Module 14 Solutions

Module 14
Cost Behavior, Activity Analysis,

and Cost Estimation
DISCUSSION QUESTIONS
Q14-1.
Variable, fixed, mixed, and step costs and their related total cost
functions are described as follows:
Variable costs are uniform for each incremental unit of activity.
Total variable costs change in direct proportion to changes in
activity, equaling zero dollars when activity is zero and
increasing at a constant amount per unit of activity.
Fixed costs are a constant amount per period of time. The fixed
cost curve is flat with a slope of zero.
Mixed costs contain a fixed and a variable cost element. They
are positive when activity is zero and increase in a linear
fashion as activity increases.
Step costs are constant within a given range of activity but
differ between ranges of activity. They increase in a step-like
fashion as activity increases.
Q14-2.
Because of the multitude of underlying factors that drive costs,

presenting all costs of an organization as a function of a single
independent variable is not accurate enough to make specific
decisions concerning products, services, or activities.
Solutions Manual, Module 14
Cambridge Business Publishers, 2013

14-1
Q14-3.
The vertical axis intercept of the economists short-run total cost

function represents capacity costs. Because of high marginal
costs at low levels of activity, the initial slope is quite steep. In the
normal activity range, where marginal costs are quite low, the
slope becomes less steep. Then, because of high marginal costs
above the normal activity range, the slope of the economists total
cost function increases again. The range of operations within
which a linear function is a reasonable approximation of total
costs is called the relevant range.
Q14-4.
Using the high-low method, the first step is to select representative

observations for high and low activity levels. Next, variable costs
per unit are found by dividing the difference in total costs by the
difference in total activity. Once variable costs are determined, the
fixed costs, which are identical in both periods, are computed by
estimating the total variable costs of either the high or low activity
period and subtracting them from the corresponding total costs.
Q14-5.
Cost estimation concerns the determination of previous or current

relationships between activity and cost, while cost prediction is
the forecasting of future costs.
Cost estimating equations,
developed using past data, are frequently used for predicting
future costs.
Q14-6.
A scatter diagram helps in selecting high and low activity levels

representative of normal operating conditions. It also can be used
to determine if costs can be reasonably approximated by a straight
line.
Q14-7.
Least-squares regression analysis uses all available data, rather

than just two observations. It can also provide standardized
information on how well the cost estimating equation fits the
historical cost data.
Q14-8.
Matching activity and cost within a single observation is important

because accuracy is reduced if activity is recorded in one time
period and costs are recorded in another. This problem is most
likely to exist with short time periods.

14-2
Financial & Managerial Accounting for MBAs, 3rd Edition
Q14-9.
During the past century

Direct materials have increased slightly as a percentage of total
manufacturing costs.
Direct labor has decreased significantly as a percentage of total
Manufacturing overhead has increased significantly as a
percentage of total manufacturing costs.
In the past, when manufacturing overhead was relatively small, it
was possible to ignore overhead and assume that units of product
or service were the primary cost driver. With the increase in
manufacturing overhead, units of final product or service are no
longer an adequate explanation of changes in manufacturing
overhead.
Q14-10. In a manufacturing facility, unit-level activities are performed for

each unit of product, batch-level activities are performed for each
batch of product, product-level activities are performed to support
the production of the product, and facility-level activities are
performed to maintain general manufacturing capabilities.

14-3
MINI-EXERCISES
M14-11
a.
b.
c.
d.
e.
Fixed
Variable
Fixed
Step
Variable
f.
g.
h.
i.
j.
Mixed
Variable
Mixed
Variable
Fixed
f.
g.
h.
i.
j.
Variable
Mixed
Fixed
Variable
Mixed
f.
g.
h.
i.
j.
8
7
5
2
3
k. 12
l. 5
m. 4
n. 3
o. 8
f.
g.
h.
i.
j.
9
6
1
7
2
k. 8 or 12 (Slope of total costs increases.)

l. 3
m. 10
M14-12
a.
b.
c.
d.
e.
Fixed
Mixed
Mixed
Variable
Step
M14-13
a.
b.
c.
d.
e.
8
8
11
1
11
M14-14
a.
b.
c.
d.
e.
4
2
7
5
11

14-4
EXERCISES
E14-15
a.
Monthly
Volume
100
1,000
5,000
10,000
Total
Fixed
Costs
$10,000
10,000
10,000
10,000
Total
Variable Costs
(Unit x $0.40)
$ 40
400
2,000
4,000
Total
Monthly
Costs
$10,040
10,400
12,000
14,000
Average
Unit Cost
$100.40
10.40
2.40
1.40
b. Because the variable costs remain constant at $0.40 per unit, an average
cost of $0.60 will occur when the average fixed cost is $0.20 per unit.
This will occur at 50,000 servings per month:
$10,000/$0.20 = 50,000 servings per month
E14-16
a.
Units
20,000
50,000
Current Process
Variable
Costs
Fixed
($0.20/uni Total
Costs
t)
Costs
$5,000 $ 4,000
$ 9,000
5,000
10,000
15,000
Proposed Process
Variable
Costs
Fixed ($0.20/uni
Total
Costs
t)
Costs
$10,000 $ 800
$10,800
10,000
2,000
12,000

14-5
E14-16 (concluded)
b. It is apparent from the solution to (a) and the difference in cost
structures that the proposed process costs less at higher volumes, while
the current process costs less at lower volumes. If the cost functions
are set equal to each other to find the volume at which they yield
identical costs, we can determine that the automatic process is preferred
above this volume.
Cost of current process
$5,000 + $0.20X
$0.16X
X
=
=
=
=
=
Cost of automatic process

$10,000 + $0.04X
$5,000
$5,000/$0.16
31,250
Beyond a monthly volume of 31,250 prints, the proposed process is

preferred.

14-6
E14-17
a.
Fixed
Units
Costs
500,000
$0
1,500,000
0
Student help
Variable
Total
Costs*
Costs
$800
$800
2,400
2,400
Collating machine
Fixed
Variable
Total
Costs
Costs**
Costs
$1,550
$25
$1,575
1,550
75
4,625
*$8.00 per hour/5,000 copies per hour = $0.0016 per copy

**$0.05 per 1,000 copies/1,000 copies = $0.00005 per copy
b. It is apparent from the solution to (a) and the difference in cost
structures that the collating machine costs less at higher volumes, while
the student help costs less at lower volumes. If the cost functions are
set equal to each other to find the volume at which they yield identical
costs, we can determine that the collating machine process is preferred
above this volume.
Cost of student help
$0.0016X
$0.00155X
X
=
=
=
=
=
Cost of collating machine

$1,550 + $0.00005X
$1,550
$1,550/$0.00155
1,000,000
Beyond a monthly volume of 1,000,000 copies, the collating machine is

preferred.

14-7
E14-18
Variable costs
=
=
($209,000 $177,000)/(684,000 556,000)

$0.25 per mile
Fixed costs
=
=
$209,000 $0.25(684,000)
$38,000
$177,000 $0.25(556,000)
$38,000
or
Total annual costs

=
$38,000 + $0.25X
where: X = annual fleet miles
E14-19
a. Variable costs
=
=
($52,000 $16,000)/(4,000 1,000)

$12 per sales order
Fixed costs
=
=
$52,000 $12(4,000)
$4,000
$16,000 $12(1,000)
$4,000
or
Monthly order processing costs = $4,000 + $12X

where: X = sales orders

14-8
E14-19 (concluded)
Representative
values
b.
$60,000
$50,000
Total order $40,000
processing
$30,000
costs
$20,000
$10,000
$0
0
1000 2000 3000 4000 5000

Salesorders
Variable costs
=
=
($32,000 16,000)/(3,000 1,000)

$8 per sales order
Fixed costs
=
=
$32,000 $8(3,000)
$8,000
$16,000 $8(1,000)
$8,000
or
Monthly order processing costs = $8,000 + $8X

where X = sales orders
c. The equation used in (a) is influenced by the unusually high costs
incurred at a volume of 4,000 sales orders. This volume may require the
payment of overtime and cause inefficiencies resulting from operating
beyond the capacity for which facilities were designed.
The effect of basing a cost estimating equation on this observation is to
overstate the variable costs and to understate the fixed costs.

