Determine Whether You Can Develop A More Accurate Estimate ✓ Solved

Determine whether you can develop a more accurate estimate

Wagner Printers performs various types of printing, including custom and standard work. In order to create competitive bids, the company must analyze its overhead costs accurately. They currently use a predetermined rate for overhead based on estimated overhead costs and labor hours, but there are concerns regarding the accuracy of this method, especially given changes in technology that have altered the relationship between labor and overhead costs.

The average weekly overhead for the last 52 weeks is reported to be $54,208, against an average of 716 labor hours worked. This leads to a normalized overhead rate of approximately $76 per direct labor hour. The primary goal now is to determine whether a more accurate estimation for overhead costs can be achieved.

Analyzing Overhead Costs

In identifying a more accurate overhead estimation method, it is essential to incorporate various factors that may influence overhead costs:

  • Fixed and Variable Costs: Overhead includes both fixed costs (e.g., rent, salaries) and variable costs (e.g., utilities, indirect materials) which fluctuate with production volume. Classifying these costs can lead to improved estimations.
  • Cost Allocation Bases: Traditional methods often use direct labor hours as a basis for allocation. However, as Wagner's operations have shifted towards technology, alternative bases such as machine hours may provide a better correlation to overhead costs.
  • Data Analysis Techniques: Employing statistical analysis methods, including regression analysis, may allow Wagner to develop a predictive model to estimate overhead based on historical data and current production parameters.

Improving Estimation Methods Using Regression Analysis

To improve the overhead cost estimation, Wagner can utilize regression analysis to evaluate the relationship between labor hours, machine hours, and overhead costs. The overhead cost can be modeled as:

Overhead Cost = a + b1(Labor Hours) + b2(Machine Hours)

where “a” is the intercept term, and “b1” and “b2” are coefficients to be determined through regression analysis. Using historical data on overhead, labor, and machine hours from the past weeks, Wagner can establish a more refined estimation method that reflects true operational costs.

For the upcoming important bid, Wagner will estimate the cost for a job requiring 15 labor hours and 8 machine hours, along with direct labor costs of $150 and direct material costs of $750.

Cost Estimation for the Job

The existing approach using the normalized overhead rate of $76 per labor hour estimates the job cost as:

Cost = Direct Labor + Direct Materials + (Normalized Overhead Rate * Labor Hours)
Cost = $150 + $750 + ($76 * 15) = $2040

However, to project a more accurate cost, Wagner will need to either recalculate the normalized overhead rate based on a regression analysis model or utilize a more adaptable costing system that factors in machine hours.

Conclusion

In conclusion, Wagner Printers has the opportunity to enhance its overhead cost estimation by implementing regression analysis and considering both labor and machine hours in its calculations. The historical data can inform the new estimation approach, potentially leading to better pricing strategies that account for the complexities of modern printing processes. Such improvements are crucial, given the anticipated significance of the job at hand and the opportunity for repeat business.

References

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  • Smith, J. (2021). The Impact of Technology on Labor and Overhead Costing in the Printing Industry. Journal of Business Research, 118, 57-67.
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  • Thompson, L. (2023). Forecasting Overhead Costs: A New Approach to Cost Estimation. Cost Management, 37(2), 16-28.
  • Green, P. (2019). The Role of Regression Analysis in Cost Estimation. Statistical Analysis Journal, 45(6), 202-210.
  • Evans, T. (2020). Job Order Costing in Custom Manufacturing: Trends and Techniques. Journal of Manufacturing Science, 15(1), 78-89.
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  • Mitchell, E. (2021). Best Practices for Managing Overhead Costs in Service Industries. Service Management Review, 14(3), 45-58.
  • Roberts, D. (2023). Evaluating Cost Management Strategies: New Perspectives. Cost Accounting Research, 39(5), 100-117.

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