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Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-1
CHAPTER 6
Activity Analysis, Cost Behavior, and Cost
Estimation
ANSWERS TO REVIEW QUESTIONS
6-1 Cost behavior patterns are important in the process of making cost predictions. Cost
predictions are used in planning, control, and decision making. For example, cost
6-2 a. Cost estimation is the process of determining how a particular cost behaves.
6-3 a. Hotel: Percentage of rooms occupied or the number of occupancy-days, where
an occupancy-day is defined as one room occupied for one day.
6-2
6-4 Graphs of the cost behavior patterns are as follows:
Cost
Cost
Cost
Cost
Cost
Cost
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-3
6-6 A manufacturer's cost of supervising production might be a step-fixed cost, because
6-7 As the level of activity (or cost driver) increases, total variable cost increases
6-8 a. A semivariable cost behavior pattern can be used to approximate a step-variable
cost as shown in the following graph:
Semivariable
Cost
6-4
6-9 (a) Annual cost of maintaining an interstate highway: committed cost. (Once the
6-10 The cost analyst should respond by pointing out that in most cases a cost behavior
pattern should be limited to the relevant range of activity. When the firm's utility cost
6-11 A learning curve shows how average labor time per unit of production changes as
cumulative output changes. In many production processes, as production activity
6-12 Appropriate independent variables for several tasks are as follows:
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-5
6-13 An outlier is a data point that falls far away from the other points in the scatter
diagram and is not representative of the data. One possible cause of an outlier is
6-14 Fixed costs are often allocated on a per unit-of-activity basis. For example, fixed
manufacturing-overhead costs, such as depreciation, may be allocated to units of
6-15 In the first step of the visual-fit method of cost estimation, data points are plotted on
graph paper to form a scatter diagram. Then a line is drawn through the scatter
diagram in an attempt to minimize the distance between the line and the plotted
6-16 The chief drawback of the high-low method of cost estimation is that it uses only two
data points. The rest of the data are ignored by the method. An outlier can cause a
6-17 The term least squares in the least-squares regression method of cost estimation
6-6
6-18 A least-squares regression line may be expressed in equation form as follows:
Y = a + bX
6-20 Potential cost drivers in the cruise industry include the following: number of
6-21 A particular least-squares regression line may be evaluated on the basis of
economic plausibility or goodness of fit.
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-7
SOLUTIONS TO EXERCISES
EXERCISE 6-22 (15 MINUTES)
1.
Cost per Broadcast Hour
Cost Item
August
October
Production crew:
$5,330/410 hr. ............................................
$13.00 per hr.
2.
December cost predictions:
3.
Cost Item
Cost per Broadcast Hour
in December
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-8
EXERCISE 6-23 (40 MINUTES)
1.
Cost of food:
Cost
Total cost
$25,000
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-9
EXERCISE 6-23 (CONTINUED)
2.
Cost of salaries and fringe benefits for administrative staff:
Cost per month
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-10
EXERCISE 6-23 (CONTINUED)
3.
Laboratory costs:
Total cost
Cost per month
$80,000
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-11
EXERCISE 6-23 (CONTINUED)
4.
Cost of utilities:
Cost per month
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-12
EXERCISE 6-23 (CONTINUED)
5.
Nursing costs:
Cost per month
$17,500
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-13
EXERCISE 6-24 (15 MINUTES)
1.
a.
Fixed
2.
Production cost per month = $37,000* + $2.30X †
EXERCISE 6-25 (15 MINUTES)
1.
Variable maintenance
cost per tour mile
=
(18,750r-16,500r) / (30,000 miles – 12,000 miles)
2.
Cost formula:
3.
Cost prediction at the 34,000-mile activity level:
6-14
EXERCISE 6-25 (CONTINUED)
EXERCISE 6-26 (15 MINUTES)
1.
Actual
Estimated
2.
(a)
The approximation is very accurate in the range 40,000 to 60,000 miles per
6-15
EXERCISE 6-27 (30 MINUTES)
1.
Scatter diagram and visually-fitted line:
Cost of diagnostic testing
$50,000
•
•
6-16
EXERCISE 6-27 (CONTINUED)
2.
The requirement asks for an estimate based on the visually-fit cost line. Therefore,
answers will vary on this requirement because of variation in the visually-fitted lines.
Based on the preceding plot:
Monthly fixed cost.............................................................................................
$14,000
*Calculation of variable cost:
EXERCISE 6-28 (30 MINUTES)
Answers will vary widely, depending on the company and costs selected. Some examples
of typical manufacturing costs follow.
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-17
EXERCISE 6-29 (15 MINUTES)
1.
Variable cost per pint of applesauce produced =
$.10
63,000 123,000
$66,300 $72,300 =
−
−
2.
Cost prediction when 78,000 pints of applesauce are produced
6-18
EXERCISE 6-30 (30 MINUTES)
1.
Scatter diagram and visually-fitted line:
•
Monthly energy cost
$90,000
$45,000
$30,000
$15,000
6-19
EXERCISE 6-30 (CONTINUED)
2.
Answers will vary on this requirement because of variation in the visually-fitted lines.
3.
The July cost observation at the 120,000-pint activity level appears to be an outlier.
EXERCISE 6-31 (10 MINUTES)
1.
(a)
Average time for 4 satellites ..............................................................
195 hours
3.
Learning curves indicate how labor costs will change as the company gains
Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation
6-20
EXERCISE 6-32 (15 MINUTES)
Monthly audit cost
$100,000
$60,000
$40,000
