Accounting Chapter 3 Homework Luisa might be wise to calculate the cost formula 6 to 12 months later after a longer time period has elapsed since starting the tanning business

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CHAPTER 3 Cost Behavior and Forecasting

E 3-44

1. The high point is March with 3,500 appointments. The low point is May

with 1,500 appointments.

3. Total Tanning Service Cost = $1,040 + ($0.50 × Number of Appointments)

4. Total Predicted Cost for September = $1,040 + ($0.50 × 2,500) = $2,290

5. Using the high-low method means that Luisa’s estimate of the cost formula (and

therefore the cost behavior patterns) is based on only two data points and ignores

all of the other data. She should investigate to be sure that neither the high nor the

low data point are outliers that would distort the cost formula results. Also, Luisa

might be wise to calculate the cost formula 6 to 12 months later after a longer

time period has elapsed since starting the tanning business. More time, and

data, would help her judge whether the high and low points are outliers or are

representative of the typical cost behavior patterns in her tanning business.

CHAPTER 3 Cost Behavior and Forecasting

E 3-45

E 3-46

1. Total Cost of Tanning Services = $1,016 + ($0.53 × Number of Appointments)

$2,000

$2,500

$3,000

Scattergraph of Tanning Services

CHAPTER 3 Cost Behavior and Forecasting

E 3-47

1. Airplane depreciation:

ariable Rate = ($18,000,000 – $18,000,000)/(44,000 – 28,000) = $0

Fixed Cost = $18,000,000 – ($0 × 44,000) = $18,000,000

4. Total Cost of Fuel = $10,134 × (Number of Airplane Flight Hours)

Fuel is a strictly variable cost.

5. Airplane maintenance:

ariable Rate = ($15,792,000 – $11,504,000)/(44,000 – 28,000) = $268

Fixed Cost = $15,792,000 – ($268 × 44,000) = $4,000,000

6. Total cost of airplane maintenance:

$4,000,000 + ($268 × Number of Airplane Flight Hours)

Airplane maintenance is a mixed cost.

CHAPTER 3 Cost Behavior and Forecasting

E 3-48

1. Total Annual Cost of Airplane Depreciation = 12 × $18,000,000

= $216,000,000

Total Annual Cost of Fuel = $10,134 × (Annual Number of Airplane Flight Hours)

Total Annual Cost of Airplane Maintenance =

(12 × $4,000,000) + ($268 × Number of Airplane Flight Hours)

Note: Fixed and variable costs, based on monthly data, are computed in

Exercise 3-47.

E 3-49

1. Total Cost of Receiving = $147,400 + ($210 × Number of Parts Inspected)

2. Independent variable—number of parts inspected

Dependent variable—total cost of receiving

CHAPTER 3 Cost Behavior and Forecasting

E 3-50

1. Total Annual Cost of Receiving:

= (12 × $147,400) + ($210 × Number of Parts Inspected in a Year)

= $1,768,800 + ($210 × Number of Parts Inspected in a Year)

= $16,468,800

E 3-51

1. Overhead cost……………

…

Dependent variable

$150,000…………………… Fixed cost (intercept)

$52…………………………

…

ariable rate (slope)

Direct labor hours………

…

Independent variable

2. Next Month’s Budgeted Overhead Cost = $150,000 + ($52 × 8,000)

= $566,000

CHAPTER 3 Cost Behavior and Forecasting

E 3-52

1. Unit Direct Materials Cost = $80,000/20,000 units = $4.00

Unit Direct Labor Cost = $101,400/20,000 units = $5.07

Unit Variable Overhead Cost = $15,600/20,000 units = $0.78

Unit Fixed Overhead Cost = $54,600/20,000 units = $2.73

3. Ending Inventory in Units = 20,000 – 18,900 = 1,100 units

4. Absorption-Costing Ending Inventory = $12.58 × 1,100 units = $13,838

E 3-53

1. Unit direct materials cost ($123,000/50,000 units)…………………

…

$2.46

Unit direct labor cost ($93,000/50,000 units)…………………………

…

1.86

…

CHAPTER 3 Cost Behavior and Forecasting

E 3-54

1. Unit direct materials cost……………………… $ 9.95

Unit direct labor cost…………………………… 2.75

Unit variable overhead cost…………………… 1.65

Unit fixed overhead cost………………………

…

2.50

Absorption cost per unit…………………… $16.85

3. Absorption-costing income:

Sales ($32 × 28,700)…………………………………………

…

$918,400

Less: Cost of goods sold ($16.85 × 28,700)……………

…

483,595

Gross margin……………………………………..………

…

$434,805

Less:

ariable selling expense ($2 × 28,700)………………

…

$ 57,400

Fixed selling expense……………………………………

…

65,500

Fixed administrative expense………………….………

…

231,000 353,900

Operating income……………………………………………

…

$ 80,905

…

CHAPTER 3 Cost Behavior and Forecasting

E 3-55

1. SUMMARY OUTPUT

Multiple R 0.95657699

R Square 0.915039537

Adjusted R Square 0.90087946

Standard Error 27.97952866

Observations 8

ANOVA

2. Overhead Cost = $4,316 + ($1.85 × Number of Direct Labor Hours)

3. The R² is 0.915, or 91.5%. In other words, 91.5% of the variation in the overhead costs from month to month

can be explained by the variability in the number of direct labor hours. Another factor (or factors) accounts