14-9
E14-20
a. Variable costs
=
=
($9,000 $4,800)/(400 100)

$14 per mile
Fixed costs
or
=
=
$9,000 $14(400)
$4,800 $14(100)
= $3,400
= $3,400
Monthly labor costs = $3,400 + $14X

where: X = miles mowed and cleaned
b.
Representative
values
$10,000
$8,000
Total labor $6,000
cost
$4,000
$2,000
$0
0
100
200
300
400
500
Milesmowed & cleaned

Variable costs
=
=
($9,000 $5,000)/(400 200)

$20 per mile
Fixed costs
or
=
=
$9,000 $20(400) = $1,000

$5,000 $20(200) = $1.000
Monthly labor costs = $1,000 + $20X

where: X = miles mowed and cleaned

14-10
E14-20 (concluded)
c. The equation used in (a) is influenced by the unusually high costs
incurred in October when only 100 miles were mowed and cleaned. The
October activity is low, perhaps due to the reduced growth of grass and
less highway litter after the end of the summer vacation season.
Employees may have had extra time and may have paced their work to
fill the available time. The effect of including the October observation in
the high-low cost estimate is to understate the variable costs and to
overstate the fixed costs.
The effect of basing a cost-estimating equation on this observation is to
overstate the variable costs and to understate the fixed costs.
d. The effect of a 7 percent wage increase is to increase the amount of each
cost element by 7 percent.
Total costs = $1,070 + $21.40X
E14-21
a. Fixed costs are easily identified. They are the same at each activity level.
Variable and mixed costs can be determined by dividing total costs by
monthly sales at two activity levels. The quotients of variable costs will
be the same at both levels. The quotients of mixed costs will be lower at
the higher activity level. This is because the fixed costs are spread over
a larger number of units.
Cost
Behavior
Cost of food sold

Wages and fringe benefits
Fees paid delivery help
Rent on building
Depreciation on equipment
Utilities
Supplies (soap, floor wax, etc.)
Administrative costs
Variable
Mixed
Variable
Fixed
Fixed
Mixed
Mixed
Fixed

14-11
E14-21 (concluded)
b.
Fixed
Costs
V Cost of food sold ($10,000/5,000)
M Wages and fringe benefits:
[($4,500 $4,250)/(10,000 5,000)]
[$4,500 ($0.05 10,000)]
V Fees paid delivery help ($1,250/5,000)
F Rent on building
F Depreciation on equipment
M Utilities:
[($600 $500)/(10,000 5,000)]
[$600 ($0.02 10,000)]
M Supplies:
[($200 $150)/(10,000 5,000)]
[$200 ($0.01 10,000)
F Administrative costs
Total costs equation
Variable
Costs
$2.00X
0.05X
$4,000
1,200
600
0.25X
0.02X
400
0.01X
100
1,300
$7,600
______
$2.33X
Where: X = unit sales

Note: The computations can be performed at other activity levels.
c. Total costs = $7,600 + $2.33(9,500) = $29,735

14-12
E14-22
a. Average
Units
Total
Costs
Costs
500
4,000
$21.00
7.00
$10,500
28,000
Variable costs
= ($28,000 $10,500)/(4,000 500)

= $5 per dog-day
Fixed costs
= $28,000 $5(4,000)
$8,000 per month
or
= $10,500 $5(500)
$8,000 per month
Total cost = $8,000 + $5X

where: X = dog-days per month
b. Fixed costs ($8,000 12)
Variable costs ($5 24,000)
Total costs
Dog-days
Average cost per dog-day
$ 96,000
120,000
$216,000
24,000
$
9.00

14-13
E14-23
a.
$500,000
$400,000
Mfg. $300,000
Costs $200,000
$100,000
$0
0
50000
100000
150000
UnitsSold
$500,000
$400,000
Mfg. $300,000
Costs $200,000
$100,000
$0
0
50000
100000
150000
UnitsManufactured
Manufacturing costs appear to have a higher correlation with units

manufactured than with units sold. This conclusion is based on a visual
inspection of the scatter diagrams. Using correlation as a criterion,
units manufactured is the better predictor of manufacturing costs.
Note: The instructor may ask the student to compute the coefficients of
determination between each independent variable and manufacturing
costs as an optional assignment.
The coefficient between
manufacturing costs and units manufactured is 0.939, and the coefficient
between manufacturing costs and units sold is 0.629.
b. Units are often produced in periods before the one in which they are
sold. Because manufacturing costs are incurred in connection with the
manufacture rather than the sale of products, it seems reasonable to
expect that manufacturing costs will also have a higher correlation with
units produced than they will with units sold.
c. Because selling costs are incurred in connection with selling rather than
manufacturing activities, unit sales should be the better predictor of
selling costs.

14-14
E14-24
a. R-squared values between possible independent variables and shipping
expenses are as follows:
Units shipped
Weight shipped
Sales value
0.924
0.606
0.214
Based on the coefficient of determination, units shipped has the closest

relationship with shipping expenses.
b. Shipping expenses = $2,247.35 + $1.12X
where: X = units shipped
c. Shipping expenses =
$2,247.35 + ($1.12 x 5,000)
= $7,847.35

14-15
PROBLEMS
P14-25
a. Trumpets cost estimation equation:
b = ($28,800 $19,200)/(8,000 2,000) = $1.60
a = $28,800 (8,000 $1.60) = $16,000
Y = $16,000 + $1.60(sales in dozens)
b. Plot of equations and observations:
Representative
low observation
Representative high
observation
A review of the scatter diagram, indicates the April unit volume is not
representative. Revising the cost-estimating equation with the more
representative January and March volumes:
b = ($28,800 $20,400)/(8,000 4,500) = $2.40
a = $28,800 (8,000 $2.40) = $9,600
Y = $9,600 + $2.40(sales in dozens)

14-16
P14-25 (concluded)
c. Which is a better predictor of future costs? Why?
The representative values identified with the aid of a scatter diagram
provide a better cost-estimating equation and better predictor of future
costs. This is because it omits the outlier observation at a volume of
2,000 units.
d. If you decided to develop a cost-estimating equation using the method of
least squares, should you include all the observations? Why or why
not?
No. The observation for 2,000 units should be omitted because it does
not appear representative of normal operating conditions.
e. Reasons why the least-squares method is superior to the high-low and
scatter diagram methods of cost estimation include.
It is objective.
It provides a measure of how well the cost-estimating equation
explains the variation in the dependent variable.

14-17
P14-26
a. Rate per machine hour = ($500,000 + $100,000 + $200,000)/20,000 hours
= $40 per machine hour
Predicted manufacturing overhead to produce 8,000 units of X1:
($40 2,000 machine hours) = $80,000
b. Unit-level rate per machine hour
Batch-level rate per order
Product-level rate per product
=
=
=
=
=
=
$500,000/20,000 hours
$25/hour
$100,000/1,000 orders
$100/order
$200,000/50 products
$4,000/product
Predicted manufacturing overhead to produce 8,000 units of X1 using

cost hierarchy:
Unit-level costs ($25 2,000 hours) $50,000
Batch-level costs ($100 10 orders) 1,000
Product-level costs
4,000
Total
$55,000
c. Predicted X1 manufacturing overhead based on machine hours
Predicted X1 manufacturing overhead using cost hierarchy
Over-prediction of X1 manufacturing overhead costs
with use of machine hours
d. Batch-level rate per machine hour =
=
$80,000
55,000
$25,000
$100,000/20,000 hours
$5 per machine hour
Batch-level costs predicted using machine hours ($5 2,000)

Batch-level costs predicted using orders ($100 10 orders)
Over-prediction of X1 batch-level costs with use of
machine hours
$10,000
1,000
$ 9,000
e. Product-level rate per machine hour = $200,000/20,000 machine hours

= $10 per machine hour
Product-level costs predicted using machine hours ($10 2,000) $20,000
Product-level costs predicted using rate per product
4,000
Over-prediction of X1 product-level costs with use of
machine hours
$16,000

14-18
P14-27
a. Chicken (10 bags x $3/bag)
Wages (2 hours x $8/hour)
Fresh oil
Total batch cost
b. Batch cost (3 batches x $51.00/batch)
Unit cost ($153/300 units)
$30.00
16.00
5.00
$51.00
=
=
$153.00
$ 0.51
c. 4 batches* x $51.00/batch = $204.00

*With a batch size of 100 units four batches are required to obtain 350
pieces.
d. It will increase $2.00 per hour 2 hours = $4.00
e. Chicken (5 bags $3/bag)
Wages (1 hour $8/hour)
Fresh oil
Total batch cost
$15.00
8.00
5.00
$28.00
350 pieces/50 pieces per batch = 7 batches

Total cost = (7 batches $28) = $196.00
P14-28
Management should reduce the batch size to 50 because the costs incurred
would decrease since the reduced batch size enables the exact number of
pieces of chicken needed to be prepared with no waste. When the batch
size is 100 pieces, 400 pieces must be prepared to get 350 pieces.
Management should also consider quality issues. If the oil is replaced
frequently, the taste of chicken may be better. Hence, producing 50-piece
batches may result in both lower cost and better quality. Management
should also be sure to follow Health Department regulations.

