Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
23) Munir Hassan, controller, gathered data on overhead costs and direct labour–hours over the past 12
months. List and discuss the different approaches Munir can use to estimate a cost function for overhead
costs using direct labour-hours as the cost driver.
24) The managers of the production department have decided to use the production levels of 2009 and
2012 as examples of the highest and lowest years of operating levels. During 2009 the department used
280,000 litres of chemicals and during 2012 it used 240,000 litres. The department’s costs for 2009 were
$460,000, but only $400,000 in 2012.
Required:
Using the high-low method determine the cost estimating equation for the department if litres of direct
material are used as the cost driver?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
25) Cari’s Locker Service ran its freezer in January, a slow month, for 200 hours for a total cost of $60,000.
In June, a peak month, the freezer ran for 1,000 hours for a total cost of $92,000.
Required:
Using the high-low method determine the average cost of running the machine one hour in a month were
the freezer ran for 800 hours?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
26) A cost analyst collected the following information for the Machining Department:
Observation Machine-hours Total Operating Costs
July 8,000 $60,000
August 9,200 66,000
September 7,600 61,000
October 8,800 64,000
November 9,000 65,000
Required:
a. Determine the estimating cost function with machine-hours as the cost driver. Use the high-low
method.
b. If December’s estimated machine-hours total 8,400, what is the estimated cost of the Machining
Department?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
27) Birch Canvas and Tarp manufactures canvas products in a highly automated assembly plant in
Edmonton, Alberta. Their automated system is in its first year of operation, and management is still
unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first
six months of operations the following data were collected:
Observation Machine-hours Kilowatt-hours Total Overhead Costs
January 1,950 2,260,000 $116,000
February 1,825 2,170,000 114,000
March 1,900 2,250,000 115,000
April 1,650 2,145,000 114,000
May 1,625 2,100,000 105,000
June 1,550 2,060,000 100,000
Required:
a. Compute a cost estimating equation for each predictor variable (machine-hours and kilowatt-hours)
using the high-low method.
b. For July the company ran the machines for 1,600 hours and used 2,075,000 kilowatt hours of power.
The overhead costs totalled $95,000. Which driver was the best predictor for July?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
28) The Wildcat Company has provided the following information for the factory overhead cost pool:
Units of Output 30,000 Units 42,000 Units
Indirect materials $180,000 $252,000
Indirect labour 1,080,000 1,512,000
Supervisors’ salaries 312,000 312,000
Equipment depreciation 151,200 151,200
Maintenance 81,600 110,400
Utilities 384,000 528,000
Total $2,188,800 $2,865,600
Required:
Using the high-low method and the information provided above,
a. identify the linear cost function equation and
b. estimate the total cost at 36,000 units of output.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
29) Patrick Ross, the president of Ross’s Wild Game Company, has asked for information about the cost
behaviour of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is
fixed and how much is variable. The following data are the only records available:
Month Machine-hours Overhead Costs
February 1,700 $20,500
March 2,800 22,250
April 1,000 19,950
May 2,500 21,500
June 3,500 23,950
Required:
Using the high-low method, determine the overhead cost equation. Use machine–hours as your cost
driver.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
30) Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in
Windsor, Ontario. The automated system is in its first year of operation and management is still unsure
of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six
months of operations, the following data were collected:
Machine-hours Kilowatt-hours Total Overhead Costs
January 3,800 4,520,000 $138,000
February 3,650 4,340,000 136,800
March 3,900 4,500,000 139,200
April 3,300 4,290,000 136,800
May 3,250 4,200,000 126,000
June 3,100 4,120,000 120,000
Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost
driver.
b. Use the high-low method to determine the estimating cost function with kilowatt–hours as the cost
driver.
c. For July, the company ran the machines for 3,150 hours and used 4,180,000 kilowatt-hours of power.
The overhead costs totaled $114,000. Which cost driver was the best predictor for July?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
31) As part of his job as cost analyst, Max Thompson collected the following information concerning the
operations of the Machining Department:
Observation Machine–hours Total Operating Costs
January 4,000 $45,000
February 4,600 49,500
March 3,800 45,750
April 4,400 48,000
May 4,500 49,800
Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost
driver.
b. If June’s estimated machine-hours total 4,200, what are the total estimated costs of the Machining
Department?
32) Wimmer’s Storage ran its freezer in February, a slow month, for 360 hours for a total cost of $57,600.
In July, a peak month, the freezer ran for 720 hours for a total cost of $82,080.
Required:
a. Using the high-low method, determine the overhead cost equation for the department if hours of
freezer use are used as the cost driver?
b. What is the estimated total cost at an operating level of 500 hours?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
33) The managers of the production department have decided to use the production levels of 2010 and
2012 as examples of the highest and lowest years of operating levels. Data for those years are as follows:
Year Chemicals used Overhead Costs
2010 140,000 gallons $115,000
2012 120,000 gallons $100,000
Required:
Using the high-low method, determine the overhead cost equation for the department if gallons of
chemicals are used as the cost driver?
34) The cost of the personnel department at the Miller Company has always been charged to the
production departments based upon number of employees. Recently, opinions gathered from the
department managers indicated that the number of new hires might also be a predictor of personnel costs
to be assigned. Total personnel department costs are $120,000.
Department Department Department
Cost Driver A B C
Number of employees 300 250 50
The number of new hires 15 25 10
Required:
Using the above data, prepare a report that contrasts the different amounts of personnel department cost
that would be allocated to each of the production departments if the cost driver used is
a. number of employees.
b. the number of new hires.
c. Which cost estimation method is being used by Miller Company?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
10.3 Apply OLS linear regression to analyze goodness of fit and the values of a and b
to predict the MOH cost pool.
1) The use of a single predictor variable (X) to estimate the outcome variable (y) is known as
A) high-low method.
B) multiple linear regression.
C) simple linear regression.
D) singular regression.
E) least squares regression.
2) Simple linear regression analysis provides the means to evaluate a line of regression which is fitted to a
plot of data and represents
A) the way costs change in respect to the predictor variable.
B) the way costs change in respect to the outcome variable.
C) the variability of expense with dollars of operation.
D) the variability of expense with dollars of production.
E) the estimated variability in costs.
3) Regression analysis differs from high-low analysis in that regression analysis
A) measures the average amount of change in the outcome variable.
B) measures the total amount of change in the outcome variable.
C) ignores the high and low observations of the outcome variable.
D) ignores non-representative data.
E) ignores both the high and low observations of the outcome variable, and non-representative data.
4) The slope of the line of regression is
A) the rate at which the outcome variable varies.
B) the rate at which the predictor variable varies.
C) the level of total fixed costs.
D) the level of total variable costs.
E) equal to the intercept.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
5) Pam’s Stables used two different predictor variables (trainer hours and number of horses) in two
different equations to evaluate the cost of training horses. The most recent results of the two regressions
are as follows:
Trainer’s hours:
Variable
Standard Error
t-Value
Constant
$198.12
4.61
Predictor Variable
$2.94
7.11
r2 = 0.56
Number of horses:
Variable
Standard Error
t-Value
Constant
$1,073.09
4.44
Predictor Variable
$247.14
3.50
r2 = 0.63
What is the estimated total cost for the coming year if 16,000 trainer hours are incurred and the stable has
400 horses to be trained, based on the best cost driver?
A) $99,929.09
B) $350,756.50
C) $335,313.32
D) $84,233.50
E) $47,238.12
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
6) Craig’s Cola was to manufacture 1,000 cases of cola next week. The accountant provided the following
analysis of total manufacturing costs.
Variable
Standard Error
t-Value
Constant
71.94
1.39
Predictor Variable
91.74
2.18
r2 = 0.82
What is the estimated cost of producing the 1,000 cases of cola?
A) $200,100
B) $72,032
C) $100,200
D) $9,000
E) $91,812
7) The Bhaskara Corporation used regression analysis to predict the annual cost of indirect materials. The
results were as follows:
Indirect Materials Cost Explained by Units Produced
Constant
$21,890
Standard error of Y estimate
$4,560
r2
0.7832
Number of observations
22
X coefficient(s)
11.75
Standard error of coefficient(s)
2.1876
What is the linear cost function?
A) y = $4,560 + $2.1876X
B) y = $4,560 + $11.75X
C) y = $21,890 + $4.56X
D) y = $21,890 + $2.1876X
E) y = $21,890 + $11.75X
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
8) A paper company manufactures cardboard boxes. Because the efforts of manufacturing are
approximately equal between labour and machinery, management is considering other possible cost
drivers. By considering different cost drivers, it is anticipated that the estimating process can be
improved. The following cost estimating equations with their r, values have been determined for 2012:
10-1. x = glueing time y = $39,000 + $17x r2 = 0.60
10-2. x = labour y = $10,000 + $23x r2 = 0.46
10-3. x = machinery y = $99,000 + $3x r2 = 0.53
Required:
a. Which equation should be selected for the analysis?
b. What are other factors that should be included in the selection of the estimating equation?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 10 – Quantitative Analyses of Cost Functions
9) Arfaei Company manufactures chairs. Because the efforts of manufacturing are approximately equal
between labour and machinery, management is considering other possible cost drivers. By considering
different cost drivers, it is anticipated that the estimating process can be improved. The following cost
estimating equations with their r2 values have been determined for 2012:
1. X = cutting time y = $19,500 + $20X r2 = 0.65
2. X = labour y = $5,000 + $25X r2 = 0.49
3. X = machinery y = $44,500 + $5X r2 = 0.55
Required:
a. Which equation should be selected for the analysis?
b. What other factors should be included in the selection of the estimating equation?
10) Review the following report of the results of a simple regression program for cost estimation.
Variable Coefficient Standard Error t-Value
Constant 24.88 17.90 1.39
Predictor Variable 444.70 179.31 2.48
r2 = 0.72
Required:
a. What is the cost estimation equation according to the report?
b. What is the goodness of fit? What does it tell about the estimating equation?