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1.
$3,800 $2,600
=
700 400
$4.00
$ 3,800
2,800
$ 1,000
Cost formula:
Monthly utility cost = $1,000 + $4.00 X , where X denotes hours of operation.
2.
$3,400
900
$2,500
Hours of
operation
3.
Estimation of variable- and fixed-cost components of cost behavior using leastsquares regression:
The electronic version of the Solutions Manual BUILD A SPREADSHEET
SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
4.
High-low method:
Utility cost
(b)
Visually-fitted line:
Utility cost
= $2,190
This cost prediction was simply read directly from the visually-fitted cost line.
This prediction will vary because of variations in the visually-fitted lines.
(c)
Regression:
Utility cost = $1,002 + ($4.04)(300) = $2,214
5.
Calculation of R2:
The electronic version of the Solutions Manual BUILD A SPREADSHEET
SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website:
WWW.MHHE.COM/HILTON8E.
The R2 is .9518.
Tabulation of data:
Dependent
Variable
(cost)
Y
3,240
3,400
3,800
3,200
2,700
2,600
18,940
Month
January.......................
February......................
March..........................
April.............................
May..............................
June............................
Total............................
Independent
Variable
(hours)
X
550
600
700
500
450
400
3,200
X2
302,500
360,000
490,000
250,000
202,500
160,000
1,765,000
XY
1,782,000
2,040,000
2,660,000
1,600,000
1,215,000
1,040,000
10,337,000
( Y )( X 2 ) ( X )( XY )
n( X 2 ) ( X )( X )
b = n( XY) ( X)( Y)
n( X 2 ) ( X)( X)
=
(c)
(6)(10,337,000) (3,200)(18,940)
4.04
(6)(1,765,000) (3,200)(3,200)
Cost formula:
Monthly utility cost
1.
Variable
6.
Variable
2.
7.
Fixed
3.
Fixed
8.
Fixed
4.
Fixed
9.
5.
Fixed
*The fixed-cost component is the salary of the school's repair technician. As activity
increases, one would expect more repairs beyond the technician's capability. This increase
in repairs would result in a variable-cost component equal to the dealer's repair charges.
$4,710 $2,990
525 310
= $8.00
Total maintenance cost at 310 hours of service........................................
Variable maintenance cost at 310 hours of service (310 hr. $8.00).......
Fixed maintenance cost per month............................................................
$2,990
2,480
$ 510
Cost formula:
Monthly maintenance cost = $510 + $8.00X, where X denotes hours of
maintenance service.
2.
3.
4.
$8.00
$ .84*
June
(2,700 tons)
December
(1,400 tons)
$224,500
175,500
$ 49,000
$140,000
91,000
$ 49,000
Hauling 1,400 tons is not particularly cost effective. Lone Mountain Extraction will
incur a cost of $280,000 if it needs 1,400 tons hauled or, for that matter, 1,899 tons.
The company would be better off if it had 1,399 tons hauled, saving outlays of
$40,000. In general, with this type of cost function, effectiveness is maximized if a
firm operates on the right-most portion of a step, just prior to a jump in cost.
4.
its
A committed fixed cost results from an entitys ownership or use of facilities and
basic organizational structure. Examples of such costs include property taxes,
depreciation, rent, and management salaries. Discretionary fixed costs, on the
other hand, arise from a decision to spend a particular amount of money for a specific
purpose. Outlays for research and development, advertising, and charitable
contributions fall in this category.
In times of severe economic difficulties, a companys management will
often try to cut discretionary fixed costs. Such costs are more easily altered in
the short run and do not have as significant long-term ramifications for a firm as
do more long-lasting actions. While its true that cutting expenditures on
advertising or R & D can often have adverse long-term consequences, other cuts
could have even more significant negative consequences in the future. The
decision to close a manufacturing facility, for example, could reduce property
taxes, rent, and/or depreciation. However, that decision may result in a significant
long-run change in operations that may be difficult to overturn when economic
conditions rebound.
5.
The regression equation's intercept on the vertical axis is $190. It represents the
portion of indirect material cost that does not vary with machine hours when
operating within the relevant range. The slope of the regression line is $5 per machine
hour. For every machine hour, $5 of indirect material costs are expected to be
incurred.
2.
3.
Do the observations contain any outliers, or are they all representative of normal
operations?
(b)
Are there any mismatched time periods in the data? Are all of the indirect
material cost observations matched properly with the machine hour
observations?
(c)
Are there any allocated costs included in the indirect material cost data?
(d)
4.
Beginning inventory.............................................................
+ Purchases..........................................................................
Ending inventory...............................................................
Indirect material used..........................................................
5.
April
$1,300
5,900
(1,350)
$5,850
August
$1,000
6,200
(3,000)
$4,200
High-low method:
Variable cost per machine hour
=
$5,850
5,500
$ 350
Equation form:
Indirect material cost = $350 + ($5.50 machine hours)
6.
The regression estimate should be recommended because it uses all of the data, not
just two pairs of observations when developing the cost equation.
The original method was simply the average overhead per hour for the last 12
months and did not distinguish between fixed and variable costs. Dana divided
total overhead by total labor hours, which effectively treated all overhead as
variable. Regression analysis measures the behavior of the overhead costs in
relation to labor hours and is a model that distinguishes between fixed and
variable costs within the relevant range of 2,500 to 7,500 labor hours.
2.
a. Based on the regression analysis, the variable cost per person for a cocktail
party is $23, calculated as follows:
Food and beverages...............................................................................
Labor (.6 hr. @ $11/hr.)...........................................................................
Variable overhead (.6 hr. @ $4/hr.).........................................................
Total...................................................................................................
$14.00
6.60
2.40
$23.00
b. Based on the regression analysis, the full absorption cost per person for a
cocktail party is $29, calculated as follows:
Food and beverages...............................................................................
Labor (.6 hr. @ $11/hr.)...........................................................................
Variable overhead (.6 hr. @ $4/hr.).........................................................
Fixed overhead (.6 hr. @ $10/hr.)*..........................................................
Total...................................................................................................
$14.00
6.60
2.40
6.00
$29.00
The minimum bid for a 250-person cocktail party would be $5,750. The amount is
calculated by multiplying the variable cost per person of $23 by 250 people. At
any price above the variable cost, Dana will be earning a contribution toward his
fixed costs.
Other factors that Dana should consider in developing a bid include the following:
Scatter diagram:
Administrative cost
$25,000
$20,000
$15,000
$10,000
$5,000
4.
Visually-fitted
semivariable
cost line
500
1,000
1,500
3. Relevant range
2. through 4.
2.
Visually-fitted
curvilinear
cost line
2,000
Patient load
$10,600 $7,000
$3.00
1,200 0
6.
7.
Cost
Prediction
750.....................
$9,300
350.
5,500
It makes no difference which visually-fit cost line is used to make the cost prediction
for 750 patients. The semivariable approximation is very accurate at this patient load,
which is near the middle of the relevant range. However, for a patient load of 350
patients, the visually-fit curvilinear cost line yields a much more accurate prediction.
CASE 6-49 (50 MINUTES)
1.
High-low method:
Variable administrative cost per patient =
$16,100 $4,100
$10
1,500 300
$16,100
15,000
$1,100
Cost formula:
Total monthly administrative cost = $1,100 + $10X, where X denotes the number of
patients for the month.
The variable cost per patient is $10.
2.
3.
Memorandum
Date:
Today
To:
From:
I.M. Student
Visual-fit method:
Total monthly administrative cost = $7,000 + $3.00X
These cost estimates differ very significantly. The activity level in the clinic
during its first year of operation fluctuated greatly. This fluctuation is not expected in
the future; patient loads in the range of 600 to 1,200 patients per month are
anticipated.
The cost estimates differ so greatly because two of the methods (least-squares
and high-low) used data from outside the relevant range of activity. The clinic's
administrative cost behavior appears from the scatter diagram to be curvilinear over
the entire range. The cost behavior pattern exhibits very low costs in the range of
activity below the relevant range and very high costs in the activity range above the
relevant range. Since the regression and high-low estimates are so heavily influenced
by observations outside the relevant range, they do not provide the best estimate in
this case of how administrative costs are likely to behave within the relevant range. In
this instance, the visually-fitted cost line probably provides the best estimate.
(b) Disclose fully all relevant information that could reasonably be expected to
influence an intended user's understanding of the reports, comments, and
recommendations presented.
McDonough should insist that the best and most appropriate estimate of the
clinic's administrative cost behavior be presented to the board.
Tabulation of data:
Dependent
Variable
(cost in
hundreds)
Y
60
70
139
92
119
100
94
41
102
161
83
111
1,172
Month
January.......................
February......................
March..........................
April.............................
May..............................
June............................
July..............................
August........................
September..................
October.......................
November...................
December....................
Total............................
Independent
Variable
(patients in
hundreds)
X
4
5
14
9
13
10
7
3
11
15
6
12
109
X2
16
25
196
81
169
100
49
9
121
225
36
144
1,171
XY
240
350
1,946
828
1,547
1,000
658
123
1,122
2,415
498
1,332
12,059
(1,172)(1,171) (109)(12,059)
26.707 (rounded)
(12)(1,171) (109)(109)
n( XY) ( X)( Y)
n( X 2 ) ( X)( X)
(12)(12,059) (109)(1,172)
7.812 (rounded)
(12)(1,171) (109)(109)
(d)