EXERCISE 1-25 (25 MINUTES) 1.
Measur Measuring ing invent inventory ory costs costs is most most closel closelyy associ associate ated d with with the first first two objective objectivess of manageria manageriall accounting accounting activity: activity: (1) providing providing information information for decision making and planning, and (2) assisting managers in directing and controlling operational activities. Since inventory costs are used in external financ financial ial report reports, s, they they are are also also relev relevant ant to measur measuring ing the perfor performan mance ce of managers and subunits within the organization.
2.
Esti Estima mati ting ng cost costss is is part partic icul ular arly ly rele releva vant nt to the the obj objec ecti tive ve of prov provid idin ing g information for decision making and planning.
3.
Measuring Measuring operating operating costs costs is relevant relevant to all of the objectives objectives of manageria manageriall accounting activity.
4.
Comp Compar arin ing g oper operat atin ing g stat statis isti tics cs such such as thos thosee ment mentio ione ned d for for a hote hotell is partic particula ularly rly releva relevant nt to the follow following ing object objective ive of manage manageria riall accoun accountin ting: g: Assess Assessing ing the organi organizat zation ion's 's compet competiti itive ve positi position on and workin working g with with other other mana manage gers rs to ensu ensure re the the orga organi niza zati tion on's 's long long-r -run un comp compet etit itiv iven enes esss in its its industry.
5.
Developing a bonus reward system for managerial personnel is an example of motivating managers and other employees toward the organization's goals. To be effective, the bonus system must provide incentives for managers to work toward achieving those goals.
6.
Compar Comparing ing actual actual and planne planned d costs costs is consis consisten tentt with with two object objective ivess of mana manage geri rial al acco accoun unti ting ng acti activi vity ty:: (1) (1) assi assist stin ing g mana manage gers rs in cont contro roll llin ing g oper operat atio ions ns,, and and (2) (2) meas measur urin ing g the the perf perfor orma manc ncee of acti activi viti ties es,, subu subuni nits ts,, managers, and other employees within the organization.
7.
Dete Determ rmin inin ing g manu manufa fact ctur urin ing g cost costss is rela relate ted d to all all of the the obje object ctiv ives es of manage manageria riall account accounting ing.. It is especi especiall allyy closel closelyy relat related ed to the object objective ive of providing information for decision making and planning.
EXERCISE 2-24 (20 MINUTES) 1.
Advertising cos costs: Pe Period cos costt, fi fixed
2.
Stra Straig ight ht-l -lin inee depr deprec ecia iati tion on:: Prod Product uct cost cost,, fixe fixed, d, man manuf ufac actu turi ring ng ove overh rhea ead d
3.
Wage Wa gess of asse assemb mbly ly-l -lin inee pers person onne nel: l: Produ Product ct cost cost,, vari variab able le,, dire direct ct labo labor r
4.
Deli Delive very ry cos costs ts on cus custo tome merr ship shipme ment nts: s: Per Perio iod d cost cost,, vari variab able le
5.
News Newspr prin intt cons consum umed ed:: Prod Produc uctt cost cost,, vari variab able le,, dire direct ct mat mater eria iall
6.
Plan Plantt insu insura ranc nce: e: Pro Produ duct ct cos cost, t, fix fixed ed,, manu manufa fact ctur urin ing g over overhe head ad
7.
Glas Glasss cost costs: s: Prod Produc uctt cos cost, t, vari variab able le,, dir direc ectt mat mater eria iall
8.
Tire Tire cost costs: s: Prod Produc uctt cos cost, t, vari variab able le,, dir direc ectt mat mater eria iall
9.
Sal Sales comm commis issi sion ons: s: Per Period iod cost cost,, vari variab ablle
10.
Wood Wood glue: glue: Produc Productt cost, cost, variab variable, le, either either direct direct materi material al or or manuf manufact acturi uring ng overhead (i.e., indirect material) depending on how significant the cost is
11.
Wages Wages of of secur security ity guards guards:: Prod Product uct cost, cost, variab variable, le, manufa manufactu cturi ring ng overh overhead ead
12.
Sala Salary ry of finan financi cial al vic vicee-pr pres esid ident ent:: Peri Period od cost, cost, fixe fixed d
EXERCISE 2-28 (25 MINUTES) 1.
