5-30. (25 min.) Methods of Estimating Costs High-Low: Adriana Corporation. a. High-low estimate Machine- Hours Overhead Costs Highest activity (month 12)... 8,020 $564,210 Lowest activity (month 11)... 6,490 $503,775 Variable cost = Cost at highest activity cost at lowest activity Highest activity lowest activity = $564,210 $503,775 8,020 6,490 = $39.50 Fixed costs or Fixed costs = Total costs variable costs = $564,210 ($39.50 x 8,020) = $247,420 = $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 The McGraw-Hill Companies, Inc., 2014 186 Fundamentals of Cost Accounting
5-31. (15 min.) Methods of Estimating Costs Scattergraph: Adriana Corporation.
5-32. (15 min.) Methods of Estimating Costs Scattergraph: Adriana Corporation.
5-33. (10 min.) Methods of Estimating Costs Simple 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
5-36. (20 min.) Interpretation of Regression Results Multiple Choice: Cortez Company. a. (1) R 2 =.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 overhead = Estimated fixed cost + estimated variable cost per labor-hour x laborhours = 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 Labor-hours per unit Total variable cost per unit d. (4) $14 Contribution-margin per unit e. (4) Some other equation: = 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 = Price variable cost per unit = $96 $82 = $14 Total manufacturing cost = Fixed manufacturing cost + Variable manufacturing cost = $120,000 + $82 x units *CMA adapted The McGraw-Hill Companies, Inc., 2014 190 Fundamentals of Cost Accounting
5-40. (20 min.) Learning Curves: General Dynamics. a. The learning rate is 80% for every doubling of output: Unit Produced (X) Time Required to Produce the Xth Unit 1... 10,000 hours 2... 8,000 hours (= 10,000 hours x 0.80) 4... 6,400 hours (= 8,000 hours x 0.80) 8... 5,120 hours (= 6,400 hours x 0.80) 16... 4,096 hours (= 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)
5-54. (40 min.) Methods of Cost Analysis Account Analysis, Simple and Multiple Regression Using a Spreadsheet (Appendix A): Caiman Distribution Partners. a. Estimating equation based on account analysis: Cost Item Operating Cost Fixed Cost Variable Supplies... $ 350,000 $ 0 $ 350,000 Supervision... 215,000 150,000 65,000 Truck expense... 1,200,000 190,000 1,010,000 Building leases... 855,000 550,000 305,000 Utilities... 215,000 125,000 90,000 Warehouse labor... 860,000 140,000 720,000 Equipment leases... 760,000 600,000 160,000 Data processing equipment.. 945,000 945,000 0 Other... 850,000 400,000 450,000 Total... $6,250,000 $3,100,000 $3,150,000 Variable cost per case = Total variable cost/cases produced = $3,150,000 450,000 cases = $7.00 per case Estimated overhead = Fixed overhead + Variable overhead per case x Number of cases = $3,100,000 + $7.00 x Number of cases = $3,100,000 + $7.00 450,000 = $6,250,000
5-54. (continued) b. Cost estimate using high-low analysis. Operating Cases Costs Highest activity (month 12)... 432,000 $6,362,255 Lowest activity (month 1)... 345,000 $5,699,139 Variable cost = Cost at highest activity cost at lowest activity Highest activity lowest activity = $6,362,255 $5,699,139 432,000 345,000 = $7.62202 per case Fixed costs or Fixed costs = Total costs variable costs = $6,362,255 $7.62202 x 432,000 = $3,069,542 = $5,699,139 $7.62202 x 345,000 = $3,069,542 The cost equation then is: Overhead costs = $3,069,542 + ($7.622 per case x Cases). For 450,000 cases: Operating costs = $3,069,542 + $7.622 x 450,000 = $6,499,442
