Exercise 1 – Introduction to Cost Terms & Cost Sheet

Problem 14
Prepare a Cost Statement from the following cost data which relates to HeartStrings ltd., a greeting card
manufacturer for the year 2X18:

1. Opening and closing balances

Opening (in Rs) Closing (in Rs)
Raw material 29,500 36,000
WIP:
Material 13,600 12,000
Wages 11,000 16,500
Works overheads 6,600 9,900
Finished goods 200 units @ Rs 84 1600 units

2. Purchase of raw material Rs 1,90,000; Carriage on purchases Rs 1,500; Sale of scrap of raw material Rs 5000
3. Wages Rs 2,97,000
4. Works overheads are absorbed @ 60% OF Direct labour cost
5. Administration overheads are absorbed @ Rs 12/unit produced
6. Selling & Distribution overheads are absorbed @ 20% of S.P.
7. Sales – 7600 units @ of a profit of 10% on S.P.

Problem 15:
Gator Marts, a chain of convenience grocery stores has store hours that fluctuate from month to month as the tourist
trade in the community varies. The utility costs for one of the company’s stores are listed below for the immediately
preceding six months:
Month Total hours of operation Total utility cost (in $)
January 550 3,240
February 600 3,400
March 700 3,800
April 500 3,200
May 450 2,700
June 400 2,600
Use the high-low method to estimate the cost behavior for the store’s utility costs. Express the cost behavior in
formula form (Y = a + b X). What is the variable utility cost per hour of operation? Also use the regression method to
segregate between fixed and variable components.

Problem 16:
The controller of Auto Cylinder Co. believes that the identification of the variable and fixed components of the firm’s
costs will enable the firm to make better planning & control decisions. Among the costs the controller is concerned
about is the behavior of indirect material cost. She believes there is a correlation between machine hours and the
amount of indirect materials used. A member of the controller’s staff has suggested that least squares regression
method be used to determine the cost behavior of indirect materials. The regression equation shown below was
developed from 40 pairs of observations.

S = 190 + 5 H
Where, S = total monthly cost of indirect materials
H = machine hours per month

Required:
1. Explain the meaning of 190 and 5 in the regression equation above.
2. Calculate the estimated cost of indirect materials if 850 machine hours are to be used during a month.
Assume 850 falls within the relevant range of the equation.
 Exercise 1 – Introduction to Cost Terms & Cost Sheet

3. The high and low activity levels during the past 4 years, as measured by machine hours, occurred during
April to August, respectively. Data concerning machine hours and indirect material usage follow:
April August
Machine hours 1000 700
Indirect supplies (in $):
Beginning inventory 1300 1000
Ending inventory 1350 3000
Purchases 5900 6200
Determine the cost of indirect materials used during April to August.
4. Use the high-low method to estimate the behavior of the company’s indirect material cost. Express the cost
behavior pattern in equation form.
5. Which cost estimate will you recommend to the controller, the regression estimate or the high-low
method? Why?