Regression Statistics

CHAPTER 3 Cost Behavior and Forecasting

E 3-56

1. SUMMARY OUTPUT

Multiple R 0.917226463

R Square 0.841304384

Adjusted R Square 0.825434822

Standard Error 164.5461114

Observations 12

ANOVA

2. Delivery Cost = $942 + ($1.79 × Number of Deliveries)

3. The R² is 0.841, or 84.1%. In other words, 84.1% of the variation in the monthly cost of delivery from month to month

can be explained by the variability in the number of deliveries. Another factor (or factors) accounts for just under 16%

of the variability in monthly delivery cost. This means that the number of deliveries is a fairly good predictor of the

cost.

Regression Statistics

CHAPTER 3 Cost Behavior and Forecasting

P 3-57

1. a. Mixed cost

f. Fixed cost

ariable cost (assumes counter help can be called in or sent back home as the

need arises)

h. Step cost

i. Mixed cost

2. a. While the contract stays the same ($150 per month plus $15 per hour of technical

time), the company’s need for computer technical help is so stable that the same

number of hours are required each month. Now, the cost is essentially fixed.

d. The college may use so much paper that it considers the cost of maintaining the

printers and copiers as essentially variable.

e. Suppose that the dental office is located in a large shopping mall that charges rent

based on the level of sales. Rent would be variable.

f. If the law office expanded and an additional, temporary receptionist was hired on

days with a heavy volume of appointments, the cost would be mixed.

g. If the individuals working behind the counter are assured that their complete shift

would be worked once they arrive, the cost would be a step cost (assumes more

counter help could be called in if demand rose).

PROBLEMS

CHAPTER 3 Cost Behavior and Forecasting

P 3-58

a. This must be the high-low method because she has only two data points (one for

each year).

b. This is the method of least squares done on a personal computer. While it is

possible to use a personal computer to do the other methods, it is unlikely that

Francis would have gone to all the trouble of entering 60 months of data simply

to use the high-low method.

P 3-59

a. Variable cost

b. Committed fixed cost

c. Discretionary fixed cost

d. Discretionary fixed cost

CHAPTER 3 Cost Behavior and Forecasting

P 3-60

Yes, the relationship appears to be reasonably linear.

2. Using the high-low method:

ariable Receiving Cost = ($27,000 – $15,000)/(1,700 – 700) = $12

Fixed Receiving Cost = $15,000 – ($12 × 700) = $6,600

Predicted cost for 1,450 receiving orders:

Receiving Cost = $6,600 + ($12 × 1,450) = $24,000

$25,000

$30,000

$35,000

Scattergraph of Receiving Activity

CHAPTER 3 Cost Behavior and Forecasting

P 3-61

1. Receiving Cost = $3,212 + ($15.15 × Number of Receiving Orders)

2. Receiving Cost = $3,212 + ($15.15 × 1,450) = $25,180

P 3-62

1. Salaries:

Senior accountant—fixed

Office assistant—fixed

Internet and software subscriptions—mixed

CHAPTER 3 Cost Behavior and Forecasting

P 3-62 (Concluded)

2. Internet and software subscriptions:

ariable Rate = ($850 – $700)/(150 – 120) = $5

Fixed Amount = $850 – ($5 × 150) = $100

Supplies:

ariable Rate = ($1,100 – $905)/(150 – 120) = $6.50

Fixed Amount = $1,100 – ($6.50 × 150) = $125

Unit

ariable

Fixed Cost

3. Salaries:

Senior accountant…………………………………… $2,500 —

Office assistant………………………………………

…

1,200 —

Internet and software subscriptions…………………

…

100 $ 5.00

Consulting by senior partner…………………………

…

—

10.00

Depreciation (equipment)………………………………

…

2,400 —

Supplies…………………………………………………… 125 6.50

…

4. For 170 professional hours:

Charge per Hour = ($9,025/170) + $22.60 = $75.69

The charge drops because the fixed costs are spread over more professional

hours.

CHAPTER 3 Cost Behavior and Forecasting

P 3-63

1. Committed resource charges: monthly fee, activation fee, cancellation fee

(if triggered by contract cancellation prior to 1 year)

Flexible resource charges: all additional charges for airtime, long distance,

and roaming.

3. Plan 1:*

60 minutes = 90 minutes + (30) minutes

60 minutes = 60 minutes + 0 minutes

Additional Minutes = 30 minutes

*There are a number of ways to illustrate the use of minutes with Plan 1. Here are two

possibilities. The problem, of course, is that all included monthly minutes are used and Jana

must purchase additional minutes.

Plan 2:

120 minutes = 90 minutes + 30 minutes

Minutes Available Minutes Used Unused Minutes