Question 1

Variable, Fixed, and Mixed Costs 
Classify the following costs of activity inputs as variable, fixed, or mixed. Identify the activity and the associated activity driver that allow you to define the cost behavior. For example, assume that the resource input is "cloth in a shirt." The activity would be "sewing shirts," the cost behavior "variable," and the activity driver "units produced." Prepare your answers in the following format:
  
a. Flu vaccine
b. Salaries, equipment, and materials used for moving materials in a factory
c. Forms used to file insurance claims
d. Salaries, forms, and postage associated with purchasing
e. Printing and postage for advertising circulars
f. Equipment, labor, and parts used to repair and maintain production equipment
g. Power to operate sewing machines in a clothing factory
h. Wooden cabinets enclosing audio speakers
i. Advertising
j. Sales commissions
k. Fuel for a delivery van
l. Depreciation on a warehouse
m. Depreciation on a forklift used to move partially completed goods
n. X-ray film used in the radiology department of a hospital
o. Rental car provided for a client

Accepted Answer

The answer of Variable, Fixed, and Mixed Costs 
Classify the...

Question 2

High-Low Method, Cost Formulas 
The controller of the South Charleston plant of Ravinia, Inc., monitored activities associated with materials handling costs. The high and low levels of resource usage occurred in September and March for three different resources associated with materials handling. The number of moves is the driver. The total costs of the three resources and the activity output, as measured by moves for the two different levels, are presented as follows:
  
Required: 
1. Determine the cost behavior formula of each resource. Use the high-low method to assess the fixed and variable components.
2. Using your knowledge of cost behavior, predict the cost of each item for an activity output level of 9,000 moves. 
3. Construct a cost formula that can be used to predict the total cost of the three resources combined. Using this formula, predict the total materials handling cost if activity output is 9,000 moves. In general, when can cost formulas be combined to form a single cost formula?

Accepted Answer

The answer of High-Low Method, Cost Formulas 
The controller of...

Question 3

Scatterplot, High-Low Method, Regression 
The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. Cost analysts have decided that power costs are mixed; thus, they must be broken into their fixed and variable elements so that the cost behavior of the power usage activity can be properly described. Machine hours have been selected as the activity driver for power costs. The following data for the past eight quarters have been collected:
  
Required: 
1. Prepare a scattergraph by plotting power costs against machine hours. Does the scatter- graph show a linear relationship between machine hours and power cost?
2. Using the high and low points, compute a power cost formula. 
3. Use the method of least squares to compute a power cost formula. Evaluate the coefficient of determination. 
4. Rerun the regression and drop the point (20,000; $26,000) as an outlier. Compare the results from this regression to those for the regression in Requirement 3. Which is better?

Accepted Answer

The answer of Scatterplot, High-Low Method, Regression 
The management of...

Question 4

Activity Availability, Capacity Used, Unused Capacity 
Corazon Manufacturing Company has a purchasing department staffed by five purchasing agents. Each agent is paid $28,000 per year and is able to process 4,000 purchase orders. Last year, 17,800 purchase orders were processed by the five agents.
Required: 
1. Calculate the activity rate per purchase order.
2. Calculate, in terms of purchase orders, the:
a. total activity availability
b. unused capacity
3. Calculate the dollar cost of:
a. total activity availability
b. unused capacity
4. Express total activity availability in terms of activity capacity used and unused capacity.
5. What if one of the purchasing agents agreed to work half time for $14,000? How many purchase orders could be processed by four and a half purchasing agents? What would unused capacity be in purchase orders?

Accepted Answer

The answer of Activity Availability, Capacity Used, Unused Capacity 
Corazon...

Question 5

Describe the method of least squares. Why is this method better than either the high-low method or the scatterplot method?

Accepted Answer

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Question 6

Method of Least Squares, Evaluation of Cost Equation 
Lassiter Company used the method of least squares to develop a cost equation to predict the cost of moving materials. There were 80 data points for the regression, and the following computer output was generated:
  
The activity driver used was the number of moves.
Required: 
1. What is the cost formula?
2. Using the cost formula, predict the cost of moving materials if 340 moves are made. Now prepare a 95 percent confidence interval for this prediction. (Round your answers to the nearest dollar.)
3. What percentage of the variability in moving cost is explained by the number of moves? Do you think the equation will predict well? Why or why not?

Accepted Answer

The answer of Method of Least Squares, Evaluation of Cost...

