Cost Behaviour: Analysis and Use: Discussion Case 3-1

Chapter 3
Cost Behaviour: Analysis and Use
Discussion Case 3-1
Reasons companies may be reluctant to use quantitative techniques such

as regression analysis or the high-low method:
 Lack of understanding as to how to use the techniques.

 Belief that the resultant cost behavior models produced by the
techniques are inaccurate or unreliable (especially true for the high-
low method).
 Lack of accurate data on cost drivers (e.g., the “X” values in the cost
prediction model).
 Techniques may not be used because the majority of costs are fixed
(e.g., software developers) rather than mixed.
 Cost behavior patterns are well understood by managers through
approaches such as account analysis negating the need for more
sophisticated tools such as regression analysis.
 Little value placed on predicting future costs with analysis limited to
reviewing historical costs.
© McGraw-Hill Education Ltd., 2018. All rights reserved.

Solutions Manual, Chapter 3 1
Solutions to Questions
3-1 Examples of variable costs in would be examples of step-
a restaurant include food and variable expenses.
beverages, some types of labour
(e.g., employees paid an hourly 3-6 A non-linear variable cost is
wage), cleaning supplies such as one where the per unit amount
dishwasher soap, and a portion of changes as volume increases or
utility costs. decreases. An example is direct
materials where the per unit
3-2 purchase price decreases as a
a. Unit fixed costs decrease as higher volume of materials is
volume increases. purchased.
b. Unit variable costs remain
constant as vo-lume increases. 3-7 A mixed cost has both
c. Total fixed costs remain variable and fixed elements.
constant as volume increases. Examples include some types of
d. Total variable costs increase as wages such as sales employees
volume increases. paid a fixed wage plus
commissions, utilities, and internet
3-3 plans with a base amount of data
a. Cost behaviour: Cost behaviour plus overage charges.
refers to the way in which costs
change in response to changes 3-8
in a measure of activity such as
sales volume, production a. Committed d. Discretionary
volume, or orders processed. b. Committed e. Committed
b. Relevant range: The relevant c. Discretionary f.
range is the range of activity Discretionary
within which assumptions about
variable and fixed cost 3-9 Yes. As the anticipated level
behaviour are valid. of activity changes, the level of
fixed costs needed to support
3-4 A curvilinear cost is one operations may also change. Most
where the relationship between fixed costs are adjusted upward
the cost and activity is a curve and downward in large steps,
rather than a straight line. rather than being absolutely fixed
Examples include: utilities where at one level for all ranges of
the amount charged per unit activity.
increases as the amount used
increases; and wages where the 3-10 The engineering approach to
rate per hour increases as more cost analysis is a detailed analysis
hours are worked and overtime is of cost behaviour based on an
paid. industrial engineer’s evaluation of
the inputs that are required to
3-5 A step-variable cost is carry out an activity and of the
obtainable only in large amounts costs of those inputs. It could be
and increases and decreases only used to estimate the costs of a
in response to fairly wide changes new product not previously
in the activity level. Maintenance produced. It could also be used to
staff expenses at a hospital or determine the cost of providing a
cleaning staff expenses at a hotel particular service or department
such as customer complaints.
2 Managerial Accounting, 11th Edition
3-11 The purpose of preparing a
scattergram is to allow managers
to evaluate whether or not the
relationship between two variables
(independent and dependent) is
linear.
3-12 It is problematic because the
high and low levels of activity
employed by the high-low method
may not be representative of
normal activity levels. As such, the
cost function may be inaccurate.
3-13 The formula for a
mixed cost is Y = a + bX. In cost
analysis, the “a” term represents
the fixed cost, and the “b” term
represents the variable cost per
unit of activity.
3-14 The gross margin is the
difference between sales and the
cost of goods sold (CGS) where
CGS includes both variable and
fixed manufacturing costs. The
contribution margin is the
difference between sales and total
variable costs including
manufacturing and non-
manufacturing costs (see Exhibit
3-11).

Foundational Exercises
1. Units Shipped Shipping Expense

High activity level............ 8 $3,600
Low activity level............. 2 1,500
2. Variable cost element:

Change in cost $2,100
= =$350 per unit
Change in activity 6 units
3. Fixed cost element:

Shipping expense at the high activity level................... $3,600
Less variable cost element ($350 per unit × 8 units)..... 2,800
Total fixed cost........................................................... $ 800
4. The cost formula is $800 per month plus $350 per unit shipped or
Y = $800 + $350X,
5. Total shipping expense = $800 + $350(7)

= $3,250
6. Fixed expense is $800.
7. Variable expense = $350(10)

= $3,500
8.
Price per unit $5,000

Less variable costs:
Variable manufacturing $2,500
Variable overhead 500
Variable selling & admin. 200
Variable shipping expense 350 3,550
Contribution margin per unit $1,450

4 Managerial Accounting, 11th Canadian Edition
Foundational Exercises (continued)
9. Total contribution margin = 7 x $1,450 per unit

= $10,150.
10. Operating income = Contribution margin – fixed costs

= $10,150 - $3,000 - $800 (shipping)
= $6,350
11. Contribution margin would decrease by:

$5,000 x 5% x 7 = $1,750
12. Operating income would decrease by the same $1,750 as per part 11.
13. Variable shipping expenses for 12 units:

($350 x 10) + [($350 x 90%) x 2]
$3,500 + $630 = $4,130
14. Total shipping expenses for 12 units:

$4,130 (per part 13) + $800 = $4,930
15. Non-linear because variable shipping expenses per unit are decreasing
as the volume shipped increases.

