costacctg13_sm_ch10

# The linear cost funct ion overstates costs by

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Unformatted text preview: f Service Reports 10­10 10­25 (30–40 min.) Linear cost approximation. 1. Slope coefficient (b) = Difference in cost \$529,000 - \$400,000 = = \$43.00 Difference in labor­hours 7,000 - 4,000 Constant (a) = \$529,000 – (\$43.00 × 7,000) = \$228,000 Cost funct ion = \$228,000 + \$43.00 ´ professio nal labor­hours The linear cost funct ion is plotted in Solut ion Exhibit 10­25. No, the constant component of the cost funct ion does not represent the fixed overhead cost of the Memphis Group. The relevant range o f professio nal labor­hours is fro m 3,000 to 8,000. The constant component provides the best available starting po int for a straight line that approximates how a cost behaves wit hin the 3,000 to 8,000 relevant range. 2. A co mparison at various levels o f professio nal labor­hours follows. The linear cost funct ion is based on the formula o f \$228,000 per month plus \$43.00 per professio nal labor­hour. Total overhead cost behavior: Month 1 Professio nal labor­hours 3,000 Actual total overhead costs \$340,000 Linear approximat ion 357,000 Actual minus linear approximat ion \$(17,000) Month 2 Month 3 Month 4 Month 5 Month 6 4,000 5,000 6,000 7,000 8,000 \$400,000 \$435,000 \$477,000 \$529,000 \$587,000 400,000 443,000 486,000 529,000 572,000 \$ 0 \$ (8,000) \$ (9,000) \$ 0 \$ 15,000 The data are shown in So lut ion Exhibit 10­25. The linear cost funct ion overstates costs by \$8,000 at the 5,000­hour level and understates costs by \$15,000 at the 8,000­hour level. 3. Contribut ion before deducting incremental overhead Incremental overhead Contribut ion after incremental overhead The total contribut ion margin actually forgone is \$3,000. Based on Actual \$38,000 35,000 \$ 3,000 Based on Linear Cost Function \$38,000 43,000 \$ (5,000) 10­11 SOLUTION EXHIBIT 10­25 Linear Cost Funct ion Plot of Professio nal Labor­Hours on Total Overhead Costs for Memphis Consult ing Group \$700,000 Total Overhead Costs 600,000 500,000 400,000 300,000 200,000 100,000 0 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Professional Labor­...
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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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