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CHAPTER 3 COST BEHAVIOR DISCUSSION QUESTIONS 1. Knowledge
of cost behavior allows a manager to assess changes in costs that result from changes in activity. This allows a manager to assess the effects of choices DISCOVER NEW BOOKS that change activity. For example, if excess 6. capacity exists, bids that minimally cover variable costs may be totally appropriate. Knowing what costs are variable and what costs are fixed can help a manager make better bids.
committed fixed expenses. Other resources acquired in advance are short term in nature, and they essentially correspond to discretionary fixed expenses. READ EVERYWHERE
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A variable cost increases in direct proportion to changes in activity usage. A one-unit increase in activity usage produces an increase in cost. A stepvariable cost, however, increases only as activity usage
longer the time period, the more likely 2. The longer that a cost will be variable. The short run is a period of time for which at least one cost is fixed. In the long run, all costs are variable.
changes in small blocks or chunks. An increase in cost requires an increase in several units of activity. When a stepvariable cost changes over relatively narrow ranges of activity, it may be more convenient to treat it as a variable cost.
3. Resource spending is the cost of acquiring acquiring the capacity to perform an activity, whereas resource usage is the amount of activity actually used. It is possible to use less of the activity than what is supplied. Only the cost of the activity actually used should be assigned to products.
7. Mixed costs are usually reported in total in the accounting records. The amount of the cost that is fixed and the amount that is variable are unknown and must be estimated.
4. Flexible resources are those acquired from outside sources and do not involve any longterm commitment for any given amount of resource. Thus, the cost of these resources increases as the demand for them increases, and they are variable costs (varying in proportion to the associated activity driver).
8. A scattergraph allows a visual portrayal of
5. Committed resources are acquired by the
to the high and low points, it is possible to select two points that better represent the relationship between activity and costs, producing a better estimate of fixed and variable costs. The main advantage of the high-low method is the fact that it removes subjectivity from the choice process. The
the relationship between cost and activity. It reveals to the investigator whether a relationship may exist and, if so, whether a linear function can be used to approximate the relationship.
9. Since the scatterplot method is not restricted
use of either explicit or implicit contracts to obtain a given quantity of resources, regardless of whether the quantity of resources available is fully used or not. For multiperiod commitments, the cost of these resources essentially corresponds to 3-1
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same line will be produced by two different persons.
10. Assuming that a scattergraph reveals that a linear cost function is suitable, then the method of least squares selects a line that best fits the data points. The method also provides a measure of goodness of fit so that the strength of the relationship between cost and activity can be assessed.
11.
The best-fitting line is the one that is “clos “closest” to the data points. This is usually usual ly measured by the line that has the smallest sum of squared deviations. No, the bestfitting line may not explain much of the total cost variability. There must be a strong relationship as well.
12.
If the variation in cost is not well explained by activity usage (coefficient of determination is low) as measured by a single driver, then other explanatory variables may be needed in order to build a good cost formula.
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13.
The learning curve curve describes a situation in which the labor hours worked per unit decrease as the volume produced increases. The rate of learning is determined empirically. In other words, managers use their knowledge of previous similar situations to estimate a likely rate of learning.
14.
You would prefer a learning rate of 80 percent because that would lead to a faster decrease in the cumulative average time it takes to perform the service. (To see this, rework Cornerstone 3-8 with an 85 percent learning rate. Note that the cumulativeaverage time for two systems would be 850 hours rather than 800 hours.)
15.
If the mixed costs are immaterial, then the method of decomposition is unimportant. Furthermore, sometimes managerial judgment may be more useful for assigning costs than the use of formal statistical methodology. DISCOVER NEW BOOKS
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CORNERSTONE EXERCISES Cornerstone Exercise 3.1 1.
Total labor cost = Fixed labor cost + (Variable rate rate × Classes taught) = $600 + $20(Classes taught)
2.
Total variable labor cost = Variable rate × Classes taught Read Free For 30 Days = $20 × 100 = $2,000
3.
Total labor cost = $600 + ($20 × Classes taught) = $600 + $2,000 = $2,600
4.
Unit labor cost = Total labor cost/Classes taught = $2,600/100 = $26
5.
New total classes = 100 + (0.50 × 100) = 150 Total labor cost = $600 + ($20 × 150) = $3,600 DISCOVER NEW BOOKS
Unit labor cost = $3,600/150 = $24.00
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The unit labor cost went down because the fixed cost, which stays the same, is spread over a greater number of classes taught.
Cornerstone Exercise 3.2 1.
Activity rate = Total cost of purchasing agents/Number of purchase orders = (5 × $28,000)/(5 × 4,000) = $7.00/purchase order
2.
a. b.
