Question Cost Behavior/Estimation, High-Low Method, Working Backward

31 May Question Cost Behavior/Estimation, High-Low Method, Working Backward

Question

Cost Behavior/Estimation, High-Low Method, Working Backward

<pclass=”msonormal” style=”box-sizing: border-box;”>long ANSWER TYPE QUESTIONS

1. Consider the graphs that follow (the horizontal axis represents activity; the vertical axis represents total dollars).

Required:

For items A-I that follow, choose the graph that best represents the cost behavior pattern described. Note: Graphs can be used more than once.

1. Straight-line depreciation on machinery.
2. The cost of chartering a private airplane. The cost is $800 per hour for the first 6 hours of a flight; it then drops to $600 per hour.
3. The wages of table service personnel in a restaurant. The employees are part-time workers who can be called upon for as little as 4 hours at a time.
4. Weekly wages of store clerks who work 40 hours each week. One clerk is hired for every 125 sales made during the month.
5. The cost of tires used in the production of trucks.
6. Outbound shipping charges that increase at a decreasing rate as sales rise because the firm can use more efficient modes of transportation (e.g., full trailer loads, full rail cars, etc.). Gradually, however, at high levels of sales, freight costs start to increase at an increasing rate, which reflects more transactions made to customers in far-away locations.
7. Equipment leasing costs that are computed at $2 per machine hour worked. The company pays a maximum of $120,000 per month.

1. The monthly cost of a franchise fee for a fast-food restaurant. The franchisee must pay $20,000 plus 5% of gross dollar sales.
2. The cost of electricity during peak demand periods, which is based on the following schedule:

Up to 20,000 kilowatt hours (KWH): $4,000

Above 20,000 kilowatt hours: $4,000 + $0.02 per KWH

2. Resource Consulting is studying the costs of several clients, and has found that the accompanying graphs appear as follows:
3. A straight line that gradually slopes upward to the right
4. A curvilinear line that gradually slopes upward to the right
5. A straight line that is parallel to the graph’s horizontal axis
6. A straight line that gradually slopes downward to the right
7. A curvilinear line that gradually slopes downward to the right
8. A straight line that gradually slopes upward to the right and then, at a specific point, flattens out to run parallel to the horizontal axis
9. A series of straight lines that appear to resemble a set of steps
10. A straight line that runs parallel to the graph’s horizontal axis and then, at a specific point, drops to a lower level

Unless told otherwise, assume that the horizontal axis represents total activity and the vertical axis represents total cost.

Required:

For items A-F, indicate the number of the graph that best represents the cost behavior pattern described. Note: Graphs can be used more than once, and not all graphs need be used.

1. The salary cost of lab technicians employed at a clinic. One technician is needed for every 1,500 patients serviced.
2. The cost of glass used by a manufacturer of automobile windshields.
3. A profit-sharing bonus that is paid to the associate director of a firm that conducts professional-development courses for executives. The bonus is based on revenues from courses that are being run, subject to a maximum amount each year.
4. Flood insurance premiums that are paid by Reliable Manufacturing, which operates a production facility close to a river.

1. The paper cost that is used in the production of a textbook. Note: Assume that for this part only, the graph’s vertical axis represents the cost per unit rather than total cost.
2. Tariffs that are paid on products shipped overseas. For one particular country, if fewer than 15,000 units are shipped, the client must pay $4 per unit. The tariff is raised by $1 according to the following schedule:

15,000 to 29,999 units $5 per unit

30,000 to 44,999 units $6 per unit

45,000 to 59,999 units $7 per unit

3. Consider the six costs that follow.
4. Advertising and promotion costs of a do-it-yourself retailer
5. Surgical supplies used in a hospital’s operating room
6. Aircraft depreciation charges of an airline
7. Utility charges that include a minimum-use fee, for a small business
8. Annual business licensing fee paid by a daycare center
9. Truck fuel consumed by a road construction company

Required:

1. Classify each of these costs as variable, committed fixed, discretionary fixed, or semivariable.
2. Briefly describe the behavior of a per-unit variable cost as activity changes.
3. What elements are present in a semivariable cost that cause it to behave in a semivariable manner?
4. Generally speaking, does management have more flexibility when dealing with committed fixed costs or discretionary fixed costs?
5. Sunshine Valley Meat Company produces one of the best sausage products in Pennsylvania. The company’s controller compiled the following information by analyzing the accounting records:
6. Meat costs the company $3.25 per pound of sausage produced.
7. Compensation of production employees is $2.25 per pound of sausage produced.
8. Supervisory salaries total $23,000 per month.
9. The company incurs utility costs of $9,000 per month plus $0.35 per pound of sausage produced.
10. Insurance and property taxes average $6,400 per month.

Required:

1. Classify each cost as variable, fixed, or semivariable.
2. Write a formula to express the behavior of the firm’s production costs. (Use the form Y = a + bX, where X denotes the quantity of sausage produced.)
3. Viscount Corporation has a machining capacity of 200,000 hours per year. Utilization of capacity is normally 75%; it has been as low as 40% and as high as 90%. An analysis of the accounting records revealed the following selected costs:

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