Unformatted text preview: ts. In designing an act ivit ybased cost system, Fashio n Flair should use number o f purchase orders and number o f suppliers as cost drivers o f purchasing depart ment costs. As the chapter appendix describes, Fashio n Flair can eit her (a) estimate a mult iple regressio n equat ion for purchasing department costs with number o f purchase orders and number o f suppliers as cost drivers, or (b) divide purchasing depart ment costs into two separate cost pools, one for costs related to purchase orders and another for costs related to suppliers, and estimate a separate relat ionship for each cost pool. 3. Guidelines presented in the chapter could be used to gain addit ional evidence on cost drivers of purchasing department costs. 1. Use phys ical relat ionships or engineering relationships to establish causeandeffect links. Lee could observe the purchasing department operations to gain insight into how costs are driven. 2. Use knowledge of operations. Lee could interview operating personnel in the purchasing depart ment to obtain their insight on cost drivers. 1035 SOLUTION EXHIBIT 1040A Regressio n Lines of Various Cost Drivers on Purchasing Dept. Costs for Fashio n Flair Pu rc h asin g D e p artm e n t Co sts $2,500, 000 2,000, 000 1,500, 000 1,000, 000 500,000 0 0 50 100 150 D ol l ar Valu e o f M e rch an d i se Pu rch ase d (in m i ll i o n s) $2,500, 000 Pu rch as i n g D e p art m e n t Cos ts 2,000, 000 1,500, 000 1,000, 000 500,000 0 0 2,000 4,000 6,000 8,000 N u m b e r o f Pu rc h ase O rd e rs $2,500, 000 Pu rch as i n g D e p art m e n t Cos ts 2,000, 000 1,500, 000 1,000, 000 500,000 0 0 100 200 300 N u m b e r o f S u p p l ie rs 1036 SOLUTION EXHIBIT 1040B Comparison o f Alternat ive Cost Functions for Purchasing Department Costs Estimated with Simple Regressio n for Fashion Flair Criterion 1. Economic Plausibilit y Regression 1 PDC = a + (b ´ MP$) Result presented at seminar by Couture Fabrics found little support for MP$ as a driver. Purchasing...
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- Spring '10
- Cost Accounting, representative, cost funct ion, Bob Jones