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Cost Behavior and the Method of Least Squares

Cost Behavior and the Method of Least Squares

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Cost Behavior and the Method of Least Squares Instructions: Use the tabs above to navigate back and forth between steps. Objecti Review basic methods for separating ve: mixed costs - Click here to refer to the question information. Introduction: Anselmi Company has been in business one year manufacturing specialty Italian pastas. The company began based on strong favorable reaction to an Anselmi family pasta dough recipe. Carlo Anselmi was convinced by friends and associates that his grandma's pasta would have great market appeal. Carlo and two close family members test marketed some packages of grandma's homemade fettuccine. Based on the response, they decided to start a company that would mass produce ribbon and string-style pasta (fettucine, linguine, and spaghetti). Seven sequential processes were required to produce the final product (with Grandma Anselmi Pasta being the chosen product name). Following Grandma Anselmi's recipe, the pasta products start with a mixing process where flour, water, eggs, and a special blend of herbs and spices are mixed and kneaded to a lumpy consistency. Next, the kneaded mixture goes through a rolling process, where the dough is placed on a laminator and flattened into sheets. The flattened dough is then pasteurized to kill bacteria and subsequently passed through a cutting machine. The cutting machine has to be configured (setup) to produce the particular type of pasta (fettucine, linguine or spaghetti). The final two steps are drying and packaging. The pasta is produced in batches because the recipe differs for each type of pasta (fettucine, linguine, and spaghetti). Each time a batch is produced, the vats for mixing must be cleaned and prepared and the settings for cutting must be appropriately set. During the first year, sales were weaker than expected during the first quarter, but increased in each of the remaining three quarters. Marketing surveys revealed that customers were very pleased with the quality and flavor of the pasta. The trends were all good, but Carlo was somewhat concerned as they had yet to make a profit. Over the course of the year, 733,000 boxes were sold, less than initially projected. Carlo was interested in knowing how many boxes of pasta must be sold to breakeven. To do the CVP analysis, Joe Anselmi, his controller (and nephew), accumulated the following per-unit data to help determine the relevant fixed and variable costs (the prime costs are essentially the same for each type of pasta even though the recipe varies): Selling price $1.80 Direct materials 0.70 Direct labor 0.50 Joe also determined that selling and administrative expenses, all fixed, totaled $240,000. However, Joe had difficulty with separating overhead into fixed and variable components. In examining the two major overhead-related activities (machining and setups), Joe has observed that machine hours appears to be closely correlated with units produced in that 100 boxes of pasta can be produced per machine hour. Joe has accumulated the following information on overhead costs, machine hours, and number of setups for the past 12 months. Machi Number Overhe ne of Month ad Hours Setups January $31,125 595 18 Februar $24,900 500 6 y March $29,625 575 12 April $30,225 615 15 May $32,750 650 20 June $28,150 610 10 July $29,250 630 16 August $29,175 625 12 Septem $29,150 650 11 ber October $28,800 600 12 Novemb $27,900 580 14 er Decemb $31,100 700 14 er Joe Anselmi wants to separate overhead costs into fixed and variable components. He is not sure whether machine hours, setups, or both drive 1 the overhead costs. Initially, he decided to use the high-low method to . identify fixed and variable components, first using machine hours and then using setups. Required: Using the high-low method, calculate the total monthly fixed cost and the variable cost per unit for machine hours and setups (round the monthly fixed costs to the nearest dollar and the unit costs to the nearest cent): Machine hours: $ Monthly fixed cost: Item1 Unit variable cost: $ per machine hour Item2 Item2 Setups: Monthly fixed cost: Unit variable cost: $ Item3 $ per setup Item4 After seeing the two high-low equations, Joe was somewhat befuddled. Which driver should he use-if either? After some analysis, he decided that a method was needed that would allow him to choose the driver(s) that best described the cost relationship. He discovered that the method of least 2 squares calculates a measure called the coefficient of determination (R2). . The coefficient of determination is a measure of - Select your answer - which gives Item5 - Select your answer - Item6 explained by the driver(s). Required: Using a regression program such as Microsoft Excel, separate overhead into fixed and variable components using ordinary least squares (regression) analysis. Run three regressions using (a) number of machine hours, (b) number of setups, and (c) a multiple regression using both