You can submit an Excel file to support calculations, but please ?cut and paste? your solutions into the Word or PDF file. Be sure to show how you did your calculations.

ACT 5140 - Accounting for Decision Makers HW #3 - Chapter 2 Directions: Answer all three questions. Please submit your work in Word or PDF formats only. You can submit an Excel file to support calculations, but please \"cut and paste\" your solutions into the Word or PDF file. Be sure to show how you did your calculations. Also, please be sure to include your name at the top of the first page of your file. Question #1 a) A company estimates that its total cost( look at hint) to send out invoices, receive payments, deposit the payments, and update accounting records was $10 per sale in 2014. In 2014, there were 10,000 sales and fixed costs of $60,000. In 2015, the company expects total fixed costs and variable costs per unit to be the same as in 2014. If the company budgets 10,500 sales in 2015, what are the expected total costs and expected costs per unit for 2015? b) Assume the same facts as in part a, except the company expects 9,500 sales in 2015. What are the expected total costs and expected costs per unit for 2015? HINT: TOTAL COSTS = FIXED COST + VARIABLE COST. So you have to figure out Variable cost and Fixed cost from this cost. Question #2 a) A company estimates that its total cost to acquire materials, set up machines, and produce products is $25 per unit produced in 2014. In 2014, there were 50,000 units produced and variable costs per unit produced totaled $15. In 2015, the company expects total fixed costs and variable costs per unit to be the same as in 2014. If the company budgets to produce 52,000 units in 2015, what are the expected total costs and expected costs per unit for 2015? b) Assume the same facts as in part a, except the company expects to produce 49,000 units in 2015. What are the expected total costs and expected costs per unit for 2015? Question #3 The Bear Company collected the following monthly information on units produced and electricity costs: Month January February March April May June Units Produced 50,000 48,000 47,000 54,000 58,000 53,000 Electricity Costs $78,000 $74,500 $72,000 $81,000 $86,000 $79,500 Using the high-low method, prepare an estimate of electricity costs for July, assuming 53,500 units are expected to be produced in July. MANAGERIAL ACCOUNTING Al L. Hartgraves Wayne J. Morse CHAPTER 2 Cost Behavior, Activity Analysis, and Cost Estimation Cambridge Business Publishers, 2015 7e Learning Objective 1 Identify basic patterns of how costs respond to changes in activity cost drivers. Cambridge Business Publishers, 2015 2 Basic Cost Behavior Patterns Variable Costs Fixed Costs Change in total in direct proportion to changes in activity Do not change in response to a change in activity volume Mixed Costs Contain a fixed and variable cost element; sometimes called semi-variable costs Step Costs Constant within a narrow range of activity, but shift to a higher level when activity exceeds the range Cambridge Business Publishers, 2015 3 Variable Costs Increases as activity increases Equals zero dollars when activity is zero Total variable cost: Total variable costs (Y) Y = bX Higher variable cost per unit creates a steeper line slope. b = Variable cost per unit 0 Cambridge Business Publishers, 2015 Total activity (X) 4 Fixed Costs No change as activity increases or decreases No response to short-run changes in activity cost drivers Total fixed cost: Total costs (Y) fixed Y = a Slope is zero, represented by a flat line. a = Total fixed costs 0 Cambridge Business Publishers, 2015 Total activity (X) 5 Mixed Costs Increase in a linear fashion when activity increases Positive in amount when activity is zero Total mixed cost: Total mixed costs (Y) Y = a + bX Variable portion Contains both fixed and variable cost elements. Fixed portion 0 Cambridge Business Publishers, 2015 Total activity (X) 6 Step Costs Increase in a step-like fashion as activity increases Total cost shifts to a higher level when activity exceeds a range Total step cost: Total costs (Y) Y = ai step 0 Cambridge Business Publishers, 2015 Total activity (X) 7 Shift in Cost Structure The importance of managers understanding cost behavior continues to increase efforts to monitor and minimize total cost. Total cost function in recent years Has shifted to more fixed costs and lower variable costs Important for organizations to manage their fixed costs Example: Vizio acquires television components rather than manufacturing them Cambridge Business Publishers, 2015 8 Cost Behavior Pattern Assumptions The four cost behavior patterns assume... A unit of final output is the primary cost driver The time period is too short to incorporate changes in strategic cost drivers such as the scale of operations Causes some costs to be viewed as fixed in the short term, but appear variable in the long run Cambridge Business Publishers, 2015 9 Total Cost Behavior Total Cost Equation = Total Fixed Costs + (Variable Costs per Unit x Number of Units) a = Y Cambridge Business Publishers, 2015 X b + 10 Relevant Range A portion of a range of activity associated with the fixed cost of the current or expected capacity A normal range of activity in which a company expects to operate, where the fixed costs remain linear, i.e., total cost remains the same Example: During normal operations, factory space is adequate for Mattel. However, during the three months preceding the holiday season, Mattel's operations