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Chapter 05 - Cost Estimation

Solutions to Exercises
5-23. (15 min.) Methods of Estimating CostsAccount Analysis: Miller Fixtures.
a. Cost estimate with new costs and volume.

Last Years
Cost
Cost Item
Direct
materials
Direct
labor ..........
Variable
overhead ...
Fixed
Overhead ..
Total
costs ..........

(1)

Cost
Change
(1 + Cost
Increase)
(2)

This Years
Cost
(at last
years
volume)
(1) x (2) =
(3)

$210,000

120%

$252,000

175,000

104%

182,000

154,000

100%

154,000

240,000

110%

264,000

$779,000

b. Costs per unit:


Last year:
This year:

$3.71
$4.00

Growth in
Volume

This Years
Cost

(4)
220,000
210,000
220,000
210,000
220,000
210,000

(3) x (4) = (5)

(fixed)

= $264,000
= 190,667
=

161,333

= 264,000
$880,000

(= $779,000 210,000)
(= $880,000 220,000)

5-6

Chapter 05 - Cost Estimation

5-26. (25 min.) Methods of Estimating CostsHigh-Low: Adriana Corporation.


a. High-low estimate

Highest activity (month 12) .................


Lowest activity (month 11)..................

Overhead
Costs
$564,210
$503,775

Cost at highest activity cost at lowest activity


Highest activity lowest activity

Variable cost
=

Fixed
costs

Machine
Hours
8,020
6,490

$564,210 $503,775
8,020 6,490

Total costs variable costs

=
=

$564,210 ($39.50 x 8,020)


$247,420

$503,775 ($39.50 x 6,490)

$247,420

= $39.50

or
Fixed
costs

The cost equation then is:


Overhead costs = $247,420 + ($39.50 per MH x Machine hours)
b. For 7,500 MH:
Overhead costs

=
=
=

$247,420 + ($39.50 x 7,500)


$247,420 + $296,250
$543,670

5-9

Chapter 05 - Cost Estimation

5-49. (40 min.) Methods of Cost AnalysisAccount Analysis, Simple and Multiple
Regression Using Spreadsheets: Caiman Distribution Partners.
a. Estimating equation based on account analysis:
Cost Item
Supplies ................................
Supervision ...........................
Truck expense ......................
Building leases ......................
Utilities ..................................
Warehouse labor...................
Equipment leases .................
Data processing equipment ..
Other .....................................
Total ......................................

Variable cost per case

=
=
=

Estimated overhead

=
=
=
=

Operating Cost
$ 350,000
215,000
1,200,000
855,000
215,000
860,000
760,000
945,000
850,000
$6,250,000

Fixed Cost
$
0
150,000
190,000
550,000
125,000
140,000
600,000
945,000
400,000
$3,100,000

Variable
$ 350,000
65,000
1,010,000
305,000
90,000
720,000
160,000
0
450,000
$3,150,000

Total variable cost/Cases


produced
$3,150,000 450,000 cases
$7.00 per case

Fixed overhead + Variable overhead per case


x Number of cases
$3,100,000 + $7.00 x Number of cases
$3,100,000 + $7.00 450,000
$6,250,000

5-32

Chapter 05 - Cost Estimation

5-49. (continued)
b. Cost estimate using high-low analysis.

Highest activity (month 12) .........................


Lowest activity (month 1)............................

Cost at highest activity cost at lowest activity


Highest activity lowest activity

Variable cost =

$6,362,255 $5,699,139
432,000 345,000

Fixed
costs

Cases
432,000
345,000

Operating
Costs
$6,362,255
$5,699,139

= $7.62202 per case

Total costs variable costs

=
=

$6,362,255 $7.62202 x 432,000


$3,069,542

$5,699,139 $7.62202 x 345,000

$3,069,542

or
Fixed
costs

The cost equation then is:


Overhead costs = $3,069,542 + ($7.622 per case x Cases).
For 450,000 cases:
Operating costs

=
=

$3,069,542 + $7.622 x 450,000


$6,499,442

5-33

Chapter 05 - Cost Estimation

5-49. (continued)
c. Simple regression based on cases:
Regression Statistics
Multiple R
0.98034501
R Square
0.96107634
Standard Error
39850.1391
Observations
12
Coefficients
$3,411,468
$6.70765

Intercept
Cases
Operating costs

=
=
=

$3,411,468 + $6.70765 x cases


$3,411,468 + $6.70765 x 450,000
$3,411,468 + $3,018,443
$6,429,911

d. Multiple regression based on cases and price level.


Regression Statistics
Multiple R
0.9905
R Square
0.9810
Adjusted R Square
0.9768
Standard Error
29315.827
Observations
12
Coefficients
$3,176,995
$4.41892
$8,857.73

Intercept
Cases
Price Index
Operating costs

=
=
=

$3,176,995 + $4.41892 x cases + $8,857.73 x Price level


$3,176,995 + $4.41892 x 450,000 + $8,857.73 x 145
$3,176,995 + $1,988,514 + $1,284,371
$6,449,880

5-34

Chapter 05 - Cost Estimation

5-49. (continued)
e. Recommendation.
The multiple regression appears to improve the fit (compare the adjusted R2s), but
the rationale for the inclusion of the price level as a cost driver is unclear. There is some
possibility that the price index variable is a surrogate for some other factor correlated
with the growth of the business. It might be better to adjust the cost figures to real
(price-level adjusted) and forecast the adjusted operating costs.
Once the simple regression is complete, and it is relatively easy to do, there is no
reason for the high-low estimate, because it ignores most of the information.
Therefore, some combination of the controllers account analysis estimate and the
estimate from the simple regression seems most appropriate.

5-35