Roberts PB Cups Inc. produces and markets high quality peanut butter cups throughout the U.S. Because of their high quality the peanut butter cups traditionally sell for a significant premium over the other brands. For the most part, the company produces different size bags of peanut butter cups. Because of their niche market and focus on high quality, the company has stayed relatively small in the 35 years since it was originally founded. The owners, all members of the original founding family, have been reluctant to allow the company to grow significantly, fearing that they would be unable to maintain sufficient control over expanded production. They have long felt that without their personal oversight, quality would diminish and so would their unique market position. Recently, however, one of the Board members, Eugene Roberts, has become convinced that growth in the family would either require the company to expand or to deny some members of the family a part of the business. No one was in favor of pushing family members out, especially since most of the new members were the third generation coming of age and interested in the family business. Based on Eugene's recommendation and compelling evidence that their own incomes would soon decrease as ownership became spread among more family members, the Board voted to create a new department that would produce a line of specialty peanut butter cups. The new department's management team has been encouraged to focus on maintaining the company's reputation for high quality as its primary goal. The Board believes that cost efficiencies can be achieved once the new line is established and the new managers sufficiently trained. Traditionally, the company has focused on making peanut butter cups, and their process has been carefully handed down from Cup Master to cup maker to apprentice since inception. However, as more family members have decided to join the firm, Roberts's Board has found itself in need of specialized help that the family cannot always provide. For example, even though the Controller, Percy Roberts, is grandson of the founder, he can no longer do all the accounting himself. Thus, the company has been forced to hire several new accountants to provide the information they need. Percy sighed as he looked at the list of numbers in front of him. As the company controller, he had better things to do with his time than fight with these small details. While figuring out the cost breakdown was important to analysis and budgeting, it wasn't something that he should be wasting his time on. What he needed was an assistant. There was a knock on his door, and Percy looked up to see Lauren Roberts, the head of Human Resources standing there. "Lauren, what are you doing here?" he asked. "Bringing you a present, and from the look on your face, you look like you can use it," Lauren walked into the office followed by a young lady. "This," Lauren said gesturing behind her, "is Jennifer Haire, and she's your new staff accountant." "New staff accountant? I don't remember.... Oh wait," Percy smiled at the young lady. "I do remember. We talked about it after the last executive meeting, right after we discussed the creation of the new division. I said I was super busy, and you said that we didn't have anyone in the family interested in accounting." "Right," Lauren agreed. "So, we decided to look outside the family to find you some help. I sent you several emails asking what you were looking for in an assistant, but you never answered." Percy grimaced. "I assumed that since you were too busy to even answer my emails, I'd better get right on it. Anyway, Jennifer has just graduated with an undergraduate degree in accounting from High Point University. She doesn't have any experience yet, but she earned good grades and is excited to work in the same firm as several of her family members. Her dad is a Cup Master, with Roberts for over 20 years, Right, Jennifer?" The young lady nodded. "Yes, mam," she said in a polite voice. "My family has worked for Roberts since it was founded. When I went into accounting, I didn't think I would be able to work here, so I was really excited when a position opened up." "Well, that settles it," Lauren said with a nod. "I'll be in touch to make sure things are going well. Enjoy!" And with that, Lauren was gone. Percy stared at his new assistant for a few moments. "Um," she finally said, "I really wasn't prepared for this. Since accounting never gets any new hires, I started filtering Lauren's emails, so I had no idea that she was moving forward on finding me some help." Jennifer looked a little crestfallen. "But, that's okay," Percy went on quickly, "I do have a project ready for you to get started on." Jennifer immediately brightened up. "We need to break down our corporate costs so that we can do some analysis and get ready for the next budget. Here's the data." He handed her a spreadsheet. (This workbook can be found in the Roberts PB Cups \#1 spreadsheet also on Blackboard.) "Take the Cost Behavior spreadsheet that I gave you and add a column next to the amount. Classify each cost as a Variable, Fixed, or Mixed. Even though direct labor and direct materials are always variable, make a note of that anyway in your new column. Then move on to the overhead items." "How can I tell the difference between variable and mixed costs?" Jennifer asked. "Well, first you get the total direct labor hours per quarter from the Quarterly Labor Report, since that's our new cost driver. (You have a copy included in the Excel file). Then you divide the cost each quarter by the direct labor hours per quarter. Remember to use the total direct labor hours from all three levels of labor. If the quarterly cost per hour is constant, then it is a variable cost. If the cost per hour changes, then you have a mixed cost. With the mixed costs you run a regression analysis in Excel. The constant is the fixed portion and the coefficient is the variable portion. "Once you have classified all of the costs, I need you to also create a cost equation for each one. Do you remember what a cost equation is?" "Not really," Jennifer confessed. "Don't worry about it," Percy said. "We'll get you up to speed yet. A cost equation summarizes each cost so that you can predict future costs for budgeting or for calculating predetermined overhead rates. The basic setup looks like this." He wrote out the equation on a piece of paper: Total