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

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

MEMO
TO:	Kim Breashears
FROM:	Jacob Carder
SUBJECT:	Preliminary Analysis

	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

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

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

	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

4. Using a regression program such as Microsoft Excel, calculate two cost formulas: (1) overhead using direct labor cost as the driver and (2) materials handling cost using number of moves as the driver. Based on the outcomes, answer the following: Round the intercept to the nearest dollar and round the slope to the nearest cent.

a. Formula one, Direct labor cost formula: Y = $fill in the blank f932b9fe504ff90_16 + $fill in the blank f932b9fe504ff90_17 X

Intercept (rounded to nearest dollar): $fill in the blank f932b9fe504ff90_18

Slope (Coefficient 1, rounded to the nearest cent): $fill in the blank f932b9fe504ff90_19

R Square (rounded to two decimal places): $fill in the blank f932b9fe504ff90_20

b. Formula for material handling cost (based on number of moves): Y = $fill in the blank f932b9fe504ff90_21 + $fill in the blank f932b9fe504ff90_22 X

Intercept (rounded to nearest dollar): $fill in the blank f932b9fe504ff90_23

Slope (Coefficient 1, rounded to the nearest cent): $fill in the blank f932b9fe504ff90_24

R Square (rounded to two decimal places): $fill in the blank f932b9fe504ff90_25

c. The intercept can be interpreted as:

fixed cost.variable cost per unit.total cost.mixed cost.fixed cost.

d. Coefficient 1 can be interpreted as:

fixed cost.variable cost per unit.total cost.mixed cost.variable cost per unit.

e. Comment on Jacobs observations concerning the outcomes.

Jacob's comments seem to be on target.

Direct labor costDirect material costDirect labor cost

explains less than 40 percent of the variability in overhead costnot enough to justify using

Direct labor costDirect material costDirect labor cost

as the only driver to trace overhead to individual products. The

units completednumber of movesinspection hoursrework hoursnumber of moves

a non-unit driver, explains 90 percent of the materials handling cost variability. Using the

units completednumber of movesinspection hoursrework hoursnumber of moves

to assign materials handling cost appears reasonable and certainly better than using direct labor cost to assign this cost. In fact, as small batches use the same

movesreworkunitsmoves

as large batches but much less labor, large batches are receiving too much materials handling cost. Thus, some evidence exists that high-volume products are

overcostedundercostedovercosted

.

5. Answer the following:

a. Inspection is a

fixedmixedstep-fixedvariablestep-fixed

cost, with each

stepunitstep

being defined by fill in the blank f932b9fe504ff90_36 inspection hours per year. Each

stepunitstep

costs $fill in the blank f932b9fe504ff90_38. Current activity capacity for inspection is fill in the blank f932b9fe504ff90_39 hours.

Current demand for the inspection activity is fill in the blank f932b9fe504ff90_40 hours.

b. Rework is a:

variable cost.fixed cost.mixed cost.step-fixed cost.variable cost.

c. Warranty is a:

variable cost.fixed cost.mixed cost.step-fixed cost.mixed cost.

d. Assume that quality improves so that the current demand for the output of the inspection, rework, and warranty activities drops by 50 percent (with the Phone Division capturing all savings possible by reducing the resources currently used by the activities). Calculate the increase in Marchs pre-tax operating income produced by the savings.

March income would increase by the amount is $fill in the blank f932b9fe504ff90_43

6. Using the data generated by Jacobs pilot for a preliminary ABC analysis, answer the following:

a. Calculate the overhead cost per unit for each phone model using direct labor cost to assign all overhead costs to products (round overhead rate to two decimal places).

	Overhead Cost per Unit
Regular	$fill in the blank f932b9fe504ff90_44
Deluxe	$fill in the blank f932b9fe504ff90_45

b. Calculate the overhead cost per unit for each phone model using the four activities and drivers identified by Jacob (round activity rates to two decimal places).

	Activity Rates
Other:		fill in the blank f932b9fe504ff90_46	per direct labor dollar
Moving:		$fill in the blank f932b9fe504ff90_47	per move
Inspecting:		$fill in the blank f932b9fe504ff90_48	per inspection hour
Reworking:		$fill in the blank f932b9fe504ff90_49	per rework hour

	Unit Cost
Regular	$fill in the blank f932b9fe504ff90_50
Deluxe	$fill in the blank f932b9fe504ff90_51

c. Using the ABC assignments as the benchmark, the unit manufacturing cost for the Regular model is currently

understatedoverstatedoverstated

by $fill in the blank f932b9fe504ff90_53.

d. If the unit product cost of the Regular model is

understatedoverstatedoverstated

, then the selling price could be

increaseddecreaseddecreased

, making the company

morelessmore

competitive.

7. Suppose that Jacob learned about duration-based costing after completing the pilot study. According to the plant manager of the phone plant used for the pilot study, the cycle time for the Regular model is 0.50 hours and that of the Deluxe model is one hour. Calculate the unit cost for each model using duration-based costing.

The unit costs of the Regular Models is $fill in the blank f932b9fe504ff90_57

The unit costs of the Deluxe Models is $fill in the blank f932b9fe504ff90_58