Chapter 5 Answers

lOMoARcPSD|7242917
SM-Ch05-5e - Solutions Manual
Cost Accounting (Silliman University)
StuDocu is not sponsored or endorsed by any college or university

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)
lOMoARcPSD|7242917
5
Cost Estimation
Solutions to Review Questions
5-1.
Common methods of cost estimation are engineering analysis, account analysis, and
statistical analysis of historical data.
5-2.
Engineering estimates are based on design specifications and industry and firm cost
standards.
5-3.
Engineering estimates are particularly helpful when:
 Attempting to compare company operations with standards;
 Trying to estimate costs for projects that have not been undertaken in the past
(e.g., new construction, major special orders such as defense items);
 Considering alternatives to present operations, such as assembly line
reorganization and similar changes, where it would be too costly to carry out the
change and then see if it was cost-effective.
5-4.
The biggest problem likely to be encountered from the indiscriminate use of regression
methods is that the model may not have any logical foundation. This may result in a
model that appears sound on a statistical basis, but with no logical relationship between
Y and X's, the model may not continue to provide good predictions. A number of
spurious correlation and regression studies have been presented in the literature. For
example, a simple run of correlations between average education levels in the U.S. and
U.S. inflation rates might lead one to conclude that education causes inflation.
©The McGraw-Hill Companies, Inc., 2017

Solutions Manual, Chapter 5 191

lOMoARcPSD|7242917
5-5.
The longer the data series used in the analysis, the easier it is to see a trend in the data
when using the scattergraph method. When using any method, the longer the data
series, the greater the likelihood of having the widest possible range of observations.
When using statistical methods, the more observations, the smaller the standard
deviations and the tighter the resulting estimates. On the other hand, the longer the data
series, the more likely that operating conditions, technology, prices, and costs have
changed. Thus, the older data may not be very representative of the operations
expected over the period for which the estimate is made.
5-6.
Simple regression assumes a single independent variable (e.g., cost driver) and
multiple regression assumes two or more independent variables.
5-7.
Adjusted R2 considers the number of independent variables used in the estimation and
―adjusts‖ the R2 to reflect the use of additional variables.
5-8.
Accurate cost estimates improve decision-making. Better decisions lead to higher
company value.
5-9.
Three common implementation problems with regression analysis are nonlinear
relations between or among the variables, the effect of nonrepresentative observations
(outliers) and the effect of spurious relations.
5-10.
It is important to incorporate learning into cost estimates, because doing so improves
the accuracy of the cost estimates, which leads to better decisions.
5-11.
Common data problems when estimating costs include missing data, outliers, allocated
and discretionary costs, inflation, and mismatched time periods.

192 Fundamentals of Cost Accounting

lOMoARcPSD|7242917
Solutions to Critical Analysis and Discussion Questions
5-12.
a. Direct labor would be fixed if a union contract limited the company's ability to lay off
unneeded personnel or if management were contemplating a change in facilities but
maintaining the same labor force.
b. Equipment depreciation would be a variable cost if computed on a unit-of-production
basis.
c. Utilities are variable above the minimum, but if the company's usage falls to the
minimum or below, the costs would be fixed.
d. Supervisory salaries normally increase in steps. If the activity range is narrow, the
costs are fixed; but if the range is wide enough so that several "steps" would fall within
the range, then the costs would appear to be variable.
e. A certain (fixed) level of spoilage may be a fact of life in some operations. An
example might be certain waste that occurs in setting up machines.
5-13.
Account analysis incorporates the judgment of the executive where experience would
be quite helpful. As a result it may include factors that are not easily captured in
statistical models. The best overall cost estimate may be derived by considering both
account analysis results and statistical results.
5-14.
Data in the historical accounting records should only be used insofar as they are likely
to continue in the future. In periods of price instability or technological innovation, use of
the historical data without adjustment is likely to result in incorrect estimates. A better
alternative is to use the costs that are expected to be incurred during the period for
which the cost estimate is prepared.
5-15.
One may:
 Adjust the data to present all costs in some common dollar measure;
 Use activity measures that are expressed in dollars that move with the price
change effects in the cost to be estimated,
 Use a multiple regression approach with a suitable price index as one of the
predictor variables.


