Question 1

Woodman Products,Inc. ,has found that new products follow a learning curve.The first two units have been completed with the following results: $$\begin{array} { | l | r | } \hline \text { Units Procuced } & \text { Marginal Labor Time } \ \hline 1 & 112.50 \ \hline 2 & 90.00 \ \hline \end{array}$$ Required: (a. )How much time will be needed to complete the 4^th unit? (b. )How much time will be needed to complete the 8^th unit? (c. )How much time will be needed to complete the 16^th unit?

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Question 2

Explain the difference between the engineering method of cost estimation and the account analysis method.

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Question 3

Markham,Inc.has received a contract for 8 units of a new product.The contract is a cost-plus contract,with the total to be received equal to the total labor cost + 30%.Markham found that the first unit of a new product required 90 hours to complete.The second unit was completed using only 76.5 hours.Markham believes that the rate of learning that was observed will continue for all 8 units of the contract.The labor wage paid is $40/hour.The following factors are available for various rates of learning: 80% learning,b = -.3219;85%,b = -.2345;90%,b = -.1520;95%,b = -.0740.
Required:
(a. )What will the total labor cost be for the contract?
(b. )What will be the total fee for the contract?

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Question 4

New Venture,Inc.has received a contract for 8 units of a new product.The contract is a cost-plus contract,with the total to be received equal to the total labor cost + 20%.New Venture found that the first unit of a new product required 120 hours to complete.The second unit was completed using only 114 hours.New Venture believes that the rate of learning that was observed will continue for all 8 units of the contract.The labor wage paid is $25/hour.The following factors are available for various rates of learning: 80% learning,b = -.3219;85%,b = -.2345;90%,b = -.1520;95%,b = -.0740.Required:
(a. )What will the total labor cost be for the contract?
(b. )What will the total fee be for the contract?

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Question 5

Yates Corp.wants to develop a cost equation for its administrative costs.The controller believes the appropriate cost driver is units produced.Last year's data are presented below:
$$\begin{array} { | l | r | r | } 
\hline \text { Month } & \begin{array} { r } 
\text { Units } \
\text { produced }
\end{array} & \begin{array} { r } 
\text { Aoministrative } \
\text { Costs }
\end{array} \
\hline \text { January } & 32,500 & \$ 24,288 \
\hline \text { February } & 37,700 & 27,720 \
\hline \text { March } & 24,700 & 17,820 \
\hline \text { April } & 40,300 & 30,360 \
\hline \text { May } & 49,400 & 37,290 \
\hline \text { June } & 42,900 & 29,040 \
\hline \text { July } & 53,300 & 32,670 \
\hline \text { August } & 45,500 & 30,030 \
\hline \text { September } & 26,000 & 20,460 \
\hline \text { October } & 48,100 & 34,320 \
\hline \text { November } & 61,100 & 40,920 \
\hline \text { December } & 54,600 & 36,630 \
\hline \text { Total } & 516,100 & \$ 361,548 \
\hline \text { Average } & 43,008 & \$ 30,129 \
\hline
\end{array}$$

Required:
(a. )What is the equation for administrative costs using the high-low method?
(b. )Prepare an estimate of administrative costs for a month when 30,000 units are produced.

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Question 6

Clough Company is interested in establishing the relationship between utility costs and machine hours.Data have been collected and a regression analysis prepared using Excel.The monthly data and the regression output follow:
 $\begin{array}{|l|r|r|}
\hline \text { Month } & \text { Machine } & \text { Electricity } \
& \text { Hours } & \text { Costs } \
\hline \text { January } & 3,250 & 22,080 \
\hline \text { February } & 3,770 & 25,200 \
\hline \text { March } & 2,470 & 16,200 \
\hline \text { April } & 4,030 & 27,600 \
\hline \text { May } & 4,940 & 33,900 \
\hline \text { June } & 4,290 & 26,400 \
\hline \text { July } & 5,330 & 29,700 \
\hline \text { August } & 4,560 & 27,300 \
\hline \text { September } & 2,600 & 18,600 \
\hline \text { October } & 4,810 & 31,200 \
\hline \text { Nowember } & 6,110 & 37,200 \
\hline \text { December } & 5,460 & 33,300 \
\hline
\end{array}$

Required:
(a. )What is the equation for utility costs using the regression analysis?
(b. )Does the variable "machine hours" have statistical significance? Explain.(c. )Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.

