Cost Segregation and Estimation

E-1. Sale expense for a particular period was as follows:

Time / Output in ‘000’ units / Cost in '00'
Jan / 600 / Rs. 1000
Feb. / 700 / 1500
Mar. / 800 / 2000
Apr. / 900 / 2500
May / 1000 / 3000

Required:

  1. Variable rate and fixed cost per month under high low point method and least square method
  2. Estimated monthly cost in 550 units and 750 units
  3. Correlation coefficient and its interpretation.

E-2. On November 15, 2004, Sandra Cook, a newly hired cost analyst at Demgren Company, was asked to predict overhead costs for the company's operations in 2005, when 510 units are expected to be produced. She collected the following quarterly data:

Quarter / Production in Units / Overhead Costs
1/01
2/01
3/01
4/01
1/02
2/02
3/02
4/02
1/03
2/03
3/03
4/03
1/04
2/04
3/04 / 76
79
72
136
125
128
125
133
124
129
115
84
84
122
90 / $ 721
715
655
1,131
1,001
1,111
1,119
1,042
997
1,066
996
957
835
1,050
991

Required:

  1. Using the high-low method to estimate costs, prepare a prediction of overhead costs for 2005.
  2. Sandy ran a regression analysis using the data she collected. The result was Y = $337 + $5.75 X
  3. Using this cost function, predict costs for 2005.
  4. Which prediction do you prefer? Why?

E-3. Data on the company's maintenance costs for its store buildings and furnishing are presented below.

Month / Sales(units) / Maintenance Cost
Jan
Feb
Mar
Apr
May
Jun / 600
800
700
600
500
600 / $500
600
700
500
600
500

Required:

a. Estimate the cost behavior for the firm's maintenance costs using high low point method and least square method

b. Compute and explain the following results: Correlation coefficient (r) and Coefficient of determination (r2)

E-4. Mr. Ellis wants his analyst to use regression analysis to demonstrate which cost driver best explains support costs.Using Excel Spreadsheet

Week / Circuit Board Assembly Support Costs, Y / Direct Labor Hours, X1 / Number of Boards Completed, X2 / Average Cycle Time (Hours), X3
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25 / $ 66,402
56,943
60,337
50,096
64,241
60,846
43,119
63,412
59,283
60,070
53,345
65,027
58,220
65,406
35,268
46,394
71,877
61,903
50,009
49,327
44,703
45,582
43,818
62,122
52,403 / 7,619
7,678
7,816
7,659
7,646
7,765
7,685
7,962
7,793
7,732
7,771
7,842
7,940
7,750
7,954
7,798
7,764
7,635
7,849
7,869
7,576
7,557
7,569
7,672
7,653 / 2,983
2,830
2,413
2,221
2,701
2,656
2,495
2,128
2,127
2,127
2,338
2,685
2,602
2,029
2,136
2,046
2,786
2,822
2,178
2,244
2,195
2,370
2,016
2,515
2,942 / 186.44
139.14
151.13
138.30
158.63
148.71
105.85
174.02
155.30
162.20
142.97
176.08
150.19
194.06
100.51
137.47
197.44
164.69
141.95
123.37
128.25
106.16
131.41
154.88
140.07

Required:

(a)Plot support costs, Y, versus each of the possible cost drivers, X1, X2, X3.

(b)Use regression analysis to measure cost functions using each of the cost drivers.

(c)According to the criteria of reliability, which is the best cost driver for support costs in the circuit board assembly department?

(d)Interpret the economic meaning of the best cost function.

E- 5.14.A manufacturing company furnished the following information.

Output in units / 6,000 / 8,000
Direct Material / Rs. 12,000 / Rs.16,000
Direct labour / 30,000 / 40,000
Direct chargeable expenses / 6,000 / 8,000
Consumable materials / 1,500 / 2,000
Depreciations / 1,000 / 1,000
Maintenance and repairs / 1200 / 1400
Salaries / 1,000 / 1,000
Shop labour / 600 / 800
Inspection / 200 / 400

Required:

  1. Segregate each expense into fixed cost and variable cost per unit using high low point method.
  2. Estimate cost at 6,500 units, 7,000 units and 7,500 units.

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