ACCG200 SolutionCh 03 PDF

CHAPTER 3
COST BEHAVIOUR, COST DRIVERS AND

COST ESTIMATION
ANSWERS TO QUESTIONS
3.1 Cost behaviour refers to the relationship between a cost and the level of its cost driver.
Understanding cost behaviour patterns can help a company to manage its resources
effectively and enhance shareholder value.
A company such as Qantas can focus on reducing costs by reducing the level of cost drivers,
such as fuel consumption and labour time. Although, as we discuss in the chapter, to reduce
costs it is important to identify the underlying causes of costs, called root cause cost drivers.
While the quantity of fuel consumed may be an effective cost driver for predicting operating
costs, Qantas needs to focus on the root causes of fuel consumption, such as the efficiency
of the engines, or the weight of the cargo and passenger load. (Of course, the fuel price has a
major influence over Qantas fuel cost, but this is more difficult to control.)
Also Qantas can use its understanding of cost behaviour to predict future costs. Cost
predictions in the form of budgeting are used in Qantas cost reduction program (Sustainable
Future Program); the Sustainable Future Program has strategic importance for Qantas to stay
competitive in the airline industry. Cost savings can be accomplished by comparing actual
costs against budgeted costs, which are based on cost predictions. Reliable information for
planning and control is an important part of effective resource management. Cost
predictions also play a role in decision making, since the desirability of various cost control
alternatives often depends on the savings that will be incurred under those alternatives; and
effective decision making and resource management enhance shareholder value.
3.2 (a) Cost estimation: The process of determining how a particular cost behaves.
(b) Cost behaviour: The relationship between cost and the level of activity (i.e. cost
driver).
(c) Cost prediction: Using knowledge of cost behaviour to forecast the level of a cost at a
particular level of activity.
Cost estimation is the process used to determine what the cost behaviour is for a particular
cost item. The cost behaviour pattern is used to make a cost prediction about the cost at a
particular level of activity.
3.3 A cost driver is an activity or factor that causes costs to be incurred. In identifying cost
behaviour, the management accountant identifies the relationship between a particular cost
and the level of its cost driver.
3.4 Volume-based cost drivers are used in conventional management accounting systems. This
assumes that variable costs vary in proportion to production volume and fixed costs, do not
change with production volume. ABC allows a range of cost drivers such as unit level,
batch level, product level, and facility level so that for these various types of cost there is a
more realistic link between the cost and its cost driver..
3.5 Unit level: The cost varies in proportion to the volume produced, e.g. direct materials,
power for machines, packing or sales commissions. Volume is the cost driver.
Batch level: The cost varies in proportion to the number of batches produced, e.g. setup or
quality audit. The cost driver is usually the number of batches or loads.
Product level: The cost relates to activities that are performed for specific products or
product families. The cost driver may be the number of products, although in some cases
Chapter 3 Solutions Manual t/a Management Accounting: Information for Managing and Creating Value 5e
by Langfield-Smith, Thorne and Hilton 1
specific product features may drive these costs.
Facility level: The cost relates to the facilities rather than products, e.g. security or grounds
maintenance. There is no obvious cost driver.
3.6 Appropriate independent variables for several tasks are as follows:

