Reference no: EM132824299

Question - Kim Hyun Bo Industries Ltd. manufactures a wide range of products for customers with varying needs. Often the company will produce in small batches to provide customers with customized products. At the same time, some large customers purchase in significantly greater volumes.

Management was very surprised to find that there have been significant overhead variances in 2020. In 2020 and prior years, overhead has been allocated on the basis of direct labour hours. Changes have taken place over the last few years, however, and the manufacturing process has become increasingly automated. The Brandon University graduate recently hired into the accounting department has suggested that the use of labour hours as an allocation basis no longer appears appropriate, given the nature of the production process today.

Management is willing to consider changing the allocation base, and believes that both the machine hours incurred and number of batches processed seem to be potential cost drivers.

The most recently completed year is 2020, and the following data has been gathered:

Month	Cost incurred	Machine hrs	# of batches
January	$38,240	1,680	105
February	34,643	1,460	75
March	38,932	1,810	122
April	40,524	1,760	110
May	49,013	2,050	112
June	43,828	1,180	125
July	48,358	2,180	105
August	45,562	2,090	108
September	42,058	1,790	120
October	44,195	1,910	135
November	35,148	1,550	98
December	40,106	1,710	100

Required -

a) Using Excel, insert a scatterplot graph using machine hours as the independent variable. Using only this information, explain whether or not machine hours looks like a potential cost driver.

b) Using Excel, insert a scatterplot graph using number of batches as the independent variable. Using only this information, explain whether or not the number of batches looks like a potential cost driver.

c) Using the regression function in Excel, find the fixed and variable components of overhead in 2020, using machine hours as the independent variable.

d) Using the regression function in Excel, determine the fixed and variable components of overhead in 2020, using number of batches as the independent variable.

e) What is the cost function equation for the allocation base that should be used for preparing the next year's budget. Select one data point (live a little, pick a month other than January....) and use the actual volume to estimate the expected cost. Explain why this amount differs or does not differ from the actual amount spent that month. Clearly you are not able to investigate to find out the specific reason, so explain the concept.

f) Make short report to management identifying which of the two potential allocation bases, machine hours or number of batches, should be used as the allocation base for overhead for budgeting for future years. Using the statistical information available from using Excel to support your recommendation, clearly indicate why the recommended allocation base is superior to the alternative. Describe how reliable the numbers are that you have calculated for the fixed cost and variable cost per unit, using the t-stat and p-value data provided by Excel.