BA 510 Accounting Prob 2-17/2-19/2-21/2-24- Echeverria SA is an Argentinian manufacturing company whose total factory..

BA 510 Accounting,

 book "Managerial Accounting for Managers" Author Noreen, Brewer,Garrison 3rd Edition. 

 Prob 2-17/2-19/2-21/2-24

PROBLEM 2-17 (LO 2-3, LO 2-4)

1. Echeverria SA is an Argentinian manufacturing company whose total factory OVERHEAD COST fluctuates somewhat from year to year according to the number of the machine-hours worked in its production facility. These costs (in Argentinian pesos) at HIGH and LOW levels of activity

Over recent years are given below:

Level of Activity

Low High

Machine - hours ……………………….. 60,000 80,000

Total factory Over Head Cost…… 274,000 P 312,000 P

The factor Overhead costs above consists of indirect materials, rent, and maintenance.

The company has analyzed these costs at the 60,000 machine level activity as follows:

Indirect materials (variables)…………………….. 90,000 Pesos

Rent (Fixed)……………………………………………….. 130,000

Maintenance (Mixed)………………………………… 54,000

Total factory Overhead costs……………………… 274,000 Pesos

For Planning Purposes, the company wants to break down the maintenance cost into its Variable and Fixed cost elements.

Required:

1. Estimate how much of the factory Overhead cost of 312,000 pesos at the High Level of activity consists of maintenance cost.

HINT: To do this, it may be helpful to first determine how much of the 321,000 pesos cost consists of indirect materials and rent. Think about the behavior of Variable and Fixed costs.

2. Using the High-low method, estimate a cost formula for maintenance.

3. What total Overhead costs would you expect the company to incur at an operating level of 65,000 machine-hours?

Problem 2-19 High – Low and Scattergraph Analysis (LO 2-4) Page 58-59

Sebolt Wire Company heats copper ingots to very high temperatures by placing the ingots in a large heat coil. The heated ingots are then run through a shaping machine that shapes the soft ingots into wire. Due to the long heat-up time, the coil is never turned off. When an ingot is placed in the coil, the coil, the temperature is raised to an even higher level, and then the coil is allowed to drop to the “waiting” temperature between ingots.

Management needs to know the Variable cost of power involved in heating an ingot and the Fixed cost of power during “waiting” periods . The following data on ingots processed and power costs are available:

Number Power

Month of Ingots Cost

Jan…………………………………………. 110 $5,500

Feb ………………………………………. 90 4,500

Mar ………………………………………. 80 4,400

Apr……………………………………….. 100 5,000

May ……………………………………… 130 6,000

June……………………………………… 120 5,600

July………………………………………. 70 4,000

Aug………………………………………. 60 3,200

Sep………………………………………. 50 3,400

Oct……………………………………….. 40 2,400

REQUIRE:

1. Using the High – Low method, estimate a cost formula for power. Express the formula in the form Y = a + bX.

2. Prepare a Scattergraph by plotting ingots processed and power cost on a graph. Draw a straight line though the two data points that correspond to the high and Low levels of activity. Make sure your line intersects the Y-axis.

3. Comment on the accuracy of your High-Low estimates assuming a least squares regression analysis estimated the total Fixed cost to be $1,185.45 per month and Variable cost to be $37.82 per ingots. How would the straight line that you drew in requirement 2 differ from a straight line that minimizes the sum of the Squared errors?

PROBLEM 2-21 HIGH-LOW Method; Predicting Cost (LO2-3; LO2-4)

Golden company’s total Overhead cost at various levels of activity are presented below:

Month Machine-hours Total Overhead Cost

March…………………………… 50,000 $194,000

April……………………………… 40,000 170,200

May……………………………… 60,000 217,000

Assume that the Overhead cost above consists of utilities, supervisory salaries, and maintenance.

The breakdown of these costs at the 40,000 machine-hour level of activity is as follow:

Utilities (Variables)……………………………………. $ 52,000

Supervisory salaries (fixed)……………………….. 60,000

Maintenance (mixed) ………………………………. 58,200

Total Overhead Cost………………………………… $ 170,000

The company wants to break down the maintenance cost into its Variable and Fixed cost elements.

REQUIRED:

1. Estimate how much of the $241,600 of Overhead cost June was maintenance cost.

Hint: To do this, it may be helpful to first determine how much of the $ 241,600 consisted of utilities and supervisory salaries. Think about the behavior of Variable and Fixed costs within the Relevant range).

2. Using the High-Low method, estimate a cost formula for maintenance.

3. Express the company’s total Overhead cost in the form Y = a + b X.

4. What total Overhead cost would you expect to be incurred at an activity level of 45,000 machine-hours?

PROBLEM 2-24 Cost Classification and Cost Behavior (LO 2-2; LO 2-3; LO 2-6)

Heritage company manufactures a beautiful bookcase that enjoys widespread popularity. The company has a backlog of orders that is large enough to keep production going indefinitely at the plant’s full capacity of 4,000 bookcases per year. ANNUAL cost data at full capacity follow:

Direct materials (wood and glass)………………………………….. $ 430,000

Administrative Office salaries………………………………………… 110,000

Factory Supervision……………………………………………………….. 70,000

Sales commissions…………………………………………………………. 60,000

Depreciation, factory building……………………………………….. 105,000

Depreciation, Administrative Office Equipment……………. 2,000

Indirect materials, factory……………………………………………… 18,000

Factory labor (cutting assy.)………………………………………….. 90,000

Advertising……………………………………………………………………. 100,000

Insurance factory………………………………………………………….. 6,000

Administrative office supplies (billing)………………………….. 4,000

Property taxes, factory…………………………………………………. 20,000

Utilities, factory……………………………………………………………. 45,000

REQUIRED:

1. Prepare an answer sheet with the column headings shown below. Enter each cost item on your

Answer sheet, placing the dollar amount under the appropriate headings. As examples, this has been done already for the first two items in the list above.

NOTE that each cost item is classified in two ways; first, as either variable or fixed with respect to the number of units produced and sold; and second; as either a selling and administrative cost or a product cost. (If the item is a product , it should also be classified as either direct or indirect as shown.)

Selling or

Cost Behavior Administrative Product Cost

Cost Item Variable Fixed Cost Direct Indirect

Materials used…………………….. $ 430,000 430,000

Administrative Office salaries 100,000 $ 100,000

· To Units of Product.

2. Total the dollar amounts in each of the column in (1) above. Compute the average product per bookcase.

3. Due to a recession, assume that production drops to only 2,000 bookcases per year. Would you expect the average product cost per bookcases to increase, decrease or remain unchanged? Explain. No computations are necessary.

4. Refer to the original data. The president’s next – door neighbor has considered making himself a bookcase and has priced the necessary materials at a building supply store. He has asked the president whether he could purchase a bookcase from the Heritage /company “at cost”, and the president has agreed to let him do so.

a. Would you expect any disagreement between the two men over the price the neighbor should pay? Explain, What price does the president probably have in mind? The neighbor?

b. Because the company is operating at full capacity, what cost term used in the chapter might be justification for the President to change the full, regular price to the neighbor and still be selling “at cost”? Explain.