(a) Handling materials at a loading dock: Weight of materials handled.
(b) Registering vehicles at a state motor vehicle registration office: Number of
registrations processed.
(c) Picking oranges: Number or weight of oranges picked.
(d) Inspecting computer components in an electronics firm: Number of components
inspected.
3.7 Graphs of the cost behaviour patterns are as follows:
3.8 As the time horizon lengthens, fixed costs can be varied; for example, spare floor area can
be sold or rented out. In the long term, all costs are likely to vary. In an organisation like
BHP that owns blast furnaces costs can only be varied in the much longer term, when
blast furnaces can be sold off or shut down. However, costs that vary are not necessarily
variable costs, as variable costs are defined as costs which vary in proportion to their cost
driver.
3.9 As the level of activity (or cost driver) increases, total variable cost increases
proportionately and the variable cost per unit remains constant.
3.10 As the level of activity (cost driver) increases, total fixed cost remains constant. However,
the fixed cost per unit of activity declines as activity increases. Examples include factory
rent, managers salaries, straight-line depreciation and property taxes.
3.11 Cost drivers used to describe cost behaviour give a useful explanation of how costs vary.
But they do not necessarily reveal the real causes of costs, that is the root-cause cost drivers.
The cost of loading vans may be explained by the volume of product loaded. But the cost
may be driven by poor design of the loading bay; the use of the wrong type of vans for the
particular type of delivery; or the need for a better computer system to assemble orders. The
root-cause cost drivers are needed for cost management.
3.12 Committed costs result from an organisations basic structure and facilities, for example,
costs resulting from an organisations ownership or use of premises, and its fundamental
structure. Committed costs are very difficult to change in the short term. Examples of
committed costs of the photographic studio include rent and equipment hire/lease, which are
likely to be locked in by a long term lease, and possibly the salaries of the photographers
(depending on the terms of their contract).
Discretionary costs result from a management decision to spend money on items for some
purpose, which can be avoided or changed if management chooses. Examples of
discretionary costs of the photographic studio include amounts spent on advertising. and
possibly the salaries of studio sales staff.
The distinction between committed and discretionary costs can help management in the
planning and management of costs. By knowing the distinction, management is fully aware
of which costs can be avoided in the short-term should circumstances change (discretionary
costs, in most cases) and those which it cannot avoid in the short term, even if circumstances
change (committed costs).
3.13 1 Annual cost of maintaining an interstate highway: committed cost. (Once the
highway has been built, it must be maintained. The transportation authorities are
largely committed to spending the necessary funds to maintain the highway
adequately.)
2 Ingredients in a breakfast cereal: engineered cost.
3 Advertising for a credit card company: discretionary cost.
4 Depreciation on an insurance company's computer: committed cost.
5 Charitable donations: discretionary cost.
6 Research and development: discretionary cost.
3.14 (a) Variable cost, assuming that rubber is the only direct material used in the
manufacturing process.
(b) Unit-level cost.
(c) The number of tyres produced determines the quantity of rubber used in production
and therefore the total direct material cost. If only the quantity of rubber used is the
cost driver, it ignores any abnormal wastage incurred in the process, or the effects of
changing supply and / or demand on rubber prices. To identify the cost driver from a
cost management perspective, it is necessary to identify the underlying causes of the
direct material cost.
3.15 The cost analyst should respond by pointing out that in most cases a cost behaviour pattern
should be limited to the relevant range of activity. When the firms electricity cost was
shown as a semivariable cost, it is likely that only some portion in the middle of the graph
would fall within the relevant range. Within the relevant range, the firms electricity cost can
be approximated reasonably closely by a semivariable cost behaviour pattern. However,
outside that range (including an activity level of zero) the semivariable cost behaviour
pattern should not be used as an approximation of the cost.
3.16 An outlier is a data point that falls far away from the other points in the scatter diagram and
is not representative of the data. One possible cause of an outlier is simply a mistake in
recording the data. Another cause of an outlier is a random event that occurred, which
caused the cost during a particular period to be unusually high or low. For example, a power
shortage may have resulted in unusually high costs of idle time for a particular time period.
Outliers should be eliminated from the data set upon which cost estimates are based.
3.17 Fixed costs are often allocated on a per unit of activity basis. For example, fixed
manufacturing overhead costs, such as depreciation, may be allocated to units of production.
As a result, such costs may appear to be variable in the cost records. Discretionary costs are
often budgeted in a manner that makes them appear variable. A cost such as charitable
donations, for example, may be fixed once agreement is reached on the level of donations to
be made. If managements policy is to budget charitable donations on the basis of sales
dollars, however, the cost will appear to be variable to the cost analyst. An experienced
analyst should be wary of allocated and discretionary costs and take steps to learn how the
amounts are determined.
3.18 The chief drawback of the high-low method of cost estimation is that it uses only two data
points, and ignores all other observations. The rest of the data are ignored. An outlier can
cause a significant problem when the high-low method is used, if one of the two data points
happens to be an outlier. In other words, if the high activity level happens to be associated
with a cost that is not representative of the data, the resulting cost line may also not be
representative of the cost behaviour pattern.
3.19 A least squares regression line may be expressed in equation form as follows:
Y = a + bX
In this equation, X, the volume of activity or cost driver, is referred to as the independent
variable, since it is the variable upon which the estimate is based. Y, the estimated total cost,
is called the dependent variable, since its estimate depends on the independent variable. The
intercept of the line on the vertical axis is denoted by a, and the slope of the line is denoted
by b. Within the relevant range, a is interpreted as an estimate of the fixed cost component,
and b is interpreted as an estimate of the variable cost per unit of activity.
The term least squares, in the least squares regression method of cost estimation, refers to
the process of minimising the sum of the squares of the distances between the data points
and the regression line.
3.20 Regression analysis is a statistical method that measures the average amount of change in the
dependent variable that is associated with a unit change in one or more independent variables.
Simple regression analysis estimates the relationship between the dependent variable and a
single independent variable, while multiple regression estimates the relationship between the
dependent variable and multiple independent variables. Multiple regression can help
management determine more accurate cost estimates because it is able to recognise the effects
of two or more factors that influence total costs, and therefore is more economically plausible.
Assume that a rug manufacturer is trying to estimate the indirect labour cost associated with
the manufacture of rugs, when production on one batch of rugs is stopped and another batch
started. Management believes that in addition to machine hours , indirect labour costs are
also affected by the number of different batches worked on during the period (a batch-level
cost driver).
3.21 A particular least squares regression line may be evaluated on the basis of economic
plausibility or goodness of fit.
The cost analyst should always evaluate a regression line from the perspective of economic
plausibility. Does the regression line make economic sense? Is it reasonable? An
experienced cost analyst should have a good feel for whether the regression line looks
reasonable.
Statistical methods can also be used to determine how well a regression line fits the data
upon which it is based. This method is referred to as assessing the goodness of fit of the
regression. A commonly used measure of goodness of fit is the coefficient of determination,
which is described in the appendix at the end of the chapter. The coefficient of
determination is also denoted by R2. The higher the R2, the better the fit.
3.22 Some of the problems often encountered when collecting data for cost estimation include the
following:
missing data due to misplaced documents or failure to record a transaction
outliers which need to be detected and eliminated from the data set
mismatched time periods between dependent and independent variables
trade-offs in choosing the length of the time period
recording of allocated and discretionary costs as per unit data
inflation may effect the currency of historic data.
3.23 Some of the possible reasons that approximations are used in estimating cost functions
include the following:
lack of accounting time or lack of knowledge about cost estimation techniques
lack of data
low priority may be given to determining accurate cost functions
the resultant cost functions may be regarded as accurate enough for the firms needs.
3.24 The use of activity-based costing (ABC) will heighten the awareness of cost drivers and cost
behaviour. The organisation is increasing its attention to establishing what the cost drivers
are. There is a need to be very careful in evaluating the cost drivers chosen, otherwise the
information could be even worse than under a conventional volume drive system.
3.25 A learning curve reflects how production efficiency increases with increased production. An
experience curve shows how product costs from across the value chain decrease with
increased production.
SOLUTIONS TO EXERCISES
EXERCISE 3.26 (10 minutes) Cost drivers: manufacturer
(a) production volume; unit; variable

(b) production volume; unit; variable (assuming casual labour and shifts are used to get the
right amount of labour)
(c) number of production runs; batch; variable (with the number of batches), (assuming casual
labour and shifts are used to get the right amount of labour)
(d) number of new products; product; variable (if varies with the number of new products, but is
this really a cost driver, or are there other factors? For example there may be a stable
number of engineers used, with variations for changes outside of the relevant range).
(e) no cost driver is really possible; facility; fixed.
EXERCISE 3.27 (15 minutes) Variable and fixed costs; graphical and tabular
analyses: manufacturer
1 Graph of raw materials cost:
Raw materials cost
$1 200 000
$900 000
$600 000
$300 000
Kilograms of raw material

10 000 20 000 30 000 40 000
2
Production level (kg) Unit cost Total cost
10 000 $30 per kilogram $300 000
20 000 $30 per kilogram $600 000
30 000 $30 per kilogram $900 000
3 Graph of fixed production cost:
Fixed costs
$50 000
$40 000
$30 000
$20 000
$10 000
Kilograms of raw material

10 000 20 000 30 000 40 000
4
Production level (kg) Unit cost Total cost
10 000 $5 $50 000
20 000 $2.50 $50 000
30 000 $1.667 $50 000*
* rounded
EXERCISE 3.28 (15 minutes) Account classification method; manufacturer.
1 (a) Fixed
(b) Variable
(c) Variable
(d) Fixed
(e) Semivariable (or mixed)
2 Production cost per month = $33 000* + $2.00X
*33 000 = $19 000 + $10 000 + $4 000

$2.00 = $1.10 + $.70 + $.20
EXERCISE 3.29 (15 minutes) Fixed and variable costs; missing data: service
firm
Number of muffler replacements

