|

 

|



What we really want to understand is how

spending will vary in a variety of decision
settings.

Cause-effect relations and costs drivers.

 |



ë heoretical = 100,000
ë
ractical = 90,000
ë ormal = 85,000
ë udgeted = 80,000
ë uppose fixed overhead is budgeted at
$1,000,000; variable overhead is $1 per unit;
direct material costs = $3; and direct labor =
$3. Overhead is applied based on units of
product.
 |



What does a unit of product cost if overhead

is allocated based on theoretical capacity?
$17

ractical capacity? $18.11

ormal capacity? $18.76
udgeted capacity. $19.50
Which measure should the company use?
 |


uppose the company allocates overhead
based on practical capacity and actual
production is 70,000 units.

y how much is overhead underapplied?

About $222,300
What does that cost represent?
he cost of idle
or excess capacity.
 |


ë Who should pay for excess capacity?

ë Who should pay for idle capacity?

ë ow is capacity measured?

What is the scarcest resource?

ë dle capacity and opportunity costs.

 |

   
ë When is it important to understand how overhead
behaves?

± When pricing, production, process and product

design decisions are made.

± When bids and make or buy decisions are made.

± When we need to answer ³what if´ questions.

 |

   


ë irst week¶s product costing exercises:

applied overhead.
± Valuing inventories & costs of sales.
± ot for costing individual products
± ot for predicting costs
 2 
 


ë ngineering estimates

ë Account analysis

ë cattergraph and high-low estimates

ë tatistical methods (typically regression)

 |

   



 
C = C + VC*(level of cost driver)
where
C= total cost
C = fixed cost
VC = variable cost per unit of the cost
driver,
and sometimes the cost driver is
represented by X.

 

Ò


A  C D
 |

  



ë eview each account

ë dentify it as fixed or variable (or mixed)
ë Attempt to determine the relationship
between the activity of interest and the cost
± Cost of building occupancy
± Cost of quality inspections
± Cost of materials handling
 V 
uppose management believes that the monthly
overhead cost ($5000) in the factory is mixed. t is
believed to be 50% fixed and 50% variable. he
variable portion is believe to depend on machine
hours, which average 10,000 per month. ow
would you show this as a linear equation?

C = $2500 + $.25(machine hours)

eterson Mfg. in
roblem et #1 will require account analysis.

 Ä  

uppose you have data on overhead costs and

machine hours for the past 15 months. Can
you easily determine whether the posited
relationship exists?

Yes, plot the data and look for a relationship.

 ï    



 

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= == = == = == = == = == 
= ==

 
 È  

 

ind the variable cost per unit of the cost

driver (VC):

à
à

 

à



à
à



à





 

à





à


È   V 
 


 


›
 ›




›


 ›

 È  

 
K K 

›

K 

stimate the total overhead cost during a

months when 115 machine hours will be used:
    



 K

 K

 

 K

 |

 
  

 

ë Y = the dependent variable (total O/ cost)

ë X = the explanatory variables

Y = V
X + 

where X = machine hours and  = random error.

C = C + VC*X + 
 

 
 

 


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=== ==


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= ==
= == = == = == = == = == 
= ==

 
 Ä   

 

ë One explanatory variable

ë Cost estimation equation
ë Coefficient of correlation ( )
ë Coefficient of determination ( 2)
± Goodness of fit
± Measure of importance
ë -statistic (hypothesis testing)
ë p-value
 |    

Measures the correlation between the independent

and the dependent variables.
 |    

Measures the percentage of variation in the

dependent variable explained by the independent
variable.

When the predicted values exactly equal the

actual costs, 2 = 1.

A goodness of fit test: 2 > .3

 



ë Goodness of fit hypothesis testing

ë Compute a statistic for regression results
ë Compute the associated p-value, or
ë
ook up a critical -value and compare
± 1 numerator degree of freedom
± (n-2) denominator degrees of freedom
± alpha = .05
 


ë he hypothesis is: he slope coefficient is

zero.

ë he -statistic measures the loss of fit that

results when we impose the restriction that
the slope coefficient is zero.

ë f  is large, the hypothesis is rejected.

  

ë his is the probability that the statistic we

computed could have come from the
population implied by our null hypothesis.
ë uppose we hypothesize that the slope
coefficient is zero.
ë f the p-value associated with the -statistic
is small, chances are the slope coefficient is
not zero.
  

  
   

 


     
Count 15
Num. Missing 0
R .896
R Squared .802
Adjusted R Squared .787
RMS Residual 182.244

 
     
DF Sum of Squares Mean Square F-Value P-Value
Regression 1 1753772.049 1753772.049 52.804 <.0001
Residual 13 431765.285 33212.714
Total 14 2185537.333


   

     
Coefficient Std. Error Std. Coeff. t-Value P-Value
Intercept 1334.293 162.913 1334.293 8.190 <.0001
Machine Hours 12.373 1.703 .896 7.267 <.0001
 Ä   

 
Ä


=== ==


== ==

=== ==


== ==

=== ==


== ==

=== ==

== ==

= ==
= == = == = == = == = == 
= ==

 
   
   !=
 




  
    
  
Count 15
Num. Missing 0
R .960
R Squared .921
Adjusted R Squared .915
RMS Residual 115.087

   
    
  
DF Sum of Squares Mean Square F-Value P-Value
Regression 1 2013351.144 2013351.144 152.007 <.0001
Residual 13 172186.189 13245.091
Total 14 2185537.333


   
  
    
  
Coefficient Std. Error Std. Coeff. t-Value P-Value
Intercept 1456.586 87.225 1456.586 16.699 <.0001
Direct Materials Cost .356 .029 .960 12.329 <.0001

  ›› 
  

 
        
Count 15
Num. Missing 0
R .976
R S ua e .952
juste R S ua e .944
RMS Resi ual 93.658

 
        
DF Sum of S ua es Mean S ua e F alue P alue
Regression 2 2080274.802 1040137.401 118.576 <.0001
Resi ual 12 105262.531 8771.878
Total 14 2185537.333


      
        
Coefficient St . Error St . Coeff. t alue P alue
Interce t 1333.960 83.724 1333.960 15.933 <.0001
Mac ine Hours 4.359 1.578 .316 2.762 .0172
Direct Materials Cost .258 .042 .697 6.101 <.0001
  
  

ë
redict monthly overhead when machine

hours are expected to be 62 and direct
materials costs are expected to be $1,900.
ë ecall
± V = $1,333.96
± Coefficient for mhrs = $4.359
± Coefficient for DM$ = $.258
 ï   


K  K
 KK  

K


 ï  


ë Calculate a minimum bid for a contract that

would use 22 machine hours and $900 in
direct materials. his would be a one-time-
only job.
ë What if there is no idle capacity?
ë Would your bid change if there were
potential for repeated business?
 ï

  

 

ë onlinear relationships
ë Outliers
ë purious relationships
ë Data problems
± naccurate accounting cut-offs
± Arbitrarily allocated costs
± Missing data
± nflation
 


ë Cenex and urd & letcher Cases.

ë se xcel for regression computations
ë We will discuss the problems in class and
ë Work a handout problem in groups.