Identifying activity costs Linda Collins is manager in charge of cost analysis and LO 3, 4, 5 planning at Montex Company. Montex makes steel and brass pumps at its four plants located in Minnesota, Indiana, Illinois, and Michigan. Linda first examined the accounting and payroll records at the Minnesota plant. She organized payroll costs including benefits by department and analyzed expenditure records to iden¬ tify tools, supplies, and other costs with individual departments. After collecting the departmental cost information, Linda interviewed the departmental managers to identify what activities the personnel in their departments performed. The fol¬ lowing table shows the cost associated with two departments, machine setups and quality inspections, and the names of the managers of each department.

Edited versions of Linda's interviews with the two managers appear below. Linda first interviewed Roger Smith, manager of the machine setup de¬ partment, who has been with Montex Company for 26 years.
Linda Collins: How many people do you have in your department?
Roger Smith: I supervise eight people. We had seven until last June, but be¬ cause of the high workload we had to add Steve Swanson in the second half of last year. Steve is now a permanent worker in our department.
Linda Collins: What work do they do?
Roger Smith: All my people are responsible for setting up the machines.
Linda Collins: What drives the amount of work that they do?
Roger Smith: Well, setups are required each time they begin a production run. When the machine is available for the production run, our people go and set up the machine and inspect the first item produced to make sure that the machine is set up right.
Linda Collins: So the number of production runs or batches seems to drive your work, not how large a run is?
Roger Smith: Yes, that is really the case. Setting up the machine takes the same time, whether we produce 60 pumps or 5 pumps.
Linda Collins: Do the setups for all batches take about the same amount of time?
Roger Smith. No. There are big differences, depending on the product for which we have to set up the machines. Some products have very complex specifi¬ cations that require about three hours of setup time. Other products, such as PI 01, are much simpler, and we can set those up in only one-half hour.
Linda Collins: So the number of setup hours is perhaps the best measure of how much work the setup people perform for the manufacture of a product.
Roger Smith: Yes.
Linda Collins: How many hours of setup work can your crew perform in a year?
Roger Smith: Well, I expect about 1800 hours of productive time per year from each of my people. Last year we had 7.5 workers on average, so there were a total of 13,500 hours available for setup. This year we have 8 workers who will provide a total of 14,400 possible hours for setup.
Linda next interviewed David Carlson, an 18-year veteran at Montex now in charge of the quality inspection department.
Linda Collins: How many people do you have in the quality inspection de¬ partment?
David Carlson: I have 12 people in addition to myself. Three of them are re¬ sponsible for inspecting materials received from our suppliers The remaining nine are responsible for the final inspection of all our produc¬ tion. I supervise all of their work, so I spend about 25% of my time on re¬ ceipt inspection and 75% on final inspection.
214 Chapter 5 Linda Collins: Hmm. Let me see. Our payroll records indicate that there are only 11 people reporting to you in your department.
David Carlson: Yes, but Jon Wang from the production engineering depart¬ ment is now permanently assigned to me to help us with our final product inspections.
Linda Collins: (Checking her payroll records) That means I need to add an¬ other $38,000 in wages and benefits to your department and subtract it from the production engineering department. Your departmental costs, therefore, are $540,000.
David Carlson: Yes.
Linda Collins: Let me move on. What determines the amount of work for your people who inspect material receipts?
David Carlson: We inspect every lot of materials we receive, so I suppose it is the number of material receipts.
Linda Collins: Does the amount of inspection time depend on the size of the lot?
David Carlson: Not unless it is an exceptionally large lot that we receive only once or twice a year. You see, we randomly inspect a fixed quantity from each batch of incoming materials. It normally takes about one hour to record, inspect, and store each lot we receive.
Linda Collins: How many lots can you receive and inspect in a year with your present staff?
David Carlson: We can do up to 100 per week. Since the plant works 50 weeks in a year, I suppose that means that we can inspect 5000 materials receipts in a year.
Linda Collins: What triggers the work done by your people who are responsi¬ ble for the final inspection of your production?
David Carlson: Company policy requires us to inspect every unit we produce, so it is the total number of units produced at the plant.
Linda Collins: Do all products require the same number of inspection hours?
David Carlson: Yes. We follow the same procedures for every pump we produce.
Linda Collins: How many pumps can your crew inspect in a year?
David Carlson: We can inspect 5000 pumps in a week, so it means that we can inspect 250,000 pumps in a year. You should realize, of course, that during some weeks when the production level is low in the plant, we do not inspect 5000 pumps and sometimes during peak production periods we work overtime to get the job completed.
REQUIRED

(a) Using the information above, determine cost driver rates for machine se¬ tups, inspecting materials from suppliers, and inspecting units produced. Provide justification of your choice of cost drivers, and label your drivers as transaction, duration, or intensity drivers.

(b) Upon viewing the computed cost driver rates, Montex managers sug¬ gested exploring reducing inspection of materials purchased from suppli¬ ers. What advice would you give management as they pursue this option?

Transcribed Image Text:

Department Manager Wages and benefits MONTEX COMPANY Tools, supplies, and other costs Initial total costs Add: Engineer's wages Revised total costs Machine Setups Roger Smith $406,000 110,000 $516,000 Quality Inspections David Carlson $476,000 26,000 $502,000 0 38,000 $516,000 $540,000