CableTech Bell Corporation (CTB) operates in the telecommunications industry. CTB has two divisions: the Phone Division and the Cable Service Division. The Phone Division manufactures telephones in several plants located in the Midwest. The product lines run from relatively inexpensive touch-tone wall and desk phones to expensive, high-quality cellular phones. CTB also operates a cable TV service in Ohio. The Cable Service Division offers three products: a basic package with 25 channels; an enhanced package, which is the basic package plus 15 additional channels and two movie channels; and a premium package, which is the basic package plus 25 additional channels and three movie channels.

The Cable Service Division reported the following activity for the month of March:

	Basic			Enhanced			Premium
Sales (units)		50,000			500,000			300,000
Price per unit		$16			$30			$40
Unit costs:
Directly traced		$3			$5			$7
Driver traced		$2			$4			$6
Allocated		$10			$13			$15

The unit costs are divided as follows: 70 percent production and 30 percent marketing and customer service. Direct labor cost is the only driver used for tracing. Typically, the division uses only production costs to define unit costs. The preceding unit product cost information was provided at the request of the marketing manager and was the result of a special study.

Bryce Youngers, the president of CTB, is reasonably satisfied with the performance of the Cable Service Division. Marchs performance is fairly typical of what has been happening over the past two years. The Phone Division, however, is another matter. Its overall profit performance has been declining. Two years ago, income before income taxes had been about 25 percent of sales. Marchs dismal performance was also typical for what has been happening this year and is expected to continue unless some action by management is taken to reverse the trend. During March, the Phone Division reported the following results:

Inventories:
Materials, March 1	$23,000
Materials, March 31	40,000
Work in process, March 1	130,000
Work in process, March 31	45,000
Finished goods, March 1	480,000
Finished goods, March 31	375,000
Costs:
Direct labor	$117,000
Plant and equipment depreciation	50,000
Materials handling	85,000
Inspections	60,000
Scheduling	30,000
Power	30,000
Plant supervision	12,000
Manufacturing engineering	21,000
Sales commissions	120,000
Salary, sales supervisor	10,000
Supplies	17,000
Warranty work	40,000
Rework	30,000

During March, the Phone Division purchased materials totaling $312,000. There are no significant inventories of supplies (beginning or ending). Supplies are accounted for separately from materials. CTBs Phone Division had sales totaling $1,170,000 for March.

Based on my initial analysis, I am confident that an ABC system will offer significant improvement. For one of our conventional phone plants, I regressed total monthly overhead cost on monthly direct labor cost using the following 15 months of data:

	Overhead			Direct Labor Cost
	$360,000				$110,000
	300,000				100,000
	350,000				90,000
	400,000				100,000
	320,000				90,000
	380,000				100,000
	300,000				90,000
	280,000				90,000
	340,000				95,000
	410,000				115,000
	375,000				100,000
	360,000				85,000
	340,000				85,000
	330,000				90,000
	300,000				80,000

The results were revealing. Although direct labor cost appears to be a driver of overhead cost, it really doesnt explain a lot of the variation. I then searched for other driversparticularly non-unit drivers that might offer more insight into overhead cost behavior. Every time a batch is produced, material movement occurs, regardless of the size of the batch. The number of moves seemed like a more logical driver. I was able to gather only 10 months of data for this. (Our information system doesnt provide the number of moves, so I had to build the data set by interviewing production personnel.) This information is provided next:

Materials-Handling Cost		Number of Moves
$80,000			1,500
60,000			1,000
70,000			1,250
72,000			1,300
65,000			1,100
85,000			1,700
67,000			1,200
73,500			1,350
83,000			1,400
84,000			1,700

The regression results were impressive. There is no question in my mind that the number of moves is a good driver of materials-handling costs. Using the number of moves to assign materials-handling costs to products would likely be better than the cost assignment using direct labor cost. Furthermore, since small batches use the same number of moves as large batches, we have some evidence that we may be overcosting our high-volume products.

I looked at one more overhead activity: inspecting products. We have 15 inspectors who are paid an average of $4,000 per month. Each inspector offers about 160 hours of inspection capacity per month. However, it appears that they actually work only about 80 percent of those hours. The drop in demand we have experienced explains this idle time. I see no evidence of variable cost behavior here. Im not exactly sure how to treat inspection cost, but I think that it is more related to inspection hours than direct labor cost. Some of the other overhead activities seem to be non-unit-level, as well enough, in fact, to be concerned about how we assign costs.

After receiving the memo, Kim was intrigued. She then asked Jacob to use the same phone plant as a pilot for a preliminary ABC analysis. She instructed him to assign all overhead costs to the plants two products (Regular and Deluxe models), using only four activities. The four activities were rework, moving materials, inspecting products, and a general catch-all activity labeled other manufacturing activities. From the special study already performed, she knew that materials handling and inspecting involved significant cost; from production reports, she also knew that the rework activity involved significant cost. If the ABC and unit-based cost assignments did not differ by breaking out these three major activities, then ABC may not matter.

Pursuant to the request, Jacob produced the following cost and driver information:

Activity	Expected Cost				Driver		Activity Capacity
Other activities		$2,000,000			Direct labor dollars			$1,250,000
Moving materials		900,000			Number of moves			18,000
Inspecting		720,000			Inspection hours			24,000
Reworking		380,000			Rework hours			3,800
Total overhead cost		$4,000,000

Prepare an income statement for the Phone Division for March.

Phone Division
Income Statement
For the Month of March
Sales		$fill in the blank 79c5a1071f8d007_2
Cost of goods sold:
Beginning finished goods inventory	$fill in the blank 79c5a1071f8d007_4
Add: Cost of goods manufactured	fill in the blank 79c5a1071f8d007_6
Goods available for sale	$fill in the blank 79c5a1071f8d007_7
Less: Ending finished goods inventory	fill in the blank 79c5a1071f8d007_9	fill in the blank 79c5a1071f8d007_10
Gross margin		$fill in the blank 79c5a1071f8d007_12
Less: Selling expenses		fill in the blank 79c5a1071f8d007_14
Income before income taxes		$fill in the blank 79c5a1071f8d007_16
dling cost using number of moves as the driver. Round the intercept to the nearest dollar and round the slope to the nearest cent. Formula one, overhead and direct labor cost: Y = $fill in the blank 9d9f3efe4010f94_8 + $fill in the blank 9d9f3efe4010f94_9 X Formula two, materials handling cost and number of moves: Y = $fill in the blank 9d9f3efe4010f94_10 + $fill in the blank 9d9f3efe4010f94_11 X