5-54. (continued) c. Simple regression based on cases: Regression Statistics Multiple R 0.98034501 R Square 0.96107634 Standard Error 39850.1391 Observations 12 Coefficients Intercept $3,411,468 Cases $6.70765 Operating costs = $3,411,468 + $6.70765 x cases = $3,411,468 + $6.70765 x 450,000 $3,411,468 + $3,018,443 = $6,429,911 d. Multiple regression based on cases and price level. Regression Statistics Multiple R 0.9905 R Square 0.9810 Adjusted R Square 0.9768 Standard Error 29315.827 Observations 12 Coefficients Intercept $3,176,995 Cases $4.41892 Price Index $8,857.73 Operating costs = $3,176,995 + $4.41892 x cases + $8,857.73 x Price level = $3,176,995 + $4.41892 x 450,000 + $8,857.73 x 145 $3,176,995 + $1,988,514 + $1,284,371 = $6,449,880
5-54. (continued) e. Recommendation. The multiple regression appears to improve the fit (compare the adjusted R 2 s), but the rationale for the inclusion of the price level as a cost driver is unclear. There is some possibility that the price index variable is a surrogate for some other factor correlated with the growth of the business. It might be better to adjust the cost figures to real (price-level adjusted) and forecast the adjusted operating costs. Once the simple regression is complete, and it is relatively easy to do, there is no reason for the high-low estimate, because it ignores most of the information. Therefore, some combination of the controller s account analysis estimate and the estimate from the simple regression seems most appropriate.
5-55. (40 min.) Learning Curves (Appendix 5B). a. The learning rate coefficient is -0.152004, so the table in Exhibit 5-21 would be as follows for a learning rate of 90%. (Note: rounding errors might lead to slight differences from the results reported below.) Labor Time Required to Produce the Xth Unit (i.e, the Last Cumulative Unit Single Unit Total Time Produced Produced) 1 in Labor Total Average Cost (X) (Y) Hours 2 Cost 3 Per Unit 4 1... 100.00 100 $5,000.00 $5,000.00 2... 90.00 190.00 9,500.00 4,750.00 3... 84.62 274.62 13,731.02 4,577.01 4... 81.00 355.62 17,781.02 4,445.25 5... 78.30 433.92 21,695.95 4,339.19 6... 76.16 510.08 25,503.87 4,250.64 7... 74.39 584.47 29,223.60 4,174.80 8... 72.90 657.37 32,868.59 4,108.57 1. Y = 100 (X -0.152004 ). 2. Cumulative time in labor hours for unit X is the sum of the time for each of the units up to and including unit X. 3. Total cost is equal to the cumulative time multiplied by $50. 4. Average cost is equal to the total cost divided by the number of units produced.
5-56. (40 min.) Learning Curves (Appendix 5B): Krylon Company. Krylon should produce the tool itself. With an 80 percent learning rate (learning rate coefficient of -0.3219), the average cost of a tool for 8 tools is $93,461, which is less than the supplier cost. This is shown in the table below, which is similar to Exhibit 5-21. (Note: rounding errors might lead to slight differences from the results reported below.) Unit Learning Total Average Total Produced Factor 1 Labor Labor Cost Materials Average (X) (Y) Cost 2 Per Unit 3 Cost Cost 1 1.00 $ 80,000.00 $80,000.00 $40,000.00 $120,000.00 2 0.80 144,001.25 72,000.62 40,000.00 112,000.62 3 0.70 200,171.28 66,723.76 40,000.00 106,723.76 4 0.64 251,373.27 62,843.32 40,000.00 102,843.32 5 0.60 299,026.41 59,805.28 40,000.00 99,805.28 6 0.56 343,963.31 57,327.22 40,000.00 97,327.22 7 0.53 386,724.81 55,246.40 40,000.00 95,246.40 8 0.51 427,687.20 53,460.90 40,000.00 93,460.90 1. This is the ratio of the labor time it takes to produce unit X relative to the first unit and is equal to( X -0.3219 ). 2. The total labor cost is $80,000 (the labor cost to produce the first unit) multiplied by the cumulative learning factor. 3. The average cost is the total cost divided by the number of units produced.