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Activity Cost Behavior: Learning Objectives
Activity Cost Behavior: Learning Objectives
CHAPTER 3
Activity Cost Behavior
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Define and describe fixed, variable, and mixed costs.
2. Explain the use of the resources and activities and their relationship to cost behavior.
3. Separate mixed costs into their fixed and variable components using the high-low method,
the scatterplot method, and the method of least squares.
4. Evaluate the reliability of the cost formula.
5. Explain how multiple regression can be used to assess cost behavior.
6. Define the learning curve, and discuss its impact on cost behavior.
7. Discuss the use of managerial judgment in determining cost behavior.
C H A P T E R S U M M A RY
This chapter introduces cost behavior as the way in which a cost changes in relation to changes
in activity output. The resource usage model helps one better understand the cost behavior. It
emphasizes that the committed resources may have excess capacity because they are
frequently fixed. There are three methods of separating mixed costs presented in the chapter
with their strengths and weaknesses. The method of least squares produces the line that best fits
the data points and is therefore recommended over the high-low and scatterplot methods. The
least-squares method has the advantage of offering methods to assess the reliability of cost
equations. The learning curve is discussed to better describe a nonlinear relationship between
labor hours and output. The chapter concludes by describing how managers use their judgment
alone or in conjunction with the cost behavior analytical methods.
CHAPTER REVIEW
Knowledge of cost behavior allows you to assess changes in costs that result from changes
in activities. Cost accountants use this knowledge to assess the effects of decisions that
change activities.
I.
Learning Objective #1
A.
Cost behavior is the way a cost changes in relation to changes in the levels of activity
usage.
B.
The types of cost behavior include variable costs, fixed costs, and mixed costs.
Summary of Variable and Fixed Cost Behavior
40
Chapter3
Cost
In Total
Per Unit
Variable
Fixed
Review textbook Exhibit 3-1, which graphically illustrates fixed cost behavior.
Review textbook Exhibit 3-2, which graphically illustrates variable cost behavior.
Mixed costs are costs that have both a fixed and a variable component.
Review textbook Exhibit 3-5, which graphically illustrates mixed cost behavior.
C.
Linearity Assumption
A linear cost function is used to approximate the underlying cost function within a
relevant range because it is less time consuming and less expensive to estimate. A
relevant range is the range of activity for which the assumed cost relationship is valid.
Review textbook Exhibit 3-4, which graphically illustrates
linear cost function approximation within the relevant range.
D.
Time Horizon
1. The longer the time period, the more likely that a cost will be a variable cost. In the
long run, all costs are variable.
2. The short run is a period of time in which at least one cost is fixed.
3. Two factors determine what is long run and what is short run:
Management judgment
Types of decisions that management faces (short-term and long-term decisions)
4. Understanding of the nature of long-run and short-run cost behavior provides
insights to activities and the resources needed to enable an activity to be performed.
II.
Learning Objective #2
Introduction
1. Resources are the economic elements that are consumed in performing activities.
2. When a firm acquires the resources needed to perform an activity, it is
obtaining activity capacity. Activity capacity is the ability to perform activities.
a. Practical capacity is the level at which the activity is performed efficiently.
b. Unused capacity occurs when the activity capacity acquired is not used.
Unused capacity = Activity capacity Capacity used
B.
Flexible Resources
41
Committed Resources
Committed resources are acquired by the use of either an explicit or implicit contract
to obtain a given quantity of resource. They are supplied in advance of usage, regardless of whether the resources acquired are fully used or not.
Acquisition of committed resources include:
1. Committed fixed expenses are the costs incurred to provide long-term activity
capacity. They are not subject to change in the short run.
Examples:
Acquiring multiperiod service capacities by hiring employees.
Purchasing a long-lived asset or entering a long-term contract (buildings and
equipment, either purchased or leased).
2. Discretionary fixed expenses are the costs incurred for the acquisition of shortterm activity capacity. They are independent of actual activity usage, but the levels
of usage can be changed quickly.
Example:
Salaries of employees, because workers may not be laid off if there is a shortterm drop in production.
D.
E.
Step-Cost Behavior
A step-cost function displays a constant level of cost for a range of activity output
and then jumps to a higher level of cost at some point, where it remains for a similar
range of activity.
