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CHAPTER V DIRECT EXPENSES AND OVERHEAD SOLUTIONS TO BUSINESS APPLICATION CASES Case no. 1. KESHKALA BEAUTY PARLOUR 1.

Scattergraph

3,000 2,800 2,600 2,400 2,200 2,000 1,800

Cost

1,600 1,400 1,200 1,000 800 600 400 200 0 0 500 1,000 1,500 2,000 2,500 3,000 3,500

Number of Tanning Appointments

Yes, there appears to be a linear relationship.

2. Low High

(700, 1,758) (3,100, 2,790)

V = (Y2 Y1)/(X2 X1) = (Rs.2,790 Rs.1,758)/(3,100 700) = Rs.1,032/2,400 = Rs.0.43 per appointment F = Rs.2,790 Rs.0.43(3,100) = Rs.1,457 Y = Rs.1,457 + Rs.0.43X 3. Y = Rs.1,457 + Rs.0.43(2,500) = Rs.1,457 + Rs.1,075 = Rs.2,532

4. Regression output from spreadsheet program:


Regression Statistics Adjusted R Square 0.912674 Standard Error 107.4796 Observations 8 ANOVA df Regression Residual Total Intercept X Variable 1 1 6 7 Coefficients 1289.853 0.445459

SS 8566767.7 69311.21 925987.9 Standard Error 117.8339 0.051728

MS 856676.7 11551.87 t Stat 10.94637 8.611571

F 74.15915

P-value 3.45E-05 0.000135

Y = Rs.1,289.85 + Rs.0.45X 5. Y = Rs.1,289.85 + Rs.0.45(2,500) = Rs.1,289.85 + Rs.1,125 = Rs.2,414.85

Case 2 CIVIL MEDICAL CLINIC 1. Salaries, nursesfixed Aidesfixed Labouratorymixed Pharmacymixed Depreciationfixed Laundryvariable Administrationfixed Lease (equipment)fixed

2. Lab: V = (Y2 Y1)/(X2 X1) = (Rs.117,500 Rs.110,000)/(2,250 2,100) = Rs.50 F = Y2 VX2 = Rs.117,500 (Rs.50)(2,250) = Rs.5,000 Pharmacy: V = (Y2 Y1)/(X2 X1) = (Rs.32,500 Rs.31,000)/(2,250 2,100) = Rs.10 F = Y2 VX2 = Rs.32,500 (Rs.10)(2,250) = Rs.10,000 3. Salaries Aides Laboratory Pharmacy Depreciation Laundry Administration Lease (equipment) Total cost Fixed Rs.6,000 1,200 5,000 10,000 11,800 12,000 30,000 Rs.76,000 Unit Variable Cost Rs.50 10 8 Rs.68

Thus, Y = Rs.76,000 + Rs.68X For 2,000 patient days, Y = Rs.76,000 + Rs.68(2,000) = Rs.212,000 The charge per patient day is computed as follows: Charge = Rs.76,000/2,000 + Rs.68 = Rs.38 (fixed) + Rs.68 (variable) = Rs.106

4.

For 2,500 patient days: Charge/day = Rs.76,000/2,500 + Rs.68 = Rs.30.40 + Rs.68 = Rs.98.40 The charge drops because fixed costs are spread over more days. Note: The concept of relevant range has less meaning in this problem because the center has been in existence for only two months. So, the fact that next months budgeted patient days is not between the number of patient days for the first two months cannot be helped. In a case like this, the manager will want to use the numerical results with caution, knowing that they are based on only two observations.

CASE NO. 3 RAJESH XEROX AND PRINT 1. Rs.35,000/5,000 = Rs.7.00 per DLH 2. Rs.85,000/5,000 = Rs.17.00 per DLH 3. Cost of job on May 20: Direct materials (100 Rs.0.015) Direct Labour (0.2 Rs.6) Applied overhead (0.2 Rs.7) Cost of job on June 20: Direct materials (100 Rs.0.015) Direct Labour (0.2 Rs.6) Applied overhead (0.2 Rs.17) Rs.1.50 1.20 3.40 Rs.6.10 Rs.1.50 1.20 1.40 Rs.4.10

4. Photocopying overhead rate = Rs.35,000/5,000 = Rs.7.00/DLH Computer-aided printing overhead rate = Rs.50,000/2,000 = Rs.25.00/MHr The use of two rates more accurately costs the jobs in this shop as it shows a better cause-and-effect relationship between activity and overhead cost.

