Study Appendix3. Richard Ellis, the director of cost operations of American MicroDevices, wishes to develop anaccurate cost function to explain and predict support costs in thecompany's printed circuit.
board assemblyoperation. Mr. Ellis is concerned that the cost function that hecurrently uses-based on direct labor costs-s notaccurate enough for proper planning and control of supportcosts. Mr. Ellisdirected one of his financial analysts to obtain a random sample of25 weeks of support costs and threepossible cost drivers in the circuit-board assembly department:direct labor hours, number of boardsassembled, and average cycle time of boards assembled. (Averagecycle time is the average time betweenstart and certified completion-fter quality testing-fboards assembled during a week.) Much ofthe effort in this assembly operation is devoted to testing forquality and reworking defectiveboards, all of which increase the average cycle time in any period.Therefore, Mr. Ellis believes thataverage cycle time will be the best support cost driver. Mr. Elliswants his analyst to use regression analysis to demonstratewhich cost driver best explains support costs.