Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Chapter 10, Problem 10.47P
Purchasing department cost drivers, activity-based costing, simple regression analysis. Perfect Fit operates a chain of 10 retail department stores. Each department store makes its own purchasing decisions. Carl Hart, assistant to the president of Perfect Fit, is interested in better understanding the drivers of purchasing department costs. For many years, Perfect Fit has allocated purchasing department costs to products on the basis of the dollar value of merchandise purchased. A $100 item is allocated 10 times as many
Hart recently attended a seminar titled “Cost Drivers in the Retail Industry.” In a presentation at the seminar, Kaliko Fabrics, a leading competitor that has implemented activity-based costing, reported number of purchase orders and number of suppliers to be the two most important cost drivers of purchasing department costs. The dollar value of merchandise purchased in each purchase order was not found to be a significant cost driver. Hart interviewed several members of the purchasing department at the Perfect Fit store in Miami. They believed that Kaliko Fabrics’ conclusions also applied to their purchasing department.
Hart collects the following data for the most recent year for Perfect Fit’s 10 retail department stores:
Hart decides to use simple regression analysis to examine whether one or more of three variables (the last three columns in the table) are cost drivers of purchasing department costs. Summary results for these regressions are as follows:
Regression 1: PDC = a + (b × MP$)
Regression 2: PDC = a + (b × No. of POs)
Regression 3: PDC = a + (b × No. of Ss)
- 1. Compare and evaluate the three simple regression models estimated by Hart. Graph each one. Also, use the format employed in Figure 10-18 (page 406) to evaluate the information.
- 2. Do the regression results support the Kaliko Fabrics’ presentation about the purchasing department’s cost drivers? Which of these cost drivers would you recommend in designing an ABC system?
- 3. How might Hart gain additional evidence on drivers of purchasing department costs at each of Perfect Fit’s stores?
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Purchasing department cost drivers, activity-based costing, simple regression analysis. Perfect Fit operates a chain of 10 retail department stores. Each department store makes its own purchasing decisions. Carl Hart, assistant to the president of Perfect Fit, is interested in better understanding the drivers of purchasing department costs. For many years, Perfect Fit has allocated purchasing department costs to products on the basis of the dollar value of merchandise purchased. A $100 item is allocated 10 times as many overhead costs associated with the purchasing department as a $10 item.
Hart recently attended a seminar titled “Cost Drivers in the Retail Industry.” In a presentation at the seminar, Kaliko Fabrics, a leading competitor that has implemented activity-based costing, reported number of purchase orders and number of suppliers to be the two most important cost drivers of purchasing department costs. The dollar value of merchandise purchased in each purchase order was not…
Figure Four is a distributor of pharmaceutical products. Its activity-based costing system has five activity areas:
Activity Area
Cost Driver and Rate
Order processing
$40 per order
Line item ordering
$3 per line item
Store deliveries
$50 per store delivery
Carton deliveries
$1 per carton
Shelf-stocking
$16 per stocking-hour
Rick Flair, the controller of Figure Four, wants to use this activity-based costing system to examine individual customer profitability within each distribution market. Two customers are used to exemplify the insights available with the activity-based costing approach. Data pertaining to these two customers in August are as follows:
Charleston Pharmacy
Chapel Hill Pharmacy
Total orders
12
10
Average line items per order
10
18
Total store deliveries
6
10
Average cartons shipped per store delivery
24
20
Average hours of shelf-stocking per store delivery
0
0.5
Average…
Marvin's Kitchen Supply delivers restaurant supplies throughout the city. The firm adds 10 percent to the cost of the supplies to cover
the delivery cost. The delivery fee is meant to cover the cost of delivery. A consultant has analyzed the delivery service using activity-
based costing methods and identified four activities. Data on these activities follow.
Activity
Processing order
Loading truck
Delivering merchandise
Processing invoice
Total overhead
Order value
Number of orders
Number of items
Number of invoices
Cost Driver
Number of orders
Number of items
Number of orders
Number of invoices
Two of Marvin's customers are City Diner and Le Chien Chaud. Data for orders and deliveries to these two customers follow.
City Diner Le Chien Chaud
$75,000
$90,000
110
1,500
150
Required A
Cost Driver Volume
52
600
12
Cost
$ 75,000
150,000
90,000
72,000
$387,000
Required B
City Diner
Le Chien Chaud
Driver Volume
5,000 orders
100,000 items
Required:
a. What would the delivery charge for each…
Chapter 10 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 10 - What two assumptions are frequently made when...Ch. 10 - Describe three alternative linear cost functions.Ch. 10 - What is the difference between a linear and a...Ch. 10 - High correlation between two variables means that...Ch. 10 - Name four approaches to estimating a cost...Ch. 10 - Describe the conference method for estimating a...Ch. 10 - Describe the account analysis method for...Ch. 10 - List the six steps in estimating a cost function...Ch. 10 - When using the high-low method, should you base...Ch. 10 - Describe three criteria for evaluating cost...
Ch. 10 - Define learning curve. Outline two models that can...Ch. 10 - Discuss four frequently encountered problems when...Ch. 10 - Prob. 10.13QCh. 10 - All the independent variables in a cost function...Ch. 10 - Multicollinearity exists when the dependent...Ch. 10 - HL Co. uses the high-low method to derive a total...Ch. 10 - A firm uses simple linear regression to forecast...Ch. 10 - In regression analysis, the coefficient of...Ch. 10 - A regression equation is set up, where the...Ch. 10 - What would be the approximate value of the...Ch. 10 - Estimating a cost function. The controller of the...Ch. 10 - Identifying variable-, fixed-, and mixed-cost...Ch. 10 - Various cost-behavior patterns. (CPA, adapted)....Ch. 10 - Matching graphs with descriptions of cost and...Ch. 10 - Account analysis, high-low. Stein Corporation...Ch. 10 - Account analysis method. Gower, Inc., a...Ch. 10 - Prob. 10.27ECh. 10 - Estimating a cost function, high-low method. Lacy...Ch. 10 - Linear cost approximation. Dr. Young, of Young and...Ch. 10 - Cost-volume-profit and regression analysis....Ch. 10 - Regression analysis, service company. (CMA,...Ch. 10 - High-low, regression. May Blackwell is the new...Ch. 10 - Learning curve, cumulative average-time learning...Ch. 10 - Learning curve, incremental unit-time learning...Ch. 10 - High-low method. Wayne Mueller financial analyst...Ch. 10 - High-low method and regression analysis. Market...Ch. 10 - High-low method; regression analysis. (CIMA,...Ch. 10 - Regression, activity-based costing, choosing cost...Ch. 10 - Interpreting regression results. Spirit...Ch. 10 - Cost estimation, cumulative average-time learning...Ch. 10 - Cost estimation, incremental unit-time learning...Ch. 10 - Regression; choosing among models. Apollo Hospital...Ch. 10 - Multiple regression (continuation of 10-42). After...Ch. 10 - Cost estimation. Hankuk Electronics started...Ch. 10 - Prob. 10.45PCh. 10 - Interpreting regression results, matching time...Ch. 10 - Purchasing department cost drivers, activity-based...Ch. 10 - Purchasing department cost drivers, multiple...
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