155. Just Burn It! Manufactures blank CDs. The company incurs $22,000 in monthly depreciation costs on its
manufacturing equipment as well as monthly advertising costs of $2,000 to place ads in newspapers and on the
radio. Each CD requires materials and manufacturing overhead resources. On average the company uses
26,000 pounds of material to manufacture 12,000 CDs per month. Each pound of material costs $2.50. The
manufacturing overhead is driven by machine hours and on average the company incurs $30,000 in
manufacturing overhead to produce 12,000 CDs per month.
Required:
1.) Create a formula for the monthly cost of the CDs for Just Burn It!
2.) If the company plans to manufacture 15,000 CDs next month, what is the expected fixed cost? What is the total variable cost? What is the
total cost?
Calculations:
1.) 26,000 pounds/12,000 CDs = 2.17 pounds per CD
Cost per pound = $2.50 x 2.17/CD = $5.43 per CD
cost of manufacturing overhead = $30,000/12,000 CDs = $2.50 per CD
Total variable rate = $5.43 + 2.50 = $7.93
Total cost of CDs = $24,000 + ($7.93 x number of CDs)
total cost of CDs = 24,000 + 118,950
total cost of CDs = $142,950
Fixed cost = $24,000 Variable cost = $118,950
156. Boswan Company incurred the following costs and machine hours for the months of April and May.
Type of cost
April
May
Insurance
$10,000
$10,000
Factory supplies
3,000
4,500
Direct labor
20,000
30,000
Maintenance
5,500
5,750
Machine hours
1,000
1,500
Required:
A.
Assuming that the driver for all costs is machine hours, determine the cost behavior of each of the four types of costs above (fixed,
variable, or mixed).
B.
Assume that the following is the cost formula for maintenance cost.
Total maintenance cost = $5,000 + ($.50 ´ no. of machine hours)
Construct a cost formula to be used to estimate total monthly costs within the relevant range.
C.
Estimate the total monthly costs to be incurred by Boswan Company at a level of 1,200 machine hours.
Insurance (Fixed)
Direct Labor (Variable)
Maintenance (Mixed)
B.
Total costs
= Fixed costs ($10,000 + $5,000) +
[Variable rate ($3.00 + $20.00 + $.50) ´ no. of machine hours]
157. Consider each of the following independent situations.
A.
The salary of a legal secretary in a law firm.
B.
A lease contract for an automobile which requires a monthly payment of $300 plus $.05 per mile.
C.
The cost of lumber for a homebuilder.
D.
The cost of Internet service which is calculated based on hours of usage.
E.
The cost of telephone service which includes a fixed monthly charge of $50 plus $.10 a minute for long distance calls.
F.
The salary cost of seasonal tax preparers for a CPA firm. One tax preparer can prepare 100 tax returns per month.
G.
A factory supervisor’s salary.
H.
The cost of sugar in the production of soft drinks.
Required: For each situation, describe the cost as one of the following: fixed cost, variable cost, mixed cost, or step cost.
A.
Fixed
B.
Mixed
C.
Variable
D.
Variable
E.
Mixed
Step
Fixed
H.
Variable
158. Ross Company has the following information available regarding costs at various levels of monthly
production:
Production volume
7,000
10,000
Direct materials
$ 70,000
$100,000
Direct labor
56,000
80,000
Indirect materials
21,000
30,000
Supervisors’ salaries
12,000
12,000
Depreciation on plant
10,000
10,000
Maintenance
32,000
44,000
Utilities
15,000
21,000
Insurance on plant and equipment
1,600
1,600
Property taxes on plant
2,000
2,000
Total
$219,600
$300,600
Required:
A.
Mixed Costs
B.
C.
Variable Costs
Fixed Costs
Mixed Costs
Direct materials
Supervisors’ salaries
Maintenance
Direct labor
Depreciation
Utilities
Indirect materials
Insurance
Property taxes
B.
Variable costs = ($300,600 –
$219,600)/($10,000 – $7,000) = $27.00
Fixed costs = $300,600 – ($27.00 ´ 10,000) =
Total monthly production costs = $30,600 +
$27.00(# of units)
C.
Total costs = $30,600 + ($27.00 ´ 8,000) =
$246,600
159. Olson Company makes hearing aids. Olson has found that total electricity cost for the factory can be
represented by the following formula: total annual electricity cost = $149,000 + $2.75x, where x = labor hours.
Last year, Olson incurred 212,000 labor hours.
Required:
A.
What is the independent variable in Olson’s cost formula?
B.
What was the total electricity cost incurred by Olson last year?
C.
What would be Olson Company’s estimated electricity cost for next year if they have budgeted 229,000 labor hours?
160. Harnock Company constructed the following cost formula for its monthly janitorial cost.
Total monthly janitorial cost = $5,000 + ($.48 ´ units of output)
Required:
A.
Identify the independent variable.
B.
Identify the dependant variable.
C.
Identify the intercept.
D.
Identify the slope.
E.
Compute the total janitorial cost if Harnock produces 10,000 units of output next year.
A.
units of output
B.
Total monthly janitorial cost
C.
$5,000
D.
.48
($5,000 ´ 12) + ($.48 ´ 10,000) = $64,800 (Total Yearly Janitorial Costs)
A.
labor hours
B.
$149,000 + ($2.75 ´ 212,000) = $732,000
C.
$149,000 + ($2.75 ´ 229,000) = $778,750
161. Spangle Company constructed the following cost formula for its monthly maintenance cost.
Total monthly maintenance cost = $9,000 + ($1.75 ´ no. machine hours)
Required:
A.
Identify the independent variable.
B.
Identify the dependant variable.
C.
Identify the intercept.
D.
Identify the slope.
E.
Compute the total maintenance cost if Spangle uses 12,000 machine hours next year.
A.
machine hours
B.
Total monthly maintenance cost
C.
$9,000
D.
$1.75
E.
($9,000 ´ 12) + ($1.75 ´ 12,000) = $129,000
162. Arcadia Company incurred the following costs and machine hours during the first three months of the
current year. Assume that the driver for all costs is machine hours.
Type of cost
January
February
March
Electricity
$20,000
$15,000
$18,000
Depreciation
15,000
15,000
15,000
Factory supplies
9,600
5,600
7,600
Property taxes
12,000
12,000
12,000
Machine hours
1,200
700
950
Required:
A.
Using the high-low method, construct a cost formula for electricity cost.
B.
If Arcadia had total costs in April of $53,000, how many machine hours did they incur during April?
C.
If Arcadia expects to incur 1,500 machine hours in May what would be the estimate of their total costs?
A.
($20,000 – $15,000)/(1,200 – 700) = $10.00 per machine hour
$20,000 – ($10.00 ´ 1,200) = $8,000
Total cost = $8,000 + ($10.00 ´ no. of machine hours)
B.
$53,000 – Fixed costs ($35,000) = $18,000 of variable costs
Variable rate (Factory Supplies; $8.00, Electricity; $10.00) ´ machine hours = $18,000
Machine hours = 1,000
C.
Fixed Costs ($8,000 + $15,000 + $12,000) + ($18.00 ´ 1,500) = $62,000
163. Graber and Johnson, Attorney’s at Law, recently opened a law practice in the Northwest. Their goal is to
generate a monthly net income of $10,000. They have initially set their billing rate at $150 per hour. Their
billable hours in the first month of operations (January) were 150 and in the second month of operations
(February), 175 billable hours. The costs incurred at these levels for January and February are given below.
150 billable hours
175 billable hours
Salaries:
Mr. Graber
$10,000.00
$10,000.00
Ms. Johnson
10,000.00
10,000.00
Legal Secretary
4,000.00
4,000.00
Depreciation (Furniture)
500.00
500.00
Supplies
450.00
525.00
Rent
1,000.00
1,000.00
Utilities
412.00
449.50
Total cost
$26,362.00
$26,474.50
Required:
A.
Classify each cost as fixed, variable, or mixed using billable hours as the driver.
B.
Use the high-low method to separate mixed costs into their fixed and variable components.
C.
Compute the net income/loss for January and February.
D.
If they expect to average 200 billable hours each month what do they need to set as a billing rate per hour to achieve their goal of
generating $10,000 of monthly net income? Show your calculations.
A.
Fixed:
Salaries
Depreciation
Rent
Variable:
Supplies
Mixed:
Utilities
B.
($449.50 – $412)/(175 – 150) = $1.50 per billable hour
$449.50 – ($1.50 ´ 175) = $187 fixed utility cost
C.
January
February
Revenues: (150 ´ $150)
$22,500.00
$26,250.00
Less: Costs
26,362.00
26,474.50
Net Income
<$3,862.00>
<$224.50>
D.
Total costs at a 200 billable hour level:
Salaries:
$24,000
Depreciation
Rent
1,000
Supplies (200 ´ $3.00)
Utilities [$187 + ($1.50 ´ 200)]
487
$26,587
Add: desired net income
$10,000
$36,587
164. Below are the overhead costs and labor hours for Smith & Co.
Month
Overhead Cost
# of labor hours
January
$ 9,640
490
February
$ 12,680
680
March
$ 11,080
580
April
$ 11,720
620
May
$ 13,000
700
June
$ 10,120
520
July
$ 8,840
440
August
$ 6,600
300
Required: Using the high-low method:
1.) Calculate the fixed cost of overhead.
2.) Calculate the variable rate per labor hour.
3.) Construct the cost formula for total overhead cost.
4.) The company is estimating that in September the labor hours will be 600. How much should they estimate to have in total overhead cost for
September?
high cost-low cost
high hours-low hours
700-300 400
13000 – (16 x 700)
$1,800
fixed amount
6,600 – (16 x 300)
$1,800
fixed amount
165. The controller at Speedy Delivery wants to break-out the cost of deliveries into fixed and variable
components so that they will be better able to predict costs for next year. Below are the delivery cost incurred
each month and the number of deliveries.
Month
Delivery Cost
# of deliveries
January
$2,176.00
105
February
$2,272.00
110
March
$1,926.40
92
April
$1,696.00
80
May
$1,600.00
75
June
$2,752.00
135
July
$3,616.00
180
August
$1,849.60
88
September
$1,676.80
79
October
$ 3,808.00
190
November
$ 3,961.60
198
December
$ 4,000.00
200
Required: Using the high-low method:
1.) Calculate the fixed cost of overhead.
2.) Calculate the variable rate per labor hour.
3.) Construct the cost formula for total overhead cost.
4.) The company is estimating that in January the number of deliveries will be 125. How much should they estimate to have in total delivery costs
for January?
166. The following six months of data were collected on electricity cost and the number of machine hours in a
factory.
Electricity
Machine
Month
cost
hours
June
$25,160
4,500
July
26,170
4,810
August
27,250
5,120
September
26,680
5,010
October
27,950
5,430
November
27,500
5,190
Required:
A.
Using the high-low method compute the variable rate for the electricity cost.
B.
Using the high-low method compute the fixed cost of electricity.
C.
Estimate the total electricity cost to be incurred in December if 5,300 machine hours are incurred.
167. Margolo Company makes cross-country skis. The company controller wants to calculate the fixed and
variable costs associated with janitorial services incurred by the factory. Data for the past six months were
collected.
Janitorial
Labor
Month
cost
hours
January
$9,200
10,120
February
8,800
9,500
March
9,350
10,500
April
9,620
11,100
May
8,400
8,660
June
9,400
10,650
Required:
A.
Using the high-low method compute the variable rate of the janitorial cost.
B.
Using the high-low method compute the fixed cost of janitorial services.
C.
Compute the estimated janitorial cost to be incurred during the next six months assuming that 58,200 labor hours will be worked.
A.
($9,620 – $8,400)/(11,100 – 8,660) = $.50 per labor hour
B.
$9,620 – ($.50 ´ 11,100) = $4,070
($4,070 ´ 6) + ($.50 ´ 58,200) = $53,520
A.
($27,950 – $25,160)/(5,430 – 4,500) = $3.00 per machine hour
$27,950 – ($3.00 ´ 5,430) = $11,660
C.
$27,560 = $11,660 + ($3.00 ´ 5,300)
168. Blacken Company manufactures motorcycles. The company’s management accountant wants to calculate
the fixed and variable costs associated with utility cost incurred by the factory. Data for the past six months
were collected.
Utility
Machine
Month
cost
hours
March
$30,255
2,200
April
32,750
2,525
May
34,712
2,710
June
31,850
2,410
July
30,720
2,290
August
29,980
2,150
Required:
A.
Using the high-low method calculate the variable rate per machine hour for the utility cost.
B.
Using the high-low method calculate the fixed cost of utilities.
C.
Construct a cost formula for total utility cost.
D.
Estimate the cost of utilities if 2,425 machine hours are used.
169. Coefficients shown by a regression program are:
Intercept
7,600
X Variable 1
5.10
Required:
A.
Using the results of regression calculate the fixed cost of maintenance and the variable rate per machine hour.
B.
Using the results of regression, construct the cost formula for the total maintenance cost.
C.
Calculate the budgeted cost for maintenance assuming that 610 hours are worked next month.
A.
Fixed cost = $7,600
Variable rate = $5.10 per machine hour
B.
Total maintenance cost = $7,600 + ($5.10 ´ no. of machine hours)
D.
Total utility cost
= $11,812.50 + ($8.45 ´ 2,425)
170. Andover Company makes weather balloons. The company controller wanted to calculate the fixed and
variable costs associated with the maintenance costs incurred by the factory. Data for the past six months were
collected.
Maintenance
Machine
Month
cost
hours
January
$10,120
526
February
9,560
389
March
9,712
412
April
10,460
569
May
10,226
541
June
9,686
399
Required:
A.
Using the high-low method, calculate the fixed cost of maintenance and the variable rate per machine hour.
B.
Using the high-low method, construct the cost formula for the total maintenance cost.
C.
Calculate the budgeted cost for maintenance assuming that 485 hours are worked next month.
($10,460 – $9,560)/(569 – 389) = $5.00 per machine hour
$10,460 – ($5.00 ´ 569) = $7,615 fixed cost
B.
Total maintenance cost = $7,615 + ($5.00 ´ no. of machine hours)
$10,040 = $7,615 + ($5.00 ´ 485)
171. Hipcuts Company operates a chain of trendy beauty salons. The company’s chief executive officer is
interested in accumulating some information on the overhead costs incurred by the company. You have been
asked to analyze the following six months worth of data.
Overhead
No. of
Month
cost
Appointments
April
$60,160
867
May
56,500
624
June
58,900
689
July
63,500
974
August
59,325
730
September
62,400
901
A regression analysis produced the following coefficients.
Intercept
42,900
X Variable 1
20.46
Required:
A.
Using the results of regression, construct a cost formula for the total overhead cost.
B.
The CEO would like to limit total overhead cost in future months to 16% of total revenues. Will that be possible if total revenues are
expected to average $300,000 per month and total appointments per month are expected to average 925? Show all of your
calculations.
A.
Total overhead costs = $42,900 + ($20.46 ´ no. of appointments)
$59,779.50 = $42,900 + ($20.46 ´ 825)
$59,779.50/$300,000 = .199 or 19.9%
172. Grindgood Company operates a chain of cozy coffee shops. The company’s chief executive officer is
interested in accumulating some information on the overhead costs incurred by the company. You have been
asked to analyze the following six months worth of data.
Overhead
No. of
Month
cost
Labor Hours
April
$60,160
867
May
56,500
624
June
58,900
689
July
63,500
974
August
59,325
730
September
62,400
901
Required:
A.
Using the high low method, construct a cost formula for the total overhead cost.
B.
The CEO would like to limit total overhead cost in future months to 20% of total revenues. Will that be possible if total revenues are
expected to average $300,000 per month and total labor hours per month are expected to average 780? Show all of your calculations.
C.
Compute the total cost of overhead assuming 925 labor hours are incurred in a given month.
173. The cost accountant for Bolagio Company used an Excel spreadsheet program to run ordinary least squares
on a set of cost data for its utility cost. Bolagio’s cost driver for utility cost is machine hours. The following
results were produced.
Intercept
2,490
X Variable
4.89
Required:
A.
Construct the cost formula for Bolagio’s utility cost using the results from the method of least squares.
B.
Using the formula computed in (A), what is the estimated cost of utilities for May assuming that Bolagio will incur 110,000 machine
hours?
A.
Total utility cost = $2,490 + ($4.89 ´ no. of machine hours)
B.
$540,390 = $2,490 + ($4.89 ´ 110,000)
A.
($63,500 – $56,500)/(974 – 624) = $20.00 per labor hour
$63,500 – ($20.00 ´ 974) = $44,020 fixed cost
Total overhead cost = $44,020 + ($20.00 ´ no. of labor hours)
B.
$59,620 = $44,020 + ($20.00 ´ 780)
$59,620/$300,000 = .199 or 19.9%.
C.
$44,020 + ($20 ´ 925) = $44,020 + $18,500 = $62,520
174. Machine hours and electricity costs for Wells Industries for 2011 were as follows:
Machine
Electricity
Month
Hours
Costs
January
2,000
$ 9,200
February
2,320
10,500
March
1,520
6,750
April
2,480
11,500
May
3,040
14,125
June
2,640
11,000
July
3,280
12,375
August
2,800
11,375
September
1,600
7,750
October
2,960
13,000
November
3,760
15,500
December
3,360
13,875
Required:
A.
Using the high-low method, develop an estimate of variable electricity costs per machine hour.
B.
Using the high-low method, develop an estimate of fixed electricity costs per month.
C.
Using the high-low method, develop a cost function for monthly electricity costs.
D.
Estimate electricity costs for a month in which 3,000 machine hours are worked.
175. Tamo Company used an Excel spreadsheet program to run ordinary least squares on a set of cost data for
its utility cost. The cost driver for labor cost is employee hours. The following results were produced.
Intercept
1,145
X Variable
13.82
Required:
A.
Construct the cost formula for Tamo’s labor cost using the results from the method of least squares.
B.
Using the formula computed in (A), what is the estimated cost of utilities for October assuming that Tamo will incur 560 employee
hours?
A.
Total labor cost = 1,145 + ($13.82 ´ no. of employee hours)
B.
$8,884.20 = $1,145 + ($13.82 ´ 560)
A.
[($15,500 – $6,750/(3,760 – 1,520) = $3.91
B.
[($15,500 – ($3.91 ´ 3,760)] = $798.40
C.
Electricity costs = $798.40 + ($3.91 ´ Machine hours)
D.
[$798.40 + ($3.91 ´ 3,000)] = $12,528.40
176. Explain the difference between a committed and a discretionary fixed cost.
177. Why is it necessary to separate a mixed cost into its variable and fixed components?
178. Why would cost behavior change outside of the relevant range?
179. Explain the differences between a variable, fixed, and a mixed cost.
180. Why is managerial judgment essential to predicting cost behavior?
181. You decide
The controller of Lamps Limited is concerned about the how much the company’s costs have risen over the
past few months. Since the majority of the company’s costs are mixed, it is hard to tell if the increasing costs
are due to variable costs or fixed costs. The controller asks that you research the different ways to separate
mixed costs and then to present a report showing the advantages and disadvantages of each method. He would
also like you to make a recommendation as to which method should be used.