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and therefore causing more cost. Most of us classifyelectricity cost as a mixed cost that is not presented untillater in the chapter. /ou may want to take this opportunity toreason with students about whether electricity cost wouldtotally disappear if no burgers were cooked #as a preview of

mixed cost analysis$.

4-3. 0dditional costs that relate to the mountain climbing clubparty could include" decorations party favors a pi1ata cupsand paper goods for the party food a variety of beveragesinvitations postage on the invitations cleanup after theparty chaperones directional signs to show guestsdirections to the party and other similar costs. )f these

additional costs those classified as fixed would bedecorations a pi1ata cleanup after the party and directionalsigns. The costs classified as variable would include partyfavors cups and paper goods beverages chaperonesinvitations and postage on the invitations. /ou may find yourstudents categori2e the cost of %chaperones& as either fixedor variable costs. 3ith any relevant range only a certainnumber of chaperones may be needed. (ut if the number of

additional guests increases and the activity #number ofguests$ increases beyond the relevant range appropriate forthe selected number of chaperones more would be needed.!ince the concept of relevant range has not been covered atthis point in the chapter only those students that have readahead may bring up the concept.

4-4. 4ixed costs plus variable costs equals total costs. !ince thedollar amount of fixed cost is known at 5676 and the

variable cost per guest is known at 576 an equation can beset up to determine the number of guests that could attendthe party.

Total Costs = i!e" Costs # $aria%le Costs 56688 9 5676 : #76$ ;

; 9

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(ased on a budget of 56688 a total of

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with a company. The sales manager may also be concernedabout whether the selling prices of the products the companysells to customers are enough to recover the costs of theproduct selling and administrative expenses and then leavea contribution to profit for the period.

4-*. !ince this is a question about what your students would dopersonally there is obviously no right or wrong answer. Theimportant part is how they reason their responses. f theyfeel they have a solid understanding of the costs and costbehaviors involved in operating the fleet of delivery vehiclesthey would likely not enlist the aid of any outside experts tohelp separate the costs. f on the other hand they were

unsure of the costs and behaviors they would seek outsideassistance. The engineering approach relies on engineers orother professionals who are familiar with the technicalaspects of an activity and the associated cost to analy2e thesituation and determine which costs are fixed and which arevariable. 0n automotive expert can identify which costsassociated with the vehicles will likely increase as a result ofusage or remain constant. The expert&s industry experience

and evaluations are helpful in separating the fixed and thevariable components of a mixed cost. Most accountantswould not likely be familiar with the technical aspects ofvehicles so consulting an automotive expert would beadvantageous in learning how costs behave for vehicles.

4-1+. !ome variable costs associated with the cost of operatingthe fleet of delivery trucks would be" gasoline oiltransmission and brake fluids timing and fan belts the

battery tires windshield wipers and certain othermaintenance-type items. !ome fixed costs associated withthe cost of operating a fleet of delivery trucks would include"the cost of the body of the car its paint ?ob interior lightingfixtures components such as doors and windows the seatsthe headliner and other items of this nature.

M,-, +hapter M, -- +ost (ehavior

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4-11. n order to calculate the expected cost of operating the fleetfor the year you must recall that total costs equal fixed costsplus variable costs. @lugging in the information provided inthe example we get"

Total costs 9 4ixed costs : Aariable costs; 9 B #>888$ : #.8$ #B$ #76888$; 9 57,888 : 578888

The expected cost of operating the fleet is 5,,888. The costper vehicle is 56688 #5,,888CB vehicles$.

4-12. The maintenance cost of operating the delivery truck that isexpected to be driven 76888 miles can be calculated usingthe formula for mixed cost"

Total Mi!e" Costs=i!e" Cost Ele,et # $aria%le Cost Ele,et

(ased on the example provided in the text the fixed costelement of the maintenance cost is the point where the /-axis is intercepted which is 588. The number of milesdriven at this point is 2ero. The variable cost per mile isalready calculated at ,. cents per mile.

