1.

Figure 1 on the next page presents a number of charts, each indicating some relationship
between cost and a cost driver. No attempt has been made to draw these charts to any particular
scale; the absolute numbers on each axis may be closely or widely spaced.

Indicate by number which one of the charts best fits each of the situations or items described. Each
situation or item is independent of all others; all factors not stated are assumed to be irrelevant.
Some charts may be used more than once; some may not be used as they may not apply to any of
the situations.

Note that chart 11, “No Relationship” and chart 15, “Some other pattern” are two different choices.

The horizontal axis represents activity; the vertical axis represents dollar amounts for the total or
per unit costs.

A. Direct material costs.

B. Plant Manager’s salary.
C. Mixed costs – for example, fixed electrical power demand charge plus variable usage rate.
D. Cost per tire used in the production of trucks.
E. Pay as you go phone voice service. The rate is a minimum fixed fee of $50 for the first 500
minutes and $0.25 per minute for the next 1000 minutes. All usage above 1500 minutes are
free.
F. Incentive bonus plan that pays managers $0.10 for every unit produced above some level of
production.
G. Interest charges on money borrowed at a fixed rate of interest to finance the acquisition of a
plant, before any payments on principal.
H. Monthly property taxes for manufacturing plant.
I. Pay as you go phone voice service. The rate is $0.35 per minute for the first 100 minutes and
$0.25 per minute thereafter.
J. Monthly salaries of production supervisors. One supervisor is required for every batch of 1,000
units produced.
K. Cost of wood planks used in the production of furniture.
L. Sales commissions to sales persons that are paid at a rate of 10% of sales up to a maximum of
$10,000 per month.
M. Compensation for sales supervisors who are paid an annual salary of $50,000 and an additional
commission at 1% of sales.
N. Pay as you go phone voice service. The rate is a minimum fixed fee of $20 for the first 100
minutes and $0.25 per minute thereafter.
 Figure 1

1 2 3 4 5

6 7 8 9 10

No Relationship Some Other Pattern

11 12 13 14 15

Situation A B C D E F G H I J K L M N
Graph
#
2. The following information is available for the first quarter of 2015:

Month Units Packaged Unit Cost for Packaging Total Cost

Jan 1,000 $19 $19,000
Feb 1,250 $17 $21,250
Mar 800 $21.5 $17,200

What is the cost equation for packaging? What type of cost (behaviour) does packaging exhibit?
What is the total cost of packaging for 250 units?

3. AKUHN uses three different independent variables (number of patients, patient hours, and
number of nurses) in three different equations to evaluate the cost of ER Medical Services
during a given month. The most recent results of the three regressions are as follows:

Number of patients:
Variable Coefficient Standard Error t-Value
Constant $352,000 198,000 1.11
X-Coefficient $450 115 2.15
r2 = 0.61

Patient hours:
Variable Coefficient Standard Error t-Value
Constant $200,000 3,000 8.12
X-Coefficient $850 $45 8.15
r2 = 0.93

Number of nurses:
Variable Coefficient Standard Error t-Value
Constant $152,000 33,000 2.23
Independent Variable $3,280 5,000 0.95
r2 = 0.23

Write the estimated cost function obtained (concluded) from each of the above three regression
results?
If in a given month, the ER saw visits from 200 patients for an average time of 4 hours each and 40
nurses worked during the month, what is the estimated cost for operating the ER?
What is the minimum cost the ER is expected to incur in any given month?
True/False and Multiple Choice

1. The term "relevant range" refers to the levels of activity within which the assumptions relative
to cost behavior are valid.
a. True
b. False

2. The high-low method is likely to produce an inaccurate cost estimating equation when the
organization has mixed costs.
a. True
b. False

3. When estimating a cost function for a firm, the estimated parameters are valid only relevant
within the range of activities.
a. True
b. False

Use the following information to answer the next three questions:

The Skip Corporation has assembled the following data pertaining to certain costs which cannot be
easily identified as either fixed or variable. Skip Corporation has heard about a method of
measuring cost functions called the high-low method and has decided to use it in this situation.

Cost Hours
$20,000 7,000
12,200 4,000
17,000 5,200
15,640 4,900
18,200 6,000
22,080 7,800
22,500 7,680
18,600 6,760

4. Using the high-low method, unit variable cost is calculated to be:

a. $0.46
b. $0.38
c. $2.16
d. $2.80
e. $2.60
5. Using the high-low method, total monthly fixed cost is calculated to be:
a. $1,004
b. $13,386
c. $10,680
d. $5,056
e. $1,800

6. Using the high-low method, total cost for using 7,680 machine hours is:
a. $22,500
b. $25,024
c. $18,389
d. $21,768
e. $13,598

7. The high-low method:

a. easily handles estimating the relationship between the dependent variable and two or more
independent variables
b. is more accurate than the regression method
c. calculates the slope coefficient using only two observed values within the relevant range
d. uses the residual term to measure goodness of fit
e. All of the above
 Answers

Question 1

A B C D E F G H I J K L M N
1 9 2 9 13 3 11 9 14 7 1 10 2 8

Question 2

Packaging Cost = 9Q + $10,000 (Can use High Low or Data Points 1,3 ; 2,3 ; 1,2 to find the
equation of a straight line). Packaging is a mixed cost.
For 250 units, Total Cost = 9 (250) + $10,000 = $12,250. Unit cost for 250 units is $49.

Question 3
Number of patients: Total Cost of ER = $450 x # of patients i.e. purely variable. This is because
the T-Value of constant is below the threshold of 2.0 and therefore the fixed costs can be ignored.
Patient hours: Total Cost of ER = $850 x patient hours + $200,000 i.e. mixed cost
Number of nurses: Total Cost of ER = $152,000 i.e. purely fixed. This is because the T-Value of
x-coefficient is below the threshold of 2.0 and therefore the variable costs can be ignored.

Total Cost of ER = $850 x (200 patients x 4hrs) + $200,000 = $880,000. The best equation to use is
Patient Hours since it has the highest R-Squared, well beyond the threshold of 0.60. Furthermore,
both its variable cost component and fixed cost component has high T-Values and small errors (as a
percent of their respective components).

The minimum cost the ER is expected to incur in a given month is $200,000 irrespective of the
number of visits or the time taken per visit, or the number of nurses working, since that is the
expected fixed cost from the Regression output that is chosen i.e. patient hours.

True/False and Multiple Choice

1. A
2. B
3. A
4. E
5. E
6. D
7. C