Purchasing department cost drivers, activity-based costing, simple regression analys...

Purchasing department cost drivers, activity-based costing, simple regression analysis. Designer Wear operates a chain of 10 retail department stores. Each department store makes its own purchasing decisions. Barry Lee, assistant to the president of Designer Wear, is interested in better understanding the drivers of purchasing department costs. For many years, Designer Wear has allocated purchasing department costs to products on the basis of the dollar value of merchandise purchased. A $100 item is allocated 10 times as many overhead costs associated with the purchasing department as a $10 item. Lee recently attended a seminar titled “Cost Drivers in the Retail Industry.” In a presentation at the seminar, Couture Fabrics, a leading competitor that has implemented activity-based costing, reported number of purchase orders and number of suppliers to be the two most important cost drivers of purchasing department costs. The dollar value of merchandise purchased in each purchase order was not found to be a significant cost driver. Lee interviewed several members of the purchasing department at the Designer Wear store in Miami. They believed that Couture Fabrics’ conclusions also applied to their purchasing department.

Lee collects the following data for the most recent year for Designer Wear’s 10 retail department stores:

Lee decides to use simple regression analysis to examine whether one or more of three variables (the last three columns in the table) are cost drivers of purchasing department costs. Summary results for these regressions are as follows:

1. Compare and evaluate the three simple regression models estimated by Lee. Graph each one. Also, use the format employed in Exhibit 10-18 (page 404) to evaluate the information.

2. Do the regression results support the Couture Fabrics’ presentation about the purchasing department’s cost drivers? Which of these cost drivers would you recommend in designing an ABC system?

3. How might Lee gain additional evidence on drivers of purchasing department costs at each of Designer Wear’s stores?