1. Step-variable costs are costs that follow a step-cost behavior with narrow steps
(resources must be purchased in small chunks).
Step-variable costs can be approximated with a strictly variable cost assumption.
2. Step-fixed costs are costs that follow a step-cost behavior with wide steps
(resources are acquired at large quantities).
Many so-called fixed costs are best described by a step-cost function because
they are fixed over the normal operating range of a firm (relevant range).
Many committed resources, such as engineers salaries, follow a step-cost
function.
42
Chapter3
Activity rate is the average unit cost obtained by dividing the resource
expenditure by the activitys practical capacity. The activity rate is used to calculate
the cost of the activity used (resource usage) and the cost of unused activity as
follows:
Cost of activity used = Activity rate Actual activity output
Cost of unused activity = Activity rate Unused activity
Thus,
Cost of activity supplied = Cost of activity used + Cost of unused activity
Note that a traditional cost management system typically provides information only
about the cost of the resources supplied.
F.
III.
Learning Objective #3
Total activity cost (Y ) is the dependent variable because its value depends on
the value of another variable.
Measure of activity output (X ) is the independent variable because it measures
activity output and explains changes in the activity cost. There may be more
than one independent variable. The choice of an independent variable is related
to its economic plausibility.
The intercept parameter corresponds to fixed activity cost (F ) or total fixed
cost. Graphically, the intercept parameter is the point at which the mixed cost
line intercepts the cost (vertical) axis.
The slope parameter corresponds to the variable cost per unit of activity
(V ). Graphically, this represents the slope of the mixed cost line.
2. There are three widely used methods of separating mixed costs into their fixed
and variable components: the high-low method, the scatterplot method, and the
method of least squares.
B.
43
2. The parameters for the cost formula (F and V ) are computed using the
following equations:
Variable cost per unit of activity = Change in cost / Change in activity
V = (Y2 Y1) / (X2 X1)
Fixed activity cost = Total cost Total variable cost
F = Y2 V X2or
F = Y1 V X1
Review textbook Exhibit 3-9, which illustrates cost behavior situations not appropriate for the
high-low method. Using a scattergraph to inspect data visually would be more
advantageous.
D.
44
Chapter3
The method of least squares produces a best-fitting line that is closer to the data
points than any other line.
1. Mathematically, closer is defined as the line with the smallest sum of the squared
deviations. Deviation is defined as the difference between the predicted and
actual cost.
2. The method of least squares uses the sum of squared deviations to identify the
best-fitting line because:
Squaring the deviations eliminates the canceling effect of positive and negative
deviations.
Squaring the deviations also assesses a larger penalty to data points that have
a large deviation. Many small deviations are better than a few large deviations.
Since the measure of closeness is the sum of the squared deviation of points from
the line, the smaller the measure, the better the line fits the data points.
E.
Review textbook Exhibit 3-12, which shows regression output produced by Excel.
2. Use the coefficients of the intercept and the X variable reported at the bottom of
the regression output to construct the cost formula.
IV.
Learning Objective #4
Regression output is useful to assess the reliability of the estimated cost formula because
it provides the results of hypothesis testing of cost parameters, goodness of fit, and
confidence intervals. These tests help the manager determine whether there is a strong
association between an activity cost and an activity driver. Strong test results provide
evidence to the manager about the correctness of the driver selection.
A.
Excel is a registered trademark of Microsoft Corporation. Lotus and 1-2-3 are registered trademarks of the Lotus Development
Corporation. Quattro Pro is a registered trademark of Novell, Inc. Any further reference to Excel, Lotus 1-2-3, or Quattro Pro refers
to this footnote.
45
If the reported P-value is less than the specified degree of confidence (for example, 0.05), the independent variable is a significant explanatory variable.
If the reported P-value is greater than the specified degree of confidence (for
example, 0.05), the independent variable is not a significant explanatory
variable.
B.
C.
Confidence Intervals
A confidence interval provides a range of values for the actual cost with a
prespecified degree of confidence.
1. The confidence interval of the predicted costs is used to measure the discrepancy
between the actual cost and the predicted cost using the least-squares cost
equation.
The predicted cost can be expected to be different from the actual cost because:
The cost equation may have omitted a relevant activity driver.