Exercise 3-1 (15 minutes)
1. Smoothies Served
in a Week
2,100 2,800 3,500
Fixed cost $2,500 $2,500 $2,500
Variable cost ($0.75 per cup) 1,575 2,100 2,625
Total cost $4,075 $4,600 $5,125
Cost per smoothie served * $1.94 $1.64 $1.46
* Total cost ÷ smoothies served in a week
2. The average cost of a smoothie declines as the number of smoothies

served increases because the fixed cost is spread over more units.

1. The completed scattergram is presented below:
$31,000
$30,000
$29,000
Admitting Costs
$28,000
$27,000
$26,000
$25,000
$24,000
$23,000
2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 4,000
Patients Admitted
2. It appears that admitting costs are strongly related to the number of

patients admitted. As the number of patients admitted increases there is
a very linear increase in admitting costs.

1. Patients Admitting
Month Admitted Costs
High activity level (June)...... 3,800 $30,400
Low activity level (November) 2,200 $25,600
Change............................... 1,600 $4,800
Variable cost = Change in cost ÷ Change in activity
= $4,800 ÷ 1,600 patients admitted
= $3.00 per patient admitted
Total cost (June)........................................................ $30,400
Variable cost element
($3 per patient × 3,800 patients)............................. 11,400
Fixed cost element..................................................... $19,000
2. The type of care needed by the patients being admitted may also affect
admitting department costs. For example, patients requiring more
complicated procedures may take more time to process by admissions
staff and require more ‘paperwork.’ Thus the $3 per patient variable
component calculated for requirement 1 reflects an average cost, which
may be higher for some patients, depending on the nature of the
admissions process involved.

The Rhythm Shop
1 Income Statement—Acoustic Guitar Department
. For the Quarter Ended March 31
Sales................................................................ $1,600,000
Variable expenses:
Cost of goods sold ($400 per guitar × $800,000
2,000 guitars*).............................................
Selling expenses ($75 per guitar × 2,000 150,000
guitars)........................................................
Administrative expenses (25% × 50,000 1,000,000
$200,000)....................................................
Contribution margin........................................... 600,000
Fixed expenses:
Selling expenses (400,000-150,000).................250,000
Administrative expenses(75% x 200,000)......... 150,000 400,000
Operating income.............................................. $ 200,000
*$1,600,000 sales ÷ $800 per guitar = 2,000 guitars.
2. Since 2,000 guitars were sold and the contribution margin totaled
$600,000 for the quarter, the contribution of each guitar toward fixed
expenses and profits was $300 ($600,000 ÷ 2,000 guitars = $300 per
guitar). Another way to compute the $300 is:
Selling price per guitar........................ $800
Less variable expenses:
Cost per guitar................................. $400
Selling expenses.............................. 75
Administrative expenses
($50,000 ÷ 2,000 guitar)............... 25 500
Contribution margin per guitar............ $300

Exercise 3-4 (continued)
3. If the Rhythm Shop sells 100 more guitars in the quarter ending June
30, than they did for the quarter ending March 31, profits will increase
by:
100 x $300* per guitar = $30,000
*$800 selling price - $500 total variable cost per guitar
Total operating income for the quarter ended June 30 will be:
Operating income for the Quarter ended March 31 $200,000

Contribution margin from additional unit sales 30,000
Total operating income** $230,000
** Check:
2,100 guitars sold x $300/guitar $630,000
Less fixed expenses 400,000
Total operating income $230,000

1. The company’s variable cost per hour would be:
$54,000
=$4.50 per hour.
12,000 hours
Taking into account the difference in behaviour between variable and

fixed costs, the completed schedule would be:
Operating Hours
12,000 14,000 16,000 18,000
Total costs:
Variable costs........................ $54,000 * $63,000 $72,000 $81,000
Fixed costs............................ 504,000 * 504,000 504,000 504,000
$567,00 $585,000
Total costs...............................$558,000 * 0 $576,000
Cost per hour:
Variable cost......................... $4.50 $4.50 $4.50 $4.50
Fixed cost............................. 42.00 36.00 31.50 28.00
Total cost per unit.................... $46.50 $40.50 $36.00 $32.50
*Given.
Sales (15,000 hours × $40 per hour)............................. $600,000

Variable expenses (15,000 hours × $4.50 per hour)....... 67,500
Contribution margin..................................................... 532,500
Fixed expenses............................................................ 504,000
Operating income......................................................... $ 28,500

Variabl
Fixed e Total
1.Account Cost Cost
Production supervision1 $120,000 $42,000 $162,000
Utilities2 $ 12,000 $67,200$ 79,200
Sales staff wages3 $140,000 $84,000 $224,000
Quality control inspections4 $ 36,000 $ 5,600$ 41,600
1
Fixed: $150,000 x .8; Variable ($150,000 x .2)/500 x 700
2
Fixed: $60,000 x .2; Variable ($60,000 x .8)/500 x 700
3
Fixed: $200,000 x .7; Variable ($200,000 x .3)/(500 x $2,000) x (700 x
$2,000)
4
Fixed: $40,000 x .9; Variable ($40,000 x .1)/(500 x .5) x (700 x .5)
2. Contribution margin:
Sales (700 x $2,000) $1,400,000
Variable Costs:
Direct materials (700 x $500) $350,000
Direct labour (700 x $250) 175,000
Production supervision 42,000
Utilities 67,200
Sales staff wages 84,000
Quality control inspections 5,600 723,800
Contribution margin $676,200

