Creating and Using a Cost Formula

Big Thumbs Company manufactures portable flash drives for computers. Big Thumbs incurs monthly depreciation costs of $14,300 on its plant equipment. Also, each drive requires materials and manufacturing overhead resources. On average, the company uses 8,700 ounces of materials to manufacture 5,800 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 $23,200 of variable manufacturing overhead resources to produce 5,800 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 = $ _________________ + ($ _________________ 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)? $ _________________

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

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)? $ _________________

2.

eBook VideoVideoVideoVideoVideoVideoVideo

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 eight months were collected:

Month	Labor Cost($)	Employee Hours
	January		7,200			420
	February		8,340			610
	March		10,099			720
	April		9,987			670
	May		8,690			540
	June		7,650			410
	July		9,690			630
	August		7,731			370

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, use rounded calculations in intermediate steps. Round your final answers to the nearest cent.

Required:

1. Using the high-low method, calculate the fixed cost of labor. $ _________________

2. Using the high-low method, calculate the variable rate. $ _________________ per employee hour

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

Total labor cost = $ _________________ + ($ _________________ Employee hours)

3.

eBook VideoVideoVideoVideoVideoVideoVideo

Using Regression to Calculate Fixed Cost, Calculate the Variable Rate, Construct a Cost Formula, and Determine Budgeted Cost

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

Month	Labor Cost	Employee Hours
January	$6,900			360
February	8,140			550
March	9,899			630
April	9,787			590
May	8,490			480
June	7,450			350
July	9,490			570
August	7,531			310

Coefficients shown by a regression program for Pizza Vesuvio's data are:

Intercept	4,415
X Variable	8.43

Required:

Use the results of regression to make the following calculations:

1. Calculate the fixed cost of labor. $ _________________

Calculate the variable rate per employee hour. $ _________________ per employee hour

2. Construct the cost formula for total labor cost. Total labor cost = $ _________________ + ($ _________________ Employee hours)

3. Calculate the budgeted cost for next month, assuming that 705 employee hours are budgeted. Round answer to the nearest dollar. $ _________________

4.

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Variable and Fixed Costs

What follows are a number of resources that are used by a manufacturer of futons. Assume that the output measure or cost driver is the number of futons produced. All direct labor is paid on an hourly basis, and hours worked can be easily changed by management. All other factory workers are salaried.

Required:

Classify the resource costs as variable or fixed.

a. Power to operate a drill (to drill holes in the wooden frames of the futons)	_________________
b. Cloth to cover the futon mattress	_________________
c. Salary of the factory receptionist	_________________
d. Cost of food and decorations for the annual Fourth of July party for all factory employees	_________________
e. Fuel for a forklift used to move materials in a factory	_________________
f. Depreciation on the factory	_________________
g. Depreciation on a forklift used to move partially completed goods	_________________
h. Wages paid to workers who assemble the futon frame	_________________
i. Wages paid to workers who maintain the factory equipment	_________________
j. Cloth rags used to wipe the excess stain off the wooden frames	_________________

5.

eBook

Cost Behavior

Alisha Incorporated manufactures medical stents for use in heart bypass surgery. Based on past experience, Alisha has found that its total maintenance costs can be represented by the following formula: Maintenance Cost = $1,950,000 + $325X, where X = Number of Heart Stents. Last year, Alisha produced 63,000 stents. Actual maintenance costs for the year were as expected.

Required:

If required, round your answers to the nearest cent.

1. What is the total maintenance cost incurred by Alisha last year? $ _________________

2. What is the total fixed maintenance cost incurred by Alisha last year? $ _________________

3. What is the total variable maintenance cost incurred by Alisha last year? $ _________________

4. What is the maintenance cost per unit produced? $ _________________ per unit

5. What is the fixed maintenance cost per unit? $ _________________ per unit

6. What is the variable maintenance cost per unit? $ _________________ per unit

7. Conceptual Connection: Briefly explain how Alisha management could improve its cost function to better understand past maintenance costs and predict future maintenance costs.

The input in the box below will not be graded, but may be reviewed and considered by your instructor. _________________

6.

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Scattergraph Method

Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed but found that tanning salon costs increased with the number of appointments. Costs for this service over the past eight months are as follows:

Required:

Conceptual Connection: On your own paper, prepare a scattergraph based on Luisa's data. Use cost for the vertical axis and number of tanning appointments for the horizontal. Based on an examination of the scattergraph, does there appear to be a linear relationship between the cost of tanning services and the number of appointments? _________________

7.

eBook

Identifying Variable Costs, Committed Fixed Costs, and Discretionary Fixed Costs

Required:

Classify each of the following costs for a jeans manufacturing company as a variable cost, committed fixed cost, or discretionary fixed cost.

a. The cost of buttons. ________________	_________________
b. The cost to lease warehouse space for completed jeans?the lease contract runs for 2 years at $5,000 per year.	_________________
c. The salary of a summer intern. ________________	_________________
d. The cost of landscaping and mowing the grass?the contract with a local mowing company runs from month to month. ________________	_________________
e. Advertising in a national magazine for teenage girls. ________________	_________________
f. Electricity to run the sewing machines. ________________	_________________
g. Oil and spare needles for the sewing machines. ________________	_________________
h. Quality training for employees?typically given for four hours at a time, every six months. ________________	_________________
i. Food and beverages for the company Fourth of July picnic. ________________	_________________
j. Natural gas to heat the factory during the winter. ________________	_________________

Creating and Using a Cost Formula Big Thumbs Company manufactures portable flash drives for computers. Big Thumbs incurs monthly depreciation costs of $14,300 on its plant equipment. Also, each drive requires materials and manufacturing overhead resources. On average, the company uses 8,700 ounces of materials to manufacture 5,800 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 $23,200 of variable manufacturing overhead resources to produce 5,800 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 = $ _________________ + ($ _________________ 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)? $ _________________ What is the total variable cost (assume that 6,000 units is within the company's current relevant range)? $ _________________ 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)? $ _________________ 2. eBook VideoVideoVideoVideoVideoVideoVideo Using HighLow to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function Pizza Vesuvio makes specialty pizzas. Data for the past eight months were collected: Month Labor Cost($) Employee Hours January 7,200 420 February 8,340 610 March 10,099 720 April 9,987 670 May 8,690 540 June 7,650 410 July 9,690 630 August 7,731 370 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, use rounded calculations in intermediate steps. Round your final answers to the nearest cent. Required: 1. Using the highlow method, calculate the fixed cost of labor. $ _________________ 2. Using the highlow method, calculate the variable rate. $ _________________ per employee hour 3. Using the highlow method, construct the cost formula for total labor cost. Total labor cost = $ _________________ + ($ _________________ Employee hours) 3. eBook VideoVideoVideoVideoVideoVideoVideo Using Regression to Calculate Fixed Cost, Calculate the Variable Rate, Construct a Cost Formula, and Determine Budgeted Cost Pizza Vesuvio makes specialty pizzas. Data for the past eight months were collected: Month Labor Cost Employee Hours January $6,900 360 February 8,140 550 March 9,899 630 April 9,787 590 May 8,490 480 June 7,450 350 July 9,490 570 August 7,531 310 Coefficients shown by a regression program for Pizza Vesuvio's data are: Intercept X Variable 4,415 8.43 Required: Use the results of regression to make the following calculations: 1. Calculate the fixed cost of labor. $ _________________ Calculate the variable rate per employee hour. $ _________________ per employee hour 2. Construct the cost formula for total labor cost. Total labor cost = $ _________________ + ($ _________________ Employee hours) 3. Calculate the budgeted cost for next month, assuming that 705 employee hours are budgeted. Round answer to the nearest dollar. $ _________________ 4. eBook Variable and Fixed Costs What follows are a number of resources that are used by a manufacturer of futons. Assume that the output measure or cost driver is the number of futons produced. All direct labor is paid on an hourly basis, and hours worked can be easily changed by management. All other factory workers are salaried. Required: Classify the resource costs as variable or fixed. a. Power to operate a drill (to drill holes in the wooden frames of the futons) b. Cloth to cover the futon mattress c. Salary of the factory receptionist d. Cost of food and decorations for the annual Fourth of July party for all factory employees e. Fuel for a forklift used to move materials in a factory f. Depreciation on the factory g. Depreciation on a forklift used to move partially completed goods h. Wages paid to workers who assemble the futon frame i. Wages paid to workers who maintain the factory equipment j. Cloth rags used to wipe the excess stain off the wooden frames 5. eBook Cost Behavior Alisha Incorporated manufactures medical stents for use in heart bypass surgery. Based on past experience, Alisha has found that its total maintenance costs can be represented by the following formula: Maintenance Cost = $1,950,000 + $325X, where X = Number of Heart Stents. Last year, Alisha produced 63,000 stents. Actual maintenance costs for the year were as expected. Required: If required, round your answers to the nearest cent. 1. What is the total maintenance cost incurred by Alisha last year? $ _________________ 2. What is the total fixed maintenance cost incurred by Alisha last year? $ _________________ 3. What is the total variable maintenance cost incurred by Alisha last year? $ _________________ 4. What is the maintenance cost per unit produced? $ _________________ per unit 5. What is the fixed maintenance cost per unit? $ _________________ per unit 6. What is the variable maintenance cost per unit? $ _________________ per unit 7. Conceptual Connection: Briefly explain how Alisha management could improve its cost function to better understand past maintenance costs and predict future maintenance costs. The input in the box below will not be graded, but may be reviewed and considered by your instructor. _________________ 6. eBook Scattergraph Method Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed but found that tanning salon costs increased with the number of appointments. Costs for this service over the past eight months are as follows: Required: Conceptual Connection: On your own paper, prepare a scattergraph based on Luisa's data. Use cost for the vertical axis and number of tanning appointments for the horizontal. Based on an examination of the scattergraph, does there appear to be a linear relationship between the cost of tanning services and the number of appointments? _________________ 7. eBook Identifying Variable Costs, Committed Fixed Costs, and Discretionary Fixed Costs Required: Classify each of the following costs for a jeans manufacturing company as a variable cost, committed fixed cost, or discretionary fixed cost. a. The cost of buttons. ________________ b. The cost to lease warehouse space for completed jeansthe lease contract runs for 2 years at $5,000 per year. c. The salary of a summer intern. ________________ d. The cost of landscaping and mowing the grassthe contract with a local mowing company runs from month to month. ________________ e. Advertising in a national magazine for teenage girls. ________________ f. Electricity to run the sewing machines. ________________ g. Oil and spare needles for the sewing machines. ________________ h. Quality training for employeestypically given for four hours at a time, every six months. ________________ i. Food and beverages for the company Fourth of July picnic. ________________ j. Natural gas to heat the factory during the winter. ________________