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JTI is in the process of measuring its manufacturing costs and has assigned you to the measure of the manufacturing maintenance activity of JTI’s small travel items, including travel clocks. This production is done in a large plant in the eastern United States.
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, JTI’s cost accounting system does not trace these costs to maintenance activity separately.
JTI employs two full-time maintenance mechanics to perform maintenance. The annual salary of a maintenance mechanic is $30,000 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 made for the cost driver – units of production. The maintenance cost figures collected include estimates for labor, supplies, and energy. You recently attended an activity-based costing seminar where you learned 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, you have gathered data on the number of setups performed over the past 12 months. The plots of monthly maintenance costs vs. the two potential cost drivers follow.
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Please see attachment for charts (then)
- 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.
- Find monthly fixed maintenance cost of the variable maintenance cost per
driver unit using the high-low method based on each potential cost driver. - Which cost driver best meets the criteria for choosing cost functions? Explain.
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Attachments D).doc
Solution Preview
- 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.
Using the visual fit method the fixed costs are represented by the intersection of the regression line and the vertical axis. The variable cost is equal to the slope of the regression line. In this case the intersection of the regression line on both the …
