Managers are interested in modeling past cost behavior in order to make more accurate predictions of future costs. Models of past cost behavior are called cost functions. Factors that influence costs are called cost drivers (Horngren, Foster, and Datar, Cost Accounting, 1994). The cost data shown in the second table on page 555 are from a rug manufacturer. Indirect manufacturing labor costs consist of machine maintenance costs and setup labor costs. Machine-hours and direct manufacturing labor-hours are cost drivers.
Your task is to estimate and compare two alternative cost functions for indirect manufacturing labor costs. In the first, machine-hours is the independent variable; in the second, direct manufacturing labor hours is the independent variable. Prepare a report that compares the two cost functions and recommends which should be used to explain and predict indirect manufacturing labor costs. Be sure to justify your choice.
