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-
41
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 in-
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.
8. A step cost with narrow steps can be treated
as variable, while one with wide steps is typ-
ically treated as fixed.
9. An activity rate is the resource expenditure
for an activity divided by the activity’s prac-
tical capacity.
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 poss-
ible to select two points that better represent
the relationship between activity and costs,
 producing a better estimate of fixed and va- by the activity. As such, it is a measure of the
riable costs. A scattergraph also identifies goodness of fit, the strength of the rela-
outliers that could represent a high or low tionship between cost and activity.
point that is an aberration. The main advan-
18. The correlation coefficient is the square root
tage of the high-low method is that it re-
of the coefficient of determination. The cor-
moves subjectivity from the choice process.
relation coefficient reveals the direction of the
The same line will be produced by two dif-
relationship in addition to the strength of the
ferent people.
relationship.
14. Assuming that the scattergraph reveals that a
19. If the variation in cost is not well explained by
linear cost function is suitable, then the
activity usage (the coefficient of determi-
method of least squares selects a line that
nation is low) as measured by a single driv-
best fits the data points. The method also
er, then other explanatory variables may be
provides a measure of goodness of fit so that
needed to build a good cost formula.
the strength of the relationship between cost
and activity can be assessed. 20. If the mixed costs are immaterial, then the
method of decomposition is unimportant.
15. The best-fitting line is the one that is “clos-
Furthermore, sometimes managerial judg-
est” to the data points. This is usually meas-
ment may be more useful for assigning costs
ured by the line that has the smallest sum of
than the use of formal statistical me-
squared deviations.
thodology.
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

42
 EXERCISES

3–1

1. Number of Units Total Cost Cost per Unit

0 $120,000 NA
50,000 120,000 $2.40
100,000 120,000 1.20
150,000 120,000 0 .80
200,000 120,000 0 .60
250,000 120,000 0 .48

2. Supervision cost is strictly fixed.

3–2

1. Miles Traveled Total Cost Cost per Mile

0 $ 0 $0.00
2,000 600 0.30*
4,000 1,200 0.30
6,000 1,800 0.30
8,000 2,400 0.30
10,0003,000 0.30
*$1,200/4,000 or $3,000/10,000 = $.30

2. The cost of fuel for the delivery activity is strictly variable.

43
3–3

1.
Graph of Truck Depreciation

$250,000
Depreciation Cost

$200,000
$150,000
$100,000
$50,000
$0
0 10 20 30 40 50 60 70 80 90 100

Cubic Yards of Concrete (in

thousands)

2.

Graph of Raw Materials Cost

materials
Costofraw

3,000,000
0

2,000,000 Series2
1,000,000
1 2 3 4 5

Cubic yards of concrete

3. Truck depreciation: Fixed cost

Raw materials cost: Variable cost

3-4
1. Number of Units Total Cost Cost per Unit
0 $10,000 NA
10,000 10,000 $1.00
20,000 10,000 0.50
30,000 20,000 0.67
40,000 20,000 0.50
50,000 30,000 0.60

44
 2. Forming machines rental cost is a step cost.

3-5

1.

Graph of Machining Direct Labor Cost

350000
300000
Cost
250000
of
200000
Direct
150000
Labor 100000
50000
0
0 1000 2000 3000 4000 5000
Number of units

The direct labor cost in the machining department is a step cost (with narrow
steps).
2.

Graph of Machining Department

Supervision Cost

Cost 150000
of
Super 100000
visio
50000
n
0
0 1000 2000 3000 4000 5000
Number of units

The cost of supervision for the machining department is a step cost (with wide
steps).

45
3.Direct labor cost increase = $144,000 – $108,000 = $36,000

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

3-6

Cost Category Variable Cost Discretionary Committed Fixed

Fixed Cost Cost
Technician X
salaries
Laboratory facility X
Laboratory X
equipment
Chemicals and X
other supplies

3–7

Resource Flexible/Committed Cost Behavior

Jet rental Committed Fixed
Hotel rooms Committed Fixed
Buffet Flexible Variable
Favor package Flexible Variable
Buses Committed Step

3–8

1. Resource Total Cost Unit Cost

1
Plastic $10,800 $0.027
Direct labor and
2
variable overhead 8,000 0.020
3
Mold sets 20,000 0.050
4
Other facility costs 10,000 0.025
Total $48,800 $0.122

1
0.90 × $0.03 × 400,000 = $10,800; $10,800/400,000 = $0.027
2
$0.02 × 400,000 = $8,000; $8,000/400,000 = $0.02
3
$5,000 × 4 quarters = $20,000; $20,000/400,000 = $0.05
4
$10,000; $10,000/400,000 = $0.025

2. Plastic, direct labor, and variable overhead are flexible resources; molds and
other facility costs are committed resources. The cost of plastic, direct labor,
and variable overhead are strictly variable. The cost of the molds is fixed for

46
 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

47
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
*($24,000 × 20) + ($10,000 × 12);
**8 × 250 × 20

3. Activity availability = Activity usage + Unused capacity

Calls available = Calls made + Unmade calls
40,000 calls = 35,000 calls + 5,000 calls
4. Total cost of Cost of Cost of

committed resources = activity used + unused capacity

$600,000 = ($15 × 35,000) + ($15 × 5,000)
$600,000 = $525,000 + $75,000
Note: The analysis is restricted to committed resources, since only these re-
sources will ever have any unused capacity.

48
3–11

1. Committed resource charges: monthly fee, activation fee, cancellation fee (if
triggered by contract cancellation prior to one year)
Flexible resource charges: all additional charges for airtime, long distance and
roaming

2. Plan 1:
Minutes available = Minutes used + Unused minutes
60 minutes = 45 minutes + 15 minutes
Plan 2:
Minutes available = Minutes used + Unused minutes
120 minutes = 45 minutes + 75 minutes
Plan 1 is more cost effective. Jana will have some unused capacity (on aver-
age, 15 minutes a month), and the overall cost will be lower by $10 per month.

3. Plan 1*:
Minutes available = Minutes used + Unused minutes
60 minutes = 90 minutes + (− 30) minutes
Plan 1*:
Minutes available = Minutes used + Unused minutes
60 minutes = 60 minutes + 0 minutes
Additional minutes = 30 minutes
*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:
Minutes available = Minutes used + Unused minutes
120 minutes = 90 minutes + 30 minutes
Plan 2 is now more cost effective, as the monthly cost is $30. Under Plan 1,
Jana will pay $20 plus $30 (30 minutes × $1.00) or $50 per month. (The $1.00
additional charge includes the airtime and regional roaming charge.)

49
 3-12

1.

Graph of Cost of Giving Opening Shows

8000
7000
6000
Cost

5000
4000
3000
2000
1000
0
0 5 10 15 20
Number of opening shows

This is a strictly variable cost.

2.
Graph of Cost of Running the Gallery

100000
80000

60000
Cost
40000

20000

0
0 5 10 15 20
Number of opening shows

This is a strictly fixed cost.

50
3.

Graph of Ben's Total Costs

88000
87000
86000
Total Cost

85000
84000
83000
82000
81000
80000
79000
0 5 10 15 20
Number of opening shows

This is a mixed cost.

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

5. Total cost = $80,000 + $500(12) = $86,000

Total cost = $80,000 + $500(14) = $87,000

3-13

1. The high point is March with 3,100 appointments. The low point is January with
700 appointments.

2. Variable rate = ($2,790 – $1,758)/(3,100 – 700)

= $1,032/2,400
= $0.43 per tanning appointment

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

51
 Total fixed cost for September = $1,457

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

3-14

1.

Scattergraph of Tanning Services

3000

2500

Monthl 2000

y Cost 1500

1000

500

0
0 1000 2000 3000 4000
Number of appointments

Yes, it appears that there is a linear relationship between tanning cost and num-
ber of appointments.

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

52
3–15

1.

Cost of Oil Changes

$9,000
$8,000
$7,000
$6,000
$5,000
Cost
$4,000
$3,000
$2,000
$1,000
$0
0 500 1,000 1,500

Number of Oil Changes

The scattergraph provides evidence for a linear relationship.

2. High (1,400, $7,950); Low (700, $5,150)

V = ($7,950 – $5,150)/(1,400 – 700)
= $2,800/700 = $4 per oil change
F = $5,150 – $4(700)
= $5,150 – $2,800 = $2,350
Cost = $2,350 + $4 (oil changes)
Predicted cost for January = $2,350 + $4(1,000) = $6,350

53
3–15 Concluded

3. Output of the regression routine calculated by a spreadsheet:

Constant 1697.097
Std. Err. of Y Est. 243.6784
R Squared 0.967026
No. of Observations 8
Degrees of Freedom 6
X Coefficient(s) 4.64678

Std. Err. of Coef. 0.350304

Rounding the coefficients:

Variable rate = $4.65 per oil change
Fixed cost = $1,697
Predicted cost for January = $1,697 + $4.65 (oil changes) =
$1,697 + $4.65(1,000) = $6,347
2
R = 0.97 (rounded)
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.

54
3–16

1.

Cost of Moving Materials

$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
0 500 1,000

Number of Moves

The scattergraph provides evidence for a linear relationship, but the observa-
tion for 300 moves may be an outlier.

2. High (800, $14,560); Low (100, $3,000)

V = ($14,560 – $3,000)/(800 – 100)
= $11,560/700 = $16.51 per move (rounded)
F = $3,000 – $16.51(100)
= $3,000 – $1,651 = $1,349
Cost = $1,349 + $16.51 (moves)
Predicted cost = $1,349 + $16.51(550) = $10,430 (rounded)

55
3–16 Concluded

3. Output of the regression routine calculated by a spreadsheet:

Constant 497.50
Std. Err. of Y Est. 987.0073
R Squared 0.926208
No. of Observations 8
Degrees of Freedom 6
X Coefficient(s) 18.425

Std. Err. of Coef. 1.954566

Rounding the coefficients:

Variable rate = $18.43 per move
Fixed cost = $498
Cost = $498 + $18.43 (moves)
= $498 + $18.43(550) = $10,635 (rounded)
2
R = 0.93 (rounded)
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 obser-
2
vation (300 moves and $3,400 of cost) is dropped, the R rises to 99 percent.
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.

56
3–17

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

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

3. To obtain the percentage explained, r needs to be squared: 0.89 × 0.89 = 79.21

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.

3–18

1. Overhead = $2,130 + $17(DLH) + $810(setups) + $26(purchase orders)

2. Overhead = $2,130 + $17(600) + $810(50) + $26(120)

= $2,130 + $10,200 + $40,500 + $3,120
= $55,950

3. Since total setup cost is $40,500 for the following month, a 50 percent de-
crease would reduce setup cost to $20,250, saving $20,250 for the month.

57
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. In-
spection hours are negatively correlated with warranty repair costs.

4. In this equation, the independent variables—number of defects and inspec-tion

hours—account for 88 percent of the variability in warranty repair costs. It
seems that analysts have identified some very good drivers for warranty re-
pair costs.

58
 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

3-21

1.

Scattergraph of Receiving Activity

35000
30000
Receiv 25000
ing 20000
15000
Cost 10000
5000
0
0 500 1000 1500 2000
Number of receiving orders

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)

59
 = $19,800 + $55,800
= $75,600

Receiving cost for the year = 12($6,600) + $12(18,000)

= $79,200 + $216,000
= $295,200

4.Receiving cost = $3,212 + $15.15 × Number of receiving orders

Receiving cost = $3,212 + $15.15(1,475) = $25,558

Receiving cost for the quarter = 3($3,212) + $15.15(4,650)

= $9,636 + $70,448
= $80,084

Receiving cost for the year = 12($3,212) + $15.15(18,000)

= $38,544 + $272,700
= $311,244

3-22

1. Results of regressions:

10 Months Data 12 Months Data

Intercept 3,212.121 3,820
Slope 15.15152 15.10
2 0.8485 0.7451
R

60
2.

Scattergraph of Receiving Activity -

12 Months Data

35000
Recei 30000
25000
ving
20000
cost 15000
10000
5000
0
0 500 1000 1500 2000
Number of receiving orders

The point for the 11th month (1,200 receiving orders and $28,000 total receiving
cost) appears to be an outlier. Since the cost was so much higher in this month
due to an event that is not expected to happen again, this data point could easily
be dropped. Then, data from the 11 remaining months could be used to develop a
cost formula for receiving cost.

61
 3. Results for the method of least squares after dropping month 11.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.926737
R Square 0.858841
Adjusted R
Square 0.843157
Standard Error 2051.781
Observations 11
ANOVA

df SS MS F Significance
F
Regression 1 2.31E+08 2.31E+08 54.7581 4.1E-05
Residual 9 37888233 4209804
Total 10 2.68E+08

Coeffi- Standard Upper Lower Upper

cients Error t Stat P-value Lower 95% 95% 95.0% 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
2
better than the one for all 12 months. R is higher for the regression without the
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.

62
3–23

1. Salaries:
Senior accountant—fixed
Office assistant—fixed
Internet and software subscriptions—mixed
Consulting by senior partner—variable
Depreciation (equipment)—fixed
Supplies—mixed
Administration—fixed
Rent (offices)—fixed
Utilities—mixed

2. Internet and software subscriptions:

V = (Y2 – Y1)/(X2 – X1)
= ($850 – $700)/(150 – 120) = $5 per hour
F =Y2–VX2
= $850 – ($5)(150) = $100
Consulting by senior partner:
V = (Y2 – Y1)/(X2 – X1)
= ($1,500 – $1,200)/(150 – 120) = $10 per hour
F =Y2–VX2
= $1,500 – ($10)(150) = $0
Supplies:
V = (Y2 – Y1)/(X2 – X1)
= ($1,100 – $905)/(150 – 120) = $6.50 per hour
F =Y2–VX2
= $1,100 – ($6.50)(150) = $125
Utilities:
V = (Y2 – Y1)/(X2 – X1)
= ($365 – $332)/(150 – 120) = $1.10 per hour
F =Y2–VX2
= $365 – ($1.10)(150) = $200

63
3–23 Concluded

3. Fixed Unit
Variable Cost
Salaries:
Senior accountant $2,500 $ —
Office assistant 1,200 —
Internet and subscriptions 100 5.00
Consulting — 10.00
Depreciation (equipment) 2,400 —
Supplies 125 6.50
Administration 500 —
Rent (offices) 2,000 —
Utilities 200 1.10
Total cost $9,025 $22.60
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

4. For 170 professional hours:

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.

64
3–24

1. High (1,700, $21,000); Low (700, $15,000)

V = (Y2 – Y1)/(X2 – X1)
= ($21,000 – $15,000)/(1,700 – 700) = $6 per setup
F =Y2–VX2
= $21,000 – ($6)(1,700) = $10,800
Y = $10,800 + $6X

2. Output of spreadsheet regression routine with number of setups as the inde-

pendent variable:
Constant 4512.98701298698
Std. Err. of Y Est. 3456.24317476605
R Squared 0.633710482694768
No. of Observations 10
Degrees of Freedom 8
X Coefficient(s) 13.3766233766234

Std. Err. of Coef. 3.59557461331427

V = $13.38 per receiving order (rounded)

F = $4,513 (rounded)
Y = $4,513 + $13.38X
2
R = 0.634, or 63.4%
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.

65
3–24 Continued

3. Regression with setup hours as the independent variable:

Constant 5632.28109733183
Std. Err. of Y Est. 2390.10628259277
R Squared 0.824833789433823
No. of Observations 10
Degrees of Freedom 8
X Coefficient(s) 4.49642991356633

Std. Err. of Coef. 7.32596

V = $4.50 per setup hour

F = $5,632 (rounded)
Y = $5,632 + $4.50X
2
R = 0.825, or 82.5%
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.

66
3–24 Concluded

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

the independent variables:
Constant 752.104072925631
Std. Err. of Y Est. 1350.46286973443
R Squared 0.951068418023306
No. of Observations 10
Degrees of Freedom 7
X Coefficient(s) 3.33883151096915 7.14702865269395

Std. Err. of Coef. 0.495524841198368 1.68182916088492

V1 = $3.34 per pound of material delivered (rounded)

V2 = $7.147 per receiving order (rounded)
F = $752 (rounded)
Y = $752 + $3.34a + $7.147b
2
R = 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.
Materials ($94 × 20,000) $1,880,000
Labor ($16 × 20,000) 320,000
Variable overhead ($80 × 20,000) 1,600,000
Variable selling ($7 × 20,000) 140,000
Total additional resource spending $3,940,000
Divided by units produced ÷ 20,000
Total unit variable cost $ 197
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.

67
3–25 Concluded

2. The correlation coefficients indicate the reliability of the cost formulas. Of the
four formulas, overhead activity may be a problem. A correlation coefficient of
0.75 means that only about 75 percent of the variability on overhead cost is
explained by direct labor hours. This should have a bearing on the answer to
Requirement 1 because if the percentage is low, there are activity drivers oth-
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:

Material ($94 × 20,000) $ 1,880,000
Labor ($16 × 20,000) 320,000
Variable overhead:
($85 × 20,000) 1,700,000
($5,000 × 12) 60,000
($300 × 600) 180,000
Variable selling ($7 × 20,000) 140,000
Total additional resource spending $ 4,280,000
Divided by units produced ÷ 20,000
Total unit variable cost $ 214
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.

68
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
F = $52,000 – ($85 × 1,200) = –$50,000
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:

Constant 236.211171346831
Std. Err. of Y Est. 1788.59942408259
R Squared 0.993939842186014
No. of Observations 14
Degrees of Freedom 11
X Coefficient(s) 40.8752113255057 35307.5122042085

Std. Err. of Coef. 2.2207348945557 970.201096681915

b. Output of spreadsheet regression routine on 2008 data:

Constant 10081.3333333337
Std. Err. of Y Est. 94.8068211329403
R Squared 0.999887905585866
No. of Observations 8
Degrees of Freedom 6
X Coefficient(s) 34.9533333333331

Std. Err. of Coef. 0.151087766637518

69
3–26 Concluded

c. Output of spreadsheet regression routine on 2009 data:

Constant 19964.2403242688
Std. Err. of Y Est. 12.0521931978647
R Squared 0.999999089146329
No. of Observations 6
Degrees of Freedom 4
X Coefficient(s) 50.0216788702923

Std. Err. of Coef. 0.0238700194326353

2
While each regression has a high R , the multiple regression gives unaccept-
able results. Notice the $35,308 coefficient on the independent variable
“changes.” Yet, the increased fixed cost was only $10,000 per month. Re-
gression (c) gives more reasonable results. The intercept term, $19,964, is
roughly $10,000 higher than the intercept term for Regression (b), as ex-
pected. So, the hospital should use Regression (c) to budget for the rest of the
year.

3–27

1. Output of spreadsheet regression with pounds as independent variable:

Constant 4,997.2877
Std. Err. of Y Est. 571.36
R Squared 0.9315
No. of Observations 9
Degrees of Freedom 7
X Coefficient(s) 2.5069

Std. Err. of Coef. 0.257

Budgeted setup cost at 5,200 pounds:

Y = $4,997.29 + $2.51(5,200)
= $18,033.24

70
3–27 Continued

2. Output of spreadsheet regression with number of orders as the independent

variable:
Constant 17,485.8088
Std. Err. of Y Est. 2168.03
R Squared 0.01327
No. of Observations 9
Degrees of Freedom 7
X Coefficient(s) 6.0507

Std. Err. of Coef. 19.718

Budgeted setup cost for 160 orders:

Y = $17,485.81 + $6.05(160)
= $18,453.81

3. The regression equation based on pounds is better because the coefficient of

determination is much higher. Pounds explain about 93 percent of the varia-
tion in receiving costs, while number of orders explains only 1.3 percent of the
variation in receiving costs.

71
3–27 Concluded

4. Output of spreadsheet for multiple regression:

Constant 2986.529
Std. Err. of Y Est. 99.67
R Squared 0.9982
No. of Observations 9
Degrees of Freedom 6
X Coefficient(s) 2.6056 13.7142

Std. Err. of Coef. 0.0453 0.9163

Y = $2,986.53 + $2.61(5,200) + $13.71(160)

= $18,729.81
The explanatory power of both variables is very high. Yet, pounds seems to
explain most of the variation, and the use of one driver would vastly simplify
budgeting and product costing. The increased complexity is probably not
worth adding the second driver.

72
 MANAGERIAL DECISION CASE

3–28

1. Jackie violated the standard of confidentiality. Management accountants

should not disclose confidential information acquired in the course of their
work unless legally obligated to do so. Her motives for disclosing the confi-
dential information apparently were intended to further her personal interests.
Management accountants are prohibited from using confidential information
for unethical advantages. In addition, some could argue that Jackie also vi-
olated the standard of integrity. Conflict of interest, receipt of favors or gifts,
and subversion of an organization’s pursuit of its legitimate objectives all
could be in violation.

2. Assuming that the data were acquired illicitly, Brindon’s instincts were on
target. To analyze the data and be party to its use would most certainly violate
the standard of integrity. Management accountants should not engage in or
support any activity that would discredit the profession. In addition, Brindon
would violate the standard of confidentiality if he chose to analyze the data.
Management accountants should refrain from using confidential information
acquired in the course of their work for unethical advantage, either personally
or through a third party (II-3).

RESEARCH ASSIGNMENT

3–29

Answers will vary.

73
74