Name: Olivia Sabatika
ID: 201900230
Tutorial Class Submission – Topic 6
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Exercise 6-25
1. Use the high-low method to estimate the company’s energy cost behavior and
express it in equation form.
Answer: Variable cost per pint of an applesauce produced = $24,100 - $22,100
41,000 – 21,000
= $10
Total cost at 41,000 pints = $24,100
Variable cost at 41,000 pints (41,000 * $10 per pint) = 4,100
Fixed Cost ($24,100 – 4,100) = $20,000
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Cost equation:
Total energy cost = $20,000 + $10 per pint, where the pint denotes pints of applesauce
produced.
2. Predict the energy cost for a month in which 26,000 pints applesauce are produced.
Answer: Cost prediction when 26,000 pints of applesauce are produced energy cost;
= $20,000 + ($10 * 26,000)
= $22,600
So, the prediction of energy cost for a month is $22,600.
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Exercise 6-32
1. What will be the average labor time required to assemble and test each satellite the
company has produced for satellites? Eight satellites?
Answer:
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Calculate average labor time: On the learning curve when the output increases 12
times the Average labor time per unit declines by 50%.
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For increase of production 12 times the average labor time decreases by: 50% from
300 hour to 150 hours.
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For increase of production 4 times the average labor time per unit will decrease by:
= 4 * 50%
12
= 16.67%
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For increase of production 8 times the average labor time per unit decreases by:
= 8 * 50%
12
= 33.33%
Cumulative Output (in units)
Average Labor Time per Unit
4
(300 – 300 * 16.67%) 250 hours
8
(300 – 300 * 33.33%) 200 hours
2. What will be the total labor time required to assemble and test all satellites
produced if the firm manufactures only four satellites? Eight satellites?
Answer: Calculate total labor time required:
Cumulative Output (in units)
Average Labor Time per Unit
Total Labor Time (Hours)
4
250 hours
1,000 hours
8
200 hours
1,600 hours
3. How can the learning curve be used in the company’s budgeting process? In setting
cost standards?
Answer:
Learning curve concept is applied to complex, labor-intensive manufacturing operations
such as shipbuilding, satellite manufacture and aircraft. As cumulative production output
increases. The industries with major labor-intensive manufacturing operations make an
extensive use of the learning curve concept for budgeting the costs for a new product
designed. These cost predictions are then used in scheduling production budgeting.
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Exercise 6-37
1. Classify the five-cost listed in term of their behavior: Variable, step-variable,
committed fixed, discretionary fixed, step-fixed, or semi variable.
Answer:
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Straight – line depreciation – Committed fixed
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Charitable contributions – Discretionary fixed
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Mining labor/fringe benefits – Variable
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Royalties – Semi variable
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Trucking and hauling – Step fixed
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The per-ton mining labor/fringe benefits cost is constant at both volume levels
presented, which is characteristic of a variable cost.
-

$345,000 : 1,500 tons = $230 per ton

$598,000 : 2,600 tons = $230 per ton
Royalties have both a variable and a fixed component, making it a semi variable
(mixed) cost.

