Cost Estimation, Cost Behavior, Cost Prediction
Challenge 4 Summary:
High-End Lifts has learned that managing the business requires an in depth understanding of the costs that are incurred and
reported on the income statement. Understanding cost behavior is crucial to controlling costs and managing profitability. The management team has
noticed that some costs seem to change in direct proportion to changes in sales, other costs don’t seem to change at all relative to changes in sales, and
still others appear to change but not at the same rate as the changes in sales. They’d like you to explain how to interpret cost behavior, and to estimate
and predict future costs for developing and constructing master budget documents.
Read the information in the Challenge 4 Workbook to prepare for the challenge assignment. Watch the videos to gain a
stronger understanding of the concepts.
: Using the sales mix percentages given in the problem, calculate the weighted average number of units sold in each of the last six months of
year 4 (follow the directions for completing the yellow highlighted areas).
Use the check-point figures to validate your answers.
In the Excel template, tab Task #2 IS,
you will find nine questions (in a yellow box) posted to the right of the income statement.
these questions (you will use the answers for completing Task #4 later in the challenge).
Explore the information on
Task #2 IS
, and use it to develop your answers to the questions.
You may need to refer to the U2.1 workbook to review some
of the terms. Of importance is an understanding of the high-low method and the linear regression method for constructing cost equations for each
account on the income statement and for the firm in total. These have been completed for you, but you need to interpret the answers.
: In the Excel template, tab
Task #2.2 Cost Behavior
, complete the table using the results from Task #2.1 for both the high-low method of
analysis and the linear regression (the equations inside the graphs). Classify the costs into their fixed and variable components. Use the space provided
to comment on any difference that exists between the HL and the LR methods. (Hint: There are only two graphs that provide different results for fixed
and variable costs.) Explain why there is a
difference between the two results.
Determine the equation for summarizing fixed and variable costs and
predicting future costs for budgeting purposes (use the linear regression results).
Using the equation derived in
, create a contribution margin income statement on tab
Task #3 CM IS
. Follow the directions in the tab
and complete the yellow highlighted areas.
Write a letter to the management team that: