Chapter 3:

Exercises: 3-9, 3-10, 3-16, & 3-19

Problems: 3-32, 3-41, & 3-42

124 Chapter 3 Cost Behavior Chapter 3 Cost Behavior 125 Required: i. Advertising 1. Set up a table with columns showing the cumulative number of units, Cumulative average j. Sales commissions time unit i ti hours, and cumulative total time in hours. Show results by tow for tota pro- k. Fuel for a delivery van duc of: one engthe, two engines, four engines, eight engines, sixteen engines, and thirty- 1. Depreciation on a warehouse two Roundhour answers t vo significant digits.) m. Depreciation on a forklift used to move partially completed goods n. X-ray film used in the radiology department of a hospital the Total lab cost if Pohl manufactures he following number of angs es: one, o. Rental car provided for a client for sixteen? WE it is the average post per engine fo the following number of engines: on for sixteen (Round you ans vers to the nearest dollar.) Exercise 3.10 Cost Behavior OBJECTIVE 1 at if Polman is reparing a bad to build 16 engines? Calculate budgeted labor doat for an entine d iin which kohlman has built before (assume that 16 of the e engines had can made SmokeCity, Inc., manufactures barbeque smokers. Based on past experience, SmokeCity has Vious and the fin : unit tool 500 hours). Calculate budgeted lapor cost for a found that its total annual overhead costs can be represented by the following formula: Over- engine sign the Pohlman's workers have never made before (assume the first un will take sod hours). head cost = $543,000 + $1.34X, where X equals number of smokers. Last year, SmokeCity pro- duced 20,000 smokers. Actual overhead costs for the year were as expected. EXERCISES Required: 1. What is the driver for the overhead activity? OBJECTIVE 1 2 Exercise 3.8 Cost Behavior, Flexible and Compitted Resources 2. What is the total overhead cost incurred by SmokeCity last year? Stat Univer 's football team just recoved a bowl game in it tion, and the student 3. What is the total fixed overhead cost incurred by SmokeCity last year? alumni are ed. Holiday Travel Agency, located close to can e ideo to put toge fa 4. What is the total variable overhead cost incurred by SmokeCity last year? boy game tage. For $ 0,000, a 737 jose could be chartered to to 170 people from the bo ty. A block 35 hotel rooms could be confirme oo dach (a three ght 5. What is the overhead cost per unit produced? commitment); pliday Trav must pay for ll the rooms in adv I cannot call 6. What is the fixed overhead cost per unit? the. The day the game, regame buff ill be catered at $50 , and cach p son 7. What is the variable overhead cost per unit? will receive a gathe favor pad age (consisti of a sweatshirt, commemorativ pin Will 8. Recalculate Requirements 5, 6, and 7 for the following levels of production: (a) 19,500 units the school and bowl logo and two pom pons in the school's colors Allitems the byor and (b) 21,600 units. (Round your answers to the nearest cent.) Explain this outcome. package can be purchased by holiday Travel el on December 21 and Will the agency $2 per sell Buses will be chartered ingthebowl city to transport partic pants t from the Firpor land Exercise 3.11 Types of Costs OBJECTIVE 1 thegame. Each bus holds 50 becole and can be chartered for $500. The game is Filed vil span three nights December 26, 27, a just Cashion Company pro luces chemical mixty res for veterinary pharmaceu companies. Its for December 28, and the trip 8. Purchasers fad pus four mising lines that mix various ered chemicals together ding to speci- everve their package and pale in fell by December 20. fiel for las. Each line can pra ice up to ,ood els per year. Each lif The sup d visor d $34, 00 pe year. Depreciation on qui ment averages $16. 0 per year irect Required steri ad por ker cos about $4. per whit List the resources that are mentioned in the above scenario. 2. For each resource, determine (a) whether it is a flexible or committed resource and (b) the ke qured: type of cost behavior displayed (variable, fixed, mixed, or step cost). P pare a graph for rach these Free co equipment deprecation supervisor wages, i direc materials and we the wer. Ve cal axis for cost and the horizont for OBJECTIVE 1 Exercise 3.9 Variable, Fixed, and Mixed Costs Its (bar & s). Assume thansales range fro to 20,010 units. Classify the following costs of activity inputs as variable, fixed, or mixed. Identify the activity and 2. sume ha the norn al op rating ange e company is 16000 to 19 000 un s pe year. the associated activity driver that allow you to define the cost behavior. For example, assume that w would sou class y each of the of cost? the resource input is "cloth in a shirt." The activity would be "sewing shirts," the cost behavior "variable," and the activity driver "units produced." Prepare your answers in the following format: Exe se 31 2 Resource Usa ge Mode and t Behav OBJECTIVE 2 Activity Cost Behavior Activity Driver For e for owing activity ir as resources identify the following (1) a cost drive (2) lexible resource Com sources. label ach resource as dhe of Sewing shirts Variable Units produced the lowing with respect to at drive able and fixed. a. Flu vaccine Re b. Salaries, equipment, and materials used for moving materials in a factory Descript C. Forms used to file insurance claims nce Equ ent, labor, parts d. Salaries, forms, and postage associated with purchasing Tes quipment, ins tors (each inspect can i S i spect five batches per e. Printing and postage for advertising circulars y), and units in cted (proce fructives mpling)* f. Equipment, labor, and parts used to repair and maintain production equipment cking e rials, labor (ead packer place a box), conveyor Power to operate sewing machines in a clothing factory vable processing erks, materials, equipment, and facility g. sembly h. Wooden cabinets enclosing audio speakers onveyor belt, supervision (one supervisor for every three assembly line, direct labor, and materials *Destructive sampling occurs whene (continued)Exercise 3.16 Account Analysis Method OBJECTIVE 3 Shirrell Blackthorn is the accountant for several pizza restaurants based in a tri-city area. The president of the chain wanted some help with budgeting and cost control, so Shirrell decided to analyze the accounts for the past year. She divided the accounts into four different categories, depending on whether they appeared to be primarily fixed or to vary with one of three different drivers. Food and wage costs appeared to vary with the total sales dollars. Delivery costs varied with the number of miles driven (workers were required to use their own cars and were reim- bursed for miles driven). A group of other costs, including purchasing, materials handling, and purchases of kitchen equipment, dishes, and pans, appeared to vary with the number of different product types (e.g., pizza, salad, and lasagna). Shirrell came up with the following monthly averages Food and wage costs $175,000 Delivery costs $18,000 Other costs $9,520 Fixed costs $255,000 Sales revenue $560,000 Delivery mileage in miles 8,000 Number of product types 14 Required: 1. Calculate the average variable rate for the following costs: food and wages, delivery costs, and other costs. 2. Form an equation for total cost based on the fixed costs and your results from Requirement 1. 3. The president is considering expanding the restaurant menu and plans to add one new offer- ing to the menu. According to the cost equation, what is the additional monthly cost for the new menu offering?128 Chapter 3 Cost Behavior Chapter 3 Cost Behavior 129 OBJECTIVE 4 Exercise 7 Scattergraph Method, H ah-Low lethod Required: Deepa I opened a free-standing radio gy clinic had anticipa the cos 1. Determine the cost behavior formula of each resource. Use the high-low method to assess radiolog ists would be primarily fixed but she f i that costs Crea the fixed and variable components. of tests fo ned. Costs for this service ov the pas e months a as fd OwS 2. Using your knowledge of cost behavior, predict the cost of each item for an activity output Month diology Total level of 9,000 moves. January 2,80 $133 DO 3. Construct a cost formula that can be used to predict the total cost of the three resources February 560 combined. Using this formula, predict the total materials handling cost if activity output is March 000 9,000 moves. In general, when can cost formulas be combined to form a single cost April formula? May 900 June 5.60 July 4.43 Exercise 3.20 Method of Least Squares, Evaluation of Cost Equation OBJECTIVE 4 5 August Lass Company use The method of least squares to develop a cost equation to predict the cost September of m in terials. are were 80 data points the regression, and the following computer X Requil d: outp rated- 1. P pare a attergraph based on the ped g data. Us for the vert is and num lept $17,350 of radio y test "for the horizon Based on amination ergraph, 12.00 s there app r to a linear rel between the st of radiol and the ent of correlation 0.92 nber of tests. d error $220 mpute the cost for radio vices using the h-low met Iculate the predic for 3,50 using the for- he activity d ver 1 Co ervices for Oc s the number of mares. of radi ila found in Require Require OBJECTIVE 4 5 se 3.18 Method of Wha Squ Goodness of F 1. is the chat for R o the data in Exercise 3.1 Us the cost orm the cost of moving materia 340 move are made. (Rou to the 1 arest dol Red Fed: Wha percent e of the va ty in movin cost is explained by the member of moves? 1. mpute the cost formula for rvices using the 1 of 1 uares. you ink the quat n wil ct well? WH or why no the formula computed i eme 1, what is he pred ed c f radiolog serv- October for 3,500 appon S? (Ro d the an ver to th near pllar.) kercise 8.21 Regres OBJE TIVE 6 3. 