machine hours and number of setups). Round fixed costs to the nearest dollar and unit variable costs to the nearest cent. Also, calculate and provide the coefficient of determination (R2) for each equation. Round R2 to two decimal places. a Machine hours: . $ Monthly fixed cost: Item7 Cost per machine hour: $ Item8 R2: Item9 b Setups: . Monthly fixed cost: $ Item10 $ Cost per setup: Item11 R2: Item12 c Both machine hours and setups: If required, use rounded answers in the . subsequent requirements. Monthly fixed cost: Cost per machine hour: $ Item13 $ Item14 $ Cost per setup: Item15 R2: Summary Questions: Item16 The high-low method may not work well because the high or low points 1 may be (Select "Yes" for the statements that are applicable, else please . select "No" from the below dropdowns.): representative of the cost-activity - Select your answer Item17 pattern not very representative of the cost- Select your answer Item18 activity pattern - Select your answer Item19 too simple be outliers - Select your answer - Item20 2Based on the results of the regressions, the best-fitting equation is the one . using: - Select your answer - Item21 3Calculate the expected overhead if 600 machine hours and 12 setups are . used (round to the nearest dollar): Expected overhead cost: $ Item22 CVP and Cost Behavior Instructions: Use the tabs above to navigate back and forth between steps. Objecti Use results of cost separation methods to produce information ve: needed for CVP analysis - Click here to refer to the question information. Introduction: Anselmi Company has been in business one year manufacturing specialty Italian pastas. The company began based on strong favorable reaction to an Anselmi family pasta dough recipe. Carlo Anselmi was convinced by friends and associates that his grandma's pasta would have great market appeal. Carlo and two close family members test marketed some packages of grandma's homemade fettuccine. Based on the response, they decided to start a company that would mass produce ribbon and string-style pasta (fettucine, linguine, and spaghetti). Seven sequential processes were required to produce the final product (with Grandma Anselmi Pasta being the chosen product name). Following Grandma Anselmi's recipe, the pasta products start with a mixing process where flour, water, eggs, and a special blend of herbs and spices are mixed and kneaded to a lumpy consistency. Next, the kneaded mixture goes through a rolling process, where the dough is placed on a laminator and flattened into sheets. The flattened dough is then pasteurized to kill bacteria and subsequently passed through a cutting machine. The cutting machine has to be configured (setup) to produce the particular type of pasta (fettucine, linguine or spaghetti). The final two steps are drying and packaging. The pasta is produced in batches because the recipe differs for each type of pasta (fettucine, linguine, and spaghetti). Each time a batch is produced, the vats for mixing must be cleaned and prepared and the settings for cutting must be appropriately set. During the first year, sales were weaker than expected during the first quarter, but increased in each of the remaining three quarters. Marketing surveys revealed that customers were very pleased with the quality and flavor of the pasta. The trends were all good, but Carlo was somewhat concerned as they had yet to make a profit. Over the course of the year, 733,000 boxes were sold, less than initially projected. Carlo was interested in knowing how many boxes of pasta must be sold to breakeven. To do the CVP analysis, Joe Anselmi, his controller (and nephew), accumulated the following per-unit data to help determine the relevant fixed and variable costs (the prime costs are essentially the same for each type of pasta even though the recipe varies): Selling price $1.80 Direct materials 0.70 Direct labor 0.50 Joe also determined that selling and administrative expenses, all fixed, totaled $240,000. However, Joe had difficulty with separating overhead into fixed and variable components. In examining the two major overhead-related activities (machining and setups), Joe has observed that machine hours appears to be closely correlated with units produced in that 100 boxes of pasta can be produced per machine hour. Joe has accumulated the following information on overhead costs, machine hours, and number of setups for the past 12 months. Machi Number Overhe ne of Month ad Hours Setups January $31,125 595 18 Februar $24,900 500 6 y March $29,625 575 12 April $30,225 615 15 May $32,750 650 20 June $28,150 610 10 July $29,250 630 16 August $29,175 625 12 Septem $29,150 650 11 ber October $28,800 600 12 Novemb $27,900 580 14 er Decemb $31,100 700 14 er Assume that Joe Anselmi has decided to use the machine-hour based equation for CVP analysis because it used a unit-based driver, facilitating CVP analysis. Required: Using a regression program such as Microsoft Excel, separate overhead into fixed and variable components using ordinary least squares (regression) analysis. Run three regressions using (a) number of machine hours, (b) number