14-19
MANAGEMENT APPLICATIONS
MA14-29
The negative fixed costs were obtained by fitting a cost estimating line
through observed data. The negative fixed costs are better viewed as a
constant term. The true cost function changes in some unknown way
beyond the range of observations. Even though the constant term is
negative, it may still be used to predict costs within the relevant range.
MA14-30
Mr. Morriss reaction may be appropriate in this case. Apparently the
assistant engaged in a random search for a high R-squared, testing
relationships that had no logical relationship.
If enough random
relationships are tested, the laws of probability indicate that, sooner or
later, a high R-squared will be found. Relationships determined in this way
are merely hypotheses and they should be verified on a second set of
independent data.
Ultimately, it may be determined that pounds of scrap has a high R-squared
with manufacturing overhead, but it does not seem to be a feasible basis
for predicting manufacturing overhead. In order to do this, it would be
necessary to predict scrap. This would cause predictions of overhead to be
two steps removed from their cause production.

14-20
MA14-31
a. Repairs and maintenance take place during periods of low production,
perhaps because they are deferred until time is available or because the
existence of a breakdown, requiring repairs, halts production.
Think of miles driven and maintenance costs on an automobile. A car
cannot be driven as much on the day it is in the garage being repaired.
b. Weekly or monthly data might provide a better match of the relationship
between production and repair costs. Production personnel might be
asked how frequently machines need repairs under normal operating
conditions. If it is weekly, then weekly data might be used.
MA14-32
Mike is in a difficult situation. There is a strong temptation to keep quiet
and hope there is no problem. Perhaps the excess oil consumption was a
random event. There is also a temptation to want to avoid detecting a
pollution problem. If there is pollution, it might not be detected when XTown is demolished and paved over; and if pollution is detected then, Mike
will be in another position. If questioned at that later date, he could claim
ignorance.
On the other hand, if there is a pollution problem that continues for a
couple more years, the cost of cleanup will be much higher than if the
problem is corrected immediately. The increased awareness of the dangers
of ground water pollution and the corresponding increase in regulations
make it very unlikely that an oil tank leakage problem will go detected.
Hence, correcting the problem today will likely be significantly less
expensive than correcting it at some future date when more oil has leaked
and the leaked oil has traveled further.
No information is provided about the ethical climate set by top
management. Mike would feel much more comfortable informing top
management of the situation and making an appropriate recommendation if
he believed top management wanted to do the right thing. On the other
hand, if top management treated the bearers of bad news as whistleblowers, he has some difficult decisions to make.

14-21
MA14-32 (concluded)
If Phoenix Management Company has a code of ethics, Mike should consult
it. If a code is not available for Phoenix, he might consult the code for
another business or professional organization.
The appropriate sequence of actions is outlined under the heading
Resolution of Ethical Conflict. In this case, Mike should start by
discussing the problem with his immediate supervisor. He should explain
the situation, outline the financial aspects of the alternative actions, and
point out the advantage of developing a reputation as a good corporate
citizen, concerned about the environment. Such a reputation will make the
development of shopping malls in new communities easier.
MA14-33
a. The relevant major assumption that limits the accuracy of the current
cost estimating equation is that the volume of activity is the only cost
driver.
b. Incorporating the hierarchy of activity costs into the cost estimating
equation will improve the accuracy of cost predictions. The current
equation erroneously assumes that all varieties of ice cream cost the
same to produce, that all packaging costs vary with gallons, and that all
distribution activities vary with gallons. Recognizing the variability in
each of these cost elements improves accuracy.
c. A general form of a more accurate cost-estimating equation is as
follows:
Y = b1iX1i + b2iX2i + b3iX3i + b4iX4i + b5 iX5i
Labels, descriptions, and examples of elements are:
Y = total costs per month
b1i, b2i, b3, b4i, b5i = cost per unit of cost driver
X1i = unit-level driver, where the subscript i refers to a specific driver,
such as pounds of raw materials
X2i = batch-level driver, where the subscript i refers to a specific driver,
such as batch inspection
X3i = product-level driver, where the subscript i refers to a specific
driver, such as maintaining a supplier for special ingredients, perhaps
almonds
X4i = customer driver, where the subscript i refers to a specific driver,
such as packaging or advertising
X5 = facility-level drivers, where the subscript i refers to a specific driver,
14-22
such as property taxes

