ITT Rooms Inspected 254 Inspection Costs $1,740 2,500 2,250 2,800 Week Inspection Labor-Hours 1 66 322 335 2 110 3 82 431 198 4 123 5 48 1,400 239 62 1,690 252 108 1,720 325 127 2,200 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 Inspection labor-hours)
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:
Q.Explain why rooms inspected and inspection labor-hours are plausible cost drivers of inspection costs.
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