Berengar Ltd. is a small manufacturing company that pro- duces a variety of products using a number of different processes in different- sized job lots. For example, some products will be ordered in lots of ten or less, while others are produced in batches of up to 1,000 units.

Berengar will modify products as required by customer order and, thus, there is little product standardization. Despite the high level of product differentiation, Berengar has, up until now, used a single factory-wide overhead rate based upon direct labour hours. The company president, J.P. Blomer, believes that this over- simplified way of applying overhead has led to the loss of several contracts for long production runs (that is, large job lots) of two of Berengar's most popular products.

Blomer has consulted with the operations staff in the machining depart- ment to see whether they have any suggestions for alternate overhead bases (other than direct labour hours for their department). Because of the recent addition of five numerically controlled machines, the supervisor of scheduling has noticed that direct labour hours in the department have declined considerably. The chief production engineer for machining believes that, with the new machine environment, production overhead probably varies more with machine hours per batch and setup time than it does with the current overhead applica- tion base, direct labour hours.

Blomer asked the controller to run four regressions to assist in predicting overhead cost in the machining department. The four regressions were based on

1. Direct labour hours

2. Machine hours

3. Setup hours

4. Machine hours and setup hours

One problem that the controller had to deal with was that approximately 35 per- cent of departmental overhead consisted of various lump-sum monthly charges for central services such as personnel and power. The controller decided that these charges were justifiably an expense of running the machining department and left them in for the regression analyses. The results of the regressions (using the most recent 24 weeks of data, shown below) are given in Exhibit 3A-1.

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BERENGAR LTD. MACHINE DEPARTMENT DATA FOR REGRESSION ANALYSIS MOST RECENT 24 WEEKS OVERHEAD COST DIRECT LABOUR HOURS WEEK -2345678 (OH COST) $72,892 76,451 75,930 (DL HRS) MACHINE HOURS (MACH HRS) SETUP HOURS (SETUP HRS) 2,036 379 98 2,125 385 101 2,012 378 110 78,591 1,900 390 112 77,870 1,934 401 108 75,420 2.095 376 110 73,529 1,966 365 95 78,210 1,924 387 103 9 85,620 1,865 464 130 10 84,322 1,912 451 110 11 89,621 1,901 496 125 12 79,739 1,864 401 101 13 81,221 1,850 425 95 14 85,130 1,812 4561 102 15 83,550 1,800 446 110 16 79,985 1,712 398 114 17 87,870 1,718 485 135 18 90,565 1,741 502 129 19 89,032 1,622 491 142 20 87,979 1.639 487 110 21 86,646 1,641 479 124 22 90,772 1,628 516 99 23 85,542 1,598 472 125 24 90,159 1,597 508 160