Accounting
What the Numbers Mean 9e
Demonstration Problem
Chapter 12 – Exercise 4
Estimating Costs Based on
Behavior Patterns
Problem Definition
• The following table shows the amount of
cost incurred in May for the cost items
indicated. During May 16,000 units of the
firm’s single product were manufactured.
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
$83,200
81,000
198,400
12,200
8,400
1,600
Problem Requirements
a. How much cost would you expect to be
incurred for each of the above items during
June when 19,200 units of product are
planned for production?
b. Calculate the average total cost per unit for the
16,000 units manufactured in May. Explain why
this figure would not be useful to a manager
interested in predicting the cost of producing
19,200 units in June.
Problem Solution
• Step 1 – Determine the cost behavior pattern
for each cost item:
Cost
Behavior
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Problem Solution
• Step 1 – Determine the cost behavior pattern for
each cost item:
Cost
Behavior
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Is the cost item
a variable cost
or a fixed cost?
Problem Solution
• Step 1 – Determine the cost behavior pattern for
each cost item:
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Cost
Behavior
Variable
Variable costs
change as
activity
changes.
Problem Solution
• Step 1 – Determine the cost behavior pattern for
each cost item:
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Cost
Behavior
Variable
Fixed
Fixed costs
remain
constant as
activity
changes.
Problem Solution
• Step 1 – Determine the cost behavior pattern for
each cost item:
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Cost
Behavior
Variable
Fixed
Variable
Problem Solution
• Step 1 – Determine the cost behavior pattern for
each cost item:
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Cost
Behavior
Variable
Fixed
Variable
Fixed
Problem Solution
• Step 1 – Determine the cost behavior pattern for
each cost item:
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Cost
Behavior
Variable
Fixed
Variable
Fixed
Fixed
Problem Solution
• Step 1 – Determine the cost behavior pattern for
each cost item:
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Cost
Behavior
Variable
Fixed
Variable
Fixed
Fixed
Variable
Problem Solution
• Step 2 - Determine the fixed amount or variable
rate for each cost item at 16,000 units of activity:
Cost @
Cost
16,000 units Behavior
Raw materials
$ 83,200
Variable
Factory depreciation expense
81,000
Fixed
Direct labor
198,400
Variable
Production supervisor’s salary 12,200
Fixed
Computer rental expense
8,400
Fixed
Maintenance supplies used
1,600
Variable
Total Cost
$384,800
Fixed
Variable
Amount Rate/Unit
Problem Solution
• Step 2 - Determine the fixed amount or variable
rate for each cost item at 16,000 units of activity:
Cost @
Cost
16,000 units Behavior
Raw materials
$ 83,200
Variable
Factory depreciation expense
81,000
Fixed
Direct labor
198,400
Variable
Production supervisor’s salary 12,200
Fixed
Computer rental expense
8,400
Fixed
Maintenance supplies used
1,600
Variable
Total Cost
$384,800
Fixed
Variable
Amount Rate/Unit
$ 5.20
Variable rate
calculation:
$83,200 / 16,000
units = $ 5.20/unit
Problem Solution
• Step 2 - Determine the fixed amount or variable
rate for each cost item at 16,000 units of activity:
Cost @
Cost
16,000 units Behavior
Raw materials
$ 83,200
Variable
Factory depreciation expense
81,000
Fixed
Direct labor
198,400
Variable
Production supervisor’s salary 12,200
Fixed
Computer rental expense
8,400
Fixed
Maintenance supplies used
1,600
Variable
Total Cost
$384,800
Fixed
Variable
Amount Rate/Unit
$ 5.20
81,000
Fixed costs items will
remain constant
regardless of the level
of activity (within the
relevant range).
