Chapter 3 – Cost Behavior
Figure 3-12.
The method of least squares was used to develop a cost equation to predict the cost of monthly equipment maintenance.
The following computer output was received:
Intercept
32,000
Slope
25
The driver used was the number of machine hours.
129. Refer to Figure 3-12. What was the cost formula for equipment maintenance?
a.
total maintenance cost = $25 × machine hours
b.
total maintenance cost = $32,000
c.
total maintenance cost = $32,000 + ($25 × machine hours)
d.
None of these are correct.
130. Refer to Figure 3-12. Using the cost formula for the equipment maintenance cost, what is the predicted cost of
equipment maintenance for April assuming that 5,000 machine hours will be incurred in April?
a.
$32,000
b.
$125,000
c.
$157,000
d.
None of these are correct.
SUPPORTING CALCULATIONS: $32,000 + ($25 × 5,000)
131. Refer to Figure 3-12. What is the independent variable of the cost formula for equipment maintenance?
a.
number of machine hours
b.
the variable rate
c.
the fixed cost
d.
the total cost
Figure 3-13.
The following 6 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
132. Refer to Figure 3-13. Select the correct set of high and low months.
a.
high: June, low: July
b.
high: June, low: October
c.
high: October, low: September
d.
high: October, low: June
Chapter 3 – Cost Behavior
133. Refer to Figure 3-13. An independent variable value used in calculating the cost line using the high-low method is:
a.
$27,950
b.
5,430
c.
$25,160
d.
4,000
134. Refer to Figure 3-13. A dependent variable value used in calculating the cost line using the high-low method is:
a.
$27,900
b.
5,430
c.
$25,160
d.
4,500
135. 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 6 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
Select the correct set of high and low months.
a.
high: June, low: April
b.
high: June, low: May
c.
high: January, low: February
d.
high: April, low: May
136. Advantages of the method of least squares over the high-low method include all of the following except
a.
a statistical method is used to mathematically derive the cost function.
b.
only two points are used to develop the cost function.
c.
the squared differences between actual observations and the line (cost function) are minimized.
d.
All the observations have an effect on the cost function.
137. If an automobile manufacturer changes from skilled labor to computer-controlled assembly procedures, the past data
a.
are useful in predicting future costs.
b.
are of little or no value in predicting future costs.
c.
should be used without adjustments to predict future costs.
d.
are representative of future costs.
Chapter 3 – Cost Behavior
138. Which of the following is an advantage of using the scatter-graph method over the high-low method to estimate
costs?
a.
It is a statistical method to determine “best fit”.
b.
A cost analyst can review the data visually and eliminate outliers.
c.
The quality of the cost formula relies on the objective judgment of the analysts.
d.
The cost formula can be determined simply by looking at two points of data.
139. If at a given volume total costs and fixed costs are known, the variable costs per unit may be computed as follows:
a.
(total costs − fixed costs) / unit volume
b.
(total costs / unit volume) − fixed costs
c.
(total costs × unit volume) − (fixed costs / unit volume)
d.
total costs − (fixed costs / unit volume)
Figure 3-14.
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 five 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
140. Refer to Figure 3-14. Using a regression program, the value of the intercept (rounded to the nearest penny) is
a.
$0.99.
b.
$195.35.
c.
$10,630.80.
d.
$190,267.00.
141. Refer to Figure 3-14. Using a regression program, the value of the X Variable 1 (rounded to the nearest penny) is
a.
$0.99.
b.
$8.83.
c.
$195.35.
d.
$11,594.00.
142. Refer to Figure 3-14. Using a regression program, the forecasted utility cost at 2,300 machine hours (rounded to the
nearest dollar) is
a.
$30,940.
b.
$37,116.
c.
$25,945.
Chapter 3 – Cost Behavior
d.
$10,631.
143. Refer to Figure 3-14. Using a regression program, the forecasted utility cost at 2,600 machine hours (rounded to the
nearest dollar) is
a.
$28,288.
b.
$33,589.
c.
$45,945.
d.
$10,631.
144. Refer to Figure 3-14. Using a regression program, the forecasted utility cost at 2,550 machine hours (rounded to the
nearest dollar) is
a.
$28,288.
b.
$37,116.
c.
$33,147.
d.
$10,631.
145. Refer to Figure 3-14. Using a regression program, the yearly utility cost equation (with all variables to the nearest
penny) is
a.
total utility cost = $127,569.60 + ($8.83 × machine hours).
b.
total utility cost = $10,630.80 + ($8.83 × machine hours).
c.
total utility cost = $8.83 + ($10,630.80 × machine hours).
d.
total utility cost = $10,630.80 − ($8.83 × machine hours).
146. Laconic Company manufactures ultra sound equipment. Based on past experience, Laconic has found that total
annual repair and maintenance cost can be represented by the following formula: total annual repair and maintenance cost
= $205,000 + $7.50x, where x = machine hours. Last year, Laconic incurred 145,000 machine hours.
Required:
A.
What was the total repair and maintenance cost incurred by Laconic last year?
B.
What was the total fixed repair and maintenance cost incurred by Laconic last year?
C.
What was the total variable repair and maintenance cost incurred by Laconic last year?
D.
What was the repair and maintenance cost per machine hour last year?
E.
What was the fixed repair and maintenance cost per machine hour last year?
F.
What was the variable repair and maintenance cost per machine hour last year?
A.
$205,000 + ($7.50 × 145,000) = $1,292,500
B.
$205,000
C.
$7.50 × 145,000 = $1,087,500
D.
$1,292,500 / 145,000 = $8.91
E.
$205,000 / 145,000 = $1.41
Chapter 3 – Cost Behavior
147. Harnow Company manufactures drill presses. Based on past experience, Harnow has found that its total overhead
cost can be represented by the following formula: Total overhead cost = $35,500 + $1.25x, where x = number of machine
hours. Last year Harnow incurred 120,000 machine hours.
Required (round to the nearest cent):
A.
What was the total overhead cost incurred by Harnow last year?
B.
What was the total variable overhead cost incurred by Harnow last year?
C.
What was the total overhead cost per machine hour last year?
D.
What was the fixed overhead cost per machine hour last year?
E.
If Harnow incurs 140,000 machine hours next year, what will be the total overhead cost
per machine hour?
A.
$185,500 = $35,500 + ($1.25 × 120,000)
B.
$1.25 × 120,000 = $150,000
C.
$185,500 / 120,000 = $1.55
D.
$35,500 / 120,000 = $.30
$210,500 = $35,500 + ($1.25 × 140,000)
$210,500 / 140,000 = $1.50
148. The average unit cost at a monthly volume of 9,000 units is $3, and the average unit cost at a monthly volume of
22,500 units is $2.10.
Required:
A.
Develop an equation for total monthly costs.
B.
What are the total monthly costs if 15,000 units are produced?
A.
(9,000 × $3) = $27,000
(22,500 × $2.10) = $47,250
Variable cost per unit = ($47,250 − $27,000) / (22,500 − 9,000) = $1.50
Fixed costs per month = $27,000 − ($1.50 × 9,000) = $13,500
Total monthly costs = $13,500 + $1.50(# of units)
B.
$13,500 + (15,000 × $1.50) = $13,500 + $22,500 = $36,000
149. 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
Chapter 3 – Cost Behavior
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 × 2.17/CD = $5.43 per CD
26,000 × $2.50 = $65,000
$65,000 / 12,000 = $5.42
Cost of manufacturing overhead = $30,000 / 12,000 CDs = $2.50 per CD
Total variable rate = $5.43 + 2.50 = $7.93
Cost formula:
Total cost of CDs = $24,000 + ($7.93 × number of CDs)
$24,000 + ($7.92 × number of CDs)
2.) Total cost of CDs = $24,000 + (7.93 x 15,000) OR $24,000 + ($7.92 × 15,000)
total cost of CDs = 24,000 + 118,950 OR $24,000 + $118,000
total cost of CDs = $142,950 OR $142,800
Fixed cost = $24,000 Variable cost = $118,950 OR $118,800
150. 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 + ($0.50 × 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
Chapter 3 – Cost Behavior
machine hours.
A.
Insurance (Fixed)
Factory Supplies (Variable)
Direct Labor (Variable)
Maintenance (Mixed)
B.
Total costs
= Fixed costs ($10,000 + $5,000) +
[Variable rate ($3.00 + $20.00 + $0.50) × no. of machine hours]
C.
$43,200 = $15,000 + ($23.50 × 1,200)
151. 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.
152. Ross Company has the following information available regarding costs at various levels of monthly production:
Production volume
7,000 units
10,000 units
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.
Identify each cost as being variable, fixed, or mixed by writing the name of each
Chapter 3 – Cost Behavior
cost under one of the following headings:
Variable Costs
Fixed Costs
Mixed Costs
B.
Develop an equation for total monthly production costs.
C.
Predict total costs for a monthly production volume of 8,000 units.
A.
Variable Costs
Fixed Costs
Mixed Costs
Direct materials
Supervisors’ salaries
Direct labor
Indirect materials
Property taxes
B.
Variable costs = ($300,600 − $219,600) / ($10,000 − $7,000) = $27.00
Fixed costs = $300,600 − ($27.00 × 10,000) = $30,600 per month
Total monthly production costs = $30,600 + [$27.00 × (# of units)]
C.
Total costs = $30,600 + ($27.00 × 8,000) = $246,600
153. 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?
154. 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 dependent 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.
D.
E.
($5,000 × 12) + ($.48 × 10,000) = $64,800 (total yearly janitorial costs)
Chapter 3 – Cost Behavior
155. 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 dependent 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
156. 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 OR $15,000 – ($10.00 × 700) = $8,000
Total cost = $8,000 + ($10.00 × no. of machine hours)
B.
$53,000 − Fixed costs ($35,000) = $18,000 of variable costs
Fixed Costs = Depreciation + Property Taxes + Fixed Portion of Electricity
Variable rate (Factory Supplies; $8.00, Electricity; $10.00) × machine hours = $18,000
Machine hours = 1,000
Chapter 3 – Cost Behavior
157. Graber and Johnson, Attorneys 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
$449.50 − ($1.50 × 175) = $187 fixed utility cost
C.
Fixed Costs ($8,000 + $15,000 + $12,000) + ($18.00 × 1,500) = $62,000
Chapter 3 – Cost Behavior
Salaries
Depreciation
Rent
158. Below are the overhead costs and labor hours for Smith & Co.
Month
Overhead Costs
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?
Chapter 3 – Cost Behavior
159. 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
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?
160. 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: