6-52
PROBLEM 6-46 (CONTINUED)
(c)
Fixed- and variable-cost components:
Monthly fixed cost = $11,796
Variable cost = $677 per hundred flights
Calculation and interpretation of R 2 using manual calculations
(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
March ………….
18
17.889
.012
April ……………
19
14
21.274
.174
May …………….
17
17.212
.045
June ……………
20
11
19.243
.573
.340
July …………….
21
15
21.951
August ………..
17
17.889
.790
21
12
19.920
October ……….
19
10
18.566
.188
.174
November ……
24
14
21.274
December ……
18
11
19.243
=
($11,796 + $677X)/$1,000
(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
Variable overhead (5 DLH $9.25 per DLH) ………………………………………..
Total variable cost per 1,000 square feet ……………………………………………
$491.25
*DLH denotes direct-labor hours.
3.
The minimum bid should include the following incremental costs of the project.:
Direct material ($390.00 50) …………………………………………………………….
$19,500.00
Variable overhead ($9.25 per DLH 5 DLH 50) ………………………………..
412.50
Minimum bid …………………………………………………………………………………….
4.
decreases.
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
Variable OH2 (50 $13.60) …………………………………………………………………
Variable OH3 (70 $5.90) …………………………………………………………………..
413.00
Total incremental variable overhead …………………………………………………..
b.
Variable OH1 (50 5 $4.15) ……………………………………………………………..
$1,037.50
Variable OH2 (25 $13.60) …………………………………………………………………
Variable OH3 (230 $5.90) …………………………………………………………………
Total incremental variable overhead …………………………………………………..
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
$15,000
2.
•
$10,000
$5,000
500
3.
•
•
•
•
•
4.
•
•
•
•
•
CASE 6-48 (CONTINUED)
5.
Fixed cost = $7,000
6.
Administrative cost = $7,000 + $3.00X, where X denotes the number of patients.
7.
Cost predictions using visually-fit cost lines:
Patient
Load
Cost
Prediction
750 …………………
$9,300
350…….
5,500
which is near the middle of the relevant range. However, for a patient load of 350
CASE 6-49 (50 MINUTES)
1.
High-low method:
Total cost at 1,500 patients…………………………………………………………………
Variable cost at 1,500 patients ……………………………………………………………
Fixed cost per month …………………………………………………………………………
$4,100 $16,100 =
−
Cost formula:
Total monthly administrative cost = $1,100 + $10X, where X denotes the number of
The variable cost per patient is $10.
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:
Total monthly administrative cost = $2,671 + $7.81X
(b)
High-low method:
Total monthly administrative cost = $1,100 + $10X
(c)
Visual-fit method:
Total monthly administrative cost = $7,000 + $3.00X
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.
relevant range. Since the regression and high-low estimates are so heavily influenced
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:
(a)
Communicate information fairly and objectively.
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
April ……………………….
92
9
81
828
May ………………………..
119
13
169
1,547
June ……………………….
100
10
100
1,000
July ………………………..
94
7
49
658
August ……………………
41
3
9
123
September ………………
102
11
121
1,122
October …………………..
November ……………….
83
6
36
498
December ……………….
(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):*
$7.81 per patient.
(d)
The variable cost per patient is $7.81, as explained above.
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