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6-52
PROBLEM 6-46 (CONTINUED)
(c)
Fixed- and variable-cost components:
(a)
Formula for calculation:
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-53
PROBLEM 6-46 (CONTINUED)
(b)
Tabulation of data:*
Month
Y
X
Predicted Cost (in
thousands)
Based on
Regression
Line Y'
[( Y– Y')2]†
[(Y –
Y
)2]†
January ..........
20
12
19.920
.006
.340
February ........
19
10
18.566
.188
.174
(c)
Calculation of R2:
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
SOLUTIONS TO CASES
CASE 6-47 (45 MINUTES)
1.
Cairns' preliminary estimate for overhead of $18.00 per direct-labor hour does not
distinguish between fixed and variable overhead. This preliminary rate is applicable
only to the activity level at which it was computed (72,000 direct-labor hours per year)
and may not be used to predict total overhead at other activity levels.
2.
Direct material ..............................................................................................
$390.00
3.
The minimum bid should include the following incremental costs of the project.:
Direct material ($390.00 50) ......................................................................
$19,500.00
4.
Yes, Cairns can rely on the formula as long as she recognizes that there are some
shortcomings. The fact that least-squares regression estimates cost behavior
6-55
CASE 6-47 (CONTINUED)
5.
a.
Variable OH1 (50 5 $4.15) .......................................................................
$1,037.50
b.
Variable OH1 (50 5 $4.15) .......................................................................
$1,037.50
c.
The two scenarios in (a) and (b) differ in terms of the activities to be undertaken.
6-56
CASE 6-48 (45 MINUTES)
1.
Scatter diagram:
2. through 4.
See scatter diagram for requirement (1).
$25,000
$20,000
$10,000
$5,000
4.
•
•
•
•
•
CASE 6-48 (CONTINUED)
7.
Cost predictions using visually-fit cost lines:
Patient
Load
Cost
Prediction
CASE 6-49 (50 MINUTES)
1.
High-low method:
$4,100 $16,100 =
−
Cost formula:
6-58
CASE 6-49 (CONTINUED)
3.
Memorandum
Date:
Today
To:
Jeffrey Mahoney, Administrator
From:
I.M. Student
Subject:
Comparison of cost estimates for clinic administrative costs
Three alternative cost-estimation methods were used to estimate the pediatric clinic's
administrative cost behavior. The results of these three approaches (in formula form)
are shown below. In each formula, X denotes the number of patients in a month.
(a)
Least-squares regression method:
These cost estimates differ very significantly. The activity level in the clinic
during its first year of operation fluctuated greatly. This fluctuation is not expected in
the future; patient loads in the range of 600 to 1,200 patients per month are
anticipated.
6-59
CASE 6-49 (CONTINUED)
Another possible approach would be to use least-squares regression, but
4.
It is very inappropriate for the hospital administrator to manipulate the cost
information supplied by the director of cost management in order to push his own
agenda before the board of trustees. It is the board's legitimate role to decide whether
or not to establish and continue operations in the clinic. In making decisions about
the clinic, the board should have the best information possible, including the
controller's best estimate as to how administrative costs will behave.
Megan McDonough, the hospital’s director of cost management, has a
professional obligation to provide her best professional judgment to the board of
trustees. The standards of ethical conduct for management accountants include the
following requirements concerning credibility:
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-60
CASE 6-49 (CONTINUED)
The following alternative approach to calculating the regression parameters is not a
requirement in the problem.
Least-squares regression using manual calculations
(a)
Tabulation of data:
Month
Dependent
Variable
(cost in
hundreds)
Y
Independent
Variable
(patients in
hundreds)
X
X2
XY
January .......................
60
4
16
240
February .....................
70
5
25
350
March ..........................
139
14
196
1,946
(b)
Calculation of parameters:
a
=
))(( )(
))(( ))((
2
2
XXXn
XYXXY
−
−
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-61
CASE 6-49 (CONTINUED)
(c)
Cost behavior in formula form (with rounded parameters):*
FOCUS ON ETHICS (See page 245 in the text.)
Is direct labor a variable cost? Is it ethical to “tap and zap” employees?
Direct labor is a variable cost if management is both able and willing to continually
adjust the workforce to meet short-term needs. Many observers would argue that it is
