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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption

Variable Costing

Learning Obe!tives
After reading and studying Chapter 3, you should be able to answer the
following questions:
1. Why and how are overhead costs allocated to products and services?
. What causes underapplied or overapplied overhead, and how is it
treated at the end of a period?
3. What i!pact do di"erent capacity !easures have on setting
predeter!ined overhead rates?
#. $ow are the high%low !ethod and least squares regression analysis
used in analy&ing !i'ed costs?
(. $ow do !anagers use )e'ible budgets to set predeter!ined
overhead rates?
*. $ow do absorption and variable costing di"er?
+. $ow do changes in sales or production levels a"ect net inco!e
co!puted under absorption and variable costing?
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PR"#"$"R%&'"# OV"R("A# RA$"),
FL"*&BL" B+#,"$), A'# AB)ORP$&O'
VAR&ABL" CO)$&',
C(AP$"R
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
$erminolog-
Absorption !osting a cost accu!ulation and reporting !ethod that
treats the costs of all !anufacturing co!ponents ,direct !aterial, direct
labor, variable overhead, and -'ed overhead. as inventoriable or product
costs in accordance with generally accepted accounting principles
Applied overhead the a!ount of overhead that has been assigned to
Wor/ in 0rocess 1nventory as a result of productive activity2 credits for
this a!ount are to an overhead account
Contribution margin the di"erence between total revenues and total
variable e'penses2 this a!ount indicates the dollar a!ount available to
3contribute4 to cover all -'ed e'penses, both !anufacturing and
non!anufacturing
#ependent variable an un/nown variable that is to be predicted using
one or !ore independent variables
#ire!t !osting see variable costing
"xpe!ted !apa!it- a short%run concept that represents the anticipated
level of capacity to be used by a -r! in the upco!ing period, based on
pro5ected product de!and
Flexible budget a planning docu!ent that presents e'pected variable
and -'ed overhead costs at di"erent activity levels
Full !osting see absorption costing
Fun!tional !lassi.!ation is a group of costs that were all incurred for
the sa!e principle purpose2 it includes cost of goods sold and detailed
selling and ad!inistrative e'penses
(igh/lo0 method a technique used to deter!ine the -'ed and variable
portions of a !i'ed cost2 it uses only the highest and lowest levels of
activity within the relevant range
&ndependent variable a variable that, when changed, will cause
consistent, observable changes in another variable2 a variable used as
the basis of predicting the value of a dependent variable
Least s1uares regression anal-sis a statistical technique that
investigates the association between dependent and independent
variables2 it deter!ines the line of 3best -t4 for a set of observations by
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
!ini!i&ing the su! of the squares of the vertical deviations between
actual points and the regression line2 it can be used to deter!ine the
-'ed and variable portions of a !i'ed cost
%ultiple regression a statistical technique that uses two or !ore
independent variables to predict a dependent variable
'ormal !apa!it- the long%run ,(617 years. average production or
service volu!e of a -r!2 it ta/es into consideration cyclical and seasonal
)uctuations
Outlier an abnor!al or nonrepresentative point within a data set
Overapplied overhead the balance of the overhead account that
re!ains at the end of the period when the applied overhead a!ount is
greater than the actual that was incurred2 it !eans that too !uch
overhead was applied to production
Phantom pro.ts a te!porary absorption costing pro-t caused by
producing !ore inventory than is sold
Pra!ti!al !apa!it- the physical production or service volu!e that a -r!
