College of Management

AE 108 (Cost Accounting and Control)

Chapter 10 Assignment – Answer Key

1. Assume the following information:

Volume Total Cost
80 units £1,200
88 units £1,300
96 units £1,400
What is the variable cost per unit?
Answer:

VC / U = (Highest Cost – Lowest Cost) / (Highest Activity – Lowest Activity) using High-Low Method
= (1,400 – 1,200) / (96 – 80) = 200 / 16 = 12.50

2. The following information is available for electricity costs for the last six months of the year:
Month Production Volume Electricity Costs
July 1,400 £3,150
August 2,800 5,400
September 3,200 5,700
October 1,750 3,900
November 1,200 2,400
December 2,100 4,050

Using the high-low method, estimated variable cost per unit of production is
Answer:

VC / U = (Highest Cost – Lowest Cost) / (Highest Activity – Lowest Activity) using High-Low Method
= (5,700 – 2,400) / (3,200 – 1,200) = 3,300 / 2,000 = 1.65

3. The following information was available about supplies cost for the second quarter of the year:
Month Production Volume Supplies Cost
April 700 £3,185
May 1,600 7,100
June 600 2,700
Using the high-low method, the estimate of supplies cost at 1,000 units of production is
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Answer:
VC / U = (Highest Cost – Lowest Cost) / (Highest Activity – Lowest Activity) using High-Low Method
= (7,100 – 2,700) / (1,600 – 600) = 4,400 / 1,000 = 4.40

FC in Total = Total Cost – (VCU x Number of Units) = 7,100 – (4.40 x 1,600) = 60

Estimate of supplies cost at 1,000 units = FC + VC = 60 + (4.40 x 1,000) = 4,460

4. Baker Enterprises developed a cost function for manufacturing overhead costs of Y = £8,000 + £1.60X. Estimated
manufacturing overhead costs at 10,000 units of production are
Answer:

Estimated manufacturing overhead costs at 10,000 units = FC + (VCU x Number of Units)

= 8,000 + (1.60 x 10,000) = 24,000

5. Greene Enterprises has the following information about its truck fleet miles and operating costs:
Year Miles Operating Costs
2005 400,000 £256,000
2006 480,000 280,000
2007 560,000 320,000
What is the best estimate of total costs using the high-low method if the expected fleet mileage for 2008 is 500,000 miles?
Answer:

VC / U = (Highest Cost – Lowest Cost) / (Highest Activity – Lowest Activity) using High-Low Method
= (320,000 – 256,000) / (560,000 – 400,000) = 64,000 / 160,000 = 0.40

FC in Total = Total Cost – (VCU x Number of Units) = 320,000 – (0.40 x 560,000) = 96,000
Estimate of supplies cost at 500,000 miles = FC + VC = 96,000 + (0.40 x 500,000) = 296,000

6. Hook Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data:

Month Cost of Electricity Direct labour Hours

January £ 8,100 750
April 9,000 850
July 10,200 1,000
October 8,700 800
Using the high-low method, what is the best equation?
Answer:
VC / U = (Highest Cost – Lowest Cost) / (Highest Activity – Lowest Activity) using High-Low Method
= (10,200 – 8,100) / (1,000 – 750) = 2,100 / 250 = 8.40

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FC in Total = Total Cost – (VCU x Number of Units) = 10,200 – (8.40 x 1,000) = 1,800
High-Low Equation = Y = 1,800 + 8.40x

7. Kane Ltd. found its maintenance cost and sales revenues to be somewhat correlated. Last year's high and low
observations were as follows:
Maintenance Cost Sales
£36,000 £400,000
£42,000 £600,000
What is the fixed portion of the maintenance cost?
Answer:
VC / U = (Highest Cost – Lowest Cost) / (Highest Activity – Lowest Activity) using High-Low Method
= (42,000 – 36,000) / (600,000 – 400,000) = 6,000 / 200,000 = 0.03

FC in Total = Total Cost – (VCU x Number of Units) = 42,000 – (0.03 x 600,000) = 24,000

8. The following information was taken from a computer printout generated with the least-squares method for use in
estimating overhead costs:

Slope 45
Intercept 5,700
Correlation coefficient .72
Activity variable Direct labour hours
The cost formula is
Answer:
Overhead = 5,700 + 45x

9. The following information is available for maintenance costs:

Month Production Volume Maintenance Costs
January 75 £250
February 115 310
March 190 400
April 60 240
May 135 355
Using a computer or calculator, compute the estimate of variable cost per unit of production using the method of least
squares. Rounded to two decimal places, this value would be

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Answer:

Month Volume (x) Cost (y) xy x2

January 75 250 18,750 5,625

February 115 310 35,650 13,225
March 190 400 76,000 36,100
April 60 240 14,400 3,600
May 135 355 47,925 18,225
Total 575 1,555 192,725 76,775

= [5 (192,725) – (575) (1,555)] / 5 (76,775) – (575)2

= (963,625 – 894,125) / (383,875 – 330,625)
= 69,500 / 53,250
= 1.31

10. Refer to problem 9. Using a computer or calculator, compute the estimate of the fixed portion of maintenance costs
using the method of least squares. Rounded to the nearest figure, this value would be
Answer:

Where:

y = 1,555 / 5 = 311
x = 575 / 5 = 115
FC = 311 – (1.31 x 115) = 160.35

11. Refer to problem 9 in the above question. Using a computer or calculator, compute the estimate of maintenance costs
at 100 units of production using the method of least squares. This value would be

Answer:
Total Cost = FC + VC
Estimate of maintenance costs at 100 units = 160.35 + (1.31 x 100)
= 291.35

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12. A managerial accountant has determined the following relationships between overhead and several possible bases:
Basis Correlation with Total Overhead
Direct labour hours 0.842
Direct labour (£) 0.279
Machine hours -0.837
Employee minutes in coffee breaks -0.243

The best basis for overhead application is?

Answer:

Direct Labor Hours. Among the different basis, DLH with correlation value of 0.842 is the nearest value to 1, which in
correlation, it means that the two variables are moving in the same direction or proportion.

13. What is the difference between a correlation equal to -1 and a correlation equal to 0?
Answer:
A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of 0 means they
are unrelated. A correlation equal to 1 means two alternatives are moving on the same direction.

14. Abboud Company is planning to introduce a new product with an 80 percent incremental unit-time learning curve for
production for batches of 1,000 units. The variable labour costs are £30 per unit for the first 1,000-unit batch. Each batch
requires 100 hours. There are £10,000 in fixed costs not subject to learning. What is the cumulative total time (labour
hours) to produce 2,000 units?
Answer:
Each time the cumulative output doubles, the time per unit for that quantity should be approximately S O L U T I O N equal to the
previous time multiplied by the learning percentage (80 percent in this case).

Unit Unit Time (hours) Cumulative hours

1,000 100 100
2,000 80%(100) 80 180

15. Abboud Company is planning to introduce a new product with an 80 percent cumulative learning curve for production
for batches of 1,000 units. The variable labour costs are £30 per unit for the first 1,000-unit batch. Each batch requires 100
hours. There are £10,000 in fixed costs not subject to learning.

What is the individual unit time (labour hours) to produce 2,000 units?

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Member: Philippine Association of State Universities and Colleges (PASUC)
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Answer:
Unit Unit Time (hours)
1,000 100
2,000 80%(100) 80

Since there is learning curve, as the number of units doubles, the time per unit becomes lesser, thus for the first
1,000 it takes 100 hours to finish production, and with the learning curve of 80%, shown in the above solution, the
estimated time to produce is now 80 hours, thus for 2,000 units:

80 hours x 2 (2,000 /1,000) = 160 hours

16. Given the cost function, Y = £10,000 + £4X, at what level of the activity cost drivers will total cost be £22,000?
Answer:

Y = 10,000 + 4x
22,000 = 10,000 + 4x
22,000 – 10,000 = 4x
12,000 / 4 = 4x / 4
X = 3,000

17. The following cost functions were developed for manufacturing overhead costs:

Manufacturing Overhead Cost Cost Function

Electricity £400 + £140 per direct labour hour
Maintenance £800 + £40 per direct labour hour
Supervisors' salaries £16,000 per month
Indirect materials £50 per direct labour hour
If July production is expected to be 200 units that require 300 direct labour hours, estimated manufacturing overhead costs
would be
Answer:
Electricity – 400 + (140 x 300) = 42,400
Maintenance – 800 + (40 x 300) = 12,800
Salaries - 16,000
Indirect Materials – 50 x 300 = 15,000
Total Mfg. Costs 86,200

18. Silversleeves, SA., shipped 18,000 tons of silver for £450,000 in January and 22,000 tons for £549,000 in February.
Shipping costs for 21,000 tons to be shipped in March would be expected to be

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Answer:
VC / U = (Highest Cost – Lowest Cost) / (Highest Activity – Lowest Activity) using High-Low Method
= (549,000 – 450,000) / (22,000 – 18,000) = 99,000 / 4,000 = 24.75

FC in Total = Total Cost – (VCU x Number of Units) = 549,000 – (24.75 x 22,000) = 4,500
Shipping Cost = 4,500 + (24.75 x 21,000) = 524,250