Each vehicle has a fixed cost element of 588. Thevariable cost of each vehicle is determined by multiplying thecost per mile of ,. cents times the 76888 expected milesper year giving a total of 568.

NOTE TO INSTUCTO: !hould your students selectalternate points on the scatter graph the cost per mile drivenwill likely be different. This is an opportunity to point out thatthe relationship between the variables is not linear. f thepattern is identified as random the information provided inthe scatter graph will not be useful for managers to makedecisions.

+hapter M, +ost (ehavior M,-6

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4-13. To determine the cost of operating a fleet of eight deliverytrucks multiply the total vehicle maintenance cost by B. Thetotal maintenance cost on the fleet of eight trucks is B times57B68 or a total of 587B88. The calculations for the totalmaintenance cost for one vehicle appears in Dis/0ssio

Q0estio 4-12.

4-14. The maintenance cost for one truck using the high-lowmethod can be calculated using the cost formula"

Total Mi!e" Cost = i!e" Cost Ele,et # $aria%le Cost Ele,et

The high-low method focuses on the mathematicaldifferences between the highest and lowest observations.The example in the text determined that the fixed costelement was 5868 and the variable cost per mile is 6cents. @lugging these numbers into the mixed cost formulawe get"

Total Mi!e" Cost = 1+&+ # +.+& ! 2&+++ = 23++

4-1&. To determine the maintenance cost of a fleet of eight trucksmultiply B times the total maintenance cost of 57>88 per

vehicle for a total of 5B,88.

E$IE5 T6E 7CTS

7. +ost behavior is the reaction of costs to changes in the levelof business activity.

B. 4ixed costs remain constant regardless of the level ofactivity. 0s activity increases the fixed cost per unit willdecrease.

C. Aariable cost changes in total proportionately with changesin the level of activity.

M,-F +hapter M, -- +ost (ehavior

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D. Aariable cost per unit does not change as the level of activityincreases.-

E. The relevant range is the range of activity within which costbehavior assumptions are valid.

. The relevant range concept applies to both fixed andvariable costs.

8. 0 mixed cost is a cost that contains elements of both fixedand variable costs.

6. The four methods of separating a mixed costs into its fixed

and variable components are the"a. engineering approachb. high-low methodc. scatter graphing approach

d. regression analysis approach

I. The scatter graphing method plots all of the historical dataabout activity and costs making it more reliable than the

high-low method which uses information for only two levelsof activity and cost.

9. The ma?or flaw with the high-low method is that the twopoints used in the computation may not be representative ofthe population which will cause the results to be flawed.

. 0nother name for regression analysis is the total costformula.

;. There are computer programs available that willautomatically compute and analy2e the regression formulamaking it very easy to generate an accurate formula.

+hapter M, +ost (ehavior M,-

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7

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4-1*.. +ost of the new office building 7. $ or M (asic telephone service

>. $ +ost of attorney salaries,. +ost of the receptionist&s wages

4-2+.. +ost of store rent. #or M if the store has entered

into a bonus rent situation$7. (asic telephone service>. +ost of salaries for the two salespeople,. or M +ost of advertising6. +ost of store displays

F. M or $ +ost of electricity. $ +ost of merchandise sold

4-21.The accounting department finds it difficult to use the scatter

diagram because this diagram does not present a very linearpattern. 3ithout a clear linear pattern the cost estimates usedmight bear little correlation to the actual cost behavior of the truckmaintenance. The accounting department could derive precise

calculations of the cost behavior for truck maintenance with aregression analysis. (ecause no one knows how to accomplishthis the accountants can use the high-low method whichapproximates the results obtained with regression analysis. Thehigh-low method is a quick easy and low-cost method toapproximate the fixed and variable cost of truck maintenance.

4-22.

Diagram #a$ is preferred because the relationship between the xand y is more linear and therefore easier to predict outcomes atvarious levels of production.


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4-23. !ales !elling Expensea. Iigh 57BF8888 5>F88888 >,888Difference 5 6F8888 5 77,88

Aariable rate 9 577,88 C 56F88889 58.8, of selling expense for each 5 of sales

b. T+ 9 4+ : #KA+ x A$5>,888 9 4+ : #8.8, x 57>88888$ 4+ 9 5>,888 5FF66888

M,-8 +hapter M, -- +ost (ehavior

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4-24. Knits @ackaging +osta. Iigh 6>88 5>>76FDifference B88 5 F7,

Aariable rate 9 5F7, C B88 units9 58.B packaging cost for each unit packaged

b. T+ 9 4+ : #KA+ x A$5>76F 9 4+ : #5.B x ,688$ 4+ 9 5>76F 5>8 4+ 9 5776

orT+ 9 4+ : #KA+ x A$

5>>88$4+ 9 5>>7

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4-2&. nspections nspection +osta. Iigh ,BF88 5B>FF7 : #5.FF7 : 5,,88T+ 9 5B87F7

M,-7 +hapter M, -- +ost (ehavior

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4-2'. Machine Iours Electricity +osta. Iigh 78888 577F88

Jow 88888 BB888Difference 78888 5 >>F88

Aariable rate 9 5>>F88 C 78888 hours9 5.FB of electricity for each machine hour

b. T+ 9 4+ : #KA+ x A$577F88 9 4+ : #5.FB x 78888$ 4+ 9 577F88 578F88

4+ 9 578888

or T+ 9 4+ : #KA+ x A$

5BB888 9 4+ : #5.FB x 88888$ 4+ 9 5BB888 5FB888

4+ 9 578888

c. T+ 9 4+ : #KA+ x A$T+ 9 578888 : #5.FB x 77688$

T+ 9 578888 : 5786B88T+ 9 5776B88

+hapter M, +ost (ehavior M,->

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4-2(. +opies @roduced HH+ostHa. Iigh B88 576.76 C 76768 copies 9 58.876 of service and supply cost for each

copy produced

b. T+ 9 4+ : #KA+ x A$ 5.6

4+ 9 5F,.B7

or T+ 9 4+ : #KA+ x A$

576

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4-2). @arts Iandled H+ostHa. Iigh B6,88 58F6.>

Jow 6,>88 88 5 ,>8.F8

Aariable rate 9 5,>8.F8 C >88 copies9 58.8,F of service and material handling cost

for each part handled

%. T+ 9 4+ : #KA+ x A$ 58F6.> 9 4+ : #5.8,F x B6,88$

4+ 9 58F6.> 5B67B.,84+ 9 57,F.

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4-2*. Knits !hipping +ost Iigh B888 5>6,88

Jow 6888 >8888Difference >888 5 6,88

Aariable rate 9 56,88 C >888 units9 5.B8 of shipping expense for each unit sold

T+ 9 4+ : #KA+ x A$5>6,88 9 4+ : #5.B8 x B888$ 4+ 9 5>6,88 5>7,88

4+ 9 5>888

T+ 9 4+ : #KA+ x A$T+ 9 5>888 : #5.B8 x F688$T+ 9 5>888 : 57788

4-3+. 4light Iours )perating +ostIigh B6 57,B76

Jow 768 6F>68Difference F76 5 6B,>6

Aariable rate 9 56B,>6 C F76 hours9 56 of operating expense per flight hour

T+ 9 4+ : #KA+ x A$57,B76 9 4+ : #56 x B6$

4+ 9 57,B76 56>76

4+ 9 5>

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4-31.

a. Lumber )perating +ostIigh 7>8 577888Jow 68 6768

Difference B8 5 F68

Aariable rate 9 5F68 C B89 5B,.>6 of operating expense per charter

T+ 9 4+ : #KA+ x A$577888 9 4+ : #5B,.>6 x 7>8$ 4+ 9 577888 5

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4-32.a. Lumber )perating +ost

Iigh >888 5,8888Jow 888 B8888Difference 7888 5 F8888

Aariable rate 9 5F8888 C 78889 5>8 of operating expense per purchase order

b. T+ 9 4+ : #KA+ x A$ 5,8888 9 4+ : #5>8 x >888$

4+ 9 5,8888 58 x 888$ T+ 9 5788888 : 578888 T+ 9 5,8888

M,-B +hapter M, -- +ost (ehavior

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4-33. a.

