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    Chapter 3 Managerial Acc

    Uploaded by

    Lydia Samosir
    The document describes cost behavior for a company that rents forming machines. It shows that rental cost is fixed at $10,000 as long as production is between 0-20,000 units, but increases to $20,000 for production between 20,000-30,000 units. It also provides monthly cost and production data for an auto repair shop. A scatterplot shows no clear linear relationship between cost and the number of oil changes. Using the high-low method, it calculates the shop's fixed costs as $2,350 and variable cost as $4 per oil change. It predicts the shop's total cost for 1,000 oil changes in January would be $6,350.

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    Chapter 3 Managerial Acc

    Uploaded by

    Lydia Samosir
    463 views3 pages
    The document describes cost behavior for a company that rents forming machines. It shows that rental cost is fixed at $10,000 as long as production is between 0-20,000 units, but increases to $20,000 for production between 20,000-30,000 units. It also provides monthly cost and production data for an auto repair shop. A scatterplot shows no clear linear relationship between cost and the number of oil changes. Using the high-low method, it calculates the shop's fixed costs as $2,350 and variable cost as $4 per oil change. It predicts the shop's total cost for 1,000 oil changes in January would be $6,350.

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    The document describes cost behavior for a company that rents forming machines. It shows that rental cost is fixed at $10,000 as long as production is between 0-20,000 units, but increases to $20,000 for production between 20,000-30,000 units. It also provides monthly cost and production data for an auto repair shop. A scatterplot shows no clear linear relationship between cost and the number of oil changes. Using the high-low method, it calculates the shop's fixed costs as $2,350 and variable cost as $4 per oil change. It predicts the shop's total cost for 1,000 oil changes in January would be $6,350.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    463 views3 pages

    Chapter 3 Managerial Acc

    Uploaded by

    Lydia Samosir
    The document describes cost behavior for a company that rents forming machines. It shows that rental cost is fixed at $10,000 as long as production is between 0-20,000 units, but increases to $20,000 for production between 20,000-30,000 units. It also provides monthly cost and production data for an auto repair shop. A scatterplot shows no clear linear relationship between cost and the number of oil changes. Using the high-low method, it calculates the shop's fixed costs as $2,350 and variable cost as $4 per oil change. It predicts the shop's total cost for 1,000 oil changes in January would be $6,350.

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    © All Rights Reserved
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    You are on page 1of 3

    Lydia Stephanie Fransisca

    008201900051
    Accounting Class 1

    3-4 Cost Behavior


    Lorberg Company produces a variety of products, including some that require the use of a specialized
    forming machine. Lorberg can rent forming machines for $10,000 per year. Each machine can produce
    as many as 20,000 units per year.
    Required
    1. Prepare a table that shows the total cost of forming equipment rental and unit cost for units ranging
    from 0 to 50,000, using increments of 10,000 units.
    2. How would you describe the behavior of the forming equipment rental cost?

    Answer
    1.
    Unit Total Cost of Equipment Rental
    0 10,000
    10,000 10,000
    20,000 10,000
    30,000 20,000 (2 machines x $10,000)
    40,000 20,000
    50,000 30,000 (3 machines x $10,000)

    2. It is showing a step-cost behavior, because it displays a constant level of cost for a range of output
    and then at some point jumps to a higher level of cost, where it remains for a similar range of output.
    The cost would be $10,000 as long as the activity output is between 0 and 20,000 units. If the output is
    between 20,000 and 30,000 units, the cost jumps to $20,000.

    3-15 Separating Fixed and Variable Costs; Service Setting


    Jim Beaumont, the owner of Lube ‘n’ Go, is interested in determining the fixed and variable costs of
    performing a standard oil change. Since the oil changes are fairly standard, each one taking about the
    same amount of time and using about the same amount of grease, paper towels, etc., Jim thinks the
    number of oil changes would be a good independent variable. The total monthly cost includes the
    salaries of the two service persons, depreciation on the facility and equipment, utilities, and supplies
    such as grease and wipes. (The cost of oil is not included, as it differs from car to car and is charged to
    each customer based on the number of quarts actually used.) Data for the past eight months are as
    follows:

    Month Number of Oil Changes Total Cost


    May 1100 7150
    June 1400 7950
    July 1380 8350
    August 1250 7425
    September 890 5730
    October 900 5730
    November 850 5450
    December 700 5150

    Required
    1. Prepare a scattergraph based on these data. Use cost for the vertical axis and number of oil changes
    for the horizontal. Based on an examination of the scattergraph, does there appear to be a linear
    relationship between the cost of oil changes and the number of oil changes performed?
    2. Compute the cost formula for oil changing services using the high-low method. Calculate the
    predicted cost for January for 1,000 oil changes using the high-low formula.

    Answer
    1.

    Lube 'n' Go Company Cost


    9000

    8000

    7000

    6000
    Total Cost

    5000

    4000

    3000

    2000

    1000

    0
    600 700 800 900 1000 1100 1200 1300 1400 1500
    Number of Oil Changes

    There is no linear relationship. It shows outliers that are not representative of the overall cost
    relationship.

    2. Using High-Low Method


    Variable rate = (High cost – Low cost)/ (High output – Low output)
    = ($7,950 – 5,150)/ (1,400 – 700)
    = $2,800/700
    = $4 per oil change
    Fixed Cost = Total cost for high point – (Variable rate – High Output)
    Fixed Cost = $7,950 – ($4 x 1,400)
    Fixed Cost = $7,950 – 5,600
    Fixed Cost = $2,350

    Total Cost = $2,350 + ($4 x oil changes)


    Predicted Total Cost for January = $2,350 + ($4 x 1,000)
    Predicted Total Cost for January = $2,350 + 4,000
    Predicted Total Cost for January = $6,350

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