Outside Environment, Inc. provides commercial landscaping services in San Diego. Sasha Cairns, thefirm’s owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzingthe firm’s costs, Cairns has developed the following preliminary cost estimates for each 1,000 squarefeet of landscaping.Cairns is quite certain about the estimates for direct material and direct labor. However, she is not ascomfortable with the overhead estimate. The estimate for overhead is based on the overhead costs thatwere incurred during the past 12 months as presented in the following schedule. The estimate of $18per direct-labor hour was determined by dividing the total overhead costs for the 12-month period($1,296,000) by the total direct-labor hours (72,000).Cairns believes that overhead is affected by total monthly direct-labor hours. Cairns decided to performa least-squares regression of overhead (OH) on total direct-labor hours (DLH).Required:1. Develop cost formula for overhead cost using least square regression method by constructingexcel spreadsheet.2. The overhead rate developed from the least-squares regression is different from Cairns’preliminary estimate of $18 per direct-labor hour. Explain the difference in the two overheadrates.3. Using the overhead formula that was derived from the least-squares regression, determine atotal variable-cost estimate for each 1,000 square feet of landscaping.4. Cairns has been asked to submit a bid on a landscaping project for the city governmentconsisting of 50,000 square feet. Cairns estimates that 30 percent of the direct-labor hoursrequired for the project will be on overtime. Calculate the incremental costs that should be included in any bid that Cairns would submit on this project. Use the overhead formula derivedfrom the least-squares regression.5. Should management rely on the overhead formula derived from the least-squares regression asthe basis for the variable overhead component of its cost estimate? Explain your answer.
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