hilton ch 6 select solutions

EXERCISE 6-33 (45 MINUTES)

1. Variable utility cost per hour = = $4.00

Total utility cost at 700 hours....................................................................... $ 3,800Variable utility cost at 700 hours ($4.00 700 hours).............................. 2,800 Fixed cost per month.................................................................................... $ 1,000

Cost formula:

Monthly utility cost = $1,000 + $4.00 X , where X denotes hours of operation.

2. Variable-cost estimate based on the scatter diagram on the next page:

Cost at 600 hours ........................................................................ $3,400Cost at 0 hours ........................................................................ 900Difference 600 hours ........................................................................ $2,500

Variable cost per hour = $2,500/600 hr. = $4.17 (rounded)

EXERCISE 6-33 (CONTINUED)

Scatter diagram and visually-fit line:

0

1000

2000

3000

4000

5000

0 100 200 300 400 500 600 700

Utility costper month

Hours ofoperation


3. Estimation of variable- and fixed-cost components of cost behavior using least-squares regression:

The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.

4. Cost predictions at 300 hours of operation:

(a) High-low method:

Utility cost = $1,000 + ($4.00)(300) = $2,200

(b) Visually-fitted line:

Utility cost = $2,190

This cost prediction was simply read directly from the visually-fitted cost line. This prediction will vary because of variations in the visually-fitted lines.

(c) Regression:

Utility cost = $1,002 + ($4.04)(300) = $2,214

5. Calculation of R2:

The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: WWW.MHHE.COM/HILTON8E.

The R2 is .9518.

http://www.mhhe.com/hilton8e



The following alternative approach to calculating the regression parameters is not a requirement in the problem.

Least-square regression using manual calculations:

(a) Tabulation of data:

Month

Dependent Variable

(cost)Y

Independent Variable (hours)

X X2 XYJanuary....................... 3,240 550 302,500 1,782,000February...................... 3,400 600 360,000 2,040,000March........................... 3,800 700 490,000 2,660,000April............................. 3,200 500 250,000 1,600,000May.............................. 2,700 450 202,500 1,215,000June............................. 2,600 400 160,000 1,040,000 Total............................. 18,940 3,200 1,765,000 10,337,000

(b) Calculation of parameters:

a =

=

b =

=

(c) Cost formula:

Monthly utility cost = $1,002 + $4.04X, where X denotes hours of operation.

Variable utility cost = $4.04 per hour of operation

PROBLEM 6-36 (15 MINUTES)

An appropriate activity measure for the school would be hours of instruction. The costs are classified as follows:

1. Variable 6. Variable

2. Semivariable (or mixed)* 7. Fixed

3. Fixed 8. Fixed

4. Fixed 9. Semivariable (or mixed)

5. Fixed

*The fixed-cost component is the salary of the school's repair technician. As activity increases, one would expect more repairs beyond the technician's capability. This increase in repairs would result in a variable-cost component equal to the dealer's repair charges.


1. Variable maintenance cost per hour of service =

= $8.00

Total maintenance cost at 310 hours of service......................................... $2,990Variable maintenance cost at 310 hours of service (310 hr. $8.00)...... 2,480Fixed maintenance cost per month............................................................. $ 510

Cost formula:

Monthly maintenance cost = $510 + $8.00X, where X denotes hours of maintenance service.

2. The variable component of the maintenance cost is $8.00 per hour of service.

3. Cost prediction at 600 hours of activity:

Maintenance cost = $510 + ($8.00)(600) = $5,310

4. Variable cost per hour [from requirement (2)]............................................ $8.00Fixed cost per hour at 610 hours of activity ($510/610)............................. $ .84*

*Rounded.

The fixed cost per hour is a misleading amount, because it will change as the number of hours changes. For example, at 500 hours of maintenance service, the fixed cost per hour is $1.02 ($510/500 hours).


