Managerial Accounting

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Scattergraph, High-Low Method, and Predicting Cost for a Different Time Period from the One Used to Develop a Cost Formula

Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10 months. Tracy Heppler, a member of the controller's department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. One such activity is receiving raw materials (unloading incoming goods, counting goods, and inspecting goods), which she believes is driven by the number of receiving orders. Ten months of data have been gathered for the receiving activity and are as follows:

Month		Receiving Orders		Receiving Cost
1		1,000			$18,000
2		700			15,000
3		1,500			28,000
4		1,200			17,000
5		1,300			25,000
6		1,100			21,000
7		1,600			29,000
8		1,400			24,000
9		1,700			27,000
10		900			16,000

Required:

1.  On your own paper, prepare a scattergraph based on the 10 months of data. Based on this, does the relationship appear to be linear?

2.  Using the high-low method, select a cost formula for the receiving activity.

Using the cost formula, what is the predicted cost of receiving for a month in which 1,450 receiving orders are processed? $fill in the blank 3

3.   Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated? $fill in the blank 4

Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the predicted cost of receiving for a year in which 18,000 receiving orders are anticipated? $fill in the blank 5

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Method of Least Squares, Predicting Cost for Different Time Periods from the One Used to Develop a Cost Formula

Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10 months. Tracy Heppler, a member of the controller's department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. One such activity is receiving raw materials (unloading incoming goods, counting goods, and inspecting goods), which she believes is driven by the number of receiving orders. Ten months of data have been gathered for the receiving activity and are as follows:

Month		Receiving Orders		Receiving Cost
1		1,000			$18,000
2		700			15,000
3		1,500			28,000
4		1,200			17,000
5		1,300			25,000
6		1,100			21,000
7		1,600			29,000
8		1,400			24,000
9		1,700			27,000
10		900			16,000

Assume that Tracy has used the method of least squares on the receiving data and has gotten the following results:

Intercept	3,212
Slope	15.15

Required:

1.  Using the results from the method of least squares, what is the cost formula for the receiving activity?

2.  Using the cost formula, what is the predicted cost of receiving for a month in which 1,450 receiving orders are processed? (Note: Round your answer to the nearest dollar.) $fill in the blank 2

3. Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated? Round your answer to the nearest dollar. $fill in the blank 3

Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the predicted cost of receiving for a year in which 18,000 receiving orders are anticipated? Round your answer to the nearest dollar. $fill in the blank 4

Feedback

Variable-Costing and Absorption-Costing Income

Borques Company produces and sells wooden pallets that are used for moving and stacking materials. The operating costs for the past year were as follows:

Variable costs per unit:
Direct materials	$ 2.85
Direct labor	$ 1.92
Variable overhead	$ 1.60
Variable selling	$ 0.90
Fixed costs per year:
Fixed overhead	$180,000
Selling and administrative	$ 96,000

During the year, Borques produced 200,000 wooden pallets and sold 204,300 at $9 each. Borques had 8,200 pallets in beginning finished goods inventory; costs have not changed from last year to this year. An actual costing system is used for product costing.

Required:

1. What is the per-unit inventory cost that is acceptable for reporting on Borques’s balance sheet at the end of the year?

$fill in the blank 1

How many units are in ending inventory?

fill in the blank 2 units

What is the total cost of ending inventory?

$fill in the blank 3

2. Calculate absorption-costing operating income.

$fill in the blank 4

3. What would the per-unit inventory cost be under variable costing? Round your answer to the nearest cent.

$fill in the blank 5

Does this differ from the unit cost computed in Requirement 1?

4. Calculate variable-costing operating income.

$fill in the blank 7

5. Suppose that Borques Company had sold 196,700 pallets during the year. What would absorption-costing operating income have been?

$fill in the blank 8

What would variable-costing operating income?

$fill in the blank 9

(Appendix 3A) Scattergraph, High-Low Method, Method of Least Squares, Use of Judgment

The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. Cost analysts have decided that power costs are mixed. The costs must be broken into their fixed and variable elements so that the cost behavior of the power usage activity can be properly described. Machine hours have been selected as the activity driver for power costs. The following data for the past 8 quarters have been collected:

Quarter		Machine Hours	Power Cost
1		20,000			$26,000
2		25,000			38,000
3		30,000			42,500
4		22,000			37,000
5		21,000			34,000
6		18,000			29,000
7		24,000			36,000
8		28,000			40,000

Note: For the following requirements, round the fixed cost to the nearest dollar, round the variable rates to three decimal places, and the R2 to two decimal places.

Required:

1.  Prepare a scattergraph by plotting power costs against machine hours. Does the scattergraph show a linear relationship between machine hours and power cost?

2.  Using the high and low points (i.e., the high-low method), compute a power cost formula. (Note: Round variable rate to three decimal places.)

