Bus 227 Management Accounting

May Trimester 2016

Workshop Solutions Session 3
Chapter 6
RQ:

6-4; 6-16

E:

6-24; 6-26

P:

6-37; 6-43

Review Questions (RQ):

Cost

Cost

Graphs of the cost behavior patterns are as follows:

Activity

Activity

a. Variable

b. Step-variable

Cost

Cost

Activity
Cost

c. Fixed

Activity
Cost

d. Step-fixed

Activity
e. Semivariable

Activity
f. Curvilinear

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 3
6-16

The chief drawback of the high-low method of cost estimation is that it uses only
two data points. The rest of the data are ignored by the method. An outlier can
cause a significant problem when the high-low method is used if one of the two
data points happens to be an outlier. In other words, if the high activity level
happens to be associated with a cost that is not representative of the data, the
resulting cost line may not be representative of the cost behavior pattern.

EXERCISE 6-24 (15 MINUTES)

1.

2.

a.

Fixed

b.

Variable

c.

Variable

d.

Fixed

e.

Semivariable (or mixed)

Production cost per month = $37,000* + $2.30X

*37,000 = $21,000 + $11,000 + $5,000

$2.30 = $1.20 + $.85 + $.25

EXERCISE 6-26 (15 MINUTES)

1.
Actual

Estimated

a.

20,000 miles..................................................................

$1,950

$2,200

b.

40,000 miles..................................................................

2,600

2,600

c.

60,000 miles..................................................................

3,000

3,000

d.

90,000 miles..................................................................

4,250

3,600

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 3
2.

(a)

The approximation is very accurate in the range 40,000 to 60,000 miles

per month.

(b)

The approximation is less accurate in the extremes of the longer range,

20,000 to 90,000 miles.

PROBLEM 6-37 (25 MINUTES)

1.

Variable maintenance cost per hour of service

= $4,710 $2,990
525 310

= $8.00
Total maintenance cost at 310 hours of service........................................

$2,990

Variable maintenance cost at 310 hours of service (310 hr. $8.00).......

2,480

Fixed maintenance cost per month............................................................

$ 510

Cost formula:
Monthly maintenance cost = $510 + $8.00X, where X denotes hours of
maintenance service.
2.

The variable component of the maintenance cost is $8.00 per hour of

service.

3.

Cost prediction at 600 hours of activity:

Maintenance cost = $510 + ($8.00)(600) = $5,310

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 3

4.

Variable cost per hour [from requirement (2)]............................................

$8.00

Fixed cost per hour at 610 hours of activity ($510/610)............................

$ .84*

*Rounded.
The fixed cost per hour is a misleading amount, because it will change
as the number of hours changes. For example, at 500 hours of
maintenance service, the fixed cost per hour is $1.02 ($510/500 hours).

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 3
PROBLEM 6-43 (35 MINUTES)
1.

The regression equation's intercept on the vertical axis is $190. It represents the portion of ind
cost that does not vary with machine hours when operating within the relevant range. The
regression line is $5 per machine hour. For every machine hour, $5 of indirect material costs are e
incurred.

2.

Estimated cost of indirect material at 850 machine hours of activity:

S = $190 + ($5 850)
= $4,440

3.

Several questions should be asked:

(a)

Do the observations contain any outliers, or are they all representative of normal
operations?

(b)

Are there any mismatched time periods in the data? Are all of the indirect
material cost observations matched properly with the machine hour
observations?

(c)

Are there any allocated costs included in the indirect material cost data?

(d)

Are the cost data affected by inflation?

4.

5.

April

August

Beginning inventory.............................................................

$1,300

$1,000

+ Purchases..........................................................................

5,900

6,200

Ending inventory...............................................................

(1,350)

(3,000)

Indirect material used..........................................................

$5,850

$4,200

High-low method:
Variable cost per machine hour

Bus 227 Management Accounting

May Trimester 2016
Workshop Solutions Session 3

difference in cost levels

difference in activity levels

$5,850 $4,200 $1,650

$5.50 per machine hour

1,000 700
300

PROBLEM 6-43 (CONTINUED)

Fixed cost per month:
Total cost at 1,000 hours...............................................................................

$5,850

Variable cost at 1,000 hours

($5.50 1,000).........................................................................................

5,500

Fixed cost.......................................................................................................

$ 350

Equation form:
Indirect material cost = $350 + ($5.50 machine hours)
6.

The regression estimate should be recommended because it uses all of the data, not
just two pairs of observations when developing the cost equation.