Laramie Company Has a Traditional, Unit-Based Cost System

question 87

Essay

Laramie Company has a traditional, unit-based cost system. The Kansas City plant of Laramie produces eight different electronic products. Each year, 100,000 units of all products are produced. The demand for each product is about the same; thus, the average output for each product is 12,500 units. Although the products differ in complexity, each product uses about the same labor time and materials. The plant has used direct labor hours for years to assign overhead to products. The cost accounting department developed the following cost equation to help design engineers understand the assumed cost relationships. (The equation describes the relationship between total manufacturing costs and direct labor hours. The equation is supported by a coefficient of determination of 63 percent):
Y = $5,000,000 + $60X where X is the number of direct labor hours
The variable rate of $60 is broken down as follows:
Because of competitive pressures, product engineering was asked to redesign products to reduce the total cost of manufacturing. Using the above cost relationships, product engineering adopted the strategy of redesigning to reduce direct labor content. As each design was completed, an engineering change order was cut, triggering a series of events such as design approval, vendor selection, bill of materials update, redrawing of schematic, test runs, changes in setup procedures, development of new inspection procedures, and so on.
After one year of design change, the normal volume of direct labor was reduced from 125,000 hours to 100,000 hours, with the 100,000 units being built. Although each product differs in its labor content, the redesign efforts reduced the labor content for all products. On average, labor content per unit of product dropped from 1.25 hours per unit to 1 hour per unit. Fixed overhead, however, increased from $5,000,000 to $6,000,000.
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Definitions:

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Negative perceptions and evaluations one holds about themselves, often associated with low self-esteem and mental health challenges.

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The subjective experience of feeling more youthful than one's actual chronological age, often relating to physical health, vigor, or mental state.

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A feeling of disappointment about someone or something you previously respected or admired; disillusionment.