Solution manual managerial accounting 8e by hansen mowen ch 3

Knowledge of cost behavior allows a man-ager to assess changes in costs that result from changes in activity.. Resource spending is the cost of acquiring the capacity to perform an ac

CHAPTER 3 ACTIVITY COST BEHAVIOR QUESTIONS FOR WRITING AND DISCUSSION

1 Knowledge of cost behavior allows a

man-ager to assess changes in costs that result

from changes in activity This allows a

man-ager to assess the effects of choices that

change activity For example, if excess

ca-pacity exists, bids that at least cover variable

costs may be totally appropriate Knowing

what costs are variable and what costs are

fixed can help a manager make better bids

2 The longer the time period, the more likely

that a cost will be variable The short run is a

period of time for which at least one cost is

fixed In the long run, all costs are variable

3 Resource spending is the cost of acquiring

the capacity to perform an activity, whereas

resource usage is the amount of activity

ac-tually used It is possible to use less of the

activity than what is supplied Only the cost

of the activity actually used should be

as-signed to products

4 Flexible resources are those acquired from

outside sources and do not involve any

long-term commitment for any given amount of

resource Thus, the cost of these resources

increases as the demand for them

increas-es, and they are variable costs (varying in

proportion to the associated activity driver)

5 Committed resources are acquired by the

use of either explicit or implicit contracts to

obtain a given quantity of resources,

regard-less of whether the quantity of resource

available is fully used or not For multiperiod

commitments, the cost of these resources

essentially corresponds to committed fixed

costs Other resources acquired in advance

are short term in nature and essentially

cor-respond to discretionary fixed costs

6 Committed fixed costs are those incurred for

the acquisition of long-term activity capacity

and are not subject to change in the short

run Annual resource expenditure is

inde-pendent of actual usage For example, the

cost of a factory building is a committed

fixed cost Discretionary fixed costs are

those incurred for the acquisition of

short-term activity capacity, the levels of which

can be altered quickly In the short run,

re-source expenditure is also independent of actual activity usage An engineer’s salary is

an example of such an expenditure

7 A variable cost increases in direct proportion

to changes in activity usage A one-unit crease in activity usage produces an in- crease in cost A step cost, however, in- creases only as activity usage changes in small blocks or chunks An increase in cost requires an increase in several units of activ- ity When a step cost changes over relatively narrow ranges of activity, it may be more convenient to treat it as a variable cost

in-8 A step cost with narrow steps can be treated

as variable, while one with wide steps is ically treated as fixed

typ-9 An activity rate is the resource expenditure

for an activity divided by the activity’s tical capacity

prac-10 Mixed costs are usually reported in total in

the accounting records How much of the cost is fixed and how much is variable is un- known and must be estimated

11 A scattergraph allows a visual portrayal of

the relationship between cost and activity It reveals to the investigator whether a rela- tionship may exist and, if so, whether a li- near function can be used to approximate the relationship A scattergraph also can as- sist in identifying any outliers

12 Managers can use their knowledge of cost

relationships to estimate fixed and variable components A scattergraph can be used as

an aid in this process From a scattergraph,

a manager can select two points that best represent the relationship These two points can then be used to derive a linear cost for- mula The high-low method tells the manag-

er which two points to select to compute the linear cost formula The selection of these two points is not left to judgment

13 Because the scatterplot method is not

re-stricted to the high and low points, it is ible to select two points that better represent the relationship between activity and costs,

poss-producing a better estimate of fixed and

va-riable costs A scattergraph also identifies

outliers that could represent a high or low

point that is an aberration The main

advan-tage of the high-low method is that it

re-moves subjectivity from the choice process

The same line will be produced by two

dif-ferent people

14 Assuming that the scattergraph reveals that

a linear cost function is suitable, then the

method of least squares selects a line that

best fits the data points The method also

provides a measure of goodness of fit so

that the strength of the relationship between

cost and activity can be assessed

15 The best-fitting line is the one that is

“clos-est” to the data points This is usually

meas-ured by the line that has the smallest sum of

squared deviations

16 No The best-fitting line may not explain

much of the total cost variability There must

be a strong relationship as well

17 The coefficient of determination is the

per-centage of total variability in costs explained

by the activity As such, it is a measure of the goodness of fit, the strength of the rela- tionship between cost and activity

18 The correlation coefficient is the square root

of the coefficient of determination The relation coefficient reveals the direction of the relationship in addition to the strength of the relationship

cor-19 If the variation in cost is not well explained

by activity usage (the coefficient of nation is low) as measured by a single driv-

determi-er, then other explanatory variables may be needed to build a good cost formula

