Sawaya Co Ltd Of Japan Is A Manufacturing Company

Sawaya Co Ltd Of Japan Is A Manufacturing Company Whose Total Fact

Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below: Level of Activity Low High Direct labor-hours 50,000 Total factory overhead costs $14,250,000 $17,625,000.

Paper For Above instruction

Introduction

Understanding the relationship between factory overhead costs and direct labor-hours is fundamental in managerial accounting, as it helps in budgeting, cost control, and setting pricing strategies. Sawaya Co., Ltd., exemplifies a manufacturing company where total factory overhead costs vary significantly with changes in direct labor-hours. This paper explores the nature of these costs, the concept of variable and fixed costs within overhead, and the implications for cost management and decision-making.

Analysis of Overhead Costs

Based on the data provided, Sawaya’s overhead costs at different activity levels are as follows:

- At the low activity level: 50,000 direct labor-hours, with total factory overhead costs of $14,250,000.

- At the high activity level: presumably a higher number of direct labor-hours, with total factory overhead costs of $17,625,000.

The data indicates that factory overhead costs increase with activity level, suggesting a significant variable component. To analyze this relationship further, we employ the comprehension of variable and fixed costs.

Variable and Fixed Cost Components

The increase in overhead costs from $14,250,000 at 50,000 hours to $17,625,000 at the higher activity level indicates that overhead costs are partly variable with respect to direct labor-hours. To quantify these components, we can use the high-low method, which determines the variable cost rate per labor-hour and the fixed costs.

Calculations:

Variable cost per labor-hour = (High overhead - Low overhead) / (High hours - Low hours)

Assuming the high activity level corresponds to an unknown number of labor-hours, but if we consider the change in overhead costs relative to the change in activity, the variable cost rate can be approximated as:

Variable cost rate = ($17,625,000 - $14,250,000) / (Change in labor-hours)

If we assume the number of hours at high activity level is proportional to the increase observed, more data would be required for precise calculations. However, preliminary estimates suggest that overhead costs are primarily variable.

Implications for Cost Management

Recognizing that factory overhead costs vary with direct labor-hours has substantial implications for cost management:

1. Cost Planning and Budgeting: Understanding the variable portion allows the company to forecast overhead costs at different production levels accurately.

2. Pricing Strategies: Variable costs influence unit cost calculations, which are essential for setting competitive prices.

3. Efficiency Improvements: Identifying the cost behavior enables the company to control costs by optimizing labor-hours without disproportionately increasing overhead.

Cost Behavior and Decision-Making

The insight into overhead costs' behavior aids in strategic decision-making, such as evaluating production levels, outsourcing, or investment in automation to reduce overhead variability. Knowing the fixed component also assists in break-even analysis and assessing operational risk.

Conclusion

Sawaya Co., Ltd.'s factory overhead costs demonstrate variable behavior in relation to direct labor-hours, emphasizing the importance of cost analysis tools like the high-low method. Effective management of these costs requires continuous monitoring of cost drivers and implementing strategies that optimize labor efficiency and overhead control.

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