Global Journal of Management and Business Research, D: Accounting and Auditing, Volume 21 Issue 2

Plant A has three production departments: Sheet Metal, Machine Shop, and Brush & Steel Wool. The Sheet Metal department produces the casings and other components made of steel plates. The Machine Shop produces a variety of machine related parts such as engine mountings, frames, brackets, bearings and rods. The Brush & Steel Wool department manufactures different types of brushes that perform the cleaning function in the assembled equipment. The production processes in these three departments are operated in parallel, and there is no sequential dependence among them. Plant B has four production departments: Paint Shop, Component Assembly, Welding, and Final Assembly. The parts are painted in the Paint Shop and then assembled into components in the component assembly department. These assembled components are welded together in accordance with the product design in welding department. The welded components are finally assembled into the finished product ready for shipment to customers. Each production department represents a different production activity and a different pattern of consumption of activity resources. Both direct and indirect labor costs are incurred in all seven production departments. Direct labor hours are associated with productive operations for the manufacture or assembly of parts or components. Indirect labor hours are associated with other activities such as materials handling, machine setup, team meetings and inspection. The cost accounting system at our research site allocates indirect costs to individual products on the basis of direct labor costs. A separate overhead rate is determined for the allocation of each production department's indirect costs. We interviewed managers and staff from production and cost accounting departments at our research site to assess production processes, products, and existing cost records and procedures. There were no major changes in products or manufacturing operations during the five year period covered by our study. We also obtained sample reports for production planning, cost allocations, daily departmental labor activity and expense summary. We collected production and labor cost data electronically with the assistance of the plants' information systems personnel. The data set includes the daily activities of all production department workers. The time spent on different activities is classified into direct and indirect labor. Direct labor hours are further identified with a part number, work center where the part was produced, customer order number and quantity, standard labor hours, and quantity produced. The data we obtained are an integral part of the company's information system for production labor accounting. These data are entered directly into the company's computerized system daily by production workers in the presence of their supervisors. The data are maintained by the central information systems department of the company and constitute the source information for periodic reports for payroll, accounting and manufacturing department managers. Payroll staff use these data to process labor wage payments. Accounting staff use these data for cost allocation, inventory valuation, standard costing and variance analysis. Manufacturing staff use these data for production planning purposes and for updating manufacturing standards. Because of the importance of these data, several internal checks exist to ensure the integrity and reliability of the data. We cross-checked the data with summary reports obtained from senior managers. We also plotted the data to visually scan for outliers or otherwise unusual data records. We determined that these data are a reliable record of the daily work in the plants' production departments. b) Variable Construction We measure the daily indirect production labor cost (ILCOST) separately for each of the seven production departments. The detailed daily data also allow us to construct cost drivers based on the cost hierarchy framework of unit-related, batch-related, product-sustaining and facility- sustaining activities described by Cooper and Kaplan (1991). The demand for unit-related activity resources varies directly with the number of units produced. Examples include direct labor and direct materials. We selected direct labor dollars (DLCOST) as the unit-level cost driver in our analysis because the present cost accounting system at our research site allocates indirect costs based on this measur e 1 Product-sustaining activities are required to handle the additional complexity resulting from an increase in the number of products or parts. Examples of product sustaining activities include engineering change orders, process engineering, maintaining bill of materials, and preparing routing sheets. Within a . Batch-related activities occur each time a batch is processed or at the beginning or end of each production run. These activities include machine setup, material movement and material requisition. We chose the number of setups (NUMSETUPS) as a batch-level activity cost driver (Cooper and Kaplan, 1987; Anderson and Sedatole, 2013). Setup activities differ across departments. For example, in the Machine Shop, a setup involves only changing and correctly positioning the tools in the machines. Setups in the Paint Shop are longer because machines require a thorough cleanup before colors are changed. Setups are also lengthy in the Final Assembly department because they involve coordination and movement of many sub-assemblies. 1 DLCOST is highly correlated to direct labor hours (DLHOURS), and the results reported here do not change appreciably when this alternative unit-level cost driver is employed in our analysis. 3 Global Journal of Management and Business Research Volume XXI Issue II Version I Year 2021 ( ) D © 2021 Global Journals Cost Hierarchy: Evidence and Implications