Problem Solution
• Step 2 - Determine the fixed amount or variable
rate for each cost item at 16,000 units of activity:
Cost @
Cost
16,000 units Behavior
Raw materials
$ 83,200
Variable
Factory depreciation expense
81,000
Fixed
Direct labor
198,400
Variable
Production supervisor’s salary 12,200
Fixed
Computer rental expense
8,400
Fixed
Maintenance supplies used
1,600
Variable
Total Cost
$384,800
Fixed
Variable
Amount Rate/Unit
$ 5.20
40,500
12.40
Variable rate
calculation:
$198,400 / 16,000
units = $12.40/unit
Problem Solution
• Step 2 - Determine the fixed amount or variable
rate for each cost item at 16,000 units of activity:
Cost @
Cost
16,000 units Behavior
Raw materials
$ 83,200
Variable
Factory depreciation expense
81,000
Fixed
Direct labor
198,400
Variable
Production supervisor’s salary 12,200
Fixed
Computer rental expense
8,400
Fixed
Maintenance supplies used
1,600
Variable
Total Cost
$384,800
Fixed
Variable
Amount Rate/Unit
$ 5.20
40,500
12.40
12,200
Problem Solution
• Step 2 - Determine the fixed amount or variable
rate for each cost item at 16,000 units of activity:
Cost @
Cost
16,000 units Behavior
Raw materials
$ 83,200
Variable
Factory depreciation expense
81,000
Fixed
Direct labor
198,400
Variable
Production supervisor’s salary 12,200
Fixed
Computer rental expense
8,400
Fixed
Maintenance supplies used
1,600
Variable
Total Cost
$384,800
Fixed
Variable
Amount Rate/Unit
$ 5.20
40,500
12.40
6,100
8,400
Problem Solution
• Step 2 - Determine the fixed amount or variable
rate for each cost item at 16,000 units of activity:
Cost @
Cost
Fixed
Variable
16,000 units Behavior Amount Rate/Unit
Raw materials
$ 83,200
Variable
$ 5.20
Factory depreciation expense
81,000
Fixed
40,500
Direct labor
198,400
Variable
12.40
Production supervisor’s salary 12,200
Fixed
6,100
Computer rental expense
8,400
Fixed
4,200
Maintenance supplies used
1,600
Variable
0.10
Total Cost
$384,800
Variable rate calculation:
$1,600 / 16,000 units = $ 0.10/unit
Problem Solution
• Step 2 - Determine the fixed amount or variable
rate for each cost item at 16,000 units of activity:
Cost @
Cost
Fixed
Variable
16,000 units Behavior Amount Rate/Unit
Raw materials
$ 83,200
Variable
$ 5.20
Factory depreciation expense
81,000
Fixed
81,000
Direct labor
198,400
Variable
12.40
Production supervisor’s salary 12,200
Fixed
12,200
Computer rental expense
8,400
Fixed
8,400
Maintenance supplies used
1,600
Variable
0.10
Total Cost
$384,800
$ 101,600
$17.70
Problem Solution
• Step 2 - Determine the fixed amount or variable
rate for each cost item at 16,000 units of activity:
Cost @
Cost
Fixed
Variable
16,000 units Behavior Amount Rate/Unit
Raw materials
$ 83,200
Variable
$ 5.20
Factory depreciation expense
81,000
Fixed
81,000
Direct labor
198,400
Variable
12.40
Production supervisor’s salary 12,200
Fixed
12,200
Computer rental expense
8,400
Fixed
8,400
Maintenance supplies used
1,600
Variable
0.10
Total Cost
$384,800
$ 101,600
$17.70
Cost formula = $101,600 fixed cost + $17.70 per unit variable cost
Problem Solution
• Step 3 – Calculate the cost expected to be incurred
in June when 19,200 units are manufactured using
the cost formula determined in Step 2:
Cost
Fixed
Variable
Cost @
Behavior Amount Rate/Unit 19,200 units
Raw materials
Variable
$ 5.20
Factory depreciation expense Fixed
81,000
Direct labor
Variable
12.40
Production supervisor’s salary Fixed
12,200
Computer rental expense
Fixed
8,400
Maintenance supplies used
Variable
0.10
Total Cost
$ 101,600
$17.70
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in
June when 19,200 units are manufactured using the
cost formula determined in Step 2:
Cost
Fixed
Variable
Cost @
Behavior Amount Rate/Unit 19,200 units
Raw materials
Variable
$ 5.20
$ 99,840
Factory depreciation expense Fixed
81,000
Calculation:
Direct labor
Variable
12.40
19,200 units *
Production supervisor’s salary Fixed
12,200
$5.20 per unit
Computer rental expense
Fixed
8,400
Maintenance supplies used
Variable
0.10
Total Cost
$ 101,600
$17.70
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in
June when 19,200 units are manufactured using the
cost formula determined in Step 2:
Cost
Fixed
Variable
Cost @
Behavior Amount Rate/Unit 19,200 units
Raw materials
Variable
$ 5.20
$ 99,840
Factory depreciation expense Fixed
81,000
81,000
Direct labor
Variable
12.40 Fixed costs do
Production supervisor’s salary Fixed
12,200
not change at
Computer rental expense
Fixed
8,400
19,200 units.