1. Straight-line depreciation—committed fixedCharitable contributions—discretionary fixedMining labor/fringe benefits—variableRoyalties—semivariableTrucking and hauling—step-fixed

The per-ton mining labor/fringe benefit cost is constant at both volume levels presented, which is characteristic of a variable cost.

$315,000 1,400 tons = $225 per ton$607,500 2,700 tons = $225 per ton

Royalties have both a variable and a fixed component, making it a semivariable (mixed) cost.

Variable royalty cost = difference in cost difference in tons= ($224,500 – $140,000) (2,700 – 1,400)

= $84,500 1,300 tons= $65 per ton

Fixed royalty cost:June

(2,700 tons)December

(1,400 tons)

Total royalty cost………………………. $224,500 $140,000Less: Variable cost at $65 per ton….. 175,500 91,000 Fixed royalty cost……………………… $ 49,000 $ 49,000

2. Total cost for 1,700 tons:

Depreciation…………………………………………... $ 30,000Charitable contributions……………………………. ----Mining labor/fringe benefits at $225 per ton……. 382,500Royalties:

Variable at $65 per ton………………………….. 110,500Fixed……………………………………………….. 49,000

Trucking and hauling……………………………….. 280,000 Total……………………………………………….. $852,000

PROBLEM 6-38 (CONTINUED)

3. Hauling 1,400 tons is not particularly cost effective. Lone Mountain Extraction will incur a cost of $280,000 if it needs 1,400 tons hauled or, for that matter, 1,899 tons. The company would be better off if it had 1,399 tons hauled, saving outlays of $40,000. In general, with this type of cost function, effectiveness is maximized if a firm operates on the right-most portion of a step, just prior to a jump in cost.

4. A committed fixed cost results from an entity’s ownership or use of facilities and its basic organizational structure. Examples of such costs include property taxes,

depreciation, rent, and management salaries. Discretionary fixed costs, on the other hand, arise from a decision to spend a particular amount of money for a specific

purpose. Outlays for research and development, advertising, and charitable contributions fall in this category.

In times of severe economic difficulties, a company’s management will often try to cut discretionary fixed costs. Such costs are more easily altered in the short run and do not have as significant long-term ramifications for a firm as do more long-lasting actions. While it’s true that cutting expenditures on advertising or R & D can often have adverse long-term consequences, other cuts could have even more significant negative consequences in the future. The decision to close a manufacturing facility, for example, could reduce property taxes, rent, and/or depreciation. However, that decision may result in a significant long-run change in operations that may be difficult to overturn when economic conditions rebound.

5. Lone Mountain Extraction uses a calendar year for tax-reporting purposes. At year-end, it may have ample funds available and decide to make donations to charitable causes. Such contributions are deductible in computing the company’s tax obligation to the government. Tax deductions reduce taxable income and, therefore, produce a tax savings for the firm.


1. The regression equation's intercept on the vertical axis is $190. It represents the portion of indirect material cost that does not vary with machine hours when operating within the relevant range. The slope of the regression line is $5 per machine hour. For every machine hour, $5 of indirect material costs are expected to be incurred.

2. Estimated cost of indirect material at 850 machine hours of activity:

S = $190 + ($5 850)

= $4,440

3. Several questions should be asked:

(a) Do the observations contain any outliers, or are they all representative of normal operations?

(b) Are there any mismatched time periods in the data? Are all of the indirect material cost observations matched properly with the machine hour observations?

(c) Are there any allocated costs included in the indirect material cost data?

(d) Are the cost data affected by inflation?

4. April August Beginning inventory.............................................................. $1,300 $1,000+ Purchases........................................................................... 5,900 6,200– Ending inventory................................................................ (1,350) (3,000)Indirect material used........................................................... $5,850 $4,200

5. High-low method:

Variable cost per machine hour

=

=


Fixed cost per month:

Total cost at 1,000 hours................................................................................ $5,850Variable cost at 1,000 hours

($5.50 1,000)......................................................................................... 5,500

Fixed cost......................................................................................................... $ 350

Equation form:

Indirect material cost = $350 + ($5.50 machine hours)

6. The regression estimate should be recommended because it uses all of the data, not just two pairs of observations when developing the cost equation.