500 600 700
Total costs:
Fixed Costs (a) $84 000 $84 000 (b) $84 000
Variable costs (c) 50 000 60 000 (d) 75 000
Total costs (e) $134 000 $144 000 (f) $154 000
Cost per muffler replacement:
Fixed cost (g) $168 (h) $140 (i) $120
Variable cost (j) 100 (k) 100 (l) 100
Total cost per muffler replacement: (m) $268 (n) $240 (o) $220
Explanatory notes:
(a) Total fixed costs do not vary with activity.
(b) Variable cost per replacement = $60 000/600 = $100
(c) Total variable cost for 500 replacements = $100 500 = $50 000
(d) Fixed cost per replacement = $84 000/500 = $168
(e) Variable cost per replacement = $50 000/500 = $100
EXERCISE 3.30 (40 minutes) Graphing cost behaviour patterns: hospital
1 Cost of salaries and on-costs for administrative staff:
2 Cost of food:
3 Laboratory cost:
4 Cost of utilities:
5 Nursing costs:
EXERCISE 3.31 (10 minutes) Behaviour of fixed and variable costs: not-for-
profit organisation
1
Cost per broadcast hour
Cost item July September
Production crew:
$5 330/410 hours $13.00 per hour
$8 840/680 hours $13.00 per hour
Supervisory employees:
$6 000/410 hours $14.63 per hour*
$6 000/680 hours $ 8.82 per hour*
*Rounded
2 December cost predictions:
Production crew (440 $13.00 per hour) $5 720

Supervisory employees $6 000
3 Cost item
Cost per broadcast hour December
Production crew $13.00 per hour
Supervisory employees ($6 000/440 hours) $13.64 per hour*
*Rounded
EXERCISE 3.32 (15 minutes) Approximating a curvilinear cost: service firm
1.
Actual Estimated
(a) 20 000 km $3 900 $4 400
(b) 40 000 km 5 200 5 200
(c) 60 000 km 6 000 6 000
(d) 80 000 km 8 500 7 200
2 (a) The approximation is very accurate in the range of 40 000 to 60 000 km per month.
(b) The approximation is less accurate in the extremes of the longer range of 20 000 to 90
000 km per month.
EXERCISE 3.33 (15 minutes) Estimating cost behaviour; highlow method:

manufacturer
21 400 22 100
1 Variable cost per machine hour = = 2 000 / 20 000 = $0.10
41 000 21 000
Total electricity cost at 41 000 machine hours = $24 100
Variable cost at 41 000 machine hours (41 000 x $0.10 per hour) = $4 100
Fixed cost = $20 000
Cost equation:
Total electricity cost = $20 000 + $0.10X, where X denotes machine hours.
2 Cost prediction when 78 000 machine hours are used:

Electricity cost = $20 000 + ($0.10)(78 000) = $27 800
EXERCISE 3.34 (45 minutes) Estimating cost behaviour; regression

analysis: manufacturer.
1 The calculations to estimate the companys electricity behaviour are shown below, using
Excel. Some of the figures have been rounded.
Regression statistics
Multiple R 0.788333
R square 0.621469
Adjusted R square 0.583616
Standard error 1 061.946
Observations 12
Coefficients
Intercept 17 537.5
X Variable 1 0.191667
From this, the equation to explain cost behaviour is as follows.
Y = a + bX
where:
X = the independent variable (machining hours for one month)
Y = the dependent variable (cost for one month)
Y = $17 538 + $0.19X
This can be expressed as total cost = fixed costs of $17 538 plus $0.19 per machining hour
worked.
2 Given that this question does not assume a knowledge of the appendix the evaluation will
focus on R2. In this case, the figure for R2 0.6215 suggests that 62 per cent of the
variability of electricity costs can be explained by changes in the machining hours. The
higher the R2 figure, the more confident the accountant can be that changes in dependent
variable can be explained in terms of changes in the independent variable. In this case 38 per
cent of the variability of electricity costs remained unexplained.
EXERCISE 3.35 (30 minutes) Estimating cost behaviour; high-low method:

hospital
$99 000 61 000

2 Variable cost per blood test = = $9.38 per test.*
7 100 3 050
Total cost at 7 100 tests $99 000
Variable cost at 7 100 tests (7 100 $9.38 per test) 66 598
Fixed cost $32 402
* rounded
EXERCISE 3.36 Estimating cost behaviour; regression analysis:

manufacturer
1 The calculations to estimate the Pathology Services cost behaviour are shown below, using
Excel. Some of the figures have been rounded.
Multiple R 0.981047
R square 0.962453
Observations 12
Coefficients
Intercept 29 568.04
X Variable 1 10.09565
From this, the equation to explain cost behaviour is as follows.
Y = a + bX
where:
X = the independent variable (number of blood tests for one month)
Y = $29 568 + $10.10X
The regression suggests that there is a component of the cost ($29 568 per month) that is
unrelated to the total number of blood tests completed. This cost component is the intercept
on the vertical axis and is often considered to be the fixed cost as long as the activity level is
within the relevant range. Thus, the least squares regression results in a cost function with
two components, fixed cost per month and variable cost per blood test. This can be
expressed as total cost = fixed costs of $29 568 plus $10.09 per blood test completed.
2 Given that this question does not assume a knowledge of the appendix, the evaluation will
focus on R2.. In this case, the R2 is 0.9625 as per the above calculations. This suggests that
96 per cent of the variability of laboratory running costs can be explained by changes in the
number of blood tests conducted. The higher the R2 figure, the more confident the
accountant can be that changes in dependent variable can be explained in terms of changes
in the independent variable. In this case only 4 per cent of the variability in laboratory costs
remains unexplained.
EXERCISE 3.37 (15 minutes) Regression analysis: service firm
1 The calculations to estimate the companys cost behaviour are shown below, using Excel.
Some of the figures have been rounded.
Multiple R 0.968494
R square 0.937980
Standard error 143.0611
Observations 6
Standard
Coefficients error
Intercept 10 376.90584 179.8564
X Variable 1 0.10074321 0.129525
2 The formula to explain the behaviour of maintenance costs is as follows:

Y = a + bX, where:
X = the independent variable (kilometres per month)
Y = $10 376 + $0.10X
This can be expressed as total cost = fixed costs of $10 287 plus $0.10 per kilometre
travelled.
3 Maintenance cost at 20 000 kilometres:
$10 376 + ($0.10 20 000 km) = $12 376
Note that this is very similar to the recorded cost at 22 000 kilometres in the data provided
($12 500). With an R2 of 0.9380 (and an adjusted R2 of 0.9225), it appears that kilometres
travelled is the major factor in explaining the maintenance costs of the firm. Other factors
could be the way in which the bus is driven, the number of stops made, the number of
passengers carried, and so on.
EXERCISE 3.38 (10 minutes) (appendix) Average costs; learning curve

effects: manufacturer
1 (a) $425 ($850/2)

