Cedar Rapids Implements Company produces farm implements. Cedar Rapids is in the process of measuring its manufacturing costs and is particularly interested in the costs of the manufacturing maintenance activity, since maintenance is a significant mixed cost. Activity analysis indicates that maintenance activity consists primarily of maintenance labor setting up machines using certain supplies. A setup consists of preparing the necessary machines for a particular production run of a product. During setup, machines must still be running, which consumes energy. Thus, the costs associated with maintenance include labor, supplies, and energy. Unfortunately, Cedar Rapids’ cost accounting system does not trace these costs to maintenance activity separately. Cedar Rapids employs two full-time maintenance mechanics to perform maintenance. The annual salary of a maintenance mechanic is $42,000 and is considered a fixed cost. Two plausible cost drivers have been suggested: “units produced” and “number of setups.”
Data had been collected for the past 12 months and a plot was made for the cost driver—units of production. The maintenance cost figures collected include estimates for labor, supplies, and energy. Cory Fielder, controller at Cedar Rapids, noted that some types of activities are performed each time a batch of goods is processed rather than each time a unit is produced. Based on this concept, he has gathered data on the number of setups performed over the past 12 months. The plots of monthly maintenance costs versus the two potential cost drivers follow:
1. Find monthly fixed maintenance cost and the variable maintenance cost per driver unit using the visual-fit method based on each potential cost driver. Explain how you treated the April data.
2. Find monthly fixed maintenance cost and the variable maintenance cost per driver unit using the high-low method based on each potential cost driver.
3. Which cost driver best meets the criteria for choosing cost functions? Explain.