Janice Kerry is the management accountant at the can manufacturing plant of United Packaging. She looked a little puzzled as she stared at the regression equation for estimating the relationship between total engineering support costs reported in the plant records and machine- hours. As she looked up from the computer she mumbled to herself, “ I have to dive deeper to understand this. Why do engineering support costs decrease when we run our machines harder?” United Packaging has been facing pressure from customers to reduce prices. To respond to this challenge, Terrence Jimenez, the general manager of the plant, has put in place a cost reduc-tion program to increase United’s competitiveness. To implement this program, he has asked Kerry to gain a better understanding of the spending in various categories of overhead costs. In his speeches to employees, Jimenez would often emphasize the importance of managing based on data and repeat his favorite mantra, “You cannot manage that which you cannot measure.”

Required

1. What data do you think Kerry collected to obtain the numbers in column 3? That is, what do the numbers in column 3 represent?

2. Plot the cost functions for

(i) The reported costs for total engineering support and machine-hours and

(ii) The restated costs for total engineering support and machine- hours. Contrast and evaluate the cost function estimated with regression analysis using restated data for materials and parts with the cost function estimated with regression analysis using the data reported in the plant records. Which cost function would you choose to best represent the relationship between engineering support costs and machine- hours? Explain briefly.

3. Is it important for Kerry to choose the correct cost function? That is, what potential problems could Kerry encounter by choosing a cost function other than the one you chose in requirement 2. Explain briefly.

4. What problems might Kerry encounter when restating the materials and parts costs recorded in column 3 of United Packaging Exhibit 1?

5. Do you think Kerry should estimate any other cost function? Why? Explainbriefly.

Transcribed Image Text:

United Packaging Exhibit 1 All numbers in thousands) Materials and Parts: Materials and Parts: Total Engineering Support: Total Engineering Support: Labor Reported Costs Reported Costs Restated Costs Reported Costs Restated Costs Machine-Hours Month March April $347 521 398 355 473 617 245 487 431 $182 411 268 228 348 349 125 $847 $1,194 521 398 1,316 473 617 1,066 487 431 $529 30 63 49 38 57 73 932 961 June July August September October November 821 370 851 721 821 290 42