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Question 7

Barnard Enterprises had an average cost of $8.60 during a month when 75,000 units were produced.When production was 125,000 units several months later,the average cost dropped to $6.98.Required:
(a. )Determine the fixed and variable portions of production costs.(b. )What will unit cost be when production equals 110,000 units?

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Question 8

Describe the engineering method of cost estimation.Provide two advantages and two disadvantages associated with the engineering approach to cost estimation.

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Question 9

Doran Products had costs of $950,000 when sales equaled 55,000 units.When sales increased to 85,000 units,total costs increased to $1,400,000.The selling price is $21 per unit.Required:
(a. )Determine the fixed and variable portions of costs.(b. )Prepare a contribution margin income statement for a month with sales of 70,000 units.

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Question 10

Market Products,Inc. ,has found that new products follow a learning curve.The first two units have been completed with the following results: $$\begin{array} { | l | r | } \hline \text { Units Procuced } & \text { Marginal Labor Time } \ \hline 1 & 250.00 \ \hline 2 & 225.00 \ \hline \end{array}$$ Required: (a. )How much time will be needed to complete the 4^th unit? (b. )How much time will be needed to complete the 8^th unit? (c. )How much time will be needed to complete the 16^th unit?

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Question 11

The Wonder Drug Company's total overhead costs at various levels of activity are presented below:
 $$\begin{array} { | l | r | r | } 
\hline \text { Month } & \text { Direct Labor } & \text { Total Overhead } \
\hline \text { September } & 15,000 & \$ 472,000 \
\hline \text { October } & 12,000 & 409,400 \
\hline \text { Nowember } & 18,000 & 542,000 \
\hline \text { December } & 21,000 & 604,700 \
\hline
\end{array}$$

Assume that the overhead costs above consist of indirect labor,scheduling salaries,and maintenance.The breakdown of these costs for the month of November is as follows:
$$\begin{array} { | l | r | } 
\hline \text { Indirect labor } ( V ) & \$ 219,600 \
\hline \text { Maintenance } ( M ) & 197,400 \
\hline \text { Scheduling Salaries (F) } & 125,000 \
\hline & \$ 542,000 \
\hline
\end{array}$$

Required:
(a. )Using the high-low method,determine the cost formula for maintenance.(b. )Express the company's total overhead costs in linear equation form.

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Question 12

The Norcross Company has traditionally estimated manufacturing overhead costs using production volume.Some of the production managers believe that the number of setups may also have an impact on monthly manufacturing overhead costs.In order to investigate this possibility,the company collected information on its monthly manufacturing overhead costs,production in units,and number of setups for 2016.
$$\begin{array} { | c | r | r | c | } 
\hline \text { Month } & \begin{array} { r } 
\text { Production } \
\text { (Units) }
\end{array} & \begin{array} { r } 
\text { Manufacturing } \
\text { Overhead Cost }
\end{array} & \text { Number of Setups } \
\hline 1 & 50,000 & \$ 800,100 & 17 \
\hline 2 & 65,000 & 752,500 & 16 \
\hline 3 & 40,000 & 795,100 & 21 \
\hline 4 & 55,000 & 822,750 & 16 \
\hline 5 & 30,000 & 771,225 & 21 \
\hline 6 & 25,000 & 706,200 & 15 \
\hline 7 & 60,000 & 843,000 & 19 \
\hline 8 & 80,000 & 935,200 & 22 \
\hline 9 & 77,000 & 901,750 & 20 \
\hline 10 & 43,000 & 786,400 & 17 \
\hline 11 & 50,000 & 819,600 & 19 \
\hline 12 & 70,000 & 880,900 & 21 \
\hline
\end{array}$$
Regression analysis results of the information presented above are as follows:
Ordinary regression:
Equation: $650,398 + $3.1061 × units
r-square: .707
Multiple regression:
Equation: $464,481 + $2.5356 × units + $11,631.6048 × number of set ups
r-square: .867
Required:
(a. )Use the results from the ordinary regression and estimate next month's manufacturing overhead costs,assuming the company is planning to produce 75,000 units.(final answer should be rounded to the nearest whole dollar)
(b. )Use the results from the multiple regression and estimate the next month's manufacturing costs,assuming the company is planning to produce 75,000 units with 18 set ups.(final answer should be rounded to the nearest whole dollar)
(c. )Comment on which regression seems to be more appropriate under these circumstances.What additional information would you like to see? Be specific.

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Question 13

The Ornate Company produces a single product and has total costs ranging from $321,875 (at 20,000 units)to $966,875 (at 80,000 units).Sales volume in 2016 was 32,000,and operating income was $45,125.Ornate's product is highly specialized;therefore,no units are kept in inventory.
Required:
(a. )Determine the cost equation for Ornate's costs.
(b. )Prepare a contribution margin income statement for 2016 including separate columns for total dollars,per unit dollars,and percentages.
(c. )Determine the break-even point (in units and in dollars).

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Question 14

Iowa Enterprises had an average cost of $10.75 during a month when 50,000 units were produced.When production doubled several months later,the average cost dropped to $8.25.Required:
(a. )Determine the fixed and variable portions of production costs.(b. )What will unit cost be when production equals 80,000 units?

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Question 15

The Feline Company has been having some difficulties estimating its manufacturing overhead costs.In the past,manufacturing overhead costs have been related to production levels.However,some production managers have indicated that the size of their production lots might also be having an impact on the amount of their monthly manufacturing overhead costs.In order to investigate this possibility,the company collected information on its monthly manufacturing overhead costs,production in units,and average production lot size for 2016.
$$\begin{array} { | c | r | r | c | } 
\hline \text { Month } & \begin{array} { r } 
\text { Production } \
\text { (Units) }
\end{array} & \begin{array} { r } 
\text { Manufacturing } \
\text { Ovenead Cost }
\end{array} & \begin{array} { c } 
\text { Average Monthly } \
\text { Production Lot Size }
\end{array} \
\hline 1 & 75,000 & \$ 925,800 & 20 \
\hline 2 & 90,000 & 843,875 & 19 \
\hline 3 & 65,000 & 910,125 & 24 \
\hline 4 & 80,000 & 946,000 & 19 \
\hline 5 & 55,000 & 879,000 & 24 \
\hline 6 & 50,000 & 825,000 & 18 \
\hline 7 & 85,000 & 960,000 & 22 \
\hline 8 & 105,000 & 1,053,500 & 25 \
\hline 9 & 102,000 & 1,020,000 & 23 \
\hline 10 & 68,000 & 905,000 & 20 \
\hline 11 & 75,000 & 938,000 & 22 \
\hline 12 & 95,000 & 995,000 & 24 \
\hline
\end{array}$$ 
Regression analysis results of the information presented above are as follows:
Ordinary regression:

$$\begin{array} { | l | l | } 
\hline \text { Equation: } & \$ 691,741 + \$ 3.0692 \times \text { units } \
\hline \text { r-square: } & .628 \
\hline
\end{array}$$
Multiple regression:
$$\begin{array} { | l | l | } 
\hline \text { Equation: } & \$482,172  + \$2.4918  \times \text { units } +\$11,770.939 \times \text {lot size} \
\hline \text { r-square: } & .777 \
\hline
\end{array}$$
  Required:
(a. )Use the results from the ordinary regression and estimate next month's manufacturing overhead costs,assuming the company is planning to produce 92,000 units.(final answer should be rounded to the nearest whole dollar)
(b. )Use the results from the multiple regression and estimate the next month's manufacturing costs,assuming the company is planning to produce 92,000 units with an average lot size of 21.(final answer should be rounded to the nearest whole dollar)
(c. )Comment on which regression seems to be more appropriate under these circumstances.What additional information would you like to see? Be specific.

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Question 16

Yates Corp.wants to develop a cost equation for its administrative costs.The controller believes the appropriate cost driver is units produced.Last year's data are presented below:
 $$\begin{array} { | l | r | r | } 
\hline \text { Month } & \begin{array} { r } 
\text { Units } \
\text { produced }
\end{array} & \begin{array} { r } 
\text { Acministrative } \
\text { Costs }
\end{array} \
\hline \text { January } & 32,500 & \$ 24,288 \
\hline \text { February } & 37,700 & 27,720 \
\hline \text { March } & 24,700 & 17,820 \
\hline \text { April } & 40,300 & 30,360 \
\hline \text { May } & 49,400 & 37,290 \
\hline \text { June } & 42,900 & 29,040 \
\hline \text { Juby } & 53,300 & 32,670 \
\hline \text { August } & 45,500 & 30,030 \
\hline \text { September } & 26,000 & 20,460 \
\hline \text { October } & 48,100 & 34,320 \
\hline \text { November } & 61,100 & 40,920 \
\hline \text { December } & 54,600 & 36,630 \
\hline
\end{array}$$

Required:
(a. )What is the equation for administrative costs using the regression analysis?
(b. )Does the variable "units produced" have statistical significance? Explain.(c. )Prepare an estimate of administrative costs for a month when 30,000 units are produced.

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Question 17

When using past data to predict a cost that has fixed and variable components,it is possible to have an equation with a negative intercept.Does this mean that at a zero production level,the company will make money on its fixed costs? Explain.

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Question 18

Below are several examples of costs that are labeled fixed or variable according to their typical accounting designations.Under which circumstances would any of these costs behave in a manner opposite to that listed?
a.Direct labor-variable.
b.Equipment depreciation-fixed.
c.Utilities (with a minimum charge)-variable.
d.Supervisory salaries-fixed.
e.Indirect materials purchased in given lot sizes that become spoiled within a few days-variable.

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Question 19

Washington Products had costs of $600,000 when sales equaled 75,000 units.When sales increased by 25,000 units,costs increased by $125,000.The selling price is $9 per unit.Required:
(a. )Determine the fixed and variable portions of costs.(b. )Prepare a contribution margin income statement for a month with sales of 80,000 units.

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Question 20

Clough Company is interested in establishing the relationship between utility costs and machine hours.Data have been collected and a regression analysis prepared using Excel.The monthly data and the regression output follow:
$\begin{array}{|l|r|r|}
\hline \text { Month } & \text { Machine } & \text { Electricity } \
& \text { Hours } & \text { Costs } \
\hline \text { January } & 3,250 & 22,080 \
\hline \text { February } & 3,770 & 25,200 \
\hline \text { March } & 2,470 & 16,200 \
\hline \text { April } & 4,030 & 27,600 \
\hline \text { May } & 4,940 & 33,900 \
\hline \text { June } & 4,290 & 26,400 \
\hline \text { July } & 5,330 & 29,700 \
\hline \text { August } & 4,560 & 27,300 \
\hline \text { September } & 2,600 & 18,600 \
\hline \text { October } & 4,810 & 31,200 \
\hline \text { Nowember } & 6,110 & 37,200 \
\hline \text { December } & 5,460 & 33,300 \
\hline
\end{array}$

Required:
(a. )What is the equation for utility costs using the high-low method?
(b. )Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.

Accepted Answer

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Quiz 5: Cost Estimation

Explain the difference between the engineering method of cost estimation and the account analysis method.

Describe the engineering method of cost estimation.Provide two advantages and two disadvantages associated with the engineering approach to cost estimation.

When using past data to predict a cost that has fixed and variable components,it is possible to have an equation with a negative intercept.Does this mean that at a zero production level,the company will make money on its fixed costs? Explain.