(b) $385 ($1540/4)
(c) $370 ($1850/5)
2 The average cost changes as the number of covers made increases, because each successive
cover takes less time to make. There may also be fixed costs which decrease, on a per unit
basis, as the number of units increase.
EXERCISE 3.39 (10 minutes) (appendix) Learning curve; high technology:

manufacturer
1 (a) Average time for 4 satellites 130 hours

(b) Average time for 8 satellites 100 hours
2 (a) Total time for 4 satellites (130 hours 4) 520 hours
(b) Total time for 8 satellites (100 hours 8) 800 hours
3 Learning curves indicate how labour costs will change as the company gains experience
with the production process. Since labour time and costs must be predicted for both
budgeting and setting cost standards, the learning curve is a valuable tool.
EXERCISE 3.40 (45 minutes) Estimating cost behaviour using multiple

methods: retailer
$3,800 $2,600
1 Variable electricity cost per hour = = $4 per hour
700 400
Total electricity cost at 700 hours $ 3 800
Variable electricity cost at 700 hours ($4.00 700 hours) 2 800
Fixed cost per month $ 1 000
Cost formula: Monthly electricity cost = $1000 + $4 X, where X denotes hours of operation.
2 Regression analysis:
Using Excel
Multiple R 0.975590116
R square 0.951776075
Observations 6
Coefficients Standard error
Intercept 1 002 246.6107401
Hrs of operation 4.04 0.454689847
Cost formula:
Monthly electricity cost = $1 002 + $4.04X, where X denotes hours of operation
Variable electricity cost = $4.04 per hour of operation
3 Cost predictions at 470 hours of operation:
(a) Highlow method:
Electricity cost = $1 000 + ($4)(470) = $2 880
(b) Regression:
Electricity cost = $1 002 + ($4.04)(470) = $2 901*
* rounded
EXERCISE 3.41 (45 minutes) Regression analysis: airline
1 Regression analysis:
Using Excel:
Intercept 29 13.77085196
Passengers 1.636363636 0.833195581
Monthly cost of flight service = $29 000 + $1 636X
where X denotes thousands of passengers.
2 Evaluation of the regression equation
Using Excel:
R square 0.490909091
Observations 6
Given that this question does not assume a knowledge of the appendix, , the evaluation will
focus on R2.. The coefficient of determination, R2, is a measure of the goodness of fit of the
least-squares regression line. An R2 of .49 means that 49 per cent of the variability of the
dependent variable about its mean is explained by the variability of the independent variable
about its mean. The higher the R2, the better the regression line fits the data. The
interpretation of a high R2 is that the independent variable is a good predictor of the
behaviour of the dependent variable. In cost estimation, a high R2 means that the cost analyst
can be relatively confident in the cost predictions based on the estimated-cost behaviour
pattern.
SOLUTIONS TO PROBLEMS
PROBLEM 3.42 (20 minutes) Cost drivers: manufacturer
Answers to this question will vary. It is not always possible to find two cost drivers, and rather than
looking for a right answer, instructors should seek an understanding of the concepts.
(a) Number of weekly papers printed (unit level). If the number of pages per edition was
changed from 40, or the size changed from broadsheet to tabloid (or vice versa), these would
also be cost drivers.
(b) Number of cards printed (unit level), and the quality of business cards required
(c) Fixed: remuneration may be related to total circulation (product level, as it relates to the
Times).
(d) Number of hours that the presses are operating for, which is related to the number of units
produced (unit level).
(e) No obvious driver (facility level).
(f) Number of jobs (batch level).
(g) Lease costs would be driven by the number of delivery trucks (which in turn may be
influenced by the number of copies printed; geographical spread of circulation; number of
customers; number of loads) Discuss whether unit (number of copies), batch (number of
loads) or product (related to the Times).
(h) No obvious driver (facility level).
(i) Number of different business cards designed (batch or product levels).
(j) Advertising revenue (unit or product levels).
PROBLEM 3.43 (15 minutes) Account classification; cost drivers: school
Answers to this question will vary. Rather than looking for a right answer, instructors should seek
an understanding of the concepts.
1 Given that a full-time technician is hired, this is a fixed cost. The additional cost of repairs
by the local dealer may be related to the number of instruments used in the school, or
number of hours of instruction. A semi-variable cost.
2 The number of audit hours is a cost driver, which, in turn may be related to the number of
students (influencing the number of transactions.) A variable cost.
3 No cost driver; a fixed cost.
4 Number of students enrolled, or number of hours of instruction. Variable cost.
5 No cost driver i.e. a fixed cost (if annual fixed salary paid) or, (if paid on an hourly basis)
the number of hours employed or the number of hours of instruction (i.e a variable cost).
6 Number of students enrolled. A variable cost.
7 A fixed cost; no driver (however, in the long term, the cost of instruments will drive the
depreciation charge).
8 Probably fixed; no cost driver.
9 Number of hours the school is open. A semi-variable cost.
PROBLEM 3.44 (30 minutes) Cost behaviour patterns in a variety of settings
1 h 5 b 9 d
2 i 6 g 10 j
3 f 7 c 11 l
4 e 8 a
Note that k was not used.
PROBLEM 3.45 Cost estimation: high low; regression: wholesaler
1 Scatter diagram:
Material-handling
costs
$12 500
$12 000
$11 500
$11 000
$10 500
$10 000
$9 500
Hundreds of
500 1000 1500 2000 2500 kilograms of
equipment
The lower part of the
vertical axis has
been shortened
2 Highlow method:
Variable cost per unit of cost driver $12 120 $10 200
=
2 600 1 000
= $1.20 per kg of equipment
loaded/unloaded
Total cost at 2 600 units of cost driver $12 120

Total variable cost at 2 600 units of cost
driver (2 600 $1.20) 3 120
Fixed cost $9 000
Cost equation based on highlow method:
Material-handling cost per month = $9 000 + $1.20X
where X denotes the number of kilograms of equipment loaded/unloaded during the month
3 Cost when 2 300kgs are moved:

Total cost = 9 000 + (1.20 x 2 300) = $11 760
4 Estimating the fixed and variable cost components using regression analysis can be
determined by using Excel, the output from which is reproduced below.
R square 0.598375125
Observations 12

Intercept 9 942.831126 406.4392148
X variable 1 0.885099338 0.22930607
5 The formula to explain the behaviour of materials handling costs is as follows.

