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

Resource Consulting is studying the costs of several clients, and has found graphs of cost behaviour patterns would appear as follows: 1. A straight line that gradually slopes upward to the right 2. A curvilinear line that gradually slopes upward to the right 3. A straight line that is parallel to the graph's horizontal axis 4. A straight line that gradually slopes downward to the right 5. A curvilinear line that gradually slopes downward to the right 6. A straight line that gradually slopes upward to the right and then, at a specific point, flattens out to run parallel to the horizontal axis 7. A series of straight lines that appear to resemble a set of steps 8. A straight line that runs parallel to the graph's horizontal axis and then, at a specific point, drops to a lower level Unless told otherwise, assume that the horizontal axis represents total activity and the vertical axis represents total cost. Required: For items A-F below, indicate the number of the graph that best represents the cost behaviour pattern described. Note: Graphs can be used more than once, and not all graphs need be used. 15,000 to 29,999 units \ 5 per unit 30,000 to 44,999 units \ 6 per unit 45,000 to 59,999 units \ 7 per unit

Montgomery Company has a variable selling cost. If sales volume increases, how will the total variable cost and the variable cost per unit behave? Total Variable Cost 1 Increase Increase 2 Increase Remain constant 3 Increase Decrease 4 Remain constant Decrease 5 Decrease Increase

Which of the following costs changes in total in direct proportion to a change in the activity level?

Walnut Corporation operates a small medical lab in Mississauga, one 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, say, 15%, will the lab's total operating costs increase by 15%? Explain. A. No. The lab has a mixture of both variable and fixed costs. Variable costs (such as supplies) will increase, directly paralleling the increase in clients. The salaries of the technicians and office manager are step-fixed in nature, meaning that a 15% hike in client load will likely do nothing to these expenditures. A possibility exists, though, that an increase in patient load could create the need for an added technician. B. Fixed costs typically do not change when activity changes. However, the opening of a new branch will create the need for added technicians and presumably another office manager, thus causing costs to rise. In addition, facility rental charges will increase and there will be an added cost if the firm leases and/or depreciates equipment. Note: This answer assumes that the original facility will continue with existing personnel and not implement a job-sharing arrangement through a cutback in operating hours. B. Walnut is considering opening an additional lab in a new medical building in Milton. What will likely happen to the lab's level of fixed cost incurrence? Why? C. Possible methods include account classification, visual fit, high-low, and least-squares regression.

Straight-line depreciation is a typical example of a:

The following data relate to the Lyle Company for May and August of the current year: May August Maintenance hours 25,000 29.000 Maintenance cost \ 1.175,000 \ 1,247,000 May and August were the lowest and highest activity levels, and Lyle uses the high-low method to analyze cost behaviour. Which of the following statements is true?

Yang Manufacturing, which uses the high-low method, makes a product called Yin. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below. Type A Type B Type C Total 5,000 units \ 4 \ 9 \ 4 \ 17 7.500 units \ 4 \ 6 \ 3 \ 13 The cost types shown above are identified by behaviour as: Type A 1 Fixed 2 Fixcd 3 Variable 4 Variable 5 Semivariable Type B Variable Semivariable Scmivariable Fixed Variable Type C Semivariable Variable Fixed Semivariable Fixed

Costs that remain the same over a wide range of activity, but jump to a different amount for activity levels outside that range, are termed as:

The non-statistical method of cost estimation that calls for the creation of a scatter diagram is the:

A high R²measure in regression analysis is preferred because:

A staff assistant at Cornwall Corporation recently determined that the first four units completed in a new manufacturing process took 800 hours to complete, or an average of 200 hours per unit. The assistant also found that when the cumulative output produced doubles, the average labour time declines by 20%. On the basis of this information, how many total hours would Cornwall use if it produces 16 units?

The following data were taken from the accounting records of Guild Corporation: \ Machine Manufacturing August 46,000 \ 889,000 September 60,000 1,130,000 October 78,000 1,300,000 November 62,000 1,000,000 October's costs consisted of machine supplies ($190,000), property taxes ($30,000), and plant maintenance ($1,080,000). These costs exhibit the following respective behaviour: variable, fixed, and semi-variable. Required: A. Determine the machine supplies and property taxes for August. Round all calculations to two decimal places. B. By using the high-low method, analyze Guild's plant maintenance cost and calculate the monthly fixed portion and the variable cost per machine hour. C. Assume that present cost behaviour patterns continue into future months. Estimate the total amount of manufacturing overhead Guild can expect in December if 56,000 machine hours are worked.

Distinguish between least-squares regression and multiple regression as cost estimation methods.

Yang Manufacturing, which uses the high-low method, makes a product called Yin. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below. Type A Type B Type C Total 5,000 units \ 4 \ 9 \ 4 \ 17 7.500 units \ 4 \ 6 \ 3 \ 13 If Yang produces 10,000 units, the total cost would be:

Van Dijk Incorporated recently produced and sold 200,000 units. Fixed costs at this level of activity amounted to $60,000; variable costs were $100,000. How much total cost would the company anticipate if during the next period it produced and sold 202,000 units?

Charger Corporation has three costs: A, which is variable; B, which is fixed; and C, which is semi-variable. 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.

SouthlakeMedical Clinic offers a number of specialized medical services. A review of data for the year just ended revealed variable costs of $40 per patient day, annual fixed costs of $510,000, and semi-variable costs, which displayed the following behaviour at the "peak" and "valley" levels of activity. March (2,500 patient days): $258,400 July (3,000 patient days): $278,900 Required: A. Calculate the total cost for an upcoming month (3,200 patient days) if current cost behaviour patterns continue. Southlake uses the high-low method to analyze cost behaviour. B. There is a high probability that Southlake'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 3,200 patient days be employed to estimate the costs for, say, 5,200 patient days? Why or why not?

A review of Parry Corporation's accounting records found that at a volume of 90,000 units, the variable and fixed cost per unit amounted to $8 and $4, respectively. On the basis of this information, what amount of total cost would Parry anticipate at a volume of 85,000 units?

Sugarsweet Confections Inc. produces one of the best brands of all natural jam in Ontario. The following information was obtained through an analysis of the accounting records: 1. Raw materials and packaging (strawberries and sugar) cost the company $5.00 per jar produced. 2. Compensation of production employees is $6.00 per jar produced. 3. Supervisory salaries total $33,000 per month. 4. The company incurs utility costs of $8,000 per month plus $0.50 per jar produced. 5. Insurance and property taxes average $7,000 per month. Required: A. Classify each cost as variable, fixed, or semi-variable. B. Write a formula to express the behaviour of the firm's production costs. (Use the form Y = a + bX, where X denotes the quantity of jam produced.)

Lincoln Incorporated observed that when 30,000 units were sold, a particular cost amounted to $90,000, or $3.00 per unit. When the sales volume increased by 20%, the cost also increased to $108,000(i.e., $3.00 per unit). The cost that Lincoln is studying can best be described as a: