DETERMINING HOW COSTS BEHAVE
10-16 (10 min.)
Estimating a cost function.
= = $0.35 per machine-hour
= Total cost – (Slope coefficient Quantity of cost driver)
= $5,400 – ($0.35 10,000) = $1,900
= $4,000 – ($0.35 6,000) = $1,900
The cost function based on the two observations is
Maintenance costs = $1,900 + $0.35 Machine-hours
The cost function in requirement 1 is an estimate of how costs behave within the relevant range, not at cost levels outside the relevant range. If there are no months with zero machine-hours represented in the maintenance account, data in that account cannot be used to estimate the fixed costs at the zero machine-hours level. Rather, the constant component of the cost function provides the best available starting point for a straight line that approximates how a cost behaves within the relevant range.
81/300=.27 per M.hr
Identifying variable-, fixed-, and mixed-cost functions.
See Solution Exhibit 10-17.
Contract 1: y = $50
Contract 2: y = $30 + $0.20X
Contract 3: y = $1X
where X is the number of miles traveled in the day.
| Cost Function
| Fixed MixedVariable
Solution Exhibit 10-17
Plots of Car Rental Contracts Offered by Pacific Corp.
(20 min.) Various cost-behavior patterns.
Note that A is incorrect because, although the cost per pound eventually equals a
constant at $9.20, the total dollars of cost increases linearly from that point
The total costs will be the same regardless of the volume level.
This is a classic step-cost function.
Matching graphs with descriptions of cost and revenue behavior.
A step-cost function.
It is data plotted on a scatter diagram, showing a linear variable cost function with
constant variance of residuals. The constant variance of residuals implies that
there is a uniform dispersion of the data points about the regression line. g.
10-20 (15 min.) Account analysis method.
Car wash labor
Soap, cloth, and supplies
Electric power to move conveyor belt
Total variable costs
Total fixed costs
Some costs are classified as variable because the total costs in these categories change in proportion to the number of cars washed in Lorenzo’s operation. Some costs are classified as fixed because the total costs in these categories do not vary with the number of cars washed. If the conveyor belt moves regardless of the number of cars on it, the electricity costs to power the conveyor belt would be a fixed cost.
Variable costs per car = = $5.15 per car
Total costs estimated for 90,000 cars = $110,000 + ($5.15 × 90,000) = $573,500
10-21 ( 15 min.) Account analysis
1. The electricity cost is clearly variable since it entirely depends on number of kilowatt hours used.
The Waste Management contract is a fixed amount if the cost object is not number of quarters, since it does not depend on amount of activity or output during the quarter.
The telephone cost is a mixed cost because there is a fixed component and a component that depends on number of calls made.
2. The electricity rate is $573 ÷ 3000 kw hour = $0.191 per kw hour The waste management fixed cost is $270 for three months, or $90 (270 ÷ 3) per month. The telephone cost is...
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