14-23
MA14-34
a. The following results are obtained using a spreadsheet program:
Regression
Output:
Constant
Std Err of Y EST
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std Err of Coef.
-3967.575
517.696
0.978
12
7
56.775
64.266 52.987 101.016
9.462
9.835 6.184
7.699
The resulting cost estimation equation and the cost per unit of each
service is as follows:
Y = $3,967.58 + $56.78(X1) + $64.27(X2) + $52.99(X3) + $101.02(X4)
This equation explains 97.8 percent of the variation in total monthly
costs.
b. A comparison of the proposed rates and the estimated variable costs is
presented below:
Procedure
Proposed rate
Est. cost
Profit (loss)
X1
$45.00
56.78
$(11.78)
X2
$90.00
64.27
$25.73
X3
$60.00
52.99
$ 7.01
X4
$105.00
101.02
$ 3.98
The desirability of the proposal depends on the mix of services used

by the employees of the local business. If the mix contained a
significant portion of X1, the proposal might not be desirable.
Perhaps the best recommendation is to negotiate on the rate for
procedure X1 to make sure that service is profitable. Central City
might even offer to reduce the rate on procedure X2 to obtain an
increase in the rate for X1.
c. According to the given information, the proposed rates are significantly
below the current rates. Hence, accepting the proposal would require
turning away regular customers who pay more for the identical services.
This is not logical. Central City should reject the proposal.

14-24
MA14-35
a. The high observation is April 2011 and the low observation is December
2011.
Slope = ($97,800 $37,650)/(315 165) = $60,150/150 = $401
Vertical axis intercept = $97,800 ($401 315) = ($28,515)
or
Vertical axis intercept = $37,650 ($401 165) = ($28,515)
Cost estimating equation: Y = ($28,515) + $401X
The negative $28,515 does not represent what costs would be at a
production level of zero. Rather this is merely a value that assists in
fitting an equation through the high and low observations. Because the
high-low method utilizes two unusual observations (highest and lowest
activity) it is possible that an equation developed with the high-low
method does not represent the actual cost behavior pattern. The scatter
graph, developed below, assists in evaluating the high and low
observations and selecting representative high and low observations.
b. The scatter diagram is as follows:
It appears the April 2011 observation is not representative of normal

operating conditions and should be excluded from an analysis of costs
under normal operating conditions.

14-25
MA14-35 (continued)
c. The high observation is now August 2010 while the low observation
remains December 2011
Slope = ($60,630 $37,650)/(285 165) = $22,980/120 = $191.50
Vertical axis intercept = $60,630 ($191.50 285) = $6,052.50
or
Vertical axis intercept = $37,650 ($191.50 165) = $6,052.50
Cost estimating equation: Y = $6,052.50 + $191.50X
The results are strikingly different from those obtained in part a. The
vertical axis intercept is much higher, and a positive number, while the
slope is smaller. Basically, the unusual high observation in part a
pulled the high end of the equation up from what it should be.
d. Presented is a partial printout from an Excel spreadsheet, excluding the
April 2011 observation, with items of interest highlighted in bold:
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.826789
R Square
0.68358
Adjusted R
Square
0.663804
Standard Error
4049.279
Observations
18
Intercept
X Variable 1
Standard
Coefficients
Error
t Stat
P-value
14001.1 6268.23112 2.233661 0.040133
158.3602 26.93540398 5.879258 2.33E-05

14-26
MA14-35 (continued)
A consideration of the data not presented in bold, although important in
applications of regression analysis, is beyond the scope of this text
where we focus on how cost data can be analyzed using regression
analysis.
The cost estimating equation is:
Cost estimating equation: Y = $14,001.10 + $158.36X
This equation has two advantages over that developed in part c.
It uses all observations (except April 2011), rather than just two
representative observations.
It provides information on how well the cost-estimating equation
explains the variation in the dependent variable. In this case, the costestimating equation explains 68.358 percent of the variation in total
Because of the least-squares criteria, the analyst must evaluate the data
used in regression analysis and exclude unusual observations.
Otherwise, a single large squared deviation will have a disproportionate
influence in the cost-estimating equation.

