Demonstration Problem
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![Page 1: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/1.jpg)
Demonstration Problem
Chapter 12 – Exercise 10
Estimating Costs Based on
Behavior Patterns
AccountingWhat the Numbers Mean 10e
![Page 2: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/2.jpg)
Problem Definition
• The following table shows the amount of cost incurred in August for the cost items indicated. During August, 8,000 units of the firm’s single product were manufactured.
Raw materials $41,600Factory depreciation expense 40,500Direct labor 99,200Production supervisor’s salary 6,100Computer rental expense 4,200Maintenance supplies used 800
![Page 3: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/3.jpg)
Problem Requirements
a. How much cost would you expect to be incurred for each of the above items during September when 9,600 units of product are planned for production?
b. Calculate the average total cost per unit for the 8,000 units manufactured in August. Explain why this figure would not be useful to a manager interested in predicting the cost of producing 9,600 units in September.
![Page 4: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/4.jpg)
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
![Page 5: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/5.jpg)
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
Is the cost item a variable cost or a fixed cost?
![Page 6: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/6.jpg)
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expenseDirect laborProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
Variable costs change
as activity changes.
![Page 7: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/7.jpg)
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect laborProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
Fixed costs remain
constant as activity changes.
![Page 8: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/8.jpg)
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect labor VariableProduction supervisor’s salaryComputer rental expenseMaintenance supplies used
Cost Behavior
![Page 9: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/9.jpg)
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect labor VariableProduction supervisor’s salary FixedComputer rental expenseMaintenance supplies used
Cost Behavior
![Page 10: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/10.jpg)
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect labor VariableProduction supervisor’s salary FixedComputer rental expense FixedMaintenance supplies used
Cost Behavior
![Page 11: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/11.jpg)
Problem Solution
• Step 1 – Determine the cost behavior pattern for each cost item:
Raw materials VariableFactory depreciation expense FixedDirect labor VariableProduction supervisor’s salary FixedComputer rental expense FixedMaintenance supplies used Variable
Cost Behavior
![Page 12: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/12.jpg)
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
Cost @ 8,000 units
$ 41,60040,50099,200
6,1004,200
800$192,400
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
![Page 13: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/13.jpg)
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
Cost @ 8,000 units
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
Variable rate calculation:
$41,600 / 8,000 units = $ 5.20/unit
![Page 14: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/14.jpg)
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
Fixed Amount
Variable Rate/Unit
$40,500
VariableFixed
VariableFixedFixed
Variable
Fixed costs items will remain constant regardless of the level of activity (within the relevant range).
Cost @ 8,000 units
![Page 15: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/15.jpg)
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
Fixed Amount
Variable Rate/Unit
$40,500
VariableFixed
VariableFixedFixed
Variable
Variable rate calculation:
$99,200 / 8,000 units = $12.40/unit
Cost @ 8,000 units
![Page 16: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/16.jpg)
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
Fixed Amount
Variable Rate/Unit
$40,500
6,100
VariableFixed
VariableFixedFixed
Variable
Cost @ 8,000 units
![Page 17: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/17.jpg)
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
Fixed Amount
Variable Rate/Unit
$40,500
6,1004,200
VariableFixed
VariableFixedFixed
Variable
Cost @ 8,000 units
![Page 18: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/18.jpg)
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
0.10
Fixed Amount
Variable Rate/Unit
$40,500
6,1004,200
VariableFixed
VariableFixedFixed
Variable
Variable rate calculation:
$800 / 8,000 units = $ 0.10/unit
Cost @ 8,000 units
![Page 19: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/19.jpg)
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
$40,500
6,1004,200
$50,800
VariableFixed
VariableFixedFixed
Variable
Cost @ 8,000 units
![Page 20: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/20.jpg)
Problem Solution
• Step 2 - Determine the fixed amount or variable rate for each cost item at 8,000 units of activity:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 41,60040,50099,200
6,1004,200
800$192,400
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
Cost formula = $50,800 fixed cost + $17.70 per unit variable cost
Cost @ 8,000 units
$40,500
6,1004,200
$50,800
![Page 21: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/21.jpg)
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
Cost @ 9,600 units
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
$40,500
6,1004,200
$50,800
VariableFixed
VariableFixedFixed
Variable
![Page 22: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/22.jpg)
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,920
Calculation:
9,600 units * $5.20 per unit
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
![Page 23: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/23.jpg)
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
Fixed costs do not change at 9,600 units.
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
![Page 24: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/24.jpg)
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,040
Calculation:
9,600 units * $12.40 per unit
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
![Page 25: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/25.jpg)
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,0406,100
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
![Page 26: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/26.jpg)
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,0406,1004,200
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
![Page 27: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/27.jpg)
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,0406,1004,200
960
Calculation:
9,600 units * $0.10 per unit
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
![Page 28: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/28.jpg)
Problem Solution
• Step 3 – Calculate the cost expected to be incurred in September when 9,600 units are manufactured using the cost formula determined in Step 2:
Raw materialsFactory depreciation expenseDirect laborProduction supervisor’s
salary Computer rental expenseMaintenance supplies used Total Cost
Cost Behavior
$ 5.20
12.40
0.10$17.70
Fixed Amount
Variable Rate/Unit
VariableFixed
VariableFixedFixed
Variable
$ 49,92040,500
119,0406,1004,200
960$220,720
$40,500
6,1004,200
$50,800
Cost @ 9,600 units
![Page 29: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/29.jpg)
Problem Requirements
a. How much cost would you expect to be incurred for each of the above items during September when 9,600 units of product are planned for production?
b. Calculate the average total cost per unit for the 8,000 units manufactured in August. Explain why this figure would not be useful to a manager interested in predicting the cost of producing 9,600 units in September.
![Page 30: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/30.jpg)
Problem Solution
• Average total cost for August:
• It would not be meaningful to use this average total cost figure to predict costs in the subsequent months; that would involve unitizing the fixed expenses – and fixed costs do not behave on a per unit basis.
$192,400 / 8,000 = $24.05 per unit
![Page 31: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/31.jpg)
Problem Solution
• Average total cost calculations are only valid for the number of units used in the calculation. Average total cost for any other number of units produced would be different because the fixed expenses per unit would decrease for each additional unit produced.
• Using the average total cost of $24.05 to estimate the cost of producing 9,600 units would give an estimate of $230,880, which is significantly higher than the $220,720 calculated in part a using the cost formula:
Total Cost = $50,800 fixed cost + $17.70 per unit variable cost
![Page 32: Demonstration Problem](https://reader035.fdocuments.us/reader035/viewer/2022062517/56812d55550346895d925d1d/html5/thumbnails/32.jpg)
AccountingWhat the Numbers Mean 10e
David H. MarshallWayne W. McManus
Daniel F. Viele
You should now have a better understandingof using cost behavior information.
Remember that there is a demonstration problem for each chapter that is here for your learning benefit.