are out of the relevant range and storage trailers must be rented for the additional merchandise. Cambridge Business Publishers, 2015 11 Relevant Range Economist's total cost function, referred to as curvilinear Cambridge Business Publishers, 2015 Accountant's linear approximation of total cost function 12 Marginal Cost Marginal cost is the varying increment in total cost of making one more unit. Economist Cambridge Business Publishers, 2015 13 Marginal Costs and Activity Levels Excess capacity resulting in high marginal costs Cambridge Business Publishers, 2015 Optimal circumstances with marginal costs relatively low Capacity constraints resulting in high marginal costs 14 Predicting Total Costs with a Graph Total $6,000 costs $5,000 $4,000 $3,000 $2,000 - Total cost graph is useful in predicting total costs for the coming period. $1,000 $0 0 Cambridge Business Publishers, 2015 | | | | | 100 200 300 400 500 Number of Customers served 15 Unit Variable Costs Costs Per unit $- Unit variable costs stay the same at all activity levels. $$$0100 Cambridge Business Publishers, 2015 200 300 400 Activity 500 16 Average Costs $35 -Number Numberof of Average AverageCost Cost Customers Customers Per Percustomer customer 100 $35.00 100 $35.00 300 $15.00 300 $15.00 500 $11.00 500 $11.00 Average costs $30 -$25 -$20 -$15 -$10 -$5 -$0 0 100 200 300 400 500 Number of Customers Served Average cost graph is useful if a manager wants to know the cost of serving a customer. Cambridge Business Publishers, 2015 17 Classifying Fixed Costs Classification depends on the immediate impact if the company attempts to change the fixed costs. Committed fixed costs, known also as capacity costs, are required to maintain the current service or production capacity or to fill previous legal commitments. Cambridge Business Publishers, 2015 Discretionary fixed costs , known also as managed fixed costs, are set at a fixed amount each period by management. 18 Learning Objective 2 Determine a linear cost estimating equation. Cambridge Business Publishers, 2015 19 Cost Estimation What is it? The determination of the relationship between activity and cost An important part of cost management Identifying variable or fixed costs Analyzing available accounting records Interviews Purpose of cost estimation Cost prediction i.e., forecasting future costs Cambridge Business Publishers, 2015 Cost Forecasting 20 Estimating Mixed Cost Components Variable Costs Mixed Costs Fixed Costs Cambridge Business Publishers, 2015 Methods of estimating fixed and variable cost components High-low method Scatter diagrams Least-squares regression analysis 21 High-Low Cost Estimation Utilizes data from two time periods A high activity period, and a low activity period Step 1: Select a representative high point and a representative low activity point. Step 2: Determine variable costs per unit: Difference in total costs Variable Costs = Difference in activity Per Unit Step 3: Subtract total variable costs from total fixed costs using either the high or low point: Total Fixed Costs = Total costs - [Variable cost per unit number of units] Cambridge Business Publishers, 2015 22 High-Low Example: Variable Costs Low activity period High activity period Variable cost per unit (b) = Number of Shipments Packaging Costs January 8,600 $25,000 February 9,800 26,000 March 11,600 31,600 April 11,200 33,000 $31,600 - $25,000 = $2.20 11,600 - 8,600 The variable cost of each unit produced is $2.20. Cambridge Business Publishers, 2015 23 High-Low Example: Fixed Costs Calculate fixed costs: Variable cost per unit (b) = $2.20 per unit a = Total costs - Variable costs January $25,000 = a + ($2.20 x 8,600 units) a = $6,080 March $31,600 = a + ($2.20 x 11,600 units) a = $6,080 The same total fixed costs result using either the high or low activity point. Cambridge Business Publishers, 2015 24 High-Low Cost Estimation Total Cost Equation: Y = $2.20X + $6,080 Cambridge Business Publishers, 2015 25 Scatter Diagrams A graph of past activity and cost data, with individual observations represented by dots. When used alone to estimate costs, professional judgment is required. Cambridge Business Publishers, 2015 26 Least-Squares Regression Also known as simple regression (one variable) A mathematical technique to fit a cost-estimating equation to observed data Minimizes the vertical squared difference between the estimated and actual costs at each data point Accomplished using Microsoft Excel Statistical software Some calculators Time consuming math calculations Cambridge Business Publishers, 2015 27 Least-Squares Criterion The least-squares method minimizes the sum of all squared vertical deviations between individual observations and the cost-estimating line. Cambridge Business Publishers, 2015 28 Least-Squares Advantage Superior to the high-low and scatter diagram methods Because it uses all data points, and Does not rely on subjective judgment Statistical measures are available to determine how well the equation fits the line Coefficient of determination Measures the percent of variation in the dependent variable that the independent variable explains Also called R-squared (R2) Cambridge Business Publishers, 2015 29 Simple and Multiple Regression Simple Regression Equation (one variable) Multiple Regression Equation (two variables) Y = a + bX Y = a + b1X1 + b2X2 Multiple regression Often contains more than two variables Can be used to determine the effect of individual product features on the market value of a product Cambridge Business Publishers, 2015 30 Cautions in Developing Cost Estimate Equations Managers are responsible for making decisions Mathematical models do not make decisions; they are tools to aid decision making Not all data are based on normal operating conditions Nonlinear relationships may exist Results should make sense Cambridge Business Publishers, 2015 31 Learning Objective 3 Identify and discuss problems encountered in cost estimation. Cambridge Business Publishers, 2015 32 Cost Estimation Problems: Technology & Price Changes in Technology Data used in developing cost estimates must be based on the same technology. Changes in Prices Data used must reflect the same price level, or be restated to a single price level. Cambridge Business Publishers, 2015 33 Cost Estimation Problems: Matching Activity & Costs Time Lags Actual costs are not known until a future time period. Examples: Cell phone bills arrive at the end of the month, but usage occurs throughout the month. Vehicle mileage is used consistently but maintenance costs occur every few months. Shorter time periods have higher probabilities of error in matching costs and activities. Cambridge Business Publishers, 2015 34 Cost Estimation Problems: Identifying Activity Cost Drivers Which cost driver should be used? Cost driver should have a logical, casual relationship with costs Scatter diagrams and statistical measures are helpful Selection of a driver requires judgment and professional experience Cambridge Business Publishers, 2015 35 Learning Objective 4 Describe and develop alternative classifications for activity cost drivers. Cambridge Business Publishers, 2015 36 Unit-Level Cost Behavior Assumes changes in costs are best explained by changes in the number of units of product (or service provided) Inaccurate for analyzing cost behavior when a company changes...... From labor-based to automated manufacturing From a limited number related products to multiple products, with variations in volume and complexity From a set of similar customers to a diverse set of customers Cambridge Business Publishers, 2015 37 Manufacturing Costs Direct Materials Cost of primary raw materials converted to finished goods Manufacturing Overhead All manufacturing costs other than direct materials and direct labor Cambridge Business Publishers, 2015 Direct Labor Wages earned by production employees for the time they spend converting raw materials into finished products \"Direct\" costs: easily or directly traceable to a finished product or service 38 Changing Composition of Total Manufacturing Costs Cambridge Business Publishers, 2015 39 Changing Composition of Total Manufacturing Costs The problem Past tendency was to ignore overhead and focus on direct materials and labor Units produced is no longer adequate in explaining manufacturing costs Dealing with overhead causing activities Include non-unit activity drivers Hierarchy scheme frameworks Manufacturing cost hierarchy, or Customer cost hierarchy Cambridge Business Publishers, 2015 40 Manufacturing Cost Hierarchy Unit level activities Batch level activities Product level activities A separate cost driver is selected for each level of cost. Facility level activities Cambridge Business Publishers, 2015 41 Unit Level Activity Examples: Cost of raw materials Cost of cutting a component Cost of a box to package cereal Sales commission Cost of paint brushes used by a painting company to paint an office building Cambridge Business Publishers, 2015 This activity is performed for each UNIT of product produced or sold. 42 Batch Level Activity Examples: Cost of processing sales orders Cost of tracking work orders Cost of equipment setup Cost of moving a batch between workstations Cost of inspecting batches Cambridge Business Publishers, 2015 This activity is performed for each BATCH of product produced or sold. 43 Product Level Activity Examples: Cost of product development Cost of specialized equipment Cost of maintaining specialized equipment Cambridge Business Publishers, 2015 This activity is performed to support the production of each different type of product. 44 Facility Level Activity Examples: Cost of maintaining factory building and grounds Cost of real property taxes Cost of non-specialized equipment Cost of general advertising Cost of factory supervisor Cambridge Business Publishers, 2015 This activity is performed to maintain general manufacturing capabilities. 45 Customer Cost Hierarchies for Merchandising and Sales Divisions Often used by Merchandising organizations Sales divisions of manufacturers Customer classification scheme Unit-level activities Order-level activities Customer-level activities Facility-level activities Answers questions about the cost of individual orders or costs of individual customers. Cambridge Business Publishers, 2015 46 Customer Cost Hierarchy for Distinct Market Segments Often used by companies that sells to distinct market segments such as Not-for-profit For-profit Government Customer classification scheme Unit-level activities Market-segment-level Order-level activities activities Customer-level activities Facility-level activities Answers questions about the profitability of a segment. Cambridge Business Publishers, 2015 47 Customer Cost Hierarchy for Unique Projects Often used by Builders Special contracts with the government Customer classification scheme Project-level activities Market-segment-level activities Facility-level activities Answers questions about the cost of individual projects. Cambridge Business Publishers, 2015 48 The End