Material Sampling-Analyzing Direct Material Costs
You are reviewing a cost proposal, which includes an $800,200 direct material estimate. After initial examination of the proposal, you note that there are 500 material items, but you also note that 20 high-cost items account for $620,000 of the total. The remaining $180,200 is spread across 480 relatively small purchases.
Answer the following questions:
1. Examination of the 20 high-cost items (estimated at $620,000) shows that all are properly priced except one item. That item is overpriced by $20,000. What should be your objective for these 20 items?
2. After analyzing a sample of the remaining 480 items, you find that the sample is overpriced by six percent. Using this six percent decrement factor, what cost should you estimate for those items? Remember that the average sample item cost is 106 percent of what it ought to be.
3. Given your answers to Questions 1 and 2, what should you estimate for total material cost?