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Accounting What the Numbers Mean 10e. Demonstration Problem. Chapter 12 – Exercise 10 Estimating Costs Based on Behavior Patterns. Problem Definition. - PowerPoint PPT Presentation
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Demonstration Problem
Chapter 12 – Exercise 10
Estimating Costs Based on
Behavior Patterns
AccountingWhat the Numbers Mean 10e
Problem Definition
• The following table shows the amount of cost incurred in August for the cost items indicated. During August, 8,000 units of the firm’s single product were manufactured.
Raw materials $41,600Factory depreciation expense 40,500Direct labor 99,200Production supervisor’s salary 6,100Computer rental expense 4,200Maintenance supplies used 800
Problem Requirements
a. How much cost would you expect to be incurred for each of the above items during September when 9,600 units of product are planned for production?
b. Calculate the average total cost per unit for the 8,000 units manufactured in August. Explain why this figure would not be useful to a manager interested in predicting the cost of producing 9,600 units in September.
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
Is the cost item a variable cost or a fixed cost?
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expenseDirect laborProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
Variable costs change
as activity changes.
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect laborProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
Fixed costs remain
constant as activity changes.
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect labor VariableProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect labor VariableProduction supervisor’s salary FixedComputer rental expenseMaintenance supplies used
Cost Behavior
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect labor VariableProduction supervisor’s salary FixedComputer rental expense FixedMaintenance supplies used
Cost Behavior
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect labor VariableProduction supervisor’s salary FixedComputer rental expense FixedMaintenance supplies used Variable
Cost Behavior
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
Cost @ 8,000 units
$ 41,60040,50099,200
6,1004,200
800$192,400
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
Cost @ 8,000 units
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
Variable rate calculation:
$41,600 / 8,000 units = $ 5.20/unit
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
Fixed Amount
Variable Rate/Unit
$40,500
VariableFixed
VariableFixedFixed
Variable
Fixed costs items will remain constant regardless of the level of activity (within the relevant range).
Cost @ 8,000 units
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
Fixed Amount
Variable Rate/Unit
$40,500
VariableFixed
VariableFixedFixed
Variable
Variable rate calculation:
$99,200 / 8,000 units = $12.40/unit
Cost @ 8,000 units
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
Fixed Amount
Variable Rate/Unit
$40,500
6,100
VariableFixed
VariableFixedFixed
Variable
Cost @ 8,000 units
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
Fixed Amount
Variable Rate/Unit
$40,500
6,1004,200
VariableFixed
VariableFixedFixed
Variable
Cost @ 8,000 units
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
0.10
Fixed Amount
Variable Rate/Unit
$40,500
6,1004,200
VariableFixed
VariableFixedFixed
Variable
Variable rate calculation:
$800 / 8,000 units = $ 0.10/unit
Cost @ 8,000 units
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
$40,500
6,1004,200
$50,800
VariableFixed
VariableFixedFixed
Variable
Cost @ 8,000 units
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
Cost formula = $50,800 fixed cost + $17.70 per unit variable cost
Cost @ 8,000 units
$40,500
6,1004,200
$50,800
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
Cost @ 9,600 units
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
$40,500
6,1004,200
$50,800
VariableFixed
VariableFixedFixed
Variable
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,920
Calculation:
9,600 units * $5.20 per unit
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
Fixed costs do not change at 9,600 units.
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,040
Calculation:
9,600 units * $12.40 per unit
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,0406,100
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,0406,1004,200
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,0406,1004,200
960
Calculation:
9,600 units * $0.10 per unit
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,0406,1004,200
960$220,720
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
Problem Requirements
a. How much cost would you expect to be incurred for each of the above items during September when 9,600 units of product are planned for production?
b. Calculate the average total cost per unit for the 8,000 units manufactured in August. Explain why this figure would not be useful to a manager interested in predicting the cost of producing 9,600 units in September.
Problem Solution
• Average total cost for August:
• It would not be meaningful to use this average total cost figure to predict costs in the subsequent months; that would involve unitizing the fixed expenses – and fixed costs do not behave on a per unit basis.
$192,400 / 8,000 = $24.05 per unit
Problem Solution
• Average total cost calculations are only valid for the number of units used in the calculation. Average total cost for any other number of units produced would be different because the fixed expenses per unit would decrease for each additional unit produced.
• Using the average total cost of $24.05 to estimate the cost of producing 9,600 units would give an estimate of $230,880, which is significantly higher than the $220,720 calculated in part a using the cost formula:
Total Cost = $50,800 fixed cost + $17.70 per unit variable cost
AccountingWhat the Numbers Mean 10e
David H. MarshallWayne W. McManus
Daniel F. Viele
You should now have a better understandingof using cost behavior information.
Remember that there is a demonstration problem for each chapter that is here for your learning benefit.
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