CH 2003 20notes

ACC 1110 Chapter 3 1
J. Pai Cost Behaviour: Analysis and Use

Cost Behaviour
To assist cost planning and control, it is assumed that the activity level (such as units of product
produced or units of product sold) incurred in a company is within the relevant range, where a
linear relation exists between costs and activity level. This assumption allows the costs to be
separated into variable or fixed cost category.
Characteristics of Variable and Fixed Costs
A total variable cost will increase or decrease in proportion to the change in activity level. For
example, when more pages of flyer are printed, the more paper will be used. However, the unit
variable cost or cost per sheet of paper remains the same and does not vary as number of pages
printed varies.
A total fixed cost remains the same in total despite a change in activity level. For example, the
storage rental remains the same regardless of how many items you placed in the storage unit.
However, unit fixed cost will increase when activity level decreases.
Cost Estimation Formula
Based on the characteristics of aforementioned costs and the assumption of relevant range, most
costs -- whether, mixed, variable, or fixed, can be estimated using this formula:
Y = a + bX
Mixed Cost = Fixed Cost + Unit Variable Cost x Activity Based Used
Or
Estimated = Fixed Cost + Unit Variable Cost x Activity Based Used

Cost
Estimation Methods
o Scatter graph or scattergram,
o High-low method,
o Linear regression using Excel
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EXERCISE 3–1 Fixed and Variable Cost Behaviour [LO1]
Goes-Down-Smooth operates a number of smoothie bars in busy suburban malls. The

fixed weekly expense of a smoothie bar is $2,500, and the variable cost per smoothie
served is $0.75.
Required:
1. Fill in the following table with your estimates of total costs and cost per smoothie at the
indicated levels of activity for a smoothie bar. Round off the cost of a smoothie to the
nearest tenth of a cent.
Smoothies Served in a Week
2,100 2,800 3,500
Fixed cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? ? ?
Variable cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? ? ?
Total cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? ? ?
Cost per smoothie served. . . . . . . . . . . . . . . . . . . . . ? ? ?
2. Does the cost per smoothie increase, decrease, or remain the same as the number of
smoothies served in a week increases? Explain.
EXERCISE 3–2 Scattergram Analysis [LO2]
The data below have been taken from the cost records of the Halifax General Hospital. The
data relate to the costs of admitting patients at various levels of patient activity:
Number of Admitting
Patients Department
Month Admitted Costs
May 3,600 $29,400
June 3,800 $30,400
July 2,900 $27,400
August 3,200 $28,000
September 3,300 $28,600
October 2,600 $26,200
November 2,200 $25,600
December 3,500 $29,200
Required:
1. Use Microsoft Excel to prepare a scattergram using the above data. Plot admitting department costs
on the vertical axis and the number of patients admitted on the horizontal axis.
$31,000
Admitting Costs
$30,000
$29,000
$28,000
$27,000
$26,000
$25,00 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
0 Patients Admitted
2. Does it appear that admitting department costs are related to the number of patients admitted?
Explain.
EXERCISE 3–5 Cost Behaviour; Contribution Format Income Statement [LO1, LO3]
Parker Company manufactures and sells a single product. A partially completed schedule of
the company’s total and per unit costs over a relevant range of 60,000 to 100,000 units
produced and sold each year is given below:
Units Produced and Sold
60,000 80,000 100,000
Total costs:
Variable costs. . . . . .. . . . . . . . $150,000 ? ?
Fixed costs . . . . . . . . . . . . . . . . . . . 360,000 ? ?
Total costs . . . . . . . . . . . . . .. . . . . . . . . $510,000 ? ?
Cost per unit:
Variable cost . . . . . . . . . . . . . . . . .. . . . ? ? ?
Fixed cost . . . . . . . . . . . . .. . . . . . . . . . . ? ? ?
Total cost per hour . . . . . . . .. . . . . . . . . . . . . ? ? ?
Required:
1. Complete the schedule of the company’s total and unit costs above.
Units produced and sold
60,000 80,000
100,000
Total costs:
Variable
costs ....................... Fixed
costs ...........................
Total
costs ..............................
Cost per unit:
Variable
cost......................... Fixed
cost.............................
Total cost per
unit ...................
2. Assume that the company produces and sells 90,000 units during the year at a selling
price of $7.50 per unit. Prepare a contribution format income statement for the year.
EXERCISE 3–7 Cost Behaviour; High–Low Method [LO2]
Prompt Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful
study by the company’s cost analyst has determined that if a truck is driven 120,000 kilometres
during a year, the average operating cost is 11.6 cents ($0.116) per kilometre. If a truck is
driven only 80,000 kilometres during a year, the average operating cost increases to 13.6 cents
($0.136) per kilometre.
Required:
1. Using the high–low method, estimate the variable and fixed cost elements of the annual
cost of truck operation.
2. Express the variable and fixed costs in the form Y = a + bX .
3. If a truck was driven 100,000 kilometres during a year, what total cost would you expect
to be incurred?
PROBLEM 3–17 High–Low Method; Predicting Cost [LO1, LO2]
Echeverria S.A. is an Argentinian manufacturing company whose total factory overhead costs
fluctuate somewhat from year to year, according to the number of machine-hours worked in
its production facility. These costs (in Argentinian pesos) at high and low levels of activity over
recent years are given below:
Level of Activity
Low High
Machine-hours. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 80,000
Total factory overhead costs. . . . . . . . . . . . . . . . . . . . . . . 274,000 pesos 312,000 pesos
The factory overhead costs above consist of indirect materials, rent, and maintenance. The
company has analyzed these costs at the 60,000 machine-hours level of activity as follows:
Indirect materials (variable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 pesos

Rent (fixed). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,000
Maintenance (mixed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
Total factory overhead costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,000 pesos
For planning purposes, the company wants to break down the maintenance cost into its
variable and fixed cost elements.
Required:
1. Estimate how much of the factory overhead cost of 312,000 pesos at the high level of activity
consists of maintenance cost. ( Hint : First determine how much of the 312,000 pesos cost
consists of indirect materials and rent. Think about the behaviour of variable and fixed costs.)
2. Using the high–low method, estimate a cost formula for maintenance.
3. What total overhead costs would you expect the company to incur at an operating level of
65,000 machine-hours?
MOH at 80,000 MH level
Total OH = indirect material cost + rent + maintenance costs

Total OH – Indirect mat. – rent = maint. Costs
At 80,000 MHs
Total factory overhead cost 312,000 pesos
Deduct:
Indirect materials (variable)
(90,000 pesos/ 60,000 MHs) X 80,000 MHs = (120,000)
Rent (fixed) (130,000)
Maintenance cost 62,000 pesos
Maintenance cost High low machine

High 62,000 80,000
Low 54,000 60,000
Change 8,000 20,000
8,000/20,000
This study source was = 0.40 pesosfrom
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Fixed cost = total maint. Cost – variable maint. Cost

= 54,000 pesos – (60,000 MHs x 0.40 pesos)
= 54,000 – 24,000
= 30,000 pesos
maintanence cost (Y) is 30,000 pesos per year, plus 0.40 pesos per machine hour (X) 0r
Y = 30,000 + 0.40X
What is total OH costs if expected 60,000 MHs
Indirect materials
65,000 MHs x 1.5 pesos per MH 97,500
rent 130,000
Maintenance:
Variable cost elelment
(65,000 MHs x 0.40) 26,000
Fixed cost element 30,000
56,000
283,500
total OH costs
fixed Oh costs + unit var. OH costs x MHs incurred
(130,000 +30,000) + (1.5+0.4) pesos x MHs
160,000 + 1.9 x MHs incurred
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ACC 1110 Chapter 3 1

J. Pai Cost Behaviour: Analysis and Use

Characteristics of Variable and Fixed Costs

Cost Estimation Formula

Estimated = Fixed Cost + Unit Variable Cost x Activity Based Used

Goes-Down-Smooth operates a number of smoothie bars in busy suburban malls. The

Indirect materials (variable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 pesos

MOH at 80,000 MH level

Total OH = indirect material cost + rent + maintenance costs

Maintenance cost 62,000 pesos

Maintenance cost High low machine

Fixed cost = total maint. Cost – variable maint. Cost

What is total OH costs if expected 60,000 MHs

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