Question 7

Method of Least Squares 
DeMarco Company is developing a cost formula for its packing activity. Discussion with the workers in the Packing Department has revealed that packing costs are associated with the number of customer orders, the size of the orders, and the relative fragility of the items (more fragile items must be specially wrapped in bubble wrap and Styrofoam). Data for the past 20 months have been gathered:

Required: 
1. Using the method of least squares, run a regression using the number of orders as the independent variable.
2. Run a multiple regression using three independent variables: the number of orders, the weight of orders, and the number of fragile items. Which regression equation is better? Why? 
3. Predict the total packing cost for 25,000 orders, weighing 40,000 pounds, with 4,000 fragile items. Prepare a 99 percent confidence interval for this estimate of total packing cost. 
4. How much would the cost estimated for Requirement 3 change if the 25,000 orders weighed 40,000 pounds, but only 2,000 were fragile items?

Accepted Answer

The answer of Method of Least Squares 
DeMarco Company is...

Question 8

How does the length of the time horizon affect the classification of a cost as fixed or variable? What is the meaning of short run? Long run?

Accepted Answer

The answer of How does the length of the time...

Question 9

Cost Behavior 
SmokeCity, Inc., manufactures barbeque smokers. Based on past experience, SmokeCity has found that its total annual overhead costs can be represented by the following formula: Overhead cost = $543,000 + $1.34X, where X equals number of smokers. Last year, SmokeCity produced 20,000 smokers. Actual overhead costs for the year were as expected.
Required: 
1. What is the driver for the overhead activity?
2. What is the total overhead cost incurred by SmokeCity last year?
3. What is the total fixed overhead cost incurred by SmokeCity last year?
4. What is the total variable overhead cost incurred by SmokeCity last year?
5. What is the overhead cost per unit produced?
6. What is the fixed overhead cost per unit?
7. What is the variable overhead cost per unit?
8. Recalculate Requirements 5, 6, and 7 for the following levels of production: (a) 19,500 units and (b) 21,600 units. (Round your answers to the nearest cent.) Explain this outcome.

Accepted Answer

The answer of Cost Behavior 
SmokeCity, Inc., manufactures barbeque smokers....

Question 10

Multiple Regression 
Sweet Dreams Bakery was started five years ago by Della Fontera who was known for her breads, sweet rolls, and personalized cakes. Della had kept her accounting system simple, believing that she had a good intuitive handle on costs. She had been using the following formula to describe her monthly overhead costs:
Overhead cost = $7,800 + $7.50 (direct labor hours)
For breads and sweet rolls that were available in the bakery case each day, she applied a standard pricing system. For special orders, however, Della needed her cost formula to help her come up with an estimated cost for the personalized cake or wedding cake. To that cost, she applied a markup percentage.
Lately, however, the increase in the variety of orders and the elaborateness of the wedding cakes made her wonder if a more sophisticated view of costs would help her in planning, budgeting, and pricing.
After some late-night discussions with her workers, Della determined that Sweet Dreams' expansion into wedding cakes and gift baskets had made special orders a more complex operation. The various shapes of the wedding cake tiers had required Della's investing in differentsized cake pans, as well as decorating tips for icing. The different icing patterns and elaborate designs took much more time for icing, as well. In addition, while a five-year-old's birthday cake just requires that the child's name and (possibly) the superhero's name are spelled correctly, a wedding cake is a once-in-a-lifetime item that must achieve perfection. (Della hated to use the term "bridezilla" but.…) Gift baskets required Della to stock baskets, cellophane, and bows. Then when an order came in, a worker had to stop baking to arrange the muffins and breads artfully in the basket, wrap it, and tie the bow. While it seemed simple enough, this took time and thought. Thus, the number of direct labor hours was still an important variable, but so were the number of wedding cakes and gift baskets. Della rummaged through her college textbooks and found information on regression. Then, with help from one of her computer savvy workers, she ran multiple regression tables for the past 24 months of data for Sweet Dreams for three independent variables: number of direct labor hours, the number of wedding cakes, and the number of gift baskets. The following printout was obtained:
  
Required: 
1. Write out the cost equation for Sweet Dreams' monthly overhead cost.
2. Suppose that next month Sweet Dreams expects to have 550 direct labor hours, 35 wedding cakes, and 20 gift baskets. What is the expected overhead? (Round to the nearest dollar.)
3. Calculate a 95 percent confidence interval for the prediction made in Requirement 2. (Round to the nearest dollar.)
4. What does R 2 mean in this equation? Overall, what is your evaluation of the cost equation that was developed for the cost of overhead? Suppose that Sweet Dreams charges an extra $2.50 to prepare a gift basket. This charge is in addition to the price charged for the items (e.g., muffins) that the customer chooses to put into the basket. How might Della use the results of the regression equation to see whether or not the $2.50 charge is appropriate?

Accepted Answer

The answer of Multiple Regression 
Sweet Dreams Bakery was started...

