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5.E: Exercises (Part 2)

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    Exercises: Set B

    1. Identifying Cost Behavior. Ivanov, Inc., is trying to identify the cost behavior of the three costs shown. Cost information is provided for six months.
        Cost A Cost B Cost C
    Month Units Produced Total Costs Cost per Unit Total Costs Cost per Unit Total Costs Cost per Unit
    1 8,000 $10,000   $24,000   $32,000  
    2 10,000 $10,000   $29,000   $40,000  
    3 12,000 $10,000   $33,600   $48,000  
    4 14,000 $10,000   $36,400   $56,000  
    5 16,000 $10,000   $38,400   $64,000  
    6 18,000 $10,000   $39,600   $72,000  

    Required:

    1. Calculate the cost per unit, and then identify how the cost behaves (fixed, variable, or mixed) for each of the three costs. Explain the reasoning behind your answers.
    2. Why is it important to identify how costs behave with changes in activity?
    1. Account Analysis. Swim-Safe Company hires several instructors who provide weekly one-hour private swim lessons to individuals. The company would like to estimate costs associated with its swim lessons on a weekly basis. Assume costs for towels, snacks, drinks, and instructor wages are variable costs. The accounting records indicate the following costs were incurred last week for 250 customer lessons:
    Towels, snacks, drinks $1,250
    Instructor wages (hourly employees) $3,000
    Manager (owner) salary $1,500
    Pool rental $2,000

    Required:

    1. Use account analysis to estimate total fixed costs per week, and the variable cost per lesson. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\) .
    2. Estimate the total costs for this coming week assuming 220 lessons will be provided.
    1. High-Low Method Quality Tools. Quality Tools Incorporated would like to estimate costs associated with its sales personnel. Salespeople are paid a salary plus commission. Commission rates vary among products and are based on sales dollars. The company reported the following monthly cost data related to sales personnel:
    Reporting Period (Month) Total Costs Sales Amount
    January $710,000 $13,800,000
    February $695,000 $13,600,000
    March $765,000 $15,100,000
    April $650,000 $12,000,000
    May $775,000 $15,500,000
    June $750,000 $14,700,000
    July $715,000 $14,500,000
    August $680,000 $13,100,000
    September $830,000 $16,500,000
    October $815,000 $16,000,000
    November $800,000 $15,600,000
    December $690,000 $13,200,000

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per sales dollar. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    2. What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
    3. What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month? Why should you feel uncomfortable estimating costs for $20,000,000 in sales?
    1. Scattergraph Method. Quality Tools Incorporated would like to estimate costs associated with its sales personnel. Salespeople are paid a salary plus commission. Commission rates vary among products and are based on sales dollars. The company reported the following monthly cost data related to sales personnel (this is the same data as the previous exercise):
    Reporting Period (Month) Total Costs Sales Amount
    January $710,000 $13,800,000
    February $695,000 $13,600,000
    March $765,000 $15,100,000
    April $650,000 $12,000,000
    May $775,000 $15,500,000
    June $750,000 $14,700,000
    July $715,000 $14,500,000
    August $680,000 $13,100,000
    September $830,000 $16,500,000
    October $815,000 $16,000,000
    November $800,000 $15,600,000
    December $690,000 $13,200,000

    Required:

    1. Use the five steps of the scattergraph method to estimate total fixed costs per month and the variable cost per sales dollar. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    2. What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
    3. What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month?
    1. Regression Analysis. Regression analysis was run for Quality Tools Incorporated resulting in the following output (this is based on the same data as the previous two exercises):
      Coefficients
    y-intercept 129,188
    x variable 0.04

    Required:

    1. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    2. What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
    3. What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month?
    1. Contribution Margin Income Statement, Service Company. Last month Seafood Grill had total sales of $200,000. Food preparation and service costs totaled $90,000 (20 percent fixed, 80 percent variable). Selling and administrative costs totaled $30,000 (70 percent fixed, 30 percent variable).

    Required:

    1. Prepare a traditional income statement for Seafood Grill.
    2. Prepare a contribution margin income statement for Seafood Grill.
    3. Why do companies use the contribution margin income statement format?
    1. Regression Analysis Using Excel (Appendix). Cain Company produces calculators. Management wants to estimate the cost of production equipment used to produce the calculators. The company reported the following monthly cost data related to production equipment:
    Reporting Period (Month) Total Costs Machine Hours
    January $1,250,000 59,000
    February $990,000 33,000
    March $850,000 28,000
    April $1,500,000 67,000
    May $1,860,000 128,000
    June $1,480,000 71,000
    July $1,500,000 67,000
    August $1,860,000 128,000
    September $1,480,000 71,000
    October $1,500,000 67,000
    November $1,860,000 128,000
    December $1,480,000 71,000

    Required:

    1. Use Excel to perform regression analysis. Provide a printout of the results.
    2. Use the regression output to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    3. What would Cain Company’s estimated costs be if it used 110,000 machine hours this month?

    Problems

    1. Cost Behavior. Assume you are a consultant performing work for two different companies. Each company has asked you to help them identify the behavior of certain costs.

    Required:

    1. Identify each of the following costs for Hwang Company, a producer of ski boats, as variable (V), fixed (F), or mixed (M): 
      1. _____Salary of production manager
      2. _____Materials required for production
      3. _____Monthly rent on factory building
      4. _____Hourly wages for assembly workers
      5. _____Straight-line depreciation for factory equipment
      6. _____Annual insurance on factory building
      7. _____Invoices sent to customers
      8. _____Salaries and commissions of salespeople
      9. _____Salary of chief executive officer
      10. _____Company cell phones with first 50 hours free, then 10 cents per minute
    2. Identify each of the following costs for Rainier Camping Products, a maker of backpacks, as variable (V), fixed (F), or mixed (M): 
      1. _____Hourly wages for assembly workers
      2. _____Fabric required for production
      3. _____Straight-line depreciation on factory building
      4. _____Salaries and commissions of salespeople
      5. _____Lease payments for factory equipment
      6. _____Company cell phones with first 80 hours free, then 8 cents per minute
      7. _____Invoices sent to customers
      8. _____Salary of production manager
      9. _____Salary of controller (accounting)
      10. _____Electricity for factory building
    3. How might the managers of these companies use the cost behavior information requested?
    1. Account Analysis and Contribution Margin Income Statement. Madden Company would like to estimate costs associated with its production of football helmets on a monthly basis. The accounting records indicate the following production costs were incurred last month for 4,000 helmets.
    Assembly workers’ labor (hourly) $70,000
    Factory rent $3,000
    Plant manager’s salary $5,000
    Supplies $20,000
    Factory insurance $12,000
    Materials required for production $20,000
    Maintenance of production equipment (based on usage) $18,000

    Required:

    1. Use account analysis to estimate total fixed costs per month and the variable cost per unit. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    2. Estimate total production costs assuming 5,000 helmets will be produced and sold.
    3. Prepare a contribution margin income statement assuming 5,000 helmets will be produced, and each helmet will be sold for $70. Fixed selling and administrative costs total $10,000. Variable selling and administrative costs are $8 per unit.
    1. High-Low, Scattergraph, and Regression Analysis; Manufacturing Company. Woodworks, Inc., produces cabinet doors. Manufacturing overhead costs tend to fluctuate from one month to the next, and management would like to accurately estimate these costs for planning and decision-making purposes.

      The accounting staff at Woodworks recommends that costs be broken down into fixed and variable components. Because the production process is highly automated, most of the manufacturing overhead costs are related to machinery and equipment. The accounting staff believes the best starting point is to review historical data for costs and machine hours:

     

    Reporting Period (Month) Total Costs Machine Hours
    January $278,000 1,550
    February $280,000 1,570
    March $266,000 1,115
    April $290,000 1,700
    May $262,000 1,110
    June $269,000 1,225
    July $275,000 1,335
    August $286,000 1,660
    September $250,000 1,000
    October $253,000 1,020
    November $260,000 1,025
    December $281,000 1,600

    These data were entered into a computer regression program, which produced the following output:

      Coefficients
    y-intercept 210,766
    x variable 45.31

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    2. Use the five steps of the scattergraph method to estimate total fixed costs per month, and the variable cost per machine hour. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    3. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    4. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c), to estimate costs for 1,500 machine hours. (You will have three different answers—one for each method.) Which approach do you think is most accurate and why?
    5. Management likes the regression analysis approach and asks you to estimate costs for 5,000 machine hours using this approach (the company plans to expand by opening another facility and hiring additional employees). Calculate your estimate, and explain why your estimate might be misleading.
    1. High-Low, Scattergraph, and Regression Analysis; Service Company. Sanchez Accounting Company prepares tax returns for individuals. Marie Sanchez, the owner, would like an accurate estimate of the company’s costs for planning and decision-making purposes. When Marie asks you to devise a way to estimate costs on a monthly basis, you recall the importance of breaking costs into fixed and variable components. Because the company’s costs are driven primarily by the number of tax returns prepared, you decide to use historical data for costs and tax returns prepared:
    Reporting Period (Month) Total Costs Returns Prepared
    January $157,000 315
    February $145,000 300
    March $167,500 375
    April $163,000 325
    May $120,000 250
    June $112,000 210
    July $138,000 280
    August $100,000 190
    September $108,000 205
    October $115,000 245
    November $136,000 265
    December $126,000 255

