Exam 5: Cost Estimation

Barnard Enterprises had an average cost of $8.60 during a month when 75,000 units were produced.When production was 125,000 units several months later,the average cost dropped to $6.98.Required: (a. )Determine the fixed and variable portions of production costs.(b. )What will unit cost be when production equals 110,000 units?

The McGraw Company is accumulating data to be used in preparing its annual profit plan for the coming year.The cost behavior pattern of the maintenance costs must be determined.The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs.Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted) What would be the cost equation if regression analysis is used?

A cost driver is defined as: (CMA adapted)

Thane Company is interested in establishing the relationship between electricity costs and machine hours.Data have been collected and a regression analysis prepared using Excel.The monthly data and the regression output follow: Month Machine Hours Electricity Costs January 2,500 18,400 February 2,900 21,000 March 1,900 13,500 April 3,100 23,000 May 3,800 28,250 June 3,300 22,000 Juby 4,100 24,750 August 3,500 22,750 September 2,000 15,500 October 3,700 26,000 November 4,700 31,000 December 4,200 27,750 If the controller uses the high-low method to estimate costs,the fixed cost portion of the cost equation for electricity cost is:

Thane Company is interested in establishing the relationship between electricity costs and machine hours.Data have been collected and a regression analysis prepared using Excel.The monthly data and the regression output follow: Month Machine Hours Electricity Costs January 2,500 18,400 February 2,900 21,000 March 1,900 13,500 April 3,100 23,000 May 3,800 28,250 June 3,300 22,000 Juby 4,100 24,750 August 3,500 22,750 September 2,000 15,500 October 3,700 26,000 November 4,700 31,000 December 4,200 27,750 If the controller uses the high-low method to estimate costs,the cost equation for electricity cost is:

The Missou Manufacturing Company recorded overhead costs of $14,182 at an activity level of 4,200 machine hours and $8,748 at 2,300 machine hours.The records also indicated that overhead of $9,730 was incurred at 2,600 machine hours.What is the total estimated cost for 2,600 machine hours using the high-low method to estimate the cost equation?

The Norcross Company has traditionally estimated manufacturing overhead costs using production volume.Some of the production managers believe that the number of setups may also have an impact on monthly manufacturing overhead costs.In order to investigate this possibility,the company collected information on its monthly manufacturing overhead costs,production in units,and number of setups for 2016. Month Production (Units) Manufacturing Overhead Cost Number of Setups 1 50,000 \ 800,100 17 2 65,000 752,500 16 3 40,000 795,100 21 4 55,000 822,750 16 5 30,000 771,225 21 6 25,000 706,200 15 7 60,000 843,000 19 8 80,000 935,200 22 9 77,000 901,750 20 10 43,000 786,400 17 11 50,000 819,600 19 12 70,000 880,900 21 Regression analysis results of the information presented above are as follows: Ordinary regression: Equation: $650,398 + $3.1061 × units r-square: .707 Multiple regression: Equation: $464,481 + $2.5356 × units + $11,631.6048 × number of set ups r-square: .867 Required: (a. )Use the results from the ordinary regression and estimate next month's manufacturing overhead costs,assuming the company is planning to produce 75,000 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 75,000 units with 18 set ups.(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.

The quality of the cost equation depends on collecting appropriate data.

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

Woodman Products,Inc. ,has found that new products follow a learning curve.The first two units have been completed with the following results: Units Procuced Marginal Labor Time 1 112.50 2 90.00 Required: (a. )How much time will be needed to complete the 4^th unit? (b. )How much time will be needed to complete the 8^th unit? (c. )How much time will be needed to complete the 16^th unit?

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: Month Actinistrative Costs Credit 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 184,449 1,112 January 219,137 1,339 February 245,000 1,373 March 209,462 1,064 April 191,925 1,123 May 249,978 1,360 June 170,418 420 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: The percent of the total variance that can be explained by the regression is:

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: Month Actinistrative Costs Credit 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 184,449 1,112 January 219,137 1,339 February 245,000 1,373 March 209,462 1,064 April 191,925 1,123 May 249,978 1,360 June 170,418 420 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: Based on the results of the high-low analysis,the estimate of administrative costs in a month with 1,000 credit hours would be: (rounded to the nearest whole dollar)

In general,the use of multiple independent variables increases the proportion of the variation in the dependent variable explained by the cost equation.

Which of the following is the difference between variable costs and fixed costs: (CMA adapted)

Below are several examples of costs that are labeled fixed or variable according to their typical accounting designations.Under which circumstances would any of these costs behave in a manner opposite to that listed? a.Direct labor-variable. b.Equipment depreciation-fixed. c.Utilities (with a minimum charge)-variable. d.Supervisory salaries-fixed. e.Indirect materials purchased in given lot sizes that become spoiled within a few days-variable.

Clough Company is interested in establishing the relationship between utility costs and machine hours.Data have been collected and a regression analysis prepared using Excel.The monthly data and the regression output follow: Month Machine Electricity Hours Costs January 3,250 22,080 February 3,770 25,200 March 2,470 16,200 April 4,030 27,600 May 4,940 33,900 June 4,290 26,400 July 5,330 29,700 August 4,560 27,300 September 2,600 18,600 October 4,810 31,200 Nowember 6,110 37,200 December 5,460 33,300 Required: (a. )What is the equation for utility costs using the high-low method? (b. )Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.

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: Month Actinistrative Costs Credit 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 184,449 1,112 January 219,137 1,339 February 245,000 1,373 March 209,462 1,064 April 191,925 1,123 May 249,978 1,360 June 170,418 420 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: If the controller uses the high-low method to estimate costs,the variable cost per credit hour is:

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 2016. Month Production (Units) Manufacturing Ovenead Cost Average Monthly Production Lot Size 1 75,000 \ 925,800 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: .628 Multiple regression: Equation: \4 82,172+ \2 .4918\times units + \1 1,770.939\times lot size r-square: .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.

The Thomas Company's total overhead costs at various levels of activity are presented below: Month Direct Labor Hours Total Overhead Juby 7,500 \ 272,000 August 6,000 234,000 September 9,000 319,000 October 10,500 340,500 Assume that the overhead costs above consist of utilities,supervisory salaries,and maintenance.The breakdown of these costs at the 9,000 direct labor hour level of activity is as follows: Utilities () \ 137,700 Superyisory Salaries (F) 80,000 Maintenance () 101,300 319,000 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.

Your manager asks you for a cost estimate to open a new retail outlet and says,"I want you to use statistical analysis,so it will be objective because it is based on real data." How would you respond?