Horngren - Managerial Accounting Chapter3 Solution

CHAPTER 3

COVERAGE OF LEARNING OBJECTIVES

LEARNING OBJECTIVE FUNDA-

MENTAL

ASSIGN-MENT

MATERIAL CRITICAL THINKING EXERCISES AND EXERCISES

PROBLEMS CASES, NIKE 10K, EXCEL,

COLLAB., & INTERNET EXERCISES

LO1: Explain step- and mixed-cost behavior. A1,B1 26, 30, 31,

32 43,44,48,55 59, 61, 62

LO2: Explain management influences on cost behavior. 27, 37 43 56, 60

LO3: Measure and mathematically express cost functions and use them to predict costs. 28, 33, 34, 35, 38

39, 40, 41

42 43, 45, 50

52, 54, 55 60, 62

LO4: Describe the importance of activity analysis for measuring cost functions. A2,B2 46,49 57, 59

LO5: Measure cost behavior using the engineering analysis, account analysis, high-low, visual-fit, and least-squares regression methods. A3,B3 29, 33, 34, 38, 39

40, 41, 42 47, 50, 51

52, 53, 55 58, 62

CHAPTER 3

Measurement of Cost Behavior

3-A1 (20-25 min.)

Some of these answers are controversial, and reasonable cases can be built for alternative classifications. Class discussion of these answers should lead to worthwhile disagreements about anticipated cost behavior with regard to alternative cost drivers.

1. (b) Discretionary fixed cost.

2. (e) Step cost.

3. (a) Purely variable cost with respect to revenue.

4. (a) Purely variable cost with respect to miles flown.

5. (d) Mixed cost with respect to miles driven.

6. (c) Committed fixed cost.

7. (b) Discretionary fixed cost.

8. (c) Committed fixed cost.

9. (a) Purely variable cost with respect to cases of Coca-Cola.

10. (b) Discretionary fixed cost.

11. (b) Discretionary fixed cost.

3-A2 (25-30 min.)

1. Support costs based on 60% of the cost of materials:

Sign A Sign B

Direct materials cost $300 $150

Support cost (60% of materials cost) $180 $ 90

Support costs based on $40 per power tool operation:

Sign A Sign B

Power tool operations 2 6

Support cost $80 $240

2. If the activity analysis is reliable, by using the current method, Evergreen Signs is predicting too much cost for signs that use few power tool operations and is predicting too little cost for signs that use many power tool operations. As a result she could be losing jobs that require few power tool operations because her bids are too high -- she could afford to bid less on these jobs. Conversely, she could be getting too many jobs that require many power tool operations, because her bids are too low -- given what her "true" costs will be, she cannot afford these jobs at those prices. Either way, her sign business could be more profitable if she better understood and used activity analysis. Evergreen Signs would be advised to adopt the activity analysis recommendation, but also to closely monitor costs to see if the activity analysis predictions of support costs are accurate.

3-A3 (25-30 min.)

1. High-Low Method:

Support Cost Machine Hours

High month = September $13,500 1,750

Low month = May 9,000 850

Difference $ 4,500 900

Variable cost per machine hour =

= = $5.00

Fixed support cost per month = Total support cost - Variable support cost

At the high point: = $13,500 - $5.00 x 1,750

= $13,500 - $8,750

= $ 4,750

or at the low point: = $ 9,000 - $5.00 x 850

= $ 9,000 - $4,250

= $ 4,750

2. The high-low method uses the high and low activity levels to determine the cost function. Since the new October data for machine hours does not change either the high or low level there would be no change in the analysis.

3. The regression analysis results are somewhat different from the results of the high-low method. As a result, estimates of total support cost may differ considerably depending on the expected machine hour usage. For example, consider the following support cost estimates at three levels of machine hour usage (all within the relevant range):

Machine Hour Usage

950 Hours 1,200 Hours 1,450 Hours

High-Low:

Fixed $4,750 $ 4,750 $ 4,750

Variable: $5.00 x 950 4,750

$5.00 x 1,200 6,000

$5.00 x 1,450 7,250

Total $9,500 $10,750 $12,000

Regression:

Fixed $3,355 $ 3,355 $ 3,355

Variable: $6.10 x 950 5,795

$6.10 x 1,200 7,320