Exam 5: Cost Estimation

Which of the following is not a data problem an analyst must watch for when estimating cost behavior?

Which cost estimation method does not use the company's cost information as its primary source of information about the relationship between total costs and activity levels?

The Wonder Drug Company's total overhead costs at various levels of activity are presented below: Direct Lubor Month Hours Total Overhead Septernber 15,000 \ 472,000 October 12,000 409,400 Novernber 18,000 542,000 Decernber 21,000 604,700 Assume that the overhead costs above consist of indirect labor, scheduling salaries, and maintenance. The breakdown of these costs for the month of November is as follows: Indirect labor (V) $219,600 Maintenance (M) 197,400 Scheduling Salaries (F) 125,000 $542,000 Required: (a.) Using the high-low method, determine the cost formula for maintenance. (b.) Express the company's total overhead costs in linear equation form.

Balcom Enterprises is planning to introduce a new product that will sell for $110 per unit. Manufacturing cost estimates for 20,000 units for the first year of production are: ? Direct materials $1,000,000. ? Direct labor $720,000 (based on $18 per hour × 40,000 hours). Although overhead has not be estimated for the new product, monthly data for Balcom's total production for the last two years has been analyzed using simple linear regression. The analysis results are as follows: Dependent variable Factory overhead costs Independent variable Direct labor hours Intercept \ 120,000 Coefficient on independent variable \ 5.00 Coefficient of correlation 0.911 0.814 - Based on this information, what is the total overhead cost for an estimated activity level of 45,000 direct labor-hours?

The College of Business at Northeast College is accumulating data as a first step in the preparation of next year's budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below: Administrative Credit Month Costs Hours July \ 129,301 250 August 82,613 115 September 225,580 1,392 October 216,394 1,000 November 258,263 1,309 December 184,445 1,112 January 219,137 1,335 February 245,000 1,373 March 209,462 1,064 April 191,925 1,123 May 249,978 1,360 June 170,41\varepsilon 420 July 128,167 315 Total \ 2,510,687 12,172 Average \ 193,130 936 The controller's office has analyzed the data and has given you the results from the regression analysis: SUMMARY OUTPUT Regression Statistics Multiple R 0.9317157 R Square 0.868094147 Adjusted R Square 0.856102705 Standard Error 20,134.92395 Observations 13 ANOVA df S S M S F Significance F Repression 1 29,349,143,514 29,349,143,514 72.3928117 3.61909-06 Residual 11 4,459,566,787 405,415,162.4 Total 12 33,808,710,301 - If the controller uses the high-low method to estimate costs, the fixed cost portion of the cost equation for administrative costs is:

In general, the account analysis method focuses on the underlying relationship between cost and activities from the previous period.

The College of Business at Northeast College is accumulating data as a first step in the preparation of next year's budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below: Administrative Credit Month Costs Hours July \ 129,301 250 August 82,613 115 September 225,580 1,392 October 216,394 1,000 November 258,263 1,309 December 184,445 1,112 January 219,137 1,335 February 245,000 1,373 March 209,462 1,064 April 191,925 1,123 May 249,978 1,360 June 170,41\varepsilon 420 July 128,167 315 Total \ 2,510,687 12,172 Average \ 193,130 936 The controller's office has analyzed the data and has given you the results from the regression analysis: SUMMARY OUTPUT Regression Statistics Multiple R 0.9317157 R Square 0.868094147 Adjusted R Square 0.856102705 Standard Error 20,134.92395 Observations 13 ANOVA df S S M S F Significance F Repression 1 29,349,143,514 29,349,143,514 72.3928117 3.61909-06 Residual 11 4,459,566,787 405,415,162.4 Total 12 33,808,710,301 - If the controller uses regression analysis to estimate costs, the cost equation for administrative costs is:

Doran Products had costs of $950,000 when sales equaled 55,000 units. When sales increased to 85,000 units, total costs increased to $1,400,000. The selling price is $21 per unit. Required: (a.) Determine the fixed and variable portions of total costs. (b.) Prepare a contribution margin income statement for a month with sales of 70,000 units.

The Feline Company has been having some difficulties estimating its manufacturing overhead costs. In the past, manufacturing overhead costs have been related to production levels. However, some production managers have indicated that the size of their production lots might also be having an impact on the amount of their monthly manufacturing overhead costs. In order to investigate this possibility, the company collected information on its monthly manufacturing overhead costs, production in units, and average production lot size for 2020. Average Monthly Production Manufacturing Production Month (Units) Overhead Cost Lot Size 1 75,000 \ 25,800 20 2 90,000 843,875 19 3 65,000 910,125 24 4 80,000 946,000 19 5 55,000 879,000 24 6 50,000 825,000 18 7 85,000 960,000 22 8 105,000 1,053,500 25 9 102,000 1,020,000 23 10 68,000 905,000 20 11 75,000 938,000 22 12 95,000 995,000 24 Regression analysis results of the information presented above are as follows: Ordinary regression: Equation: \ 691.741+\ 3.0692\times units r-square: 0.628 Multiple regression: Equation: \ 482,172+\ 2.4918\times units +\ 1.770.939\times lot size r-square: 0.777 Required: (a.) Use the results from the ordinary regression and estimate next month's manufacturing overhead costs, assuming the company is planning to produce 92,000 units. (final answer should be rounded to the nearest whole dollar) (b.) Use the results from the multiple regression and estimate the next month's manufacturing costs, assuming the company is planning to produce 92,000 units with an average lot size of 21. (final answer should be rounded to the nearest whole dollar) (c.) Comment on which regression seems to be more appropriate under these circumstances. What additional information would you like to see? Be specific.

A basic assumption of most cost estimation methods is cost behavior patterns are linear within the relevant range.

In general, cost behavior results are likely to differ between the engineering method and the account analysis method.

Cost behavior is the most important characteristic for managerial decision making.

Engineering cost estimates are usually based on operating conditions that are considered:

Iowa Enterprises had an average cost of $10.75 during a month when 50,000 units were produced. When production doubled several months later, the average cost dropped to $8.25. Required: (a.) Determine the fixed and variable portions of production costs. (b.) What will unit cost be when production equals 80,000 units?

The College of Business at Northeast College is accumulating data as a first step in the preparation of next year's budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below: Administrative Credit Month Costs Hours July \ 129,301 250 August 82,613 115 September 225,580 1,392 October 216,394 1,000 November 258,263 1,309 December 184,445 1,112 January 219,137 1,335 February 245,000 1,373 March 209,462 1,064 April 191,925 1,123 May 249,978 1,360 June 170,41\varepsilon 420 July 128,167 315 Total \ 2,510,687 12,172 Average \ 193,130 936 The controller's office has analyzed the data and has given you the results from the regression analysis: SUMMARY OUTPUT Regression Statistics Multiple R 0.9317157 R Square 0.868094147 Adjusted R Square 0.856102705 Standard Error 20,134.92395 Observations 13 ANOVA df S S M S F Significance F Repression 1 29,349,143,514 29,349,143,514 72.3928117 3.61909-06 Residual 11 4,459,566,787 405,415,162.4 Total 12 33,808,710,301 - If the controller uses the high-low method to estimate costs, the variable cost per credit hour is:

Ballard Company incurred a total cost of $8,600 to produce 400 units of pulp. Each unit of pulp required five (5) direct labor hours to complete. What is the total fixed cost if the variable cost was $1.50 per direct labor hour?

The linear cost estimate tends to understate the slope of the cost line in ranges close to capacity.

Which of the following is a common assumption of cost estimation?

In the cost equation TC = F + VX, "V" is best described as the:

The following manufacturing costs were incurred by the Trinitram Company in 2019: Direct materials \ 112,500 Direct labor 175,000 Manufacturing overhead 235,000 These costs were incurred to produce 25,000 units of product. Variable manufacturing overhead was 80% of the direct materials cost. In 2020, the direct material and variable overhead costs per unit will increase by 15%, but the direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected to increase by 7.5%. Required: (a.) Prepare a cost estimate for an activity level of 20,000 units of product in 2020. (b.) Determine the total product costs per unit for 2019 and 2020.