Question

Comprehensive Case

51. Ethics: Manipulating Data to Establish a Budget (Appendix). Healthy Bar, Inc., produces energy bars for sports enthusiasts. The company’s fiscal year ends on December 31. The production manager, Jim Wallace, is establishing a cost budget for the production department for each month of this coming quarter (January through March). At the end of March, Jim will be evaluated based on his ability to meet the budget for the three months ending March 31. In fact, Jim will receive a significant bonus if actual costs are below budgeted costs for the quarter.

The production budget is typically established based on data from the last 18 months. These data are as follows:

Reporting Period (Month)	Total Overhead Costs	Total Machine Hours
July	$695,000	3,410
August	700,000	3,454
September	665,000	2,453
October	725,000	3,740
November	655,000	2,442
December	672,500	2,695
January	687,500	2,937
February	715,000	3,652
March	625,000	2,200
April	632,500	2,244
May	650,000	2,255
June	702,500	3,520
July	730,000	3,542
August	735,000	3,597
September	697,500	2,552
October	762,500	3,894
November	687,500	2,541
December	705,000	2,805

You are the accountant who assists Jim in preparing an estimate of production costs for the next three months. You intend to use regression analysis to estimate costs, as was done in the past. Jim expects that 3,100 machine hours will be used in January, 3,650 machine hours in February, and 2,850 machine hours in March.

Jim approaches you and asks that you add $100,000 to production costs for each of the past 18 months before running the regression analysis. As he puts it, “After all, management always takes my proposed budgets and reduces them by about 10 percent. This is my way of leveling the playing field!”

Required:

1. Use Excel to perform regression analysis using the historical data provided.
   1. Submit a printout of the results.
   2. Use the regression output to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
   3. Calculate estimated production costs for January, February, and March. Also provide a total for the three months.
2. Use Excel to perform regression analysis after adding $100,000 to production costs for each of the past 18 months, as Jim requested.
   1. Submit a printout of the results.
   2. Use the regression output to develop the cost equation Y = f + vX by filling in the dollar amounts for f and v.
   3. Calculate estimated production costs for January, February, and March. Also provide a total for the three months.
3. Why did Jim ask you to add $100,000 to production costs for each of the past 18 months?
4. How should you handle Jim’s request? (If necessary, review the presentation of ethics in Chapter 1 "What Is Managerial Accounting?" for additional information.)

Answer 1

					After Adding 1,00,000 Production Overheads Costs
Reporting Period (Month)	Total Overhead Costs	Total Machine Hours	Percentage of Machine Hours		Total Overhead Costs	Total Machine Hours	Percentage of Machine Hours
July	695,000	3,410	20381.23%		795,000	3,410	23313.78%
August	700,000	3,454	20266.36%		800,000	3,454	23161.55%
September	665,000	2,453	27109.66%		765,000	2,453	31186.30%
October	725,000	3,740	19385.03%		825,000	3,740	22058.82%
November	655,000	2,442	26822.28%		755,000	2,442	30917.28%
December	672,500	2,695	24953.62%		772,500	2,695	28664.19%
January	687,500	2,937	23408.24%		787,500	2,937	26813.07%
February	715,000	3,652	19578.31%		815,000	3,652	22316.54%
March	625,000	2,200	28409.09%		725,000	2,200	32954.55%
April	632,500	2,244	28186.27%		732,500	2,244	32642.60%
May	650,000	2,255	28824.83%		750,000	2,255	33259.42%
June	702,500	3,520	19957.39%		802,500	3,520	22798.30%
July	730,000	3,542	20609.82%		830,000	3,542	23433.09%
August	735,000	3,597	20433.69%		835,000	3,597	23213.79%
September	697,500	2,552	27331.50%		797,500	2,552	31250.00%
October	762,500	3,894	19581.41%		862,500	3,894	22149.46%
November	687,500	2,541	27056.28%		787,500	2,541	30991.74%
December	705,000	2,805	25133.69%		805,000	2,805	28698.75%
Average Percentage of Machine Hours (A)			23746.04%		Average Percentage of Machine Hours (B)		27212.40%
Estimated production costs for January, February, and March					Estimated production costs for January, February, and March
Reporting Period (Month)	Total Overhead Costs (C * A)	Total Machine Hours (C)			Reporting Period (Month)	Total Overhead Costs (B * D)	Total Machine Hours (D)
January	736,127	3,100			January	843,584	3,100
February	866,730	3,650			February	993,253	3,650
March	676,762	2,850			March	775,553	2,850
Total	2,279,620	9,600			Total	2,612,391	9,600