UCF-ACG2071 Ch. 6 Cost Behavior

UCF-ACG2071 Ch. 6 Cost Behavior - Example# . A B C D E...

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In Class Chapter 6 Examples – Cost Behavior Example #1  Account Analysis Method ABC Company makes sausages.  Their costs are as follows: A. Monthly depreciation on buildings and equipment is $19,000 B. Product costs (raw materials)  are $1.00 per pound produced C. Wages are $.70 per pound produced D. Supervisory Salaries total $10,000 per month E. Utilities cost $4,000 per month plus $.20 per pound produced. What is their cost function (formula?) Fixed Variable Depreciation $19,000 Product costs  $1.00 per pound Wages $.70 per pound Supervisory Salaries $10,000 Utilities $4,000 $.20 per pound              Total $33,000 $1.90 per pound Or, write the cost function as follows:  y = $33,000 + $1.90 (x) where X is the number of pounds produced. Example #2 High Low Method Month Miles Transportation Costs $ November 8,500 $11,400 December 10,600 11,600 January 12,700 11,700 February 15,000 12,000 March 20,000 12,500 April 8,000 11,000 Prepare the cost function to predict this cost. Step 1:  Determine the variable cost per unit, or “v”, which is the slope of the line if you graph total costs versus volume. Difference between High and Low Costs/Difference between High and Low Volume ($12,500 - $11,000)/(20,000-8,000) = $.125 So at this point, we know that y = f + $.125(x) Step 2:  Using either the high or low data, solve for “f” which is fixed costs. $12,500 = f  + $.125(20,000) $12,500 = f + $2,500 $10,000 = f So now you can write the total formula.  y = $10,000 + $.125(x) Page 1 of 7
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Example #3 High Low Method The Florida Company makes and sells garden tractors and law mowers.  A company accountant has recently  completed a cost study of the Billing Department, as follows: Month Invoices Processed Billing Department Costs July 20,000 $57,000 August 23,000 $62,000 September 25,000 $64,000 October 21,000 $58,000 November 19,000 $59,000 December 15,000 $54,000 a)Determine the cost estimation equation (cost function) for the Billing Department. Step One: ( $64,000 - $54,000)/(25,000 – 15,000) = $1.00 unit variable cost Step two:  $64,000 = f + $1.00(25,000) $39,000 = f So the overall formula is :  y = $39,000 + $1.00x b)  Use the equation in part A to predict Billing Department cost for January, when 22000 invoices are expected  to be processed.
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