Plasma Pathology has incurred the following costs in its diagnostic blood laboratory during the past 12 months:

Month	Number of blood test completed	Cost
January	6100	$90000
February	5300	87000
March	4900	76200
April	4800	78100
May	5050	80700
June	3050	61000
July	4500	74500
August	7100	99000
September	6200	95600
October	4700	74800
November	5900	89000
December	6000	91000

Additional Requirement: Lecture illustration 1

Estimate the monthly fixed cost and the variable cost per blood test using the high-low method.

Develop a formula to express the cost behaviour exhibited by Plasma Pathology?s costs.

Predict the total cost in a month when 5500 tests are performed.

Lecture Illustration 2 - Estimating cost behaviour; regression analysis

Use the same data as above.

Required:

1. Use regression analysis to estimate the variable cost per blood test and the fixed cost per month.
2. Develop a formula to express the cost behaviour exhibited by Plasma Pathology?s costs.
3. Predict the total cost in a month when 5500 tests are performed.

AF201 - MANAGERIAL ACCOUNTING WEEK 2 - LECTURE GUIDE (Week beginning 18th July 2016) Chapter 3 COST BEHAVIOUR, COST DRIVERS AND COST ESTIMATION Lecture Overview: As was discussed in Chapter 1, planning and control are integral part of management accounting. Furthermore, management accountants need to utilize the processes and techniques in order to effectively and efficiently use resources to create customer and shareholder values. In assisting management accountants to plan and control their operation, they need to know the behaviour of the costs. Understanding cost behaviour requires the identification of cost drivers so that costs can be controlled. Once the behaviour of cost is known, management accountants can then be able to estimate and predict future cost to assist them in their decision making. PART A: COST BEHAVIOUR AND COST DRIVERS 1. Basic concepts Cost behaviour Cost estimation Cost prediction 2. Cost behaviour 3. Cost drivers Conventional viewpoint Contemporary viewpoint Selecting cost drivers Inputs or outputs? Level of analysis? Long or short term? Cost estimation or cost management? 4. Cost behaviour patterns Variable costs Fixed costs Step-fixed costs AF201 Lecture Guide Week 2 Page 1 Semi-variable costs Curvilinear costs PART B: COST ESTIMATION 1. Cost estimation Managerial judgement Engineering approach Quantitative analysis Scatter plot High-low method Regression Analysis 2. Lecture Illustration - High-low method and regression analysis 3. Practical issues in cost estimation Lecture Illustration - E3.28 Regression analysis: health services firm Plasma Pathology has incurred the following costs in its diagnostic blood laboratory during the past 12 months: Month January February March April May June July August September October November December Number of blood test comp leted 6100 5300 4900 4800 5050 3050 4500 7100 6200 4700 5900 6000 Cost $90000 87000 76200 78100 80700 61000 74500 99000 95600 74800 89000 91000 Additional Requirement: Lecture illustration 1 1. Estimate the monthly fixed cost and the variable cost per blood test using the high-low method. 2. Develop a formula to express the cost behaviour exhibited by Plasma Pathology's costs. AF201 Lecture Guide Week 2 Page 2 3. Predict the total cost in a month when 5500 tests are performed. Lecture Illustration 2 - Estimating cost behaviour; regression analysis Use the same data as above. Required: 1. Use regression analysis to estimate the variable cost per blood test and the fixed cost per month. 2. Develop a formula to express the cost behaviour exhibited by Plasma Pathology's costs. 3. Predict the total cost in a month when 5500 tests are performed. Lecture Revision Questions. Semester 1, 2015 Mid-Semester Test Paper: Multiple choice questions 3- 6 AF201 Lecture Guide Week 2 Page 3 Take Home Exercise A. Semester 1, 2015 Mid-Semester Test Paper: MC question 7 (The test paper is posted on moodle) B. Semester 2, 2005 F2F Mid-Semester Test Question 4 Lautoka Sugar Mill Ltd. believes that the number of machine hours worked affects their electricity costs. As a result, a regression analysis was performed to estimate the cost function and the following printout was generated: SUMMARY OUTPUT Regression Statistics Multiple R 0.965744225 R Square Adjusted R 0.932661908 0.925928099 AF201 Lecture Guide Week 2 Page 4 Square Standard Error 885.7731015 Observations 12 ANOVA df MS F 1 108669685.1 108669685.1 138.5043562 Residual 10 7845939.874 784593.9874 Total 11 116515625 Regression SS Coefficients Standard Error Significance F 3.50721E-07 t Stat P-value Intercept 2433.588317 637.9879243 3.814473949 0.003404192 Lower 95% 1012.06239 3855.114244 Upper 95% Machine hours 9.337889162 0.793445311 11.76878737 3.50721E-07 7.569982531 11.10579579 REQUIRED: Using the results of the regression output above, (a) Determine an estimate of (i) (ii) Variable electricity costs per machine hour. Fixed electricity costs per month. (2 marks) (b) Develop a cost function for monthly electricity costs for the Lautoka Sugar Mill. (3 marks) (c) Estimate electricity costs for a month in which 500 machine hours are worked using the cost function developed in requirement (b) above. (2 marks) (d) What percentage change in electricity costs can be explained by changes in machine hours? (2 marks) (Total marks for question: 9 marks) C. Semester 1, 2012 DFL Mid-Semester Test QUESTION 12 On July 30, 2006, you were hired as a management accountant for Western Manufacturing. Kim Western, the plant manager, has expressed frustration at the company's inability to accurately forecast total factory overhead using the following formula: Total Factory Overhead = $20,000 + $9X R2 = 0.3 Where X = Direct labour hours AF201 Lecture Guide Week 2 Page 5 The following printout was generated by the date processing department using observations gathered during the past 12 months: Regression coefficients: Intercept Units Setups Engineering hours R2 48,000 34 12 5 0.96 Budgeted activity levels for July: Units Setups Engineering hours Direct labor hours 10,000 200 50 20,000 REQUIRED Prepare a memorandum to Kim Western that indicates the following: 1. A new cost formula for estimating factory overhead costs based on the generated printout. (Define your variables very clearly if you use variables in your equation). 2. An example of how the formula can be used to estimate costs for the month of July. 3. An explanation as to why the previous formula failed to accurately predict factor overhead costs. Total marks for this question: 15 marks AF201 Lecture Guide Week 2 Page 6