68,000 22,500 65,000
9,400 86,700 1,283,000 $170,000 $355,000
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Ch 4-45© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Budget (Labor Assets)
Center Wrkrs Wage($/hr)
Fringes($/hr)
Gross($/hr)
DirectHours
BudgetCost ($)
Light29 21.40 6.42 27.82
58,000 1,613,560
Heavy4 25.75 7.73 33.48
8,000 267,800
Assy10 18.65 5.60 24.25
20,000 484,900
Test8 20.05 6.02 26.07
16,000 417,040
Total 51 102,000 2,783,300
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Ch 4-46© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Collecting Overhead Costs
�Costs Tied to Production−But Not to Specific Products
�General Costs−Engineering
−Management
−Sales
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Ch 4-47© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Annual Overhead
Overhead BudgetFactory
Space $256,000Utilities $239,625Indirect labor $229,000Tooling services $469,600
Engineering
$247,000Management
$505,000
Total budget $1,946,225
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Ch 4-48© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Allocating Overhead Costs
�Single Overhead Rate (Traditional)−Divide Total Overhead Over SomeMeasure of Production
−e.g. Per Direct Labor Hour (Burden)
−Misleading, Does Not ApportionOverhead as It Is Used
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Ch 4-49© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Allocation Basis
�Collect Overhead Charges
�Determine the Concurrent Basis−Labor $, Hours, Prime Cost
�Calculate the Overhead Rate
�Apply the Rate
basis
charges overhead rate overhead =
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Ch 4-50© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Overhead Charges
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Ch 4-51© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Basis
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Ch 4-52© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Overhead Rate
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Ch 4-53© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Applying the Rate
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Ch 4-54© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Single Rate Example
Center
Est. Hours
Wage($/hr)
DirectLabor ($)
O/H($/hr)
O/HCosts ($)
Total($)
Light 7.31 27.82 203.36 24.23 177.12 380.49
Heavy 471.23 33.48 15,776.78 24.23 11,417.90 27,194.68
Assy 21.26 24.25 515.56 24.23 515.13 1,030.68
Test 7.93 26.07 206.74 24.23 192.14 398.88
Subtot 29,004.73
Mat’l($/unit)
$173.80
TotalMat’l
36,498.00
TotalCost
65,502.73
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Ch 4-55© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Productive Hour Cost
�Collect O/H Charges by Category
�Apportion O/H Charges by Use
�Examples−Maintenance to Equipment
−Management to Labor
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Ch 4-56© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Assignment to CentersCenter Dep Tooling Space Utilities
Light $52,500 $200,000 $87,149 $82,739
Heavy 95,000 80,000 92,596 139,703
Assy 10,000 29,957 4,482
Test 22,500 65,000 46,298 12,700
$170,000 $355,000 $256,000 $239,625
Allo-cation
MACRS Directlyassigned
Shop area HP Hr
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Ch 4-57© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Assignment to Centers (con’t)Center Indir Lab Tools Engr Mgmt Total O/H
Light $130,216 $162,146 $140,451 $292,763 $1,147,963
Heavy 17,961 273,781 19,373 48,589 767,003
Assy 44,902 8,784 48,431 87,980 234,538
Test 35,922 24,889 38,745 75,667 321,721
$229,000 $469,600 $247,000 $505,000 $2,471,225
Allo-cation
DLHr HP Hr DLHr DL$
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Ch 4-58© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Productive Hour Cost Rate
�PHC = Machine Rate + Direct Rate
Center Total O/HBudget
hrMachine
$/hrWages
$/hrPHC$/hr
Light $1,147,963 49,300 23.29 27.82 51.11
Heavy 767,003 6,800 112.79 33.48 146.27
Assy 234,538 17,000 13.80 24.25 38.04
Test 321,721 13,600 23.66 26.07 49.72 $2,471,225 86,700
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Ch 4-59© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Applying PHC RatesCenter Est Hrs PHC $/hr Cost, $/lot
Light 7.31 51.11 373.61
Heavy 471.23 146.27 68,926.81
Assy 21.26 38.04 808.73
Test 7.93 49.72 394.28
Subtotal 507.73 70,503.43
Material 36,498.00
Total 107,001.44
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Ch 4-60© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Methods Comparison
�Traditional Single Rate−Example Product Cost
�$65,503
�Productive Hour Cost Rate−Example Product Cost
�$107,001
�Significant Potential Error
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Ch 4-61© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Activity Based Costing (ABC)
�Volume Related Cost Drivers−Number of Product Units Built DirectlyEffects Costs
�Non-Volume Related Cost Drivers−Costs Not Effected by Number of Units
−Can Be Determined By Various Factors
−e.g. Engineering, Upper Management
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Ch 4-62© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
CostDrivers
Volume Non-volumeDirect labor hours Input
Machine hours Number of suppliers
Direct labor costs Number of engr changes
Production volume Number of sales orders
Kilowatt hours Output
Utilities Number of products Inventory levels Defect and scrap levels Process Number of schd changes Amount of rework Downtime Number of material moves
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Ch 4-63© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Calculation
�Sum Up Costs By Categories
( ) oib
oii
b
hibihipiuabc C
N
CM
N
ChChC Σ+
Σ+
Σ+Σ=
Eq 4.13
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Ch 4-64© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Variance
�Compare Budget to Actual Costs
�Variance Indicates Deviation from Plan
�Unfavorable Variance−Actual Costs Exceed Standard Costs
�Favorable Variance−Actual Costs Are Less Than Standard
−Not Always Beneficial to the Company
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Ch 4-65© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Evaluation of Variance�Unfavorable Variance
−Example Increased Cost Due to HigherProduction Than Planned
−Probably Results in More Profit for theCompany
�Favorable Variance−Could Be from Lower Number of Orders
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Ch 4-66© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Finding the Variance
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Ch 4-67© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Finding the Variance - Alt.
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Ch 4-68© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Material Variance
�Total Is the Same
�Depends on Order of Calculation
aeam
eeam
NCCV
CNNV
)(
)(' −=
−=Eq 4.14
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Ch 4-69© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Illustration
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Ch 4-70© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Use of Variances
�Monitor and Control−Find Causes of Variance
−Correct Causes or Budget Process
�Example−Extra Production
�Scrap or More Orders
−Scrap is Production Problem
−More Orders Is Sales Forecast Problem
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Ch 4-71© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Summary
�How Accounting Works and Fits
�Working With and Impact ofDepreciation
�What a Budget Is, What It’s Used For
�Determine and Apply Overhead Rates
�Use Variance for Monitor and Control