1. Kilometers Total Annual

Driven Cost*
High level of activity......................... 105,000 $11,970
Low level of activity.......................... 70,000 9,380
Change............................................ 35,000 $ 2,590
105,000 kilometers × $0.114 per kilometer = $11,970
70,000 kilometers × $0.134 per kilometer = $9,380
Variable cost per kilometer:

= =$0.074 per kilometer
Change in activity 35,000 kilometers
Fixed cost per year:
Total cost at 105,000 kilometers..................... $11,970
Less variable portion:
105,000 kilometers × $0.074 per kilometer... 7,770
Fixed cost per year........................................ $ 4,200
2. Y = $4,200 + $0.074X
3. Fixed cost......................................................... $ 4,200

Variable cost:
80,000 kilometers × $0.074 per kilometer........ 5,920
Total annual cost............................................... $10,120

1. Blood Tests Costs

High activity level (February)........ 3,500 $14,500
Low activity level (June)............... 1,500 8,500
Change........................................ 2,000 $ 6,000
Variable cost per blood test:

Change in cost = $6,000 = $3 per blood test
Change in activity 2,000 blood tests
Fixed cost per month:

Blood test cost at the high activity level................. $14,500
Less variable cost element:
3,500 blood tests × $3.00 per test...................... 10,500
Total fixed cost.................................................... $ 4,000
The cost formula is $4,000 per month plus $3.00 per blood test
performed or, in terms of the equation for a straight line:
Y = $4,000 + $3.00X
where X is the number of blood tests performed.
2. Expected blood test costs when 2,300 tests are performed:

Variable cost: 2,300 blood tests × $3.00 per test....... $6,900
Fixed cost................................................................ 4,000
Total cost................................................................ $10,900

1. The scattergram appears below.
16,000
Chart Title
14,000
12,000
Cost of Blood tests
10,000
8,000
6,000
4,000
2,000
0
1,000 2,000 3,000 4,000
Number of Blood Tests Performed
2. The high-low method would not provide an accurate cost formula in this
situation, since a line drawn through the high and low points would
have a slope that is too flat. Consequently, the high-low method would
overestimate the fixed cost and underestimate the variable cost per
unit.

1. Monthly operating costs at 70% occupancy:
2,000 rooms × 70% = 1,400 rooms;
1,400 rooms × $42 per room per day × 30 days... $1,764,000
Monthly operating costs at 45% occupancy (given).. 1,584,000
Change in cost....................................................... $180,000
Difference in rooms occupied:

70% occupancy (2,000 rooms × 70%)................. 1,400
45% occupancy (2,000 rooms × 45%)................. 900
Difference in rooms (change in activity).................. 500
Change in cost = $180,000 = $360 per room

Change in activity 500 rooms
$360 per room ÷ 30 days = $12 per room per day.
2. Monthly operating costs at 70% occupancy (above)... $1,764,000

Less variable costs:
1,400 rooms × $12 per room per day × 30 days..... 504,000
Fixed operating costs per month............................... $1,260,000
3. 2,000 rooms × 50% = 1,000 rooms occupied.

Fixed costs.............................................................. $1,260,000
Variable costs:
1,000 rooms × $12 per room per day × 30 days..... 360,000
Total expected costs................................................. $1,620,000

Problem 3-11 (45 minutes)
1.
Home Entertainment
Income Statement
For the Month Ended April 30
Sales (150 televisions × $1,500 per set)............. $225,000
Cost of goods sold
(150 televisions × $900 per set)...................... 135,000
Gross margin..................................................... 90,000
Selling and administrative expenses:
Selling expenses:
Advertising................................................... $ 950
Delivery of televisions
(150 televisions × $40 per set)................... 6,000
Sales salaries and commissions
[$2,900 + (4% × $225,000)]..................... 11,900
Utilities........................................................ 400
Depreciation of sales facilities........................ 3,000
Total selling expenses..................................... 22,250
Administrative expenses:
Executive salaries......................................... 8,000
Depreciation of office equipment................... 500
Clerical
[$1,500 + (150 televisions × $40 per set)].. 7,500
Insurance.................................................... 400
Total administrative expenses.......................... 16,400
Total selling and administrative expenses............ 38,650

Problem 3-11 (continued)
2. Home Entertainment
Income Statement
For the Month Ended April 30
Total Per Unit
Sales (150 televisions × $1,500 per set)............. $225,000 $1,500
Variable expenses:
Cost of goods sold
(150 televisions × $900 per set).................... 135,000 900
Delivery of televisions
(150 televisions × $40 per set)..................... 6,000 40
Sales commissions (4% × $225,000)............... 9,000 60
Clerical (150 televisions × $40 per set)............ 6,000 40
Total variable expenses................................ 156,000 1,040
Contribution margin........................................... 69,000 $ 460
Fixed expenses:
Advertising..................................................... 950
Sales salaries.................................................. 2,900
Utilities........................................................... 400
Depreciation of sales facilities.......................... 3,000
Executive salaries............................................ 8,000
Depreciation of office equipment...................... 500
Clerical........................................................... 1,500
Insurance....................................................... 400
Total fixed expenses.......................................... 17,650
3. Fixed costs remain constant in total but vary on a per unit basis with
changes in the activity level. For example, as the activity level increases,
fixed costs decrease on a per unit basis. Showing fixed costs on a per
unit basis on the income statement make them appear to be variable
costs. That is, management might be misled into thinking that the per
unit fixed costs would be the same regardless of how many televisions
were sold during the month. For this reason, fixed costs should be
shown only in totals on a contribution-type income statement.

