91Ó°ÊÓ

Sleep Late, a large hotel chain, has been using activity-based costing to determine the cost of a night's stay at their hotels. One of the activities, "Inspection," occurs after a customer has checked out of a hotel room. Sleep Late inspects every 10th room and has been using "number of rooms inspected" as the cost driver for inspection costs. A significant component of inspection costs is the cost of the supplies used in each inspection. Mary Adams, the chief inspector, is wondering whether inspection labor-hours might be a better cost driver for inspection costs. Mary gathers information for weekly inspection costs, rooms inspected, and inspection labor-hours as follows: $$\begin{array}{cccc}\text { Week } & \text { Rooms Inspected } & \text { Inspection Labor-Hours } & \text { Inspection costs } \\\\\hline 1 & 254 & 66 & \$ 1,740 \\\2 & 322 & 110 & 2,500 \\\3 & 335 & 82 & 2,250 \\\4 & 431 & 123 & 2,800 \\\5 & 198 & 48 & 1,400 \\\6 & 239 & 62 & 1,690 \\\7 & 252 & 108 & 1,720 \\\8 & 325 & 127 & 2,200\end{array}$$ Mary runs regressions on each of the possible cost drivers and estimates these cost functions: Inspection costs \(=\$ 193.19+(\$ 6.26 \times \text { Number of rooms inspected })\) Inspection costs \(=\$ 944.66+(\$ 12.04 \times\) Inspection labor-hours) 1\. Explain why rooms inspected and inspection labor-hours are plausible cost drivers of inspection costs. 2\. Plot the data and regression line for rooms inspected and inspection costs. Plot the data and regression line for inspection labor-hours and inspection costs. Which cost driver of inspection costs would you choose? Explain. 3\. Mary expects inspectors to inspect 300 rooms and work for 105 hours next week. Using the cost driver you chose in requirement 2, what amount of inspection costs should Mary budget? Explain any implications of Mary choosing the cost driver you did not choose in requirement 2 to budget inspection costs.

Step by step solution

01

1. Explain why rooms inspected and inspection labor-hours are plausible cost drivers of inspection costs.

Both rooms inspected and inspection labor-hours are reasonable cost drivers of inspection costs because the more rooms need to be inspected or the more time is spent on inspecting a room, the higher the inspection costs should be. These two variables directly influence the amount of supplies and labor used during inspections, hence impacting the overall inspection costs.

02

2. Plot the data and choose the best cost driver.

We will have to create two scatter plots with respective regression lines for the relationship between inspection costs and each cost driver: \[\text{Plot 1: Inspection Costs vs Rooms Inspected}\] The data points and the regression line for rooms inspected and inspection costs are plotted. The equation for this regression line is given by: \(\text{Inspection costs} = \$193.19 + (\$6.26 \times \text{Number of rooms inspected})\) \[\text{Plot 2: Inspection Costs vs Inspection Labor-Hours}\] The data points and the regression line for inspection labor-hours and inspection costs are plotted. The equation for this regression line is given by: \(\text{Inspection costs} = \$944.66 + (\$12.04 \times \text{ Inspection labor-hours})\) After plotting both sets of data and their respective regression lines, compare the fit of each line to the data. If the regression line for one of the cost drivers is a noticeably better fit for the data, then that cost driver should be chosen.

03

3. Calculate expected inspection costs and explain implications.

Assuming that we choose the best-fitting cost driver (for example, inspection labor-hours) from step 2, we can use the regression equation to predict inspection costs based on the information given by Mary: \) \text{Inspection costs} = \$944.66 + (\$12.04 \times 105\, \text{inspection labor-hours}) \) Calculate the expected inspection costs using the chosen cost driver: \) \text{Inspection costs} = \$944.66 + (\$12.04 \times 105) \approx \$2,168.86 \) So, Mary should budget approximately \$2,168.86 for inspection costs. As for the implications of choosing the other cost driver (in this case, rooms inspected), if the other cost driver was not as good of a fit, this might lead to overestimating or underestimating the expected inspection costs. This would have repercussions on budgeting, resource allocation, and possibly the accuracy of their activity-based costing model, which could affect decision-making within the company.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cost Drivers

When determining costs using activity-based costing, it is crucial to identify appropriate cost drivers. Cost drivers are factors that have a direct cause-and-effect relationship with the costs incurred for a particular activity. In the case of hotel inspections at Sleep Late, two potential cost drivers were evaluated: the number of rooms inspected and the inspection labor-hours. More rooms inspected generally suggest higher usage of inspection supplies, driving up costs. On the other hand, inspection labor-hours are also plausible because increased hours typically translate to higher labor costs. Choosing the right cost driver helps in accurately assigning costs, ensuring more precise budgeting and financial reporting.

Regression Analysis

Regression analysis is a statistical method used to estimate relationships among variables. In this context, Mary performed regression analysis to compare the relationships between inspection costs and the two potential cost drivers: rooms inspected and inspection labor-hours. The analysis resulted in two cost function equations:

• For rooms inspected: \( \text{Inspection costs} = \\(193.19 + (\\)6.26 \times \text{Number of rooms inspected}) \)
• For inspection labor-hours: \( \text{Inspection costs} = \\(944.66 + (\\)12.04 \times \text{inspection labor-hours}) \)

By plotting these equations on a graph, one can visually assess which driver provides a better fit to the actual data. A regression line that closely follows the data points typically indicates a more reliable predictor of costs.

Inspection Costs

Inspection costs in activity-based costing encompass all expenses related to inspecting rooms, including labor and supplies. These costs can fluctuate based on activities such as the number of rooms checked out or the labor hours committed by the inspectors. At Sleep Late, inspection costs form a significant part of the total cost per night stay. By establishing a reliable cost relationship through cost drivers, such as the rooms inspected, Mary can predict future inspection expenses and better manage supply usage and labor allocation. Hence, accurate forecasting and a deep understanding of inspection-related activities are critical to maintaining an efficient operational and budgeting process.

Budgeting

Budgeting is the process of creating a plan to spend an organization's resources. In terms of inspection costs at Sleep Late, budgeting involves predicting and allocating funds for future room inspections based on chosen cost drivers.With a reliable cost driver and clear cost function, Mary can budget effectively by calculating expected costs for the coming period using the regression equation. For instance, if inspection labor-hours are chosen, Mary might use the equation to estimate costs based on the projected hours for next week: \[ \text{Inspection costs} = \\(944.66 + (\\)12.04 \times 105) \approx \$2,168.86 \]Accurate estimation prevents overspending and ensures resources are available when needed, bolstering financial efficiency and organizational strategy in handling inspection tasks.