Question 11

High-Low Method, Scatterplot, Regression 
Weber Valley Regional Hospital has collected data on all of its activities for the past 16 months. Data for cardiac nursing care follow:
  
Required: 
1. Using the high-low method, calculate the variable rate per hour and the fixed cost for the nursing care activity.
2. Run a regression on the data, using hours of nursing care as the independent variable. Predict cost for the cardiac nursing care for September 2014 if 1,400 hours of nursing care are forecast. Evaluate the regression equation. How comfortable are you with the predicted cost for September 2014?
3. Upon looking into the events that happened at the end of 2013, you find that the cardiology ward bought a cardiac-monitoring machine for the nursing station. Administrators also decided to add a new supervisory position for the evening shift. Monthly depreciation on the monitor and the salary of the new supervisor together total $10,000. Now, run two regression equations, one for the observations from 2013 and the second using only the observations for the eight months in 2014. Discuss your findings. What is your predicted cost of the cardiac nursing care activity for September 2013?

Accepted Answer

The answer of High-Low Method, Scatterplot, Regression 
Weber Valley Regional...

Question 12

Account Analysis to Determine Cost Behavior 
Darnell Poston, owner of Poston Manufacturing, Inc., wants to determine the cost behavior of labor and overhead. Darnell pays his workers a salary; during busy times, everyone works to get the orders out. Temps (temporary workers hired through an agency) may be hired to pack and prepare completed orders for shipment. During slower times, Darnell catches up on bookkeeping and administrative tasks while the salaried workers do preventive maintenance, clean the lines and building, etc. Temps are not hired during slow times. Darnell found that workers' salaries, temp agency payments, rentals, utilities, and plant and equipment depreciation are the largest dollar accounts. He believes that workers' salaries and plant and equipment depreciation are fixed, temp agency payments are associated with the number of orders (since temp workers are used to pack and prepare completed orders for shipment), and electricity is associated with the number of machine hours. When the number of different parts stored by Poston exceeds the space in the materials storeroom, Darnell rents nearby warehouse space. He can rent as much or as little space as he wants on a month-to-month basis. Therefore, he believes warehouse rental payments are variable with the number of parts purchased and stored. The account balances for the past six months as well as the six-month total are as follows:
  
Information on number of machine hours, orders, and parts for the six-month period follows:
  
Required: 
1. Calculate the monthly average account balance for each account. Calculate the average monthly amount for each of the three drivers.
2. Calculate fixed monthly cost and the variable rates for temp agency payments, warehouse rent, and electricity. Express the results in the form of an equation for total cost.
3. In July, Darnell predicts there will be 420 orders, 250 parts, and 5,900 machine hours. What is the total labor and overhead cost for July?
4. What if Darnell buys a new machine in July for $24,000? The machine is expected to last 10 years and will have no salvage value at the end of that time. What part of the cost equation will be affected? How? What is the new expected cost in July?

Accepted Answer

The answer of Account Analysis to Determine Cost Behavior 
Darnell...

Question 13

What is meant by the best-fitting line? Is the best-fitting line necessarily a good-fitting line? Explain.

Accepted Answer

The answer of What is meant by the best-fitting line?...

Question 14

Multiple Regression 
Ginnian and Fitch, a regional accounting firm, performs yearly audits on a number of different for-profit and not-for-profit entities. Two years ago, Luisa Mellina, Ginnian's partner in charge of operations, became concerned about the amount of audit time required by not-for-profit entities. As a result, she instituted a series of training programs focusing on the auditing of not-forprofit entities. Now, she would like to see if the training seemed to work. So, she ran a multiple regression on 22 months of data for Ginnian for three variables: the total monthly cost of audit professional time, the number of not-for-profit audits, and the hours of training in the audit of not-for-profit entities. The following printout was obtained:
  
Required: 
1. Write out the cost equation for Ginnian's audit professional time.
2. If Ginnian expects to have 9 audits of not-for-profits next month and expects that audit professionals will have a total of 130 hours of not-for-profit training, what is the anticipated cost of professional time?
3. Calculate a 99 percent confidence interval for the prediction made in Requirement 2.
4. Are the hours spent auditing not-for-profit entities positively or negatively correlated with audit professional costs? Is percentage of experienced team members positively or negatively correlated with audit professional cost?
5. What does R 2 mean in this equation? Overall, what is your evaluation of the cost equation that was developed for the cost of audit professionals?

Accepted Answer

The answer of Multiple Regression 
Ginnian and Fitch, a regional...

Question 15

Comparison of Regression Equations 
Friendly Bank is attempting to determine the cost behavior of its small business lending operations. One of the major activities is the application activity. Two possible activity drivers have been mentioned: application hours (number of hours to complete the application) and number of applications. The bank controller has accumulated the following data for the setup activity:
  
Required: 
1. Estimate a regression equation with application hours as the activity driver and the only independent variable. If the bank forecasts 2,600 application hours for the next month, what will be the budgeted application cost?
2. Estimate a regression equation with number of applications as the activity driver and the only independent variable. If the bank forecasts 80 applications for the next month, what will be the budgeted application cost? 
3. Which of the two regression equations do you think does a better job of predicting application costs? Explain. 
4. Run a multiple regression to determine the cost equation using both activity drivers. What are the budgeted application costs for 2,600 application hours and 80 applications?

Accepted Answer

The answer of Comparison of Regression Equations 
Friendly Bank is...

Question 16

Explain the difference between resource spending and resource usage.

Accepted Answer

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Question 17

Types of Costs 
Cashion Company produces chemical mixtures for veterinary pharmaceutical companies. Its factory has four mixing lines that mix various powdered chemicals together according to specified formulas. Each line can produce up to 5,000 barrels per year. Each line has one supervisor who is paid $34,000 per year. Depreciation on equipment averages $16,000 per year. Direct materials and power cost about $4.50 per unit.
Required: 
1. Prepare a graph for each of these three costs: equipment depreciation, supervisors' wages, and direct materials and power. Use the vertical axis for cost and the horizontal axis for units (barrels). Assume that sales range from 0 to 20,000 units.
2. Assume that the normal operating range for the company is 16,000 to 19,000 units per year. How would you classify each of the three types of cost?

Accepted Answer

The answer of Types of Costs 
Cashion Company produces chemical...

Question 18

Learning Curve 
Bordner Company manufactures HVAC (heating, ventilation, and air conditioning) systems for commercial buildings. For each new design, Bordner faces a 90 percent learning rate. On average, the first unit of a new design takes 600 hours. Direct labor is paid $25 per hour.
Required: 
1. Set up a table with columns showing: the cumulative number of units, cumulative average time per unit in hours, and cumulative total time in hours. Show results by row for total production of one unit, two units, four units, eight units, and sixteen units. (Round hour answers to two significant digits.)
2. What is the total labor cost if Bordner makes the following number of units: one, four, sixteen? What is the average cost per system for the following number of systems: one, four, or sixteen? (Round your answers to the nearest dollar.) 
3. Using the logarithmic function, set up a table with columns showing: the cumulative number of units, cumulative average time per unit in hours, cumulative total time in hours, and the time for the last unit. Show results by row for each of units one through eight. (Round answers to two significant digits.)

Accepted Answer

The answer of Learning Curve 
Bordner Company manufactures HVAC (heating,...

Question 19

Multiple Regression, Confidence Intervals, Reliability of Cost Formulas 
Randy Harris, controller, has been given the charge to implement an advanced cost management system. As part of this process, he needs to identify activity drivers for the activities of the firm. During the past four months, Randy has spent considerable effort identifying activities, their associated costs, and possible drivers for the activities' costs.
Initially, Randy made his selections based on his own judgment using his experience and input from employees who perform the activities. Later, he used regression analysis to confirm his judgment. Randy prefers to use one driver per activity, provided that an R 2 of at least 80 percent can be produced. Otherwise, multiple drivers will be used, based on evidence provided by multiple regression analysis. For example, the activity of inspecting finished goods produced an R 2 of less than 80 percent for any single activity driver. Randy believes, however, that a satisfactory cost formula can be developed using two activity drivers: the number of batches and the number of inspection hours. Data collected for a 14-month period are as follows:
  
Required: 
1. Calculate the cost formula for inspection costs using the two drivers, inspection hours and number of batches. Are both activity drivers useful? What does the R 2 indicate about the formula?
2. Using the formula developed in Requirement 1, calculate the inspection cost when 300 inspection hours are used and 30 batches are produced. Prepare a 90 percent confidence interval for this prediction.

Accepted Answer

The answer of Multiple Regression, Confidence Intervals, Reliability of Cost...

Question 20

High-Low Method to Determine Fixed Cost and Variable Rate 
Dohini Manufacturing Company had the following 12 months of data on purchasing cost and number of purchase orders.
  
Required: 
1. Determine the high point and the low point.
2. Calculate the variable rate for purchasing cost based on the number of purchase orders.
3. Calculate the fixed monthly cost of purchasing.
4. Write the cost formula for the purchasing activity showing the fixed cost and the variable rate.
5. If Dohini Manufacturing Company estimates that next month will have 430 purchase orders, what is the total estimated purchasing cost for that month?
6. What if Dohini Manufacturing wants to estimate purchasing cost for the coming year and expects 5,340 purchase orders? What will estimated total purchasing cost be? What is the total fixed purchasing cost? Why doesn't it equal the fixed cost calculated in Requirement 3 above?

Accepted Answer

The answer of High-Low Method to Determine Fixed Cost and...

Quiz 3: Cost Behavior

Describe the method of least squares. Why is this method better than either the high-low method or the scatterplot method?

How does the length of the time horizon affect the classification of a cost as fixed or variable? What is the meaning of short run? Long run?

What is meant by the best-fitting line? Is the best-fitting line necessarily a good-fitting line? Explain.

Explain the difference between resource spending and resource usage.