Carly Davis, production manager, was upset and puzzled by the latest performance report, which indicated that she was $100,000 over budget. She and her staff had worked hard to beat the budget. Now she saw 3 items-direct labor, power, & setups—were over budget. The actual costs for these 3 items were as follows:

Direct labor ......................$210,000

Power ..............................$135,000

Setups..............................$140,000

Total .................................485,000

Carly felt that the add’l labor & power cost were due to the fact that her team produced more units than originally budgeted. Uncertainty in scheduling had led to more setups than planned. She asked Sean Carpenter, the controller, why the performance report did not take the add’l production into account. Sean assured Carly that he did adjust the report for increased production & shower her the budget formulas he used to predict the cost for different levels of activity. The formulas were based on direct labor hours as follows:

Direct labor = $10X

Power Cost = $5, 000 + $4x

Setup cost = $100,000

Carly pointed out that power costs were unrelated to direct labor hours, but that they seemed to vary with machine hours instead. She also pointed out that setup costs were not fixed. They varied with the number of setups—, which had increased due to scheduling changes. The increase in setups required her team to work overtime, adding to the costs. Each setup also took supplies that added significantly to overhead costs.

Sean agreed that the formulas did not adequately take care of Carly’s concerns. He agreed to develop a new set of cost formulas based on better explanatory variables. After a few days, Sean shared the following cost formulas with Carly:

Direct labor cost = $10X where X = direct labor hours

Power cost = $68,000 + 0.9Y where Y = machine hours

Setup cost = $98,000 + $400Z where Z = number of setups

The actual measure of each activity driver is as follows

Direct labor hours ....................20,000

Machine hours .........................90,000

Number of setups .........................110

Required:

1. Prepare a performance report for direct labor, power, & setups using the direct labor-based formulas

2. Prepare a performance report for direct labor, power & setups using the multiple cost driver formulas that Sean developed.

3. Of the 2 approaches which provides the more accurate picture of Carly’s performance? Why?