lOMoARcPSD|7242917
5-16.
The scattergraph can be useful in checking for outliers in the data—the regression
model will not pick this up. Also, the scattergraph may point out changes in the data
series that need to be considered when constructing the regression database.
5-17.
It is possible for empirical data to show a negative intercept even though fixed costs
cannot be negative. It may be that the slope of the cost curve is particularly steep over
the values used in the estimation process. It may be that the operations are relatively far
away from the intercept. This would be particularly likely if the company were operating
close to capacity. Negative intercepts usually mean that there is some error in the
specification of the cost estimate. If the company is operating close to capacity, for
example, then the assumption of a linear cost function may be in error—or may only be
a reasonable approximation in the range of activity close to capacity.
5-18.
How well defined is the model? That is, does the one independent variable explain
variation in the dependent variable? Are there any outliers? Is the relation linear?
5-19.
Answers will vary. Some important factors, depending on the event, include
temperature, winning percentage, income, target audience (teenagers versus retirees,
for example), day of the week, time of day, venue capacity, and so on.
5-20.
This was probably unethical. Of course, it might be that there are legitimate reasons for
dropping the observations. They might represent very unusual conditions (a strike, bad
weather) that would not be expected to occur.
5-21.
You should probably tell the executive about the error. If correcting the errors does not
change the result (perhaps there are offsetting results or they are not significant), it
might matter less when you tell the executive, but he or she needs the correct
information to make good decisions.
5-22.
You should report your concerns. At a minimum, the manager responsible for recording
costs should be told.
5-23.
Answers will vary. (1) Income tax preparers become more proficient as they learn; (2)
graders on an exam can process an individual exam paper in less time as they

lOMoARcPSD|7242917
complete more; and, (3) a travel agent will be able to book a flight in less time the more
reservation requests they handle.
5-24.
It is possible that material costs could be affected by learning curves. If material is
difficult to work with making it subject to breakage or spoilage, employees will develop
skills in working with it resulting in less scrap.
5-25.
By using standardized techniques, McDonalds is able to transmit information to its
employees effectively so they learn quickly.
5-26.
Data from previous products, which are likely to be similar, provide information about
how learning might affect the cost of the new product. The disadvantage is that the
products are different and these differences might lead to learning rates that are
different and, as a result, cost estimates that are not realistic.
5-27.
It is certainly possible that for this example a statistical analysis is best. However, it
depends on the goal of the analysis. Good data might not be available. For example,
the new outlet might be located in an area in which the company has no operations. In
addition, historical data might not be representative of the future. It would be best to use
a combination of methods and compare the estimates.


lOMoARcPSD|7242917
Solutions to Exercises
5-28. (15 min.) Methods of Estimating Costs―Engineering Estimates: Custom

Homebuilders.
Administrative costs .......................................... $20,000
Building costs – per square foot (moderate) ....(3,000 x $150 =) 450,000
Appliances (moderate) ...................................... 25,000
Utilities costs (if required) .................................. 40,000
Estimated cost ............................................. $535,000
5-29. (15 min.) Methods of Estimating Costs – Engineering Estimates: Twain

Services.
Guru cost (per hour) .......................................... (10 x $900 =) $9,000
Mentor cost (per hour) ....................................... (125 x $375 =) 46,875
Helper cost (per hour) ........................................ (150 x $100 =) 15,000
Out-of-pocket cost ............................................. 25,000
Estimated consultant and miscellaneous cost ... $95,875
G&A costs.......................................................... (60% x $95,875 =) 57,525
Estimated costs $153,400


lOMoARcPSD|7242917
5-30. (15 min.) Methods of Estimating Costs—Account Analysis: Portland

Products.
a. Cost estimate with new costs and volume.
This Year’s
Cost
Cost (at last
Last Year’s Change year’s Growth in This Year’s
Cost (1 + Cost volume) Volume Cost
Increase) (1) x (2) =
Cost Item (1) (2) (3) (4) (3) x (4) = (5)
Direct 120,000
$315,000  120% = $378,000  = $302,400
materials 150,000
Direct 120,000
262,500  104% = 273,000  = 218,400
labor .................. 150,000
Variable 120,000
231,000  100% = 231,000  = 184,800
overhead ........... 150,000
Fixed
270,000  110% = 297,000 (fixed) = 297,000
Overhead ..........
Total
$1,078,500
costs .................. $1,002,600
b. Costs per unit:

Last year: $10.27 (= $1,078,500 ÷ 105,000)
This year: $11.61 (= $1,393,000 ÷ 120,000)


lOMoARcPSD|7242917
5-31. (15 min.) Methods of Estimating Costs—Account Analysis: Hal’s

Accounting Services.
a. Cost estimate with new costs and volume.
Year 2 Cost
Cost (at last Growth
Year 1 Change year’s in Year 2 Cost
Cost (1 + Cost volume) Volume (3) x (4) = (5)
Cost Item Increase) (1) x (2) =
(1) (2) (3) (4)
Direct 20,000
$40,000  110% = $44,000  = $35,200
materials ... 25,000
Direct 20,000
2,900,000  105% = 3,045,000  = 2,436,000
labor .......... 25,000
Variable 20,000
600,000a  100% = 600,000  = 480,000
overhead ... 25,000
Fixed
700,000  105% = 735,000 (fixed) = 735,000
Overhead ..
Total
costs .......... $4,240,000 $3,686,200
a $600,000 = $1,300,000 total overhead – $700,000 fixed overhead.
b. Costs per unit:
Last year: $169.60 (= $4,240,000 ÷ 25,000)

This year: $184.31 (= $3,686,200 ÷ 20,000)


lOMoARcPSD|7242917
5-32. (10 min.) Methods of Estimating Costs—High-Low, Ethical Issues: Oak

Island Amusements Center.
a.
Cost at highest activity – cost at lowest activity
Variable cost =
Highest activity – lowest activity
$3,750,000 – $2,925,000
= = $1.50
2,375,000 – 1,825,000
Fixed = Total costs – variable costs

costs
= $3,750,000 – ($1.50 x 2,375,000)
= $187,500
or
Fixed = $2,925,000 – ($1.50 x 1,825,000)

costs
= $187,500
b.
Maintenance costs = $187,500 + ($1.50 x 2,600,000)

= $187,500 + $3,900,000
= $4,087,500
Note that 2,600,000 visitors is outside the range of the cost observations, so this
estimate may not be reliable.
c. Whether this is ethical depends on the reason for dropping the observation. If you
are convinced that the higher number of visitors represents such unusual activity
that this should be treated as an outlier, then you should eliminate the observation.
If, however, the reason for dropping the observation is that someone does not like
the result, then you should not change the analysis.


lOMoARcPSD|7242917
5-33. (25 min.) Methods of Estimating Costs—High-Low: Adriana Corporation.

a. High-low estimate
Machine- Overhead
Hours Costs
Highest activity (month 12) ................. 8,020 $564,210
Lowest activity (month 11) .................. 6,490 $503,775

Variable cost =
$564,210 – $503,775
= = $39.50
8,020 – 6,490

costs
= $564,210 – ($39.50 x 8,020)
= $247,420
or
Fixed = $503,775 – ($39.50 x 6,490)

costs
= $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


lOMoARcPSD|7242917
5-34. (15 min.) Methods of Estimating Costs—Scattergraph: Adriana Corporation.


lOMoARcPSD|7242917
5-35. (15 min.) Methods of Estimating Costs—Scattergraph: Adriana

Corporation.


lOMoARcPSD|7242917
5-36. (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
5-37. (10 min.) Methods of Estimating Costs—Simple Regression: Adriana

Corporation.
Simple regression estimate (note that the estimated 3,000 machine hours is outside the
relevant range):
Overhead = $217,610 + $88.61 x Labor-hours

= $217,610 + $88.61 x 3,000 Labor-hours
= $217,610 + $265,830
= $483,440
5-38. (20 min.) Methods of Estimating Costs—Multiple Regression: Adriana

Corporation.
Multiple regression estimate (note that the estimated 9,000 machine hours and 3,000
direct labor hours are outside the relevant range):
Overhead = $124,570 + $31.93 x Labor-hours + $41.10 x Machine-hours

= $124,570 + $31.93 x 3,000 Labor-hours + $41.10 x 9,000 Machine-hours
= $124,570 + $95,790 + $369,900
= $590,260


lOMoARcPSD|7242917
5-39. (40 min.) Methods of Estimating Costs—High-Low: Davis Stores.

Revenues Costs
Highest activity (Store 107) ................ $6,894 $5,029
Lowest activity (Store 108) ................. $1,779 $2,374

Variable cost =
$5,029 – $2,374
= = 51.9%
$6,894 – $1,779

costs
= $5,029 – ($6,894 x 0.519)
= $1,451
or
Fixed = $2,374 – ($1,779 x 0.519)

costs
= $1,451

Store costs = $1,451 + (51.9% x Revenue)
b. For a store with revenues of $2.5 million, estimated costs would be:
Store costs = $1,451 + ($2,500 x 0.519)

= $1,451 + $1,297.5
= $2,748.5
c. For a store with revenues of $10 million, estimated costs would be:
Store costs = $1,451 + ($10,000 x 0.519)

= $1,451 + $5,190
= $6,641


lOMoARcPSD|7242917
5-39 (continued)
d. We would be less confident of the estimate in part c. Revenues of $10 million is much
higher than any existing store (outside the relevant range), so we cannot be sure that
the estimates of fixed and variable costs will be representative.
5-40. (15 min.) Methods of Estimating Costs—Scattergraph: Davis Stores.


lOMoARcPSD|7242917
5-41. (10 min.) Methods of Estimating Costs—Simple Regression: Davis Stores.

a. Simple regression estimate (note that the estimated $2.5 million is inside the relevant
range):
Store = $1,604.4 + Revenue x 0.536

cost
= $1,604.4 + $2,500 x 0.536
= $1,604.4 + $1,340.0
= $2,944.4
b. 69.8% of the variation in store costs is explained by the independent variable, store
revenues as reported by the R2.


