Acctg314- Management Accounting Part 1

Exercises on Cost Concepts and Cost Behavior Analysis

1. Carl Kleen operates a car spa. Incoming cars are put on an automatic conveyor belt. Cars are washed as the conveyor
belt carries the car from the start station to the finish station. After the car moves off the conveyor belt, the car is
dried manually. Workers then clean and vacuum the inside of the car. Carl serviced 80, 000 cars in 2013. He reports
the following costs for 2013:
Car wash labor P 200 000
Soap, cloth, and supplies 40 000
Water 24 000
Electric power to move conveyor belt 64 000
Depreciation 70 000
Salaries 50 000
REQUIRED:
1. Classify each cost item as variable or fixed with respect to the number of cars washed.
2. Carl expects to wash 90 000 cars in 2012. Using the cost classification developed in Requirement 1, estimate
KleenCar’s total costs in 2012. Depreciation is computed on a straight- line basis.

2. An analysis of past janitorial costs indicates that the average janitorial costs is P1.50 per machine hour at an activity
level of 40 000 machine hours and P1.20 per machine hour at an activity level of 50 00 machine hours. Assuming that
this activity is within the relevant range, what is the total expected janitorial cost if the activity level is 45 000
machine hours?

3. Marl Boro Rentals operates a boat rental service. Consider the following costs of the company over the relevant
range of 5 000 to 8 000 hours of operating time for its boats:
Hours of Operating Time
5,000 6,000 7,000 8,000
Total Costs:
Variable Costs P 35,000 ? ? ?
Fixed Costs P 420,000 ? ? ?
Total P 45 000 ? ? ?

Cost Per Hour

Variable Costs ? ? ? ?
Fixed Costs ? ? ? ?
Total ? ? ? ?
REQUIRED: Compute the missing amounts, assuming that the cost behavior patterns remain unchanged within the
relevant range of 5 000 to 8 000 hours.

4. The Ram Company has assembled the following data pertaining to certain costs that cannot be easily identified as
either fixed or variable. Ram Company has heard about a method of measuring cost functions called the high low
method and has decided to use it in this situation.
Cost Hours
P 13,200 3,000
13,400 2,050
16,370 2,900
19,800 3,650
17,600 2,670
72,960 12,000
18,500 2,650
REQUIRED:
1. What is the cost function?
2. Using the cost function in Number 1, compute the total cost for 2,500 hours.
5. Below is an examination of the last year’s financial statements of Mickey Company. Labor hours and production costs for
the last four (4) months of the year, which are representative for the year, were as follows:
Month Labor Hours Total Production Costs
September 250 P 2,000
October 350 2,500
November 450 3,000
December 350 2,500
REQUIRED:
1. Using the least squares method, calculate the monthly fixed and variable components of the total production costs.
2. Using the estimates made in Number 1, compute the total cost for 3,000 labor hours.

6. Makina Company’s total overhead costs at various levels of activity are presented below:
Month Machine Hours Total Overhead Costs
April 140 000 P 198 000
May 120 000 174 000
June 160 000 222 000
July 180 000 246 000
Assume that the total overhead cost at various above consists of utilities, supervisory salaries, and maintenance. The
breakdown of these costs at the 120 000 machine-hour level of activity is:
Utilities (V) P 48,000
Supervisory salaries (F) 21,000
Maintenance (M) 105,000
Total overhead costs V=variable; F=fixed; M=mixed P174,000
Makina Company’s management wants to break down the maintenance cost into its basic variable and fixed cost elements.

REQUIRED:
1. As shown above, overhead costs in July amounted to P 246,000. Determine how much of this consisted of
maintenance cost.
2. By means of the high-low method, estimate a cost formula for maintenance.
3. Express the company’s total overhead costs in the linear equation form Y= a + bX.
4. What total overhead cost would you expect to be incurred at an operating activity level of 150,000 machine hours?

7. The Edelweiss Hotel in Colorado has accumulated records of the total electrical costs of the hotel and the number of
occupancy- days over the last year. An occupancy-day represents a room rented out for one day. The hotel’s business is highly
seasonal, with peaks occurring during the ski season and in the summer.
Month Occupancy- Days Electrical Costs
January 2,604 $ 6, 257
February 2,856 6,550
March 3,534 7,986
April 1,440 4,022
May 540 2,289
June 1,116 3,591
July 3,162 7,264
August 3,608 8,111
September 1,260 3,707
October 186 1,712
November 1,080 3,321
December 2,046 5,196
REQUIRED:
A. Using high-low method, estimate the fixed cost per month and variable cost per occupancy day.
B. Using the methods of least square, estimate the fixed cost per month and variable cost per occupancy day.
C. Using your answers in (A) and (B), estimate the electrical cost for next month if Edelweiss expects occupancy days of
2,750.
8. Use the same data as in the previous item for Edelweiss Hotel, except that the hotel does not have peak and lean season,
thus, operations are normal throughout the year. How would your answers from (A) – (C) change under this new assumption?