could achieve during nor!al wor/ing hours with consideration given to
ongoing, e'pected operating interruptions
Produ!t !ontribution margin the di"erence between selling price and
variable cost of goods sold
Regression line any line that goes through the !eans ,or averages. of
the set of observations for an independent variable and its dependent
variables2 !athe!atically, there is a line of 3best -t4, which is the least
squares regression line
)imple regression a statistical technique that uses only one
independent variable to predict a dependent variable
$heoreti!al !apa!it- is the esti!ated !a'i!u! production or service
volu!e that a -r! could achieve during a period2 it disregards realities
such as !achine brea/downs and reduced or stopped plant operations on
holidays
+nderapplied overhead the condition wherein actual overhead is
greater than overhead charged to production
Variable !osting a cost accu!ulation and reporting !ethod that
includes only variable production costs ,direct !aterial, direct labor, and
variable overhead. as inventoriable or product costs2 it treats -'ed
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
overhead as a period cost2 it is not acceptable for e'ternal reporting and
ta' returns
Volume varian!e re)ects the !onetary i!pact of a di"erence between
the budgeted capacity used to deter!ine the -'ed overhead application
rate and the actual capacity at which the co!pany operates
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
Le!ture Outline
A2 'ormal Costing and Predetermined Overhead
1. 8or!al Costing and 0redeter!ined 9verhead.
a. 8or!al costing is an alternative costing syste! to actual
costing.
b. 8or!al costing assigns actual direct !aterial and direct labor to
products but allocates production overhead to products using a
predeter!ined overhead rate.
c. :ee te't "xhibit 3/3 for actual and nor!al costing co!pared.
d. ;our pri!ary reasons for using predeter!ined overhead rates in
product costing.
i. A predeter!ined overhead rate allows overhead to be
assigned during the period to the goods produced or sold and
to the services rendered. We sacri-ce so!e precision for
ti!eliness.
ii. 0redeter!ined overhead rates ad5ust for variations in actual
overhead costs that are unrelated to activity. ;or e'a!ple,
electricity costs run higher in the su!!er because of the
costs of air conditioning.
iii. 0redeter!ined overhead rates overco!e the proble! of
)uctuations in activity levels that have no i!pact on actual
-'ed overhead costs. ;i'ed cost per unit varies when activity
levels change. <o !ini!i&e such variations in unit cost, we
use an annual predeter!ined overhead rate for -'ed
overhead for all units produced during the year.
iv. =sing predeter!ined overhead rates allows !anagers to be
!ore aware of individual product or product line pro-tability
as well as the pro-tability of doing business with a particular
custo!er or vendor.
. ;or!ula for 0redeter!ined 9verhead >ate.
0redeter!ined 9$ rate ? <otal @udgeted 9$ Cost at a :peci-ed Activity Aevel
Bolu!e of :peci-ed Activity Aevel
a. 9verhead is typically budgeted for one year.
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
b. Co!panies should use an activity base that is logically related to
actual overhead cost incurrence. Co!!on activity bases
include:
i. Cirect labor hours2
ii. Cirect labor dollars2 and
iii. Dachine hours.
c. 9ther activity bases could include:
i. 8u!ber of purchase orders2
ii. 0hysical characteristics such as tons or gallons2
iii. 8u!ber of !achine setups2
iv. 8u!ber of parts2 and
v. Daterial handling ti!e.
d. Activity based costing is discussed in chapter #.
3. Applying 9verhead to 0roduction.
a. Applied overhead is the a!ount of overhead assigned to Wor/
in 0rocess 1nventory using the activity that was e!ployed to
develop the application rate. ;or convenience, both actual and
applied overhead are recorded in a single general ledger
account.
b. <he a!ount of applied overhead is deter!ined by !ultiplying
the predetermined rate by the actual activity level.
c. Cebits to the overhead account represent actual overhead
credits to the overhead account represent applied overhead ,see
te't "xhibit 3/4..
d. <he general ledger !ay contain a single overhead account or
separate accounts for variable and -'ed overhead.
e. Actual overhead incurred during a period will rarely equal
applied overhead2 this di"erence represents underapplied or
overapplied overhead.
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
i. +nderapplied overhead is the a!ount of overhead that
re!ains at the end of the period when the applied overhead
is less than the actual overhead.
ii. Overapplied overhead is the a!ount of overhead that
re!ains at the end of the period when the applied overhead
is greater than the actual overhead.
f. <here are two factors that cause underapplied or overapplied
overhead.
i. A di"erence between actual and budgeted variable overhead
cost per unit2 and
ii. A di"erence between actual and budgeted total -'ed
overhead cost2 and a di"erence between actual activity and
the budgeted capacity used to calculate the -'ed overhead
application rate, only if the co!panyEs actual activity level
e'actly equals the e'pected activity level will the total
budgeted a!ount of -'ed overhead be applied to production.