1. Traditional income statement
Haaki Shop, Inc.
Traditional Income Statement
Quarter ended May 31
Sales................................................................ $800,000
Cost of goods sold
($80,000 + $320,000 – $100,000)................... 300,000
Gross margin..................................................... 500,000
Selling and administrative expenses:
Selling expenses (($50 per unit × 2,000
surfboards*) + $150,000)............................. 250,000
Administrative expenses (($20 per unit × 2,000
units) + $120,000)....................................... 160,000 410,000
*$800,000 sales ÷ $400 per surfboard = 2,000 surfboards.
2. Contribution format income statement

Haaki Shop, Inc.
Contribution Format Income Statement
Quarter ended May 31
Sales................................................................ $800,000
Variable expenses:
Cost of goods sold
($80,000 + $320,000 – $100,000)................. $300,000
Selling expenses
($50 per unit × 2,000 surfboards)................. 100,000
Administrative expenses
($20 per unit × 2,000 surfboards)................. 40,000 440,000
Contribution margin........................................... 360,000
Fixed expenses:
Selling expenses............................................. 150,000
Administrative expenses.................................. 120,000 270,000

Exercise 3-12 (continued)
3. Since 2,000 surfboards were sold and the contribution margin totaled
$360,000 for the quarter, the contribution of each surfboard toward
fixed expenses and profits was $180 ($360,000 ÷ 2,000 surfboards =
$180 per surfboard).
Alternate calculation:
Selling price $400 – $220 variable costs (production $150* + Selling $50
+ admin $20) = $180
*($300,000 ÷ 2,000)

1. a. 5
b. 1
c. 4
d. 2
e. 9
f. 3
g. 6
h. 8
i. 7
2. Knowledge of the underlying cost behaviour patterns will allow a

manager to properly analyze the firm’s cost structure. The reason is that
all costs don’t behave in the same way. One cost might move in one
direction as a result of a particular action, and another cost might move
in an opposite direction. If the behaviour pattern of each cost is clearly
understood, the impact of a firm’s activities on its costs can be
estimated before the activity has occurred.

1. The completed scattergram follows:
24,000
Chart Title
21,000
18,000
15,000
Repair Cost
12,000
9,000
6,000
3,000
0
0 30 60 90 120 150 180 210 240 270
Jobs
Repair costs appear to be closely related to the number of jobs completed

each month. The data points all fall quite close to the trend line added to
the plot and suggest the relationship between repair costs and jobs is
approximately linear.
2. High-low method:
Number of Repair
Jobs Costs
High activity level.............. 260 $24,000
Low activity level............... 80 9,600
Change............................. 180 $14,400
Variable cost per job:
Change in cost = $14,400 = $80 per job
Change in activity 180 jobs
Fixed cost: Total repair cost at high activity level........ $24,000

Less variable element:
260 jobs × $80 per job.......................... 20,800
Fixed cost element................................... $ 3,200
Therefore, the cost formula is: Y = $3,200 + $80X.
3. The formula developed in part 2 probably should not be used to

predict costs for a 600-job month because that level of activity
appears to be well outside of the relevant range. The next closest
activity level is only 260 jobs (May), which is less than half of the
number of jobs the manager wants to predict costs for. Both fixed
and variable costs could increase if the level of activity is 600 jobs.
For example, additional mechanics may need to be hired, more repair
equipment may be needed and facilities may need to be expanded
(even temporarily) to accommodate an increase of that magnitude.

1. Maintenance cost at the 90,000 machine-hour level of activity can be
isolated as follows:
Level of Activity
60,000 MHs 90,000 MHs
Total factory overhead cost........ $174,000 $246,000
Deduct:
Utilities cost @ $0.80 per MH*.. 48,000 72,000
Supervisory salaries................. 21,000 21,000
Maintenance cost....................... $105,000 $153,000
*$48,000 ÷ 60,000 MHs = $0.80 per MH
2. High-low analysis of maintenance cost:

Machine- Maintenance
Hours Cost
High activity level..................... 90,000 $153,000
Low activity level..................... 60,000 105,000
Change................................... 30,000 $ 48,000
Variable rate:
= = $1.60 per MH
Change in activity 30,000 MHs
Total fixed cost:
Total maintenance cost at the high activity level. . $153,000
Less variable cost element
(90,000 MHs × $1.60 per MH)......................... 144,000
Fixed cost element............................................. $ 9,000
Therefore, the cost formula for maintenance is $9,000 per month plus
$1.60 per machine-hour or
Y = $9,000 + $1.60X.

