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 35 additional channels and two movie channels; and a premium package, which is the basic package plus 55 additional channels and six 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 $32 $60 $90 Unit costs: Directly traced $6 $18 $36 Driver traced $4 $8 $12 Allocated $20 $26 $30 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. March's 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. March's 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: 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. March's performance is fairly typical of what has been happening over the past two years. The Phone Division, however, another matter. Its overall profit performance has been declining. Two years ago, income before income taxes had been about 25 percent of sales. March's 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 12,000 21,000 Plant supervision Manufacturing engineering Sales commissions Salary, sales supervisor 120,000 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 ar ending). Supplies are accounted for separately from materials. CTe's Phone Division had sales totaling $1,170,000 for March. Based on March's results, Bryen decided meet with three of the Phane Division's managers: Kim Breashears, divisional manager; Jacob Carder, divisional controller; and Larry Hartley, sales manager. A transcript of their recorded conversation is given next: Bryce: "March's profit performance is down once again, and I think we need to see if we can identify the problem and correct it-before it's too late. Kim, what's your assessment of the situation? Kim: "Foreign competition eating us alive-selling phones at a lower price and high quality. If we could lower our prices by 10 to 15 percent, I think that we'd regain most of our lost market share. But we also need to make sure that the quality of our products meets that of our competitors. We are spending a lot of money each month on inspection, rework, and warranties. I'd like to see these costs cut by at least 50 percent. If we could do that by improving quality, then customers would be more satisfied with our products, and we would not only regain our market share but increase it." Larry: "They're right. If we could lower our prices by 10 to 15 percent, I think that we'd regain most of our last market share. But we also need make sure that the quality of our products meets that of our competitors. As you know, we are spending a lot of money each month on rework and warranties. That warries me. I'd like to see that warranty cost cut by 70 to 80 percent. If we could do that, then customers would be more satisfied with our products, and I bet that we would not Only regain our market share but increase it." Jacob: "Lawering prices without lowering per-unit costs will not help us increase our profitability. I think we need to improve our cost accounting system. I am not confident that we really know how much each of our product lines is costing us. It may be that we are overpricing some of our units because we are overcasting them. We may be underpricing ather units. Larry: "This sounds promising-especially if the overcasting is for some of our high-volume lines. A price decrease for these products would make the biggest difference and if we knew they were over-costed, then we could offer immediate price reductions." Bryce: Jacob, I need more explanation. We have been using the same cost accounting system for the last 10 years. Why would it be a problem?" Jacob: "I think that our manufacturing environment has changed. Over the years, we have added a lot of different product lines. Some of these products make very different demands on our manufacturing overhead resources. We trace-or attempt to trace-overhead costs to the different products using direct labor cost, a unit-based cost driver. We may be doing more allocation than tracing. If so, then we probably don't have a very good idea of our actual product costs. Also, as you know, with the way computer technology has changed over time, it is easier and cheaper to collect and use detailed information, information that will allow us to assign costs more accurately." Bryce: "This may be something we should explore. Jacob, what do you suggest?" Jacob: "If we want more accurate product costs and if we really want to get in the cost reduction business, then we need to understand how costs behave. In particular, we need to understand activity cost behavior. Knowing what activities we perform, why we perform them, and how well we perform them will help us identify areas for improvement. We also need to know how the different products consume activity resources. What this boils down to is the need to use an activity-based see if direct labor management system. But before we jump into this, we need some idea of whether non-unit-based drivers add anything. Activity-based management is not an inexpensive undertaking. So I suggest that we do a preliminary study cost is adequate for tracing. If not, then maybe some non-unit-drivers might be needed. In fact, if you would like, I can gather same data that will provide some evidence on the usefulness of the activity-based approach." Bryce: "What do you think, Kim? It's your division." Kim: "What Jacob has said sounds promising. I think he should pursue it and do so quickly. I also think that we need to look at improving our quality. It sounds like we have a problem there. If quality could be improved, then our costs will drop. I'll talk to our quality people. Jacob, in the meantime, find out for us if moving to an activity-based system is the way to go. How much time do you need? Jacob: "I have already been gathering data. I could probably have a report within two weeks." MEMO TO: Kim Breashears FROM: Jacob Carder SUBJECT: Preliminary Analysis 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 doesn't explain a lot of the variation. I then searched for other drivers-particularly non-unit driversthat 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 doesn't 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. Kim, you expressed the desire of reducing the costs of inspection, reworking, and warranties. In addition to the pilot study for one plant, I also collected information about these three activities for the division. For the inspection activity, we have 15 inspectors who are paid an average of $4,000 per month. Each inspector offers a practical inspection capacity of 2,000 hours per year. However, it appears that inspectors actually work only about 80 percent of those hours. Rework cost is simply the cost of replacing some faulty components and the associated direct labor. The rework cost per unit is predictable and constant per unit regardless of the product model. Warranty cost, on the other hand, involves the salaries of two technicians, with the remaining cost, the cost of replacement components, which is relatively constant per unit repaired. The technicians are paid $5,000 per month and provide 2,000 hours of service per year. Warranty service usually requires 3,600 technician hours per year. 