While collecting the first data set, Julie Jordan, the lead Cost Accountant for FTC, also collected some additional information over the 48 observations. Alfred Olson is Julie's direct supervisor. When Julie was a student at the University of Memphis, she studied activity-based costing in her cost accounting class. Like Alfred, she thought that only part of the conversion costs (labor-related costs such as wages, benefits, etc.) appeared to be related to direct labor hours. After further study, it appeared that some batch-related costs in the conversion costs were related to the number of setups, and another portion of conversion costs was related to the number of orders made to purchase direct materials for the tires.

Data Set 2 provides additional information for the 48 observations collected by Julie. It includes information for setup costs, purchasing costs, labor-related costs, and total conversion costs. The total conversion costs are equal to the sum of setup costs, purchasing costs and labor-related costs. Julie also provides you with the number of setups, the number of purchase orders, and direct labor hours used for products FTC/A105 and FTC/B107.

Product # of Setups # of POs DLHs

FTC/A105 30 30 9,000

FTC/B107 110 150 2,000

Julie Jordan is concerned that the relationship between conversion costs and direct labor hours has weakened since automation, given the significant decrease in the required number of direct labor hours. At the same time, overhead costs resulting from the new automation has increased dramatically. Thus, Julie has asked you to compile some additional information for her next meeting with the CEO next week.

In your analysis, recalculate the product costs for FTC/A105 and FTC/B107 using activity-based costing.

What can you tell Julie and Alfred about the relationships between the different costs and the cost drivers? What happens when you calculate the correlations or perform some simple regressions between the different costs and the cost drivers?

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