Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Chapter 12, Problem 29P
Kelly Gray, production manager, was upset with the latest performance report, which indicated that she was $100,000 over budget. Given the efforts that she and her workers had made, she was confident that they had met or beat the budget. Now, she was not only upset but also genuinely puzzled over the results. Three items—direct labor, power, and setups—were over budget. The actual costs for these three items follow:
Kelly knew that her operation had produced more units than originally had been budgeted, so more power and labor had naturally been used. She also knew that the uncertainty in scheduling had led to more setups than planned. When she pointed this out to John Huang, the controller, he assured her that the budgeted costs had been adjusted for the increase in productive activity. Curious, Kelly questioned John about the methods used to make the adjustment.
JOHN: If the actual level of activity differs from the original planned level, we adjust the budget by using budget formulas—formulas that allow us to predict what the costs will be for different levels of activity.
KELLY: The approach sounds reasonable. However, I’m sure something is wrong here. Tell me exactly how you adjusted the costs of labor, power, and setups.
JOHN: First, we obtain formulas for the individual items in the budget by using the method of least squares. We assume that cost variations can be explained by variations in productive activity where activity is measured by direct labor hours. Here is a list of the cost formulas for the three items you mentioned. The variable X is the number of direct labor hours:
Labor cost = $10X
Power cost = $5,000 + $4X
Setup cost = $100,000
KELLY: I think I see the problem. Power costs don’t have a lot to do with direct labor hours. They have more to do with machine hours. As production increases, machine hours increase more rapidly than direct labor hours. Also, ...
JOHN: You know, you have a point. The coefficient of determination for power cost is only about 50 percent. That leaves a lot of unexplained cost variation. The coefficient for labor, however, is much better—it explains about 96 percent of the cost variation. Setup costs, of course, are fixed.
KELLY: Well, as I was about to say, setup costs also have very little to do with direct labor hours. And I might add that they certainly are not fixed—at least not all of them. We had to do more setups than our original plan called for because of the scheduling changes. And we have to pay our people when they work extra hours. It seems as if we are always paying overtime. I wonder if we simply do not have enough people for the setup activity. Supplies are used for each setup, and these are not cheap. Did you build these extra costs of increased setup activity into your budget?
JOHN: No, we assumed that setup costs were fixed. I see now that some of them could vary as the number of setups increases. Kelly, let me see if I can develop some cost formulas based on better explanatory variables. I’ll get back with you in a few days.
Assume that after a few days’ work, John developed the following cost formulas, all with a coefficient of determination greater than 90 percent:
Labor cost = $10X; where X = Direct labor hours
Power cost = $68,000 + 0.9Y; where Y = Machine hours
Setup cost = $98,000 + $400Z; where Z = Number of setups
The actual measures of each of the activity drivers are as follows:
Required:
- 1. Prepare a performance report for direct labor, power, and setups using the direct-labor-based formulas.
- 2. Prepare a performance report for direct labor, power, and setups using the multiple cost driver formulas that John developed.
- 3. Of the two approaches, which provides the most accurate picture of Kelly’s performance? Why?
- 4. After reviewing the approach to performance measurement, a consultant remarked that non-value-added cost trend reports would be a much better performance measurement approach than comparing actual costs with budgeted costs—even if activity flexible budgets were used. Do you agree or disagree? Explain.
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Chapter 12 Solutions
Cornerstones of Cost Management (Cornerstones Series)
Ch. 12 - What are the two dimensions of the activity-based...Ch. 12 - What is driver analysis? What role does it play in...Ch. 12 - What is activity analysis? Why is this approach...Ch. 12 - What are value-added activities? Value-added...Ch. 12 - What are non-value-added activities?...Ch. 12 - Identify and define four different ways to manage...Ch. 12 - What is a kaizen standard? Describe the kaizen and...Ch. 12 - Prob. 8DQCh. 12 - Prob. 9DQCh. 12 - Prob. 10DQ
Ch. 12 - Prob. 11DQCh. 12 - Prob. 12DQCh. 12 - Prob. 13DQCh. 12 - Describe a financial-based responsibility...Ch. 12 - Describe an activity-based responsibility...Ch. 12 - Cicleta Manufacturing has four activities:...Ch. 12 - Assume that at the beginning of 20x2, Cicleta...Ch. 12 - Gordon Company produces custom-made machine parts....Ch. 12 - Foy Company has a welding activity and wants to...Ch. 12 - Uchdorf Manufacturing just completed a study of...Ch. 12 - Harvey Company produces two models of blenders:...Ch. 12 - Prob. 7ECh. 12 - Thayne Company has 30 clerks that work in its...Ch. 12 - Suppose that clerical erroreither Thaynes or the...Ch. 12 - Refer to Exercise 12.8. Suppose that clerical...Ch. 12 - Prob. 11ECh. 12 - For Situations 1 through 6, provide the following...Ch. 12 - Maquina Company produces custom-made machine...Ch. 12 - Sanford, Inc., has developed value-added standards...Ch. 12 - Refer to Exercise 12.14. Suppose that for 20x2,...Ch. 12 - Jane Erickson, manager of an electronics division,...Ch. 12 - For each of the following situations, two...Ch. 12 - Which of the following are examples of...Ch. 12 - A company is spending 70,000 per year for...Ch. 12 - Which of the following is likely to be used to...Ch. 12 - Activity-based management includes both process...Ch. 12 - The activity of moving materials uses four...Ch. 12 - Joseph Fox, controller of Thorpe Company, has been...Ch. 12 - Baker, Inc., supplies wheels for a large bicycle...Ch. 12 - Novo, Inc., wants to develop an activity flexible...Ch. 12 - Prob. 26PCh. 12 - Tom Young, vice president of Dunn Company (a...Ch. 12 - Bienestar, Inc., has two plants that manufacture a...Ch. 12 - Kelly Gray, production manager, was upset with the...Ch. 12 - Douglas Davis, controller for Marston, Inc.,...
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