#. Cisposition of underapplied or overapplied overhead is recorded
annually.
a. <he !ethod of disposition of underapplied or overapplied
overhead depends upon the !ateriality of the a!ount involved.
b. <he a!ount is closed to Cost of Foods :old if it is i!!aterial
,see te't "xhibit 3/3 and the 5ournal entries on te't page +3..
c. <he a!ount, if it is !aterial, should be allocated a!ong the
accounts containing applied overhead: Wor/ in 0rocess
1nventory, ;inished Foods 1nventory, and Cost of Foods :old
,see te't "xhibit 3/5..
(. Alternative Capacity Deasures
a. $heoreti!al !apa!it- is the esti!ated !a'i!u! production or
service volu!e that a -r! could achieve during a period. 1t
disregards realities such as !achine brea/downs and reduced or
stopped plant operations on holidays.
b. Pra!ti!al !apa!it- the physical production or service volu!e
that a -r! could achieve during nor!al wor/ing hours with
consideration given to ongoing, e'pected operating
interruptions.
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
c. 'ormal !apa!it- the long%run ,(617 years. average production
or service volu!e of a -r!2 it ta/es into consideration cyclical
and seasonal )uctuations.
d. "xpe!ted !apa!it- a short%run concept that represents the
anticipated level of capacity to be used by a -r! in the
upco!ing period, based on pro5ected product de!and.
e. :ee te't "xhibit 3/6 for a visual representation of !easures of
capacity.
B2 )eparating %ixed Costs
1. :eparating Di'ed Costs.
a. Accountants describe a given costEs behavior pattern according
to the way its total cost ,rather than its unit cost. reacts to
changes in a related activity !easure.
b. A -'ed cost re!ains -'ed in total within the relevant range of
activity under consideration.
c. A variable cost varies as production changes, but the cost per
unit re!ains the sa!e.
d. Di'ed costs contain both a variable and a -'ed cost ele!ent
and are assu!ed by accountants to be linear rather than
curvilinear, within a relevant range of activity.
e. <he linear for!ula for a !i'ed cost is y ? a G b'
Where:
y ? total cost ,dependent variable.
a ? -'ed portion of total cost
b ? unit change of variable cost relative to unit
changes in activity ,slope.
' ? activity base to which y is being related ,the
predictor, cost driver, or independent variable.
i. <he linear for!ula for a variable cost is y ? b'
ii. <he linear for!ula for a -'ed cost is y ? a
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
. <he $igh%Aow Dethod
a. <he high/lo0 method is a technique used to deter!ine the
-'ed and variable portions of a !i'ed cost2 it uses only the
highest and lowest levels of activity and related costs within the
relevant range.
b. <he !ethod uses the highest and lowest observed levels of
actual activity to deter!ine the change in costs which re)ects
the variable cost ele!ent b as follows:
Aevel. Activity ,Aow 6 Aevel. Activity ,$igh
Aevel. Activity Aow at ,Cost 6 Aevel. Activity $igh at ,Cost
b=
Aevel Activity in Change
Cost <otal in Change
b=
c. <he -'ed portion of a !i'ed cost is found by subtracting total
variable cost fro! total cost.
d. Outliers are abnor!al or nonrepresentative observations within
a data set that !ay be inadvertently used in the application of
the high%low !ethod.
e. <e't "xhibit 3/7 illustrates the high low !ethod.
3. Least )1uares Regression Anal-sis is a statistical technique
that analy&es the association between dependent and independent
variables. 1t deter!ines the line of 3best -t4 for a set of
observations by !ini!i&ing the su! of the squares of the vertical
deviations between actual points and the regression line. 1t can be
used to deter!ine the -'ed and variable portions of a !i'ed cost.