Total activity availability = 5 × 4,000 = 20,000 purchase orders Unused capacity = 20,000 – 17,800 – 17,800 = 2,200 purchase orders
3.
a. b.
Total activity availability = $7(5 × 4,000) = $140,000 Unused capacity = $7(20,000 – 17,800) – 17,800) = $15,400
4.
Total activity availability = Activity capacity used + Unused capacity 20,000 = 17,800 + 2,200 or $140,000 = $124,600 + $15,400
5.
Four purchasing agents working full time and another working half time could process 18,000 purchase orders (4.5 × 4,000). Since 17,800 purchase orders are processed, the unused capacity would be 200 purchase orders (18,000 – (18,000 – 17,800). 17,800).
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Cornerstone Exercise 3.3 1.
Average workers’ salaries = $ 43,200/6 = $7,200 Average temp agency payment = $6,240/6 = $1,040 Average warehouse rental = $1,700/6 = $283 (rounded) Average electricity = $3,410/6 = $568 (rounded) Average depreciation = $13,200/6 = $2,200 Read Free For 30 Days Average machine hours = 29,600/6 = 4,933 (rounded) Average number of orders = 1,720/6 = 287 (rounded) Average number of parts = 2,800/6 = 467 (rounded)
2.
Average fixed monthly cost = $7,200 + $2,200 = $9,400 Variable rate for temp agency = $1,040/287 = $3.62 (rounded) per order Variable rate for warehouse rental = $283/467 = $0.61 (rounded) per part Variable rate for electricity = $568/4,933 = $0.12 (rounded) per mach. hr. Monthly cost = $9,400 + $3.62(orders) + $0.61(parts) + $0.12(machine hours)
3.
DISCOVER NEW BOOKS READ parts) EVERYWHERE BUILD YOUR DIGITAL READING LISTS July cost = $9,400 + $3.62(420 orders) + $0.61(250 p arts) + $0.12(5,900 mhrs.) = $9,400 + $1,520 + $153 + $708 = $11,781 (rounded)
4.
New machine depreciation = ($24,000 – 0)/10 – 0)/10 years = $2,400 New machine depreciation per month = $2,400/12 = $200 Only the fixed cost will be affected since depreciation is part of fixed cost. New fixed cost per month = $9,400 + $200 = $9,600 New July cost = $9,600 + $1,520 + $153 + $708 = $11,981 (rounded)
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Cornerstone Exercise 3.4 1.
Month with high number of purchase orders = August Month with low number of purchase orders = February
2.
Variable rate = (High cost – cost – Low Low cost)/(High purchase orders – Low – Low purchase orders) = ($20,940 – ($20,940 – $18,065)/(560 $18,065)/(560 – – 330) 330) = $2,875/230 Read Free For 30 Days = $12.50 per PO
3.
Fixed cost = Total cost – cost – (Variable (Variable rate × Purchase orders) Let’s choose the high po int with cost of $20,940 and 560 purchase orders. Fixed cost = $20,940 – $20,940 – ($12.50 ($12.50 × 560) = $13,940 (Hint: Check your work by computing fixed cost using the low point.)
4.
If the variable rate is $12.50 per purchase order and fixed cost is $13,940 per month, then the formula forDISCOVER monthly purchasing cost is: NEW BOOKS READ EVERYWHERE BUILD YOUR DIGITAL READING LISTS Total purchasing cost = $13,940 + ($12.50 × Purchase orders)
5.
Purchasing cost = $13,940 + $12.50(430) = $19,315
6.
Purchasing cost for the year = 12($13,940) + $12.50(5,340) = $167,280 + $66,750 = $234,030 The fixed cost for the year is 12 times the fixed cost for the month. Thus, instead of $13,940, the yearly fixed cost is $167,280.
Cornerstone Exercise 3.5 1.
Rounding the intercept to the nearest dollar, and the variable variable rate to the nearest cent, the formula for monthly purchasing cost is: Total purchasing cost = $15,021 + ($9.74 × Purchase orders)
2.
Purchasing cost = $15,021 + $9.74(430) = $19,209 (rounded)
3.
Purchasing cost for the year = 12($15,021) + $9.74(5,340) = $180,252 + $52,012 = $232,264 (rounded) The fixed cost for the year is 12 times the fixed cost for the month. Thus, instead of $15,021, the yearly fixed cost is $180,252 (rounded).
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Cornerstone Exercise 3.6 1.
Degrees of freedom = Number of observations – Number – Number of variables = 12 – 12 – 2 2 = 10 The t -value -value from Exhibit 3-14 for 95 percent and 10 degrees of freedom is 2.228.
2.
Read Free For 30 Days Predicted purchasing cost = $15,021 + ($9.74 × Purchase orders) = $15,021 + $9.74(430) = $19,209
Confidence interval = Predicted cost ± ( t -value -value × Standard error) = $19,209 ± (2.228 × $513.68) = $19,209 ± $1,144 (rounded) $18,065 ≤ Predicted value ≤ $20,353 $ 20,353 3.
For a lower confidence level, the confidence interval will be smaller (narrower) since only a 90 percent degree of confidence is required. For a 90 DISCOVER NEW BOOKSof freedom, READ EVERYWHERE BUILD YOUR DIGITAL READING LISTS percent confidence levelwith 10 degrees the t -value -value is 1.812. Confidence interval = Predicted cost ± ( t -value -value × Standard error) = $19,209 ± (1.812 × $513.68) = $19,209 ± $931 $18,278 ≤ Predicted value ≤ $20,140 $ 20,140
Cornerstone Exercise 3.7 1.
Rounding the regression estimates to the nearest cent, the formula for monthly purchasing cost is: Total purchasing cost = $14,460 + ($8.92 × Purchase orders) + ($20.39 × Nonstandard orders)
2.
Purchasing cost = $14,460 + $8.92(430) + $20.39(45) = $19,213 (rounded)
3.
Purchasing cost for the year = 12($14,460) + $8.92(5,340) + $20.39(580) = $173,520 + $47,632.80 + $11,826.20 = $232,979 The fixed cost for the year is 12 times the fixed cost for the month. Thus, instead of $14,460, the yearly fixed cost is $173,520.
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Cornerstone Exercise 3.8 1.
Cumulative Number of Units (column 1) 1 2 4 8 16 32
Cumulative Cumulative Average Time Total Time: per Unit in Hours Labor Hours (column 2) (3) = (1) × (2) 500 500 400 (0.80 × 500) Read Free For 30800 Days 320 (0.80 × 400) 1,280 256 (0.80 × 320) 2,048 204.8 (0.80 × 256) 3,276.80 163.84 (0.80 × 204.80) 5,242.88
Notice that every time the number of engines produced doubles, the cumulative average time per unit (in column 2) is just 80 percent of the previous amount. 2.
Cost for installing one engine = 500 hours × $30 = $15,000 Cost for installing four engines = 1,280 hours × $30 = $38,400 engines DISCOVER NEW BOOKS hours READ EVERYWHERE BUILD YOUR DIGITAL READING LISTS Cost for installing sixteen = 3,276.80 × $30 = $98,304 Average cost per system for one engine = $15,000/1 = $15,000 Average cost per system for four engines = $38,400/4 = $9,600 Average cost per system for sixteen engines = $98,304/16 = $6,144
3.
Budgeted labor cost for experienced team = (5,242.88 – 3,276.80) – 3,276.80) × $30 = $58,982 (rounded) Budgeted labor cost for new team = 3,276.80 × $30 = $98,304
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EXERCISES Exercise 3.9 Activity a. Vaccinating patients b. Moving materials c. Filing claims d. Purchasing goods e. Selling products f. Maintaining equipment g. Sewing h. Assembling i. Selling goods j. Selling goods goods k. Delivering orders l. Storing goods m. Moving materials n. X-raying patients o. Transporting clients
Cost Behavior Variable Mixed Variable Mixed Variable Mixed Variable Variable Fixed Variable Variable Fixed Fixed DISCOVER NEW BOOKS Variable Mixed
Driver Number of flu shots Number of moves Read Free Forof30claims Days Number Number of orders Number of circulars Maintenance hours Machine hours Units produced Units sold Units sold sold Mileage Square feet Number of moves READ Number EVERYWHERE BUILD YOUR DIGITAL READING LISTS of X-rays Miles driven
Exercise 3.10 1.
Driver for overhead activity: Number of smokers
2.
Total overhead cost = $543,000 + $1.34(20,000) = $569,800
3.
Total fixed overhead cost = $543,000
4.
Total variable overhead cost = $1.34(20,000) = $26,800
5.
Unit cost = $569,800/20,000 = $28.49 per unit
6.
Unit fixed cost = $543,000/20,000 = $27.15 per unit
7.
Unit variable cost = $1.34 per unit
8.
a. and b. Unit cost a Unit fixed cost b Unit variable cost c
19,500 Units $29.19* 27.85* 1.34*
a
21,600 Units $26.48 25.14 1.34
[$543,000 + $1.34(19,500)]/19,500; [$543,000 + $1.34(21,600)]/21,600 $543,000/19,500; $543,000/21,600 c ($29.19 – ($29.19 – $27.85); $27.85); ($26.48 – ($26.48 – $25.14) $25.14) *Rounded. b
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