Note to Istr0/tor: Each student&s graph will vary. Jikewiseeach of their calculations of variable cost per purchase order andfixed costs will vary. 3hen you examine a number of thestudents& computations of the total cost you will find that they arereasonably similar.

The variable cost per purchase order is found by comparingtwo coordinates on the graph"

)rders +ost>688 566888

688 88888 7888 5 66888 566888 C 7888 9 57.68


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4.33. #+ontinued$a. The fixed cost for one quarter is 5F8888

%. T+ 9 4+ : #KA+ x A$T+ 9 #5F8888 x ,$ : #57.68 x 888$

T+ 9 57,8888 : 7688

4-34.a. T+ 9 56

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4-3'.a. T+ 9 57

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4-3).a. T+ 9 58, x 7888$T+ 9 5,6 : 57

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4-4+.

Note to Istr0/tor: Each student&s graph will vary. Jikewiseeach of their calculations of variable cost per purchase order andfixed costs will vary. 3hen you examine a number of the students&

computations of the total cost you will find that they arereasonably similar.a. The variable cost per broom produced is found by comparing

two coordinates on the graph"+al2ones +ost,888 577888

F888 ,888 B888 5 B888 5B888 C B888 9 5.88

%. The total fixed cost per the graph is 5B888.

/. T+ 9 4+ : #KA+ x A$T+ 9 5B888 : #5.88 x 7888$T+ 9 5B888 : 57888T+ 9 57888

+hapter M, +ost (ehavior M,-7>

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4-41.a. T+ 9 5B8.,B : #58.

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4-43. a.

Note to Istr0/tor: Each student&s graph will vary. Jikewiseeach of their calculations of variable cost per purchase order andfixed costs will vary. 3hen you examine a number of the students&computations of the total cost you will find that they are

reasonably similar.

The variable cost per purchase order is found by comparingtwo coordinates on the graph"!essions +ost ,8 58888 >8 5F8888 5F8888 C >8 9 57888

%. The total fixed costs from the graph are 58888.

c. T+ 9 4+ : #KA+ x A$T+ 9 58888 : #57888 x 76$T+ 9 58888 : 568888T+ 9 5F8888


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4-43. #+ontinued$Note to Istr0/tor: To ?udge the merits of each method considerthat the regression model for this data computes fixed costs perquarter at 5768 and the variable cost per order at 5

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4-4&. a.

Note to Istr0/tor: Each student&s graph will vary. Jikewiseeach of their calculations of variable cost per purchase order andfixed costs will vary. 3hen you examine a number of thestudents& computations of the total cost you will find that they arereasonable similar.

The variable cost per test is found by comparing twocoordinates on the graph" Tests +ostF8888 5

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4-4&. #+ontinued$

%. 4ixed costs from the graph are 5876888

/. T+ 9 4+ : #KA+ x A$

T+ 9 5876888 : #56.B6 x 76888$T+ 9 5876888 : 57>7>T+ 9 5,B7>

4-4'.

a. T+ 9 587F8.7 : #56.B7 x number of tests performed$

%. 56.B7 per test

/. 4+ 9 587F8.7

". T+ 9 4+ : #KA+ x A$T+ 9 587F8.7 : #56.B7 x 76888$T+ 9 587F8.7 : 57688T+ 9 56>F8.7

4-4(.Cost o@ 8oo"s Sol" +ost !ales

Iigh 5

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4-4(. #+ontinued$Sales Co,,issios +ost !ales

Iigh 5768 568888Jow 6888 888888Difference 5 7768 5 68888

Aariable rate 9 57768 C 5688889 58.86 of sales commission per sales dollar

T+ 9 4+ : #KA+ x A$5768 9 4+ : #5.86 x 68888$

4+ 9 5768 57684+ 9 -8-

Store et +ost !alesIigh 5>888 568888Jow >888 888888Difference -8- 5 68888

Aariable rate 9 58 C 5688889 58.8 of store rent for each dollar of sales

T+ 9 4+ : #KA+ x A$5>888 9 4+ : #58 x 68888$ 4+ 9 5>888

DeAre/iatio +ost !alesIigh 578888 568888Jow 78888 888888

Difference 5 -8- 5 68888

Aariable rate 9 58 C 5688889 58.8 of Depreciation for each dollar of sales

T+ 9 4+ : #KA+ x A$578888 9 4+ : #58 x 68888$

4+ 9 578888 58


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4-4(. #+ontinued$

Maitea/e +ost !alesIigh 5,88 568888Jow >B88 888888

Difference 5 >88 5 68888

Aariable rate 9 5>88 C 5688889 58.887 of maintenance cost per sales dollar

T+ 9 4+ : #KA+ x A$5,88 9 4+ : #5.887 x 68888$ 4+ 9 5,88 57>88

4+ 9 5B88

O@@i/e Salaries +ost !alesIigh 5>6688 568888Jow >,888 888888Difference 5 688 5 68888

Aariable rate 9 5688 C 568888

9 5.8 of office salaries for each dollar of sales

T+ 9 4+ : KA+ x A5>6688 9 4+ : #5.8 x 68888$4+ 9 5>6688 56884+ 9 57,888

4-4).Dire/t Material Knits +ost

Iigh >7F888 56BB8Jow 76888 FFF8Difference F8 +hapter M, -- +ost (ehavior

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4-4). #+ontinued$

T+ 9 4+ : #KA+ x A$56BB8 9 4+ : #57.>B x >7F888$

4+ 9 56BB8 56BB8

4+ 9 -8-

Dire/t ;a%or Knits +ostIigh >7F888 578

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4-4*.Cost o@ 8oo"s Sol" +ost !ales

Iigh 57688 568888Jow 6888 88888Difference 5 >688 5 68888

Aariable rate 9 5>688 C 568888 9 5.6 of +)N! for each dollar of sales

T+ 9 4+ : #KA+ x A$57688 9 4+ : #5.6 x 68888$

4+ 9 57688 576884+ 9 -8-

Sales Co,,issios +ost !alesIigh 5 688 568888Jow 6888 88888Difference 5 7688 5 68888

Aariable rate 9 57688 C 568888 9 58.86 of sales commission per dollar of sales

T+ 9 4+ : #KA+ x A$5688 9 4+ : #5.86 x 68888$

4+ 9 5688 56884+ 9 -8-

Store et +ost !alesIigh 5 888 568888Jow 888 88888

Difference 5 -8- 5 68888

Aariable rate 9 58 C 568888 9 58.8 of !tore Gent for each dollar of sales

M,->7 +hapter M, -- +ost (ehavior

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4-4*. #+ontinued$

T+ 9 4+ : #KA+ x A$5888 9 4+ : #58 x 68888$

4+ 9 5888 58

4+ 9 5888

DeAre/iatio +ost !alesIigh 5 688 568888Jow 688 88888Difference 5 -8- 5 68888

Aariable rate 9 58 C 568888

9 58.8 of depreciation for each dollar of sales

T+ 9 4+ : #KA+ x A$5688 9 4+ : #58 x 68888$

4+ 9 5688 584+ 9 5688

Maitea/e +ost !ales

Iigh 5 768 568888Jow 788 88888Difference 5 68 5 68888

Aariable rate 9 568 C 568888 9 58.88 of maintenance per dollar of sales

T+ 9 4+ : #KA+ x A$5768 9 4+ : #5.88 x 68888$

4+ 9 5768 5684+ 9 588

+hapter M, +ost (ehavior M,->>

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4-4*. #+ontinued$O@@i/e Salaries +ost !ales

Iigh 5F888 568888Jow 6888 88888Difference 5888 5 68888

Aariable rate 9 5888 C 568888 9 58.87 of office salaries per dollar of sales

T+ 9 4+ : #KA+ x A$5F888 9 4+ : #5.87 x 68888$ 4+ 9 5F888 5>888

4+ 9 5>888

b. The information provided in part a describes the costbehavior of each cost. This helps decision makers budgetcosts for the future.

4-&+.. / @ /7. " a

>. %b

,. a e ;

M,->, +hapter M, -- +ost (ehavior

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4-&1.The high-low method approximates the true relationship

between fixed and variable costs in a total cost formula. t isquick and easy to compute but only considers two observationsfrom the entire body of available data. t does not afford the

opportunity to determine if a linear relationship exists betweenthe costs and the volume in the given situation.

The scatter graph method presents a visual picture of thetotal cost behavior over a number of measurement points. Thepicture allows the reader to see how linear the relationship is andany data that falls outside the normal results. The decision makermust attempt to draw a line that represents the mean of the datapoints. The point at which the line intersects the / axis at 2ero

activity is the fixed cost amount. The slope of the line is thevariable cost per unit. The line provides the total cost for anyactivity amount along the line. Even though this method usesvisual estimation the method provides a more robust result thanthe high-low method because all of the observations areincorporated into the solution and the decision maker can visuallyevaluate the linearity of the data.

Gegression analysis provides a very accurate description of

the relationship between cost and activity. 0lthough mostspreadsheet software contains regression models that are easy touse regression analysis requires more knowledge than either thescatter graph method or the high-low method. The data output isas easy to use as the data output of the other methods.

4-&2.!tudents& answers will vary but should include the basic

information contained in the answer to ,-6 plus their own

recommendation.

+hapter M, +ost (ehavior M,->6

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4-&3.Deliver E!Aese Lumber Expense

Iigh 88 57F,B8Jow F88 76,B8Difference 88 5 888

Aariable rate 9 5888C889 58 of Delivery Expense for each delivery

T+ 9 4+ : #KA+ x A$57F,B8 9 4+ : #58 x 88$

4+ 9 57F,B8 58884+ 9 58 56>768+ost under +urrent !ystem >7>8 #F +hapter M, -- +ost (ehavior

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4-&4.Each student group&s analysis will vary but should describe

the fixed costs of the merchandising business including suchthings as straight-line depreciation of furniture and equipmentinsurance monthly salaries and rent. The variable costs should

include product and packaging. Mixed costs include many othercosts such as telephone utilities wages and advertising.

4-&&.To" Mr. 0l @almer4rom"

The costs of your new playground will consist of a number offixed variable and mixed costs. 0 fixed cost is the same

regardless of the number of hours of operation variable costsrelate directly to the number of hours of operation and mixedcosts have some fixed amount and some variable amount.

The fixed cost of the playground includes the depreciationthat will occur each year on the equipment and the buildingaddition. n addition the property taxes and property insurancewill increase because of the building and equipment. /ou mightalso need to increase the personal in?ury liability insurance to

include the risk of children being hurt lost or endangered.Aariable costs of operating the playground include the salaryof the childcare workers payroll taxes employee benefits papersupplies food and drink that you might serve and utilities. Thesewill vary in proportion to the number of hours of operation.

Mixed costs include telephone expense because we have abase rate and must also pay for each minute of usage. Gepairsand maintenance on the equipment and space will be partlyroutine and partly dependent upon the amount of usage.

f we can analy2e each of these costs we can determine theoverall fixed costs of the operation and the variable cost per hour.3e can construct the pro?ected revenues and expenses to allowyou to make the best possible decision about this pro?ect.

ima_sm chapter m4 06-24-07

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