lOMoARcPSD|7242917
5-42. (20 min.) Interpretation of Regression Results—Multiple Choice: Cortez

Company.
a. (1) R2 = .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 = Estimated fixed cost + estimated variable cost per labor-hour x labor-
overhead hours
= 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 = Total direct labor costs ÷ Direct labor wage rate
= $640,000 ÷ $16 per hour
= 40,000 direct labor-hours
Labor-hours per unit = Total labor hours ÷ Total units

= 40,000 ÷ 20,000
= 2 labor-hours per unit
Total variable cost per = Direct materials + Direct labor + Variable overhead
unit
= ($800,000 ÷ 20,000) + ($640,000 ÷ 20,000)
+ ($5 x 2 labor-hours)
= $40 + $32 + ($5 x 2 labor-hours)
= $82
d. (4) $14
Contribution-margin per unit = Price – variable cost per unit
= $96 – $82
= $14
e. (4) Some other equation:
Total manufacturing cost = Fixed manufacturing cost + Variable manufacturing cost

= $120,000 + $82 x units


lOMoARcPSD|7242917
*CMA adapted
5-43. (15 min.) Interpretation of Regression Results: Brodie Company.

This problem is frequently encountered when applying analytical techniques to certain
costs. Quite often the advertising expenditures result in sales being generated in the
following month or so. In addition, many companies increase their advertising when
sales are declining and cut back on advertising when there is capacity business. A
better model might be developed by relating this month's sales to last month's
advertising.
Similar problems exist for repair and maintenance costs since machines are usually
given routine repairs and maintenance during slow periods.
An inverse relationship often exists between salespersons' travel expenses and sales
because the salesperson spends more time traveling when the sales are more difficult
to make.
5-44. (15 min.) Interpretation of Regression Results: Ross Enterprises.

costs. Quite often maintenance is done during periods of relatively low activity. A better
model might be developed by including variables for slow months or lagged activity.
Similar problems exist for advertising costs since advertising usually leads sales.
An inverse relationship often exists between salespersons' travel expenses and sales
because the salesperson spends more time traveling when the sales are more difficult
to make.


lOMoARcPSD|7242917
5-45. (30 min.) Interpretation of Regression Results—Simple Regression.

a. Estimation equation for surgical unit costs:
Surgical unit costs = Fixed costs + Variable cost based on number of procedures
= $2,300,000 + $835 x Procedures
b.
Surgical unit costs = $2,300,000 + $835 x Procedures

= $2,300,000 + $835 x 1,500
= $2,300,000 + $1,252,500
= $3,552,500
c.
The R2 for the equation is only 19.8%, which is very low for this type of regression. The
director might want to consider other methods. One possible problem is that there is so
much variation in the nature of procedures, that the estimate of an average procedure
cost is not very precise.


lOMoARcPSD|7242917
5-46. (20 min.) Learning Curves: General Dynamics.

a. The learning rate is 80% for every doubling of output:
Unit Time Required to

Produced (X) 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)
5-47. (20 min.) Learning Curves: Whee, Cheatham, and Howe.

a. The learning rate is 90% for every doubling of output:
Financial Time Required to

Statements Proofread the Xth
Proofread (X) Financial Statement
1 ................ 2.0000 hours
2 ................. 1.8000 hours (= 2.0000 hours x 0.90)
4 ................. 1.6200 hours (= 1.8000 hours x 0.90)
8 ................. 1.4580 hours (= 1.6200 hours x 0.90)
16 ............... 1.3122 hours (= 1.4580 hours x 0.90)
b. Cost of proofreading the first report = $40 (= 2.0 hours x $20 per hour)
Cost of proofreading the 16th report = $26.24 (= 1.3122 hours x $20 per hour)
= 65.60% of the first unit cost (= $26.24 ÷ $40)


lOMoARcPSD|7242917
5-48. (20 min.) Learning Curves (Appendix B).

–0.3219
The formula for the time to produce unit z is Y =100 z .
Substitute 5, 6, 7 for z, to obtain:
Formula for Time to

Unit (z) Produce Unit z Time to Produce Unit z
–0.3219
5 ................ Y =100 × (5) 59.57
–0.3219
6 ................. Y =100 × (6) 56.17
–0.3219
7 ................. Y =100 × (7) 53.45
Also, note that the time to produce the third unit is 70.21. Doubling production, the
time to produce the sixth unit is 56.17 (= 70.21 x 0.80).
The remaining numbers can be verified easily. The cumulative time for the 5th unit is
simply the cumulative time for the 4th unit (314.21) plus 59.56 (the time to produce
the 5th unit), or 373.77 hours, and so on. The total cost is the cumulative time
multiplied by $50 per hour. For example, the total cost for five units is $18,688.50
(=$50 x 373.77 hours) and so on. Finally, the average cost is the total cost divided
by the number of units produced. So the average cost of producing five units is
$3,737.70 (= $18,688.50 ÷ 5 units) and so on.


