Solutions to Exercises

5-1. (15 min.) Methods of Estimating CostsAccount Analysis: Miller Fixtures.

a. Cost estimate with new costs and volume. This Years Cost (at last years volume) (1) x (2) = (3) $252,000 182,000 154,000 264,000

Last Years Cost Cost Item Direct materials (1) $210,000

Cost Change (1 + Cost Increase) (2) 120% 104% 100% 110% = = = =

Growth in Volume (4) 220,000 210,000 220,000 210,000 220,000 210,000 (fixed)

This Years Cost (3) x (4) = (5) = $264,000 = 190,667 = 161,333

Direct 175,000 labor .................. Variable 154,000 overhead ........... Fixed 240,000 Overhead .......... Total $779,000 costs .................. b. Costs per unit: Last year: This year:

= 264,000 $880,000

$3.71 $4.00

(= $779,000 210,000) (= $880,000 220,000)

5-2.

(15 min.) Methods of Estimating CostsAccount Analysis.

a. Cost estimate with new costs and volume. Year 2 Cost (at last years volume) (1) x (2) = (3) = $396,000

Year 1 Cost Cost Item (1) Direct materials ... Direct labor .......... Variable overhead ... $360,000 2,580,000 540,000a

Cost Change (1 + Cost Increase) (2) 110% 115% 100% 105%

Growth in Volume (4) 195,000 150,000 195,000 150,000 195,000 150,000 (fixed)

Year 2 Cost (3) x (4) = (5)

= $514,800 = 3,857,100 = = 702,000 630,000

= 2,967,000 = = 540,000 630,000

Fixed 600,000 Overhead .. Total costs .......... $4,080,000

a

$5,703,900

$540,000 = $1,140,000 total overhead $600,000 fixed overhead.

b. Costs per unit: Last year: This year: $27.20 $29.25 (= $4,080,000 150,000) (= $5,703,900 195,000)

5-3. a.

(10 min.) Methods of Estimating CostsHigh-Low, Ethical Issues: Oak Island Amusements Center. Cost at highest activity cost at lowest activity Highest activity lowest activity $3,750,000 $2,925,000 2,375,000 1,825,000 = = = Total costs variable costs $3,750,000 ($1.50 x 2,375,000) $187,500

Variable cost =

= $1.50

Fixed costs

or Fixed costs b. Maintenance costs = $187,500 + ($1.50 x 2,600,000) = $187,500 + $3,900,000 = $4,087,500 = = $2,925,000 ($1.50 x 1,825,000) $187,500

Note that 2,600,000 visitors is outside the range of the cost observations, so this estimate may not be reliable. c. Whether this is ethical depends on the reason for dropping the observation. If you are convinced that the higher number of visitors represents such unusual activity that this should be treated as an outlier, then you should eliminate the observation. If, however, the reason for dropping the observation is that someone does not like the result, then you should not change the analysis.

5-4.

(25 min.) Methods of Estimating CostsHigh-Low: Adriana Corporation.

a. High-low estimate Machine Hours 8,020 6,490 Overhead Costs $564,210 $503,775

Highest activity (month 12) ................. Lowest activity (month 11) .................. Variable cost =

Cost at highest activity cost at lowest activity Highest activity lowest activity $564,210 $503,775 8,020 6,490 Total costs variable costs $564,210 ($39.50 x 8,020) $247,420

= $39.50

Fixed costs

= = =

or Fixed costs = = $503,775 ($39.50 x 6,490) $247,420

The cost equation then is: Overhead costs = $247,420 + ($39.50 per MH x Machine hours) b. For 7,500 MH: Overhead costs = = = $247,420 + ($39.50 x 7,500) $247,420 + $296,250 $543,670

5-5.

(15 min.) Methods of Estimating CostsScattergraph: Adriana Corporation.

5-6.

(15 min.) Methods of Estimating CostsScattergraph: Adriana Corporation.

5-7.

(10 min.) Methods of Estimating CostsSimple Regression: Adriana Corporation.

Simple regression estimate (note that the estimated 9,000 machine hours is outside the relevant range): Overhead = = = = $206,469 + $45.83 x Machine-hours $206,469 + 45.83 x 9,000 Machine-hours $206,469 + $412,470 $618,939

5-8.

(10 min.) Estimating CostsSimple Regression: Adriana Corporation.

Simple regression estimate (note that the estimated 3,000 labor-hours is outside the relevant range): Overhead = = = = $217,610 + $88.61 x Labor-hours $217,610 + $88.61 x 3,000 Labor-hours $217,610 + $265,830 $483,440

5-9.

(20 min.) Estimating CostsMultiple Regression: Adriana Corporation.

Multiple regression estimate (note that the estimated 9,000 machine hours and 3,000 direct labor hours are outside the relevant range): Overhead = = = = $124,570 + $31.93 x Labor-hours + $41.10 x Machine-hours $124,570 + $31.93 x 3,000 Labor-hours + $41.10 x 9,000 Machine-hours $124,570 + $95,790 + $369,900 $590,260

5-10. (20 min.) Interpretation of Regression ResultsMultiple Choice: Cortez Company. a. (1) R2 = .848 (84.8%), the explanation of variation in Y from the X regressor. b. (2) $370,000. The equation resulting from this regression analysis is Total = Estimated fixed cost + estimated variable cost per labor-hour x laboroverhead hours = Intercept estimate + Coefficient estimate on independent variable x 50,000 DLH = $120,000 + $5 x 50,000 DLH = $120,000 + $250,000 = $370,000 c. (2) $82 Total labor-hours

= Total direct labor costs Direct labor wage rate = $640,000 $16 per hour = 40,000 direct labor-hours = Total labor hours Total units = 40,000 20,000 = 2 labor-hours per unit = Direct materials + Direct labor + Variable overhead = ($800,000 20,000) + ($640,000 20,000) + $5 x 2 labor-hours = $40 + $32 + $5 x 2 labor-hours = $82

Labor-hours per unit

Total variable cost per unit

d. (4) $14 Contribution-margin per unit

= Price variable cost per unit = $96 $82 = $14

e. (4) Some other equation: Total manufacturing cost = = Fixed manufacturing cost + Variable manufacturing cost $120,000 + $82 x units

*CMA adapted

5-11. (15 min.) Interpretation of Regression Results: Brodie Company. This problem is frequently encountered when applying analytical techniques to certain costs. Quite often the advertising expenditures result in sales being generated in the following month or so. In addition, many companies increase their advertising when sales are declining and cut back on advertising when there is capacity business. A better model might be developed by relating this month's sales to last month's advertising. Similar problems exist for repair and maintenance costs since machines are usually given routine repairs and maintenance during slow periods. An inverse relationship often exists between salespersons' travel expenses and sales because the salesperson spends more time traveling when the sales are more difficult to make. 5-12. (15 min.) Interpretation of Regression Results: Ross Enterprises. This problem is frequently encountered when applying analytical techniques to certain costs. Quite often maintenance is done during periods of relatively low activity. A better model might be developed by including variables for slow months or lagged activity. Similar problems exist for advertising costs since advertising usually leads sales. An inverse relationship often exists between salespersons' travel expenses and sales because the salesperson spends more time traveling when the sales are more difficult to make.

5-13. (30 min.) Interpretation of Regression ResultsSimple Regression: Freds Fish Fry. a. Estimation equation for nonfood kitchen costs: Nonfood kitchen costs b. Nonfood kitchen costs = = = = $14,000 + 225% Food cost $14,000 + 225% x $15,000 $14,000 + $33,750 $47,750 = Fixed costs + Variable cost as a percentage of food cost = $14,000 + 225% Food cost

c. The R2 for the equation is only 23.3%, which is very low for this type of regression. Fred should consider identifying other cost drivers and using them to estimate other nonfood kitchen costs.

5-14. (20 min.) Learning Curves: General Dynamics. a. The learning rate is 80% for every doubling of output: Unit Produced (X) 1................. 2................. 4................. 8................. 16............... Time Required to Produce the Xth Unit 10,000 hours 8,000 hours 6,400 hours 5,120 hours 4,096 hours

(= 10,000 hours x 0.80) (= 8,000 hours x 0.80) (= 6,400 hours x 0.80) (= 5,120 hours x 0.80)

b. Cost of producing the first unit = $1,250,000 (= 10,000 hours x $125 per hour) Cost of producing the 16th unit = $512,000 (= 4,096 hours x $125 per hour) = 40.96% of the first unit cost (= $512,000 $1,250,000) 5-15. (20 min.) Learning Curves: Whee, Cheatham, and Howe. a. The learning rate is 90% for every doubling of output: Financial Statements Proofread (X) 1 ................ 2 ................. 4 ................. 8 ................. 16 ............... Time Required to Proofread the Xth Financial Statement 2.0000 hours 1.8000 hours 1.6200 hours 1.4580 hours 1.3122 hours

(= 2.0000 hours x 0.90) (= 1.8000 hours x 0.90) (= 1.6200 hours x 0.90) (= 1.4580 hours x 0.90)

b. Cost of proofreading the first report = $40 (= 2.0 hours x $20 per hour) Cost of proofreading the 16th report = $26.24 (= 1.3122 hours x $20 per hour) = 65.60% of the first unit cost (= $26.24 $40)

5-16. (20 min.) Learning Curves. The formula for the time to produce unit z is Y =100 z Substitute 5, 6, 7 for z, to obtain:
0.3219

Unit (z) 5 ................ 6 ................. 7 .................

Formula for Time to Produce Unit z 0.3219 Y =100 (5) 0.3219 Y =100 (6) 0.3219 Y =100 (7)

Time to Produce Unit z 59.56 56.17 53.45

Also, note that the time to produce the third unit is 70.21. Doubling production, the time to produce the sixth unit is 56.17 (= 70.21 x 0.80). The remaining numbers can be verified easily. The cumulative time for the 5th unit is simply the cumulative time for the 4th unit (314.21) plus 59.56 (the time to produce the 5th unit), or 373.77 hours, and so on. The total cost is the cumulative time multiplied by $50 per hour. For example, the total cost for five units is $18,688.50 (=$50 x 373.77 hours) and so on. Finally, the average cost is the total cost divided by the number of units produced. So the average cost of producing five units is $3,737.70 (= $18,688.50 5 units) and so on.