finance- Linear Cost Functions

QUESTION

5-36 Linear Cost Functions
LetY=total costs, X1=production
volume, and X2
=number of
setups. Which of~efollowingare linear cost
functions? Which are mixed cost functions? ··
a.Y=$8X1
b.y=$1,500
c. Y=$8,500+$ I.50X1
d.Y=$3,000+$6X1+$30X2
e.Y=$9,000+$3(X1X X2)
f.Y=$5,000
+
$4.00X1
Answer: E

5-41 Government Service Cost
Analysis
Auditors for the Internal Revenue
Service (IRS) scrutinize income tax returns after they have been
prescreened
with the help of computer tests for normal ranges of deductions claimed by
taxpayers. The IRS uses an expected cost of $5 per tax return, based on
measurement studies that allow 15 minutes per return. Each agent has a workweek
of 5 days of 8 hours per day. Eighteen auditors are employed at a salary of
$790 each per week.
The audit supervisor has the
following data regarding performance for the most recent 4-week period, when
8,300 returns were processed:

===================================================================================
Actual Cost Expected Cost for Difference or
Of Auditors Processing Returns Variance
===================================================================================
$56,880 $41,500 $15,380 U
====================================================================================
1.
Compute the expected cost and the variance.

2.
The supervisor believes that audit work
should be conducted more productively and that superfluous personnel should be
transferred to field audits. If the foregoing data are representative, how many
auditors should be transferred?

5 auditors should be transferred. $15380¸ ($790x
4) = 5.056
Or
Total
of 8,300 returns, means: 2075/week, 415/day, 51.875/hour, and the agent
complete 4/hour, 13 agents will complete 52 returns.

3.
List some possible reasons for the variance.

The variance
may be due to inefficiency of the auditors, improperly trained or inexperienced
auditors, inaccuracy of the cost measures, a batch of unusually complex
returns, or a combination of all these factors.

4.
Describe some alternative cost drivers
for processing income tax returns.
Alternative cost drivers might include number of
individual forms included in filed returns, number of pages of returns
processed, and amount of taxes shown on returns filed.

5-46 High-Low, Regression
Analysis
On November 15,
2009, Sandra Cook, a newly hired cost analyst at Peterson Company, was asked to
predict overhead costs for the company’s operations in 2010, when 530 units are
expected to be produced. She collected the following quarterly data:

===================================================================================================
Quarter Production in Units Overhead
Costs
===================================================================================================
1/06 73 $ 715
2/06 76 709
3/06 68 640
4/06 133 1,124
1/07 122 995
2/07 125 1,105
3/07 122 1,113
4/07 130 1,036
1/08 121 982
2/08 126 1,060
3/08 112 990
4/08 81 951
1/09 81 829
2/09 119 1,044
3/09 87 985
1.
Using the high-low method to estimate costs, prepare a
prediction of overhead costs for 2010.

Overhead Costs Production
in Units
High Level $1,124 133
Low Level 640 68
Difference $484
65

Variable cost = Change in cost ÷ Change in activity
= $484 ÷ 65 = $7.45 per unit

Fixed Cost = total cost – variable cost
=
$1,124 – ($7.45×133) = $133.15 per batch

2.
Sandy ran a regression analysis using the data she
collected. The result was
Y=$347+$5.76X
Using this cost
function, predict overhead costs for 2010.
$347 + (5.76 x
133) = $1,113.08

3.
Which prediction do you prefer? Why?
I prefer the
regression analysis because it gives more accurate data. But the high-low
method is easy and simple.

5-48 Regression Analysis
Study Appendix 3. Mr. Liao, CEO
of a manufacturer of fine china and stoneware, is troubled by fluctuations in
productivity and wants to compute how manufacturing support costs are related
to the various sizes of batches of output. The following data show the results
of a random sample of
10 batches of one pattern of stoneware:
==============================================================================================
Sample
Batch Size, X
Support Costs,Y
==============================================================================================
1 15 $180
2 12 140
3 20 230
4 17 190
5 12 160
6 25 300
7 22 270
8 9 110
9 18 240
10 30
320
==========================================================================
1. Plot supportcosts, Y,versus batch
size,X.

2. Using regression analysis,
measure the cost function of support costs and batch size.

Constant 24.42553
R
Squared 0.955692
X
Coefficient 10.53191

3. Predict the support costs for
a batch size of 25.
Support costs =
fixed cost + variable cost
=
$24.43 + $10.53 × 25
=
$287.68

4. Using the high-low method,
repeat requirements 2 and 3. Should the manager use the high-low or regression
method? Explain.