's the coefficient of de nation teh out the c moute in weet Dreams Batery s started ve years go by De a Pantera who s known for quirem 1? What are the t s. stics for the number of tests and the intercept reads, feet rolls and personalized akes. Del had kept her counting sy em simple, be That do these statistics tell you about the choice of number of tests as the independent vari- ng that he had a good tuitive ha lle on co s. She ha beer using the fo owing formu to able and the probability that there are fixed costs? describe ver mont head costs OBJECTIVE 4 Exercise 3.19 High-Low Method, Cost Formulas erhead co 7,800 $7.50 rect lab hours) The controller of the South Charleston plant of Ravinia, Inc., monitored activities associated For jeads an SWC rolls that able in with materials handling costs. The high and low levels of resource usage occurred in September he bake case cac , she ap led a and March for three different resources associated with materials handling. The number of standard ricing stem. or special wever, bella needed her cos ula to help her with an tima alize cake or that moves is the driver. The total costs of the three resources and the activity output, as measured come up d cost for dding c Ist. she by moves for the two different levels, are presented as follows: applied markup kroen ige. Late howeve the crease in le va ty of ders and elabora f the edding Resource Number of Moves Total Cost cakes ma e her wo more son istica i view costs wou 1 help he in pl mining budget- Forklift depreciation: ing, and ricing. Low 6,500 $ 1,800 After some late discussion WILL WO ers, Della ermine that Dreams' High 20,000 1.800 expansio into wed cakes and had made specia orders more ex oper- Indirect labor: ation. T various s of the we din had required Del s inves n differ- Low 6,500 $ 74,250 ent-sized cake pans well as ded icing. The differ at icing rns and High 20.000 135,000 elaborate designs to much more t well. In ad tion while a fi ear-old's Fuel and oil for forklift: birthday cake just r ires that the and (possibl superhero' game are Low 6,500 $ 4,940 High 20,000 15,200 (continued)134 pter 3 Cost Behavior Chapter 3 Cost Behavior 135 ollers can be produ using an ava ble a a wi in the plant. Ho equipment two months before determining how much to charge per patient day on an ongoing basis. As a ction the rollers i need to be per year lease pa t). Addition temporary measure, the clinic adopted a patient-day charge of $190, an amount equal to the fees ould co $0.50 pe hine hour oil, d other oper xpenses. The charged by a hospital specializing in orthopedic care in a nearby city. will p vide 60,0 chine hoy Direc material cos Iwill verage $0.75 This initial per-day charge was quoted to patients entering the orthopedic center during the d direct bor wil e SO.25 ce only he type of roller could be pro- first two months with assurances that if the actual operating costs of the new center justified it, no addition demat setup ad vity. Of er over ead activities the charge could be less. In no case would the charges be more. A temporary policy of billing es m chining ad set s), ho you ected. Th company's cos management after 60 days was adopted so that any adjustments could be made. pro ides the allow g infor ab current sta he over ead activities The orthopedic center opened on January 1. During January, the center had 4,200 patient would e affected supply eman figu es do not it the effect of roller pro- days of activity. During February, the activity was 4,500 patient days. Costs for these two levels on on ese activi he lumpy antity ndic es how much cap lity mus be purchased of activity output are as follows: d any pansion ivity supp e ned e purchase the co of acquiring the lumpy uan tit Thi price also rep s the st of current 4,200 Patient 4,500 Patient capacity presente ding on disting act ach bi Days Days supply (fo activity). Salaries, nurses $ 55,000 $55,000 PY Cost Driv tity Aides 32,000 32,000 Activity P Usage urcha Pharmacy 235,700 251,300 Purchasing Orders 23,000 5,000 Laboratory 120,300 127,200 Inspection Hour 10 9,000 0,000 Depreciation 25,000 25,000 Materials handling Move 4 4.300 5.000 Laundry 20,160 21,600 Administration 27,000 27,000 Production of ollers uld play the llow Ig de hands on the ove tiviti Lease (equipment) 36,000 36,000 Activ Resource Demand Required: Mach ing 50,0 ine hours 1. Classify each cost as fixed, variable, or mixed, using patient days as the activity driver. Purcha ing ase orders (associ ed with sed to make the rollers) 2. Use the high-low method to separate the mixed costs into fixed and variable. Inspect 750 in on hours 3. The administrator of the orthopedic center estimated that the center will average 4,300 Materia han 500 me patient days per month. If the center is to be operated as a nonprofit organization, how facing the rollers hat the purchase utside rollers will cease. T us, purch much will it need to charge per patient day? How much of this charge is variable? How or s associated with he acquisition of rollo will drop by 1000. Similar the mo much is fixed? for e handling of in ers will do rease by 00. The company has not suspected 4. Suppose the orthopedic center averages 4,800 patient days per month. How much would roll s purchased from pliers. need to be charged per patient day for the center to cover its costs? Explain why the charge per patient day decreased as the activity output increased. Red red 1. ify