3. Variable Cost per

Machine-Hour Fixed Cost
Utilities cost.................... $0.80
Supervisory salaries cost.. $21,000
Maintenance cost............ 1.60 9,000
Total overhead cost......... $2.40 $30,000
Thus, the cost formula would be: Y = $30,000 + $2.40X.
4. Total overhead cost at an activity level of 75,000 machine-hours:

Fixed costs................................................. $ 30,000
Variable costs: 75,000 MHs × $2.40 per MH. 180,000
Total overhead costs................................... $210,000

1. Cost of goods sold................... Variable
Advertising expense................. Fixed
Shipping expense..................... Mixed
Salaries and commissions......... Mixed
Insurance expense................... Fixed
Depreciation expense............... Fixed
2. Analysis of the mixed expenses:

Salaries and
Shipping Commissions
Units Expense Expense
High level of activity...... 5,000 $38,000 $90,000
Low level of activity....... 4,000 34,000 78,000
Change......................... 1,000 $ 4,000 $12,000
Variable cost element:

Change in cost
Variable rate =
Change in activity
$4,000
Shipping expense: = $4 per unit
1,000 units
$12,000
Salaries and commissions expense: = $12 per unit
1,000 units
Fixed cost element:
Salaries and
Shipping Commissions
Expense Expense
Cost at high level of activity.... $38,000 $90,000
Less variable cost element:
5,000 units × $4 per unit..... 20,000
5,000 units × $12 per unit.... 60,000
Fixed cost element................. $18,000 $30,000

The cost formulas are:
Shipping expense:
$18,000 per month plus $4 per unit
or
Y = $18,000 + $4X
Salaries and commissions expense:
$30,000 per month plus $12 per unit
or
Y = $30,000 + $12X
3.
Skate World
Income Statement
For the Month Ended September 30
Sales (5,000 units × $100 per unit)............ $500,000
Variable expenses:
Cost of goods sold
(5,000 units × $60 per unit)................ $300,000
Shipping expense
(5,000 units × $4 per unit)................... 20,000
Salaries and commissions expense
(5,000 units × $12 per unit)................. 60,000 380,000
Contribution margin.................................. 120,000
Fixed expenses:
Advertising expense................................ 21,000
Shipping expense................................... 18,000
Salaries and commissions expense.......... 30,000
Insurance expense................................. 6,000
Depreciation expense............................. 15,000 90,000
Operating income..................................... $ 30,000

1. Maintenance cost at the 75,000 machine-hour level of activity can be
isolated as follows:
Level of Activity
50,000 MHs 75,000 MHs
Total factory overhead cost................. $14,250,000 $17,625,000
Deduct:
Indirect materials @ $100 per MH*... 5,000,000 7,500,000
Rent................................................ 6,000,000 6,000,000
Maintenance cost................................ $ 3,250,000 $ 4,125,000
* $5,000,000 ÷ 50,000 MHs = $100 per MH
2. High-low analysis of maintenance cost:

MachineHou Maintenance
rs Cost
High level of activity........ 75,000 $4,125,000
Low level of activity......... 50,000 3,250,000
Change........................... 25,000 $ 875,000
Variable cost element:
= =$35 per MH
Change in activity 25,000 MH
Fixed cost element:
Total cost at the high level of activity.................. $4,125,000
Less variable cost element
(75,000 MHs × $35 per MH)............................ 2,625,000
Fixed cost element............................................. $1,500,000
Therefore, the cost formula for maintenance is $1,500,000 per year plus
$35 per direct labor-hour or
Y = $1,500,000 + $35X

3. Total factory overhead cost at 70,000 machine-hours is:

Indirect materials
(70,000 MHs × $100 per MH)............... $ 7,000,000
Rent....................................................... 6,000,000
Maintenance:
Variable cost element
(70,000 MHs × $35 per MH).............. $2,450,000
Fixed cost element............................... 1,500,000 3,950,000
Total factory overhead cost..................... $16,950,000

1. Sales staff wages are a mixed cost with both fixed ($80,000 salary) and
variable components (commissions). However the variable component is
non-linear since the commission rate increases as sales dollar volume
increases.
2. Total wages will be as follows for a sales person who sells $210,00 of
the company’s service:
Cumulativ
e Wages
Sales
Fixed salary $80,000
Commissions:
First $100,000 in sales $100,000 $ 5,000
Next $50,000 in sales $150,000 $ 3,500
Next $50,000 in sales $200,000 $ 4,500
Final $10,000 in sales $210,000 $ 1,500
Total wages $94,500
3. A potential negative behavioural consequence of the commission

structure used by Learn Fast is that sales staff may use high-pressure
sales tactics to increase sales and the related commissions. While this
may be good for the company in the short term (i.e., sales will grow) it
may be off-putting to clients to have to deal with aggressive sales staff.
This could hurt the company’s ability to do business with that client in
the future and more generally could result in a negative reputation for
the company.
4. Customer support staff wages are a mixed cost with both fixed ($78,000
salary) and variable components ($60 per hour). These wages are also
step-variable in the sense that as Learn Fast grows more customer
support staff will need to be hired to keep up with the demand for
technical support services.