Support cost Batch size
High
Level $320 30
Low
Level 110 9
Difference $210 21

Variable
cost = Change in cost ÷ Change
in activity
=
$210 ÷ 21 = $10 per unit in batch

Fixed
Cost = total cost – variable
cost
=
$320 – $10×30 = $20 per batch

Support
costs of a batch of size 25 = $20 + $10 × 25 = $270

Although
the cost functions and cost estimates are fairly close, the manager would
probably be better off using the regression result. The regression results
appear to be very reliable and plausible. Since regression uses all the data
and no data appear to be unusual (per the graph), there is little reason not to
use the regression.

6-26 Fill In the Blanks
Enter the word or phrase that
best completes each sentence.
I. The financial budget process
includes the following budgets:
a. Cash budget
b.Capitalbudget
c.Budgeted balance sheet
2. The master budget process
usually begins with the sales budget.
3. A(n) continuous budget is a
plan that is revised monthly or quarterly, dropping one period and adding another.
4. Strategic planning sets the overall goals of the organization.

6-30 Sales Budget
Suppose a lumber yard has the
following data:
• Accounts receivable, May 31:
(.2 X May sales of $360,000)=$72,000
• Monthly forecasted sales: June,
$437,000; July, $441,000; August, $502,000; September, $531,000
Sales consist of 80% cash and 20%
credit. All credit accounts are collected in the month following the sales.
Uncollectible accounts are negligible and may be ignored.
Prepare a sales budget schedule and a cash collections
budget schedulefor
June, July, and August.

Sales budget

June

July

August

September

Credit sales

$87,400

$88,200

$100,400

106,200

Cash sales

349,600

352,800

401,600

424,800

Total sales

$437,000

$441000

$502,000

531,000

Cash collections budget

June

July

August

September

Cash sales this month

$349,600

$352,800

$401,600

424,800

100% of last months credit sales

72,000

$87,400

88,200

100,400

Total collections from customers

$421,600

$440,200

$489,800

525,200

6-36 Cash Budget
Daniel Merrill is the manager of
an airport gift shop, Merrill News and Gifts. From the following data, Mr.
Merrill wants a cash budget showing expected cash receipts and disbursements
for the month of April, and the cash balance expected as of April 30, 20X7.

• Planned cash balance, March 31,
20X7: $100,000
• Customer receivables as of
March 31: $530,000 total, $80,000 from February sales, $450,000 from March
sales
• Accounts payable, March 31:
$460,000
• Merchandise purchases for
April: $450,000, 40% paid in month of purchase, 60% paid in next month
• Payrolls due in April: $90,000
• Other expenses for April,
payable in April: $45,000
• Accrued taxes for April,
payable in June: $7, 500
• Bank note due’ April 10:
$90,000 plus $7, 200 interest
• Depreciation for April: $2, 100
• Two-year insurance policy due
April 14 for renewal: $1,500, to be paid in cash
• Sales for April: $1,000,000,
half collected in month of sale, 40% in next month, and 10%in third month
Prepare the cash budget for the month ending April 30, 20X7.
The cash budget for the month ending April 30, 20X7:

Beginning Balance

$ 100,000

Collection from Sales

$ 500,000

(50% of April Sales of $ 1,000,000)

Collection from Customer Receivables

$ 80,000

(of February to be received in April)

Collection from Customer Receivables

$ 360,000

(of March to be received in April) ($ 450,000/50% * 40%)

Total Receipts

$ 1,040,000

Payment for Merchandise Inventory

$ 180,000

(40% of Merchandise purchases of $ 450,000)

Payment to accounts payable

$ 460,000

(to be paid in April, being 60% of merchandise purchases
of March)

Payrolls due in April

$ 90,000

Other expenses

$ 45,000

Bank note

$ 90,000

interest on bank note

$ 7,200

Insurance policy

$ 1,500

Total Payments

$ 873,700

Ending Cash Balance

$ 166,300

7-A3 Direct-Material and
Direct-Labor Variances
Hill Fine Instruments manufactures
trumpets, trombones, tubas, and other brass instruments. The following
standards were developed for a line of trumpets:

========================================================================================================
Standard Inputs Standard
Price
Expected for Each Unit per Unit
of
Output Achieved of Input
==============================================================================
Direct materials 5pounds $IO per pound
Direct
labor 10
hours $25
per hour
==============================================================================
During April, Hill scheduled 550
trumpets for production. However, the company produced only 525.
Hill purchased and used 3,100
pounds of direct materials at a unit price of $9.00 per pound. It used 5,500
hours of direct labor at an actual rate of $26.00 per hour.

1. Compute the standard cost per
trumpet for direct materials and direct labor.
2. Compute the price variances
and quantity variances for direct materials and direct labor.
3. Based on these sketchy data, what clues for investigation
are provided by the variances?
1. Direct
materials: 5 lb. × $10.00 = $ 50.00
Direct
labor: 10 hrs. × $25.00 = 250.00
Total $300.00
2. The
flexible budget is based on actual output achieved, not scheduled or budgeted
output.

A

B

C

Actual Cost Incurred:
Actual Input Quantities
× Actual Prices

Actual Input Quantities × Standard Prices

Flexible Budget: Standard Input Quantities Allowed
for Outputs Achieved × Standard Prices

Direct
Materials

3,100
lbs × $9.00 = $27,900

3,100
lbs × $10.00 = $31,000

525
units × 5 × $10.00 = $26,250

Price variance
(A – B) =$27,900 – $31,000 =
$3,100 F

Quantity variance
(B – C)$31,000 – $26,250 =
$4,750 U

Flexible-budget variance (A – C)
$27,900 – $26,250 =
$1,650 U

A B C

Direct
Labor

5,500 hrs × $26.00 = $143,000

5,500 hrs × $25.00 = $137,500

525 units × 10 hrs × $25.00 = $131,250

Price variance
(A – B) =
$143,000 – $137,500 =
$5,500 U

Quantity variance
(B – C) =
$137,500 – $131,250 = $6,250 U

Flexible-budget variance (A – C)
$143,000 – $131,250 = $11,750 U

3. Among
the possible explanations for the performance are:
(a) Were
substandard materials used because they were cheaper, resulting in higher waste
than usual?
(b) Net savings
in material costs may be undesirable if they cause inefficient use of direct
labor. It is possible that use of substandard materials led to increased use of
direct labor and the unfavorable direct labor quantity variance.
(c) Direct
labor is expensive. A wage rate that is about 4% above the standard rate
creates a significant dollar amount of direct-labor price variance.

7-21Production
Responsibility for Flexible-Budget Variances
Suppose a plant manager planned
to produce 100 units of product at a total cost of $1,000. Instead, actual
production was 10% higher at 110 units. When costs came in at less than a 10%
increase in costs or $1,100, the plant manager claimed that she should get
credit for a favorable variance equal to the amount by which the actual costs
fell short of $1,100. Comment on this claim.

This
is an unfavorable Variance, the planned cost was $1,000 and the actual is $1,100.
It means the manager is $100 over budget.

7-29 Direct-Material Variances
Nakhon Custom Shirt Company uses
a special fabric in the production of dress shirts. During August, Nakhon
Custom Shirt purchased and used 4,100 square yards in the production of 3,700
shirts at a total cost of B2,812,600. (B stands for the Thai baht. There are
roughly 30 bahts to a U.S. dollar.) The standard allows one yard at B680 per
yard for each shirt. ·
Calculate the material price variance and the
material
quantity variance.

Actual Cost Incurred: Actual Input
Quantities
× Actual Prices

Actual Input Quantities × Standard Prices

Flexible Budget: Standard Input Quantities
Allowed for Outputs Achieved × Standard Prices

4,100 sq. yd

4,100 sq. yd.

3,700 sq. yds. ×

× B686 =

× B680 =

B680 =

B2,812,600

B2,788,000

B2,516,000

4,100 × (B686 –
B680) =

(4,100 – 3,700)
× B680 =

Price variance,
B24,600U

Quantity
variance, B272,000U

7-30 Labor Variances
Ellen Chenoweth, the manager of
the city of St. Paul road maintenance shop, uses standards to judge
performance. Because a clerk mistakenly discarded some labor records, however,
Ellen has only partial data for April. She knows that the total direct-labor
flexible-budget variance was $1,643 favorable.
Moreover, a recent pay raise
produced an unfavorable labor price variance for April of $1,157. The actual
hours of input were 1,780 and the standard labor price was $20 per hour.

1. Find the actual labor rate per
hour.
2. Determine the standard hours allowed for the output
achieved.

Actual Hours Actual Hours Standard
Hours
× Actual Price ×
Standard Price × Standard
Price
1,780 hrs. 1,780
hrs. D hrs.
× Actual Price × $20.00 × $20.00
= $A = $B = $C

1,780 × (Actual price – $20.00)

(1,780 – D) × $20.00

= Price variance, $1,157 U

= Quantity variance, $E

Flexible-budget variance, $1,643
F

1. Given the price
variance of $1,157 U and the actual hours of 1,780, the actual labor rate will
be $1,157 ÷ 1,780 hours = $.65 / hour higher than the standard rate. Therefore,
the actual labor rate per hour y = $20.00 + .65 = $20.65.

2. Items A, B, C, and D
in the framework can now be completed as follows:

A = 1,780 hours × $20.65 per hour =36,757.

B = 1,780 hours × $20.00 per hour = 35,600.

E = Quantity variance = Flexible Budget variance – Price Variance
= 1,643 F – 1,157 U
= 2,800 F

C = 35,600 + quantity variance = 35,600 + 2,800 = 38,400.

D = 38,400 ÷ 20.00 = 1,920 standard hours allowed.

 

ANSWER:

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