19. The following information was available about supplies cost for the first three months of the year:
Month Production Volume Supplies Cost
January 4,800 £21,700
February 5,000 20,900
March 3,400 16,100
Using the high-low method, an estimate of supplies cost at 4,500 units of production would be
Answer:
VC / U = (Highest Cost – Lowest Cost) / (Highest Activity – Lowest Activity) using High-Low Method
= (20,900 – 16,100) / (5,000 – 3,400) = 4,800 / 1,600 = 3

FC in Total = Total Cost – (VCU x Number of Units) = 20,900 – (3 x 5,000) = 5,900

Supplies Cost = 5,900 + (3 x 4,500) = 19,400

The following data were obtained from the books of Thomas Company:
Month Overhead Costs Direct labour Hours
1 £14 3
2 18 5
3 25 7
4 12 4
5 26 8
6 8 2

The normal equations are ΣXY = aΣX + bΣX2

ΣY = an + bΣX

Required:

Use a computer or calculator to prepare the following:

20. Compute the fixed and variable components of the overhead costs using the high-low method.
Compute the fixed and variable components of the overhead costs using the least-squares
21.
method.

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Member: Philippine Association of State Universities and Colleges (PASUC)
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 Answer:
20. b = (£26 - £8)/(8 - 2) = £3 per DLH
a = £26 - (8 × £3) = £2
Overhead costs = £2 + £3(DLH)

21.

X Y XY X2
3 14 42 9
5 18 90 25
7 25 175 49
4 12 48 16
8 26 208 64
2 8 16 4
29 103 579 167
Normal equations:
(1) 579 = 29a + 167b
(2) 103 = 6a + 29b

Multiplying (1) by 6 and (2) by 29, we get:

3,474 = 174a + 1,002b

-2,987 = 174a + __841b
487 = 161b

b = £3.0248

Substituting 3.0248 into the first equation for b, we get:

579 = 29a + (167 × 3.0248)

a = £2.5468

The least-squares cost estimation equation is

Overhead costs = £2.5468 + £3.0248(DLH)

Machine hours and electricity costs for Wells Industries for 2007 were as follows:
Month Machine Hours Electricity Costs
January 2,000 £ 9,200
February 2,320 10,500
March 1,520 6,750
April 2,480 11,500
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May 3,040 14,125
June 2,640 11,000
July 3,280 12,375
August 2,800 11,375
September 1,600 7,750
October 2,960 13,000
November 3,760 15,500
December 3,360 13,875
Required:
22. Using the high-low method, develop an estimate of variable electricity costs per machine hour.
23. Using the high-low method, develop an estimate of fixed electricity costs per month.
24. Using the high-low method, develop a cost function for monthly electricity costs.
25. Estimate electricity costs for a month in which 3,000 machine hours are worked.

ANSWER: 22. £3.91 [(£15,500 - £6,750)/(3,760 - 1,520)]

23. £798.40 [£15,500 - (£3.91 × 3,760)]
24. Y = £798.40 + £3.91X, or
Electricity costs = £798.40 + (£3.91 × Machine hours)
25. £12,528.40 [£798.40 + (£3.91 × 3,000)]

SeyChy collected the following data on manufacturing costs and activity cost drivers for two months:

November December
Activity level in units 3,000 7,500

Variable costs £ 7,500 £ ?

Fixed costs 25,000 ?
Mixed costs _11,500 _13,750
Total manufacturing costs ? ?
Required:

26. What is total variable cost per unit?

27. What is the total fixed cost?

What is the estimated total manufacturing cost for January if the budgeted activity in January
28.
is 6,000 units?

ANSWER: 26. Variable cost (£7,500/3,000) £2.50

Variable cost component of mixed cost
[(£13,750 - £11,500)/(7,500 - 3,000)] _0.50
Total variable cost £3.00

27. Fixed cost £25,000

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 Fixed cost component of mixed cost
_10,000
[£11,500 - (£0.50 × 3,000)]
Total fixed cost £35,000

28. £35,000 + (6,000 × £3) = £53,000

74. Machine hours and electricity costs for AMK Industries for the past year were as follows:
Month Machine Hours Electricity Costs
January 2,000 £18,900
February 2,400 21,500
March 1,400 14,000
April 2,600 23,500
May 3,300 28,750
June 3,300 22,700
July 3,600 25,250
August 3,000 23,250
September 1,500 16,000
October 3,300 26,500
November 4,200 31,500
December 4,200 22,250
Required:

29. Using the high-low method, develop an estimate of variable electricity costs per machine hour.
30. Using the high-low method, develop an estimate of fixed electricity costs per month.

ANSWER: 29. £6.25 (£31,500 - £14,000)/(4,200 - 1,400)

30. £5,250 £31,500 - (£6.25 × 4,200)

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Accredited: Accrediting Agency of Chartered Colleges and Universities of the Philippines (AACCUP)
Member: Philippine Association of State Universities and Colleges (PASUC)
Agricultural Colleges Association of the Philippines (ACAP)