19 3. Exercises (Part 2)

 Last updated
 Dec 28, 2020
Exercises: Set B
 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:
 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.
 Why is it important to identify how costs behave with changes in activity?

Account Analysis. SwimSafe Company hires several instructors who provide weekly onehour 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:
 Use account analysis to estimate total fixed costs per week, and the variable cost per lesson. State your results in the cost equation form Y=f+vX by filling in the dollar amounts for f and v.
 Estimate the total costs for this coming week assuming 220 lessons will be provided.

HighLow 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:
 Use the four steps of the highlow method to estimate total fixed costs per month and the variable cost per sales dollar. State your results in the cost equation form Y=f+vX by filling in the dollar amounts for f and v.
 What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
 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?

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:
 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 Y=f+vX by filling in the dollar amounts for f and v.
 What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
 What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month?

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  
yintercept  129,188 
x variable  0.04 
Required:
 Use the regression output given to develop the cost equation Y=f+vX by filling in the dollar amounts for f and v.
 What would Quality Tools’ estimated costs be if it had sales of $12,500,000 next month?
 What would Quality Tools’ estimated costs be if it had sales of $20,000,000 next month?

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:
 Prepare a traditional income statement for Seafood Grill.
 Prepare a contribution margin income statement for Seafood Grill.
 Why do companies use the contribution margin income statement format?

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:
 Use Excel to perform regression analysis. Provide a printout of the results.
 Use the regression output to develop the cost equation Y=f+vX by filling in the dollar amounts for f and v.
 What would Cain Company’s estimated costs be if it used 110,000 machine hours this month?
Problems
 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:
 Identify each of the following costs for Hwang Company, a producer of ski boats, as variable (V), fixed (F), or mixed (M):
 _____Salary of production manager
 _____Materials required for production
 _____Monthly rent on factory building
 _____Hourly wages for assembly workers
 _____Straightline depreciation for factory equipment
 _____Annual insurance on factory building
 _____Invoices sent to customers
 _____Salaries and commissions of salespeople
 _____Salary of chief executive officer
 _____Company cell phones with first 50 hours free, then 10 cents per minute
 Identify each of the following costs for Rainier Camping Products, a maker of backpacks, as variable (V), fixed (F), or mixed (M):
 _____Hourly wages for assembly workers
 _____Fabric required for production
 _____Straightline depreciation on factory building
 _____Salaries and commissions of salespeople
 _____Lease payments for factory equipment
 _____Company cell phones with first 80 hours free, then 8 cents per minute
 _____Invoices sent to customers
 _____Salary of production manager
 _____Salary of controller (accounting)
 _____Electricity for factory building
 How might the managers of these companies use the cost behavior information requested?

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:
 Use account analysis to estimate total fixed costs per month and the variable cost per unit. State your results in the cost equation form Y=f+vX by filling in the dollar amounts for f and v.
 Estimate total production costs assuming 5,000 helmets will be produced and sold.
 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.
 HighLow, 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 decisionmaking 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  
yintercept  210,766 
x variable  45.31 
Required:
 Use the four steps of the highlow method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form Y=f+vX by filling in the dollar amounts for f and v.
 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 Y=f+vX by filling in the dollar amounts for f and v.
 Use the regression output given to develop the cost equation Y=f+vX by filling in the dollar amounts for f and v.
 Use the results of the highlow 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?
 Management likes theregression 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.
 HighLow, 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 decisionmaking 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  
yintercept  24,626 
x variable  401.86 
Required:
 Use the four steps of the highlow method to estimate total fixed costs per month and the variable cost per tax return prepared. State your results in the cost equation form Y=f+vX by filling in the dollar amounts for f and v.
 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 Y=f+vX by filling in the dollar amounts for f and v.
 Use the regression output given to develop the cost equation Y=f+vX by filling in the dollar amounts for f and v.
 Use the results of the highlow 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?
 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.
 HighLow, 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 decisionmaking 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  
yintercept  75,403 
x variable  2,536.77 
Required:
 Use the four steps of the highlow method to estimate total fixed costs per month, and the variable cost per surgery. State your results in the cost equation form Y=f+vX by filling in the dollar amounts for f and v.
 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 Y=f+vX by filling in the dollar amounts for f and v.
 Use the regression output given to develop the cost equation Y=f+vX by filling in the dollar amounts for f and v.
 Use the results of the highlow 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?
 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.)

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 decisionmaking 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:
 Use Excel to perform regression analysis. Provide a printout of the results. Use the regression output given to develop the cost equation Y=f+vXby filling in the dollar amounts for f and v.
 Use the results of the regression analysis to estimate costs for 3,750 machine hours.
 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.
 What can be done to improve the estimate made in part d?