lOMoARcPSD|7242917
Solutions to Problems
5-49. (20 min.) Account Analysis.

a.
Activity Total Cost ÷ Volume = Unit Cost
Process paychecks ($180,100 ÷ 15,945 checks) = $11.30
Maintain customer accounts ($109,600 ÷ 3,650 accounts) = 30.03
Perform special analyses ($120,000 ÷ 30 analyses) = 4,000.00
b. The average fixed costs for a month are $34,391 (= $550,250 ÷ 16 months).
For 1,000 checks, 200 accounts, and 3 analyses, the estimated cost is:
$63,697 = $34,391 + (1,000 x $11.30) + (200 x $30.03) + (3 x $4,000).
5-50. Regressions from Published Data.

a. Answers will vary. The degree to which estimates based on the first twelve months
of data are ―close‖ will depend, in part, on the variability of the data, seasonal
(monthly) patterns, and so on.
b. Answers will vary. Factors to consider are both statistical (goodness-of-fit, for
example) and institutional (the industry chosen, for example).
5-51. Regressions from Published Data.

a. Answers will vary. This is an estimate of the variable cost per dollar of sales
revenue.
b. Answers will vary.
c. Answers will vary. The results from the analysis in part (b) are based on more
observations and, therefore, might seem more ―precise.‖ The difficulty, however, is
that this estimate likely contains observations from periods that are quite different
from more recent periods. The cost analyst faces the trade-off of more information
for less relevant information.


lOMoARcPSD|7242917
5-52. (30 min.) High-Low Method, Scattergraph: Cubicle Solutions.

Support Call Center

Calls Cost
Highest activity (month 5) ......................... 61 $720
Lowest activity (month 1).......................... 37 528

Variable cost =
$720 – $528
= = $8.00 per support call
61 – 37
Fixed costs = Total costs – variable costs

= $720 – $8.00 x 61
= $232
or
Fixed costs = $528 – $8.00 x 37

= $232
The cost equation is:

Overhead costs = $232 + ($8.00 per call x Support calls)


lOMoARcPSD|7242917
5-52 (continued)
b. Scattergraph
$750
$700
$650
Cost
$600
$550
$500
30 35 40 45 50 55 60 65
Calls
c. The scattergraph shows a reasonably linear pattern, but the high point would lie
below a straight line that best fits the data. In fact, because the data suggest a
curvilinear pattern, while the high-low method assumes a linear relation between
cost and activity, you would probably not be confident in your estimate in part a.


lOMoARcPSD|7242917
5-53. (30 min.) High-Low Method, Scattergraph: Academy Products.

Machine Overhead
Hours Costs
Highest activity (month 5) ......................... 1,035,000 $3,700,000
Lowest activity (month 1).......................... 630,000 660,000

Variable cost =
$3,700,000 – $660,000
= = $7.5062 per machine-hour (rounded)
1,035,000 – 630,000
Fixed costs = Total costs – variable costs

= $3,700,000 – $7.5062 x 1,035,000
= – $4,068,889*
or
Fixed costs = $660,000 – $7.5062 x 630,000

= – $4,068,889*
Note that the estimated fixed cost is negative.

*Your answer for fixed costs might differ if you use a rounded amount for the
machine-hour rate.


lOMoARcPSD|7242917
5-53 (continued)
b. Scattergraph
$4,100,000
$3,600,000
$3,100,000
Overhead Costs
$2,600,000
$2,100,000
$1,600,000
$1,100,000
$600,000
600,000 650,000 700,000 750,000 800,000 850,000 900,000 950,000 1,000,000 1,050,000 1,100,000
Machine Hours
c. The scattergraph shows a pattern that is convex (costs are increasing faster than
machine hours), suggesting that a nonlinear cost function might provide a better
estimate. This helps explain the negative estimate for fixed costs in requirement a.


lOMoARcPSD|7242917
5-54. (40 min.) Interpretation of Regression Results—Simple Regression Using a

Spreadsheet: Lucas Plant.
Labor Overhead
Hours Costs
Highest activity (month 16) ....................... 395,938 $3,638,331
Lowest activity (month 11) ........................ 185,938 $2,314,436

Variable cost =
$3,638,331 – $2,314,436
= = $6.30426 per labor-hour
395,938 – 185,938

costs
= $3,638,331 – $6.30426 x 395,938
= $1,142,235
or
Fixed = $2,314,436 – $6.30426 x 185,938

costs
= $1,142,235
The cost equation is:

Overhead costs = $1,142,235 + ($6.30426 per LH x Labor hours)


lOMoARcPSD|7242917
5-54. (continued)
b. Scattergraph:
Note that two observations do not appear (separately) on this scattergraph. These are
observations 1 and 13. The dots actually overlap. These observations have the same
number of labor hours as observations 8 and 23, respectively, and the overhead costs
are close to the same.


lOMoARcPSD|7242917
5-54. (continued)
c. The results of the regression analysis are:
Regression Statistics
Multiple R 0.94877977
R Square 0.90018305
Adjusted R Square 0.89564591
Standard Error 176382.635
Observations 24
Coefficients
Intercept (Fixed costs) $533,857.12
Labor Hours $8.04
d.
Overhead costs = $533,857 + $8.04 x 350,000

= $533,857 + $2,814,000
= $3,347,857


lOMoARcPSD|7242917
5-55. (30 min.) Interpretation of Regression Results—Simple Regression..

Although the correlation coefficient (or R) is 0.82, the R2, the percentage of the variation
in the independent variable ―explained‖ by the dependent variable, is about 67%. This is
not low for ―real,‖ data, but it is not as convincing as Lance would have us believe.
The first thing we would look at in checking Lance’s result is a scattergraph of the data
(on the next page). There we see one observation that does not seem consistent with
the others. It appears to be an outlier. (This is observation 5.)
If the regression is re-estimated omitting observation 5, the results are:
R Square 0.98432378
Observations 12
Coefficients
Intercept 3910.62477
Unit Production 17.5286752
This regression has an R2 of 98%, which is much better. The cost equation with the new
results is:
Overhead cost = $3,911 + $17.53 x Units.
This implies a cost structure where variable costs are much more important. These
results also suggest that the controller’s estimates are very reasonable.


lOMoARcPSD|7242917
5-55. (continued)
$85,000
$80,000
$75,000
Overhead Costs
$70,000
$65,000
$60,000
$55,000
$50,000
2800 3000 3200 3400 3600 3800 4000 4200 4400
Unit Production


lOMoARcPSD|7242917
5-56. (30 Min.) Interpretation of Regression Results—Multiple Choice: Eastern

College Business School.
a. (5) Variable cost coefficient
b. (5) Dependent variable
c. (1) Independent variable
d. (1)
Credit- Administrative
hours Costs
Highest activity (September) .................... 2,923 $960,036
Lowest activity (August) ........................... 242 $346,975

Variable cost =
$960,036 – $346,975
= = $228.6688 per credit-hour
2,923 – 242

costs
= $960,036 – $228.6688 x 2,923
= $291,637
or
Fixed = $346,975 – $228.6688 x 242

costs
= $291,637
The equation is $291,637 + $229 x Number of credit hours.

e. (4) Administrative costs = $404,875 + $207 x 2,100 credit hours = $839,575.
f. (2) The correlation coefficient is the ―Multiple R,‖ 0.933.
g. (2) 87.1%, the R2.


lOMoARcPSD|7242917
5-57. (30 Min.) Interpretation of Regression Results: Simple Regression.

a. The first step in understanding the difference is to prepare a scattergraph of the
data:
210,000
200,000
190,000
180,000
Costs
170,000
160,000
150,000
140,000
10,000 11,000 12,000 13,000 14,000 15,000 16,000
Deliveries
Notice the one observation that appears to be unusual. (This is observation 5.)
Without knowing more about the reasons for the high cost, we might want to treat it
as an ―outlier‖ meaning we would estimate the regression without this observation.
The results of that regression are:
Multiple R 0.9921
R Square 0.9843
Observations 12
Coefficients
Intercept $9776.56
Number of deliveries $11.69
These results are much closer to the controller’s estimates.


lOMoARcPSD|7242917
5-57 (continued)
b. Using the results from the ―improved‖ regression, the cost equation for overhead
costs can be written as:
Monthly overhead = $9,777 + $11.69 x number of deliveries
This implies a contribution margin per delivery of $8.31 (= $20.00 – $11.69).

To earn operating profits of $10,000, the company needs approximately 2,380 (=
[$10,000 + $9,777] ÷ $8.31) deliveries.
Note, however, that this level of deliveries is outside the range of the observations
used to develop the regression estimates. Therefore, this estimate needs to be used
with caution.
5-58. (30 Min.) Interpretation of Regression Results: Brews 4 U.

a. The letter b is best described as the estimate of the cost for an additional customer
visit.
b. The letter y is best described as the observed store cost for a given month.
c. The letter x is best described as the observed customer visits for a given month.
d. The estimated costs for a month with 1,600 customer visits is $4,824 (= $1,496 +
$2.08 x 1,600 customer-visits).
2
e. The total variance that can be explained by the regression is 86.8% (= R ).


lOMoARcPSD|7242917
5-59. (30 Min.) Cost Estimation—Simple Regression: Arnie’s Arcade & Video
Palace.
a. Yes. We would expect that, in general, there is a positive relation between
maintenance costs and activity. Revenue seems to be a reasonable measure of
activity.
b. When we estimate the regression, we obtain the following results:
R Square 0.78971172
Observations 24
Coefficients
Intercept 3.4312
Revenues -0.0337813
These suggest that maintenance costs are negatively related to revenues. The R2 is
reasonably high, suggesting a good fit.
costs. These include maintenance and repair costs because machines are usually given
routine repairs and maintenance during slow periods.
Advertising is another cost that exhibits similar behavior. Many companies increase
their advertising when sales are declining and cut back on advertising when there is
capacity business.
A better model might be developed by including seasonal variables in the regression or
separating the maintenance and repair costs into routine and unscheduled costs.


lOMoARcPSD|7242917
5-60. (60 min.) Methods of Estimating Costs: Davis Stores.

Note: Part f of this question will be quite challenging for students, especially those who
have not had a course on regression analysis. The answer does not require technical
knowledge, but an understanding that if two variables are based on the same thing,
expecting two to provide more information than one is futile.
Employees Costs
Highest activity (Store 107) ................ 54 $5,029
Lowest activity (Store 108) ................. 26 $2,374

Variable cost =
$5,029 – $2,374
= = 94.82
54 – 26

costs
= $5,029 – (54 x 94.82)
= -$91.3
or
Fixed = $2,374 – (26 x 94.82)

costs
= -$91.3

Store costs = -$91.3 + (94.82 x Employees)
b. For a store with 30 employees, estimated costs would be:
Store costs = -$91.3 + (94.82 x Employees)

= -$91.3 + (94.82 x 30)
= $2,753


lOMoARcPSD|7242917
5-60 (continued)
c.


lOMoARcPSD|7242917
5-60 (continued)
d. Simple regression estimates:
Store = -$162.9 + 103.1 x Employees

cost
= -$162.9 + 103.1 x 30
= -$162.9 + $3,093
= $2,930.1


lOMoARcPSD|7242917
5-60 (continued)
e. Multiple regression estimates:
Store = -$204.2 + -0.01 x Revenues + 105.5 x Employees

cost
= -$204.2 + -0.01 x 2,500 + 105.5 x 30
= -$204.2 – 25.0 + $3,165.0
= $2,935.8
f. Although the store cost estimates are close, the ―fit‖ of the multiple regression
indicates a problem. Neither coefficient appears to be significant (based on the t-
statistics), but the R2’s are similar. This is a problem referred to as collinearity and it
arises when two or more of the independent variables are themselves related. In this
case, staffing is most likely based on store volume (revenues) so employees and
revenues are closely related. Adding either variable (revenues or employees) once we
have estimated the simple regression will provide little new information.


lOMoARcPSD|7242917
5-61. (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


lOMoARcPSD|7242917
5-61. (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 =
$6,362,255 – $5,699,139
= = $7.62202 per case
432,000 – 345,000

costs
= $6,362,255 – $7.62202 x 432,000
= $3,069,542
or
Fixed = $5,699,139 – $7.62202 x 345,000

costs
= $3,069,542
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


lOMoARcPSD|7242917
5-61. (continued)
c. Simple regression based on cases:
R Square 0.96107634
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.
Multiple R 0.9905
R Square 0.9810
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


lOMoARcPSD|7242917
5-61. (continued)
e. Recommendation.
The multiple regression appears to improve the ―fit‖ (compare the adjusted R2’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.


lOMoARcPSD|7242917
5-62. (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
1
Produced Produced) in Labor Total Average Cost
2 3 4
(X) (Y) Hours Cost Per Unit
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
-0.152004
1. Y = 100 (X ).
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.


lOMoARcPSD|7242917
5-63. (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

1
Produced Factor Labor Labor Cost Materials Average
2 3
(X) (Y) Cost Per Unit 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
-0.3219
and is equal to( X ).
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.


lOMoARcPSD|7242917
Solutions to Integrative Cases
5-64. (60 min.) Cost Estimation, CVP Analysis, and Decision Making: Luke
Corporation.
This problem is more subtle than it might appear, because the student must consider
the effect on Luke Corporation and the Product Manager, Mr. Andre separately. In
other words, it anticipates in a small way the issues in management control systems.
a. $2.24 per case.