cost=fixed cost+(per-driver variable cost*number of drivers) "Oh," Jennifer said. "I've seen that before. I assume you want me to make you one of those as well?" "Not one, Jennifer. Several. I want one for each overhead cost. I need to be able to predict each type of cost for my budgets individually. But don't worry. We can easily add up results of each equation so that we get the total estimates for the period. Since the number of drivers will be same for each cost, you will only need two new columns in your table: one for the fixed component and one for the variable component for each cost." "And each equation will be different, right?" Jennifer interrupted, "I mean, for the fixed costs the variable portion will be zero and for the variable costs the fixed portion will be zero." "Right!" Percy continued. "When you are all done, add a row at the bottom called 'Total' and sum each of the two new columns. We can quickly use these figures to estimate any individual costs or total costs if we know how many direct labor hours we will have in a period. Actually... " he thought for a moment, "what we will need is a total for all costs, but a separate total for just overhead costs as well. Think you can handle that?" He sketched out an idea of what she had in mind. Jennifer nodded. "I'll get right on it." Percy poked her head into Jennifer's office a little while later. "How's it going?" "Just fine. I think I'm just about done with the cost equations." "Excellent! Then I just have one more job for you to do before calling it a day. I'm predicting that we will use 63,000 direct labor hours next year. Using your equations, estimate the total amount we will spend on manufacturing overhead and how much we will spend overall next year. After that's done, go ahead and call it a night and I'll see you tomorrow." Questions 1. Using the information from Percy's spreadsheet, calculate Roberts' total direct material cost for last year. 2. What was the company's total direct labor cost for last year? 3. What was the company's total MOH cost for last year? 4. What do you notice about the relationship between account numbers and your classifications? 5. Using the list of general ledger accounts and the direct labor report, determine which of Roberts' MOH costs are: a. Fixed b. Variable c. Mixed 6. Perform a regression analysis for all mixed costs. Identify which mixed cost are predicted best by direct labor and explain why. 7. Create a cost equation for each of the expenses. 8. Add up the fixed and variable components of your individual expense cost equations and create a total cost equation for: a. MOH only b. Total Production Costs 9. How much should Jennifer estimate Roberts' will spend on MOH next year if they use 63,000DL hours? 10. How much should Jennifer estimate Roberts' will spend on production costs next year if they use 63,000 DL hours? Later that afternoon, Jennifer was back in Percy's office with her completed analysis. Percy looked over her classifications, and then leaned back in his chair. "Good work. I figured a straightforward assignment like this would be a good way to get you started. Now, though, I need you to work on something a bit more challenging." Jennifer nodded, eager to impress her new boss. "As you can see, manufacturing overhead is a significant portion of the expenses at Roberts, but up until now we have just applied it to production using bag weight. Since all of our cups use the same ingredients and the work is very standardized, bag weight has been a reasonable measure for assigning most of our overhead costs to our cups." "Like a cost driver?" Jennifer asked. "We usually used direct labor hours in our cost accounting class." Percy nodded. "It is a cost driver, but for us bag weight has traditionally been a much better driver than direct labor hours. You see, a 10oz. bag takes three times as much materials, labor, and other inputs as a 3.3oz. bag does, and 20oz. bag takes twice as much as a 10oz. bag. Since all cups are manufactured using the same basic processes, this has worked fairly well." He shook his head. "But, now we are developing a new specialty cup division, so bag weight might not be the best driver anymore. A 10oz. specialty bag will absorb more inputs and resources than a 10oz. regular bag. Because of the change, we are going to have to start using direct labor hours as our driver, at least for now. "Anyway, because of the change, all of my cost equations are now wrong, so I need you to classify these overhead costs as variable, fixed, and mixed and then calculate the cost equation for each one." Jennifer looked again at her spreadsheet. "Why do you need cost equations for each cost? In school we just did them for total overhead." Percy smiled. "You know, that's a great way to estimate total costs for next year, but it doesn't work well for budgeting purposes." Seeing Jennifer's confused look, she continued. "Assume that we pay a base fee for our phone service, plus $0.06 per minute. That's a mixed cost, since it has both fixed and variable components. So if I renegotiated our phone contracts, it could change both my fixed cost and my variable cost estimates. It's easy to incorporate those changes into the equation for the phone service cost, but it can get confusing to do it for a total equation, especially since some costs change every year while others stay constant. The changes can also start to offset each other." Jennifer nodded. "I get it," she said. "If you have it all broken down you can just change each component, then add them all up...." "And you get the total fixed and variable estimates for the period." Percy finished. Okay. I'Il get started on those classifications, but," Jennifer paused, I don't think that I have enough information here to do that. I mean, I know the DM and DL are variable by definition, but without being able to see how the overhead costs changed with production, I have no way of knowing if they are fixed, variable, or mixed." Percy smiled. Good catch. You do need more data, but I'm afraid I haven't gathered it all for you this time. You'll have to get what you need out of our general ledger, which will not only save me some time, but it will also give you a chance to get to know our books a little bit." He handed her the general ledger printout. (You have a copy included in the Excel file) Also, remember that those costs that don't change based on production are fixed. Those are the easiest to find