Account Analysis to Determine Cost Behavior 3. Q. Higgins, owner of Robin's Nest, wants to determine the cost behavior of labor and overhead. Higgins pays his workers a salary, during busy times, everyone works to get the orders out. Temps (temporary workers hired through an agency) may be hired to pack and prepare completed orders for shipment. During slower times, Higgins catches up on bookkeeping and administrative tasks while the salaried workers do preventive maintenance, clean the lines and building, etc. Temos are not hired during slow times. Higgins found that workers' salaries, temp agency payments, rentals, utilities, and plant and equipment depreciation are the largest dollar accounts. He believes that workers' salaries and plant and equipment depreciation are fixed, temp agency payments are associated with the number of orders (since temp workers are used to pack and prepare completed orders for shipment), and electricity is associated with the number of machine hours. When the number of different parts stored by Robin's Nest exceeds the space in the materials storeroom, Higgins rents nearby warehouse space. He can rent as much or as little space as he wants on a month-to- month basis. Therefore, he believes warehouse rental payments are variable with the number of parts purchased and stored. The account balances for the past six months as well as the six-month total are as follows: Plant & Workers' Temp Agency Warehouse Equipment Salaries Payments Rental Electricity Depreciation January $9,800 $0 $350 $880 $3,100 February 9,800 900 460 910 3,100 March 9,800 1,650 395 850 3,100 9,800 April 890 390 3,100 9,800 2,150 440 May 750 820 June 2,100 365 3,100 9,800 $2,400 $8,850 $5,100 Total $58,800 2,050 3,100 $18,600 Information on number of machine hours, orders, and parts for the six-month period follows: Number of Machine Hours Number of Parts Orders Previous Next Information on number of machine hours, orders, and parts for the six-month period follows: Machine Hours Number of Orders Number of Parts January 3,500 250 510 February 5,700 350 730 March 425 820 6,600 7,100 April 580 890 May 7,000 550 900 June 7,300 545 950 Total 37,200 2,700 4,800 Required: 1. Calculate the monthly average account balance for each account. When required, round your answers to the nearest dollar and use your rounded answers in all subsequent computations. Average workers' salaries Average temp agency payment Average warehouse rental llill Average electricity Average depreciation Calculate the average monthly amount for each of the three drivers. When required, round your answers to the nearest whole number. Average machine hours Average number of orders Average number of orders Average number of parts 2. Calculate fixed monthly cost and the variable rates for temp agency payments, warehouse rent, and electricity. If required, round your answers to the nearest cent and use the rounded answers in subsequent computations. Average fixed monthly cost Variable rate for temp agency per order Variable rate for warehouse rental per part Variable rate for electricity per machine hour Express the results in the form of an equation for total cost. Monthly cost (orders) + (parts) + (machine hours) 3. In July, Higgins predicts there will be 475 orders, 850 parts, and 6,700 machine hours. What is the total labor and overhead cost for July Round interim computations to 1 decimal place and round final answer to the nearest dollar. 4. What if Higgins buys a new machine in July for $60,000? The machine is expected to last 20 years and will have no salvage value at the end of that time. What part of the cost equation will be affected? How will this part of the cost equation be affected? What is the new expected cost in July? When required, round your answer to the nearest dollar. method. 5. Students are asked to form a prediction or estimation of various costs based on the cost function they created using the Previous Next >
