Chapter 3

TRUE or FALSE? The slope of a mixed cost line is equal to the total fixed component of the mixed cost.

False

In describing the cost function, Y = a + bX, which of the following is correct: A)"Y" is the independent variable or cost driver B)"a" is the variable cost per unit or slope C)"b" is the total fixed cost or intercept D)"X" is the independent variable or cost driver E)None of the above

Answer: D) "X" is the independent variable or cost driver

Which of the following statements is FALSE about the method of least squares (regression)? A) Regression is a way to find the best-fitting line through a set of data points B) Regression always produces the same cost function when used on the same data C) Regression is a statistical way of separating a mixed cost into its fixed and variable components D) Regression provides an estimate of the cost function but does not provide information about its accuracy E) All of the above statements are true

Answer: D) Regression provides an estimate of the cost function but does not provide information about its accuracy

Fixed cost per unit is $10 when 12,000 units are produced and $3 when 40,000 are produced. What is the total fixed cost when nothing is produced? (Assume the relevant range of production is 0-50,000 units.)

Fixed costs are FIXED in total with respect to output. This means fixed costs (in total) do not change when output changes. In this case, we're told FC per unit is $10 when 12,000 units are produced and $3 per unit when 40,000 units are produced, which means total fixed cost is $120,000 ($10 per unit x 12,000 units or $3 per unit x 40,000 units). If total FC are $120,000 when we produce 12,000 and 40,000 units, then (unfortunately) they will still be $120,000 if we don't produce any units. This is because we must pay for things like rent and machines (fixed costs) regardless of how much or little we produce.

FILL IN THE BLANK: Fixed cost per unit __________ within the relevant range when output decreases.

Increases

Glascro Company manufactures skis. Management wants to calculate the fixed and variable costs associated with leasing machines. Data for the past four months are as follows: April Lease Cost: $16,500 Machine Hours: 950 May Lease Cost: $10,000 Machine Hours: 600 June Lease Cost: $12,500 Machine Hours: 770 July Lease Cost: $16,000 Machine Hours: 1,000 What is the estimated cost function for the period assuming the firm uses the high-low method to estimate costs?

Solve for slope (b): b = ($16,000 - $10,000)/(1,000 - 600) = $15 Solve for intercept (a): $16,000 = a + ($15 x 1,000) --> a = $1,000 Cost function: y = $1,000 + $15X

The management accountant at EJM Skis wants to calculate the fixed and variable costs of leasing machinery the company uses to manufacture skis. Data for the past four months are: April Lease cost: $22,300 Machine hours: 550 May Lease cost: $16,500 Machine hours: 420 June Lease cost: $19,000 Machine hours: 510 July Lease cost: $22,230 Machine hours: 570 Using the high-low method, estimate the total cost of leasing machinery in a month when EJM uses 500 machines hours?

Solve for slope (b): b = ($22,230 - $16,500)/(570 - 420) = $38.20 per mhr Solve for intercept (a): $22,230 = a + ($38.20 x 570) --> a = $456 Cost function y = $456 + $38.20(500) y= $19,556

Total cost per unit

Total FC/units produced Total FC (the numerator of the FC per unit equation) doesn't change when promotion volume changes. This means FC per unit will change when we produce more or less units because the denominator of FC per unit equation changes. If we're spreading the Total FC out over more units, then FC per unit would decrease. In this case; however, we're told production volume is decreasing. This means we're spreading Total FC out over fewer units, so FC per unit will increase.

Zinc Company estimates the following cost function for its monthly utility cost: Total Utility cost = $1,000 + $5X If the cost driver for utility cost is labor hours and 500 labor hours are budgeted for the month of April, then what is the total expected utility cost for April?

Total Utility Cost = $1,000 + $5X = $1,000 + $5(500 labor hours) = $1,000 + $2,500 = $3,500

Regression was used to develop a cost function that uses machine hours to predict the cost of monthly equipment maintenance. The following regression output is available: Intercept: 64,895 X-Variable: 69.52 What is the dependent variable in the regression cost function?

Total equipment maintenance cost

If production volume decreases from 15,000 units to 12,000 units, then which of the following is true? (assume the relevant range is 10,000--16,000 units.)

Total variable costs will decrease by 20%

Mixed costs can be estimated using the linear equation

Y = a + bX Y = total mixed cost (or dependent variable) a = total fixed cost (or intercept) b = variable cost per unit (or slope) X = level of the cost driver (or independent variable) Therefore, the slope of the mixed cost line is variable cost per unit.