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

CTC 475 Review CTC 475 Review

Cost EstimatesCost Estimates Balance StatementBalance Statement

Snapshot in timeSnapshot in time Income StatementIncome Statement

Over a time periodOver a time period

CTC 475 CTC 475

Job Quotes & Present Job Quotes & Present Economy ProblemsEconomy Problems

ObjectivesObjectives

Know how to give job quotesKnow how to give job quotes Understand how to identify a present Understand how to identify a present

economy problemeconomy problem Know how to work present economy Know how to work present economy

problemsproblems

Job Quotes Job Quotes

Rate per Direct Labor HourRate per Direct Labor Hour

Percentage of Direct Labor CostPercentage of Direct Labor Cost

Percentage of Prime (Labor+Matl) Percentage of Prime (Labor+Matl) CostCost

Job QuotesJob Quotes

Must Prorate:Must Prorate:

LaborLabor MaterialMaterial OverheadOverhead

Job Quotes Example – Historical Job Quotes Example – Historical DataData

Direct Labor HoursDirect Labor Hours 48,00048,000

Direct Labor CostsDirect Labor Costs

Direct Labor RateDirect Labor Rate$480,000$480,000

$10 per hour$10 per hour

Direct Material CostDirect Material Cost $600,000$600,000

Total Overhead CostTotal Overhead Cost $360,000$360,000

Job Quotes ExampleJob Quotes Example

Determine quote using all 3 methods Determine quote using all 3 methods for a job that will need: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 Method 1: Rate per Direct Labor HourHour

Distribute overhead by labor hours:Distribute overhead by labor hours:

Rate = Ovhd/Labor Hrs. = Rate = Ovhd/Labor Hrs. = $360,000/48,000$360,000/48,000

=$7.50 per direct labor hour=$7.50 per direct labor hour

Method 1: Rate per Direct Labor Method 1: Rate per Direct Labor Hour – Job QuoteHour – Job Quote

Direct MaterialDirect Material $850$850

Direct Labor:Direct Labor:

40 hrs * $10/hr40 hrs * $10/hr$400$400

Overhead:Overhead:

40 hrs * $7.50 per hr40 hrs * $7.50 per hr$300$300

TotalTotal $1,550$1,550

Method 2: Rate per Direct Labor Method 2: Rate per Direct Labor CostCost

Distribute overhead by labor cost:Distribute overhead by labor cost:

Rate = Ovhd/Labor Cost = Rate = Ovhd/Labor Cost = $360,000/$480,000$360,000/$480,000

=75% =75%

Method 2: Rate per Direct Labor Method 2: Rate per Direct Labor Cost – Job QuoteCost – Job Quote

Direct MaterialDirect Material $850$850

Direct Labor:Direct Labor:

40 hrs * $10/hr40 hrs * $10/hr$400$400

Overhead:Overhead:

$400 * 75%$400 * 75%$300$300

TotalTotal $1,550$1,550

Methods 1 & 2Methods 1 & 2

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

Method 3: % of Prime CostMethod 3: % of Prime Cost

Distribute overhead by prime cost:Distribute overhead by prime cost:

Rate = Ovhd / Direct Labor + Direct Rate = Ovhd / Direct Labor + Direct Material Cost = $360,000/($480,000+Material Cost = $360,000/($480,000+$600,000)$600,000)

=33.3% =33.3%

Method 3: Rate per Prime Cost – Method 3: Rate per Prime Cost – Job QuoteJob Quote

Direct MaterialDirect Material $850$850

Direct Labor:Direct Labor:

40 hrs * $10/hr40 hrs * $10/hr$400$400

Overhead:Overhead:

$1250* 33.3%$1250* 33.3%$420$420

TotalTotal $1,670$1,670

Method 3Method 3

Gives different answer than method Gives different answer than method 1/21/2

Different companies use different Different companies use different methodsmethods

Most common is method 1Most common is method 1 Consulting firm I worked at– similar Consulting firm I worked at– similar

to method 2to method 2

Cost CentersCost Centers

Average overhead rates may not Average overhead rates may not work if you make products that are work if you make products that are very differentvery different

Can split costs among departmentsCan split costs among departments

i.e. architect dept., engineering dept.i.e. architect dept., engineering dept.

Job Quotes (w/ profit)Job Quotes (w/ profit)

Our previous examples did not include Our previous examples did not include profitprofit

Profit must be addedProfit must be added

Assume a job requires $500 worth of Assume a job requires $500 worth of material and 30 direct labor hours (@ material and 30 direct labor hours (@ $6/hr). Using a $3/hour overhead rate and $6/hr). Using a $3/hour overhead rate and a profit margin of 20%, determine the job a profit margin of 20%, determine the job quotequote

Job Quote Example (w/profit)Job Quote Example (w/profit)

Direct MaterialDirect Material $500$500

Direct Labor:Direct Labor:

30 hrs * $6/hr30 hrs * $6/hr$180$180

Overhead:Overhead:

$3*30 hours$3*30 hours$90$90

TotalTotal $770$770

Profit:Profit:

20%*$77020%*$770$154$154

Final Job QuoteFinal Job Quote $924$924

Time Value of MoneyTime Value of Money

Most of this course is based on the Most of this course is based on the fundamental concept that money has fundamental concept that money has a time valuea time value

Must take this concept into account Must take this concept into account since projects have different cash since projects have different cash flow patterns at different timesflow patterns at different times

Present Economy ProblemsPresent Economy Problems

Time is not a significant factorTime is not a significant factor

Conditions:Conditions:

No investment of capital No investment of capital

Long-term costs are the same for all Long-term costs are the same for all alternativesalternatives

Alternatives have identical resultsAlternatives have identical results

Example-Present EconomyExample-Present Economy A metal part can be machined on an A metal part can be machined on an

engine lathe (one at a time) or turret lathe engine lathe (one at a time) or turret lathe (many at a time) Material costs are the (many at a time) Material costs are the same regardless of the machine used.same regardless of the machine used.

Parts are produced in batches according to Parts are produced in batches according to the customer’s orderthe customer’s order

Based on the following cost data, what Based on the following cost data, what machine should be used for order sizes of machine should be used for order sizes of 25, 100 and 500 units?25, 100 and 500 units?

Cost DataCost Data

Turret LatheTurret Lathe Engine LatheEngine LatheSet-Up Time per Set-Up Time per OrderOrder

2 hours (every 2 hours (every 300 units)300 units)

negligiblenegligible

Direct Labor and Direct Labor and Machine time per Machine time per partpart

5 minutes5 minutes 10 minutes10 minutes

Direct Labor RateDirect Labor Rate $9.00 per $9.00 per hourhour

$7.50 per $7.50 per hourhour

Machine RateMachine Rate $15.00 per $15.00 per hourhour

$12.00 per $12.00 per hourhour

Cutting Tool Cost Cutting Tool Cost per Partper Part

$0.10 per unit$0.10 per unit $0.20 per unit$0.20 per unit

Turret Lathe CostsTurret Lathe CostsDirect Labor Direct Labor Cost per UnitCost per Unit

$9.00 per hr=$0.15 $9.00 per hr=$0.15 per minute * 5 per minute * 5 minutes per unit =minutes per unit =

$0.75 per unit$0.75 per unit

Machine Cost Machine Cost per unitper unit

$15.00 per $15.00 per hr=$0.25 per hr=$0.25 per minute * 5 minutes minute * 5 minutes per unit =per unit =

$1.25 per unit$1.25 per unit

Cutting Tool Cutting Tool Cost per unitCost per unit

$0.10 per unit$0.10 per unit

Setup Cost Setup Cost 2 hours/setup * 2 hours/setup * ($9+$15/hr)=($9+$15/hr)=

$48N $48N (where N is (where N is number of setups)number of setups)

Total Cost per Total Cost per OrderOrder

$2.10x+$48N $2.10x+$48N (where x is the (where x is the number of units and number of units and N is the number of N is the number of setups)setups)

Engine Lathe CostsEngine Lathe Costs

Direct Labor Direct Labor Cost per UnitCost per Unit

$7.50 per $7.50 per hr=$0.125 per hr=$0.125 per minute * 10 minute * 10 minutes per unit =minutes per unit =

$1.25 per unit$1.25 per unit

Machine Cost Machine Cost per unitper unit

$12.00 per $12.00 per hr=$0.20 per hr=$0.20 per minute * 10 minute * 10 minutes per unit =minutes per unit =

$2.00 per unit$2.00 per unit

Cutting Tool Cutting Tool Cost per unitCost per unit

$0.20 per unit$0.20 per unit

Total Cost per Total Cost per OrderOrder

$3.45x $3.45x (where x is (where x is the number of the number of units)units)

SummarySummary

Turret lathe costs less per unit but Turret lathe costs less per unit but has a high setup costhas a high setup cost

Engine lathe costs more per unit but Engine lathe costs more per unit but has no setup costshas no setup costs

When do I use which machine?When do I use which machine?

Comparison Costs Comparison Costs

UnitsUnitsEngine LatheEngine Lathe Turret LatheTurret Lathe

2525 $86.25$86.25 $100.50$100.50

100100 $345.00$345.00 $258.00$258.00

500500 $1,725.00$1,725.00 $1146.00$1146.00

Switchover occurs somewhere between 25 and 100 units (n=1 setup)

Determine breakeven point-MathDetermine breakeven point-Math

2.10x+48=3.45x2.10x+48=3.45x x=35 units (assumes N=1 setup)x=35 units (assumes N=1 setup)

Determine breakeven-graphicallyDetermine breakeven-graphically

Cost Comparison

$0

$100

$200

$300

$400

0 20 40 60 80 100

Units

To

tal

Co

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Engine

Turret

Next lectureNext lecture

Time value of $Time value of $ Simple vs. Simple vs.

Compound InterestCompound Interest Single Sum-Future Single Sum-Future

WorthWorth Single Sum-Present Single Sum-Present

WorthWorth