of setups, and (c) a multiple regression using both machine hours and number of setups. Round fixed costs to the nearest dollar and unit variable costs to the nearest cent. Also, calculate and 1 provide the coefficient of determination (R2) for each equation. Round R2 to . two decimal places. Next calculate the variable manufacturing cost per unit. Round the unit cost to the nearest cent and use the rounded unit cost in subsequent requirements, if required. Finally, assuming that all units produced were sold during the year, prepare a variable-costing income statement for the first year of Anselmi Company below. Round your monthly fixed cost to nearest whole dollar. Variable-costing Income Statement For the Year Ended Anselmi Company $ Sales Revenue Item1 Less variable cost of goods sold Item2 Contribution margin Item3 Less fixed overhead Item4 Less fixed selling and administrative expenses Item5 $ Operating income (loss) Item6 From the variable-costing income statement information, calculate how 2 many packages of pasta must be sold in the coming year to breakeven . (Round packages to the nearest unit). Pasta packages needed to breakeven: packages Item7 Carlo Anselmi approved an advertising campaign suggested by his Aunt Maria, the marketing manager, which would cost $50,000 and increase 3 sales by 500,000 units for the coming year. Was this a good decision? . (Round the unit cost to the nearest cent and use the rounded unit cost in subsequent requirements, if required.). because it will - Select your answer - Item8 - Select your answer - operating income by $ Item9 . Item10 Summary Questions: 1 Calculate the contribution margin ratio (round to three decimal places): . Item11 2 . The variable cost ratio (rounded to three decimal places) is equal to . Item12 3 Calculate the variable manufacturing cost per unit if the multiple . regression equation had been used: $ per unit Item13 CVP and ABC Instructions: Use the tabs above to navigate back and forth between steps. Objecti Increase the understanding of the increased reliability and accuracy of ve: CVP analysis which considers nonunit-level drivers and associated costs. - Click here to refer to the question information. Introduction: Anselmi Company has been in business one year manufacturing specialty Italian pastas. The company began based on strong favorable reaction to an Anselmi family pasta dough recipe. Carlo Anselmi was convinced by friends and associates that his grandma's pasta would have great market appeal. Carlo and two close family members test marketed some packages of grandma's homemade fettuccine. Based on the response, they decided to start a company that would mass produce ribbon and stringstyle pasta (fettucine, linguine, and spaghetti). Seven sequential processes were required to produce the final product (with Grandma Anselmi Pasta being the chosen product name). Following Grandma Anselmi's recipe, the pasta products start with a mixing process where flour, water, eggs, and a special blend of herbs and spices are mixed and kneaded to a lumpy consistency. Next, the kneaded mixture goes through a rolling process, where the dough is placed on a laminator and flattened into sheets. The flattened dough is then pasteurized to kill bacteria and subsequently passed through a cutting machine. The cutting machine has to be configured (setup) to produce the particular type of pasta (fettucine, linguine or spaghetti). The final two steps are drying and packaging. The pasta is produced in batches because the recipe differs for each type of pasta (fettucine, linguine, and spaghetti). Each time a batch is produced, the vats for mixing must be cleaned and prepared and the settings for cutting must be appropriately set. During the first year, sales were weaker than expected during the first quarter, but increased in each of the remaining three quarters. Marketing surveys revealed that customers were very pleased with the quality and flavor of the pasta. The trends were all good, but Carlo was somewhat concerned as they had yet to make a profit. Over the course of the year, 733,000 boxes were sold, less than initially projected. Carlo was interested in knowing how many boxes of pasta must be sold to breakeven. To do the CVP analysis, Joe Anselmi, his controller (and nephew), accumulated the following per-unit data to help determine the relevant fixed and variable costs (the prime costs are essentially the same for each type of pasta even though the recipe varies): Selling price $1.80 Direct materials 0.70 Direct labor 0.50 Joe also determined that selling and administrative expenses, all fixed, totaled $240,000. However, Joe had difficulty with separating overhead into fixed and variable components. In examining the two major overhead- related activities (machining and setups), Joe has observed that machine hours appears to be closely correlated with units produced in that 100 boxes of pasta can be produced per machine hour. Joe has accumulated the following information on overhead costs, machine hours, and number of setups for the past 12 months. Month Machi Number Overhe ne of ad Hours Setups January $31,125 595 18 Februar $24,900 y 500 6 March $29,625 575 12 April $30,225 615 15 May $32,750 650 20 June $28,150 610 10 July $29,250 630 16 August $29,175 625 12 Septem $29,150 ber 650 11 October $28,800 600 12 Novemb $27,900 er 580 14 Decemb $31,100 er 700 14 After receiving Joe's report on breakeven analysis, Carlo was discouraged. Even with the $50,000 advertising campaign and the resulting increase of 500,000 units in sales, the company would still not break even. Given the competitive conditions in the market, any increase in selling price was out of the question. Carlo was not sure if the company would be able to last the year. The $50,000 advertising cost plus the projected loss would be too much for him and his two family partners (Joe and Maria). Carlo approached Joe and asked him how reliable his CVP analysis was. Joe indicated some errors in the analysis may exist because his chosen overhead cost equation was not as good a fit to the data. His chosen equation actually involved two variables instead of one. Intrigued, Carlo asked to see the overhead cost equation that supposedly better fit the data. Joe gave him the following cost equation: Equation (1)Y = $15,000 + 16X1 + 350X2 where X1 = machine hours, X2 = number of setups, and $15,000 is the monthly fixed cost. In Equation (1) machine hours is a driver - Select your answer - Item1 and number of setups is a driver. In - Select your answer - Item2 traditional CVP analysis, breakeven in units sold is calculated by dividing by . In - Select your answer - Item3 - Select your answer - this setting, Item4 are those costs that do not vary - Select your answer - Item5 as units sold vary. However, units sold is a - Select your answer - Item6 driver. In reality, however, ABC shows that many of the actually vary with nonunit-level drivers. - Select your answer - Item7 Thus, the breakeven in units in an ABC framework is calculated by dividing by - Select your answer - Item8 - Select your answer - . Item9 Required: Assuming that setups is the only non-unit level cost, prepare a budgeted income statement for Anselmi Company for the coming year using Equation (1) (by 1 completing the table below). Assume all other cost relationships are the same as . Year 1, except that selling and administrative expenses are increased by the $50,000 advertising campaign (the number of setups is the same as Year 1). Round unit costs to the nearest cent and expenses to the nearest dollar. Budgeted Income Statement For the Year Ended Anselmi Company $ Sales revenue Item10 Less variable cost of goods sold Item11 Contribution margin Item12 Less fixed overhead Item13 Less nonunit-level overhead Item14 Less fixed selling and administrative expenses Item15 $ Operating income (loss) Item16 2 Calculate the ABC breakeven point assuming that number of setups remains the . same as Year 1. Round to the nearest unit. Breakeven: packages Item17 3 Calculate the breakeven point assuming that number of setups increases by 100. . Round to the nearest unit. Breakeven: packages Item18 Summary Questions: The breakeven point increased when the number of setups increased because the total costs that do not vary with units sold - Select your answer - 1 . . Item19 Assume that Anselmi found a way to reduce setup time so that the total setup costs were reduced to $6,000. The new breakeven point is now 2 . (round to the nearest unit). Item20 Cost Behavior and ABC Instructions: Use the tabs above to navigate back and forth between steps. Objecti Understanding cost behavior can help select the best drivers and - Click here to refer to the question information. Introduction: Anselmi Company has been in business one year manufacturing specialty Italian pastas. The company began based on strong favorable reaction to an Anselmi family pasta dough recipe. Carlo Anselmi was convinced by friends and associates that his grandma's pasta would have great market appeal. Carlo and two close family members test marketed some packages of grandma's homemade fettuccine. Based on the response, they decided to start a company that would mass produce ribbon and stringstyle pasta (fettucine, linguine, and spaghetti). Seven sequential processes were required to produce the final product (with Grandma Anselmi Pasta being the chosen product name). Following Grandma Anselmi's recipe, the pasta products start with a mixing process where flour, water, eggs, and a special blend of herbs and spices are mixed and kneaded to a lumpy consistency. Next, the kneaded mixture goes through a rolling process, where the dough is placed on a laminator and flattened into sheets. The flattened dough is then pasteurized to kill bacteria and subsequently passed through a cutting machine. The cutting machine has to be configured (setup) to produce the particular type of pasta (fettucine, linguine or spaghetti). The final two steps are drying and packaging. The pasta is produced in batches because the recipe differs for each type of pasta (fettucine, linguine, and spaghetti). Each time a batch is produced, the vats for mixing must be cleaned and prepared and the settings for cutting must be appropriately set. During the first year, sales were weaker than expected during the first quarter, but increased in each of the remaining three quarters. Marketing surveys revealed that customers were very pleased with the quality and flavor of the pasta. The trends were all good, but Carlo was somewhat concerned as they had yet to make a profit. Over the course of the year, 733,000 boxes were sold, less than initially projected. Carlo was interested in knowing how many boxes of pasta must be sold to breakeven. To do the CVP analysis, Joe Anselmi, his controller (and nephew), accumulated the following per-unit data to help determine the relevant fixed and variable costs (the prime costs are essentially the same for each type of pasta even though the recipe varies): Selling price $1.80 Direct materials 0.70 Direct labor 0.50 Joe also determined that selling and administrative expenses, all fixed, totaled $240,000. However, Joe had difficulty with separating overhead into fixed and variable components. In examining the two major overheadrelated activities (machining and setups), Joe has observed that machine hours appears to be closely correlated with units produced in that 100 boxes of pasta can be produced per machine hour. Joe has accumulated the following information on overhead costs, machine hours, and number of setups for the past 12 months. Machi Number Overhe ne of Month ad Hours Setups January $31,125 595 18 Februar $24,900 500 6 y March $29,625 575 12 April $30,225 615 15 May $32,750 650 20 June $28,150 610 10 July $29,250 630 16 August $29,175 625 12 Septem $29,150 650 11 ber October $28,800 600 12 Novemb $27,900 580 14 er Decemb $31,100 700 14 er The revised analysis produced a more optimistic attitude for the Anselmi partners and they began immediately to discuss the possibility of expanding the product lines to include tube and shell-shaped pasta (rigatoni, ziti, and elbow macaroni). However, that required the addition of an extruder and metal dies in the sequential process instead of the cutting machine. The dough would be fed into an extruder and then pushed into metal dies to produce the desired shapes before the final drying and packaging processes. Carlo was convinced that the overhead costs would not be consumed as evenly as the demand for machine hours and setups for the different product lines would have much more variability than currently experienced. Joe assured Carlo that the solution was easy-overhead could be assigned to the two product lines using machine hours for the machining costs and the number of setups for setup costs. Carlo then asked Joe some probing questions, "How do we know if machine hours and setups are the best consumption measures for the two product lines? Also, what if the tube and shell-shaped pasta line takes more time for setups?" To respond to the first question, Joe Anselmi gathered the following data on machining and setup costs and their associated drivers. Setup Number of Machine Machine costs setups costs hours $7,200 18 $23,925 595 $2,400 6 $22,500 500 $6,000 12 $23,050 575 $6,000 15 $24,225 615 $8,000 20 $24,750 650 $4,000 10 $23,450 610 $4,800 16 $24,450 630 $4,800 12 $24,375 625 $4,400 11 $24,750 650 $4,875 12 $24,600 600 $4,800 14 $23,700 580 $5,600 14 $25,500 700 To respond to the second question, Joe indicated that the easiest solution for this concern was to use a driver in place of - Select your answer - a Item1 driver. The main problem with using - Select your answer - Item2 drivers is that the accounting system may - Select your answer - Item3 have to expand to collect the data needed, whereas it is often the case that the accounting information system may already be collecting the data for most drivers. - Select your answer - Item4 Required: Answer the following cost behavior and ABC questions for Carlo and Joe using the information provided in the table above. Using the method of least squares, Carlo and Joe can conclude that the number of setups is a driver for setup 1 - Select your answer Item5 . cost because the coefficient of determination (R2) is (percentage rounded to two decimal places): - Select your answer - Item6 2 The expected setup cost for 15 setups is (to calculate the cost, round the . regression parameters to the nearest whole dollar): - Select your answer - 3 . Item7 Using the method of least squares, Carlo and Joe can conclude that machine hours is a driver for setup cost - Select your answer - Item8 because the coefficient of determination (R2) is (percentage rounded to two decimal places): - Select your answer - Item9 4 The activity rate for setups is (rounded to the nearest whole dollar): . - Select your answer - Item10 Summary Questions: If activity costs are fixed with respect to all reasonable candidates for be a good 1drivers, then regression Select your answer Item 11 . means for driver choice. In the case of activity costs that are largely fixed (costs do not vary over a relevant range) for the set of reasonable candidate drivers, then 2 must be used to select a driver that is . - Select your answer Item12 good measure of activity consumption