CHAPTER 3 Cost Behavior and Forecasting
P 3-64
change here first, please →Claims Claims
1. Variable costs—salary of the two paralegals times the percentage of time spent in Processing Claims Processing
processing uncontested claims; salary of the accountant times the percentage of time Cost Processed Cost
spent in this activity; cost of claims forms, checks, envelopes, and postage. February 34,907 5,700 34,907
Fixed costs—salaries of the two paralegals times the percentage of time spent in March 31,260 4,900 31,260
handling contested claims; depreciation on office equipment used in claims processing
Variable Rate = ($44,895 – $31,260)/(7,930 – 4,900) 44,895 – 31,260 / 7,930 – 4,900 Bid price 4.60 4.60
= $13,635/3,030 claims 13,635 / 3,030 = 4.50 Claim s 75,600 75,600
= $4.50 per claim months 12
Using the high point: ↓ links ↓
Fixed Cost = $44,895 – ($4.50 × 7,930) = $9,210 44,895 – 4.50 × 7,930 = 9,210
Total Cost of Claims Processing = $9,210 + ($4.50 × Claims) 9,210 + 4.50 × claims =
total cost of claims proc.
CHAPTER 3 Cost Behavior and Forecasting
P 3-65
1. The state unemployment insurance premiums and the average cost per injury are fixed
change here first, please →
with respect to the number of speakers sold. The state unemployment insurance (before safety program)
premiums are variable (to an extent) with respect to the number of injury claims. That is, state unemployment premiums 100,000
2. Yes, the safety program paid for itself. There was a $50,000 reduction in annual cost of 100,000 – 50,000 = 50,000 (after safety program)
state unemployment insurance premiums and a $22,000 reduction in the total cost of 1,500 × 15 – 50 × 10 = 22,000 state unemployment premiums 50,000
injuries per year [$22,500 ($1,500 × 15) – $500 ($50 × 10)]. This is a monetary reduction 1,500 × 15 = 22,500 average cost per injury 50
of $72,000 per year versus the $60,000 salary of the safety director. In addition, the 50 × 10 = 500 injuries per year 10
CHAPTER 3 Cost Behavior and Forecasting
P 3-66 make changes here, please
1.
$2.85 2.85 Direct materials 2.85
1.92 1.92 Direct labor 1.92
1.60 1.60 Variable overhead 1.60
0.90 180,000 / 200,000 = 0.90 Variable selling 0.90
2.
Absorption-costing income:
SP 9
Sales (204,300 units × $9)…….………….……………….………….……………………………….………….……………………………………………………
$1,838,700 204,300 × 9.00 = 1,838,700 Sold 196,700
Less: Cost of goods sold (204,300 units × $7.27)………………………………………………………………………………………………………………………………………..
1,485,261 204,300 × 7.27 = 1,485,261 3,900
Gross margin……………………………………………………………………………………
$ 353,439
Less: Selling and administrative expenses……………………….……………………..
279,870 96,000 + 204,300 × 0.90 = 279,870
Operating income…………………………………….………………………………………
$ 73,569
3.
$2.85 2.85
1.92 1.92
4. Variable-costing income:
Sales (204,300 units × $9)…….………….……………….………….……………………………….………….……………………………………………………
$1,838,700 204,300 × 9.00 = 1,838,700
Less variable expenses:
Variable cost of goods sold (204,300 units × $6.37)………………………………………………………………………………………………………………………………………….…….
1,301,391 204,300 × 6.37 = 1,301,391
Variable selling and administrative (204,300 units × $0.90)…………………………………………………………………………………………………………………………………………
183,870 204,300 × 0.90 = 183,870
Contribution margin………………………………………………………………………..……………………………………………………
$ 353,439
Less fixed expenses:
Fixed overhead…………………………………………….…………………………….……………………………………………………
180,000 180,000
Fixed selling and administrative………………………………………………………………………………………………………………...…….
96,000 96,000
Operating income…………………………………………………………………………………………………………
$ 77,439
(links)
(links)
CHAPTER 3 Cost Behavior and Forecasting
P 3-66 (Continued) (links to
5. Absorption-costing income: (links) previous page)
Sales (196,700 units × $9)………………………………………………………………………………………………………………...
$1,770,300 196,700 × 9.00 = 1,770,300 Direct materials 2.85
Less: Cost of goods sold (196,700 units × $7.27)…………………………….……………………………………………………...……………………………………
1,430,009 196,700 × 7.27 = 1,430,009 Direct labor 1.92
Gross margin………………………………………...………………………………….………………………………………..
$ 340,291 Variable overhead 1.60
Less: Selling and administrative expenses…………………………………………………………………………………………………..…………….
273,030 96,000 + 196,700 × 0.90 Variable selling 0.90
Operating income……………………………………………………………...…………………………………………………..
$ 67,261 = 273,030 Fixed overhead 180,000
Variable-costing income: Fixed S&A exp. 96,000
Sales (196,700 units × $9)………………………………………………………………………………………………………………...
$1,770,300 196,700 × 9.00 = 1,770,300 Units produced (200,000)
Less variable expenses: Units sold 204,300
Variable cost of goods sold (196,700 units × $6.37)…………………………….………………………………………………………………………………...…………
1,252,979 196,700 × 6.37 = 1,252,979 Beginning inventory 8,200.00
Variable selling and administrative (196,700 units × $0.90)………………………...……………………………………………………………………………...…………………………..
177,030 196,700 × 0.90 = 177,030 SP 9.00
Contribution margin………………………………….………………………………...…………………………………
$ 340,291 Sold 196,700
Less fixed expenses: 3,900.00
Fixed overhead…………………………………………………………………………………….………………………
180,000 180,000 SP 9.00
Fixed selling and administrative………………………………….…………………………..……………………
96,000 96,000
Operating income…………………………………..…………………………………………………………………
$ 64,291
CHAPTER 3 Cost Behavior and Forecasting
P 3-67
1. Results of regressions:
10 Months’ 12 Months’
Data Data
Intercept………………………………………………………………………………
3,212 3,820 ← links
Slope………………………………………………………………………………………
15.15 15.10
R²…………………………………………………………………………………..
0.85 0.75 change here first, please
2. Orders Cost
11,000 18,000
2700 15,000
12 950 17,500
—
The regression run on the 11 months of data from “typical” months appears to be better
than the one for all 12 months. R² is higher for the regression without the outlier
(85.88% versus 74.51%), and the scattergraph gives Tracy confidence that the data
without the outlier describe a relatively linear relationship. Since the storm damage
is not expected to recur, Month 11 can safely be dropped from a regression meant to
$35,000
Scattergraph of Receiving Activity—12 Month’s Data
CHAPTER 3 Cost Behavior and Forecasting
P 3-67 (Concluded)
3. Results for the method of least squares after dropping Month 11. change here, please
SUMMARY OUTPUT orders cost
Regression Statistics 11,000 18,000
Multiple R 0.926737002 2700 15,000
R Square 0.85884147 31,500 28,000
Adjusted R Square 0.843157189 41,200 17,000
Standard Error 2051.780599 51,300 25,000
Observations 11 61,100 21,000
CHAPTER 3 Cost Behavior and Forecasting
P 3-68 machine power
1. hours cost
0
20,000 26,000
25,000 38,000
30,000 42,500
The overall relationship looks reasonably linear—although the data point for the first
quarter may be an outlier.
2. Using the high-low method:
$35,000
$40,000
$45,000
Scattergraph of Power Cost
CHAPTER 3 Cost Behavior and Forecasting
P 3-68 (Continued)
change here first, please →
3. Output of regression program: quarter machine hours power cost
SUMMARY OUTPUT 120,000 26,000
Regression Statistics 225,000 38,000
Multiple R 0.893359672 330,000 42,500
R Square 0.798091504 422,000 37,000
Adjusted R Square 0.764440088 521,000 34,000
Standard Error 2673.924883 618,000 29,000
Observations 8 724,000 36,000
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 6899.784483 5910.387735 1.167399635 0.287338538 -7562.413284 21361.98225 -7562.413284 21361.98225
Machine Hours 1.209051724 0.248267693 4.869951909 0.002794513 0.601562566 1.816540883 0.601562566 1.816540883
CHAPTER 3 Cost Behavior and Forecasting
P 3-68 (Concluded)
4. The output of a regression program after Quarter 1 (20,000, $26,000) has been dropped.
SUMMARY OUTPUT
change here first, please →
Regression Statistics quarter machine hours power cost
Multiple R 0.957883502 2 25,000 38,000
R Square 0.917540803 3 30,000 42,500
Adjusted R Square 0.901048964 4 22,000 37,000
Standard Error 1367.284823 5 21,000 34,000
Observations 7 6 18,000 29,000
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 12407.56303 3289.994132 3.771302479 0.013005506 3950.363873 20864.76218 3950.363873 20864.76218
Machine Hours 1.009803922 0.135381371 7.458957725 0.000683462 0.661795029 1.357812814 0.661795029 1.357812814
Total Power Cost = $12,408 + ($1.01 × Number of Machine Hours) links → 12,408 + 1.01 × – = 12,408
This regression looks better in terms of R². The R² for this regression is 0.92, or 92%. By dropping the outlier, the
CHAPTER 3 Cost Behavior and Forecasting
P 3-69 change here, please
1. The scattergraph provides evidence for a linear relationship, but the observation for moves cost
300 moves may be an outlier. 0
100 3,000
200 4,650
300 3,400
400 8,500
500 10,000
600 12,600
2. High (800, $14,560); Low (100, $3,000) 800 , 14,560 100 , 3,000
Variable Rate = ($14,560 – $3,000)/(800 – 100) 14,560 – 3,000 ÷ 800 – 100
= $11,560/700 moves 11,560 ÷ 700 = 16.514
= $16.514
*Variable rate rounded to three decimal places.
Fixed Rate Cost = $3,000 – ($16.514 × 100) 3,000 – 16.514 × 100
=$3,000 – $1,651.40 3,000 – 1651.40 = 1,349
$10,000
$12,000
$14,000
$16,000
Cost of Moving Materials
*
CHAPTER 3 Cost Behavior and Forecasting
P 3-69 (Continued)
3. Output of the regression routine calculated by a spreadsheet:
SUMMARY OUTPUT change here, please
Regression Statistics moves cost
Multiple R 0.96785846 100 3,000
R Square 0.936749999 200 4,650
Adjusted R Square 0.926208332 300 3,400
Standard Error 1266.703399 400 8,500
Observations 8 500 10,000
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 497.5 987.0073364 0.504048938 0.63219637 -1917.619944 2912.619944 -1917.619944 2912.619944
Number of Moves 18.425 1.954565778 9.426646167 8.10236E-05 13.64234984 23.20765016 13.64234984 23.20765016
Rounding the coefficients:
Variable Rate = $18.43 per move
Fixed Rate = $498
Total Cost
= $498 + ($18.43 × Number of Moves)
= $498 + ($18.43 × 550) = $10,635 links → 498 + 18.43 × 550 = 10,635
CHAPTER 3 Cost Behavior and Forecasting
CHAPTER 3 Cost Behavior and Forecasting
P 3-69 (Concluded)
4. Normally, we would prefer the least squares method since the data appear to be linear. (links to previous page)
However, the third observation may be an outlier. If the third observation (300 moves
and $3,400 of cost) is dropped, the R² rises to 99%. The new cost formula would be:
Total Cost = $1,411 + ($17.28 × Number of Moves) moves cost
The higher fixed cost is much more in keeping with what we observed with the 100 3,000
scattergraph in Requirement 1. 200 4,650
CHAPTER 3 Cost Behavior and Forecasting
Case 3-70
1. The order should cover the variable costs described in the cost formulas. change here first, please
These variable costs represent flexible resources.
Materials ($94 × 20,000)………………………………………………………………………………………………………………………………..
$1,880,000 94 × 20,000 = 1,880,000 units 20,000
Labor ($16 × 20,000)………………………………………………………………………………………………………………………………..
320,000 16 × 20,000 = 320,000 price p.u. 212
Variable overhead ($80 × 20,000)………………………………………………………………………………………………………………………………..
1,600,000 80 × 20,000 = 1,600,000 direct material usage 94
Variable selling ($7 × 20,000)………………………………………………………………………………………………………………………………..
140,000 7 × 20,000 = 140,000 direct labor usage 16
Total additional resource spending……………………………….……………………………
Divided by units produced…………………………………….…………………………………
$300,000. 212 – 197 × 20,000 = 300,000
2. The coefficients of determination indicate the reliability of the cost formulas. required O/H R2 0.56
Of the four formulas, overhead activity may be a problem. A coefficient of setups 12
determination of 0.56 means that only about 56% of the variability of engineering hours 600
overhead cost is explained by direct labor hours. This should have a bearing
on the answer to Requirement 1 because if the percentage is low, there are
activity drivers other than direct labor hours that are affecting variability in
overhead cost. What these drivers are and how resource spending would
change need to be known before a sound decision can be made.
3. Resource spending attributable to order:
Materials ($94 × 20,000)…………………………………………….………………………………………
$1,880,000 94 × 20,000 = 1,880,000
Labor ($16 × 20,000)…….…………………………………….…..………………………………
Variable selling ($7 × 20,000)…………………………………….…………………………………………
Total additional resource spending…………………………………………………………………
Divided by units produced……………………………………………………………………………
CASES
CHAPTER 3 Cost Behavior and Forecasting
Case 3-70 (Concluded)
It would also be useful to know the step-cost functions for any activities that have
resources acquired in advance of usage on a short-term basis. It is possible that
Case 3-71
1. Carl’s behavior is definitely unethical. He is stealing confidential information from
Kilborn and using it for unethical advantages. Kilborn would not approve of Carl’s
actions and would have a potential lawsuit against him for theft of information.
2. Assuming that the data were acquired illicitly, Bill’s instincts were on target. To hire
Carl in implicit exchange for the confidential information would be a violation of
integrity. As soon as Carl joined Brindon’s staff, Kilborn could have legal standing
to include the Thomas Electronics Division in any suit against Carl. Not only are