Problem 3-18 continued
5. Cost formula for weekly support staff wages:

Y = $1,500 + $60 (X–35)1
1
$1,500 = $75,000/50; X = number of hours worked in excess of 35-
hour standard work-week.
6. Total customer support staff wages for most recent annual period:
($75,000 x 2) + (1,000 x $60) = $210,000
Total annual customer support staff wages if new staff member is hired:
($75,000 x 2) + $70,000 = $220,000
The benefit of hiring the new support staff member is that will ease the
workload of the existing employees who are working nearly 10 hours
per week of overtime. It will also allow Learn Fast to better service the
expected growth in the customer-base since they will have an additional
capacity of 1,750 service hours (50 x 35 hours per week).
The key disadvantage is that the new staff member may not have
enough work to keep him or her busy until more customers are
acquired. Assuming a similar level of customer service activity as last
year for existing customers, the new employee will only be working 20
hours per week (1,000/50). This will increase as new customers are
attained but this will take time. This is a key issue with step-variable
cost such as wages whereby additional capacity to serve customers
comes in large ‘chunks’ (i.e., 35 hours per week).

Case 3-19 (30 minutes)
1. The completed scattergram for the number of direct labour hours as the
activity base is presented below:
90,000
81,000
72,000
63,000
54,000
Overhead Cost
45,000
36,000
27,000
18,000
9,000
0
0 900 1,800 2,700 3,600 4,500 5,400 6,300
Direct Labour Hours

Case 3-19 (continued)
2. The completed scattergram for the number of jobs as the activity base
is presented below:
90,000
81,000
72,000
63,000
54,000
Overhead Cost
45,000
36,000
27,000
18,000
9,000
0
0 100 200 300 400 500 600 700
Number of jobs

3. For several reasons, the number of direct labour-hours should be used
as the activity base for predicting overhead costs. First, the
scattergrams suggest that it is easier to approximate the relationship
between labour-hours and overhead costs with a straight line than it is
for total number of jobs completed in a month. Although both activity
measures appear to have linear relationship with overhead costs, direct
labour-hours appears to a better fit. Second, jobs differ with respect to
complexity with more complex jobs requiring more direct labour-hours
since they take longer to complete. Thus more complex jobs would likely
result in the incurrence of more variable overhead costs such as
electricity. Evidence of the differing mix of job complexity is indicated by
the fact that during several months, around 500 jobs were completed
(January, July, September, and December) but overhead ranged from
$75,045 to $83,434 across those months. Third, management has the
flexibility to change the mix of welders used across jobs. More
experienced welders are more efficient and waste less indirect materials
suggesting labour-hours may be a better predictor of overhead costs.
4.
Direct Labour-
Hours Overhead Costs
August—High level of activity............ 6,114 $81,582
May—Low level of activity................. 1,914 60,162
Change............................................ 4,200 $ 21,420
Variable cost per unit of activity:
Change in cost = $21,420 = $5.10 per DLH

Change in activity 4,200 DLHs
Total cost at the high level of activity................... $81,582.00

Less variable cost element 31,181.40
($5.10 per unit × 6,114 hours)
Fixed cost element.............................................. $ 50,400.60
Therefore, the cost formula is:
$ Y = $50,400.60 + $5.10X, where X represents the number of direct
labour-hours.
CASE 3-20 (60 minutes)
1. High-low method:
Hours Cost
High level of activity........ 25,000 $99,000
Low level of activity......... 10,000 64,500
Change........................... 15,000 $34,500
Variable element: $34,500 ÷ 15,000 DLH = $2.30 per DLH

Fixed element:
Total cost—25,000 DLH......................... $99,000
25,000 DLH × $2.30 per DLH.............. 57,500
Fixed element....................................... $41,500
Therefore, the cost formula is: Y = $41,500 + $2.30X.
2. The scattergram is shown below:

Y
$100,000
$95,000
$90,000
Over $85,000
head
$80,000
Cost
s $75,000
$70,000
$65,000
$60,000 X
8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000
Direct Labor-Hours

2. The scattergram shows that there are two relevant ranges—one below
19,500 DLH and one above 19,500 DLH. The change in equipment lease
cost from a fixed fee to an hourly rate causes the slope of the
regression line to be steeper above 19,500 DLH, and to be
discontinuous between the fixed fee and hourly rate points.
3. The cost formula computed with the high-low method is faulty since it is
based on the assumption that a single straight line provides the best fit
to the data. Creating two data sets related to the two relevant ranges
will enable more accurate cost estimates.
4. High-low method:
Hours Cost
High level of activity........ 25,000 $99,000
Low level of activity......... 20,000 80,000
Change........................... 5,000 $19,000
Variable element: $19,000 ÷ 5,000 DLH = $3.80 per DLH

Fixed element:
Total cost—25,000 DLH......................... $99,000
25,000 DLH × $3.80 per DLH.............. 95,000
Fixed element....................................... $4,000
Expected overhead costs when 22,500 machine-hours are used:

Variable cost: 22,500 hours × $3.80 per hour............ $85,500
Fixed cost................................................................ 4,000
Total cost................................................................ $89,500

Exercise 3A-1 (continued)
1. and 2.
The scattergraph plot and least-squares regression estimates of fixed and

variable costs using Microsoft Excel are shown below:
The intercept provides the estimate of the fixed cost element, $1,378 per
month, and the slope provides the estimate of the variable cost element,
$4.04 per rental return. Expressed as an equation in the form Y = a + bX,
the relation between car wash costs and rental returns is:
Y = $1,378 + $4.04X
where X is the number of rental returns.
Note that the R2 is approximately 0.90, which is quite high, and indicates a
strong linear relationship between car wash costs and rental returns.

