Question: Regression, activity-based costing, choosing cost drivers. 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:
Mary runs regressions on each of the possible cost drivers and estimates these cost functions:
Inspection Costs = $193.19 + ($6.26 x Number of rooms inspected)
Inspection Costs = $944.66 + ($12.04 x Inspection labour-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.