1. The original method was simply the average overhead per hour for the last 12 months and did not distinguish between fixed and variable costs. Dana divided total overhead by total labor hours, which effectively treated all overhead as variable. Regression analysis measures the behavior of the overhead costs in relation to labor hours and is a model that distinguishes between fixed and variable costs within the relevant range of 2,500 to 7,500 labor hours.

2. a. Based on the regression analysis, the variable cost per person for a cocktail party is $23, calculated as follows:

Food and beverages................................................................................ $14.00Labor (.6 hr. @ $11/hr.)............................................................................ 6.60Variable overhead (.6 hr. @ $4/hr.)......................................................... 2 .40

Total..................................................................................................... $23 .00

b. Based on the regression analysis, the full absorption cost per person for a cocktail party is $29, calculated as follows:

Food and beverages................................................................................ $14.00Labor (.6 hr. @ $11/hr.)............................................................................ 6.60Variable overhead (.6 hr. @ $4/hr.)......................................................... 2.40Fixed overhead (.6 hr. @ $10/hr.)*.......................................................... 6 .00

Total..................................................................................................... $29 .00

*$48,000 x 12 months = $576,000 $576,000/57,600 hr. = $10/hr.

3. The minimum bid for a 250-person cocktail party would be $5,750. The amount is calculated by multiplying the variable cost per person of $23 by 250 people. At any price above the variable cost, Dana will be earning a contribution toward his fixed costs.


4. Other factors that Dana should consider in developing a bid include the following:

The assessment of the current capacity of Dana’s business. If the business is at capacity, other work would have to be sacrificed at some opportunity cost.

Analyses of the competition. If competition is rigorous, Dana may not have much bargaining power.

A determination of whether or not Dana’s bid will set a precedent for lower prices.

The realization that regression analysis is based on historical data, and that any anticipated changes in the cost structure should be considered.

CASE 6-48 (45 MINUTES)

1. Scatter diagram:

2. through 4. See scatter diagram for requirement (1).

Administrative cost

$25,000

$20,000

$15,000

$10,000

$5,000

500 1,000 1,500 2,000Patient load

Visually-fitted semivariable

cost line

Visually-fitted curvilinear cost line

Relevant range3.

2.

4.

CASE 6-48 (CONTINUED)

5. Fixed cost = $7,000

6. Administrative cost = $7,000 + $3.00X, where X denotes the number of patients.

7. Cost predictions using visually-fit cost lines:

Patient Load

Cost Prediction

750..................... $9,300 350……. 5,500

It makes no difference which visually-fit cost line is used to make the cost prediction for 750 patients. The semivariable approximation is very accurate at this patient load, which is near the middle of the relevant range. However, for a patient load of 350 patients, the visually-fit curvilinear cost line yields a much more accurate prediction.

CASE 6-49 (50 MINUTES)

1. High-low method:

Variable administrative cost per patient =

Total cost at 1,500 patients............................................................................ $16,100Variable cost at 1,500 patients....................................................................... 15,000Fixed cost per month...................................................................................... $ 1,100

Cost formula:

Total monthly administrative cost = $1,100 + $10X, where X denotes the number of patients for the month.

The variable cost per patient is $10.

2. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.


3. MemorandumDate: Today


To: Jeffrey Mahoney, Administrator

From: I.M. Student

Subject: Comparison of cost estimates for clinic administrative costs

Three alternative cost-estimation methods were used to estimate the pediatric clinic's administrative cost behavior. The results of these three approaches (in formula form) are shown below. In each formula, X denotes the number of patients in a month.

(a) Least-squares regression method:

Total monthly administrative cost = $2,671 + $7.81X

(b) High-low method:

Total monthly administrative cost = $1,100 + $10X

(c) Visual-fit method:

Total monthly administrative cost = $7,000 + $3.00X

These cost estimates differ very significantly. The activity level in the clinic during its first year of operation fluctuated greatly. This fluctuation is not expected in the future; patient loads in the range of 600 to 1,200 patients per month are anticipated.

The cost estimates differ so greatly because two of the methods (least-squares and high-low) used data from outside the relevant range of activity. The clinic's administrative cost behavior appears from the scatter diagram to be curvilinear over the entire range. The cost behavior pattern exhibits very low costs in the range of activity below the relevant range and very high costs in the activity range above the relevant range. Since the regression and high-low estimates are so heavily influenced by observations outside the relevant range, they do not provide the best estimate in this case of how administrative costs are likely to behave within the relevant range. In this instance, the visually-fitted cost line probably provides the best estimate.


Another possible approach would be to use least-squares regression, but restrict the data to those observations within the relevant range. However, only a handful of observations would remain to include in the analysis.

My overall recommendation is to use the visually-fitted cost line as the best estimate until the clinic has operated for its second year. Then I would recommend a new cost analysis using least-squares regression on all of the data from the relevant range of activity.

4. It is very inappropriate for the hospital administrator to manipulate the cost information supplied by the director of cost management in order to push his own agenda before the board of trustees. It is the board's legitimate role to decide whether or not to establish and continue operations in the clinic. In making decisions about the clinic, the board should have the best information possible, including the controller's best estimate as to how administrative costs will behave.

Megan McDonough, the hospital’s director of cost management, has a professional obligation to provide her best professional judgment to the board of trustees. The standards of ethical conduct for management accountants include the following requirements concerning objectivity:

(a) Communicate information fairly and objectively.

(b) Disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented.

McDonough should insist that the best and most appropriate estimate of the clinic's administrative cost behavior be presented to the board.


The following alternative approach to calculating the regression parameters is not a requirement in the problem.

Least-squares regression using manual calculations

(a) Tabulation of data:

Month

Dependent Variable (cost in

hundreds)Y

Independent Variable

(patients in hundreds)

X X2 XYJanuary....................... 60 4 16 240February...................... 70 5 25 350March........................... 139 14 196 1,946April............................. 92 9 81 828May.............................. 119 13 169 1,547June............................. 100 10 100 1,000July.............................. 94 7 49 658August......................... 41 3 9 123September................... 102 11 121 1,122October....................... 161 15 225 2,415November.................... 83 6 36 498December.................... 111 12 144 1,332 Total............................. 1,172 109 1,171 12,059

(b) Calculation of parameters:

a =

=

b =

=


(c) Cost behavior in formula form (with rounded parameters):*

Total monthly administrative cost = $2,671 + $7.81X, where X denotes the number of patients for the month.

*When interpreting the regression parameters, remember that both the cost and patient data were transformed to hundreds. Thus, the 26.707 intercept parameter (a) is in terms of hundreds of dollars of cost, or $2,671 (rounded). The 7.812 slope parameter (b) is in terms of hundreds of dollars of cost per hundred patients, or $781 (rounded) per hundred patients. This amount is equivalent to $7.81 per patient.

(d) The variable cost per patient is $7.81, as explained above.

FOCUS ON ETHICS (See page 253 in the text.)

Is direct labor a variable cost? Is it ethical to “tap and zap” employees?

Direct labor is a variable cost if management is both able and willing to continually adjust the workforce to meet short-term needs. Many observers would argue that it is ethical to “tap and zap” employees provided that those employees are appropriately notified about and compensated for the added risks and uncertainties surrounding their employment. For example, hourly rates for temporary employees may be set somewhat higher than for permanent employees to account for temps not having paid vacation, health benefits, and other standard compensation features of the modern workforce. For many cyclical industries (e.g., recreational resorts) such labor flexibility is essential. For industries with more stable labor levels, there are legal limitations, which seek to prevent classifying labor incorrectly as “temporary.” The deliberate misclassification of employees to avoid appropriate compensation is unethical, and in certain circumstances may be illegal.

hilton ch 6 select solutions

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