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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