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# ch10sol - CHAPTER 10 DETERMINING HOW COSTS BEHAVE 10-16(10...

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CHAPTER 10 DETERMINING HOW COSTS BEHAVE 10-16 (10 min.) Estimating a cost function. 1. Slope coefficient = = \$3,900 - \$3,000 7,000 - 4,000 = \$900 3,000 = \$0.30 per machine-hour Constant = Total cost – (Slope coefficient × Quantity of cost driver) = \$3,900 – (\$0.30 × 7,000) = \$1,800 = \$3,000 – (\$0.30 × 4,000) = \$1,800 The cost function based on the two observations is Maintenance costs = \$1,800 + \$0.30 × Machine-hours 2. The cost function in requirement 1 is an estimate of how costs behave within the relevant range, not at cost levels outside the relevant range. If there are no months with zero machine-hours represented in the maintenance account, data in that account cannot be used to estimate the fixed costs at the zero machine-hours level. Rather, the constant component of the cost function provides the best available starting point for a straight line that approximates how a cost behaves within the relevant range. 10-18 (20 min.) Various cost-behavior patterns. 1. K 2. B 3. G 4. J Note that A is incorrect because, although the cost per pound eventually equals a constant at \$9.20, the total dollars of cost increases linearly from that point onward. 5. I The total costs will be the same regardless of the volume level. 6. L 7. F This is a classic step-cost function. 8. K 9. C

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10-20 (15 min.) Account analysis method. 1. Variable costs: Car wash labor \$240,000 Soap, cloth, and supplies 32,000 Water 28,000 Electric power to move conveyor belt 72,000 Total variable costs \$372,000 Fixed costs: Depreciation \$ 64,000 Salaries 46,000 Total fixed costs \$110,000 Some costs are classified as variable because the total costs in these categories change in proportion to the number of cars washed in Lorenzo’s operation. Some costs are classified as fixed because the total costs in these categories do not vary with the number of cars washed. If the conveyor belt moves regardless of the number of cars on it, the electricity costs to power the conveyor belt would be a fixed cost. 2. Variable costs per car = 80,000 \$372,000 = \$4.65 per car Total costs estimated for 90,000 cars = \$110,000 + (\$4.65 × 90,000) = \$528,500 10-21 (30 min.) Account analysis method. 1. Manufacturing cost classification for 2006: 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
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ch10sol - CHAPTER 10 DETERMINING HOW COSTS BEHAVE 10-16(10...

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