10-1
CHAPTER 10
DETERMINING HOW COSTS BEHAVE
1. Variations in the level of a single activity (the cost driver) explain the variations in the
related total costs.
2. Cost behavior is approximated by a linear cost function within the relevant range. A
1. Variable cost function––a cost function in which total costs change in proportion to the
changes in the level of activity in the relevant range.
3. Mixed cost function––a cost function that has both variable and fixed elements. Total
costs change but not in proportion to the changes in the level of activity in the relevant
range.
10-3 A linear cost function is a cost function where, within the relevant range, the graph of
total costs versus the level of a single activity related to that cost is a straight line. An example of
10-4 No. High correlation merely indicates that the two variables move together in the data
1. Industrial engineering method.
3. Account analysis method.
10-6 The conference method estimates cost functions on the basis of analysis and opinions
1. The speed with which cost estimates can be developed.
3. The improved credibility of the cost function to all personnel.
10-2
10-7 The account analysis method estimates cost functions by classifying cost accounts in the
10-8 The six steps are
2. Identify the independent variable or cost driver.
4. Plot the data.
6. Evaluate the cost driver of the estimated cost function.
Step 3 typically is the most difficult for a cost analyst.
10-9 Causality in a cost function runs from the cost driver to the dependent variable. Thus,
1. Economic plausibility.
3. Slope of the regression line.
10-11 A learning curve is a function that measures how labor-hours per unit decline as units of
2. Incremental unit-time learning model. The incremental time needed to produce the last
10-12 Frequently encountered problems when collecting cost data on variables included in a
cost function are
2. Fixed costs are allocated as if they are variable.
4. Extreme values of observations occur.
6. The relationship between the cost and the cost driver is not stationary.
10-3
1. Linearity of relationship between the dependent variable and the independent variable
within the relevant range.
3. Independence of residuals.
10-14 No. A cost driver is any factor whose change causes a change in the total cost of a related
cost object. A cause-and-effect relationship underlies selection of a cost driver. Some users of
10-15 No. Multicollinearity exists when two or more independent variables are highly
correlated with each other.
1. Slope coefficient = Difference in costs
Difference in machine-hours
=
$5,400 $4,000
10,000 6,000
−
−
2. The cost function in requirement 1 is an estimate of how costs behave within the relevant
range, not at cost levels outside the relevant range. If there are no months with zero machine–
10-4
1. See Solution Exhibit 10-17.
2. Contract 1: y = $50
3.
Contract
Cost Function
1
2
3
Fixed
Mixed
Variable
10-5
10-18 (20 min.) Various cost-behavior patterns.
1. K
2. B
3. G
4. J Note that A is incorrect because, although the cost per pound eventually equals a
constant at $9.20, the total dollars of cost increases linearly from that point
onward.
6. L
8. K
9. C
10-19 (30 min.) Matching graphs with descriptions of cost and revenue behavior.
a. (1)
b. (6) A step-cost function.
c. (9)
d. (2)
e. (8)
10-20 (15 min.) Account analysis method.
1. Variable costs:
Car wash labor $260,000
Soap, cloth, and supplies 42,000
Water 38,000
10-6
1. The electricity cost is variable because, in each month, the cost divided by the number of
kilowatt hours equals a constant $0.30. The definition of a variable cost is one that remains
2. The month with the highest number of telephone minutes is June, with 1,440 minutes and
$0.02 per minute of variable telephone cost. Inserted into the cost formula for June:
$98.80 = a + ($0.02 × 1,440)
$98.80 = a + $28.80
3. The electricity rate is $0.30 per kw hour
The telephone cost is $70 + ($0.02 per minute)
1. Manufacturing cost classification for 2012:
Account
Total
Costs
(1)
% of
Total Costs
That is
Variable
(2)
Variable
Costs
(3) = (1) (2)
Fixed
Costs
(4) = (1) – (3)
Variable
Cost per Unit
(5) = (3) ÷ 75,000
Direct materials
Direct manufacturing labor
Power
Supervision labor
Materials-handling labor
Maintenance labor
Depreciation
Rent, property taxes, admin
$300,000
225,000
37,500
56,250
60,000
75,000
95,000
100,000
100%
100
100
20
50
40
0
0
$300,000
225,000
37,500
11,250
30,000
30,000
0
0
$ 0
0
0
45,000
30,000
45,000
95,000
100,000
$4.00
3.00
0.50
0.15
0.40
0.40
0
0
Total
$948,750
$633,750
$315,000
$8.45
Total manufacturing cost for 2012 = $948,750
Variable costs in 2013:
Account
Unit
Variable
Cost per
Unit for
2012
(6)
Percentage
Increase
(7)
Increase in
Variable
Cost
per Unit
(8) = (6) (7)
Variable Cost
per Unit
for 2013
(9) = (6) + (8)
Total Variable
Costs for 2013
(10) = (9) 80,000
Direct materials
Direct manufacturing labor
Power
Supervision labor
Materials-handling labor
Maintenance labor
Depreciation
Rent, property taxes, admin.
$4.00
3.00
0.50
0.15
0.40
0.40
0
0
5%
10
0
0
0
0
0
0
$0.20
0.30
0
0
0
0
0
0
$4.20
3.30
0.50
0.15
0.40
0.40
0
0
$336,000
264,000
40,000
12,000
32,000
32,000
0
0
Total
$8.45
$0.50
$8.95
$716,000
Fixed and total costs in 2013:
Account
Fixed
Costs
for 2012
(11)
Percentage
Increase
(12)
Dollar
Increase in
Fixed Costs
(13) =
(11) (12)
Fixed Costs
for 2013
(14) =
(11) + (13)
Variable
Costs for
2013
(15)
Total
Costs
(16) =
(14) + (15)
Direct materials
Direct manufacturing labor
Power
Supervision labor
Materials-handling labor
Maintenance labor
Depreciation
Rent, property taxes, admin.
$ 0
0
0
45,000
30,000
45,000
95,000
100,000
0%
0
0
0
0
0
5
7
$ 0
0
0
0
0
0
4,750
7,000
$ 0
0
0
45,000
30,000
45,000
99,750
107,000
$336,000
264,000
40,000
12,000
32,000
32,000
0
0
$ 336,000
264,000
40,000
57,000
62,000
77,000
99,750
107,000
Total
$315,000
$11,750
$326,750
$716,000
$1,042,750
Total manufacturing costs for 2013 = $1,042,750
2. Total cost per unit, 2012 =
75,000
$948,750
= $12.65
80,000
$1,042,750
3. Cost classification into variable and fixed costs is based on qualitative, rather than
quantitative, analysis. How good the classifications are depends on the knowledge of individual
10-23 (15–20 min.) Estimating a cost function, high-low method.
1. The key point to note is that the problem provides high-low values of X (annual round
trips made by a helicopter) and Y
X (the operating cost per round trip). We first need to
10-10
10-24 (20 min.) Estimating a cost function, high-low method.
1. See Solution Exhibit 10-24. There is a positive relationship between the number of
2. Number of Customer-Service
Service Reports Department Costs
Highest observation of cost driver 455 $21,500
department costs
3. Other possible cost drivers of customer-service department costs are:
a. Number of products replaced with a new product (and the dollar value of the new