Exercise 3A-2 (30 minutes)
1. Using Microsoft Excel to conduct the regression analysis:
Fixed cost: $41,916
Variable cost: $5.91 per machine hour.
Cost prediction model: Y = $40,980 + $6.17X
2. Estimated costs if 3,000 machine hours are used:
$40,980 + $6.17(3,000)= $56,490
3. I would not feel confident using the cost prediction model from part 1
because 8,000 machine hours appears to be outside the relevant range
of activity.

Exercise 3A-3 (30 minutes)
1. A spreadsheet application such as Microsoft® Excel or a statistical

software package can be used to compute the slope and intercept of
the least-squares regression line. The results are:
Intercept (fixed cost)................ $206

Slope (variable cost per unit)..... $14.08
R2............................................ 0.98
Therefore, the cost formula is $206 per week plus $14.08 per unit.
Note that the R2 is 0.98, which means that 98% of the variation in
quality control costs is explained by the number of units produced. This
is a very high R2 and indicates a very good fit.
2. Total expected quality control costs if 20 units are produced:

Variable cost: 20 units × $14.08 per unit............... $281.60
Fixed cost............................................................ 206.00
Total expected cost.............................................. $487.60
3. It seems very plausible that as more units are produced, quality control
costs would increase since each unit produced goes through a quality
control process.

Problem 3A-4 (45 minutes)
1. A spreadsheet application such as Excel or a statistical software package

can be used to compute the slope and intercept of the least-squares
regression line for the above data. The results are:
Intercept (fixed cost)................... $5,633
Slope (variable cost per unit)....... $1,284
R2.............................................. 0.97
Therefore, the variable cost per league is $1,284 and the fixed cost is
$5,633 per year.
Note that the R2 is 0.97, which means that 97% of the variation in cost
is explained by the number of leagues. This is a very high R 2 and
indicates a very good fit.
2. Y = $5,633 + $1,284X
3. The expected total cost for 11 leagues would be:

Fixed cost.......................................................... $ 5,633
Variable cost (11 leagues × $1,284 per league)... 14,124
Total cost.......................................................... $19,757

1. The scattergram is shown below.
$60,000 Chart Title
$50,000
$40,000
Guiding Expense
$30,000
$20,000
$10,000
$0
0 1,000 2,000 3,000 4,000 5,000
Customers
The scattergram reveals several interesting points about the behavior of

guiding expenses:
• The relation between guiding expenses and number of customers is
approximated reasonably well by a straight line. (However, there
appears to be a slight downward bend in the plot as the customers
increase—evidence of increasing returns to scale. This could relate to
Chief Adventures getting quantity discounts on drinks and snacks
above certain volume levels.

Problem 3A-5 (continued)
• The data points are all fairly close to the straight line. This indicates
that most of the variation in guiding expenses is explained by the
number of customers. As a consequence, there probably wouldn’t be
much benefit to investigating other possible cost drivers for the
guiding expenses.
• Most of the guiding expenses appear to be fixed. This seems
reasonable given the information in the problem about the numerous
fixed expenses related to operating Chief Adventures.
2. It does seem economically plausible that the variable guiding expenses
would be related to the number of customers. For example, costs such
as drinks and snacks for the customers would likely be highly related to
the number of customers taken on tours in a given month. Thus, using
number of customers to predict guiding expenses makes sense.
3. Using Microsoft® Excel, the least-squares regression method yields

estimates of $5.25 per customer for the variable cost and $38,601 per
month for the fixed cost. The R2 is 96%. The high R2 is not surprising
given the scattergram results in part 1 and the fact that it is
economically plausible that guiding expenses and number of customers
would be highly related.
4. Total variable costs for the tour:

Guide labour (2 guides x 3 hours each x
$20 per hour).................................... $120.00
Variable expenses (6 customers x $5.25
each from part 3 regression model).... 31.50
Total variable cost per guest................. $151.50
The minimum amount Chief Adventures should charge for the tour is
$151.50 to ensure the variable costs (including guide wages) are
covered. Any amount charged above that will contribute towards
recovering some of the fixed costs of approximately $38,601 incurred
each month (per requirement 3 above).

1a.
Units Utilities
Produced Cost
(X) (Y)
60,000 $200,000
44,000 $180,000
84,000 $240,000
48,000 $300,000
72,000 $400,000
100,000 $420,000
120,000 $340,000
112,000 $480,000
A spreadsheet application such as Excel or a statistical software package

Intercept (fixed cost)................ $113,407
Slope (variable cost per unit)..... $2.58
R2............................................ 0.47
Therefore, the cost formula using units produced as the activity base is
$113,407 per month plus $2.58 per unit produced, or
Y = $113,407 + $2.58X.
Note that the R2 is 0.47, which means that only 47% of the variation in
utility costs is explained by the number of units produced.

Case 3A-6 (continued)
b. The scattergram plot of utility costs versus units produced appears
below:
500
Chart Title
450
400
350
300
Utilities Cost (000s)
250
200
150
100
50
0
0 20 40 60 80 100 120 140
Units Produced (000s)

2a.
DLHs Utilities Cost

(X) (Y)
15,000 $200,000
9,000 $180,000
12,000 $240,000
18,000 $300,000
30,000 $400,000
27,000 $420,000
24,000 $340,000
33,000 $480,000
A spreadsheet application such as Excel or a statistical software package

Intercept (fixed cost)................ $68,000
Slope (variable cost per unit)..... $12
R2............................................ 0.93
Therefore, the cost formula using direct labour-hours as the activity
base is $68,000 per quarter plus $12 direct labour-hour, or
Y = $68,000 + $12X.
Note that the R2 is 0.93, which means that 93% of the variation in utility
costs is explained by the number of direct labour-hours. This is a very
high R2 and is an indication of a good fit.

b. The scattergram plot of utility costs versus direct labour-hours
appears below:
500 Chart Title

450
400
350
Utilities Cost (000s)
300
250
200
150
100
50
0
0 5 10 15 20 25 30 35
Direct Labour-Hours (000s)

3. The company should probably use direct labour-hours as the activity
base, since the fit of the regression line to the data is much tighter than
it is with units produced. The R2 for the regression using direct labour-
hours as the activity base is twice as large as for the regression using
units produced as the activity base. However, managers should look
more closely at the costs and try to determine why utilities costs are
more closely tied to direct labour-hours than to the number of units
produced.

4. It is plausible that both units produced and direct labour hours would be
related to utilities costs. However, because different models require
different amounts of direct labour, it seems more plausible to expect a
strong association between labour hours and utilities costs. Using units
produced as the independent variable assumes no difference in labour
hour requirements across the various models. Not surprisingly, the
results of the regression analysis are consistent with the qualitative
assessment of economic plausibility with a much higher R2 value for the
model using direct labour hours.


Cost Behaviour: Analysis and Use: Discussion Case 3-1

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Cost Behaviour: Analysis and Use: Discussion Case 3-1

Загружено:

Авторское право:

Доступные форматы

Chapter 3

Cost Behaviour: Analysis and Use

Discussion Case 3-1

Reasons companies may be reluctant to use quantitative techniques such

 Lack of understanding as to how to use the techniques.

© McGraw-Hill Education Ltd., 2018. All rights reserved.

© McGraw-Hill Education Ltd., 2018. All rights reserved.

1. Units Shipped Shipping Expense

2. Variable cost element:

3. Fixed cost element:

5. Total shipping expense = $800 + $350(7)

6. Fixed expense is $800.

7. Variable expense = $350(10)

Price per unit $5,000

© McGraw-Hill Education Ltd., 2018. All rights reserved.

9. Total contribution margin = 7 x $1,450 per unit

10. Operating income = Contribution margin – fixed costs

11. Contribution margin would decrease by:

13. Variable shipping expenses for 12 units:

14. Total shipping expenses for 12 units:

© McGraw-Hill Education Ltd., 2018. All rights reserved.

2. The average cost of a smoothie declines as the number of smoothies

© McGraw-Hill Education Ltd., 2018. All rights reserved.

2. It appears that admitting costs are strongly related to the number of

© McGraw-Hill Education Ltd., 2018. All rights reserved.

© McGraw-Hill Education Ltd., 2018. All rights reserved.

© McGraw-Hill Education Ltd., 2018. All rights reserved.

100 x $300* per guitar = $30,000

*$800 selling price - $500 total variable cost per guitar

Operating income for the Quarter ended March 31 $200,000

© McGraw-Hill Education Ltd., 2018. All rights reserved.

Taking into account the difference in behaviour between variable and

Sales (15,000 hours × $40 per hour)............................. $600,000

© McGraw-Hill Education Ltd., 2018. All rights reserved.

Sales (700 x $2,000) $1,400,000

© McGraw-Hill Education Ltd., 2018. All rights reserved.

1. Kilometers Total Annual

Variable cost per kilometer:

3. Fixed cost......................................................... $ 4,200

© McGraw-Hill Education Ltd., 2018. All rights reserved.

1. Blood Tests Costs

Variable cost per blood test:

Fixed cost per month:

2. Expected blood test costs when 2,300 tests are performed:

© McGraw-Hill Education Ltd., 2018. All rights reserved.

Number of Blood Tests Performed

© McGraw-Hill Education Ltd., 2018. All rights reserved.

Difference in rooms occupied:

Change in cost = $180,000 = $360 per room

$360 per room ÷ 30 days = $12 per room per day.

2. Monthly operating costs at 70% occupancy (above)... $1,764,000

3. 2,000 rooms × 50% = 1,000 rooms occupied.

© McGraw-Hill Education Ltd., 2018. All rights reserved.

© McGraw-Hill Education Ltd., 2018. All rights reserved.

© McGraw-Hill Education Ltd., 2018. All rights reserved.

*$800,000 sales ÷ $400 per surfboard = 2,000 surfboards.

2. Contribution format income statement

© McGraw-Hill Education Ltd., 2018. All rights reserved.

© McGraw-Hill Education Ltd., 2018. All rights reserved.

2. Knowledge of the underlying cost behaviour patterns will allow a

© McGraw-Hill Education Ltd., 2018. All rights reserved.

Repair costs appear to be closely related to the number of jobs completed

Fixed cost: Total repair cost at high activity level........ $24,000