14-27
MA14-35 (concluded)
e. The key to solving requirement e is to recognize that all previous
analysis failed to determine the separate influence of dining room table
and kitchen tables on manufacturing costs. The offer of $220 per table is
above the computations of the variable cost per table in parts c
($191.50) and d ($158.36). Hence, management might be tempted to
accept the offer.
Using multiple regression analysis with two independent variables,
rather than one, illustrates this would be a mistake. Presented is a
partial printout from an Excel spreadsheet with two independent
variables, with items of interest highlighted in bold:
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.998593
R Square
0.997187
Adjusted R
Square
0.996812
Standard Error
394.3038
Observations
18
ANOVA
df
SS
Significanc
eF
MS
4.13E+0
8
155476
2658.86
7.389E-20
Regression
Residual
2
15
826776021
233213225
Total
17
829108153
Intercept
X Variable 1
Coefficients
7888.485
295.996
Standard
Error
628.412302
4.26693951
t Stat
12.5530
69.3696
P-value
2.33E-09
3.16E-20
Lower 95%
6549.0557
286.90125
Upper
95%
9227.91
305.091
X Variable 2
120.5055
2.78141943
43.3252
3.56E-17
114.57701
126.434
Variable 1 represents the variable cost of a dining room table while

variable 2 represents the variable cost of a kitchen table. Hence, the
variable cost of a dining room table, $295.996, exceeds the offer of $220
per table. Management should reject the offer.
If students do not have access to a computer and spreadsheet software,
the instructor can assign the problem and provide the results of the
regression.
14-28
MA14-36
If students do not have access to a computer and spreadsheet software, the
instructor can still assign the problem after providing them with the
following output:
First, for simple regression analysis:
Regression Output:
Constant
Std Err of Y Est
R Squared
No. of Observations
Degrees of Freedom
X Coefficient
Std Err of Coef.
26.82222
2.994439
0.481696
10
8
1.111111
0.407492
Second, for multiple regression analysis:

Regression Output:
Constant
Std Err of Y Est
R Squared
No. of Observations
Degrees of Freedom
X Coefficient
Std Err of Coef.
9.646175
0.66333
0.980925
10
6
1.258166
0.09271
2.464264
0.175571
2.600728
0.14941
1. An important part of determining what Kevin should do is to determine

how long it takes to recondition a desktop computer.
Based on total unit and total hour information for the past 10 weeks, the
average time to repair a piece of electronic equipment is 2.7875 hours
(446 total hours/160 total units).
This suggests he can recondition approximately 14 desktop computers
per week (40 hours per week/2.7875 hours) to obtain total weekly
revenues of $560 (14 computers $40 each) and monthly revenues of
$2,240 ($560 4 weeks). Subtracting the rental fee of $200 leaves him
with $2,040 to cover other costs such as extra utilities and wages.

14-29
MA14-36 (continued)
If he worked for the store, he would receive $1,760 per month ($11 40
hours 4 weeks).
Based on this analysis, there is a monthly advantage of $280 to
accepting the contract.
One problem with this analysis is that it assumes that all pieces of
electronic equipment require the same amount of time to recondition. It
also assumes that all 40 hours are devoted to direct labor activities. It is
likely that there are facility-level activities such as equipment
maintenance, training, and paperwork.
2. Based on simple regression analysis, 26.822 facility-level hours are
required each week. This leaves 13.178 (40 26.822) hours to work on
computers. Simple regression analysis indicates that the marginal time
to repair a piece of electronic equipment is 1.111 hours. Using the
available time, approximately 12 (13.178/1.111) computers can be
reconditioned each week to obtain total weekly revenues of $480 (12
computers $40 each) and monthly revenues of $1,920 ($480 4 weeks).
Subtracting the rental fee of $200 leaves him with $1,720 to cover other
costs such as extra utilities and wages.
If Kevin worked for the store, he would receive $1,760 per month.
Based on this analysis there is a monthly advantage of $40 for working
for Radio Stuff.
While the simple regression approach recognizes the existence of
facility-level activities, it also assumes that all pieces of electronic
equipment require the same amount of time to recondition.
An advantage of the regression approach is that we are provided with
information on the goodness of fit. In this case the fit is not good. The
coefficient of determination for the simple regression analysis is
0.481696, indicating that only 48.17% of the variation in total weekly
hours is explained by the estimating equation. Hence, not much trust
can be placed in these results.

14-30
MA14-36 (concluded)
3. Based on multiple regression analysis, 9.646 facility-level hours are
required each week. This leaves 30.354 (40 9.646) hours to work on
computers. Multiple regression analysis also indicates that the marginal
time to repair a computer is 2.6 hours. Using the available time,
approximately 12 (30.354 2.6) computers can be reconditioned each
week to obtain total weekly revenues of $480 (12 computers $40 each)
and monthly revenues of $1,920 ($480 4 weeks). Subtracting the rental
fee of $200 leaves her with $1,720 to cover other costs such as extra
utilities and wages.
If Kevin worked for the store he would receive $1,760 per month.
Based on this analysis there is a monthly advantage of $40 for working
for Radio Stuff.
In this case, R-squared is 0.980925, implying that 98.09 percent of the
variation in the dependent variable is explained by the cost-estimating
equation.
Because of the small monthly advantage of working for Radio Stuff other
considerations will likely be important in making a decision. Additional
considerations include:
If Kevin can reduce the facility-level hours for setup and
administrative activities and recondition 3 or 4 more computers, the
economics would suggest accepting the contract.
Kevin may find that by reducing his travel time to and from work he is
able to devote additional time to reconditioning computers. This
might change the economics of accepting the contract.
There are quality-of-work issues. Working at home, Kevin can set his
own hours. On the other hand, having a regular job provides some
social interaction and clearly separates work from non-work
activities.
Working at home requires a higher level of self-motivation than going
to a more traditional job.
Fringe benefits are not mentioned in the case. If the store provides
fringe benefits, such as health care and retirement benefits, the
economics would clearly favor not accepting the contract.
Travel costs are not mentioned in the case. If they are high, this
would favor working at home.
Note: To avoid complexities related to self-employment taxes they are
not considered in this assignment. Some students might mention selfSolutions Manual, Module 14

14-31
employment taxes as an additional consideration.

14-32

Module 14 Solutions

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Module 14 Solutions

Uploaded by

Copyright:

Available Formats

Module 14

Cost Behavior, Activity Analysis,

Because of the multitude of underlying factors that drive costs,

Solutions Manual, Module 14

Cambridge Business Publishers, 2013

The vertical axis intercept of the economists short-run total cost

Using the high-low method, the first step is to select representative

Cost estimation concerns the determination of previous or current

A scatter diagram helps in selecting high and low activity levels

Least-squares regression analysis uses all available data, rather

Matching activity and cost within a single observation is important

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

During the past century

Q14-10. In a manufacturing facility, unit-level activities are performed for

Solutions Manual, Module 14

Cambridge Business Publishers, 2013

k. 8 or 12 (Slope of total costs increases.)

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

Solutions Manual, Module 14

Cambridge Business Publishers, 2013

Cost of automatic process

Beyond a monthly volume of 31,250 prints, the proposed process is

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

*$8.00 per hour/5,000 copies per hour = $0.0016 per copy

Cost of collating machine

Beyond a monthly volume of 1,000,000 copies, the collating machine is

Solutions Manual, Module 14

Cambridge Business Publishers, 2013

($209,000 $177,000)/(684,000 556,000)

Total annual costs

($52,000 $16,000)/(4,000 1,000)

Monthly order processing costs = $4,000 + $12X

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

1000 2000 3000 4000 5000

($32,000 16,000)/(3,000 1,000)

Monthly order processing costs = $8,000 + $8X

Solutions Manual, Module 14

Cambridge Business Publishers, 2013

($9,000 $4,800)/(400 100)

Monthly labor costs = $3,400 + $14X

Milesmowed & cleaned

($9,000 $5,000)/(400 200)

$9,000 $20(400) = $1,000

Monthly labor costs = $1,000 + $20X

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

Cost of food sold

Solutions Manual, Module 14

Cambridge Business Publishers, 2013

Where: X = unit sales

Cambridge Business Publishers, 2013

Financial & Managerial Accounting for MBAs, 3rd Edition

= ($28,000 $10,500)/(4,000 500)

$8,000 per month

$8,000 per month

Total cost = $8,000 + $5X

Solutions Manual, Module 14

Cambridge Business Publishers, 2013

Manufacturing costs appear to have a higher correlation with units

Cambridge Business Publishers, 2013