ACCT303Chapter10

# ACCT303Chapter10 - CHAPTER 10 DETERMINING HOW COSTS BEHAVE...

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CHAPTER 10 DETERMINING HOW COSTS BEHAVE 10-16 (10 min.) Estimating a cost function. 1. Slope coefficient = = = = \$0.35 per machine-hour Constant = Total cost – (Slope coefficient × Quantity of cost driver) = \$5,400 – (\$0.35 × 10,000) = \$1,900 = \$4,000 – (\$0.35 × 6,000) = \$1,900 The cost function based on the two observations is Maintenance costs = \$1,900 + \$0.35 × 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- 1

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10-17 (15 min.) Identifying variable-, fixed-, and mixed-cost functions. 1. See Solution Exhibit 10-17. 2. Contract 1: y = \$50 Contract 2: y = \$30 + \$0.20 X Contract 3: y = \$1 X where X is the number of miles traveled in the day. 3. Contract Cost Function 1 2 3 Fixed Mixed Variable SOLUTION EXHIBIT 10-17 Plots of Car Rental Contracts Offered by Pacific Corp. 10- 2
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 10-19 (30 min.) Matching graphs with descriptions of cost and revenue behavior. a. (1) b. (6) A step-cost function. c. (9) d. (2) e. (8) f. (10) It is data plotted on a scatter diagram, showing a linear variable cost function with constant variance of residuals. The constant variance of residuals implies that there is a uniform dispersion of the data points about the regression line. g. (3) h. (8) 10-20 (15 min.) Account analysis method. 1. Variable costs: Car wash labor \$260,000 Soap, cloth, and supplies 42,000 Water 38,000 Electric power to move conveyor belt 72,000 Total variable costs \$412,000 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.

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ACCT303Chapter10 - CHAPTER 10 DETERMINING HOW COSTS BEHAVE...

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