Lecture Notes 2008 winter Part 2

# Lecture Notes 2008 winter Part 2 - Estimating costs using...

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Estimating costs using historical data. Management accountants often use the Hi-Lo method to quickly separate variable costs from fixed costs, in doing so we assume, perhaps unknowingly, that the two period’s costs are comparable. Costs that span multiple years are subject to the influence of inflation and can distort our understanding of the firm’s cost behaviour. A simple illustration of how inflation will distort your model (utility cost to operate a hospital). 2001 2005 Change in costs: 568,000.00 Patient Days 23,000 29,000 Change in units: 6,000.00 Utility Costs 3,200,000 3,768,000 Rise over run==> 94.67 Total costs - variable = fixed costs! Inflation was 8% over this period. Using 2005 Total costs less variable = fixed portion Inflation is expected to 1% (2006 vs 2005) 3,768,000 2,745,333 1,022,667 Variable costs per patient day Fixed costs per year Prepared by J.Kroeker, 2008 © Sauder School of Business, UBC 1

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A more robust tool for estimating cost using historical data is __________________? If the represents years of data for different products within a firm, can we gain an understanding of costs for these products from these diagrams? \$ Units Prepared by J.Kroeker, 2008 © Sauder School of Business, UBC 2
Prepared by J.Kroeker, 2008 © Sauder School of Business, UBC 3

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ALETER CORPORATION 1 The Aleter Corporation operates several production departments. One of these departments began producing widgets four years ago. It has been profitable, but widget prices have been falling during the past year and Aleter has decided to cease operation of that department in six months. All widgets are sold to a single customer and that customer has ordered 500 units to be delivered during the first quarter (3 months) of year five. The size of the order for the second quarter of year five is under negotiation and the customer has said that he is willing to purchase either: (a) 500 units at a price of \$700 per widget (b) 1,000 units at a price of \$650 per widget To assist management in assessing which order to accept, Aleter’s accountant obtained the attached data (page 10) from his widget department records. Based on discussions with the production manager, the accountant believes that the basic physical input/output relations have been relatively constant over the four years. PART A The accountant proceeded to analyze this data to obtain an estimate of the fixed and variable costs of widget production. To this end he entered the following basic data in a spreadsheet (see webct file). C1 : Matcost = 16 quarters of material cost data C2 : Labcost = 16 quarters of labour cost data C3 : OHcost = 16 quarters of overhead data C4 : Output = 16 quarters of units produced data He then computed: C10 : Totcost = C1 + C2 + C3 = total cost PART (A) REQUIRED: A1) Run a series of regressions to find a model to represent DL, DM and OH as they relate to changes in output volume. A2)
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## This note was uploaded on 04/27/2008 for the course COMM 354 taught by Professor All during the Winter '08 term at UBC.

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Lecture Notes 2008 winter Part 2 - Estimating costs using...

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