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Uitwerkingen COST ACCOUNTING

10-16 (10 min.) Estimating a cost function.


1.

Slope coefficient =
$5, 400 $4,000
= 10,000 6,000
$1, 400
= 4, 000 = $0.35 per machine-hour
Constant = Total cost (Slope coefficient Quantity of cost driver)
= $5,400 ($0.35 10,000) = $1,900
= $4,000 ($0.35 6,000) = $1,900

The cost function based on the two observations is


Maintenance costs = $1,900 + $0.35 Machine-hours
2.
The cost function in requirement 1 is an estimate of how costs behave within the
relevant range, not at cost levels outside the relevant range. If there are no months with zero
machine-hours represented in the maintenance account, data in that account cannot be used to
estimate the fixed costs at the zero machine-hours level. Rather, the constant component of
the cost function provides the best available starting point for a straight line that approximates
how a cost behaves within the relevant range.

10-20 (15 min.) Account analysis method.


1.

Variable costs:

Car wash labor

$260,000

Soap, cloth, and supplies


42,000
Water
38,000
Electric power to move conveyor belt
72,000
Total variable costs
$412,000
Fixed costs:
Depreciation
$ 64,000
Salaries
46,000
Total fixed costs
$110,000
Some costs are classified as variable because the total costs in these categories change in
proportion to the number of cars washed in Lorenzos operation. Some costs are classified as
fixed because the total costs in these categories do not vary with the number of cars washed.
If the conveyor belt moves regardless of the number of cars on it, the electricity costs to
power the conveyor belt would be a fixed cost.

2.

$412,000
Variable costs per car = 80,000 = $5.15 per car
Total costs estimated for 90,000 cars = $110,000 + ($5.15 90,000) = $573,500

10-24 (20 min.) Estimating a cost function, high-low method.


1.
See Solution Exhibit 10-24. There is a positive relationship between the number of
service reports (a cost driver) and the customer-service department costs. This relationship is
economically plausible.
2.

Number of
Customer-Service
Service Reports Department Costs
Highest observation of cost driver
455
$21,500
Lowest observation of cost driver
115
13,000
Difference
340
$ 8,500
Customer-service department costs = a + b (number of service reports)

Slope coefficient (b)


Constant (a)

$8,500
= 340 = $25 per service report
= $21,500 ($25 455) = $10,125
= $13,000 ($25 115) = $10,125

Customer-service = $10,125 + $25 (number of service reports)


department costs

3.

Other possible cost drivers of customer-service department costs are:


a.
Number of products replaced with a new product (and the dollar value of the new
products charged to the customer-service department).
b.
Number of products repaired and the time and cost of repairs.

SOLUTION EXHIBIT 10-24


Plot of Number of Service Reports versus Customer-Service Dept. Costs for Capitol Products

$25,000
$20,000
$15,000
Customer-Service Department Costs

$10,000
$5,000
$0
0

200 400 600

Number of Service Reports

10-31 (25 min.) High-low method.


1.

Machine-Hours
Highest observation of cost driver
Lowest observation of cost driver
Difference
Maintenance costs

Maintenance Costs

140,000
95,000
45,000

$280,000
190,000
$ 90,000

= a + b Machine-hours

$90,000
Slope coefficient (b) = 45,000 = $2 per machine-hour
Constant (a)

= $280,000 ($2 140,000)


= $280,000 $280,000 = $0

or

Constant (a)

= $190,000 ($2 95,000)


= $190,000 $190,000 = $0

Maintenance costs

= $2 Machine-hours

2.
SOLUTION EXHIBIT 10-31
Plot and High-Low Line of Maintenance Costs as a Function of Machine-Hours
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
90,000 100,000 110,000 120,000 130,000 140,000 150,000

Solution Exhibit 10-31 presents the high-low line.

Economic plausibility. The cost function shows a positive economically plausible relationship
between machine-hours and maintenance costs. There is a clear-cut engineering relationship
of higher machine-hours and maintenance costs.
Goodness of fit. The high-low line appears to fit the data well. The vertical differences
between the actual and predicted costs appear to be quite small.
Slope of high-low line. The slope of the line appears to be reasonably steep indicating that, on
average, maintenance costs in a quarter vary with machine-hours used.
3.
Using the cost function estimated in 1, predicted maintenance costs would be $2
100,000 = $200,000.
Howard should budget $200,000 in quarter 13 because the relationship between
machine-hours and maintenance costs in Solution 10-31 is economically plausible, has an
excellent goodness of fit, and indicates that an increase in machine-hours in a quarter causes
maintenance costs to increase in the quarter.

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