Information:

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 signicant cost; from production reports, she also knew that the rework activity involved signif- icant 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

With this information: Solve the wrong answers within this question:

6. The Phone Division has been using the same cost accounting system for over 10 years. Explain why its cost accounting system may be outmoded. What factors determine when a new cost accounting system is warranted? The Phone Division has added a number of different products over the years. The different products seem to consume overhead resources in differentproportions. There is some belief that using only unit-based drivers is inadequate for assigning overhead costs. Furthermore, 10 years have passed since the current cost accounting system was adopted, information processing technology has advanced, and it is cheaper to operate more sophisticated cost accounting systems. Also, if the current system is overcosting the high-volume products as suggested, then bad pricing decisions are being made that could be very costly for the company-especially considering the increasedcompetition. Decreasedmeasurement costs and increased error costs are the major factors signaling the obsolescence of the current system and the need for a new system. For CTB, measurement costs have likely decreased. Evidence indicates that there may be bad cost assignments, and the cost of bad decisions has gone up. Taken together, a new system seems justified. 7. Using the method of least squares, calculate two cost formulas: one for overhead using direct labor cost as the driver, and one for materials handling 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: 105,838V 2.51 X Formula two, materials handling cost and number of moves 26,011 + 35.51 | V x Comment on Jacob Carder's observations concerning the outcomes Jacob's comments seem to be on target. Direct labor cost explains less than 40 percent of the variability in overhead cost-not enough to justify using Direct labor costas the only driver to trace overhead to individual products. The number of moves a non-unit driver, explains 90 percent of the materials-handling cost variability. Using the number of movesto assign materials-handling cost appears reasonable and certainly better than using direct labor cost to assign this cost. In fact, since small batches use the same msas large batches but much less labor, then large batches are receiving too much materials-handling cost. Thus, some evidence exists that high-volume products are overcosted v 8. How would you describe the cost behavior of the inspection activity? Assume that the quality control manager implements a program that reduces the number of defective units by 50 percent. Because of the improved quality, the demand for inspection hours will also drop by 50 percent. What is the potential monthly reduction in inspection costs? How did knowledge of inspection's cost behavior help? Inspection activity follows a step-cost function, with each step being defined by hours per year. Each step costs $432,000X Current total activity capacity is 24,000 X hours. Current demand for the activity is 19,200 | X hours. If the demand drops by 50 percent, then the new demand would be 12,000 X hours, unused capacity at this point will be 12,000 X hours. Thus, sl 36,000 can be saved per month. 9. Calulate the overhead cost per unit for each phone model using direct labor cost to assign all overhead costs to products. Overhead Cost per Unit Regular 28 6. The Phone Division has been using the same cost accounting system for over 10 years. Explain why its cost accounting system may be outmoded. What factors determine when a new cost accounting system is warranted? The Phone Division has added a number of different products over the years. The different products seem to consume overhead resources in differentproportions. There is some belief that using only unit-based drivers is inadequate for assigning overhead costs. Furthermore, 10 years have passed since the current cost accounting system was adopted, information processing technology has advanced, and it is cheaper to operate more sophisticated cost accounting systems. Also, if the current system is overcosting the high-volume products as suggested, then bad pricing decisions are being made that could be very costly for the company-especially considering the increasedcompetition. Decreasedmeasurement costs and increased error costs are the major factors signaling the obsolescence of the current system and the need for a new system. For CTB, measurement costs have likely decreased. Evidence indicates that there may be bad cost assignments, and the cost of bad decisions has gone up. Taken together, a new system seems justified. 7. Using the method of least squares, calculate two cost formulas: one for overhead using direct labor cost as the driver, and one for materials handling 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: 105,838V 2.51 X Formula two, materials handling cost and number of moves 26,011 + 35.51 | V x Comment on Jacob Carder's observations concerning the outcomes Jacob's comments seem to be on target. Direct labor cost explains less than 40 percent of the variability in overhead cost-not enough to justify using Direct labor costas the only driver to trace overhead to individual products. The number of moves a non-unit driver, explains 90 percent of the materials-handling cost variability. Using the number of movesto assign materials-handling cost appears reasonable and certainly better than using direct labor cost to assign this cost. In fact, since small batches use the same msas large batches but much less labor, then large batches are receiving too much materials-handling cost. Thus, some evidence exists that high-volume products are overcosted v 8. How would you describe the cost behavior of the inspection activity? Assume that the quality control manager implements a program that reduces the number of defective units by 50 percent. Because of the improved quality, the demand for inspection hours will also drop by 50 percent. What is the potential monthly reduction in inspection costs? How did knowledge of inspection's cost behavior help? Inspection activity follows a step-cost function, with each step being defined by hours per year. Each step costs $432,000X Current total activity capacity is 24,000 X hours. Current demand for the activity is 19,200 | X hours. If the demand drops by 50 percent, then the new demand would be 12,000 X hours, unused capacity at this point will be 12,000 X hours. Thus, sl 36,000 can be saved per month. 9. Calulate the overhead cost per unit for each phone model using direct labor cost to assign all overhead costs to products. Overhead Cost per Unit Regular 28