Maintenance supplies used
Variable
0.10
Total Cost
$ 101,600
$17.70
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in
June when 19,200 units are manufactured using the
cost formula determined in Step 2:
Cost
Fixed
Variable
Cost @
Behavior Amount Rate/Unit 19,200 units
Raw materials
Variable
$ 5.20
$ 99,840
Factory depreciation expense Fixed
81,000
81,000
Direct labor
Variable
12.40
238,080
Production supervisor’s salary Fixed
12,200
Calculation:
Computer rental expense
Fixed
8,400
19,200 units *
Maintenance supplies used
Variable
0.10
$12.40 per unit
Total Cost
$ 101,600
$17.70
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in
June when 19,200 units are manufactured using the
cost formula determined in Step 2:
Cost
Fixed
Variable
Cost @
Behavior Amount Rate/Unit 19,200 units
Raw materials
Variable
$ 5.20
$ 99,840
Factory depreciation expense Fixed
81,000
81,000
Direct labor
Variable
12.40
238,080
Production supervisor’s salary Fixed
12,200
12,200
Computer rental expense
Fixed
8,400
Maintenance supplies used
Variable
0.10
Total Cost
$ 101,600
$17.70
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in
June when 19,200 units are manufactured using the
cost formula determined in Step 2:
Cost
Fixed
Variable
Cost @
Behavior Amount Rate/Unit 19,200 units
Raw materials
Variable
$ 5.20
$ 99,840
Factory depreciation expense Fixed
81,000
81,000
Direct labor
Variable
12.40
238,080
Production supervisor’s salary Fixed
12,200
12,200
Computer rental expense
Fixed
8,400
8,400
Maintenance supplies used
Variable
0.10
Total Cost
$ 101,600
$17.70
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in
June when 19,200 units are manufactured using the
cost formula determined in Step 2:
Cost
Fixed
Variable
Cost @
Behavior Amount Rate/Unit 19,200 units
Raw materials
Variable
$ 5.20
$ 99,840
Factory depreciation expense Fixed
81,000
81,000
Calculation:
Direct labor
Variable
12.40
238,080
19,200
units *
Production supervisor’s salary Fixed
12,200
12,200
$0.10 per unit
Computer rental expense
Fixed
8,400
8,400
Maintenance supplies used
Variable
0.10
1,920
Total Cost
$ 101,600
$17.70
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in
June when 19,200 units are manufactured using the
cost formula determined in Step 2:
Cost
Fixed
Variable
Cost @
Behavior Amount Rate/Unit 19,200 units
Raw materials
Variable
$ 5.20
$ 99,840
Factory depreciation expense Fixed
81,000
81,000
Direct labor
Variable
12.40
238,080
Production supervisor’s salary Fixed
12,200
12,200
Computer rental expense
Fixed
8,400
8,400
Maintenance supplies used
Variable
0.10
1,920
Total Cost
$ 101,600
$17.20
$441,440
Problem Requirements
a.
How much cost would you expect to be incurred
for each of the above items during June when
19,200 units of product are planned for
production?
b. Calculate the average total cost per unit for
the 16,000 units manufactured in May.
Explain why this figure would not be useful
to a manager interested in predicting the cost
of producing 19,200 units in June.
Problem Solution
• Average total cost for May:
$384,800 / 16,000 = $24.05 per unit
• It would not be meaningful to use this average total cost
figure to predict costs in the subsequent months; that would
involve unitizing the fixed expenses – and they do not
behave on a per unit basis.
Problem Solution
• Average total cost calculations are only valid for the number
of units used in the calculation. Average total cost for any
other number of units produced would be different because
the fixed expenses per unit would decrease for each
additional unit produced.
• Using the average total cost of $24.05 to estimate the cost of
producing 19,200 units would give an estimate of $461,760,
which is significantly higher than the $441,440 calculated in
part a using the cost formula:
Total Cost = $101,600 fixed cost + $17.70 per unit variable cost
Accounting
What the Numbers Mean 9e
You should now have a better understanding
of using cost behavior information.
Remember that there is a demonstration problem for
each chapter that is here for your learning benefit.
David H. Marshall
Wayne W. McManus
Daniel F. Viele