Case Study: Prepare A Chavez Scatter Graph?
Question 1 (10 Marks) – Required:
1. Prepare a Chavez Scatter graph plot that puts the labor-hours on the x-axis and the overhead expenditure on the Y-axis. What insights are reveals by your scatter graph?
Labor Hours Overhead Expense
2,500 55,000
2,800 59,000
3,000 60,000
4,200 64,000
4,500 67,000
5,500 71,000
6,500 74,000
7,500 77,000
7,000 75,000
4,500 68,000
3,100 62,000
6,500 73,000
57,600 805,000
The interesting points about the behavior of overhead costs have been revealed by the Scatter graph:
- The relation between the overhead expense and labor hours is shown in a straight line. However the overhead expenses show a downward trend due to the increase of labor hours. This is mainly because of the increasing of returns to scale …show more content…
At the end of the year they would have a lower actual overhead. The overall effect of closing the over applied manufacturing overhead to cost of goods sold will result in decreasing the cost of goods sold and management would be happy with the decrease because it will increase the profit.
2. Should Terri Ronsin go along with the general manager’s request to reduce the direct labor hors in the predetermined overhead rate computation to 420,000 direct labor hours?
No, this is an unethical practice. It is violating their principle by devaluing, discrediting, outright lying, and many other aspects of her ethical oath. Inflating the overheads by under applying the direct labor hours would result in decreasing the cost of goods sold and overstating the costs of inventories. This would result in an increase in net operating income. By doing so, Terri Ronsin may show that their earnings are increasing but actually the growth of the company is decreasing.
Question 3: (15 Marks) – Required:
The company uses a plant wide overhead rate to apply manufacturing overhead cost to
1. Prepare a Chavez Scatter graph plot that puts the labor-hours on the x-axis and the overhead expenditure on the Y-axis. What insights are reveals by your scatter graph?
Labor Hours Overhead Expense
2,500 55,000
2,800 59,000
3,000 60,000
4,200 64,000
4,500 67,000
5,500 71,000
6,500 74,000
7,500 77,000
7,000 75,000
4,500 68,000
3,100 62,000
6,500 73,000
57,600 805,000
The interesting points about the behavior of overhead costs have been revealed by the Scatter graph:
- The relation between the overhead expense and labor hours is shown in a straight line. However the overhead expenses show a downward trend due to the increase of labor hours. This is mainly because of the increasing of returns to scale …show more content…
At the end of the year they would have a lower actual overhead. The overall effect of closing the over applied manufacturing overhead to cost of goods sold will result in decreasing the cost of goods sold and management would be happy with the decrease because it will increase the profit.
2. Should Terri Ronsin go along with the general manager’s request to reduce the direct labor hors in the predetermined overhead rate computation to 420,000 direct labor hours?
No, this is an unethical practice. It is violating their principle by devaluing, discrediting, outright lying, and many other aspects of her ethical oath. Inflating the overheads by under applying the direct labor hours would result in decreasing the cost of goods sold and overstating the costs of inventories. This would result in an increase in net operating income. By doing so, Terri Ronsin may show that their earnings are increasing but actually the growth of the company is decreasing.
Question 3: (15 Marks) – Required:
The company uses a plant wide overhead rate to apply manufacturing overhead cost to