Managerial Accounting: Creating Value in a Dynamic Business Environment
11th Edition
ISBN: 9781259569562
Author: Ronald W Hilton Proffesor Prof, David Platt
Publisher: McGraw-Hill Education
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Chapter 6, Problem 47C
Earth and Artistry, Inc. provides commercial landscaping services. Sasha Cairns, the firm’s owner, wants to develop cost estimates that she can use to prepare bids on jobs. After analyzing the firm’s costs, Cairns has developed the following preliminary cost estimates for each 1,000 square feet of landscaping.
Cairns is quite certain about the estimates for direct material and direct labor. However, she is not as comfortable with the
Cairns believes that overhead is affected by total monthly direct-labor hours. Cairns decided to perform a least-squares regression of overhead (OH) on total direct-labor hours (DLH). The following regression formula was obtained.
Required:
- 1. The overhead rate developed from the least-squares regression is different from Cairns’ preliminary estimate of $18 per direct-labor hour. Explain the difference in the two overhead rates.
- 2. Using the overhead formula that was derived from the least-squares regression, determine a total variable-cost estimate for each 1,000 square feet of landscaping.
- 3. Cairns has been asked to submit a bid on a landscaping project for the city government consisting of 60,000 square feet. Cairns estimates that 40 percent of the direct-labor hours required for the project will be on overtime. Calculate the incremental costs that should be included in any bid that Cairns would submit on this project. Use the overhead formula derived from the least-squares regression.
- 4. Should management rely on the overhead formula derived from the least-squares regression as the basis for the variable overhead component of its cost estimate? Explain your answer.
- 5. After attending a seminar on activity-based costing, Cairns decided to further analyze the company’s activities and costs. She discovered that a more accurate portrayal of the firm’s cost behavior could be achieved by dividing overhead into three separate pools, each with its own cost driver. Separate regression equations were estimated for each of the cost pools, with the following results.
OH1 = 10,000 + 4.10DLH,
where DLH denotes direct-labor hours
OH2 = 9,100 + 13.50SFS,
where SFS denotes the number of square feet of turf seeded (in thousands)
OH3 = 8,000 + 6.60PL,
where PL denotes the number of individual plantings (e.g., trees and shrubs)
Assume that 5 direct-labor hours will be needed to landscape each 1,000 square feet, regardless of the specific planting material used.
- a. Suppose the landscaping project for the city will involve seeding all 60,000 square feet of turf and planting 80 trees and shrubs. Calculate the incremental variable overhead cost that Cairns should include in the bid.
- b. Recompute the incremental variable overhead cost for the city’s landscaping project assuming half of the 60,000-square-foot landscaping area will be seeded and there will be 250 individual plantings. The plantings will cover the entire 60,000-square-foot area.
- c. Briefly explain, using concepts from activity-based costing, why the incremental costs differ in requirements (a) and (b).
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Chapter 6 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
Ch. 6 - Describe the importance of cost behavior patterns...Ch. 6 - Define the following terms, and explain the...Ch. 6 - Suggest an appropriate activity base (or cost...Ch. 6 - Draw a simple graph of each of the following types...Ch. 6 - Explain the impact of an increase in the level of...Ch. 6 - Explain why a manufacturers cost of supervising...Ch. 6 - Explain the impact of an increase in the level of...Ch. 6 - Prob. 8RQCh. 6 - Indicate which of the following descriptions is...Ch. 6 - Prob. 10RQ
Ch. 6 - What is meant by a learning curve? Explain its...Ch. 6 - Suggest an appropriate independent variable to use...Ch. 6 - What is an outlier? List some possible causes of...Ch. 6 - Explain the cost estimation problem caused by...Ch. 6 - Describe the visual-fit method of cost estimation....Ch. 6 - What is the chief drawback of the high-low method...Ch. 6 - Explain the meaning of the term least squares in...Ch. 6 - Prob. 18RQCh. 6 - Prob. 19RQCh. 6 - List several possible cost drivers that could be...Ch. 6 - Prob. 21RQCh. 6 - Prob. 22ECh. 6 - The behavior of the annual maintenance and repair...Ch. 6 - WMEJ is an independent television station run by a...Ch. 6 - Jonathan Macintosh is a highly successful...Ch. 6 - Jonathan Macintosh is a highly successful...Ch. 6 - The Iowa City Veterinary Laboratory performs a...Ch. 6 - Chillicothe Meat Company produces one of the best...Ch. 6 - Rio Bus Tours has incurred the following bus...Ch. 6 - Prob. 31ECh. 6 - Prob. 32ECh. 6 - Prob. 33ECh. 6 - Gator Beach Marts, a chain of convenience grocery...Ch. 6 - For each of the cost items described below, choose...Ch. 6 - The following selected data were taken from the...Ch. 6 - Antioch Extraction, which mines ore in Montana,...Ch. 6 - Nations Capital Fitness, Inc. operates a chain of...Ch. 6 - The Allegheny School of Music has hired you as a...Ch. 6 - Prob. 40PCh. 6 - (Note: Instructors who wish to cover all three...Ch. 6 - Refer to the original data in the preceding...Ch. 6 - Shortly after being hired as an analyst with...Ch. 6 - The controller of Chittenango Chain Company...Ch. 6 - Dana Rand owns a catering company that prepares...Ch. 6 - Madison County Airport handles several daily...Ch. 6 - Earth and Artistry, Inc. provides commercial...Ch. 6 - Prob. 48CCh. 6 - Refer to the data and accompanying information in...
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