Scattergraph, High-Low Method, and Predicting Cost for a Different Time Period from the One Used to
Develop a Cost Formula
Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10
months. Tracy Heppler, a member of the controller's department, has convinced management that
overhead costs can be better estimated and controlled if the fixed and variable components of each
overhead activity are known. One such activity is receiving raw materials (unloading incoming goods,
counting goods, and inspecting goods), which she believes is driven by the number of receiving
orders. Ten months of data have been gathered for the receiving activity and
2. Using the high-low method, select a cost formula for the receiving activity.
Using the cost formula, what is the predicted cost of receiving for a month in which 1,450 receiving
orders are processed?
$fill in the blank 3
3. Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the
predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated?
$fill in the blank 4
Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the
predicted cost of receiving for a year in which 18,000 receiving orders are anticipated?
$fill in the blank 5
eBook
Method of Least Squares, Predicting Cost for Different Time Periods from the One Used to Develop a
Cost Formula
Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10
months. Tracy Heppler, a member of the controller's department, has convinced management that
overhead costs can be better estimated and controlled if the fixed and variable components of each
overhead activity are known. One such activity is receiving raw materials (unloading incoming goods,
counting goods, and inspecting goods), which she believes is driven by the number of receiving
orders. Ten months of data have been gathered for the receiving activity and are as follows:
Month Receiving Orders Receiving Cost
1 1,000 $18,000
2 700 15,000
3 1,500 28,000
4 1,200 17,000
5 1,300 25,000
6 1,100 21,000
7 1,600 29,000
8 1,400 24,000
9 1,700 27,000
10 900 16,000
Assume that Tracy has used the method of least squares on the receiving data and has gotten the
following results:
Intercept 3,212
Slope 15.15
Required:
1. Using the results from the method of least squares, what is the cost formula for the receiving
activity?
2. Using the cost formula, what is the predicted cost of receiving for a month in which 1,450 receiving
orders are processed? (Note: Round your answer to the nearest dollar.)
$fill in the blank 2
3. Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the
predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated? Round your
answer to the nearest dollar.
$fill in the blank 3
Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the
predicted cost of receiving for a year in which 18,000 receiving orders are anticipated? Round your
answer to the nearest dollar.
$fill in the blank 4
Feedback
Variable-Costing and Absorption-Costing Income
Borques Company produces and sells wooden pallets that are used for moving and stacking materials.
The operating costs for the past year were as follows:
Variable costs per unit:
Direct materials $ 2.85
Direct labor $ 1.92
Variable overhead $ 1.60
Variable selling $ 0.90
Fixed costs per year:
Fixed overhead $180,000
Selling and administrative $ 96,000
During the year, Borques produced 200,000 wooden pallets and sold 204,300 at $9 each. Borques had
8,200 pallets in beginning finished goods inventory; costs have not changed from last year to this
year. An actual costing system is used for product costing.
Required:
1. What is the per-unit inventory cost that is acceptable for reporting on Borques’s balance sheet at
the end of the year?
$fill in the blank 1
How many units are in ending inventory?
fill in the blank 2
units
What is the total cost of ending inventory?
$fill in the blank 3
2. Calculate absorption-costing operating income.
$fill in the blank 4
3. What would the per-unit inventory cost be under variable costing? Round your answer to the
nearest cent.
$fill in the blank 5
Does this differ from the unit cost computed in Requirement 1?
4. Calculate variable-costing operating income.
$fill in the blank 7
5. Suppose that Borques Company had sold 196,700 pallets during the year. What would absorption-
costing operating income have been?
$fill in the blank 8
What would variable-costing operating income?
$fill in the blank 9
(Appendix 3A) Scattergraph, High-Low Method, Method of Least Squares, Use of Judgment
The management of Wheeler Company has decided to develop cost formulas for its major overhead
activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant
manufacturing cost. Cost analysts have decided that power costs are mixed. The costs must be broken
into their fixed and variable elements so that the cost behavior of the power usage activity can be
properly described. Machine hours have been selected as the activity driver for power costs. The
following data for the past 8 quarters have been collected:
Quarter Machine Hours Power Cost
1 20,000 $26,000
2 25,000 38,000
3 30,000 42,500
4 22,000 37,000
5 21,000 34,000
6 18,000 29,000
7 24,000 36,000
8 28,000 40,000
Note: For the following requirements, round the fixed cost to the nearest dollar, round the variable
rates to three decimal places, and the R 2 to two decimal places.
Required:
1. Prepare a scattergraph by plotting power costs against machine hours. Does the scattergraph show
a linear relationship between machine hours and power cost?
2. Using the high and low points (i.e., the high-low method), compute a power cost formula.
(Note: Round variable rate to three decimal places.)
Total power cost = $fill in the blank 2
+ ( $fill in the blank 3
x Number
of machine hours )
3. Use the method of least squares to compute a power cost formula. Evaluate the coefficient of
determination.
Variable rate (to two decimal places) $fill in the blank 4
per machine
hour
Fixed cost (to the nearest dollar) $fill in the blank 5
Coefficient of determination (R 2 ) (to one
decimal place).
fill in the blank 6
%
4. Conceptual Connection: Rerun the regression, and drop the point (20,000, $26,000) as an outlier.
Compare the results from this regression to those for the regression in Requirement 3. Which is
better?
eBook
(Appendix 3A) Separating Fixed and Variable Costs, Service Setting
Louise McDermott, controller for the Galvin plant of Veromar Inc., wanted to determine the cost
behavior of moving materials throughout the plant. She accumulated the following data on the
number of moves (from 100 to 800 in increments of 100) and the total cost of moving materials at
those levels of moves:
Number
of Moves Total Cost
100 $ 3,000
200 4,650
300 3,400
400 8,500
500 10,000
600 12,600
700 13,600
800 14,560
Required:
1. Prepare a scattergraph based on the data above. Use cost for the vertical axis and number of
moves for the horizontal. Based on an examination of the scattergraph, does there appear to be a
linear relationship between the total cost of moving materials and the number of moves?
2. Compute the cost formula for moving materials by using the high-low method. Calculate the
predicted cost for a month with 550 moves by using the high-low formula. (Note: Round the answer
for the variable rate to three decimal places and the answer for total fixed cost and total cost to the
nearest dollar.)
Variable
rate
$fill in the blank 2
per move
Fixed
cost
$fill in the blank 3
Total cost $fill in the blank 4
3. Conceptual Connection: Compute the cost formula for moving materials using the method of least
squares. (Note: For the method of least squares, round the variable rate to two decimal places and
total fixed cost and total cost to the nearest dollar.) Using the regression cost formula, what is the
predicted cost for a month with 550 moves?
Variable
rate
$fill in the blank 5
per move
Fixed
cost
$fill in the blank 6
Total cost $fill in the blank 7
4. Evaluate the cost formula using the least squares coefficients.Could it be improved?
Normally, we would prefer the least squares method since the data appear to be
. However, the third observation may be an outlier. If the third observation (300 moves and $3,400 of
cost) is dropped, the R² rises to 99%. The new cost formula would be: Total Cost = $1,411 + ($17.28
× Number of Moves)
eBook
Show Me How
Creating and Using a Cost Formula
Big Thumbs Company manufactures portable flash drives for computers. Big Thumbs incurs monthly
depreciation costs of $15,800 on its plant equipment. Also, each drive requires materials and
manufacturing overhead resources. On average, the company uses 16,250 ounces of materials to
manufacture 6,500 flash drives per month. Each ounce of material costs $3.00. In addition,
manufacturing overhead resources are driven by machine hours. On average, the company incurs
$45,500 of variable manufacturing overhead resources to produce 6,500 flash drives per month.
In your calculations, round variable rate per flash drive to the nearest cent. If required, round final
answers to the nearest cent.
Required:
1. Create a formula for the monthly cost of flash drives for Big Thumbs.
Total cost of flash drives =
+ (
x Number of flash drives)
Total cost of flash drives = $fill in the blank 3
+ ($fill in the blank 4
x
Number of flash drives)
2. If the department expects to manufacture 6,000 flash drives next month, what is the expected
fixed cost (assume that 6,000 units is within the company's current relevant range)?
$fill in the blank 5
What is the total variable cost (assume that 6,000 units is within the company's current relevant
range)?
$fill in the blank 6
What is the total manufacturing cost (i.e., both fixed and variable) (assume that 6,000 units is within
the company's current relevant range)?
$fill in the blank 7
eBook
Show Me How
Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function
Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:
Month Labor
Cost($)
Employee
Hours
January 9,390 400
February 6,900 470
March 7,431 500
April 8,040 370
May 9,687 430
June 8,390 340
July 11,500 560
August 7,400 310
Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with labor used in
the restaurant.
In your calculations, round the variable rate per employee hour to the nearest cent. If required, round
your final answers to the nearest cent.
Required:
1. Using the high-low method, calculate the variable rate.
$fill in the blank 1
per employee hour
2. Using the high-low method, calculate the fixed cost of labor.
$fill in the blank 2
3. Using the high-low method, construct the cost formula for total labor cost.
Total labor cost = $fill in the blank 3
+ ($fill in the blank 4
× Employee
hours)
Integrative Exercise
Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel
Using the High-Low Method to Estimate Variable and Fixed Costs
Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the
Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 20X1 to
begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native
Americans living near the park. Due to the great success of the canoes, the hotel began
manufacturing and selling paddles as well in 20X3. Many hotel guests purchase a canoe and paddles
for use in self-guided tours of Swiftcurrent Lake. Because production of the two products began in
different years, the canoes and paddles are produced in separate production facilities and employ
different laborers. Each canoe sells for $500, and each paddle sells for $50. A 20X3 fire destroyed the
hotel’s accounting records. However, a new system put into place before the 20X4 season provides
the following aggregated data for the hotel’s canoe and paddle manufacturing and marketing
activities:
Manufacturing Data:
Year
Number of
Canoes
Manufactured
Total Canoe
Manufacturing
Costs
Year
Number of
Paddles
Manufactured
Total Paddle
Manufacturing
Costs
20X9 250 $103,000 20X9 900 $38,500
20X8 275 128,000 20X8 1,200 49,000
20X7 240 108,000 20X7 1,000 44,000
20X6 310 114,000 20X6 1,100 45,500
20X5 350 141,500 20X5 1,400 52,000
20X4 400 140,000 20X4 1,700 66,500
Marketing Data:
Year
Number of
Canoes
Sold
Total Canoe
Marketing
Costs
Year
Number of
Paddles
Sold
Total Paddle
Marketing
Costs
20X9 250 $45,000 20X9 900 $7,500
20X8 275 43,000 20X8 1,200 9,000
20X7 240 44,000 20X7 1,000 8,000
20X6 310 51,000 20X6 1,100 8,500
20X5 350 62,000 20X5 1,400 10,000
20X4 400 60,000 20X4 1,700 11,500
Required:
1. High-Low Cost Estimation Method
a. Use the high-low method to estimate the per-unit variable costs and total fixed costs for
the canoe product line.
Variable cost per
unit
$fill in the blank 1
Total fixed cost $fill in the blank 2
b. Use the high-low method to estimate the per-unit variable costs and total fixed costs for
the paddle product line.