20 If the mixed costs are immaterial, then the

method of decomposition is unimportant Furthermore, sometimes managerial judg- ment may be more useful for assigning costs than the use of formal statistical me- thodology

EXERCISES 3–1

Raw materials cost: Variable cost

2 Forming machines rental cost is a step cost

3 Direct labor cost increase = $144,000 – $108,000 = $36,000

Supervision increase = $80,000 – $40,000 = $40,000

3-6

the particular action figure being produced; it is a step cost for the production

of action figures in general Other facility costs are strictly fixed

3–9

1 Total maintenance cost = $24,000 + $0.30(200,000) = $84,000

2 Total fixed maintenance cost = $24,000

3 Total variable maintenance cost = $0.30(200,000) = $60,000

4 Total maintenance cost per unit = [$24,000 + $0.30(200,000)]/200,000

= $84,000/200,000

= $0.42

5 Fixed maintenance cost per unit = $24,000/200,000 = $0.12

6 Variable maintenance cost per unit = $0.30

7 Requirements1-6 repeated:

1 Total maintenance cost = $24,000 + $0.30(100,000) = $54,000

2 Total fixed maintenance cost = $24,000

3 Total variable maintenance cost = $0.30(100,000) = $30,000

4 Total maintenance cost per unit = [$24,000 + $0.30(100,000)]/100,000

= $54,000/100,000

= $0.54

5 Fixed maintenance cost per unit = $24,000/100,000 = $0.24

6 Variable maintenance cost per unit = $0.30

3–10

1 Committed resources: trucks and technicians’ salaries

Flexible resources: supplies, small tools, and fuel

2 Variable activity rate = $420,000/35,000 = $12 per call

Fixed activity rate = $600,000*/40,000** = $15 per call

Total cost of one call = $12 + $15 = $27 per call

**8 × 250 × 20

committed resources = activity used + unused capacity

Note: The analysis is restricted to committed resources, since only these

re-sources will ever have any unused capacity

Plan 1 is more cost effective Jana will have some unused capacity (on age, 15 minutes a month), and the overall cost will be lower by $10 per month

*There are a number of ways to illustrate the use of minutes with Plan 1 Here are two possibilities The problem, of course, is that all included monthly minutes are used, and Jana must purchase additional minutes

Plan 2 is now more cost effective, as the monthly cost is $30 Under Plan 1,

additional charge includes the airtime and regional roaming charge.)

This is a mixed cost

4 Total cost = $80,000 + $500(Number of opening shows)

Using the high point:

Fixed cost = $2,790 – $0.43(3,100) = $1,457

OR

Using the low point:

Fixed cost = $1,758 – $0.43(700) = $1,457

3 Total tanning service cost = $1,457 + $0.43 × Number of appointments

4 Total predicted cost for September = $1,457 + $0.43(2,500) = $2,532

Total fixed cost for September = $1,457

Total predicted variable cost = $0.43(2,500) = $1,075

num-2 Total cost of tanning services = $1,290 + $0.45 × Number of appointments

3 Total predicted cost for September = $1,290 + $0.45(2,500) = $2,415

Cost = $2,350 + $4 (oil changes)

Predicted cost for January = $2,350 + $4(1,000) = $6,350

Rounding the coefficients:

This says that 97 percent of the variability in the cost of providing oil changes

is explained by the number of oil changes performed

4 The least-squares method is better because it uses all eight data points

in-stead of just two

Rounding the coefficients:

This says that 93 percent of the variability in the cost of moving materials is

explained by the number of moves

4 Normally, we would prefer the least-squares method since the data appear to

be linear However, the third observation may be an outlier If the third

The new cost formula would be

Cost = $1,411 + $17.28 (moves)

The higher fixed cost is much more in keeping with what we observed with

the scatterplot in requirement 1

3–17

1 Maintenance cost = $5,750 + $16X

2 Maintenance cost = $5,750 + $16(650) = $5,750 + $10,400 = $16,150

percent The relationship appears strong but perhaps could be improved by searching for another explanatory variable Leaving about 20 percent of the variability unexplained may produce less than satisfactory predictions

4 Maintenance cost = 12($5,750) + $16(8,400) = $69,000 + $134,400 = $203,400

Note: The fixed cost from the regression results is the fixed cost for the

month (since monthly data were used to estimate the equation) However, the question asks for the cost for the year Therefore, the fixed cost from the re- gression equation must be multiplied by 12

de-3–19

1 Warranty repair cost = $2,000 + $60(number of defects) - $10(inspection

hours)

2 Warranty repair cost = $2,000 + $60(100) – $10(150) = $6,500

3 The number of defects is positively correlated with warranty repair costs spection hours are negatively correlated with warranty repair costs

In-4 In this equation, the independent variables—number of defects and tion hours—account for 88 percent of the variability in warranty repair costs

inspec-It seems that analysts have identified some very good drivers for warranty pair costs

PROBLEMS 3-20

a Variable cost

b Committed fixed cost

c Discretionary fixed cost

d Discretionary fixed cost

e Discretionary fixed cost

f Variable cost

g Variable cost

h Discretionary fixed cost

i Discretionary fixed cost

j Committed fixed cost

Yes, the relationship appears to be reasonably linear

2 Using the high-low method:

Variable receiving cost = ($27,000 – $15,000)/(1,700 – 700) = $12

Fixed receiving cost = $15,000 – $12(700) = $6,600

Predicted cost for 1,475 receiving orders:

Receiving cost = $6,600 + $12(1,475) = $24,300

3 Receiving cost for the quarter = 3($6,600) + $12(4,650)

be dropped Then, data from the 11 remaining months could be used to develop a cost formula for receiving cost

3 Results for the method of least squares after dropping month 11

Coeffi-Standard Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 3168.56 2565.262 1.23518 0.248035 -2634.47 8971.589 -2634.47 8971.589

X Variable 1 15.17946 2.051314 7.399872 4.1E-05 10.53906 19.81986 10.53906 19.81986

Receiving cost = $3,168.56 + $15.18 × Number of receiving orders

Predicted receiving cost for a month

= $3,168.56 + $15.18(1,475) = $25,559.06

The regression run on the 11 months of data from “typical” months appears to be

outlier (85.88 percent versus 74.512 percent), and the scattergraph gives Joseph confidence that the data without the outlier describe a relatively linear relation- ship Since the storm damage is not expected to recur, month 11 can safely be dropped from a regression meant to help predict future receiving cost

3–23

1 Salaries:

Internet and software subscriptions—mixed

Consulting by senior partner—variable

Thus, total clinic cost = $9,025 + $22.60/professional hour

For 140 professional hours:

Clinic cost = $9,025 + $22.60(140) = $12,189

Charge per hour = $12,189/140 = $87.06

Fixed charge per hour = $9,025/140 = $64.46

Variable charge per hour = $22.60

Charge/day = $9,025/170 + $22.60 = $53.09 + $22.60 = $75.69

The charge drops because the fixed costs are spread over more professional hours

Setups explain about 63.4 percent of the variability in order filling cost,

pro-viding evidence that Brett’s choice of a cost driver is reasonable However,

other drivers may need to be considered because 63.4 percent may not be

strong enough to justify the use of only receiving orders

Setup hours explain about 82.5 percent of the variability in order filling cost

This is a better result than that of setups and should convince Brett to try

multiple regression

3–24 Concluded

4 Regression routine with pounds of material and number of receiving orders

as the independent variables:

F = $752 (rounded)

Y = $752 + $3.34a + $7.147b

R 2 = 0.95, or 95%

Multiple regression with both variables explains 95 percent of the variability

in receiving cost This is the best result

3–25

1 The order should cover the variable costs described in the cost formulas

These variable costs represent flexible resources

Garner should accept the order because it would cover total variable costs

and increase income by $15 per unit ($212 – $197), for a total increase of

$300,000

er than direct labor hours that are affecting variability in overhead cost What these drivers are and how resource spending would change need to be known before a sound decision can be made

3 Resource spending attributable to order:

The order would not be accepted now because it does not cover the variable activity costs Each unit would lose $2 ($212 – $214)

It would also be useful to know the step-cost functions for any activities that have resources acquired in advance of usage on a short-term basis It is possible that there may not be enough unused activity capacity to handle the special order, and resource spending may also be affected by a need (which,

in this case, would be unexpected) to expand activity capacity

3–26

1 High (2,000; $120,000); Low (1,200; $52,000)

V = ($120,000 – $52,000)/(2,000 – 1,200) = $85/nursing hour

This problem illustrates how the high-low method can be misleading when

cost behavior patterns have changed Fortunately, in this case, the negative

value of fixed cost tells us that something is wrong

2 a Output of spreadsheet multiple regression routine: