The following list identifies several potential cost drivers for a manufacturing company that makes eight products. The company uses a JIT production system so it stores finished products for a very limited time. The eight products vary substantially in size from small (plastic casings for pens) to large (plastic casings for truck instrument panels). The company uses order-processing labor to process all orders from customers.
● Number of setups
● Setup time
● Square feet
● Cubic feet
● Cubic feet weeks
● Number of orders
● Number or order line items
For each of the following situations (activity and related resource), identify the best cost driver from the list and briefly justify your choice.
1. To produce a product, production mechanics must set up machinery. It takes about the same time to set up for a production run regardless of the product being produced. What is the best cost driver for the resources used during the setup activity?
2. Instead of the situation described in number 1, what driver should the company use for the setup activity if it takes longer to set up for complex products, such as the instrument panel casings, than for simple products, such as pen casings?
3. What driver should the company use for warehouse occupancy costs (depreciation and insurance)? The company uses the warehouse to store finished products.
4. What driver should the company use for the warehouse occupancy costs if it did not use a JIT system (that is, the company maintains inventories), and upon inspection one of the products had a thick layer of dust on it?
5. What driver should the company use for order processing cost? All orders are similar in terms of types of products ordered and it takes about the same time to process each type of product.
6. What driver should the company use for order processing cost if orders vary substantially in terms of types of products ordered and it takes about the same time to process each type of product?