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Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation

Suggested Answers to Self-Review Questions Week 3


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a. Hotel: Percentage of rooms occupied or the number of occupancy-days, where


an occupancy-day is defined as one room occupied for one day.
b. Hospital: Patient-days, where a patient-day is defined as a one-day stay by one
patient.
c. Computer manufacturer: Number of computers manufactured, throughput,
engineering specifications, engineering change orders, or number of parts in
the finished product.
d. Computer sales store: Sales revenue.
e. Computer repair service: Repair calls or hours of repair service.
f. Public accounting firm: Hours of auditing service provided by each
classification of personnel (partner, manager, supervisor, senior accountant,
and staff accountant).

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A manufacturer's cost of supervising production might be a step-fixed cost,


because one supervisor is needed for each shift. Each shift can accommodate a
certain range of production activity; when activity exceeds that range, a new shift
must be added. When the new shift is added, a new production supervisor must be
employed. This new position results in a jump in the step-fixed cost to a higher
level.

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Appropriate independent variables for several tasks are as follows:


a. Handling materials at a loading dock: Weight of materials handled.
b. Registering vehicles at a county motor vehicle office: Number of registrations
processed.
c. Picking oranges: Volume or weight of oranges picked.
d. Inspecting computer components in an electronics firm: Number of
components inspected.

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Potential cost drivers in the cruise industry include the following: number of
passengers, number of passenger miles traveled, number of port calls, cruise ship
tonnage (i.e., ship size), and number of crew members, among others.

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Copyright 2015 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation

EXERCISE 6-31 (10 MINUTES)


1.

(a)
(b)

Average time for 4 satellites ..............................................................


Average time for 8 satellites ..............................................................

195 hours
150 hours

2.

(a)
(b)

Total time for 4 satellites (195 hr. X 4) .............................................


Total time for 8 satellites (150 hr. X 8) .............................................

780 hours
1,200 hours

3.

Learning curves indicate how labor costs will change as the company gains experience
with the production process. Since labor time and costs must be predicted both for
budgeting and for setting cost standards, the learning curve is a valuable tool.

PROBLEM 6-35 (20 MINUTES)


1.

5.

9.

2.

6.

10. k

3.

7.

11. l

4.

8.

Note that j was not used.


PROBLEM 6-44 (25 MINUTES)
1.

Scatter diagrams:
Present, in graphic form, the relationship between costs and cost drivers via a plot of
data points
Require that a straight line be fit through the data points, with approximately the same
number of data points above and below the line
Easy to use
Provide a means to easily recognize outliers
Least-squares regression:
Uses statistical formulas to fit a cost line through the data points
Is a very objective method of cost estimation that uses all the data points
Requires more computation than other cost-estimation methods; however, software
programs are readily available

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Copyright 2015 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 06 - Activity Analysis, Cost Behavior, and Cost Estimation

High-low method:
Relies on only two data points (for the highest and lowest activity levels) in drawing
conclusions about cost behavior
Is considered more objective than the scatter diagram; however, is weaker than the
scatter diagram because it relies on only two data points
The least-squares regression method will typically produce the most accurate
results.
2.

Yes. The three methods produce equations by different means. Scatter diagrams
and least-squares regression rely on an examination of all data points. The scatter
diagram, however, requires an analyst to fit a line through the points by visual
approximation, or eyeballing. In contrast, least-squares regression involves the
use of statistical formulas to derive the best possible fit of the line through the
points. Finally, the high-low method is based on an analysis of only two data
points: the highest and the lowest activity levels.

3.

These amounts represent the fixed and variable costs associated with the ticketing
operation. Fixed cost totals $300,000 within the relevant range, and Florida
International incurs $2.25 of variable cost for each ticket issued.

4.

C = $295,000 + $2.20PT
C = $295,000 + ($2.20 x 570,000)
C = $1,549,000

5.

Yes, she did err by including November data. November is not representative
because of the effects of the Southeastern Airlines strike. The month is an outlier
and should be eliminated from the data set.

6.

Currently, most of the airlines tickets are written through reservations personnel,
whose wages are likely variable in nature. Heavier reliance on the Internet means
a greater investment in software, Web-site maintenance and development, and
other similar expenditures. Outlays that fall in these latter categories are typically
fixed costs, assuming that the cost driver is the number of tickets. The outcome
would parallel the experiences of a manufacturing firm that automates its
processes and reduces its reliance on direct-labor personnel.

6-3
Copyright 2015 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.