COST ACCOUNTING

CHAPTER 6 (6-45)
PRASENRAJ RAJU CEA150123
ESWARAN A/L JAISANGKAR CEA140030

1.Explain the difference between the overhead rate originally estimated

by Dana and the overhead rate developed from the regression method.

The first method used by Dana was simply the average

overhead per hour for the last 12 months and the fixed and
variable costs cannot be identified. Dana divided total
overhead by total labor hours, which effectively treated all
overhead as variable. Regression analysis measures the
behavior of the overhead costs in relation to labor hours and is
a model that distinguishes between fixed and variable costs.

2. Using data from the regression analysis, develop the following cost
estimates per person for a cocktail party.
a. Variable cost per person

Food and beverages

$14.00

Labor (.6 hr. @ $11/hr.)

6.60

Variable overhead (.6 hr. @ $4/hr.)

2.40

Total

23.00

b. Absorption (full) cost per person(includes both variable and fixed cost per person)
Food and beverages

14.00

Labor (.6 hr. @ $11/hr.)

6.60

Variable overhead (.6 hr. @ $4/hr.)

2.40

Fixed overhead (.6 hr. @ $10/hr.)*

6.00

Total

*48000 x 12months = 576000

576000/57600hours = $10/hr

29.00

3.

Dana has been asked to prepare a bid for a 250-person

cocktail party to be given next month. Determine the
minimum bid price that Dana should be willing to
submit.
The minimum bid for 250-person cocktail party would be
$5750. The amount is calculated by multiplying the
variable cost per person of $23 by 250 people. At any price
above the variable cost, Dana will be earning a contribution
toward her fixed costs.

4. What other factors should Dana consider in developing the

bid price for the cocktail party?

a.

The assessment of the current capacity of her business. If the business is at capacity, other work would
have to be sacrificed at some opportunity cost.

b.

Analyses of the competition. If competition is rigorous, she may not have much bargaining power.

c. A determination of whether or not her bid will set a precedent for lower prices.

d. The realization that regression analysis is based on historical data, and that any
anticipated changes in the cost structure should be considered.