    You enter these data into a computer regression program and get the following results:

      Coefficients
    y-intercept 24,626
    x variable 401.86

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per month and the variable cost per tax return prepared. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    2. Use the five steps of the scattergraph method to estimate total fixed costs per month and the variable cost per tax return prepared. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    3. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    4. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c) to estimate costs for 290 tax returns. (You will have three different answers—one for each method.) Which approach do you think is most accurate, and why?
    5. Marie likes the regression analysis approach and asks you to estimate costs for 800 tax returns using this approach (she plans to expand by opening another office and hiring additional employees). Calculate your estimate, and explain why your estimate might be misleading.
    1. High-Low, Scattergraph, Regression Analysis, and Contribution Margin Income Statement. Eye Care, Inc., provides vision correction surgery for its patients. You are the accountant for Eye Care, and management has asked you to devise a way of accurately estimating company costs for planning and decision-making purposes. You believe that reviewing historical data for costs and number of surgeries is the best starting point. These data are as follows:
    Reporting Period (Month) Total Costs Number of Surgeries
    January $208,000 54
    February $205,000 52
    March $217,000 55
    April $200,000 50
    May $232,000 62
    June $230,000 60
    July $226,000 57
    August $235,000 63
    September $252,000 71
    October $250,000 70
    November $245,000 66
    December $244,000 65

    You enter these data into a computer regression program and get the following results:

      Coefficients
    y-intercept 75,403
    x variable 2,536.77

    Required:

    1. Use the four steps of the high-low method to estimate total fixed costs per month, and the variable cost per surgery. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    2. Use the five steps of the scattergraph method to estimate total fixed costs per month, and the variable cost per surgery. State your results in the cost equation form \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    3. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    4. Use the results of the high-low method (a), scattergraph method (b), and regression analysis (c), to estimate costs for 70 surgeries. (You will have three different answers—one for each method.) Which approach do you think is most accurate and why?
    5. Assume Eye Care charges $4,000 for each surgery performed. Use the regression analysis cost information (for 70 surgeries) to prepare a contribution margin income statement. (Hint: You will only have one line item for variable costs and one line item for fixed costs.)
    1. Regression Analysis Using Excel (Appendix). Metal Products, Inc., produces metal storage sheds. The company’s manufacturing overhead costs tend to fluctuate from one month to the next, and management would like an accurate estimate of these costs for planning and decision-making purposes.

      The company’s accounting staff recommends that costs be broken down into fixed and variable components. Because the production process is highly automated, most of the manufacturing overhead costs are related to machinery and equipment. The accounting staff agrees that reviewing historical data for costs and machine hours is the best starting point. Data for the past 18 months follow.
    Reporting Period (Month) Total Costs Total Machine Hours
    January $695,000 3,875
    February $700,000 3,925
    March $665,000 2,788
    April $725,000 4,250
    May $655,000 2,775
    June $672,500 3,063
    July $687,500 3,338
    August $715,000 4,150
    September $625,000 2,500
    October $632,500 2,550
    November $650,000 2,563
    December $702,500 4,000
    January $730,000 4,025
    February $735,000 4,088
    March $697,500 2,900
    April $762,500 4,425
    May $687,500 2,888
    June $705,000 3,188

    Required:

    1. Use Excel to perform regression analysis. Provide a printout of the results.
    2. Use the regression output given to develop the cost equation \(\text{Y} = \mathcal{f} + \mathcal{v} \text{X}\) by filling in the dollar amounts for \(\mathcal{f}\) and \(\mathcal{v}\).
    3. Use the results of the regression analysis to estimate costs for 3,750 machine hours.
    4. Management is considering plans to expand by opening several new facilities and asks you to estimate costs for 22,000 machine hours. Calculate your estimate, and explain why this estimate may be misleading.
    5. What can be done to improve the estimate made in part d?