Y = a + b X,
where:
X = the independent variable (the kilograms of equipment handled for one month)
Y = $9 942.83 + $$0.885X
This can be expressed as total cost = fixed costs of $9 942.83 plus $0.885 per kilogram of
materials handled.
6 Predicted material handling costs
Total cost = $9 942.83 + ($0.885 2 300) = $11 978.33
7 On the basis of using the high-low method and regression analysis, the material handling
departments monthly cost behaviour was estimated as follows:
Using the highlow method, the following cost estimate was obtained:
Material-handling cost per month = $9 000 + $1.20 per unit of cost driver
Using regression analysis = $9 942.83 + $0.885 per unit of cost driver
The two methods yield different estimates because the highlow method uses only two data
points, ignoring the rest of the information. Regression analysis, on the other hand, is a
statistical technique that can be used to estimate the relationship between the dependent
variable (cost) and the independent variable (quantity of equipment handled). Regression
analysis uses all of the data points to determine the line of best fit.
In this case, the two data points used by the highlow method do not appear to be
representative of the entire set of data. Hence, I suggest that the cost line determined using
regression analysis be utilised.
PROBLEM 3.46 (25 minutes) Cost behaviour; engineered cost; committed

and discretionary costs: manufacturer
Cost Fixed/Variable Engineered / Explanation

Committed /
Discretionary
1 Cost of a new company Fixed Discretionary Cost arising from management decision
advertising sign placed in front relating to advertising expenditure,
of the factory easy to change in short term
2 Wages of the employee who Fixed Committed Cost arising from an organisations
maintains the weaving machines basic structure, difficult to change in
short term due to contractual
obligations
3 Cost of the wool that is used to Variable Engineered Cost of wool has a direct, physical
manufacture the rugs relationship to the number of rugs
manufactured
4 Salary of the managing director Fixed Committed Management salary cost is part of
organisations basic structure, difficult
to change in short term
5 Cost of electricity used in the Variable Engineered Cost of electricity consumed in
sewing department production is directly related to the
level of manufacturing activity
6 Wages of the staff who package Variable Engineered Cost of packaging directly related to
the finished rugs the level of output produced
7 Salaries of the marketing staff Fixed Committed Marketing staff wages part of
organisations basic structure, difficult
to change in short term
8 Depreciation on the sewing Fixed Committed An allocation of the cost of the
machine, calculated using the equipment, difficult to change in short
SL method term
9 Rent on the factory building Fixed Committed Cost resulting from organisations use
of premises, difficult to change in short
term
10 Cost of daily advertisements in Fixed Discretionary Cost arising from management decision
the local newspaper relating to advertising expenditure
11 Wages of the rug designers who Fixed Committed Cost of designers wages is part of the
experiment with new fabrics and firms structure, difficult to change in
designs short term due to contractual
obligations
12 Cost of car hire to take the Fixed Discretionary Cost arising from managements
managing director to important decision, easy to change/vary in short
meetings term
13 Cost of the yearly staff Fixed Discretionary Cost arising from managements
Christmas party decision, easy to change/vary in short
term
14 Cost of repairing the gas furnace Fixed Committed Cost of maintenance and repairs is part
of the organisation basic structure,
difficult to change in short term
15 Cost of workers compensation Variable Committed Cost of workers compensation is the
insurance paid for the part of basic organisations structure
production employees difficult to change in short term due to
contractual obligations
16 Wages of the production Variable Engineered Cost with clear, direct, physical
employees who weave the rugs relationship to the level of output
PROBLEM 3.47 (40 minutes) Cost behaviour; committed and discretionary

costs; high-low method: Mining company
1 Straight-line depreciation committed fixed

Charitable contributions discretionary fixed
Mining labour (including on costs) variable
Royalties semivariable*
Trucking and hauling step-fixed
*There is not enough information to classify this cost. Given that the total cost increases
with production volume, but not at a set rate per tonne, it may be semivariable (or it could
be variable but with revenue rather than tonnes as the cost driver, or it may be even be a
step-fixed cost.)
The mining labour costs with on costs are considered as variable, because the labour cost is
$230 per tonne of ore extracted. This labour rate is the same when
345 000
1 500 tonnes (labour rate = = $230) are extracted or when
1 500
598 000
2 600 tonnes are extracted (labour rate = = $230).
2 600
2 The difficulty with this question is estimating the cost of royalties at 1650 tonnes. Assuming
the cost is semi-variable we could use the high-low method to identify its fixed and variable
components.
Variable cost per unit of cost driver $201 000-$135 000

=
2600 - 1500
= $60 per tonne
Total cost at 2 600 units of cost driver $201 000

Total variable cost at 2 600 units of cost
driver (2 600 $60) 156 000
Fixed cost $45 000
Cost equation based on highlow method:
Royalty cost per month = $45 000 + $60X
where X denotes the number of tonnes of ore extracted
The total cost for February production of 1 650 tonnes of ore

= ($25 000 + $11 000 + $45 000 + $275 000) + (($230 + 60) x 1 650) = $834 500
3 OMLs trucking and hauling costs increase from $250 000 to $275 000 when the hauling
capacity reaches 1 500 tonnes seems to indicate that OML is not cost effective in handling 1
500 tonnes of ore. This may reflect OMLs commercial arrangement with trucking and
hauling equipment, as the production capacity reaches 1 500 tonnes, the costs related to
trucking and hauling equipment escalate to a new level.
The cost effectiveness in utilising the trucking and hauling equipment can be improved by
planning the monthly production level so that the output is always slightly below the
maximum output (1 500, 1 900 and 2 300 tonnes) of each step-fixed cost ranges.
4 The committed fixed costs refer to the facilities owned or used by the business as the bare
necessity of a basic organisation structure. On the other hand, the discretionary fixed costs
arise as a result of management decision to spend a particular amount of money for some
purpose. For example, OMLs charitable contribution is only managements decision. If at
the time of economic downturn, the management would likely to cut the discretionary fixed
costs. This is because a discretionary cost can be avoidable.
PROBLEM 3.48 (45 minutes) Multiple regression analysis: service firm
1 Because there are two independent variables, it is necessary to use multiple regression
analysis, utilising Excel. The following data is provided.
R square 0.986785192
Observations 12
Intercept 432.9477003 189.033095
Hours of service (X1) 7.345228273 0.285104437
No. of photocopies(X2) 0.003203239 0.002125703
The coefficients for the regression are in the lower panel of output. The constant, or
intercept, is $432.95, and the coefficients of the two variables are the number of hours of
maintenance and the number of photocopies. The regression equation can be expressed as
follows:
Y = $432.95 + $7.35X1 + $0.003X2
Where Y = the estimated maintenance cost for the month

X1 = the number of hours of maintenance for the month
X2 = the number of photocopies produced for the month
2 The R2 for the equation is 0.988 (rounded), which means that 98.8 per cent of the variation
in the monthly maintenance cost can be explained by the variation in the numbers of hours
of maintenance and the number of photocopies produced. Given that the number of
observations (12) and the number of independent variables (2) are on the borderline for an
acceptable sample size, the adjusted R2 should be used (this measures the coefficient of
determination after adjusting for a relatively small number of observations). In this example,
an adjusted R2 of 0.984 (rounded) occurs, thus, there is little change in the outcome.
3 Using the data from the regression equation:
Variable cost per hour $7.35
Fixed cost per hour ($432.95/500 hours) 0.87
85 000 copies $0.003 = $255/500 hours 0.51
Total cost per hour $8.72
The fixed cost per hour is a misleading amount because it will change as the number of
hours changes. For example, at 600 hours of maintenance, the fixed cost per hour is $0.72
($432.95/600 hours).
PROBLEM 3.49 (40 minutes) Interpreting regression analysis in cost

estimation: catering company
1 The original method was simply the average overhead per hour for the last 12 months and
did not distinguish between fixed and variable costs. Dana divided total overhead by total
labour hours, which effectively treated all overhead as variable. Regression analysis
measures the behaviour of the overhead costs in relation to labour hours and is a model that
distinguishes between fixed and variable costs within the relevant range of 2 500 to 7 500
labour hours.
2 The regression results are shown below:
Regression Statistics
Multiple R 0.980976
R Square 0.962313
Adjusted R
Square 0.958544
Standard Error 1 448.743
Observations 12
Standard Upper Lower Upper

Coefficients Error t Stat P-value Lower 95% 95% 95.0% 95.0%
Intercept 48 126.41 1 257.89 38.25965 3.55E-12 45 323.65 50 929.16 45 323.65 50 929.16
Labour
hours 3.94936 0.247152 15.97946 1.9E-08 3.39867 4.500049 3.39867 4.500049
(It seems that Dana has rounded the regression results from $3.949 to $4.00 per labour hour for
variable overhead and $48 126 to $48 000 for fixed overhead.) Using the regression results the
variable cost per person is:
Food and beverages $14.00
Labour (0.6 hours @ $20/hour) 12.00
Variable overhead (0.6 hours @ $3.949/hour) 2.37*
Total $28.37
* Rounded.
3 The minimum bid for a 250-person cocktail party would be $7 093. The amount is
calculated by multiplying the variable cost per person of $28.37 by 250 people. At any price
above the variable cost, Dana will be earning a contribution toward his fixed costs.
4 Other factors that Dana should consider in developing a bid include the following:
the assessment of the current capacity of Danas business. If the business is at
capacity, other work would have to be sacrificed at some opportunity cost
analysis of the competition. If competition is rigorous, Dana may not have much
bargaining power
a determination of whether or not Danas bid will set a precedent for lower prices
the realisation that regression analysis is based on historical data, and that any
anticipated changes in the cost structure should be considered.
PROBLEM 3.50 (35 minutes) Comparing regression and highlow

estimates: manufacturer
1 The regression equations intercept on the vertical axis is $200. It represents the portion of
indirect materials cost that does not vary with machine hours, when operating within the
relevant range. The slope of the regression line is $4 per machine hour. For every machine
hour, $4 of indirect material costs is expected to be incurred.
2 Estimated cost of indirect material at 900 machine hours of activity:
= S $200 + ($4 900)
= $3 800
3 Several questions should be asked:
(a) Do the observations contain any outliers, or are they all representative of normal
operations?
(b) Are there any mismatched time periods in the data? Are all of the indirect material cost
observations matched properly with the machine hour observations?
(c) Are there any allocated costs included in the indirect material cost data?
(d) Are the cost data affected by inflation?
4 The choice of cost driver should reflect the nature of the production process. Other cost
drivers could include direct labour hours or direct labour cost if the production process is
labour intensive and the consumption of indirect materials is related to labour activities.
Alternative the number of units produced could be a suitable cost driver, if each unit uses
much the same amount/cost of indirect material.
PROBLEM 3.51 (30 minutes) (appendix) Learning curve): manufacturer
1 The initial batch took 10 hours for 10 ($200 / $20 per hour) or 1 hour each. When the
cumulative output is increased from 10 to 20 the average labour time per unit for the 20
tables should reduce to 0.8 hours per table. The 20 tables should take 16 hours, so the
second batch will take 6 hours (16 hours for the total output of 20 tables minus the 10 hours
for the first 10).
2 Direct labour = 6 hours $20 = $120 or $12 per table.
3 No. Labour is becoming increasingly skilled at making the tables. The hours taken is an
average of the batches and the first one produced of the first batch would take more than 10
hours, and the last of the second batch would take less than 6 hours.
4 Cumulative production is now 20, so the time taken to produce the next batch of 60 can be
estimated as follows:
Cumulative time taken for 80 tables = 80 (0.8 hours 80% 80%) = 40.96 hrs
Cumulative time taken for the first 20 = 16 hrs
Therefore, time taken for the 60 tables = 24.96 hrs
5 The direct labour cost, per table, for the batch of 60 is:
hours $20 per hour / 60 tables = $8.32 per table
Over time, tables will appear to get cheaper. Perhaps Austral needs to take a more long-run
view of their pricing, to stimulate early demand so that they can move quickly along the
learning curve.
SOLUTIONS TO CASES
CASE 3.52 (45 minutes) Costs: hospital
1 Scatter diagram
2 Relevant range of activity as marked on the diagram
Administrative Cost.
$18,000
$16,000
(2)
$14,000
relevant
range
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
0 200 400 600 800 1000 1200 1400 1600
Patient load
3 This analysis is based on the costs and activity within the relevant range, that is between 600
and 1200 patients.
Variable cost per unit cost of driver = ( $ 1 1 1 0 0 $ 8 3 0 0 ) = $ 4 . 6 6 7
(1 2 0 0 6 0 0 )
* per patient *(rounded)
Total cost at 1 200 patients of cost driver = $ 11 100
Total variable cost at 1 200 patients of cost driver = 1 200 x $4.667
= $5 600 (rounded)
Fixed cost = $5 500
Cost equation based on high-low method:
Administrative cost =$5 500 + $4.667X
where X denotes the number of patients during the period
4 Cost when 800 patients visit the hospital:

Total cost = 5 500 + (4.667 x 800) = $9 234 (rounded)
Cost when 300 patients visit the hospital:
Total cost = 5 500 + (4.667 x 300) = $6 900 (rounded)
However, it is not appropriate to use this cost function to estimate the administrative costs at
300 patients, as this is well below the relevant range.
5
Month Number of emergency Patient load Administrative cost
proc.
April 10 1000 $ 10 000
June 14 900 $ 9 200
July 8 1100 $ 10 200
September 12 700 $ 9 400
October 12 1200 $ 11 100
November 8 600 $ 8 300
6 (a) If only patient load is considered as a determinant of administration costs and only the
historical patient load data that falls within the relevant range (patient load between 600 and
1200) are considered, then the simple regression can be used, utilising Excel. The output is
reproduced below
R Square 0.859492304
Adjusted R Square 0.824365379
Standard Error 401.9749382
Observations 6
ANOVA
df SS MS F Significance F
Regression 1 3 953 664.596 395 3665 24.468191 0.00778042
Residual 4 646 335.4037 161583.9
Total 5 4 600 000
Coefficients Standard error t Stat P-value Lower 95% Upper 95%

8
Intercept 6 181.36646 730.0175478 8.467422 0.0010661 4 154.51281 208.220107
Patients 3.838509317 0.775999898 4.946533 0.0077804 1.6839882 5.993030436
From this, the equation to explain administrative cost behaviour is as follows.
Y = a + bX, where:
X = the independent variable (patient load for one month)
Y = the dependent variable (administrative cost for one month)
Y = $6 181 + $3.84X
This can be expressed as total cost = fixed costs of $6 181 plus $3.84 per patient
(b) The clinics administrative cost during the month when 800 patients visit the hospital would
be $ 6181 + $3.84 x 800 = $9 253
(c) When both patient load and the number of emergency procedures are considered as
determinants of administrative cost, multiple regression must be used. Utilising Excel, the
regression statistics are reproduced below
R Square 0.86339459
Adjusted R Square 0.77232432
Standard Error 457.669779
Observations 6
ANOVA
Regression 2 3 971 615.12 1 985 808 9.480532 0.05048959
Residual 3 628 384.8797 209 461.6
Total 5 4 600 000
Standard Lower Upper Lower Upper

Coefficients Error t Stat P-value 95% 95% 95.0% 95.0%
Intercept 5943.98625 1161.190869 5.118871 0.01443 2 248.558665 9 639.414 2 248.5599 639.414
Emergency 24.9140893 85.10570782 0.292743 0.788799 -245.930256 295.7584 -245.932 95.7584
Patients 3.80756014 0.889819838 4.279024 0.023443 0.975756281 6.639364 0.975756 6.639364
From this, the equation to explain administrative cost behaviour is as follows:
Y = a + b1X1 + b2X2, where:
X1= the independent variable (the number of emergency procedures for one month)
X2= the independent variable (patient load for one month)
Y = the dependent variable (administrative cost for one month)
i.e. Administrative cost = $5 944 + $24.91 per emergency procedure + $3.81 per patient
(d) Clinics administrative cost during the month when 800 patients visit the hospital and 12
emergency procedures taken place would be $9 291
(calculated as $5 944 + $24.91 x 12 + $3.81 x 800 = $9 291 rounded)
7 When patient load is used as the sole independent variable, the figure for R2 is 0.859 as per
the above calculations. This suggests that 86 per cent of the variability of administrative costs
can be explained by changes in patient load. An R2 figure of 86 per cent indicates that 14 per
cent of the variability in administrative costs is not explained by patient load. With only 6
observations and one independent variable, it is more appropriate to use the adjusted R2,
which is slightly lower at 0.824.
When patient load and emergency procedures are used as independent variables R2 increases
only marginally to 0.863 and the adjusted R2 is 0.772 per the above calculations. Thus the
adjusted R2 indicates that the addition of emergency procedures reduces rather than
increases the explanatory power.
The real problem is that, once we limit the analysis to observations within the relevant
range, there are only 6 observations, which undermines the effectiveness of the regression
analysis.
8 The equation from high-low method is based on only two observations and therefore should
be viewed with caution. However, as discussed above, even though both the regression cost
models have a high R2 and therefore high explanatory power, there are too few observations
to rely on the results of these regression models.
CASE 3.53 (45 minutes) Interpreting regression analysis; activity-based

costing: service firm
1 Drakes preliminary estimate for overhead of $18.00 per direct labour hour does not
distinguish between fixed and variable overhead. This preliminary rate is applicable only to
the activity level at which it was computed (72 000 direct labour hours per year) and may
not be used to predict total overhead at other activity levels.
The overhead rate developed from the least-squares regression recognises the relationship
between cost and volume in the data. The regression suggests that there is a component of
the cost ($52 402 per month) that is unrelated to total direct-labour hours. This cost
component is the intercept on the vertical axis and is often considered to be the fixed cost as
long as the activity level is within the relevant range. Thus, the least-squares regression
results in a cost function with two components: fixed cost per month and variable cost per
direct-labour hour. This cost formula can be used to predict total overhead at any activity
level within the relevant range.
2
Direct material $390.00
Direct labour (5 DLH* $19.00 per DLH) 95.00
Variable overhead (5 DLH $9.26 per DLH) 46.30
Total variable cost per 1 000 square metres $531.30
* DLH denotes direct-labour hours.
3 The minimum bid should include the following incremental costs of the project:
Direct material ($390.00 50) $19 500.00

Direct labour ($95.00 50) 4 750.00
Variable overhead ($46.30 50) 2 315.00
Overtime premium ($9.50 per DLH 5 DLH 50 .3) 712.50
Minimum bid $27 277.50
4 Yes, Grassmere Pty Ltd can rely on the formula as long as she recognises that there are
some shortcomings. The fact that least-squares regression estimates cost behaviour increases
the usefulness of rates calculated from cost data. However, the regression is based on
historical costs that may change in the future, and Drake must assess whether the cost
equation would need to be revised for future cost increases or decreases.
5 (a)
Variable OH1 (50 5 $4.15) $1 037.50
Variable OH2 (50 $13.60) 680.00
Variable OH3 (70 $5.90) 413.00
Total incremental variable overhead $2 130.50
(b)
Variable OH1 (50 5 $4.15) $1 037.50
Variable OH2 (25 $13.60) 340.00
Variable OH3 (230 $5.90) 1 357.00
Total incremental variable overhead $2 734.50
(c) The two scenarios in (a) and (b) differ in terms of the activities to be undertaken. Scenario
(a) involves a large amount of seeding activity and relatively little planting activity. Scenario
(b) involves considerably less seeding activity, but a great deal more planting activity. An
activity-based costing system accounts for the different costs in projects involving different
mixes of activity.
CASE 3.54 (45 minutes) Multiple regression: service firm (continuation of
Case 3.53)
The combined data from this case plus Case 3.53 is reproduced below so that the information is
clear.
Month Total Total direct Square metres of No. of individual
overhead labour hours turf plantings
cost (DLH) (STS) (PL)
January $108 000 6 200 48 000 50
February 94 000 4 800 44 000 30
March 96 000 4 500 44 000 40
April 112 000 5 600 51 000 65
May 114 000 7 000 53 000 35
June 130 000 8 000 55 000 50
July 128 000 8 000 60 000 60
August 112 000 6 800 50 000 16
September 106 000 5 600 52 000 40
October 94 000 5 600 45 000 37
November 94 000 4 300 46 000 40
December 108 000 5 600 51 000 60
Total $1 296 000 72 000 599 000
1 The output data from the multiple regression equation using Excel is shown below.
R square 0.9420792
Observations 12
ANOVA
Regression 3 159 022 9688 530 076 563 43.373212 2.70477E-05
Residual 8 97 770 311.89 12 221 289
Total 11 1 688 000 000

Intercept 22 376.301 14 783.20703 1.5136297 0.1685785 11713.8353 56 466.438
DLH 6.1547859 1.809122249 3.402084 0.0093317 1.982942519 10.326629
STS 0.8631741 0.512517867 1.6841834 0.1306405 0.31869424 2.0450424
PL 128.67787 94.10503138 1.3673856 0.2086844 88.3287232 345.68446
The regression equation:
Total Overhead = $22 376 + $6.15 per direct labour hour + $0.86 per square metre of turf +
$128.68 per planting.
2 As shown in part 1, the adjusted R2 for this equation is 0.9204. When DLH is used as the
sole independent variable (as in Case 3.53) the R2 is lower (0.8456), although the standard
error of the coefficient is better, as shown below.
R square 0.85965535
Observations 12
ANOVA
Regression 1 1 451 098 225 1 451 098 225 61.25316 1.4262E-05
Residual 10 236 901 775.1 23 690 177.5
Total 11 1 688 000 000

Intercept 52 402.3669 7241.440804 7.23645588 2.803E-05 36 267.4313 68 537.3024
DLH 9.26627219 1.183970292 7.82643978 1.426E-05 6.62822199 11.90432238
3 Regression functions for the various combinations of cost drivers are shown below. These
results suggest that, when considered individually, DL hours is the best of the three cost
drivers. (STS lacks economic plausibility with a negative intercept and PL has low R2.)
When combined, the three independent variable model performs the best, although DLH
combined with either STS or PL seems to be almost as effective. However, before reaching
a final conclusion on the relative performance of these models, a more detailed analysis
should be completed, considering factors such as the standard error of the coefficients and
the F statistics.
SOME COMPARISONS OF RESULTS:

SUMMARY OUTPUT
All Variables
R square 0.942079199
Observations 12
Coefficients
Intercept 22 376.30123
DLH 6.154785902
STS 0.863174082
PL 128.6778681
SUMMARY OUTPUT
STS only
R square 0.858015136
Observations 12
Coefficients
STS 2.374310736
SUMMARY OUTPUT
PL only
R square 0.163573117
Observations 12
Coefficients
PL 355.8136869
SUMMARY OUTPUT
DLH only
R square 0.859655346
Observations 12
Coefficients
DLH 9.266272189
SUMMARY OUTPUT
DLH and STS
R square 0.928542069
Observations 12
Coefficients
DLH 5.036231834
STS 1.27656575
SUMMARY OUTPUT
STS and PL
R square 0.858281008
Observations 12
Coefficients
Intercept 10874.76267
STS 2.395508163
PL 16.08458477
SUMMARY OUTPUT
DLH and PL
R square 0.921542845
Observations 12
Coefficients
DLH 8.832453796
PL 222.1676014

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CHAPTER 3

COST BEHAVIOUR, COST DRIVERS AND

3.6 Appropriate independent variables for several tasks are as follows:

EXERCISE 3.26 (10 minutes) Cost drivers: manufacturer

(a) production volume; unit; variable

1 Graph of raw materials cost:

Raw materials cost

Kilograms of raw material

Kilograms of raw material

EXERCISE 3.28 (15 minutes) Account classification method; manufacturer.

(e) Semivariable (or mixed)

2 Production cost per month = $33 000* + $2.00X

*33 000 = $19 000 + $10 000 + $4 000

Number of muffler replacements

EXERCISE 3.30 (40 minutes) Graphing cost behaviour patterns: hospital

1 Cost of salaries and on-costs for administrative staff:

2 December cost predictions:

Production crew (440 $13.00 per hour) $5 720

EXERCISE 3.32 (15 minutes) Approximating a curvilinear cost: service firm

EXERCISE 3.33 (15 minutes) Estimating cost behaviour; highlow method:

2 Cost prediction when 78 000 machine hours are used:

EXERCISE 3.34 (45 minutes) Estimating cost behaviour; regression

EXERCISE 3.35 (30 minutes) Estimating cost behaviour; high-low method:

$99 000 61 000

EXERCISE 3.36 Estimating cost behaviour; regression analysis:

EXERCISE 3.37 (15 minutes) Regression analysis: service firm

2 The formula to explain the behaviour of maintenance costs is as follows:

EXERCISE 3.38 (10 minutes) (appendix) Average costs; learning curve

1 (a) $425 ($850/2)

EXERCISE 3.39 (10 minutes) (appendix) Learning curve; high technology:

1 (a) Average time for 4 satellites 130 hours

EXERCISE 3.40 (45 minutes) Estimating cost behaviour using multiple

EXERCISE 3.41 (45 minutes) Regression analysis: airline

PROBLEM 3.42 (20 minutes) Cost drivers: manufacturer

PROBLEM 3.43 (15 minutes) Account classification; cost drivers: school

PROBLEM 3.44 (30 minutes) Cost behaviour patterns in a variety of settings

Note that k was not used.

Total cost at 2 600 units of cost driver $12 120

3 Cost when 2 300kgs are moved:

Coefficients Standard error

5 The formula to explain the behaviour of materials handling costs is as follows.

PROBLEM 3.46 (25 minutes) Cost behaviour; engineered cost; committed

Cost Fixed/Variable Engineered / Explanation

PROBLEM 3.47 (40 minutes) Cost behaviour; committed and discretionary

1 Straight-line depreciation committed fixed

Variable cost per unit of cost driver $201 000-$135 000

Total cost at 2 600 units of cost driver $201 000

The total cost for February production of 1 650 tonnes of ore

PROBLEM 3.48 (45 minutes) Multiple regression analysis: service firm

Y = $432.95 + $7.35X1 + $0.003X2

Where Y = the estimated maintenance cost for the month

PROBLEM 3.49 (40 minutes) Interpreting regression analysis in cost

Standard Upper Lower Upper

PROBLEM 3.50 (35 minutes) Comparing regression and highlow

PROBLEM 3.51 (30 minutes) (appendix) Learning curve): manufacturer

4 Cost when 800 patients visit the hospital:

Coefficients Standard error t Stat P-value Lower 95% Upper 95%

Standard Lower Upper Lower Upper

CASE 3.53 (45 minutes) Interpreting regression analysis; activity-based

Direct material ($390.00 50) $19 500.00

Coefficients Standard error t Stat P-value Lower 95% Upper 95%

Coefficients Standard error t Stat P-value Lower 95% Upper 95%

SOME COMPARISONS OF RESULTS: