Forecasting Overhead at Wagner Printers

Wagner Printers performs all types of printing, including custom work, such as advertising displays, and standard work, such as business cards. Market prices exist for standard work, and Wagner Printers must match or better these prices to get the business. The key issue is whether the existing market price covers the cost associated with doing the work. On the other hand, most of the custom work must be priced individually. Because all custom work is done on a job-order basis, Wagner routinely keeps track of all the direct labor and direct materials costs associated with each job. However, the overhead for each job must be estimated. The overhead is applied to each job using a predetermined (normalized) rate based on estimated overhead and labor hours. Once the cost of the prospective job is determined, the sales manager develops a bid that reflects both the existing market conditions and the estimated price of completing the job.

In the past, the normalized rate for overhead has been computed by using the historical average of overhead per direct labor hour. Wagner has become increasingly concerned about this practice for two reasons. First, it hasnt produced accurate forecasts of overhead in the past. Second, technology has changed the printing process, so that the labor content of jobs has been decreasing, and the normalized rate of overhead per direct labor hour has steadily been increasing. The file C11_03.xlsx shows the overhead data that Wagner has collected for its shop for the past 52 weeks. The average weekly overhead for the last 52 weeks is $54,208, and the average weekly number of labor hours worked is 716. Therefore, the normalized rate for overhead that will be used in the upcoming week is about per direct labor hour.

Questions:

1) Determine whether you can develop a more accurate estimate of overhead costs.

2) Wagner is now preparing a bid for an important order that may involve a considerable amount of repeat business. The estimated requirements for this project are 15 labor hours, 8 machine hours, $150 direct labor cost, and $750 direct material cost. Using the existing approach to cost estimation, Wagner has estimated the cost for this job as Wagner is now preparing a bid for an important order that may involve a considerable amount of repeat business. The estimated requirements for this project are 15 labor hours, 8 machine hours, $150 direct labor cost, and $750 direct material cost. Using the existing approach to cost estimation, Wagner has estimated the cost for this job as $2040(= 150 + 750 + (76 x 15)). Given the existing data, what cost would you estimate for this job?

Machine Hours Week 1 2 239 3 4 173 329 335 152 365 5 6 7 276 314 8 9 289 140 311 215 199 143 10 11 12 13 14 15 16 17 18 19 144 245 261 232 1128 361 191 20 21 22 23 24 1887 25 26 27 Overhead Labor Hours 534211 6951 44167 531 60085 839) 55181 379 44484 602 68154 807! 49415! 515) 63090 851) 55935, 7741 56159 7661 51862 5371 54799 642 42067 434) 49108 741 554671 995 53907: 675 64376 935) 48639 638 77800 54077 744 295211 180 43676 51639) 755) 57315 1014! 35410 3711 59348 758 47437 6621 494331 7211 55003 811) 57783 944 570841 11841 697591 10241 513151 772 52124 635 62643 6301 48950 417) 54092 665 585131 682 57237 1046 56184 887 65824 706) 44095; 520 55454 813 369271 3871 48322 444; 39093 725; 58789 875 70844 1026) 38749 407) 60821 815 65585 706! 77651 1231 28 29 30 31 32 33 34 35 36 37 172 254 187 244 181 280 185 172 229 176 159 290 162 244 286 246 257 286 228 194 437 204 261 179 265 144 2231 372 199 256 372 338 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52