Loose-leaf For Fundamentals Of Cost Accounting
Loose-leaf For Fundamentals Of Cost Accounting
6th Edition
ISBN: 9781260708752
Author: William N. Lanen Professor, Shannon Anderson Associate Professor, Michael W Maher
Publisher: McGraw-Hill Education
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Chapter 5, Problem 68P

a.

To determine

Use the high-low method to estimate the fixed and variable portions of store costs based on employees.

a.

Expert Solution
Check Mark

Explanation of Solution

High-low cost method:

High-low cost method helps in separating the fixed and variable cost from the total cost. It is calculated by comparing the highest and lowest level of activities and the cost of these activities.

Show the cost equation of fixed and variable cost with the overhead cost:

Store cost = Fixed cost + Variable cost($91) (1) + ($94.82(2) × Number of employees)

Thus, the cost equation is: Store cost = $232 + ($94.82 × Number of employees).

Working note 1:

Calculate the fixed cost:

Fixed cost = Total cost - Variable cost= $5029 - $5,120 (3)= ($91)

Calculate the highest and lowest activity:

ParticularEmployeesCost
Highest activity54$5,029
Lowest activity26$2,374

Table: (1)

Working note 2:

Calculate the variable cost (unit) with the help of high-low cost method:

Variable cost = Cost of highest activity  Cost of lowest activityHighest activity units  Lowest activity units= $5,029  $2,37454 26= $94.82

Working note 3:

Calculate the variable cost ($) with the help of high-low cost method:

Variable cost ($) = Number of employees× Rate per unit= 54 × $94.82(2)= $5,120

b.

To determine

Use the results of your high-low analysis to estimate the cost for a store with 30 employees.

b.

Expert Solution
Check Mark

Explanation of Solution

Total cost of store:

Total cost of the store includes the fixed and variable cost of the production. It is calculated by the cost equation.

Estimate the cost for the store:

Store cost = $232 + ($8  × number of employees)= ($232) + (94.82 × 30)= $2,753

Thus, the estimated cost for the store is $2,753.

c.

To determine

Prepare a scatter graph between store cost and employees.

c.

Expert Solution
Check Mark

Explanation of Solution

Scatter graph:

Scatter graph shows the relationship between the cost and the activity. It shows the cost at various level of activity. It helps in finding the outlier in the data. So the management can eliminate it to make more effective decisions.

Prepare the scatter graph for store cost and employee:

Loose-leaf For Fundamentals Of Cost Accounting, Chapter 5, Problem 68P

The scatter plot represents number of employees on the horizontal axis and the store cost on the vertical axis. The points on the scatter plot do not seem to form the linear pattern and there is not a healthy relationship as well.

d.

To determine

Prepare an estimate of the cost of a store with 30 employees using the results from a simple regression of store cost on employees.

d.

Expert Solution
Check Mark

Answer to Problem 68P

The store cost is $2,930.

Explanation of Solution

Cost equation:

Cost equation is a mathematical representation of the cost estimation at various level of activity. It is used by defining the fixed cost and variable cost per unit and then the variable cost per unit is multiplied by the given variable to calculate the relative cost.

Store cost = ($162.9) + 103.1 × Employees= ($162.9) + 103.1 × 30= $2,930

Thus, the store cost is $2,930.

e.

To determine

Prepare an estimate of the cost of a store with revenues of $2.5 million and 30 employees using the results of a multiple regression of store costs on store revenues and employees.

e.

Expert Solution
Check Mark

Explanation of Solution

Multiple regressions:

Multiple regressions use two or more activities (variables) to establish the relationship between cost and activities:

Store cost = ($204.2) + (0.01) × Revenues + 105.5 × Employees= ($204.2) +(0.01) × 2,500 + 105.5 × 30= $2,935.8

Thus, the store cost is $2,935.8.

f.

To determine

Comment on the results of the regression analyses in parts d and e.

f.

Expert Solution
Check Mark

Explanation of Solution

Regression analysis:

Regression analysis is used to show the relationship between the cost and the activity. It is used to estimate the cost at various level of activity.

The most important step in the calculation of regression analysis is to establish a logical relationship between the cost and the activity. The activity (independent variable) is placed on the right-hand-side and the cost (dependant variable) is placed on the left-hand-side of the graph.

Comment on the results of the regression analyses:

In case of simple and multiple regressions, the both of the coefficients are not very significant. But the both the R2 are similar and significant. This kind of problem arises when two or more independent variables in a multiple regression analyses are related to each other.

In the given case, the number of employees and revenue are closely related.

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Chapter 5 Solutions

Loose-leaf For Fundamentals Of Cost Accounting

Ch. 5 - What are some complications that can arise when...Ch. 5 - The following costs are labeled fixed or variable...Ch. 5 - Prob. 13CADQCh. 5 - When preparing cost estimates for account analysis...Ch. 5 - How can one compensate for the effects of price...Ch. 5 - Prob. 16CADQCh. 5 - Prob. 17CADQCh. 5 - A decision maker is interested in obtaining a cost...Ch. 5 - Consider the Business Application item Using...Ch. 5 - A friend comes to you with the following problem....Ch. 5 - After doing an account analysis and giving the...Ch. 5 - In doing cost analysis, you realize that there...Ch. 5 - Prob. 23CADQCh. 5 - Are learning curves likely to affect materials...Ch. 5 - McDonalds, the fast-food restaurant, is known for...Ch. 5 - Prob. 26CADQCh. 5 - A manager asks you for a cost estimate to open a...Ch. 5 - Prob. 28CADQCh. 5 - Methods of Estimating Costs: Engineering Estimates...Ch. 5 - Prob. 30ECh. 5 - Methods of Estimating Costs: Engineering Estimates...Ch. 5 - Prob. 32ECh. 5 - Methods of Estimating Costs: Account Analysis The...Ch. 5 - Methods of Estimating Costs: Account Analysis...Ch. 5 - Methods of Estimating Costs: High-Low, Ethical...Ch. 5 - Methods of Estimating Costs: High-Low Adriana...Ch. 5 - Methods of Estimating Costs: High-Low Adriana...Ch. 5 - Prob. 38ECh. 5 - Adriana Corporation manufactures football...Ch. 5 - Methods of Estimating Costs: Simple...Ch. 5 - Prob. 41ECh. 5 - Methods of Estimating Costs: High-Low Davis Stores...Ch. 5 - Methods of Estimating Costs: Scattergraph Prepare...Ch. 5 - Prob. 44ECh. 5 - Interpretation of Regression Results: Multiple...Ch. 5 - Interpretation of Regression Results Brodie...Ch. 5 - Prob. 47ECh. 5 - Interpretation of Regression Results: Simple...Ch. 5 - Learning Curves Assume that General Dynamics,...Ch. 5 - Learning Curves Assume that Whee, Cheatham, and...Ch. 5 - Prob. 51ECh. 5 - Learning Curves (Appendix B) Refer to the example...Ch. 5 - Prob. 53PCh. 5 - Prob. 54PCh. 5 - Regressions from Published Data Obtain 13 years of...Ch. 5 - Prob. 56PCh. 5 - High-Low Method, Scattcrgraph Cubicle Solutions...Ch. 5 - High-Low Method, Scattcrgraph Academy Products...Ch. 5 - High-Low, Scattergraph, Issues with Data Wyoming...Ch. 5 - Interpretation of Regression Results: Simple...Ch. 5 - Interpretation of Regression Results: Simple...Ch. 5 - Interpretation of Regression Results: Multiple...Ch. 5 - Interpretation of Regression Results: Simple...Ch. 5 - Interpretation of Regression Results Brews 4 U is...Ch. 5 - Cost Estimation: Simple Regression The following...Ch. 5 - Prob. 68PCh. 5 - Methods of Cost Analysis: Account Analysis, Simple...Ch. 5 - Learning Curves (Appendix B) Refer to the example...Ch. 5 - Learning Curves (Appendix B) Krylon Company...
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