CIA 1004- SEMINAR 4 SOLUTIONS TO QUESTIONS ON COSTS
ESTIMATES
6-3
a. Hotel: Percentage of rooms occupied or the number of occupancy-days, where
an occupancy-day is defined as one room occupied for one day.
b. Hospital: Patient-days, where a patient-day is defined as a one-day stay by one
patient.
c. Computer manufacturer: Number of computers manufactured, throughput,
engineering specifications, engineering change orders, or number of parts in
the finished product.
d. Computer sales store: Sales revenue.
e. Computer repair service: Repair calls or hours of repair service.
f. Public accounting firm: Hours of auditing service provided by each
classification of personnel (partner, manager, supervisor, senior accountant,
and staff accountant).
6-5
As the level of activity (or cost driver) increases, total fixed cost remains constant.
However, the fixed cost per unit of activity declines as activity increases.
6-6
A manufacturer's cost of supervising production might be a step-fixed cost,
because one supervisor is needed for each shift. Each shift can accommodate a
certain range of production activity; when activity exceeds that range, a new shift
must be added. When the new shift is added, a new production supervisor must be
employed. This new position results in a jump in the step-fixed cost to a higher
level.
6-7
As the level of activity (or cost driver) increases, total variable cost increases
proportionately and the variable cost per unit remains constant.
6-13
An outlier is a data point that falls far away from the other points in the scatter
diagram and is not representative of the data. One possible cause of an outlier is
simply a mistake in recording the data. Another cause of an outlier is a random
event that occurred, which caused the cost during a particular period to be
unusually high or low. For example, a power outage may have resulted in unusually
high costs of idle time for a particular time period. Outliers should be eliminated
from a data set upon which cost estimates are based.
6-16
The chief drawback of the high-low method of cost estimation is that it uses only
two data points. The rest of the data are ignored by the method. An outlier can
cause a significant problem when the high-low method is used if one of the two
data points happens to be an outlier. In other words, if the high activity level
happens to be associated with a cost that is not representative of the data, the
resulting cost line may not be representative of the cost behavior pattern.
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EXERCISE 6-22 (15 MINUTES)
1.
Cost per Broadcast Hour
August
October
Cost Item
Production crew:
$5,330/410 hr. ...........................................
$8,840/680 hr. ...........................................
Supervisory employees:
$6,000/410 hr. ...........................................
$6,000/680 hr. ...........................................
$13.00 per hr.
$13.00 per hr.
$14.63 per hr.*
$ 8.82 per hr.*
*Rounded.
2.
December cost predictions:
Production crew (440  $13.00 per hr.) .............................................
Supervisory employees .....................................................................
$5,720
$6,000
3.
Cost Item
Production crew ........................................................
Supervisory employees ($6,000/440 hr.)..................
Cost per Broadcast Hour
in December
$13.00 per hr.
13.64 per hr.*
*Rounded.
EXERCISE 6-29 (15 MINUTES)
1.
Variable cost per pint of applesauce produced =
$95,200 - $55,200
= $.50
140,000 - 60,000
Total cost at 140,000 pints .........................................................................
Variable cost at 140,000 pints
(140,000  $.50 per pint) ...................................................................
Fixed cost....................................................................................................
$95,200
70,000
$25,200
Cost equation:
Total energy cost = $25,200 + $.50X, where X denotes pints of applesauce produced
2.
Cost prediction when 95,000 pints of applesauce are produced
Energy cost = $25,200 + ($.50)(95,000) = $72,700
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PROBLEM 6-36 (15 MINUTES)
An appropriate activity measure for the school would be hours of instruction. The costs are
classified as follows:
1.
Variable
6.
Variable
2.
Semivariable (or mixed)*
7.
Fixed
3.
Fixed
8.
Fixed
4.
Fixed
9.
Semivariable (or mixed)
5.
Fixed
*The fixed-cost component is the salary of the school's repair technician. As activity
increases, one would expect more repairs beyond the technician's capability. This increase
in repairs would result in a variable-cost component equal to the dealer's repair charges.
PROBLEM 6-43 (35 MINUTES)
1.
The regression equation's intercept on the vertical axis is $250. It represents the portion
of indirect material cost that does not vary with machine hours when operating within
the relevant range. The slope of the regression line is $8 per machine hour. For every
machine hour, $8 of indirect material costs are expected to be incurred.
2.
Estimated cost of indirect material at 900 machine hours of activity:
S = $250 + ($8  900)
= $7,450
3.
Several questions should be asked:
(a)
Do the observations contain any outliers, or are they all representative of normal
operations?
(b)
Are there any mismatched time periods in the data? Are all of the indirect material
cost observations matched properly with the machine hour observations?
(c)
Are there any allocated costs included in the indirect material cost data?
(d)
Are the cost data affected by inflation?
4.
Beginning inventory ............................................................
April
$1,500
August
$1,200
3
+ Purchases .........................................................................
– Ending inventory ..............................................................
Indirect material used .........................................................
5.
7,500
(1,600)
$7,400
8,300
(3,500)
$6,000
High-low method:
Variable cost per machine hour
=
difference in cost levels
difference in activity levels
=
$7,400 - $6,000 $1,400
=
= $2.00 per machine hour
2,000 - 1,300
700
Fixed cost per month:
Total cost at 2,000 hours ..............................................................................
Variable cost at 2,000 hours
($2.00  2,000) .........................................................................................
Fixed cost.......................................................................................................
$7,400
4,000
$3,400
Equation form:
Indirect material cost = $3,400 + ($2.00  machine hours)
6.
The regression estimate should be recommended because it uses all of the data, not
just two pairs of observations when developing the cost equation.
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Syarikat Novati
1. Maintenance cost at the 90,000 machine-hour level of activity can be
isolated as follows:
Total factory overhead cost ...........
Deduct:
Utilities cost @ $0.80 per MH*....
Supervisory salaries ...................
Maintenance cost .........................
Level of Activity
60,000 MHs 90,000 MHs
$174,000
$246,000
48,000
21,000
$105,000
72,000
21,000
$153,000
*$48,000 ÷ 60,000 MHs = $0.80 per MH
2. High-low analysis of maintenance cost:
High activity level .....................
Low activity level ......................
Change ....................................
Machine- Maintenance
Hours
Cost
90,000
60,000
30,000
$153,000
105,000
$ 48,000
Variable rate:
Change in cost
$48,000
=
=$1.60 per MH.
Change in activity 30,000 MHs
Total fixed cost:
Total maintenance cost at the high activity level .... $153,000
Less variable cost element
(90,000 MHs × $1.60 per MH) ........................... 144,000
Fixed cost element .............................................. $ 9,000
Therefore, the cost formula for maintenance is: $9,000 per month
plus $1.60 per machine-hour or
Y = $9,000 + $1.60X.
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3.
Maintenance cost ...........
Utilities cost ...................
Supervisory salaries cost.
Totals ............................
Variable Cost per
Machine-Hour
$1.60
0.80
$2.40
Fixed Cost
$ 9,000
21,000
$30,000
Thus, the cost formula would be: Y = $30,000 + $2.40X.
4. Total overhead cost at an activity level of 75,000 machine-hours:
Fixed costs ..................................................
Variable costs: 75,000 MHs × $2.40 per MH ..
Total overhead costs ....................................
$ 30,000
180,000
$210,000
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