ALHAMBRA ALUMINUM COMPANY SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material: Raw-m Raw-mat ater eria iall inve invent ntor ory, y, Jan Janua uary ry 1.. 1.... .... ..... ..... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ... Add: Add: Purc Purcha hase sess of of raw raw mate materi rial al.. .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Raw mater material ial availa available ble for use... use...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ........ ........ ... Deduct: Raw-material inventory, December 31..................... Raw material used................................................................... Direct labor.................................................................................... Manufacturing overhead: Indi Indire rect ct mate materi rial al.. .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ... Indi Indire rect ct labo labor. r... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ... Depr Deprec ecia iati tion on on plan plantt and and equi equipm pmen ent. t... .... ..... ..... .... .... .... .... .... .... ..... ...... ...... ...... ..... .. Utili Utiliti ties es.. .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... ..... ...... ..... Other......................................................................................... Total manufacturing overhead................................................ Total manufacturing costs........................................................... Add: Work-in-process inventory, January 1............................... Subtotal. tal............................. ................................ ................................. ...... .... Deduct: Work-in-process inventory, December 31..................... Cost of goods manufactured........................................................
$ 55,0 55,000 00 240, 240,00 0000 $295,0 $295,000 00 75,000 $220,000 420,000 $ 12,0 12,000 00 22,0 22,000 00 110, 110,00 0000 23,0 23,000 00 35,000 202,000 $842,000 110,000 $952,000 125,000 $827,000
2.
ALHAMBRA ALUMINUM COMPANY SCHEDULE OF COST OF GOODS SOLD FOR THE YEAR ENDED DECEMBER 31, 20X1
Finish Finisheded-goo goods ds invent inventory ory,, Janua January ry 1...... 1......... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ....... ......... ......... ...... Add: Cost of goods manufactured................................................................ Cost Cost of goods goods availa available ble for sale.. sale..... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ....... ......... .......... .......... ......... ......... ....... Deduct: Finished-goods inventory, December 31........................................ Cost Cost of goods goods sold.. sold..... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ........ .........
$160,0 $160,000 00 827,000 $987,0 $987,000 00 155,000 $832,0 $832,000 00
EXERCISE 2-28 (CONTINUED) 3.
ALHAMBRA ALUMINUM COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X1
Sales Sales reven revenue. ue.... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ........ ......... ......... ......... Less: Cost of goods sold............................................................................... Gross Gross margin margin... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ........ ......... .... Selling and administrative expenses............................................................. Income Income before before taxes. taxes.... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ... Income tax expense (at 35%).......................................................................... Net income. income.... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ........ ......... .... PROBLEM 2-40 (10 MINUTES) Cost Item Number 1. 2. 3. 4. 5. 6. 7. 8. 9.
Product Cost or Period Cost Product Period* Product Period* Product Period* Product Product Product
*Service industry and retail firms typically treat all costs as operating expenses which are period expenses. Such firms do not inventory costs. PROBLEM 2-41 (10 MINUTES) Cost Item Number 1. 2. 3. 4. 5.
Direct or Indirect direct direct direct indirect indirect
Partially Controllable by Department Supervisor yes no yes no no
$1,210 $1,210,00 ,0000 832,000 $ 378,00 378,0000 105,000 $ 273,00 273,0000 95,550 $ 177,45 177,4500
PROBLEM 2-42 (20 MINUTES) 1.
3 hours
($14 + $4) = $54
Notice that the overtime premium on the flight is not a direct cost of the flight. 2.
3 hours
$14
.5 = $21
This is the overtime premium, which is part of Gaines' overall compensation. 3.
The The over overti time me prem premiu ium m shoul should d be incl includ uded ed in ove overh rhea ead d and all alloc ocat ated ed acro across ss all of the company's flights.
PROBLEM 2-42 (CONTINUED) 4.
The The $87 $87 is an an oppo opport rtun unit ityy cost cost of of usin using g Gain Gaines es on on the the flig flight ht dep depar arti ting ng fro from m San Diego on August 11. The cost should be assigned to the August 11 flight departing from San Diego.
PROBLEM 2-43 (35 MINUTES) 1.