Variable cost per
unit
$fill in the blank 3
Total fixed cost $fill in the blank 4
2. Cost-Volume-Profit Analysis, Single-Product Setting
Use CVP analysis to calculate the break-even point in units for
a. The canoe product line only (i.e., single-product setting)
BE units fill in the blank 5
canoes
b. The paddle product line only (i.e., single-product setting)
BE units fill in the blank 6
paddles
3. Cost-Volume-Profit Analysis, Multiple-Product Setting
The hotel's accounting system data show an average sales mix of approximately 300 canoes and
1,200 paddles each season. Significantly more paddles are sold relative to canoes because some
inexperienced canoe guests accidentally break one or more paddles, while other guests purchase
additional paddles as presents for friends and relatives. In addition, for this multiple-product CVP
analysis, assume the existence of an additional $30,000 of common fixed costs for a customer service
hotline used for both canoe and paddle customers. Use CVP analysis to calculate the break-even point
in units for both the canoe and paddle product lines combined (i.e., the multiple-product setting).
Canoe BE
units
fill in the blank 7
canoes
Paddle BE
units
fill in the blank 8
paddles
4. Cost Classification
a. Classify the manufacturing costs, marketing costs, and customer service hotline costs either as
production costs or period costs.
All manufacturing costs are
costs. All marketing costs and customer hotline costs are
costs
b. For the period costs, further classify them into either selling expenses or general and administrative
expenses.
Marketing costs are selling oriented; therefore, the marketing period costs would be further classified
as
. Customer hotline costs relate to the customer service section of the value chain and would be
further classified as
.
5. Sensitivity Cost-Volume-Profit Analysis and Production Versus Period Costs, Multiple- Product
Setting
If both the variable and fixed production costs (refer to your answer to Requirement 1) associated
with the canoe product line increased by 5% (beyond the estimate from the high-low analysis), how
many canoes and paddles would need to be sold in order to earn a target income of $96,000? Assume
the same sales mix and additional fixed costs as in Requirement 3.
Canoe target
income units
fill in the blank 13
canoes
Paddle target
income units
fill in the blank 14
paddles
6. Margin of Safety
Calculate the hotel’s margin of safety (both in units and in sales dollars) for Many Glacier Hotel,
assuming the same facts as in Requirement 3, and assuming that it sells 700 canoes and 2,500
paddles next year.
fill in the blank 15
total MOS units above total BE units
$fill in the blank 16
MOS in sales dollars
Contribution Margin, Break-Even Units, Break-Even Sales, Margin of Safety, Degree of Operating
Leverage
Aldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The
division's projected income statement for the coming year is:
Sales (203,000 units @ $70) $14,210,000
Total variable cost 8,120,000
Contribution margin $6,090,000
Total fixed cost 4,945,500
Operating income $1,144,500
Required:
1. Compute the contribution margin per unit, and calculate the break-even point in units. Calculate
the contribution margin ratio and use it to calculate the break-even sales revenue. (Note: Round
contribution margin ratio to four significant digits, and round the break-even sales revenue to the
nearest dollar.)
Unit contribution margin $fill in the blank 1
Break-even point in units fill in the blank 2
Contribution margin ratio fill in the blank 3
Break-even sales revenue $fill in the blank 4
2. The divisional manager has decided to increase the advertising budget by $250,000. This will
increase sales revenues by $1 million. By how much will operating income increase or decrease as a
result of this action? Use your answers from part 1 to determine the amount.
$fill in the blank 5
3. Suppose sales revenues exceed the estimated amount on the income statement by $1,500,000.
Without preparing a new income statement, by how much are profits underestimated? Use your
answers from part 1 to determine the amount.
$fill in the blank 7
4. Compute the margin of safety based on the original income statement. Round your answer to the
nearest dollar.
$fill in the blank 8
5. Compute the degree of operating leverage based on the original income statement. Round your
answer to two decimal places.
fill in the blank 9
If sales revenues are 8% greater than expected, what is the percentage increase in operating income?
Round your answer to four decimal places before converting to a percentage. For example, 0.88349
would be rounded to 0.8835 and entered as 88.35%.
fill in the blank 10
%
Our customer support team is available 24/7 to assist you with any questions or concerns. If you have questions about our service or need additional details to make a request, our friendly customer support will get your issues resolved
