costacctg13_sm_ch10

35 60001900 thecostfunct ionbasedonthetwoobservations

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Unformatted text preview: t drivers. 10­15 No. Mult ico llinearit y exists when two or more independent variables are highly correlated with each other. 10­16 (10 min.) Estimating a cost function. 1. Difference in costs Slope coefficient = Difference in machine­hours = $5, 400 - $4, 000 10, 000 - 6, 000 $1, 400 = $0.35 per machine­hour 4, 000 = Constant = Total cost – (Slope coefficient ´ Quantit y of cost driver) = $5,400 – ($0.35 ´ 10,000) = $1,900 = $4,000 – ($0.35 ´ 6,000) = $1,900 The cost funct ion based on the two observations is Maintenance costs = $1,900 + $0.35 ´ Machine­hours 2. The cost funct ion in requirement 1 is an est imate of how costs behave within the relevant range, not at cost levels outside the relevant range. If there are no months wit h zero machine­ hours represented in the maintenance account, data in that account cannot be used to estimate the fixed costs at the zero machine­hours level. Rather, the constant component of the cost funct ion provides the best available starting po int for a straight line that approximates how a cost behaves within the relevant range. 10­3 10­17 (15 min.) Identifying variable­, fixed­, and mixed­cost functions. 1. 2. See Solut ion Exhibit 10­17. Contract 1: y = $50 Contract 2: y = $30 + $0.20X Contract 3: y = $1X where X is the number of miles traveled in the day. Contract 1 2 3 Cost Function Fixed Mixed Variable 3. SOLUTION EXHIBIT 10­17 Plots of Car Rental Contracts Offered by Pacific Corp. Co n tract 1: Fi xe d C o s ts $160 Car R e n tal Co sts 140 120 100 80 60 40 20 0 0 50 100 150 M il e s Trave l e d p e r D ay Co n tract 2: M i xe d Co s ts $160 140 120 100 80 60 40 20 0 0 100 50 M il e s Trave l e d p e r D ay 150 C ar Re n t al C os ts Co n tract 3: Vari ab l e Co s ts Car R e n tal Co sts $160 140 120 100 80 60 40 20 0 0 50 100 M il e s Trave l e d p e r D ay 150 10­4 10­18 1. 2. 3. 4. 5. 6. 7. 8. 9. (20 min.) Various cost­behavior patterns. K B G J Note that A is incorrect because, alt hough the cost per...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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