LAREDO LUGGAGE COMPANY SCHEDULE OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED DECEMBER 31, 20X2
Direct material: Raw-ma Raw-mater terial ial invent inventory ory,, Januar Januaryy 1..... 1........ ...... ....... ....... ...... ...... ...... ...... ...... ........ .......... ....... Add: Purchases of raw material................................................ Raw materi material al avail availabl ablee for use... use...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ........ ........ ... Deduct: Raw-material inventory, December 31........................ Raw material used...................................................................... Direct labor.................. ................................ ................................. ........... ...... Manufacturing overhead: Indi Indire rect ct mate materi rial al.. ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ... Indi Indire rect ct labo labor. r... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ... Util Utilit itie ies: s: plan plant.. t.... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... ..... ...... ...... ...... ...... ..... Depr Deprec ecia iati tion: on: plan plantt and and equi equipm pmen ent.. t.... .... .... .... .... .... .... .... .... ..... ..... ..... ...... ...... ...... ...... ...... ... Other............................................................................................ Total manufacturing overhead................................................... Total manufacturing costs............................................................. Add: Work-in-process inventory, January 1................................. Subtotal. tal............................. ................................ ................... ...... .... ....... ....... ...... ....... ... Deduct: Work-in-process inventory, December 31...................... Cost of goods manufactured.........................................................
$ 20,000 20,000 90,000 $110,0 $110,000 00 12,500 $97,500 100,000 $ 5,00 5,0000 7,50 7,5000 20,0 20,000 00 30,0 30,000 00 40,000 102,500 $300,000 20,000 $320,000 15,000 $305,000
2.
LAREDO LUGGAGE COMPANY SCHEDULE OF COST OF GOODS SOLD FOR THE YEAR ENDED DECEMBER 31, 20X2
Fini Finish shed ed good goodss inven invento tory ry,, Janua January ry 1... 1..... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ..... .. Add: Add: Cost Cost of good goodss man manuf ufac actu ture red.. d.... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... ..... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Cost Cost of goods goods availa available ble for sale.. sale..... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ....... ......... .......... .......... ......... ......... ....... Deduct: Finished-goods inventory, December 31........................................ Cost Cost of goods goods sold.. sold..... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ........ .........
$ 10,0 10,000 00 305, 305,00 0000 $315,0 $315,000 00 25,000 $290,0 $290,000 00
PROBLEM 2-43 (CONTINUED) 3.
LAREDO LUGGAGE COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X2
Sales Sales reven revenue. ue.... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ........ ......... ......... ......... Less: Cost of goods sold............................................................................... Gross Gross margin margin... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ........ ......... .... Selling and administrative expenses............................................................. Income Income before before taxes. taxes.... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ... Income tax expense........................................................................................ Net income income... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ...... ...... ...... ...... ...... ....... ....... ...... ...... ....... ......... ....... PROBLEM 2-50 (20 MINUTES) 1.
a, d, g, j
2.
b, c, f
3.
b, d, g, k
4.
b, c and d*, e and f and g*, k* *The building is used for several purposes.
5.
b, c, f
6.
b, c, h
7.
b, c, f
8.
b, c, e
9.
b, c and d†, e and f and g †, k† †
The building heated by the furnace is used for several purposes.
10.
a, d, g, j
11.
a, d, g, i
12.
a, d, g, j
13.
b, c**, f **The sign will be depreciated as a period cost.
14.
b, d, g, k
15.
a, d, g, k
$475,0 $475,000 00 290,000 $185,0 $185,000 00 75,000 $110,0 $110,000 00 45,000 $65,00 $65,0000
PROBLEM 2-58 (25 MINUTES) 1.
Output (.75 liter bottles) 10,000 15,000 20,000
Calculation $212,400/10,000 $234,600/15,000 $256,800/20,000
Unit Cost $21.24 $15.64 $12.84
The unit cost is minimized at a sales volume of 20,000 bottles. 2.
Output (.75 liter bottles) 10,000 15,000 20,000
Sales Revenue $216,000 270,000 288,000
Total Costs Profit $212,400 $ 3,600 234,600 35,400 256,800 31,200
Profit is maximized at a production level of 15,000 bottles of wine. 3.
The 15,00015,000-bottle bottle level level is best for for the company, company, since since itit maximize maximizess profit. profit.
4.
The The unit unit cost cost decr decrea ease sess as outpu outputt incr increa ease ses, s, becau because se the fixed fixed cost cost per per unit unit declines as production and sales increase. A lower price is required to motivate consumers to purchase a larger amount of wine.
EXERCISE 7-24 (15 MINUTES) 1.
2.
a.
Fixed
b.
Variable
c.
Variable
d.
