Purchase Solution

Regression, Activity-based Costing, Cost Drivers

Not what you're looking for?

Ask Custom Question

Newroute Manufacturing has been using activity-based costing to determine the cost of produt X-678. One of the activities, "Inspection," ocbcurs just before the product is finished. newroute inspects every 10th unit, and has been using "number of units inspected" as the cost driver for inspection costs. A significant component of inspection costs is the cost of the test-kit used in each inspection.
Neela McFeen, the line manager,is wondering if inspection labor-hours might be a better cost driver for inspection cost. Neela gathers information for weekly inspection costs, units inspected, and inspection labor-hours as shown below:

Week Units Inspected Inspection Labor-Hours Inspection Cost
1 1,500 200 $3,900
2 500 80 2,000
3 1,800 240 4,700
4 2,500 250 6,000
5 2,200 220 5,500
6 800 90 2,600
7 1,000 120 3,100
Neela runs regressions on each of the possible cost drivers and estimates these cost functions:
Inspection Costs = $1,004 +($2.02 x Number of units inspected)
Inspection Costs = $626 + ($19.51 x Inspection labor-hours)

1) Explain why number of units inspected and inspection labor-hours are plausible cost drivers of inspection costs.

2) Plot the data and regression line for units inspected and inspection costs. Plot the data and regression line for inspection labor-hours and inspection costs. Which cost driver of inspection costs would you choose? Explain?

3) Neela expecst inspectors to work 150 hours next period and to inspect 1,200 units. Using the cost driver you chose in requirement 2, what amount of inspection costs should Neela budget? Explain any implications of Neela choosing the cost drive you did not choose in requirement 2 to budget inspection costs.

Purchase this Solution

Solution Summary

Newroute Manufacturing has been using activity-based costing to determine the cost of product X-678. One of the activities, "Inspection," occurs just before the product is finished. Newroute inspects every 10th unit, and has been using "number of units inspected" as the cost driver for inspection costs. A significant component of inspection costs is the cost of the test-kit used in each inspection.
Neela McFeen, the line manager,is wondering if inspection labor-hours might be a better cost driver for inspection cost. Neela gathers information for weekly inspection costs, units inspected, and inspection labor-hours as shown below:

Week Units Inspected Inspection Labor-Hours Inspection Cost
1 1,500 200 $3,900
2 500 80 2,000
3 1,800 240 4,700
4 2,500 250 6,000
5 2,200 220 5,500
6 800 90 2,600
7 1,000 120 3,100
Neela runs regressions on each of the possible cost drivers and estimates these cost functions:
Inspection Costs = $1,004 +($2.02 x Number of units inspected)
Inspection Costs = $626 + ($19.51 x Inspection labor-hours)

1) Explain why number of units inspected and inspection labor-hours are plausible cost drivers of inspection costs.

2) Plot the data and regression line for units inspected and inspection costs. Plot the data and regression line for inspection labor-hours and inspection costs. Which cost driver of inspection costs would you choose? Explain?

3) Neela expecst inspectors to work 150 hours next period and to inspect 1,200 units. Using the cost driver you chose in requirement 2, what amount of inspection costs should Neela budget? Explain any implications of Neela choosing the cost drive you did not choose in requirement 2 to budget inspection costs.

Purchase this Solution


Free BrainMass Quizzes
Operations Management

This quiz tests a student's knowledge about Operations Management

Basics of corporate finance

These questions will test you on your knowledge of finance.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media