Total power cost = $fill in the blank 2 + ( $fill in the blank 3 x Number of machine hours )

3.   Use the method of least squares to compute a power cost formula. Evaluate the coefficient of determination.

Variable rate (to two decimal places)	$fill in the blank 4	per machine hour
Fixed cost (to the nearest dollar)	$fill in the blank 5
Coefficient of determination (R2) (to one decimal place).	fill in the blank 6	%

4.  Conceptual Connection: Rerun the regression, and drop the point (20,000, $26,000) as an outlier. Compare the results from this regression to those for the regression in Requirement 3. Which is better?

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(Appendix 3A) Separating Fixed and Variable Costs, Service Setting

Louise McDermott, controller for the Galvin plant of Veromar Inc., wanted to determine the cost behavior of moving materials throughout the plant. She accumulated the following data on the number of moves (from 100 to 800 in increments of 100) and the total cost of moving materials at those levels of moves:

Number of Moves		Total Cost
100		$ 3,000
200		4,650
300		3,400
400		8,500
500		10,000
600		12,600
700		13,600
800		14,560

Required:

1.  Prepare a scattergraph based on the data above. Use cost for the vertical axis and number of moves for the horizontal. Based on an examination of the scattergraph, does there appear to be a linear relationship between the total cost of moving materials and the number of moves?

2.  Compute the cost formula for moving materials by using the high-low method. Calculate the predicted cost for a month with 550 moves by using the high-low formula. (Note: Round the answer for the variable rate to three decimal places and the answer for total fixed cost and total cost to the nearest dollar.)

Variable rate	$fill in the blank 2 per move
Fixed cost	$fill in the blank 3
Total cost	$fill in the blank 4

3.  Conceptual Connection: Compute the cost formula for moving materials using the method of least squares. (Note: For the method of least squares, round the variable rate to two decimal places and total fixed cost and total cost to the nearest dollar.) Using the regression cost formula, what is the predicted cost for a month with 550 moves?

Variable rate	$fill in the blank 5 per move
Fixed cost	$fill in the blank 6
Total cost	$fill in the blank 7

4. Evaluate the cost formula using the least squares coefficients.Could it be improved?

Normally, we would prefer the least squares method since the data appear to be 

. However, the third observation may be an outlier. If the third observation (300 moves and $3,400 of cost) is dropped, the R² rises to 99%. The new cost formula would be: Total Cost = $1,411 + ($17.28 × Number of Moves)

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Show Me How

Creating and Using a Cost Formula

Big Thumbs Company manufactures portable flash drives for computers. Big Thumbs incurs monthly depreciation costs of $15,800 on its plant equipment. Also, each drive requires materials and manufacturing overhead resources. On average, the company uses 16,250 ounces of materials to manufacture 6,500 flash drives per month. Each ounce of material costs $3.00. In addition, manufacturing overhead resources are driven by machine hours. On average, the company incurs $45,500 of variable manufacturing overhead resources to produce 6,500 flash drives per month.

In your calculations, round variable rate per flash drive to the nearest cent. If required, round final answers to the nearest cent.

Required:

1.  Create a formula for the monthly cost of flash drives for Big Thumbs.

Total cost of flash drives = 

 + ( 

 x Number of flash drives)

Total cost of flash drives = $fill in the blank 3 + ($fill in the blank 4 x Number of flash drives)

2.  If the department expects to manufacture 6,000 flash drives next month, what is the expected fixed cost (assume that 6,000 units is within the company's current relevant range)? $fill in the blank 5

What is the total variable cost (assume that 6,000 units is within the company's current relevant range)? $fill in the blank 6

What is the total manufacturing cost (i.e., both fixed and variable) (assume that 6,000 units is within the company's current relevant range)? $fill in the blank 7

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Show Me How

Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

Month	Labor Cost($)	Employee Hours
	January		9,390			400
	February		6,900			470
	March		7,431			500
	April		8,040			370
	May		9,687			430
	June		8,390			340
	July		11,500			560
	August		7,400			310

Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with labor used in the restaurant.

In your calculations, round the variable rate per employee hour to the nearest cent. If required, round your final answers to the nearest cent.

Required:

1.  Using the high-low method, calculate the variable rate. $fill in the blank 1 per employee hour

2.  Using the high-low method, calculate the fixed cost of labor. $fill in the blank 2

3.  Using the high-low method, construct the cost formula for total labor cost.

Total labor cost = $fill in the blank 3 + ($fill in the blank 4 × Employee hours)

75,600

295,200

Receiving cost = $3,212 + ($15.15 x Number of receiving orders)

25,180

80,084

311,244

7.27

3,900

28,353

73,569

6.37

Yes

Yes

77,439

67,261

64,291

This regression looks better in terms of R squared.

This regression looks better in terms of R squared.

16.514

1,349

non linear

Fixed cost

Variable rate

Receiving cost = $6,600 + ($12 x number of receiving orders)

18.4