Fixed
e.
Semivariable (or mixed)
Prod Produc ucti tion on cost cost per per mon month th = $37 $37,0 ,000 00** + $2. $2.30 30 X † *37,000 = $21,000 + $11,000 + $5,000 †
$2.30 = $1.20 + $.85 + $.25
EXERCISE 7-25 (15 MINUTES) 1.
Variable ma maintenance cost per tour mile
= (18,750r -16,500 -16,500r ) / (30,000 miles – 12,000 miles) = .125r
r denotes the real , Brazil’s national currency.
Tota Totall main mainte tena nanc ncee cost cost at 12, 12,00 0000 mile miles. s... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Variable maintenance cost at 12,000 miles (.125 r 12,000)..................... Fixe Fixed d main mainte tena nanc ncee cost cost per per month month.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 2.
16,5 16,500 00r 1,500r 15,0 15,000 00r
Cost formula: Total maintenance cost per month = 15,000r + .125rX , where X denotes tour miles traveled during the month.
3.
Cost Cost pred predic icti tion on at at the the 34,0 34,000 00-mi -mile le acti activi vity ty leve level: l: Maint ainten enaance nce cost ost
=
15,0 5,000r + (.125r )(34,000) )(34,000)
=
19,250r
EXERCISE 7-33 (45 MINUTES) 1.
Vari Variab able le util utilit ityy cos costt per per hour hour =
$3,800 700
$2,600 400
= $4.00
Tota Totall util utilit ityy cost cost at 700 700 hour hours.. s.... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... ..... ...... ..... .. Variable utility cost at 700 hours ($4.00 700 hours)............................... Fixe Fixed d cost cost per per mont month. h... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... .....
$ 3,80 3,8000 2,800 $ 1,00 1,0000
Cost formula: Monthly utility cost = $1,000 + $4.00 X , where X denotes hours of operation. 2.
Variab Variable-c le-cost ost esti estimat matee based based on the the scatte scatterr diagra diagram m on the next next page: page: Cost at at Cost at Difference
600 ho hours ....................................................................... 0 hours hours ............ .................. ............ ............. ............. ............ ............ .......................... ........................ 600 hours .......................................................................
Variable cost per hour = $2,500/600 hr. = $4.17 (rounded)
$3,400 900 $2,500
EXERCISE 7-33 (CONTINUED) Scatter diagram and visually-fitted line:
Utility cost per month 5000
4000
3000
2000
1000
0 0
100
200
300
400
500
600
700
Hours of operation
EXERCISE 7-33 (CONTINUED) 3.
Least-s t-square re regression: (a) Tabu Tabula lati tio on of of da data: ta: Dependent Variable (cost) Y 3,240 3,400 3,800 3,200 2,700 2,60 2,6000 18,940
Month January..................... February.................... March........................ April........................... May............................ June June.. .... .... .... .... .... .... .... .... .... ..... ...... ..... Total.......................... (b) (b)
Independent Variable (hours) X 550 600 700 500 450 400 400 3,200
XY 1,782,000 2,040,000 2,660,000 1,600,000 1,215,000 1,04 1,040, 0,00 0000 10,337,000
Calc Calcul ulat atio ion n of para parame mete ters rs:: a =
(
Y )( n(
X X
2
2
)
)
( (
(6)(1,765,000)
b =
=
X )( X )(
= (18,940)(1,765,000)
(c)
X 2 302,500 360,000 490,000 250,000 202,500 160, 160,00 0000 1,765,000
XY ) X )
(3,200)(10,337,000) (3,200)(3,200)
n( XY)
( X)( Y)
n( X 2 )
( X)( X)
(6)(10,337,000) (6)(1,765,000)
(3,200)(18,940) (3,200)(3,200)
1,002
4.04
Cost fo formula: Monthl Monthlyy utilit utilityy cost cost
= $1,002 $1,002 + $4.04 $4.04 X , where X denotes hours of operation.
Variable Variable utility utility cost
= $4.04 $4.04 per hour of operation operation
EXERCISE 7-33 (CONTINUED) 4.
Cost Cost pred predic icti tion onss at at 300 300 hour hourss of of ope opera rati tion on:: (a)
High-low me method: Utilit Utilityy cost cost
(b)
=
$1,000 $1,000 + ($4.00 ($4.00)(3 )(300) 00) = $2,200 $2,200
Visua isuall llyy-fi fitt tteed lin linee: Utili tility ty cos cost
= $2,1 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: Util Utilit ityy cos costt = $1,0 $1,002 02 + ($4 ($4.0 .04) 4)(3 (300 00)) = $2,2 $2,214 14
EXERCISE 7-34 (45 MINUTES) 1.
Least-s t-square re regression: (a) Tabu Tabula lati tio on of of da data: ta:
Month July.............................. August........................ September.................. October....................... November................... December.................... Total............................
Dependent Variable (cost in thousands) Y 54 54 57 60 54 57 57 336
Independent Variable (thousands of passengers) X 16 17 16 18 15 17 99
X 2 256 289 256 324 225 289 1,639
XY 864 918 912 1,080 810 969 5,553
EXERCISE 7-34 (CONTINUED) (b) (b)
Calc Calcul ulat atio ion n of para parame mete ters rs:: a =
(
Y )( n(
X
2
2
)
X
)
( (
X )(
XY )
X )(
X )
(336)(1,639) (99)(5,553) = (6)(1,639) (99)(99)
b =
= (c)
29 (rounded)
n( ∑ XY) − ( ∑ X)( ∑Y) n( ∑ X 2 ) − ( ∑ X)( ∑ X) (6)(5,553) (6)(1,639)
(99)(336)
1.636 (rounded)
(99)(99)
Cost fo formula: Monthly cost of flight service = $29,000 + $1,636X, where X denotes thousands of passengers.
2.
Calc alculat ulatio ion n and and inte interrpret pretaation tion of of R2: (a)
For Formula mula for for calc alculat ulatio ion n: 2
R
where
Y
2
∑ (Y −Y ') =1− 2 ∑ Y ) (Y −
denotes the observed value of the dependent variable (cost) at a particular activity level.
Y' denotes the predicted value of the dependent variable (cost) based on the regression line, at a particular activity level. Y
denotes the mean (average) observation of the dependent variable (cost).
EXERCISE 7-34 (CONTINUED) (b)
Tabulation of data:*
Month July................. August............ September. . . . . October.......... November. . . . . . December....... Total...............
Y 54 54 57 60 54 57
X 16 17 16 18 15 17
Predicted Cost (in thousands) Based on Regression Line Y' [( Y – Y' )2]† 55.176 1.383 56.812 7.907 55.176 3.327 58.448 2.409 53.540 .212 56.812 .035 15.273
[(Y – Y )2]† 4.000 4.000 1.000 16.000 4.000 1.000 30.000
*Y' = ($29,000 + $1 $1,636 X )/$1,000 )/$1,000 = Y Y/6 = 56 †
Rounded.
(c)
Calculation of of R2: R2 = 1 –
(d)
15.273 = .49 (rounded) 30.000
Interpretation of R2: The coefficient of determination, R2, is a measure of the goodness of fit of the least-squares regression line. An R 2 of .49 means that 49% of the variability of the dependent variable about its mean is explained by the variability of the independent variable about its mean. The higher the R2, the better the regression line fits the data. The interpretation of a high R2 is that the independent variable is a good predictor of the behavior of the dependent variable. In cost estimation, a high R2 means that the cost analyst can be relatively confident in the cost predictions based on the estimated-cost behavior pattern.
PROBLEM 7-40 (40 MINUTES) 1.
M aterial-handling aterial-handling costs $12,500 $12,000 $11,500 $11,000 2. Visually-fitted cost line
$10,500 $10,000 $9,500
5 00 The lower part of the vertical axis has been shortened.
1,0 00
1 ,5 0 0
2,00 0
2,500
Hundreds of pounds of equipment
PROBLEM 7-40 (CONTINUED) 2.
See gra graph for for requir quirem emeent (1) (1).
3.
The estima estimate te of of the the fixe fixed d cost cost is is the the inte interc rcept ept on the the vert vertica icall axis. axis. Fixed-cost component = $9,700 To estimate the variable-cost component, choose any two points on the visually-fitted cost line. For example, choose the following points: Activity 0... 0..... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. 2,00 2,000. 0... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... ..
Cost $ 9,70 9,7000 11,7 11,700 00
Then proceed as follows to estimate the variable-cost component: Variable cost per unit of activity*
=
$11,700 −$9,700 2,000 −0
= $1.00 *Pounds (in hundreds) of equipment loaded or unloaded 4.
Cost equation: Total material-handling cost = $9,700 + $1.00 X , where X denotes the number pounds (in hundreds) of equipment loaded or unloaded during the month.
PROBLEM 7-40 (CONTINUED) 5.
High-low method: Vari Variab able le cos costt unit unit of of acti activi vity ty** =
$12,120 −$10,200 2,600 −1,000
= $1.20 *Pounds (in hundreds) of equipment loaded or unloaded Tota Totall cost cost at 2,60 2,6000 unit unitss of acti activi vity ty.. .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... ..... ... Deduct: Variable cost at 2,600 units of activity (2,600 $1.20)................. Fixe Fixed d cost cost.. .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...
$12, $12,12 1200 3,120 $ 9,00 9,0000
Cost equation based on high-low method: Material-h Material-handli andling ng cost per month = $9,000 $9,000 + $1.20 X , where X denotes the number of units of activity during the month.
PROBLEM 7-40 (CONTINUED) 6.
Memorandum Date:
Today
To :
President, Nantucket Marine Supply
From:
I.M. Student
Subjec Subject: t: Mater Material ial-han -handli dling ng cost cost estima estimates tes On the basis of a scatter diagram and visually-fitted cost line, the Material-Handling Department's monthly cost behavior was estimated as follows: Material-handling cost per month = $9,700 + $1.00 unit of activity A unit of activity is defined in this department as 100 pounds of equipment loaded or unloaded at the loading dock. Using the high-low method, the following cost estimate was obtained: Material-handling cost per month = $9,000 + $1.20 unit of activity The two methods yield different estimates because the high-low method uses only two data points, ignoring the rest of the information. The method of visually fitting a cost line, while subjective, uses all of the data available. In this case, the two data points used by the high-low method do not appear to be representative of the entire set of data. 7.
Predicted Material-Handling Costs Using Visually-Fitted Cost Line* $11,950 = $9,700 + ($1.00)(2,250)
Using High-Low Method $11,700 = $9,000 + ($1.20)(2,250)
*This method is preferable, because it uses all of the data in developing the cost equation.
PROBLEM 7-41 (45 MINUTES) 1.
Leas Leastt-sq squa uarres regres gressi sion on:: (a) (a)
Tabu Tabula lati tio on of data data::
Dependent Variable (cost in thousands) Y 11.70 11.30 11.25 10.20 11.10 12.55 12.00 11.40 12.12 11.05 11.35 11.35 11.35 137.37
Month January....................... February...................... March.......................... April............................. May.............................. June............................ July.............................. August........................ September.................. October....................... November................... Decemb December. er.... ...... ...... ...... ...... ....... .... Total............................ (b) (b)
Independent Variable (units of activity in thousands) X 1.8 1.6 1.3 1.0 2.2 2.4 2.0 1.8 2.6 1.1 1.2 1.4 20.4
X 2 3.24 2.56 1.69 1.00 4.84 5.76 4.00 3.24 6.76 1.21 1.44 1.96 1.96 37.70
XY 21.060 18.080 14.625 10.200 24.420 30.120 24.000 20.520 31.512 12.155 13.620 15.890 15.890 236.202
Calc Calcul ulat atio ion n of para parame mete ters rs:: a =
= b =
=
(
Y )( n(
X
2
2
)
X
)
(137.37)(37.7) (12)(37.7)
( (
X )( X )(
XY ) X )
(20.4)(236.202) (20.4)(20.4)
9.943 (rounded)
n( ∑ XY) − ( ∑ X)( ∑Y) n( ∑ X 2 ) − ( ∑ X)( ∑ X) (12)(236.202) (12)(37.7)
(20.4)(137.37) (20.4)(20.4)
.885 (rounded)
PROBLEM 7-41 (CONTINUED) (c) (c)
Fixe Fixedd- and and varia variabl ble-c e-cos ostt compo compone nents nts:: Monthly fixed cost = $9,943* Variable cost = $.89 per unit of activity (rounded) † *The intercept parameter (a) computed above is the cost per month in thousands. † The slope parameter ( b) calculated above is the cost in thousands of dollars per unit of activity. thousand units of activity. Equivalently, it is the cost per unit
2.
Tota Totall mont monthl hlyy cos costt = $9, $9,94 9433 + $.8 $.899 per per uni unitt of acti activi vity ty
3.
Cost Cost pre predi dict ctio ion n for for 2,25 2,2500 uni units ts of act activ ivit ity: y: Total monthly cost = $9,943 + ($.89)(2,250) = $11,946 (rounded)
4.
The cost predictions differ because the cost formulas differ under the three cost-estimation methods. The high-low method, while objective, uses only two data points. Ten observations are excluded. The visual-fit method, while it uses all of the data, is somewhat subjective. Different analysts may draw different cost lines. Least-squares regression is objective, uses all of the data, and is a statistically sound method of estimation.
Therefore, least-squares regression is the preferred method of cost estimation.
PROBLEM 7-42 (40 MINUTES)
Total course maintenance maintenance cost
1. Step-variable component of maintenance cost
$13,250 $13,200
2. Semivariable cost approximation approximation
$13,150 $13,100 $13,050 $13,000
1. Fixed component of maintenance cost 0
50
The lower part of the vertical axis has been shortened.
100
150
20 0
25 0 300 Number Number of golfers
PROBLEM 7-42 (CONTINUED) 3.
Fix Fixed-c ed-cos ostt com compo pone nent nt = $1 $13,0 3,005 Variable-cost component: Variable cost = per golfer
$13,205 $13,005 200 0
= $1 Cost equation: Maintenance cost per month = $13,005 + $1 X , where X denotes the number of golfers during the month. 4.
Predicted Course Maintenance Costs
150 people tee off................................ 158 people tee off................................
Using Fixed Cost Coupled with StepVariable Cost Behavior Pattern $13,150 13,160
Using Semivariable Cost Approximation $13,155 13,163
PROBLEM 7-43 (35 MINUTES) 1.
The The regre regress ssio ion n equati equation on's 's inter interce cept pt on the verti vertica call axis is $190 $190.. It repr repres esen ents ts the port portio ion n of indi indire rect ct mate materi rial al cost cost that that does does not not vary vary with with mach machin inee hour hourss when 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.
Estima Estimated ted cost cost of indire indirect ct mate materia riall at 850 machin machinee hour hourss of activi activity: ty: S = $190 + ($5
850)
= $4,440
3.
Seve everal ral que questio stions ns shou should ld be asked sked:: (a)
Do the the observ observations ations contain contain any any outlier outliers, s, or or are are they they all all repres representat entative ive of of normal normal operations?
(b) (b)
Are Are ther theree any any mism mismat atch ched ed time time peri period odss in the data data? ? Are Are all all of the indir indirec ectt mate materi rial al cost cost obse observ rvat atio ions ns matc matche hed d prop proper erly ly with with the the mach machin inee hour hour observations?
(c)
Are ther theree any alloc allocate ated d costs costs include included d in the indi indirec rectt materia materiall cost cost data? data?
(d) (d)
Are Are the the cos costt data data aff affec ecte ted d by infl inflat atio ion? n?
4. Beginning inventory......................... ................................ .......... + Purc Purcha hase ses. s... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .... .... .... .... .... .... ..... ...... ...... ...... ..... – Ending inventory............................................................... Indirect material used.......................................................... 5.
April $1,300 5,90 5,9000 (1,350) (1, 350) $5,850
High-low method: Variable cost per machine hour = =
difference in cost levels difference in activity levels $5,850 $4,200 1,000 700
$1,650 300
$5.50 per machine hour
August $1,000 6,20 6,2000 (3,000) (3,0 00) $4,200
PROBLEM 7-43 (CONTINUED) Fixed cost per month: Tota Totall cost cost at 1,00 1,0000 hours hours.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Variable cost at 1,000 hours ($5.50 1,000)......................................................................................... Fixe Fixed d cost cost.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....
$5,8 $5,850 50 5,500 $ 350 350
Equation form: Indirect material cost = $350 + ($5.50 6.
machine hours)
The regr regress ession ion esti estimat matee should should be be recom recommen mended ded beca because use it uses uses all all of the data data,, not just two pairs of observations when developing developing the cost equation.
CASE 2-59 (50 MINUTES) 1.
a. The The pre previ viou ouss pur purch chas asee pri price ce of the the end endor or on hand hand,, $10 $10.0 .000 per per gall gallon on,, and and the average cost of the endor inventory, $9.50 per gallon, are sunk costs. These costs were incurred in the past and will have no impact on future costs. They cannot be changed by any future action and are irrelevant to any future decision. Although the current price of endor is $11.00 per gallon, no endor will be purchased at this price. Thus, it too is irrelevant to the current special order. If the order is accepted, the required 900 gallons of endor will be replaced at a cost of $11.50 per gallon. Therefore, the real cost of endor for the special order is $10,350 (900 $11.50). b. The $40,000 $40,000 paid paid by Alderon Alderon for its stock of tatooine tatooine is a sunk cost. cost. It was incurred in the past and is irrelevant to any future decision. The current market price of $22 per kilogram is irrelevant, since no more tatooine will be purchased. If the special order is accepted, Alderon will use 1,400 kilograms of its tatooine stock, thereby losing the opportunity to sell its enti entire re 1,90 1,9000-ki kilo logr gram am stoc stockk for for $28, $28,00 000. 0. Thus Thus,, the the $28, $28,00 0000 is an opportunity cost of using the tatooine in production instead of selling it to Solo Industries. Moreover, if Alderon uses 1,400 kilograms of tatooine in production, it will have to pay $2,000 for its remaining 500 kilograms to be disposed of at a hazardous waste facility. This $2,000 disposal cost is an out-of-pocket cost. The real cost of using the tatooine in the special order is $30,000 ($28,000 opportunity cost + $2,000 out-of-pocket cost).
CASE 2-59 (CONTINUED)
2.
a.
Copy CopyFa Fast st Co Compa mpany wou would ld be be indi indifffer ferent to to acqu acquir irin ing g eit either her the the smal smalll-vvolum olumee copier, 1500S, or the medium-volume copier, 1500M, at the point where the costs for 1500S and 1500M are equal. This point may be calculated using the following formula, where X equals the number of copies: (Variable costS X ) + fixed costS
= (variable cost M X ) + fixed costM
1500S
1500M
$.07 X + $4,000 = $.045 X + $5,500 $.025 X = $1,500 60,000 00 copi copies es X = 60,0 The conclusion is that the company would be indifferent to acquiring either the 1500S or 1500M machine at an annual volume of 60,000 copies. b.
A decis decision ion rule rule for for selec selectin ting g the most most profi profitab table le copie copier, r, when when the the volume volume can be be estimated estimated,, would establish establish the points where management management is indiffere indifferent nt to each machine. The volume where the costs are equal between alternatives can be calculated using the following formula, where X equals the number of copies: (Variable costS X ) + fixed costS = (variable cost M X ) + fixed costM For the 1500S machine compared to the 1500M machine: 1500S
1500M
$.07 X + $4,000 = $.045 X + $5,500 $.025 X = $1,500 60,000 00 copi copies es X = 60,0 For the 1500M machine compared to the 1500L machine: 1500M
1500L
$.045 X + $5,500 = $.025 X + $10,000 $.02 X = $4,500 225,00 0000 cop copie iess X = 225,
CASE 2-59 (CONTINUED) The decision rule is to select the alternative as shown in the following chart. Anti Antici cipa pate ted d Ann Annua uall Vol Volum umee 0 60,000 60,000 225,000 225,000 and higher
3.
Opti Optima mall Mod Model el Choi Choice ce 1500S 1500M 1500L
The The proj projeecte cted dona donati tion onss from from the the wild wildlife life show show amou amount nt to $200 $200,0 ,0000 (10 percent of the TV audience at $20,000 per 1 percent of the viewership). The projected donations from the manufacturing series amount to $150,000 (15 percent of the TV audience at $10,000 per 1 percent of the viewership). Therefore, the differential revenue is $50,000, with the advantage going to the wildlife show. However, if the manufacturing show is aired, the station will be able to sell the wildlife show to network TV. Therefore, airing the wildlife show will result in the incurrence incurrence of a $50,000 opportunity cost. The The conc conclu lusi sion on,, then then,, is that that the the stat statio ion' n'ss mana manage geme ment nt shou should ld be indifferent between the two shows, since each would generate revenue of $200,000. Wildlife show (10
$20,000)
Manufacturing show (15 $10,000) Manufacturing show (sell wildlife show)
$200 $200,0 ,0000 dona donati tion on $150 $150,0 ,0000 dona donati tion on 50,000 50,0 00 sales sale s proceeds proc eeds $200 $200,0 ,000 00 tota totall rev reven enue ue
