Bay-land Manufacturing has been using activity- based costing to determine the cost of product B- 190. One of the activities, “ Inspection,” occurs just before the product is finished. Bayland inspects every 10th unit and has been using “ number of units inspected” as the cost driver for inspection costs. A significant component of inspection costs is the cost of the test kit used in each inspection.

Meena Ley, the line manager, is wondering if inspection labor- hours might be a better cost driver for inspection costs. Meena gathers information for weekly inspection costs, units inspected, and inspection labor- hours as follows.

Meena runs regressions on each of the possible cost drivers and estimates these cost functions:
Inspection costs = $ 772 + ($ 2.04 * Number of units inspected)
Inspection costs = $ 988 + ($ 19.47 * Inspection labor@ hours)

Requird
1. Explain why number of units inspected and inspection labor- hours are plausible cost drivers of inspection costs.
2. Plot the data and regression line for units inspected and inspection costs. Plot the data and regression line for inspection labor- hours and inspection costs. Which cost driver of inspection costs would you choose? Explain.
3. Meena expects inspectors to work 120 hours next period and to inspect 1,500 units. Using the cost driver you chose in requirement 2, what amount of inspection costs should Meena budget?
4. What, if any, are the implications of Meena choosing the cost driver you did not choose in requirement 2 to budget inspectioncosts?

Transcribed Image Text:

Week Units Inspected Inspection Labor-Hours Inspection Costs 1,700 700 2,100 2,700 2,300 1,000 1,200 190 80 230 240 210 70 130 $4,000 2,100 4,900 6,300 5,700 3,100 3,200 4