Exam 6: Activity Analysis, Cost Behavior, and Cost Estimation

Duke Corporation uses least-squares regression to analyze a variety of operating costs. A staff assistant determined that monthly machine hours (MH) have a strong cause-and-effect relationship with total maintenance costs, and generated the following statistics: Intercept: $170,000 b coefficient: $3.80 Total machine hours for the year: 36,500 Required: A. Construct the company's regression equation. B. Based on your answer in part "A," identify Duke's dependent variable and independent variable. C. What does the b coefficient really represent? D. Predict the company's maintenance cost in a month when 3,200 machine hours are worked.

T.L. Franklin Corporation has three costs: A, which is variable; B, which is fixed; and C, which is semivariable. The company uses the high-low method and extracted the following data from its accounting records: · At 180,000 hours of activity, Cost A totaled $2,610,000. · At 140,000 hours, the low point during the period, Cost C totaled $1,498,000; at 200,000 hours, the high point, Cost C's fixed portion amounted to $1.75 per hour. · At 160,000 hours of activity, the sum of Costs A, B, and C amounted to $8,162,000. Required: A. Compute the variable portion (total) of Cost C at 140,000 hours of activity. B. Compute Cost C (total) at 160,000 hours of activity. C. Compute Cost B (total) at 160,000 hours of activity.

Define the term "relevant range" and explain its importance in understanding cost behavior.

Trane Medical Clinic offers a number of specialized medical services. A review of data for the year just ended revealed variable costs of $32 per patient day; annual fixed costs of $480,000, which are incurred evenly throughout the year; and semivariable costs that displayed the following behavior at the "peak" and "valley" of activity: January (2,400 patient days): $258,400 August (2,900 patient days): $278,900 Required: A. Calculate the total cost for an upcoming month (2,800 patient days) if current cost behavior patterns continue. Trane uses the high-low method to analyze cost behavior. B. There is a high probability that Trane's volume will increase in forthcoming months as patients take advantage of new scientific advances. Can the data and methodology used in part (a) for predicting the costs of 2,800 patient days be employed to estimate the costs for, say, 3,800 patient days? Why or why not?

What type of cost exhibits the behavior shown below?

Bogata Enterprises has determined that three variables play a key role in determining company revenues. To arrive at an objective forecast of revenues for the next accounting period, Bogata should use:

Organize, Inc. has only variable costs and fixed costs. A review of the company's records disclosed that when 200,000 units were produced, fixed manufacturing costs amounted to $800,000 and the cost per unit manufactured totaled $11. On the basis of this information, how much cost would the firm anticipate at an activity level of 205,000 units?

Shortly after being hired as an analyst with Hidden Cove Rentals in Coastal North Carolina, Matt Loman was asked to prepare a report that focused on the company's order processing costs-a cost driven largely by the number of rental invoices written. Matt knew that he could use several different tools to analyze cost behavior, including scatter diagrams, least-squares regression, and the high-low method. In addition, he knew that he could present the results of his analysis in the form of algebraic equations. Those equations follow. Scatter diagram: OP = $56,000 + $6.80RI Least-squares regression: OP = $59,000 + $6.75RI High-low method: OP = $53,500 + $7.25RI where OP = total order processing costs and RI = number of rental invoices written Matt had analyzed data over the past 12 months and built equations based on these data, purposely including the slowest month of the year and the busiest month so that things would "tend to even out." He observed that February was especially slow because of a paralyzing ice storm, one that forced the company to close for four days. Required: A. Will scatter diagrams, least-squares regression, and the high-low method normally result in the same equation? Why? B. Assuming the use of least-squares regression, explain what the $59,000 and $6.75 figures represent. C. Assuming the use of a scatter diagram, predict the order processing cost of an upcoming month when Hidden Cove expects to write 2,500 rental invoices. D. Did Matt err in constructing the equations on data of the past 12 months? Briefly discuss. If "yes," determine which of the three tools is likely to be affected the most and explain why.

Cheyenne Corporation operates a small medical lab in Wyoming that conducts minor medical procedures (including blood tests and x-rays) for a number of doctors. The lab consumes various medical supplies and is staffed by two technicians, both of whom are paid a monthly salary. In addition, there is an on-site office manager who is also paid by the month. Required: A. If the lab's patient count increases by 15%, will the lab's total operating costs increase by 15%? Explain. B. Cheyenne is considering opening an additional lab in a new suburban medical building. What will likely happen to the lab's level of fixed cost incurrence? Why? C. What analysis methods would be available to the office manager and/or Cheyenne management if a close look at the lab's cost behavior is desired?

An example of a discretionary cost is the cost of research and development.

Rushmont, Inc. operates a small package delivery service in the Nashville suburbs. If the company uses a regression equation to forecast total operating costs, the coefficient of the equation's independent variable would correspond to the:

Rolling Hills Bistro produces one of the best sausage products in Tennessee. The company's controller compiled the following information by analyzing the accounting records: 1. Meat costs the company $3.25 per pound of sausage produced. 2. Compensation of production employees is $2.25 per pound of sausage produced. 3. Supervisory salaries total $23,000 per month. 4. The company incurs utility costs of $9,000 per month plus $0.35 per pound of sausage produced. 5. Insurance and property taxes average $6,400 per month. Required: A. Classify each cost as variable, fixed, or semivariable. B. Write a formula to express the behavior of the firm's production costs. (Use the form Y = a + bX, where X denotes the quantity of sausage produced.)

Use the following information to answer the following Questions Barkoff Enterprises, which uses the high-low method to analyze cost behavior, has determined that machine hours best explain the company's utilities cost. The company's relevant range of activity varies from a low of 600 machine hours to a high of 1,100 machine hours, with the following data being available for the first six months of the year: - The variable utilities cost per machine hour for Barkoff is:

Which of the following is (are) example(s) of a mixed cost? I. A building that is used for both manufacturing and sales activities. II. An employee's compensation, which consists of a flat salary plus a commission. III. Depreciation that relates to five different machines. IV. Maintenance cost that must be split between sales and administrative offices.

Each of Boggart's production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing activity. Thus, if the company has 50,000 hours of manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed; for 125,000 hours, three managers are needed; and so forth. Boggart's salary cost can best be described as a:

Use the following information to answer the following QuestionsSwan, Inc. uses the high-low method to analyze cost behavior. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $30.40. -On the basis of this information, the fixed cost for Swan was:

Paige Corporation observed that when 25,000 units were sold, a particular cost amounted to $75,000, or $3.00 per unit. When volume increased by 10%, the cost totaled $82,500 (i.e., $3.00 per unit). The cost that Paige is studying can best be described as a:

When graphed, a typical fixed cost appears as:

Townson Company is making plans for the introduction of a new product, which has a target selling price of $7 per unit. The following estimates of manufacturing costs have been derived for 6 million units, to be produced during the first year: Direct material: $6,000,000 Direct labor: $2,100,000 (at $14 per hour) Overhead costs have not yet been estimated, but monthly data on total production and overhead for the past 12 months have been analyzed by using least-squares regression. The major overhead cost driver is direct labor hours, with the following results: Computed values: Fixed overhead cost: $3,200,000 Coefficient of independent variable: $2.25 Required: A. Prepare the company's regression equation (Y = a + bX) to estimate overhead. B. Calculate the predicted overhead cost at an activity level of 6,300,000 units. C. What is Townson's dependent variable in this case?

Corrine Corporation, which uses least-squares regression analysis, has derived the following regression equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if the primary cost driver is machine hours?