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. Kim, you expressed the desire of reducing the costs of inspection, reworking, and warranties. In addition to the pilot study for one plant, I also collected information about these three activities for the division. For the inspection activity, we have 15 inspectors who are paid an average of $4,000 per month. Each inspector offers a practical inspection capacity of 2,000 hours per year. However, it appears that inspectors actually work only about 80 percent of those hours. Rework cost is simply the cost of replacing some faulty components and the associated direct labor. The rework cost per unit is predictable and constant per unit regardless of the product model. Warranty cost, on the other hand, involves the salaries of two technicians, with the remaining cost, the cost of replacement components, which is relatively constant per unit repaired. The technicians are paid $5,000 per month and provide 2,000 hours of service per year. Warranty service usually requires 3,600 technician hours per year. After receiving the memo, Kim was intrigued, both by the activity-based costing pilot study and by the potential savings for the division by improving quality. 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 plant's 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 Expected activity demands: Regular Model Deluxe Model Units completed 100,000 40,000 Direct labor dollars $875,000 $375,000 Number of moves 7,200 10,800 Inspection hours 6,000 18,000 Rework hours 1,900 1,900 Required: 1. Answer the following regarding the product costing system of the Cable Service Division: a. Complete the following table with the appropriate product costs for the Cable Service Division: Round the answers to two decimal places. Basic Enhanced Premium Product cost for pricing $ Product cost for cost of services sold The product cost for the includes all production, marketing, and customer service costs. There may be, and very likely is, very little R&D function in the Cable Service Division. Thus, this unit cost could be used for other managerial objectives, such as product mix decisions and strategic and tactical profitability analysis. The cost includes only production costs; complying with external financial reporting guidelines is the primary managerial objective of this method. b. Allocation relies on: exclusive physically observable causal relationships to assign costs. causal factors to assign costs. assumed linkages or convenience to assign costs. none of the above. d. Driver tracing relies on: e. Based on how costs are assigned, do you think that the Cable Service Division is using a functional-based or an activity-based costing system? 2. Prepare an income statement for the Cable Service Division for March. Cable Service Division Income Statement For the Month of March 2. Prepare an income statement for the Cable Service Division for March. Cable Service Division Income Statement For the Month of March Accounts payable Accounts receivable Cash Sales revenue Supplies Prepare an income statement for the Phone Division for March. Phone Division Income Statement For the Month of March Beginning finished goods inventory Cash Sales Selling expenses Supplies Goods available for sale $1 For the income statement associated with the Phone Division, include a supporting cost of goods manufactured statement. For the income statement associated with the Phone Division, include a supporting cost of goods manufactured statement. Phone Division Statement of Cost of Goods Manufactured For the Month of March Direct materials: Beginning inventory Beginning work in process Ending work in process Manufacturing engineering Sales revenue Direct materials used Direct labor Overhead: Total manufacturing costs added: Cost of goods manufactured 3. Review Exhibit 2.5. Now consider the concern that Jacob has expressed about the costing practices of the Phone Division. Also consider the directives that Kim gave Jacob and his resulting actions. Now answer the following: a. What is Jacob attempting to measure? Jacob is primarily focused on th the Phone Division. He wants to ensure that the unit costs accurate and meaningful. b. Why is he attempting to mea product costing model regular and deluxe model Jacob wants to measure unit cost so that better pricing decisions can be made and so that the division better understand how to costs to improve profitability. c. How is it currently being measured, and how will the measurement approach change? allocation than tracing and that the unit overhead cost The current costing model assigns prime costs by direct tracing and overhead costs using a Jacob is arguing that the single driver is really overcosting some products, leading to overpricing those products. He is suggesting that activity-based costing will likely lead to more accurate cost assignments. d. Where did Jacob get the data needed to carry out the proposed analyses? Jacob gathered a sample of data from one of the division's phone plants. e. Which analytic methods did Jacob use or propose to be used? Jacob used analysis to show that direct labor cost, the single unit-level driver, explain much of the variability in overhead cost. He also used the same method to show that a non-unit-level driver, 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 35 additional channels and two movie channels; and a premium package, which is the basic package plus 55 additional channels and six 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 $32 $60 $90 Unit costs: Directly traced $6 $18 $36 Driver traced $4 $8 $12 Allocated $20 $26 $30 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. March's 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. March's 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: 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. March's performance is fairly typical of what has been happening over the past two years. The Phone Division, however, another matter. Its overall profit performance has been declining. Two years ago, income before income taxes had been about 25 percent of sales. March's 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 12,000 21,000 Plant supervision Manufacturing engineering Sales commissions Salary, sales supervisor 120,000 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 ar ending). Supplies are accounted for separately from materials. CTe's Phone Division had sales totaling $1,170,000 for March. Based on March's results, Bryen decided meet with three of the Phane Division's managers: Kim Breashears, divisional manager; Jacob Carder, divisional controller; and Larry Hartley, sales manager. A transcript of their recorded conversation is given next: Bryce: "March's profit performance is down once again, and I think we need to see if we can identify the problem and correct it-before it's too late. Kim, what's your assessment of the situation? Kim: "Foreign competition eating us alive-selling phones at a lower price and high quality. If we could lower our prices by 10 to 15 percent, I think that we'd regain most of our lost market share. But we also need to make sure that the quality of our products meets that of our competitors. We are spending a lot of money each month on inspection, rework, and warranties. I'd like to see these costs cut by at least 50 percent. If we could do that by improving quality, then customers would be more satisfied with our products, and we would not only regain our market share but increase it." Larry: "They're right. If we could lower our prices by 10 to 15 percent, I think that we'd regain most of our last market share. But we also need make sure that the quality of our products meets that of our competitors. As you know, we are spending a lot of money each month on rework and warranties. That warries me. I'd like to see that warranty cost cut by 70 to 80 percent. If we could do that, then customers would be more satisfied with our products, and I bet that we would not Only regain our market share but increase it." Jacob: "Lawering prices without lowering per-unit costs will not help us increase our profitability. I think we need to improve our cost accounting system. I am not confident that we really know how much each of our product lines is costing us. It may be that we are overpricing some of our units because we are overcasting them. We may be underpricing ather units. Larry: "This sounds promising-especially if the overcasting is for some of our high-volume lines. A price decrease for these products would make the biggest difference and if we knew they were over-costed, then we could offer immediate price reductions." Bryce: Jacob, I need more explanation. We have been using the same cost accounting system for the last 10 years. Why would it be a problem?" Jacob: "I think that our manufacturing environment has changed. Over the years, we have added a lot of different product lines. Some of these products make very different demands on our manufacturing overhead resources. We trace-or attempt to trace-overhead costs to the different products using direct labor cost, a unit-based cost driver. We may be doing more allocation than tracing. If so, then we probably don't have a very good idea of our actual product costs. Also, as you know, with the way computer technology has changed over time, it is easier and cheaper to collect and use detailed information, information that will allow us to assign costs more accurately." Bryce: "This may be something we should explore. Jacob, what do you suggest?" Jacob: "If we want more accurate product costs and if we really want to get in the cost reduction business, then we need to understand how costs behave. In particular, we need to understand activity cost behavior. Knowing what activities we perform, why we perform them, and how well we perform them will help us identify areas for improvement. We also need to know how the different products consume activity resources. What this boils down to is the need to use an activity-based see if direct labor management system. But before we jump into this, we need some idea of whether non-unit-based drivers add anything. Activity-based management is not an inexpensive undertaking. So I suggest that we do a preliminary study cost is adequate for tracing. If not, then maybe some non-unit-drivers might be needed. In fact, if you would like, I can gather same data that will provide some evidence on the usefulness of the activity-based approach." Bryce: "What do you think, Kim? It's your division." Kim: "What Jacob has said sounds promising. I think he should pursue it and do so quickly. I also think that we need to look at improving our quality. It sounds like we have a problem there. If quality could be improved, then our costs will drop. I'll talk to our quality people. Jacob, in the meantime, find out for us if moving to an activity-based system is the way to go. How much time do you need? Jacob: "I have already been gathering data. I could probably have a report within two weeks." MEMO TO: Kim Breashears FROM: Jacob Carder SUBJECT: Preliminary Analysis 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 doesn't explain a lot of the variation. I then searched for other drivers-particularly non-unit driversthat 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 doesn't 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. Kim, you expressed the desire of reducing the costs of inspection, reworking, and warranties. In addition to the pilot study for one plant, I also collected information about these three activities for the division. For the inspection activity, we have 15 inspectors who are paid an average of $4,000 per month. Each inspector offers a practical inspection capacity of 2,000 hours per year. However, it appears that inspectors actually work only about 80 percent of those hours. Rework cost is simply the cost of replacing some faulty components and the associated direct labor. The rework cost per unit is predictable and constant per unit regardless of the product model. Warranty cost, on the other hand, involves the salaries of two technicians, with the remaining cost, the cost of replacement components, which is relatively constant per unit repaired. The technicians are paid $5,000 per month and provide 2,000 hours of service per year. Warranty service usually requires 3,600 technician hours per year. 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. Kim, you expressed the desire of reducing the costs of inspection, reworking, and warranties. In addition to the pilot study for one plant, I also collected information about these three activities for the division. For the inspection activity, we have 15 inspectors who are paid an average of $4,000 per month. Each inspector offers a practical inspection capacity of 2,000 hours per year. However, it appears that inspectors actually work only about 80 percent of those hours. Rework cost is simply the cost of replacing some faulty components and the associated direct labor. The rework cost per unit is predictable and constant per unit regardless of the product model. Warranty cost, on the other hand, involves the salaries of two technicians, with the remaining cost, the cost of replacement components, which is relatively constant per unit repaired. The technicians are paid $5,000 per month and provide 2,000 hours of service per year. Warranty service usually requires 3,600 technician hours per year. After receiving the memo, Kim was intrigued, both by the activity-based costing pilot study and by the potential savings for the division by improving quality. 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 plant's 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 Expected activity demands: Regular Model Deluxe Model Units completed 100,000 40,000 Direct labor dollars $875,000 $375,000 Number of moves 7,200 10,800 Inspection hours 6,000 18,000 Rework hours 1,900 1,900 Required: 1. Answer the following regarding the product costing system of the Cable Service Division: a. Complete the following table with the appropriate product costs for the Cable Service Division: Round the answers to two decimal places. Basic Enhanced Premium Product cost for pricing $ Product cost for cost of services sold The product cost for the includes all production, marketing, and customer service costs. There may be, and very likely is, very little R&D function in the Cable Service Division. Thus, this unit cost could be used for other managerial objectives, such as product mix decisions and strategic and tactical profitability analysis. The cost includes only production costs; complying with external financial reporting guidelines is the primary managerial objective of this method. b. Allocation relies on: exclusive physically observable causal relationships to assign costs. causal factors to assign costs. assumed linkages or convenience to assign costs. none of the above. d. Driver tracing relies on: e. Based on how costs are assigned, do you think that the Cable Service Division is using a functional-based or an activity-based costing system? 2. Prepare an income statement for the Cable Service Division for March. Cable Service Division Income Statement For the Month of March 2. Prepare an income statement for the Cable Service Division for March. Cable Service Division Income Statement For the Month of March Accounts payable Accounts receivable Cash Sales revenue Supplies Prepare an income statement for the Phone Division for March. Phone Division Income Statement For the Month of March Beginning finished goods inventory Cash Sales Selling expenses Supplies Goods available for sale $1 For the income statement associated with the Phone Division, include a supporting cost of goods manufactured statement. For the income statement associated with the Phone Division, include a supporting cost of goods manufactured statement. Phone Division Statement of Cost of Goods Manufactured For the Month of March Direct materials: Beginning inventory Beginning work in process Ending work in process Manufacturing engineering Sales revenue Direct materials used Direct labor Overhead: Total manufacturing costs added: Cost of goods manufactured 3. Review Exhibit 2.5. Now consider the concern that Jacob has expressed about the costing practices of the Phone Division. Also consider the directives that Kim gave Jacob and his resulting actions. Now answer the following: a. What is Jacob attempting to measure? Jacob is primarily focused on th the Phone Division. He wants to ensure that the unit costs accurate and meaningful. b. Why is he attempting to mea product costing model regular and deluxe model Jacob wants to measure unit cost so that better pricing decisions can be made and so that the division better understand how to costs to improve profitability. c. How is it currently being measured, and how will the measurement approach change? allocation than tracing and that the unit overhead cost The current costing model assigns prime costs by direct tracing and overhead costs using a Jacob is arguing that the single driver is really overcosting some products, leading to overpricing those products. He is suggesting that activity-based costing will likely lead to more accurate cost assignments. d. Where did Jacob get the data needed to carry out the proposed analyses? Jacob gathered a sample of data from one of the division's phone plants. e. Which analytic methods did Jacob use or propose to be used? Jacob used analysis to show that direct labor cost, the single unit-level driver, explain much of the variability in overhead cost. He also used the same method to show that a non-unit-level driver