This is a special order question similar to those discussed in Chapter 4. The relevant
cost is the variable production cost. (The problem states that no corporate overhead
will be allocated or affected by the order.) To determine the variable production cost,
a regression analysis on the production data can be run. The results follow:
As shown, the estimated variable production cost is $2.24. This is the minumum that
can be charged without reducing profit.


lOMoARcPSD|7242917
5-64. (continued)
b. 242,120 cases.
To break even on the product, Luke has to sell a sufficient number of cases to cover
fixed production costs on the product. The contribution margin, however, is lowered
by the variable portion of the (truly) corporate costs. To determine these, we can use
the High-Low method, because we only have two observations.
Corporate costs are assumed to variable with respect to revenues, so using data on
coporate costs, variable costs are 3.65% of revenue.

Variable cost =
$5,337,500 – $4,221,000
= = 3.65% of Revenue
$106,750,000 – $76,200,000
Let Q be the number of cases sold. Then, profit for Q cases is (note that the fixed
costs are from the analysis in part a):
Profit = Revenues – Variable product costs – Variable corporate costs – Fixed
production costs
= ($5.25 x Q) – ($2.24 x Q) – (3.65% x $5.25 x Q) – $682,294
or
$2.818 x Q = $682,294
or
Q = 242,120 cases.


lOMoARcPSD|7242917
5-64. (continued)
c. 274,565 cases.
This problem differs from requirement (c), because the the requirement that the
revenue from the product covers the production costs and the full 5% corporate cost
allocation makes the corporate cost allocation entirely variable. Therefore, the
number of cases to provide a profit equal to 5% of revenue (= 5% x $5.25 x Q) can
be determined as follows. Let Q be the number of cases sold. Then, profit for Q
cases is:
Profit = Revenues – Variable product costs – Variable corporate costs – Fixed
production costs
= $5.25 x Q – $2.24 x Q – 5% x $5.25 x Q – $682,294
(5% x $5.25 x Q) = ($5.25 x Q) – ($2.24 x Q) – (5% x $5.25 x Q) – $682,294
$2.485 x Q = $682,294
Q = 274,565 cases.
d. $235,314 increase.
Because fixed manufacturing costs can be avoided, Luke will save all the production
costs plus the variable corporate overhead.
Lost revenue $(14,682,150)

Production costs avoided 14,440,395
Loss before corporate
overhead savings $ (241,755)
Corporate costs avoided (= 3.65% x $14,682,150) 535,898
Increase profits before tax $ 294,143
Tax (@20%) 58,829
Increased profits $ 235,314


Chapter 5 Answers

Uploaded by

Copyright:

Available Formats

Chapter 5 Answers

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 5 Answers

Uploaded by

Copyright:

Available Formats

lOMoARcPSD|7242917

SM-Ch05-5e - Solutions Manual

Cost Accounting (Silliman University)

StuDocu is not sponsored or endorsed by any college or university

Solutions to Review Questions

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

Solutions to Critical Analysis and Discussion Questions

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

5-28. (15 min.) Methods of Estimating Costs―Engineering Estimates: Custom

Administrative costs .......................................... $20,000

Building costs – per square foot (moderate) ....(3,000 x $150 =) 450,000

Appliances (moderate) ...................................... 25,000

Utilities costs (if required) .................................. 40,000

Estimated cost ............................................. $535,000

5-29. (15 min.) Methods of Estimating Costs – Engineering Estimates: Twain

Guru cost (per hour) .......................................... (10 x $900 =) $9,000

Mentor cost (per hour) ....................................... (125 x $375 =) 46,875

Helper cost (per hour) ........................................ (150 x $100 =) 15,000

Out-of-pocket cost ............................................. 25,000

Estimated consultant and miscellaneous cost ... $95,875

G&A costs.......................................................... (60% x $95,875 =) 57,525

Estimated costs $153,400

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

5-30. (15 min.) Methods of Estimating Costs—Account Analysis: Portland

b. Costs per unit:

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

5-31. (15 min.) Methods of Estimating Costs—Account Analysis: Hal’s

b. Costs per unit:

Last year: $169.60 (= $4,240,000 ÷ 25,000)

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

5-32. (10 min.) Methods of Estimating Costs—High-Low, Ethical Issues: Oak

Fixed = Total costs – variable costs

Fixed = $2,925,000 – ($1.50 x 1,825,000)

Maintenance costs = $187,500 + ($1.50 x 2,600,000)

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

5-33. (25 min.) Methods of Estimating Costs—High-Low: Adriana Corporation.

Cost at highest activity – cost at lowest activity

Fixed = Total costs – variable costs

Fixed = $503,775 – ($39.50 x 6,490)

The cost equation then is:

Overhead costs = $247,420 + ($39.50 x 7,500)

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

5-34. (15 min.) Methods of Estimating Costs—Scattergraph: Adriana Corporation.

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)

5-35. (15 min.) Methods of Estimating Costs—Scattergraph: Adriana

©The McGraw-Hill Companies, Inc., 2017

Downloaded by Mary Joy Banzon (mariapadillaxx@gmail.com)