Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 39

Account Analysis

The accounting department of a large limousine company is analyzing the costs of its services. The cost data and level of activity for the past 16 months follow:

Month	Special Analyses	Customer Accounts	Paychecks Processed	Accounting Service Costs
1	2	325	1,029	$ 63,800
2	4	310	993	68,900
3	2	302	1,268	64,000
4	1	213	1,028	61,300
5	2	222	984	61,600
6	0	214	712	50,800
7	1	131	762	51,020
8	1	123	739	54,300
9	0	115	708	50,500
10	2	296	1,232	64,800
11	2	213	978	58,000
12	1	222	929	57,500
13	2	217	1,059	62,200
14	2	132	942	54,900
15	4	300	1,299	71,530
16	4	315	1,283	64,800
Totals	30	3,650	15,945	$959,950

In addition to the above information, you learn that the accounting department had the following total costs for the past 16 months for each of the following:

Total cost of paychecks processed	$180,100
Total cost of maintaining customer accounts	109,600
Total cost of performing special analyses	120,000
Total fixed costs (total for 16 months)	550,250
Total costs	$959,950

Required

a. What is the cost per unit for (1) paychecks processed, (2) customer accounts maintained, and (3) special analyses performed?

b. Assuming the following level of cost-driver volumes for a month, what are the accounting department’s estimated costs of doing business using the account analysis approach?

• 1,000 paychecks processed

• 200 customer accounts maintained

• 3 special analyses

Step 1 of 5

Cost estimation

Cost estimation is an important exercise because it helps managers in decision making. Correct cost estimates result in cost saving and making business successful. Cost estimates helps managers to evaluate and choose the best alternative. It is important for managers to capture the correct cost for each alternative.

There different methods used for cost estimation like engineering, accounting and statistical analysis.

Accounting method

This method identifies the relationship between cost and activity. Each cost is classified as fixed and variable and then cost is identified for each activity. For example, a company wants to manufacture 100 music system in its manufacturing plant, so the cost of material, labor, electricity, fuel etc. is identified as variable cost which per unit based and cost or rent of building is fixed cost.