Question

Tilbert Toys (TT) makes the popular Floppin’s Freddy Frog and Jumpin’ Jill Junebug dolls in batches. TT has recently adopted activity-based costing. TT incurs setup costs for each batch of dolls that it produces. TT uses “number of setup” as the cost driver for setup costs.

TT has just hired Bebe Williams, an accountant. Bebe thinks that “number of setup hours” might be a better cost driver because the setup time for each product is different. Bebe collects the following data.

Month	Number of setups	Number of setup hours	Setup costs
1	85	110	5500
2	65	90	4500
3	20	80	4400
4	50	100	5000
5	78	130	6000
6	120	120	5600
7	100	70	4000
8	110	60	3200
9	45	50	3400
10	60	40	2400

1. Use the linear regression method to estimate cost behavior. Excel has a function that you can use (I have posted these data in excel on Blackboard for your convenience). Print out the regression output and attach to this report. Data plotting is optional and may help assess the superiority of different models.

2. Interpret and evaluate your regression results (make sure you evaluate all necessary statistics). According to the criteria of determining appropriate cost driver, which cost driver do you recommend to use and why? Write out the correct cost formula.

3. Estimate total costs in a month when 100 batches of Floppin’s Freddy Frog and 20 batches Jumpin’s Jill Junebug are produced. To set up 1 batch of Floppin’s Freddy Frog, it takes 1 setup hours. To set up 1 batch of Jumpin’s Jill Junebug, it takes 0.5 setup hours.

4. You are working on the budget for November 2012 and expect 250 setup hours to be used in total. Will you use the cost formula to estimate set up cost in your budget? Why?

5. How does linear regression differ from the high-low method in estimating fixed and variable costs? Discuss the pros and cons of each.

Answer 1