CASE 5 DENIMS TAILORING 1. Single overhead rate = Rs.100,000/10,000 = Rs.10 per DLH

Cost of Hoboken job: Direct materials Rs.6,000 Direct Labour: Sewing (160 Rs.8) 1,280 Beading (400 Rs.12.50) 5,000 Overhead (560 Rs.10) 5,600 Total cost Rs.17,880 2. Design overhead rate = Rs.55,000/2,000 = Rs.27.50 Sewing overhead rate = Rs.42,000/7,000 = Rs.6.00 Beading overhead rate = Rs.3,000/1,000 = Rs.3.00 Cost of Hoboken job: Direct materials Rs.6,000 Direct Labour: Sewing (160 Rs.8) 1,280 Beading (400 Rs.12.50) 5,000 Overhead: Sewing (160 Rs.6) 960 Beading (400 Rs.3) 1,200 Total cost Rs.14,440 3. Clearly, much of the overhead cost is in the design department. However, not all jobs use the computer-assisted design services. Therefore, a single overhead rate (which averages in the costs of all three departments) will overcost those jobs which use relatively little of the expensive departments services and will undercost those jobs which use relatively more of the expensive departments services. Since price is based on cost, customers requiring just sewing and beading may take their business elsewhere.

CASE 6 JAY BANU 1. Single charging rate = (Rs.2,500/1,000) + Rs.0.50 = Rs.3 per gift Store Candles, Etc. 510 Dream Weaver Gift Shoppe Back-in-the-Saddle Westernwear Cuppa Java Gourmet Coffees Shoe You Number of Gifts 170 310 240 10 50 Charging Rate Rs.3 3 3 3 3 = Total Rs. 930 720 30 150

Danas Sportswear Penelopes Secret Total 2. Store Candles, Etc. Dream Weaver Gift Shoppe Back-in-the-Saddle Westernwear Cuppa Java Gourmet Coffees Shoe You Danas Sportswear Penelopes Secret Total Variable rate = Rs.0.50 per gift Store Candles, Etc. 585 Dream Weaver Gift Shoppe Westernwear Back-in-the-Saddle Cuppa Java Gourmet Coffees Shoe You Danas Sportswear Penelopes Secret Total

200 450 1,430 Number of Gifts 200 300 100 70 50 130 150 1,000

3 3

600 1,350 Rs.4,290 Allocated Fixed Amount* Rs. 500 750 250 175 125 325 375 Rs.2,500

Percent 20 30 10 7 5 13 15 100

*Allocated fixed amount = Percent Rs.2,500 Number of Gifts 170 310 240 10 50 200 450 1,430 Variable Fixed Total Amount + Amount = Charge Rs.85 Rs.500 Rs. 155 120 5 25 100 225 Rs.715 750 250 175 125 325 375 Rs.2,500 905 370 180 150 425 600 Rs.3,215

3.

The shops which actually use the gift-wrapping service less than anticipated would like the single charging rate. The single charging rate assigns less of the fixed cost to the shops using less of the service. Cuppa Java Gourmet Coffees originally anticipated having 70 gifts wrapped per month but actually had only 10 gifts wrapped. Under the single charging rate, Cuppa Java pays only Rs.30; under the dual charging rate, Cuppa Java pays Rs.180. The dual charging rate method is preferred by shops which use the service as much as or more than anticipated. Penelopes Secret had a much greater use for the service and would be charged Rs.600 under the dual rate but Rs.1,350 under the single rate.

4.

Irrespective of the charging rate method, James may be overcharging by overestimating his fixed costs. The space used by the gift-wrapping service is one of five vacant spaces. The opportunity cost of using it to wrap gifts is zero. Until the eleventh space is rented and there is an occupant for the twelfth, perhaps the fixed cost should include only the salary of the wrapper.

CASE 7 TRIBHUBAN SOCIETY 1. Clearly, some expenses pertain to women living in the house while others pertain to all members. In-house members use the second floor, most of the food, and most of the variable expenses. All members use the first-floor facilities, food for Monday night dinners, and cereal and milk for snacks. HCB must determine a fair method of allocating the costs since the sorority is a nonprofit entity and house bills in total must equal house costs. It is difficult to allocate the costs precisely to the two types of members given the sketchy nature of the data. Using a benefits-received approach, the following charging rates might be applied. In-house members: Use of second floor (Rs.240,000 Rs.40,000)/2 Use of first floor [(Rs.240,000 Rs.40,000)/2]0.6 Food* (Rs.1.01)(60)(20)(32) Variable expenses Total Rs.100,000 60,000 38,784 34,800 Rs.233,584

2.

Charging rate per in-house member per year: Rs.233,584/60 = Rs.3,893 *Cost per meal: Rs.40,000/{[40 + (60 20)] 32} = Rs.1.01

Out-of-house members: Use of first floor [(Rs.240,000 Rs.40,000)/2]0.4 Food (Rs.1.01)(32)(40) Total

Rs.40,000 1,293 Rs.41,293

Charging rate per out-of-house member per year: Rs.41,293/40 = Rs.1,032

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