Consider the Boeing plant discussed on pages 36 – 37. Suppose Boeing has a cost-reduction program for this plant to reduce the costs of activities, such as receiving parts for its airplanes, by 10%.
At a meeting of the receiving department operating managers and the accounting staff, complaints were made that cost-reduction was not completely the responsibility of the receiving department because some factors were beyond the department’s control. Managers pointed out that the total cost of fuel is a function of fuel price per gallon and the gallons used. Furthermore, neither the price paid for fuel nor the lease cost is controllable by receiving department employees. Managers argue that the factors such as fuel and equipment usage were not explicitly tracked and costed. These operating measures were the ones managers believed to be the ones that should be used as cost drivers.
You have been asked to refine the way variable and fixed costs are calculated by using the more relevant cost drivers for fuel and equipment—“gallons” and “hours operated.” You have collected the following data for the most recent period.
Equipment cost .................... $45,000
Fuel cost ..................... $24,000
Hours equipment operated ............... 1,500
Gallons of fuel used .................. 6,000
Parts received .................... 30,000
Target cost goal after 10% cost reduction (90% * $69,000) . $62,100
1. Draw a diagram similar to Exhibit 2-4 on page 40 that shows the relationships between the receiving activity and the resources used and that incorporates the new cost drivers recommended by operating managers. On the diagram, show the total level of each cost driver, the fuel consumption rate in gallons used per part received, and the equipment consumption rate in hours per part received.
2. Refer to your answer to requirement 1. If the number of parts received increased from 30,000 to 40,000, which number(s) would most likely change: total gallons used, total hours operated, or gallons per part received? Derive an equation that calculates total fuel cost as a function of fuel cost per gallon and fuel consumption rate. Predict the total cost of the receiving activity if the number of parts received is 40,000.
3. The managers in the receiving department have a plan that will improve fuel efficiency. What is the predicted total cost of receiving 30,000 parts if the fuel consumption rate is reduced by 20% (assume fuel costs per gallon will not change)? Will the receiving department achieve Boeing’s 10% cost-reduction goal? Why or why not?
4. Comment on the benefits of the new cost-driver model compared to the one based solely on one cost driver—“number of parts received.”
5. Can you think of other refinements in the cost-driver model based on the data that are given?