Problem:
Eagan Electrical Instruments Company estimates manufacturing support as 950% of direct labor cost. Eagan's controller, Jim Chang, is concerned that the actual manufacturing support activity costs have differed substantially from the estimates in recent months. He suspects that the problem is related to the use of only one cost driver. Jim identifed the following three additional cost driveers that reflect support activities: number of material moves, number of setups, and number of machine hours. He developed the following rates to estimate manufacturing support activity costs:
Multiple Cost Driver System
100% of direct labor cost
$200 per move
$300 per setup
$20 per machine hour
Info for 2 recent months includes the following:
Cost and Quantity May June
Direct Labor Cost 3,000 4,200
# of material moves 50 70
# of setups 30 40
# of machine hours 1,000 1,200
Estimate manufacturing support cost using the single-driver and multiple-driver systems.
Why do the two sets of estimates differ?
Why will both methods fail to predict accurately the manufacturing support costs? Is one of the two methods likely to be more useful than the other? Explain.