Variable royalty cost = Difference : Difference in tons
= ($201,000 - $135,000) : (2,600 – 1,500)
= $66,000 : 1,100 tons
= $60 per ton
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Fixed royalty cost:
June (2,600 tons)
December (1,500 tons)
Total royalty cost
$201,000
$135,000
Less: Variable cost at $60
156,000
90,000
Fixed royalty cost
$45,000
$45,000
2. Calculate the total cost for next February when 1,650 tons are expected to be
extracted.
Answer: Total cost for 1,650 tons extracted in February:
Straight -line depreciation
$25,000
Charitable Contributions
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Mining labor/fringe benefits at $230 per ton
$379,500
Royalties:
Variable at $60 per ton
99,000
Fixed
45,000
Tracking and Hauling:
$275,000
Total:
$823,500
3. Total cost for 1,650 extracted:
Straight -line depreciation
$25,000
Charitable Contributions
-
Mining labor/fringe benefits at ($230 *
$379,500
1,650) per ton
Royalties:
Variable at [($60*1,650) + 99,000 per
198,000
ton
Fixed
45,000
Tracking and Hauling:
$243,000
Total:
$622,500
The company was efficient in producing 1,650 tons as the total cost actually incurred is
$622,500 which is less than the normal estimated cost at 1,650 tons.
4. Distinguish between committed and discretionary fixed cost.
Answer:
- Committed fixed costs are already committed to be incurred. These are irrelevant for
decision making. These costs cannot be controlled.
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Discretionary fixed costs are incurred upon the discretion of the management. These
costs are relevant costs. These costs can be controlled.
-
The management should try to cut the discretionary fixed costs.
5. Speculate as to why the company’s charitable contribution cost arises only in
December.
Answer: The company is at peak time during the month of December. Hence, the
management might have decided to have charitable contributions during the month of
December, so that the income statement won’t show high variations in all the months.
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Exercise 6-44
Answer:
1. S = 200 + 4H, in least-squares regression, $200 being intercept represents the fixed
cost component and $4 being the slope represents the variable cost component.
2. Total cost for 900hours the least-squares equation, the fixed cost of $200, and the
variable cost per unit of $4 in the cost function to determine the total cost per 900
machine hours using the scatter diagram equation, which is:
S = $200 + 4H
= when the 4H is 4x900
= 3,800
The total cost of 900 machine hours is 3,800
3. The controller should ask about the goodness of fit for the validity of cost estimated
using the least-squares regression equation. The goodness of fit can be determined
using the coefficient of determination. Cost estimation is said to be reliable in the
case of a higher amount of goodness of fit and vice versa.
4. Answer:
Particulars
Beginning inventory
Add: Purchase
Less: Ending inventory
Usage
April
1,200
6,000
1,550
5,650
August
950
6,100
2,900
4,150
5. Answer:
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Cost behaviour using the high-low method: variable cost per unit is the difference in
total cost divided by the difference in hours
= (5,650-4,150) / (1,100-800)
= $5 per hour
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fixed cost equals to total cost minus variable cost
= 5,650 – (5x1,100)
= $150
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Indirect material shown as
= $150 + ($5 x machine hours)
6. Answer: The least-squares regression method is recommended to the controller as
the cost behaviour is estimated under the high-low method using only two data
points. In contrast, in the least square regression, every data point that is used gives
more accuracy and is very clear in explaining the company's cost structure.

Exercise 6-45
1. Answer: The original method was simply the average overhead per hour for the last
12 months and did not distinguish between fixed and variable costs. Rand divided
total overhead by total labour hours, which effectively treated all overhead as
variable. Regression analysis measures the behaviour of the overhead costs in
relation to labour hours and is a model that distinguishes between fixed and variable
costs within the relevant range of 2,500 to 7,500 labour hours.
2. Answer:
a. Based on the regression analysis, the variable cost per person for a cocktail party
is $22, calculated as follows:
Food and Beverages
$515
Labour
5
Variable overhead
2
Total
$22
b. Based on the regression analysis, the full absorption cost per person for a
cocktail party is $27, calculated as follows:
Food and Beverages
$515
Labour
5
Variable overhead
2
Fixed Overhead
5
Total
$27
Total = $48,000 x 12 months
= $576,000 $576,000/57,600 hr.
= $10/hr.
3. The minimum bid for a 200-person cocktail party would be $4,400. The amount is
calculated by multiplying the variable cost per person of $22 by 200 people. At any
price above the variable cost, Dana Rand will be earning a contribution toward her
fixed costs.
4. Other factors that Dana Rand should consider in developing a bid include the
following:
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The assessment of the current capacity of her business. If the business is at capacity,
other work would have to be sacrificed at some opportunity cost.
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Analyses of the competition. If competition is rigorous, she may not have much
bargaining power. A determination of whether or not her bid will set a precedent for
lower prices.
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The realization that regression analysis is based on historical data, and that any
anticipated changes in the cost structure should be considered.