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ACCI 3 230 Cost Management Projects Cable Tech Bell Corporation ( [IB ) operates in the telecommunications industry . [ IB has two divisions : the Phone Division and the Cable Service Division . The Phone Division manufactures* telephones in a large plant in Ohio . The product lines run from relatively inexpensive touch - tone wall and desk phones to expensive , high quality cellular phones . [IB also operates a cable TV service in Ohio . The Cable Service Division offers three products : a basic package with 25 channels ; all* 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 attributable* $3 55 $7 95 Driver traced $2 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 CIB , 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 :" 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 1 130, 000 Finished goods , March 31 375, 000 Costs :` Direct labor* $ 1 17, 000 Plant and Equipment depreciation 50,000 Material handling 8.5, 000 Inspections 60. 000 Scheduling 30, 000 Power 30, 000 Plant supervision* 12 ,000 Manufacturing Engineering* 21 , 000Sales commissions 120,000 Salary, sales supervisor 10,000 Supplies 1?,000 Warranty work 40,000 Rework 30,000 During March, tlte Phone Division purchased materials totaling $312,000. There are no signicant inventories of supplies (beginning or ending). Supplies are accounted for separately from materials. CTB's Phone Division had sales totaling $1,170,000 for March. Based on hiarcb's results, Bryce decided to meet with three of the Phone 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 prot perfortnance is down once again, and I think we need to see if we can identify the problem and correct itbefore it's too late. Kim, what's your assessment of the situation?\" Kim: \"Foreign competition is eating us alive. They are coming in with lower-priced phones of comparable or higher quality than our own. I've talked with several of the retailers that carry our lines, and they say the same. They are convinced that we can sell more if we lower our prices." Larry: "They're right. 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. As you know, we are spending a lot of money each month on rework and warranties. That worries me. I'd like to see that warranty cost cut by T0 to 30 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.\" Jaoob: \"Lowering 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 condent 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 overcosting them. We may be underpricing other units.\" Larry: \"This sounds promisingespecially if the overcosting is for some of our high-volume lines. A price decrease for these products would make the biggest differenceand if we knew they were overoosted, 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 traceor attempt to traceoverhead 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 acnral 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 mformationinformation that will allow us to assign costs more acorrately." 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 or understand activity cost behavior. Knmving 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. 1|What this boils down to is the need to use an activityvbased management system. But before we jump into this, we need some idea of whether nonunit-based drivers add anything. Activity-based management is not an inexpensive undertaking. So I suggest that we do a preliminary study to see if direct labor cost is adequate for tracing. If not, then maybe some nonunit- drivers might he needed. In fact, it you would like, I can gather some data that will provide some evidence on the usefulness of the activity-based approach." Bryce: "What do you think, Kim? It's your division.\" Him: \"'What Jacob has said sounds promising. I think he should pursue it and do so quickly. Ialso 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, nd 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 prohably have a report within two weeks.\" MEMD TD: -Kim Breashears FROM: -Jacob Carder SUBJECT: -Pre]jmjnary Analysis Based on my initial analysis, I am condent that an ABC system will offer signicant improvement; I regressed total monthly overhead cost on monthly direct labor cost using the following 15 months of data: Overhead Direct Labor Cost $36!}, $110,000 300,130!) 100,000 1350,1300 90,000 400,000 100,000 320,000 00,000 300,000 100,000 300,000 00,000 200,000 00,000 340,000 05,000 410,000 115,000 335,000 100,000 300,000 05,000 340,000 05,000 330,000 00,000 300,000 00,000 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 driversparticularly 110th 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 doesn't provide* the number of moves , so I had to build the data set by interviewing production personnel . ) This information is provided next .` Material - Handling Cost Number of Moves $.80, 000 1. 500 50, 000 1, 000 70, 000 1 , 250 72.000 1 . 3.00 55, 000 1 , 100 85, 000 1 , 700 67, 000 1 , 200 73, 500 1, 350 $3, 000 1, 400 $4. 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 material - handling costs . Using the number of moves to assign material - 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* I'm 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 nonunit - level , as well- enough , in fact , to be concerned about how we assign costs . Required : Answer questions listed on the following page using EXCEL spreadsheet . Name Your* spreadsheet file # # # project ( where # # # is your assigned 3 - digital class number , e. g .` 0.0 0 project 1 .* /s ) . Submit completed EXCEL file via Blackboard Digital Dropbox by the due* 47. 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: 3:: + $:]x Formula two, materials handling cost and number of moves: Y=$:l+$:lx Comment on Jacob Ca rder's observations concerning the outcomes
