We would recommend thatleeuseregressio

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern