Assignment

Submit to: Ashiq Ali

Submit By: Obaid Khan

SAP ID: 13060 BBA-06 B

COST ACCOUNTING

CHAPTER 5 COST ESTIMATION

Question paper

Question 1
The accounting sector of ABC Inc.,. Is examining the costs of its services. The cost data and
level of activity for the preceding 20 months follow:

Months Special Customer Paycheck Account services

Investigations Accounts Proceeds costs
1 2 500 2200 $ 152,000
2 2 480 1800 $123,400
3 4 450 1083 $100,000
4 3 444 1029 $99,822
5 2 410 729 $70,294
6 1 398 829 $80,982
7 1 332 1200 $132,100
8 2 326 1234 $135,021
9 3 308 1543 $140,921
10 4 292 1531 $141,092
11 3 270 1598 $142,004
12 2 300 1999 $148,044
13 3 302 2001 $199,011
14 4 299 2076 $200,123
15 4 289 713 $700,00
16 4 311 189 $390,29
17 2 321 100 $265,10
18 1 333 4000 $180,921
19 1 347 3405 $179,029
20 2 360 987 $933,981
Total 50 7072 30246 $3,294,284
 In addition to the above information, you learn that the accounting department had the
following total costs for the past 20 months for each of the following:

Particulars Amount
Total cost of paychecks processed $ 330,000
Total cost of customer accounts $ 300,000
Total cost of special investigations $ 530,000
Rent and other fixed cost (20 months) $ 1,860,000
Total Overhead cost $ 3,020,000

Required

1. What is the cost per unit for

i. Paychecks processed
ii. Customer accounts maintained
iii. Special analyses performed?

2. Assuming the following level of cost-driver volumes for a month, what are the accounting
departments’ estimated costs of doing business using the account analysis approach?

i. 2,128 paychecks processed

ii. 560 customer accounts maintained
iii. 9 special analyses

3. Use the high-low method to estimate the fixed and variable portions of overhead costs based
on paycheck proceed.

i. The company expects a record 20000 paycheck proceed in next year. What would be the
estimated maintenance costs?
Question 2

Zmyco Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs
fluctuate significantly from year to year according to increases and decreases in the number of
direct labor-hours worked in the factory. The data given below

Months Direct Labor Total Factory

Hours Overhead
Costs
1 78,000 $279,888
2 72,300 $273,649
3 63,100 $262,981
4 80,800 $280,643
5 77,030 $280,746
6 74,102 $275,525
7 67,400 $269,442
8 64,500 $263,222
9 62,300 $260,482
10 80,204 $281,461
11 60,300 $250,738
12 69,302 $272,872
13 83,339 $287,000

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has
analyzed these costs at the 40,000-hour level of activity as follows:

Particulars Amount
Indirect material 90,000
Rent 124,000
Maintenance cost 53,000
Total factory overhead cost 343,000
To have data accessible for planning, the company wants to break down the maintenance cost into its
variable and fixed cost elements.

Requirement:

1. Use the high-low method to estimate the fixed and variable portions of overhead costs based on
direct labor hour.
2. What total factory overhead costs would you expect the company to incur at an operating level of
70,000 direct labor-hours?
Questions 3

The accounting records for Decent Fixtures report the following production costs for the past
year:

Direct materials . . . . . . . . . . . . . . . . . . . . . $210,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . 175,000

Variable overhead . . . . . . . . . . . . . . . . . . . 154,000

Production was 210,000 units. Fixed manufacturing overhead was $240,000. For the coming
year, costs are expected to increase as follows: direct materials costs by 20 percent, excluding
any effect of volume changes; direct labor by 4 percent; and fixed manufacturing overhead by 10
percent. Variable manufacturing overhead per unit is expected to remain the same.

Required

a. Prepare a cost estimate for a volume level of 220,000 units of product this year.
b. Determine the costs per unit for last year and for this year.
Question 4
Arts school Products manufactures a variety of custom components for use in aircraft navigation
and communications systems. The controller has asked for your help in estimating fixed and
variable overhead costs for Arts school Rio Puerco plant. The controller tells you that the best
cost driver for estimating overhead is machine-hours. Monthly data on machine-hours and
overhead costs for the last year have been collected and are shown below:

Required

a) Estimate the monthly fixed costs and the unit variable cost per machine-hour
using the high low estimation method.
b) Managers expect the plant to operate at a monthly average of 750,000 machine-
hours next year. What are the estimated monthly overhead costs, assuming no
inflation?
c) Why it may show error in using high low method?
Question 5
Kotler Distribution Partners is the Brazilian distribution company of a U.S. consumer products fi
rm. Inflation in Brazil has made bidding and budgeting difficult for marketing managers trying to
penetrate some of the country’s rural regions. The company expects to distribute 450,000 cases
of products in Brazil next month. The controller has classified operating costs (excluding costs of
the distributed product) as follows:

Although overhead costs were related to revenues throughout the company, the experience in
Brazil suggested to the managers that they should incorporate information from a published
index of Brazilian prices in the distribution sector to forecast overhead in a manner more likely
to capture the economics of the business. Following instructions from the corporate offices, the
controller’s office in Brazil collected the following information for monthly operations from last
year:
These data are considered representative for both past and future operations in Brazil.

Required

a. Prepare an estimate of operating costs assuming that 450,000 cases will be

shipped next month based on the controller’s analysis of accounts.
b. Use the high-low method to prepare an estimate of operating costs assuming that
450,000 cases will be shipped next month.

Question 6

Ross Enterprises maintains a fleet of agricultural equipment for rental to local farmers. Ross maintains all
its equipment in a company-owned facility. Data on maintenance costs and operating hours of the
equipment have been collected for the past 24 months to help managers plan financial needs. Managers
at Ross were initially excited about having the data and the analysis available for planning, but the initial
regression results revealed the following equation:

Maintenance costs = $10,564 $67.13 * Operating hours

The coefficient on operating hours was highly significant and the adjusted R 2 was 0.89.

Required

How would you explain a negative coefficient; does it seem likely that the more the equipment is
operated, the less the company spends on maintenance?