<he least square !ethod is used to develop an equation that
predicts the un/nown value of a dependent variable ,cost. fro! the
/nown values of one or !ore independent variables ,activities..
When !ultiple independent variables e'ist, the least squares
!ethod can be used to select the best predictor of the dependent
variable based on which independent variable has the highest
correlation with the dependent variable.
a. A dependent variable 8!ost9 is an un/nown variable that is to
be predicted using one or !ore independent variables.
b. An independent variable 8a!tivit-9 is a variable that, when
changed, will cause consistent, observable changes in another
variable2 a variable used as the basis of predicting the value of a
dependent variable.
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
c. )imple regression is a statistical technique that uses only one
independent variable to predict a dependent variable.
d. %ultiple regression is a statistical technique that uses two or
!ore independent variables to predict a dependent variable.
e. A regression line is any line that goes through the !eans ,or
averages. of the set of observations for an independent variable
and its dependent variables. Dathe!atically, there is a line of
3best -t4 which is the least squares regression line.
f. A scattergraph is a graph that plots all /nown activity
observations and the associated costs2 it is used to separate
!i'ed costs into their variable and -'ed co!ponents and to
e'a!ine patterns re)ected by the plotted observations.
#. ;le'ible @udgets
a. =sing ;le'ible @udgets in :etting 0redeter!ined 9verhead >ates
,see te't "xhibit 3/:..
i. A ;exible budget is a series of individual budgets that
present costs according to their behavior at di"erent levels of
activity.
ii. A )e'ible budget presents variable and -'ed costs at various
levels of activity within a relevant range of activity.
iii. ;le'ible budgets are prepared for both product and period
costs.
(. 0lantwide versus Cepart!ental 9verhead >ates.
a. @ecause co!panies !ay produce !any types of products, a
single plantwide overhead rate does not produce the !ost
useful infor!ation.
b. Cepart!ental overhead rates will provide !ore useful
infor!ation by using the !ost appropriate cost driver for each
depart!ent.
c. <e't "xhibit 3/< illustrates the di"erences between using a
single plantwide overhead rate, and separate overhead rates for
the asse!bly and -nishing depart!ents.
C2 Overvie0 o= Absorption and Variable Costing
1. An 9verview of Absorption and Bariable Costing.
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
a. Cost accu!ulation is an approach to product costing that
deter!ines which !anufacturing costs are recorded as part of
product cost and which are recorded as part of period costs.
b. Cost presentation is an approach to product costing that focuses
on how costs are shown on e'ternal -nancial state!ents or
internal !anage!ent reports.
c. <he two !ethods of cost accu!ulation and presentation are
absorption costing and variable costing.
. Absorption !osting is a cost accu!ulation and reporting !ethod
that treats the costs of all !anufacturing co!ponents ,direct
!aterial, direct labor, variable overhead, and -'ed overhead. as
inventoriable or product costs2 it is the traditional approach to
product costing2 it !ust be used for e'ternal -nancial state!ents
and ta' returns ,see te't "xhibit 3/3>..
a. Absorption costing is alternatively ter!ed =ull !osting since all
types of !anufacturing costs are included as product cost.
b. Absorption costing presents e'penses on an inco!e state!ent
according to their functional classi-cations. A =un!tional
!lassi.!ation is a group of costs that were all incurred for the
sa!e principle purpose. H'a!ples include cost of goods sold,
selling e'penses, and ad!inistrative e'penses.
c. <otal variable product costs increase with each additional
product !ade or each additional service rendered and are
therefore considered to be product costs and are inventoried
until the product or service is sold.
d. ;i'ed overhead does not vary with units of production or level of
service2 it provides the !anufacturing capacity necessary for
production to occur. 0roduction could not ta/e place without the
incurrence of -'ed overhead, so -'ed overhead is considered to
be a product cost under absorption costing.
e. Absorption costing is perceived to furnish e'ternal parties with a
!ore infor!ative picture of earnings, as co!pared to variable
costing, by authoritative accounting bodies such as the ;A:@
and the :HC.
f. <he 1>: requires absorption costing for inco!e ta' purposes.
3. Variable !osting is a cost accu!ulation and reporting !ethod
that includes only variable production costs ,direct !aterial, direct
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
labor, and variable overhead. as inventoriable or product costs2 it
treats -'ed overhead as a period cost2 it is also /nown as dire!t
!osting2 it is not acceptable for e'ternal reporting and ta' returns
,see te't "xhibit 3/33..
a. Bariable costing treats -'ed overhead as a period cost while
absorption costing treats -'ed overhead as a product cost.
b. A variable costing inco!e state!ent presents e'penses
according to cost behavior ,variable and -'ed., although it !ay
present e'penses by functional classi-cation within the
behavioral categories.
c. Cost of goods sold is !ore appropriately called variable cost of
goods sold since it is co!posed of only the variable production
costs related to the units sold.
d. Produ!t !ontribution margin is the di"erence between
selling price and variable cost of goods sold and indicates how
!uch revenue is available to cover all period costs and to
potentially provide net inco!e. 0roduct contribution !argin is
co!!only called manufacturing margin.
e. <otal !ontribution margin is the di"erence between revenue
and all variable costs regardless of the area of incurrence
,production or nonproduction..
f. <he accounting profession has unoIcially disallowed the use of
variable costing as a generally accepted inventory valuation
!ethod for e'ternal reporting purposes.
#2 Absorption and Variable Costing &llustrations
1. Absorption and Bariable Costing 1llustrations ,:ee te't "xhibits 3/
33 and 3/35..
a. <e't "xhibit 3/33 provides unit production costs, annual
budgeted non!anufacturing costs, and other basic operating
data.
b. <he ;9$ rate is calculated as follows.
@udgeted annual ;9$J@udgeted Annual Capacity in
=nits
c. All costs are assu!ed to re!ain constant over the three years
77* through 77K.
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
d. ;or si!plicity, >enaldo is assu!ed to co!plete all units started
and have no W10 inventory at the end of the period.
e. All actual costs are assu!ed to be equal to standard and
budgeted costs for the years presented.
f. <he botto! of te't "xhibit 3/33 co!pares actual unit
production and actual unit sales to deter!ine the change in
inventory for each of the three years.
. <e't "xhibit 3/35 presents absorption and variable costing inco!e
state!ents for the three years.
a. Although it is assu!ed that production and operating costs were
equal to standard costs and budgeted costs for the years 77*
through 77K, di"erences in actual and budgeted capacity
utili&ation occurred for 77+ and 77K.
b. <his creates a volu!e variance for each of those years under
absorption costing. <he volume varian!e is the !onetary
i!pact of a di"erence between the budgeted capacity used to
deter!ine the -'ed overhead application rate and the actual
capacity at which the co!pany operates.
c. <here was no change in inventory in 77*, but ending inventory
increased by 7,777 units in 77+, then decreased by 7,777
units in 77K.
d. 1f we !ultiply the -'ed overhead rate by the unit change in
inventory, we will calculate the di"erence in inco!e ,volu!e
variance. under the two !ethods:
7,777 units ' L.(# ? L17,K77
i. 1f inventory levels increase, absorption costing will show
higher inco!e because !ore -'ed costs are trapped in
ending inventory on the balance sheet.
ii. 1f inventory levels decrease, absorption costing will show
lower inco!e because !ore -'ed costs are passed through
to the inco!e state!ent as cost of goods sold.
e. <he di"erences in inco!e between the two !ethods are only
ti!ing di"erences based on when -'ed overhead costs )ow
through to the inco!e state!ent as part of cost of goods sold
under absorption costing. <he total inco!e for all three years
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
,or over the life of the enterprise. will ulti!ately be the sa!e
under both !ethods.
3. Phantom pro.ts are the di"erence between absorption costing
and variable costing pro-ts caused by -'ed !anufacturing
overhead added to absorption costing inventory and therefore not
e'pensed during a period. <he absorption costing phanto! pro-ts
are created when !ore inventory is produced than is sold. <here
was L17,K77 of phanto! pro-ts in 77+ fro! the 7,777 unit
increase in ending inventory.
H. Comparison o= the $0o Approa!hes
1. Absorption costing inco!e will equal variable costing inco!e if
production is equal to sales ,:ee te't "xhibit 3/36..
a. Absorption costing inco!e will be greater than variable costing
inco!e if production is greater than sales.
b. :o!e -'ed overhead cost is deferred as part of inventory cost
on the balance sheet under absorption costing.
c. <he total a!ount of -'ed overhead cost is e'pensed as a period
cost under variable costing.
. Absorption costing inco!e will be less than variable costing inco!e
if production is less than sales.
a. Absorption costing e'penses all of the current period -'ed
overhead cost as well as releasing so!e -'ed overhead cost
fro! beginning inventory where it had been deferred fro! a
prior period.
b. Bariable costing shows on the inco!e state!ent only current
period -'ed overhead, so that the additional -'ed overhead
released fro! beginning inventory !a/es absorption costing
inco!e lower.
c. <he process of deferring and releasing -'ed overhead costs into
and fro! inventory !a/es it possible to !anipulate inco!e
under absorption costing by ad5usting levels of production
relative to sales. <his leads so!e to believe that variable
costing !ight be !ore useful for e'ternal reporting purposes
than absorption costing.
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
d. ;or internal reporting purposes, variable costing provides
!anagers infor!ation about the behavior of the various product
and period costs.
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
%ultiple Choi!e ?uestions =rom C%A "xaminations
1. 1n applying overhead, individual depart!ent rates would be used
instead of a plant wide rate if
a. <he !anufactured products di"er in the resources consu!ed
fro! the individual depart!ents in the plant
b. a co!pany wants to adopt a standard cost syste!
c. a co!panyEs !anufacturing operations are highly auto!ated
d. !anufacturing overhead is the largest co!ponent of product
cost
<he correct answer is a. ,CDA adapted.
. <he appropriate !ethod for disposing of underapplied or
overapplied factory
a. is apportioned between cost of goods sold and -nished goods
inventory
b. is in -nished goods inventory only
c. is in cost of goods sold only
d. it depends on the signi-cance of the a!ount
<he correct answer is d. ,CDA adapted.
3. <he appropriate !ethod for disposing of underapplied or
overapplied factory
a. is apportioned between cost of goods sold and -nished goods
inventory
b. is in -nished goods inventory only
c. is in cost of goods sold only
d. it depends on the signi-cance of the a!ount
<he correct answer is d. ,CDA adapted.
#. 1n deter!ining cost behavior in business, the cost function is often
e'pressed as y ? a G bx. Which one of the following cost
esti!ation !ethods should not be used in esti!ating -'ed and
variable costs for the equation?
a. graphic !ethod
b. si!ple regression
c. high and low point !ethod
d. !ultiple regression
e. !anage!ent analysis of data
<he correct answer is d. ,CDA Cece!ber 1MM, 3%3.
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
(. <he average a!ount of change in a dependent variable that is
associated with a change in an independent variable is deter!ined
through:
a. factor analysis.
b. nor!al analysis.
c. correlation analysis.
d. variance linearity analysis.
e. regression analysis.
<he correct answer is e. ,CDA Cece!ber 1MK*, (%(.
Nuestions 11 and 1 are based on Dulvey Co!pany, which derived the
following cost relationship fro! a regression analysis of its !onthly
!anufacturing overhead cost:
C ? LK7,777 G L1D
where C ? !onthly !anufacturing overhead cost
D ? !achine hours
<he standard error of the esti!ate of the regression is L*,777.
<he standard ti!e required to !anufacture one si'%unit case of DulveyEs
single product is # !achine hours. Dulvey applies !anufacturing
overhead to production on the basis of !achine hours and its nor!al
annual production is (7,777 cases.
*. DulveyEs esti!ated variable !anufacturing overhead cost for a
!onth in which scheduled production is (,777 cases would be:
a. LK7,777.
b. L37,777.
c. L#7,777.
d. L3*7,777.
e. so!e a!ount other than those given.
<he correct answer is c. ,CDA Cece!ber 1MK(, (%1+.
)olution
(,777 cases O # !achine hours per case ? 7,777 !achine
hours O L1 per !achine hour
@ A45>,>>> variable overhead
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Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
+. DulveyEs predeter!ined -'ed !anufacturing overhead rate would
be:
a. L1.*7 !achine hour.
b. L3.7 !achine hour.
c. L#.77 !achine hour.
d. L#.K7 !achine hour.
e. L7.#7 !achine hour.
<he correct answer is d. ,CDA Cece!ber 1MK(, (%1K.
)olution
Annual -'ed overhead costs L M*7,777 ,LK7,777 O 1.
Annual !achine hours P 77,777 ,(7,777 O #.
;i'ed overhead rate A 52:> per !achine hour
Nuestions K through 11 are based on the following infor!ation. 1n
preparing the annual pro-t plan for the co!ing year, Wil/ens Co!pany
wants to deter!ine the cost behavior pattern of the !aintenance costs.
Wil/ens has decided to use linear regression by e!ploying the equation y
? a G bx for !aintenance costs. <he prior yearEs data regarding
!aintenance hours and costs, and the results of the regression analysis
are as follows.
$ours of Daintenance
Activity Costs
Qanuary #K7 L#,77
;ebruary 37 3,777
Darch #77 3,*77
April 377 (,K7
Day (77 #,3(7
Qune 317 ,M*7
Quly 37 3,737
August (7 #,#+7
:epte!ber #M7 #,*7
9ctober #+7 #,7(7
8ove!ber 3(7 3,377
Cece!ber 3#7 3,1*7
#,K77 L #3,77
Average #77 L3,*77
53
Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
Average cost per hour LM.77
a L*K#.*(
b L+.KK#
:tandard error of a #M.(1(
:tandard error of b 7.11*
:tandard error of the esti!ate 3#.#*M
r

7.MM+#
K. 1n the standard regression equation y ? a G bx, the letter b is best
described as a ,n.:
a. independent variable.
b. dependent variable.
c. constant coeIcient.
d. variable coeIcient.
e. coeIcient of deter!ination.
<he correct answer is d. ,CDA Cece!ber 1MM7, #%+.
M. <he letter x in the standard regression equation is best described
as a ,n.:
a. independent variable.
b. dependent variable.
c. constant coeIcient.
d. variable coeIcient.
e. coeIcient of deter!ination.
<he correct answer is a. ,CDA Cece!ber 1MM7, #%K.
17. @ased upon the data derived fro! the regression analysis, #7
!aintenance hours in a !onth would !ean the !aintenance costs
,rounded to the nearest dollar. would be budgeted at:
a. L3,+K7.
b. L3,*77.
c. L3,+M7.
d. L3,+#*.
e. L3,+(*.
<he correct answer is d. ,CDA Cece!ber 1MM7, #%M.
)olution
y ? a G bx
? L*K#.*( G L+.KK# ,#7.
? A3,B57
54
Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption
Variable Costing
11. :i!ple regression analysis !ay be used to appro'i!ate the
relationship between two variables, such as direct labor hours and
total product cost. <his technique is:
a. !ost appropriate when the relationship between the two
variables is e'pressed by an e'ponential ,non%linear. graph.
b. based on a two%di!ensional !odel and the for!ula y ? a G
bx.
c. si!ilar to the quantitative technique si!ulation and is often
used in con5unction with it.
d. useful in deter!ining variable costs per unit produced, but is
not related to -'ed costs.
e. quantitative, but is not e'pressed graphically.
<he correct answer is b. ,CDA Cece!ber 1MKM, (%1
55