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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
Fixed
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

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

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

a. High-low estimate

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

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

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

=
=

\$247,420

\$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:

=
=
=

## \$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 ......................................

=
=
=

=
=
=
=

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

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

=
=

\$3,069,542

\$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

=
=

\$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
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