A sample was used to estimate the relationship.
2. The standard error (Se) in the regression statistics and a t statistic is required to
construct the confidence interval for the predicted cost.
Confidence interval = Predicted cost t Standard error
where
Standard error is the measure of dispersion found in the data.
t statistic is a specified degree of confidence that describes the likelihood that
the prediction interval will contain the actual costs. The value of the t statistic
depends on the following:
Degree of freedom = n p
46
Chapter3
Multiple Regression
Learning Objective #5
Multiple regression uses least squares to fit an equation involving two or more
explanatory variables.
The hypothesis test of the parameters now is a test of whether or not the independent
variable should be included in the equation.
The adjusted R Square is used as the goodness of fit measure.
The t statistic for each regression coefficient is calculated, and the achieved level of
statistical significance (the reported p value) is tested in the same way as those in
simple regression.
Calculate the confidence interval in the same way as those in simple regression.
Review textbook Exhibit 3-15, which shows a sample multiple regression analysis output.
VI.
Learning Objective #6
The learning curve describes the mathematical or graphic representation of how the labor
hours worked per unit decrease as the volume produced increases in a nonlinear fashion.
The learning rate, expressed as a percent, gives the percentage of time needed to make
the next unit, based on the time it took to make the previous unit.
The use of the learning curve concept helps management to be more accurate in
budgeting and performance evaluation for processes in which learning occurs. The
learning curve can be applied to the service industry and to the manufacturing industry
using the following models:
A.
Review textbook Exhibit 3-16, which gives the data for a cumulative average-time learning
curve with an 80 percent learning rate and 100 direct labor hours for the first unit.
47
Note that the bold rows give the cumulative average time and
cumulative total time according to the doubling formula.
Calculate the amounts for units that are not doubles of the original amount using the
following formula:
Y = pXq
Where:
Y = Cumulative average time per unit
X = Cumulative number of units produced
p = Time in labor hours required to produce the first unit
q = Rate of learning = ln (percent learning) / ln 2
Review textbook Exhibit 3-17, which shows the graph of both the cumulative
average time per unit and the cumulative total hours required.
B.
Review textbook Exhibit 3-18, which gives data for an incremental unit-time learning
curve with an 80 percent learning rate and 100 direct labor hours for the first time.
Calculate the amounts for units that are not doubles of the original amount using the
following formula:
m = pXq
Where:
m = Time needed to produce the last unit
X = Cumulative number of units produced
p = Time in labor hours required to produce the first unit
q = Rate of learning = ln (percent learning) / ln 2
C.
The difference between the cumulative average-time learning curve model and the
incremental unit-time learning curve model is in the underlying assumptions of the two
models.
1. The cumulative average-time learning curve model assumes that the decrease in
learning applies to all the units in between the original observation and the
doubled observation, not just to the incremental unit.
2. The incremental unit-time learning curve model assumes that the decrease in
learning applies only to the incremental unit, not to all the units in between the
original observation and the doubled observation.
48
Chapter3
3. In general, the incremental unit-time learning curve model does not decrease as
rapidly as the cumulative average-time learning curve model.
49
VII.
Managerial Judgment
Learning Objective #7
Managers may use their experience and past observations of cost relationships to
determine fixed and variable costs. This is the most widely used method in practice; its
appeal is simplicity.
Managers may use their experience and judgment to refine the statistical estimates.
For example, experienced managers might eyeball the data and throw out several
points as outliers, excluding them from the computations.
50
Chapter3
activity capacity
activity rate
committed fixed expenses
cost behavior
cost of resource usage
cumulative average-time learning curve
model
discretionary fixed expenses
fixed costs
flexible resources
learning curve
long run
mixed costs
practical capacity
relevant range
resources supplied in advance of usage
short run
step-cost function
step-fixed cost
step-variable cost
unused capacity
variable costs
1. If the cost remains constant over wide ranges of activity usage, it is a(n) ________
_____________________ ; if the ranges are relatively narrow, it is a(n) ________
_____________________.
2. The ability to perform activities is called ______________________________.
3. The __________________________________________ states that the cumulative
average time per unit decreases by a constant learning rate each time the cumulative
quantity of units produced doubles.
4. The efficient level of activity performance is the ______________________________.
5. The period of time in which all costs are variable is the __________________; the period of
time in which at least one cost is fixed is the __________________.
6. The activity rate multiplied by actual activity usage is the formula for _____________
_______________________.
7. The ______________________ is the average unit cost.
8. Costs incurred for the acquisition of short-term capacity or services
_____________________________________________.
are
activity
capacity
are
51
12. When the cost function is defined for ranges of activity usage, it is a(n) _______________
______________.
13. ______________________________ are resources acquired from outside sources with no
requirement of any long-term commitment, while ___________________________________
____________________________ are acquired through either an explicit or implicit contract
to obtain a given quantity of resource, whether fully used or not.
14. _________________________ vary in total in direct proportion to changes in an activity
driver.
15. _________________________ have both a fixed and a variable component.
16. _________________________ are in total constant within the relevant range as the level of
the activity driver varies.
17. The assumed cost relationship is valid only for the __________________________.
18. The ____________ describes the mathematical or graphic representation of how the labor
hours worked per unit decrease as the volume produced increases in a nonlinear fashion.
SET #2
From the list that follows, select the term that best completes each statement and write it in the
space provided.
activity output
coefficient of correlation
coefficient of determination
committed resources
confidence interval
dependent variable
deviation
flexible resources
goodness of fit
high-low method
hypothesis test of cost parameters
independent variable
intercept parameter
incremental unit-time learning curve
learning rate
method of least squares
multiple regression
nonunit-level drivers
scattergraph
scatterplot method
slope parameter
unit-level drivers
1. __________________ is the difference between the predicted value and the actual cost.
2. The ________________________________________ is a measure of the relationship
between two variables, including the direction of the relationship.
3. The plot of cost versus activity is a(n) _____________________.
4. The
__________________________________
is
used
_________________ _____________.
to
predict
the
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Chapter3
M U LTI P L E - C H O I C E Q U I Z
Complete each of the following statements by circling the letter of the best answer.
1. The amount of activity capacity used in producing the organizations output is:
a. practical capacity.
b. resource spending.
c. resource usage.
d. unused capacity.
e. none of the above.
2. Which of the following costs remain constant in total when the level of the activity driver
varies?
a. conversion costs
b. direct costs
c. fixed costs
d. mixed costs
e. variable costs
53
54
Chapter3
9. Which of the following best describes the difference between the high-low method and the
scatterplot method?
a. The high-low method uses all of the activity points; the scatterplot method uses only two
points.
b. The high-low method uses the high activity point and the low activity point; the scatterplot
method allows the user to select two points that better represent the relationship between
activity and costs.
c. The high-low method uses the coefficient of correlation; the scatterplot method uses the
coefficient of determination.
d. The high-low method uses costs from the accounting records; the scatterplot method
uses costs from the operating records.
e. None of the above accurately describe the difference between the high-low method and
the scatterplot method.
10. Which of the following is not an advantage of using the least squares method rather than
the high-low method?
a. The equation line is the best-fitting line to the data points.
b. All of the data points, rather than just two points, are used.
c. A measure of the goodness of fit is available.
d. Measures of the reliability of the resulting line are available.
e. All of the above are advantages of the least squares method.
11. Which of the following is true about the coefficient of determination R 2?
a. R 2 is the probability that the actual value will be included in the confidence interval.
b. An R 2 of 95% means that 95% of the data points fall on the equation line.
c. A negative R 2 means that as activity increases, costs will decrease.
d. R 2 measures the percentage of the total variability of the costs that is explained by the
equation line.
e. None of the above are true.
12. Why is managerial judgment so critical in determining cost behavior?
a. All statistical methods are notoriously unreliable.
b. Statistical methods are highly accurate in depicting the past, but they cannot foresee the
future.
c. The fixed and variable cost breakdowns are recorded in the accounting records;
management just needs to know the appropriate accounts to search.
d. The managers can use their experience to refine the statistical estimates.
e. Managerial judgment is not critical; statistical methods can capture all of the managers
expertise without any bias.
13. XYZ Corporation has reported activity costs. When 10,000 units are produced, the average
cost is $23 per unit. When the activity is only 6,000 units, the average cost is $30 per unit.
What are the fixed and variable costs?
Fixed
a. $105,000.00
b.
12.50
c.
19.50
d.
(8,400.00)
e. 180,000.00
Variable
$ 12.50
105,000.00
(1.75)
0.08
7.00
55
14. Almost Company had setup costs totaling $265,000 when 2,750 setups were performed.
When 3,500 setups were performed, setup costs totaled $310,000. Determine the fixed and
variable cost breakdown for setup costs.
Fixed
Variable
a. $ (1,666 .67)
b. 475,000.00
c. 100,000.00
d.
12,000.00
e. (12,000.00)
$ 16.67
(60.00)
60.00
92.00
92.00
15. Colfax, Inc., had packaging costs of $150,000 when 12,500 packages were shipped.
Packaging costs were $190,000 when 17,500 packages were shipped. The variable costs
were:
a. $8.00.
b. $10.86.
c. $11.33.
d. $12.00.
e. none of the above.
16. Acme Company has just completed a least squares regression analysis of its materialhandling costs. The cost analyst has provided you with the following summary, with
apologies that the original computer output was not available:
Parameter
Intercept....................................
Number of moves.....................
Estimate
347.86
3.731
61.758
0.2387
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Chapter3
PRACTICE TEST
EXERCISE 1
Fisk Engineering is an independent testing laboratory with contracts to perform standardized
quality testing for local manufacturers. Fisk employs four engineers who are responsible for all
phases of the testing. Each engineer is paid an average salary of $40,000 and is capable of
conducting 3,200 tests per year. The facility was recently constructed for $450,000 and is being
depreciated on a straight-line basis over 20 years. Testing equipment is leased for $6,000 per
year on a five-year lease. Consumable supplies are expected to average $175,000 per year at full
capacity. During 20XX, there were 11,000 tests performed.
Required:
1. Classify the resources into one of the following: (1) long-term resources supplied in advance,
(2) short-term resources supplied in advance, or (3) resources supplied as needed.
2. Calculate the activity rate, breaking it down into fixed and variable components.
3. Calculate the total activity available, breaking it down into activity usage and unused activity.
57
EXERCISE 2
Antz Industries has provided you with the following data for its materials storeroom:
Month
January......................
February....................
March.........................
April...........................
May............................
June...........................
July............................
August.......................
September.................
October......................
November..................
December..................
Number of Shipments
Storeroom Costs
175
225
275
175
200
225
300
325
275
200
150
175
$3,000
3,600
4,300
3,800
2,700
3,200
4,250
4,400
4,100
3,150
2,650
2,750
Required:
2. Prepare a scattergraph of the data points, using cost as the vertical axis and number of
shipments as the horizontal axis. Do any of the points seem to be outliers?
58
Chapter3
EXERCISE 2(Continued)
3. Determine the cost behavior using the scatterplot method. How do these results compare
with the high-low method?
EXERCISE 3
The Saints Company wants to develop an estimate of its supplies costs. George Saint, the
controller, has collected what he believes to be the relevant data for the past 12 months. It is Mr.
Saints professional opinion that the supplies cost should be closely related to the volume of the
product produced; thus, he has provided you with the following information:
Month
Units Produced
January......................
February....................
March.........................
April...........................
May............................
June...........................
July............................
August.......................
September.................
October......................
November..................
December..................
Cost of Supplies
100
80
70
50
60
80
70
80
100
70
60
50
$3,550
2,980
2,970
2,410
2,530
3,180
2,830
2,820
3,220
2,950
2,560
2,420
Intercept
Units Produced
df
1
10
11
SS
1164437.19
174929.4766
1339366.667
MS
1164437
17492.9
F
66.56609354
Significance F
9.909E-06
Coefficients
1445.8953
19.619835
Standard Error
178.4756267
2.404743773
t Stat
8.10136
8.1588
P-value
1.05437E-05
9.9085E-06
Lower 95%
1048.2268
14.261731
Upper 95%
1843.5639
24.977939
59
EXERCISE 3(Continued)
Required:
1. Prepare a cost formula for the supplies cost using the regression output.
4. Prepare a 95 percent confidence interval for supplies cost when 90 units are produced (using
t statistic = 2.228).
60
Chapter3
EXERCISE 4
The Yuma Company has accumulated the following information in its quest to determine the cost
behavior of the Receiving Department. Gail Nelson, the manager of Yuma, feels that tons of
material received, the dollar value of receipts, the number of purchase orders, and the number of
incoming shipments could all reasonably influence the Receiving Department costs.
Receiving
Department Costs
Tons of Material
Received
Dollar Value
of Receipts
$67,100
75,200
92,200
88,600
87,700
80,200
98,000
67,600
68,500
78,500
71,700
80,300
78,000
80,000
93,800
47,300
68,200
93,500
79,200
96,800
49,500
73,700
40,700
46,200
63,800
50,600
48,400
55,000
69,300
53,900
$138,600
157,000
158,400
139,900
144,000
134,100
162,000
117,000
152,100
143,100
117,000
148,500
127,800
136,800
153,000
Number
of POs
90
89
96
105
91
110
128
85
88
90
87
108
103
98
125
Number of
Incoming Shipments
103
117
139
148
120
138
156
114
117
133
130
136
115
126
168
Required:
1. Prepare a cost formula for the Receiving Department costs. How many activity drivers are
used? Are they all different from zero?
61
EXERCISE 4(Continued)
Use this space to continue your answer.
2. How well does your model explain the variability in the costs?
3. Prepare an estimate of costs for a month when 75,000 tons valued at $125,000 are received,
90 purchase orders are handled, and 125 shipments are received.
4. Prepare a 95 percent confidence interval for the point estimate you prepared in Requirement 3.
62
Chapter3
EXERCISE 5
Titan Corp. manufactures high-tech equipment for space shuttles. It has completed
manufacturing the first unit of the new TN-3 machine design. Management believes that the 100
labor hours required to complete this unit are reasonable and is prepared to go forward with the
manufacture of additional units. An 80 percent cumulative average-time learning curve model for
direct labor hours is assumed to be valid. Data on costs are as follows:
Direct materials
Direct labor
Required:
1. Set up a table with columns for cumulative number of units, cumulative average time per unit
in hours, cumulative total time in hours, and individual unit time for the nth unit in hours.
Complete the table for 1, 2, 4, and 8 units.
2. What is the total variable cost of producing 1, 2, 4, and 8 units? What is the variable cost per
unit for 1, 2, 4, and 8 units?
63
C A N YOU ? C H E C K L I S T
Can you explain the relationship among activities, resource usage, and cost behavior? Can
you explain how resource spending, resource usage, and unused capacity are interrelated?
Can you describe how resources supplied affect cost behavior?
Can you describe the different patterns of step-cost behavior? Can you explain how the con cept of the relevant range affects the estimation of these costs?
Can you determine cost behavior using either the high-low method or the scatterplot method?
Can you explain the difference between these two methods?
Can you explain how the method of least squares defines closest and best-fitting line?
Can you use the least squares method to develop a cost formula? Can you determine
whether or not the resulting cost formula is reliable?
Can you use the cumulative average-time learning curve model and the incremental unit-time
learning curve model to produce more accurate estimates in budgeting and performance
evaluation for processes in which learning occurs?
Can you describe the role that managerial judgment plays in determining cost behavior?
ANSWERS
KEY TERMS TEST
SET #1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
SET #2
1.
2.
3.
4.
5.
6.
Deviation
coefficient of correlation
scattergraph
independent variable, dependent variable
coefficient of determination
goodness of fit
7.
8.
9.
10.
11.
12.
64
Chapter3
MULTIPLE-CHOICE QUIZ
1.
2.
3.
4.
5.
6.
7.
8.
9.
c
c
a
d
c
d
b
e
b
10.
11.
12.
13.
e
d
b
a Variable = ($23 10,000 $30 6,000) / (10,000 6,000) = $50,000 / 4,000 =
$12.50
Fixed = $230,000 ($12.50 10,000) = $105,000
14. c Variable = ($310,000 $265,000) / (3,500 2,750) = $45,000 / 750 = $60.00
Fixed = $310,000 ($60 3,500) = $100,000
15. a Variable = ($190,000 $150,000) / (17,500 12,500) = $40,000 / 5,000 = $8.00
16. d Y = 347.86 + (3.731 150) = 907.51
Y = 2.086 53.51 = 111.62
PRACTICE TEST
EXERCISE 1(Resources and Activities)
1. Engineers:
Facility:
Leased Equipment:
Supplies:
2. Activity rate:
Fixed:
[4 $40,000 + ($450,000 / 20) + $6,000] / (4 3,200) = $188,500 / 12,800 = $14.7266 per test
Variable: $175,000 / 12,800 = $13.6719
3. Activity available = Activity usage + Unused Activity
12,800
=
11,000
+
1,800
Storeroom costs
5000
4000
3000
Series1
2000
1000
0
0
100
200
300
400
Number of shipments
An analysis of the scattergraph indicates that further investigation on April data is needed. The storeroom costs
in April do not fit the general pattern of behavior in the data and, thus, can be an outlier.
65
3. Any two points that appear reasonable could be used to calculate the cost formula. Individual results may be
very similar to the high-low results, or they could be very different.
0.869 0.932
Actual
$3,550
2,980
2,970
2,410
2,530
3,180
2,830
2,820
3,220
2,950
2,560
2,420
Predicted
$3,408
3,015
2,819
2,427
2,623
3,015
2,819
3,015
3,408
2,819
2,623
2,427
4. Confidence interval
Confidence interval
Confidence interval
Confidence interval
Deviation
142)
(35)
151)
(17)
(93)
165)
11)
(195)
(188)
131)
(63)
(7)
Sum................
Deviation2
20,198
1,259
22,715
285
8,665
27,066
115
38,213
35,298
17,087
3,980
47
174,928
0.9927017
0.98545666
0.97963933
1397.87556
15
ANOVA
Regression
Residual
Total
df
4
10
14
SS
MS
1324068773 331017193
19540560.7 1954056.1
1343609333
F
169.4
Significance F
3.85634E-09
66
Chapter3
Intercept
Tons of DM received
Dollar value of receipts
No. of purchase orders
No. of incoming shipments
t Stat
1.2366827
12.643154
-0.228781
6.8932078
4.273236
P-value
0.24446
1.8E-07
0.82365
4.2E-05
0.00163
Lower 95%
-4055.15701
0.266635918
-0.08285444
236.6823593
78.82387702
Upper 95%
14171.4709
0.38072158
0.06742413
462.771747
250.581591
Based on the P-values, the results suggest that the tons of direct material received, number of purchase orders,
and number of incoming shipments are significantly different from zero, because their P-values are less than
the 5% degree of confidence. These variables seem to be good explanatory variables of the cost behavior of the
Receiving Department.
Adjusted R 2 = 0.9796, or 97.96%Standard Error = 1397.876
Second Pass:Drop the variable and redo the regression, since the P-value for the variable of dollar value of
receipts is not significant.
SUMMARY OUTPUT:THREE VARIABLES
Regression Statistics
Multiple R
0.99266336
R Square
0.98538054
Adjusted R Square
0.98139342
Standard Error
1336.30554
Observations
15
ANOVA
Regression
Residual
Total
Intercept
Tons of DM received
No. of purchase orders
No. of incoming shipments
df
3
11
14
SS
MS
1323966496 441322165
19642837.45 1785712.5
1343609333
t Stat
1.5137737
14.829568
7.4595818
4.4772744
F
247.141
Significance F
2.26457E-10
P-value
0.15827
1.3E-08
1.3E-05
0.00094
Lower 95%
-2015.30248
0.27330997
244.1751551
83.84550461
Upper 95%
10893.8132
0.36857823
448.57428
245.989132
67
Cumulative
Number
of Units
(1)
(2)
(4)
100
100
100
80 (0.8 x 100)
160
60
64 (0.8 x 80)
256
45.4
409.6
35.5
2. The calculation of total variable cost of producing 1, 2, 4, and 8 units and the variable cost per unit for 1, 2, 4, and
8 units is presented below.
1 unit
2 units
4 units
8 units
750
$ 1,500
$ 3,000
$ 6,000
Direct labor
1,500
2,400
3,840
6,144
Variable overhead
4,000
6,400
10,240
16,384
$ 6,250
$10,300
$ 17,080
$ 28,528
Direct materials
Divided by units
Unit variable cost
$ 6,250
$ 5,150
$ 4,270
$ 3,566