CPAPrepChapter10 - CHAPTER 10 DETERMINING HOW COSTS BEHAVE...

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Unformatted text preview: CHAPTER 10 DETERMINING HOW COSTS BEHAVE 10-9 Causality in a cost function runs from the cost driver to the dependent variable. Thus, choosing the highest observation and the lowest observation of the cost driver is appropriate in the high-low method. 10-13 Four key assumptions examined in specification analysis are 1. Linearity of relationship between the dependent variable and the independent variable within the relevant range. 2. Constant variance of residuals for all values of the independent variable. 3. Independence of residuals. 4. Normal distribution of residuals. 10-22 (30 min.) Account analysis method. 1. Manufacturing cost classification for 2009: Account Total Costs (1) % of Total Costs That is Variable (2) Variable Costs (3) = (1) × (2) Fixed Costs (4) = (1) – (3) Variable Cost per Unit (5) = (3) ÷ 75,000 Direct materials Direct manufacturing labor Power Supervision labor Materials-handling labor Maintenance labor Depreciation Rent, property taxes, admin $300,000 225,000 37,500 56,250 60,000 75,000 95,000 100,000 100% 100 100 20 50 40 $300,000 225,000 37,500 11,250 30,000 30,000 $ 45,000 30,000 45,000 95,000 100,000 $4.00 3.00 0.50 0.15 0.40 0.40 Total $948,750 $633,750 $315,000 $8 .45 Total manufacturing cost for 2009 = $948,750 10- 1 Variable costs in 2010: Account Unit Variable Cost per Unit for 2009 (6) Percentage Increase (7) Increase in Variable Cost per Unit (8) = (6) × (7) Variable Cost per Unit for 2010 (9) = (6) + (8) Total Variable Costs for 2010 (10) = (9) × 80,000 Direct materials Direct manufacturing labor Power Supervision labor Materials-handling labor Maintenance labor Depreciation Rent, property taxes, admin. $4.00 3.00 0.50 0.15 0.40 0.40 5% 10 $0.20 0.30 $4.20 3.30 0.50 0.15 0.40 0.40 $336,000 264,000 40,000 12,000 32,000 32,000 Total $8 .45 $0 .50 $8 .95 $716,000 Fixed and total costs in 2010: Account Fixed Costs for 2009 (11) Percentage Increase (12) Dollar Increase in Fixed Costs (13) = (11) × (12) Fixed Costs for 2010 (14) = (11) + (13) Variable Costs for 2010 (15) Total Costs (16) = (14) + (15) Direct materials Direct manufacturing labor Power Supervision labor Materials-handling labor Maintenance labor Depreciation Rent, property taxes, admin. $ 45,000 30,000 45,000 95,000 100,000 0% 5 7 $ 4,750 7,000 $ 45,000 30,000 45,000 99,750 107,000 $336,000 264,000 40,000 12,000 32,000 32,000 $ 336,000 264,000 40,000 57,000 62,000 77,000 99,750 107,000 Total $315,000 $11,750 $326,750 $716,000 $1,042,750 Total manufacturing costs for 2010 = $1,042,750 2. Total cost per unit, 2009 = 75,000 $948,750 = $12.65 Total cost per unit, 2010 = 80,000 $1,042,750 = $13.03 3. Cost classification into variable and fixed costs is based on qualitative, rather than quantitative, analysis. How good the classifications are depends on the knowledge of individual managers who classify the costs. Gower may want to undertake quantitative analysis of costs, using regression analysis on time-series or cross-sectional data to better estimate the fixed and...
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This note was uploaded on 08/11/2009 for the course ACCT 612 taught by Professor Jamesswanson during the Spring '09 term at Univ. of Massachusetts Med. School.

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CPAPrepChapter10 - CHAPTER 10 DETERMINING HOW COSTS BEHAVE...

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