all resources ted with the p ductic rollers flexible resource plem 3.33 and com Pr ligh-Low Method, Method of OBJECTIVE 2 4 5 hito resources. La h committed source a short or long-term con mitmen Bi Mike' wake store, has gathers ts overhead activi and ass low ould we descr cost behavior the rt- and long-term resource commit CO ;for nths Nizam Sanjay, the controller's payment, b ents? plain the overhead ACT nd casts should be oups that hav the me dri has ds, and ins acting goods 2. Calculate e total an source spending (fo cept for setups) that he com ling in coming goo sind these three c Ctivition are al any will cur after p gro tion of the rollers b s cost into fixed and ariab pre general receivi tha by data s n beloy have be tivity costs. In calcul the orders. The 10 gathe these figures, assume any will spend no mo the leivin cessary. What is the effect on resource spending caused by p luction of the rollers? 3. Refer to Requirement 2. For each activity, break down the cost of activity supplied into the oth Rec vin orders Recei cost of activity output and the cost of unused activity. $12, 12.9 OBJECTIVE 1 4 Problem 3.32 Cost Behavior, High-Low Method, Pricing Decision AWN 13.7 St. Teresa's Medical Center (STMC) offers a number of specialized medical services, including neuroscience, cardiology, and oncology. STMC's strong reputation for quality medical care allowed it to branch out into other services. It is now ready to expand its orthopedic services and has just added a free-standing orthopedic clinic offering a full range of outpatient, surgical, 1.490 and physical therapy services. The cost of the orthopedic facility is depreciated on a straight-line 1.800 basis. All equipment within the facility is leased. 1 70 Since the clinic had no experience with in-patient orthopedic services (for patients recovering from hip and knee replacements, for example), it decided to operate the orthopedic center for140 Chapter 3 Cost Behavior Chapter 3 Cost Behavior 141 initiate the budgeting process and to nti ore completely the underlying process that Problem 3.42 Learning Curve OBJECTIVE 7 generates sales. Thames Assurance Company sells a variety of life and health insurance products. Recently Larry Husky, the oller of L ck has dered many possible ind dent variable Thames developed a long-term care policy for sale to members of university and college alumni and equations to predi les and row choices to four eq Husky used associations. Thames estimated that the sale and service of this type of policy would be subject ual observations from s to stim pea of the four equat to a 90 percent cumulative average-time learning curve model. Each unit consists of 350 policies Following are defin var bles led the four equation statistics BUT sold. The first unit is estimated to take 1,000 hours to sell and service. ry of these equation Required: istica Summaryof For Equations Set up a table with columns for cumulative number of units, cumulative average time per epender Independent Inde ndent Standard unit in hours, and the cumulative total time in hours. Complete the table for 1, 2, 4, 8, 16, Equation Variable ariable (s) arial (Rate Error R Square and 32 units. $500,000 0.94 2. Suppose that Thames revises its assumption to an 80 percent learning curve. How will this ,00 DOO O. 001 510,0 0.90 affect the amount of time needed to sell and service eight units? How do you suppose that AWNI 90 1012 $20.0 0.81 00 Thames estimates the percent learning rate? 490 0.96 N-1 10. 4.00 0. 10002 50 CY 0003 3.43 Ches Forecasted sa in lars for clock renod orde Actual es in olla for Lod d t - give umber = Forecast U.S. domestic in per a expe being to go Actual gros mestic pro eriod costs ices? Time t = Lockit's incom period The inn ppoor witin this choptar that 1983, 1 1985, 1989, 1990, 1991. Required: 1. Write E d 4 in the for 2. If actual 500,000 in th year, ould be the fore asted sa for Lockit in year? 3. Explain why rry Husky might prefer Equation 3 to E 4. Explain the advantages and disadvantages of using Equati to for st sales. (CMA adapted) OBJECTIVE 7 Problem 3.41 Learning Curve Harriman Industries manufactures engines for the aerospace industry. It has completed manu- facturing the first unit of the new ZX-9 engine design. Management believes that the 1,000 labor hours required to complete this unit are reasonable and is prepared to go forward with the man- ufacture of additional units. An 80 percent cumulative average-time learning curve model for direct labor hours is assumed to be valid. Data on costs are as follows: Direct materials $10,500 Direct labor $30 per direct labor hour Variable manufacturing overhead $40 per direct labor hour Required: 1. Set up a table with columns for cumulative number of units, cumulative average time per unit in hours, and the cumulative total time in hours. Complete the table for 1, 2, 4, 8, 16, and 32 units. (Round hours to one significant digit.) 2. What are the total variable costs of producing 1, 2, 4, 8, 16, and 32 units? What is the vari- able cost per unit for 1, 2, 4, 8, 16, and 32 units