long ANSWER TYPE QUESTIONS
1. Consider
the graphs that follow (the horizontal axis represents activity; the vertical
axis represents total dollars).
.gif">
Required:
For
items AI that follow, choose the graph that best represents the cost behavior
pattern described. Note: Graphs can be
used more than once.
A. Straightline depreciation on machinery.
B.
The
cost of chartering a private airplane.
The cost is $800 per hour for the first 6 hours of a flight; it then
drops to $600 per hour.
C.
The
wages of table service personnel in a restaurant. The employees are parttime workers who can
be called upon for as little as 4 hours at a time.
D.
Weekly
wages of store clerks who work 40 hours each week. One clerk is hired for every 125 sales made
during the month.
E. The cost of tires used in the production
of trucks.
F.
Outbound
shipping charges that increase at a decreasing rate as sales rise because the
firm can use more efficient modes of transportation (e.g., full trailer loads,
full rail cars, etc.). Gradually,
however, at high levels of sales, freight costs start to increase at an
increasing rate, which reflects more transactions made to customers in faraway
locations.
G.
Equipment
leasing costs that are computed at $2 per machine hour worked. The company pays a maximum of $120,000 per
month.
H.
The
monthly cost of a franchise fee for a fastfood restaurant. The franchisee must pay $20,000 plus 5% of
gross dollar sales.
I.
The
cost of electricity during peak demand periods, which is based on the following
schedule:
Up
to 20,000 kilowatt hours (KWH): $4,000
Above
20,000 kilowatt hours: $4,000 + $0.02 per KWH
2. Resource
Consulting is studying the costs of several clients, and has found that the
accompanying graphs 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 AF, indicate the number of the graph that best represents the cost
behavior pattern described. Note: Graphs
can be used more than once, and not all graphs need be used.
A.
The salary cost
of lab technicians employed at a clinic.
One technician is needed for every 1,500 patients serviced.
B. The cost of glass used by a manufacturer of automobile
windshields.
C.
A profitsharing
bonus that is paid to the associate director of a firm that conducts
professionaldevelopment courses for executives. The bonus is based on revenues from courses
that are being run, subject to a maximum amount each year.
D.
Flood insurance
premiums that are paid by Reliable Manufacturing, which operates a production
facility close to a river.
E.
The paper cost
that is used in the production of a textbook.
Note: Assume that for this part only, the graph’s vertical axis represents
the cost per unit rather than total cost.
F.
Tariffs that are
paid on products shipped overseas. For
one particular country, if fewer than 15,000 units are shipped, the client must
pay $4 per unit. The tariff is raised by
$1 according to the following schedule:
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
3. Consider
the six costs that follow.
1. Advertising and
promotion costs of a doityourself retailer
2. Surgical supplies used in a hospital's
operating room
3. Aircraft depreciation charges of an airline
4. Utility charges that include a minimumuse
fee, for a small business
5. Annual business licensing fee paid by a
daycare center
6. Truck fuel consumed by a road construction
company
Required:
A.
Classify
each of these costs as variable, committed fixed, discretionary fixed, or
semivariable.
B.
Briefly
describe the behavior of a perunit variable cost as activity changes.
C.
What
elements are present in a semivariable cost that cause it to behave in a
semivariable manner?
D.
Generally
speaking, does management have more flexibility when dealing with committed
fixed costs or discretionary fixed costs?
4. Sunshine
Valley Meat Company produces one of the best sausage products in Pennsylvania. 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.)
5. Viscount
Corporation has a machining capacity of 200,000 hours per year. Utilization of capacity is normally 75%; it
has been as low as 40% and as high as 90%.
An analysis of the accounting records revealed the following selected
costs:

At a 40%
Utilization Rate

At a 90%
Utilization Rate

Cost A:




Total

$440,000

$ 440,000


Per
hour

$5.50

?


Cost B:




Total

?

$1,944,000


Per
hour

$10.80

$10.80


Cost C:




Total

$680,000

$1,330,000


Per
hour

$8.50

$7.39







Viscount
uses the highlow method to analyze cost behavior.
Required:
A.
Classify
each of the costs as being either variable, fixed, or semivariable.
B.
Calculate
amounts for the two unknowns in the preceding table.
C.
Calculate
the total amount that Viscount would expect at a 75% utilization rate for Cost
A, Cost B, and Cost C.
D.
Develop
an equation that Viscount can use to predict total cost for any level of hours
within its range of operation.
6. Walnut Corporation operates a small medical
lab in Kansas, one that conducts minor medical procedures (including blood
tests and xrays) 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 onsite 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.
B.
Walnut
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 Walnut
management if a close look at the lab's cost behavior is desired?
7. The
following selected data were taken from the accounting records of Shook
Industrial Manufacturing:
Month

Machine
Hours

Manufacturing
Overhead

May

46,000

$ 889,000


June

60,000

1,130,000


July

68,000

1,274,000


August

52,000

980,000


July's
costs consisted of machine supplies ($170,000), property taxes ($24,000), and
plant maintenance ($1,080,000). These
costs exhibit the following respective behavior: variable, fixed, and
semivariable.
Required:
A.
Determine
the machine supplies and property taxes for May.
B.
By
using the highlow method, analyze Shook's plant maintenance cost and calculate
the monthly fixed portion and the variable cost per machine hour.
Assume that present cost behavior patterns
continue into future months. Estimate
the total amount of manufacturing overhead the company can expect in September
if 56,000 machine hours are worked
8. Moore
Company needs to determine the variable utilities rate per direct machine hour
in order to estimate cost for August.
Relevant information is as follows.
Month

MachineHours Worked

Utilities
Cost

April

4,800

$4,144

May

5,200

4,300

June

5,600

4,482

July

6,000

4,804

Moore
anticipates producing 3,800 units in August, with each unit requiring 1.5 hours
of machine time. The company uses the
highlow method to analyze costs.
Required:
A.
Calculate
the variable and fixed components of the utilities cost.
B.
Using
the data calculated above, estimate the utilities cost for August.
C.
Compare
the highlow method versus the visualfit method with respect to (1) number of
data observations used in the analysis and (2) objectivity of the results.
9. The Southlake 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, and semivariable costs, which
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. Southlake
uses the highlow method to analyze cost behavior.
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 2,800 patient days be employed to estimate the
costs for, say, 3,800 patient days? Why
or why not?
C.
10. A1 Corporation extracts ore
for eight different companies in Colorado.
The firm anticipates variable costs of $65 per ton along with annual
fixed overhead of $840,000, which is incurred evenly throughout the year. These costs exclude the following
semivariable costs, which are expected to total the amounts shown for the high
and low points of ore extraction activity:
March (850
tons): $39,900
August (1,300 tons): $46,200
A1
uses the highlow method to analyze cost behavior.
Required:
A.
Calculate
the semivariable cost for an upcoming month when 875 tons will be extracted.
B.
Calculate
the total cost for that same month.
C.
A1
uses Cortez Trucking to haul extracted ore.
Cortez's monthly charges are as follows:
800  1,099
tons

$ 70,000

1,100 tons 
1,399 tons

90,000

1,400+ tons

110,000

1. From a cost behavior perspective, what
type of cost is this?
2. If A1 plans to extract 875 tons, is the
company being very "cost effective" with respect to Cortez's billing
rates? Briefly discuss.
11. Charger
Corporation has three costs: A, which is variable; B, which is fixed; and C,
which is semivariable. The company,
which uses the highlow method, 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.
12. Managers
in the Stamping Department have been studying overhead cost and the
relationship with machine hours. Data
from the most recent 12 months follow.
Month


Overhead

Machine Hours

January


$5,030

2,730


February


1,600

600


March


7,210

3,403


April


4,560

2,200


May


6,880

3,411


June


6,520

2,586


July


6,230

3,364


August


5,570

2,411


September


7,728

3,960


October


5,810

2,897


November


4,580

2,207


December


6,010

2,864








The
manager of the department has requested a regression analysis of these two
variables (labeled no. 1 below).
However, the staff person performing the analysis decided to run another
regression that excluded February (labeled no. 2). She observed that the volume of activity was
very low for that month because of two factors: a severe flu outbreak and an
electrical fire that disrupted operations for about 10 working days.
Regression No. 1


Regression No. 2

Constant

428.00


Constant

550.00

R²

0.79


R²

0.74

b coefficient

1.86


b coefficient

1.90

Required:
A.
Prepare
an overhead cost breakdown by using the highlow method. The analysis should be useful in helping to
predict variable and fixed costs under normal operating conditions.
B.
Prepare
an estimate of overhead cost for a volume of 3,000 machine hours by using
regression no. 1.
C.
You
now have the ability to analyze three cost estimates from the highlow data in
part (a) and the two regression equations.
Which one do you feel would provide the best estimate? Explain the factors that support your
choice. Note: Do not calculate an
overhead cost estimate with regression no. 2.
13.Shortly after being hired as an analyst
with Harrison Rentals, which is located in upstate New York, Luis Gomez 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. Luis knew that he could use several different
tools to analyze cost behavior, including scatter diagrams, leastsquares
regression, and the highlow 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
Leastsquares
regression: OP = $59,000 + $6.75RI
Highlow
method: OP = $53,500 + $7.25RI
where OP =
total order processing costs and RI = number of rental invoices written
Luis
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 blizzard, one that forced the company to close for four
days.
Required:
A.
Will
scatter diagrams, leastsquares regression, and the highlow method normally
result in the same equation? Why?
B.
Assuming
the use of leastsquares 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 Harrison expects to write 2,500 rental invoices.
D.
Did
Luis 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.
14. North 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 leastsquares
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 North’s dependent variable in this case?
D.
How
can the company evaluate the "quality" of its regression equation?
15. Compare and contrast the following types of
costs: (1) variable and stepvariable and (2) fixed and stepfixed.
16.Define the term "relevant range"
and explain its importance in understanding cost behavior.
17. Differentiate between committed costs and
discretionary costs. Be sure to present
two examples of each and explain which of the two cost types would likely be
cut should a company encounter financial difficulties.
18. Both the visualfit and highlow methods of
cost estimation have inherent limitations.
Briefly identify the major deficiency associated with each method.
19. Distinguish between leastsquares regression
and multiple regression as cost estimation methods.