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Chapter 6

# Chapter 6.pdf

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University of Alberta

Accounting

ACCTG322

Trish Stringer

Winter

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Chapter 6 – Solutions to Recommended Questions
Problem 6-14
1. High-lowmethod:
Repair
Number of Jobs Costs
High activity level........................260 $24,000
Low activity level...........................80 9,600
Change .....................................180.... $14,400
Variable cost per job:
Change in cost = $14,400 = $80 per job
Change in activity 180 jobs
Fixed cost: Total repair cost at high activity level...................$24,000..
Less variable element:
260 jobs × $80 per job....................................20,800......
Fixed cost element ........................................$ 3,200..........
Therefore, the cost formula is: Y = $3,200 + $80X.
2. Scattergraph method (see the scattergraph on the following page):
(Note: Students’answers will vary due to the inherent imprecision and subjectivity of the
scattergraph method of estimating fixed and variable costs.)
The line intersects the cost axis at about $4,250. The variable cost can be estimated as fol-
lows:
Total cost at 180 jobs (a point that falls on the line)..................$18,000....
Less the fixed cost element (intersection of the Y axis on the graph)... 4,250
Variable cost element at 180 jobs (total)................................$13,750........
$13,750 ÷ 180 jobs = $76.38 per job.
Therefore, the cost formula is: Y = $4,250 + $76.38X.
Page 1 of 7 Chapter 6 – Solutions to Recommended Questions
Problem 6-14 (continued)
The completed scattergraph follows:
3. Total predicted repair costs for 200 jobs:
Y = $3,200 + $80(x)
Y = $3,200 + $80(200)
Y = $3,200 + $16,000
$19,200Y
4. Neither of the formulas developed in parts 1 and 2 should be used to predict costs for a
600-job month because that level of activity appears to be well outside of the relevant
range. The next closest activity level is only 260 jobs (May), which is less than half of the
number of jobs the manager wants to predict costs for. Both fixed and variable costs
could increase if the level of activity is 600 jobs. For example, additional mechanics may
need to be hired, more repair equipment may be needed and facilities may need to be ex-
panded (even temporarily) to accommodate an increase of that magnitude.
Page 2 of 7 Chapter 6 – Solutions to Recommended Questions
Problem 6-15
1. Maintenance cost at the 140,000 machine-hour level of activity can be isolated as follows:
Level of Activity
80,000 MH 140,000 MH
Total factory overhead cost.........................$340,400 $483,200
Deduct:
Utilities cost @ $1.30 per MH*.................... 104,000 182,000
Supervisory salaries ..............................120,000. 120,000
Maintenance cost....................................$116,400.. $181,200
*$104,000 ÷ 80,000 MHs = $1.30 per MH
2. High-low analysis of maintenance cost:
Maintenance Machine-
Cost Hours
High activity level......................$181,200 140,000
Low activity level.........................116,400 80,000
Change ...................................$ 64,800. 60,000
Note: in this problem the high level of activity (140,000 hours) does not correspond to the high-
est level of total overhead costs, which occurs in November.
Variable cost per unit of activity:
Change in cost = $64,800 = $1.08 per MH
Change in activity 60,000 MHs
Total fixed cost:
Total maintenance cost at the low activity level .......................$116,400.......
Less the variable cost element
(80,000 MHs × $1.08 per MH)..............................................86,400.........
Fixed cost element........................................................$30,000.....................
Therefore, the cost formula is $30,000 per month plus $1.08 per
machine-hour or Y = $30,000 + $1.08X, where X represents machine-hours.
Page 3 of 7 Chapter 6 – Solutions to Recommended Questions
Problem 6-15 (continued)
3. Variable Rate per Ma-
chine-HourCo Fsxed
Maintenance cost............................ $1.08 $ 30,000
Utilities cost: $104,000/80,000 ........... 1.30
Supervisory salaries cost ................ 120,000
Tota..l.s....................................$2.38.. $150,000
Therefore, the cost formula would be $150,000 plus $2.38 per machine-hour, or Y =
$150,000 + $2.38X.
4. Fixedcost...............................................................$150,000...............
Variable co

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