ACC 113 Chapter Notes - Chapter 1: Income Statement, Variable Cost, Financial Statement

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amaranthjellyfish619

5 Jan 2021

School

Tunxis Community College

Department

Accounting

Course

ACC 113

Professor

Lardie

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Document Summary

Procedure that uses statistical methods (least squares regression) to fit a cost line (regression line) through a number of data points. Data points do not have to lie along straight line as the procedure finds line that minimises sum of the squared distances from each data point. Multiple r (correlation coefficient) measures proximity of data points to regression line and sign of statistic (+ or -) tells direction of correlation which is positive for ape. R square (r2) called coefficient of determination measure or goodness of fit. R2 of 1. 0 indicates perfect correlation between independent and dependent variables. Outliers can also result in low r2 values. Uses two data points (related to high and low levels of activity) and derives an equation for a straight line. Forces a line between the two points and disregards other points. Impact of income taxes on costs and decision making.

Related Questions

The Ramon Company is a manufacturer that is interested in developing a cost formula to estimate the fixed and variable components of its monthly manufacturing overhead costs. The company wishes to use machine-hours as its measure of activity and has gathered the data below for this year and last year: Last Year Machine Overhead Hours Costs This Year Machine Overhead Hours Costs Month January ........ February ...... March ...... April .. May ...... June .... July ....... August ....... September ..... October ....... November ........ December ...... 21,000 25,000 22,000 23,000 20,500 19,000 14,000 10,000 12,000 17,000 16,000 19,000 $84,000 $99,000 $89,500 $90,000 $81,500 $75,500 $70,500 $64,500 $69,000 $75,000 $71,500 $78,000 21,000 24,000 23,000 22,000 20,000 18,000 12,000 13,000 15,000 17,000 15,000 18,000 $86,000 $93,000 $93,000 $87,000 $80,000 $76,500 $67,500 $71,000 $73,500 $72,500 $71,000 $75,000 The company leases all of its manufacturing equipment. The lease arrangement calls for a flat monthly fee up to 19,500 machine-hours. If the machine-hours used exceeds 19,500, then the fee becomes strictly variable with respect to the total number of machine-hours consumed during the month. Lease expense is a major element of overhead cost. Required: 1. Using the high-low method, estimate a manufacturing overhead cost formula. 2. Prepare a scattergraph using all of the data for the two-year period. Fit a straight line or lines to the plotted points using a ruler. Describe the cost behavior pattern revealed by your scat- tergraph plot. 3. Assume a least-squares regression analysis using all of the given data points estimated the total fixed costs to be $40,102 and the variable costs to be $2.13 per machine-hour. Do you have any concerns about the accuracy of the high-low estimates that you have computed or the least-squares regression estimates that have been provided? 4. Assume that the company consumes 22,500 machine-hours during a month. Using the high- low method, estimate the total overhead cost that would be incurred at this level of activity. Be sure to consider only the data points contained in the relevant range of activity when perform- ing your computations. 5. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis using only the data points in the relevant range of activity estimated the total fixed costs to be $10,090 and the variable costs to be $3.53 per machine-hour.

EXERCISE 2-11 High-Low Method; Scattergraph Analysis [LO2-4, LO2-5] The following data relating to units shipped and total shipping expense have been assembled by Archer Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings: Month Units Shipped Total Shipping Expense January ... February March April May ...... June ....... July ........ Novo A6 $1,800 $2,300 $1,700 $2,000 $2,300 $2,700 $1,200 Required: 1. Prepare a scattergraph using the data given above. Plot cost on the vertical axis and activity on the horizontal axis. Is there an approximately linear relationship between shipping expense and the number of units shipped? 2. Using the high-low method, estimate the cost formula for shipping expense. Draw a straight line through the high and low data points shown in the scattergraph that you prepared in requirement 1. Make sure your line intersects the Y axis. 3. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis estimated the total fixed costs to be $910.71 per month and the variable cost to be $217.86 per unit. How would the straight line that you drew in requirement 2 differ from a straight line that minimizes the sum of the squared errors? What factors, other than the number of units shipped, are likely to affect the company's ship- ping expense? Explain. 4.

1. Which of the following statements is NOT true about costs perunitwithin the relevant range?

A. Fixed costs decrease in proportion to increases involume.

B. Mixed costs decrease but not in direct proportion toincreases in volume.

C. Variable costs stay constant with changes in volume.

D. Curvilinear costs stay constant with changes in volume.

2. How would the equation for total costs be written using thefollowing? y = total costs v = variable cost per unit of activity x= volume of activity f = total fixed costs

A. y = xv

B. y = xv + f

C. y = xf

D. y = f

3. A utility bill consisting of a monthly base, plus an addedamount based on usage, is classified as a:

A. fixed cost.

B. mixed cost.

C. curvilinear cost.

D. variable cost.

4. A company is analyzing its mixed costs. During July, itsbusiest month, a company had total labor hours of 14,000 and totalcosts of $40,000. During February, its slowest month, the companyhad labor hours of 8,000 and total costs of $25,000. The company isplanning for 12,000 direct labor hours next April. How many dollarsshould the company budget for fixed costsduring April?

A. $5,000

B. $6,000

C. $35,000

D. $36,000

5. A company is analyzing its mixed costs. During July, itsbusiest month, a company had total labor hours of 14,000 and totalcosts of $40,000. During February, its slowest month, the companyhad labor hours of 8,000 and total costs of $25,000. The company isplanning for 12,000 direct labor hours next April. How many dollarsshould the company budget for total costsduring April?

A. $5,000

B. $6,000

C. $30,000

D. $35,000

6. Which of the following statements is true regardingregression analysis?

A. Regression analysis considers all of the data points fordetermining the line that best fits the data so is usually moreaccurate than the high-low method.

B. Regression analysis helps generate a statistic, called theR-square, which tells how well the line fits the data points.

C. Regression analysis helps managers implement activity-basedcosting systems.

D. All of the above are true.

7. The difference between absorption costing and variablecosting is:

A. the treatment of fixed MOH.

B. the timing with which fixed MOH is expensed.

C. both of the above are differences.

D. none of the above are differences.

8. Which of the following is NOT true regarding an incomestatement organized according to the contribution marginapproach?

A. The contribution margin income statement is organized by costbehavior.

B. Operating income will always be the same as operating incomein a traditional income statement regardless of changes ininventory levels.

C. All fixed costs, including fixed MOH, are expensed below thecontribution margin line.

D. The contribution margin is equal to sales revenue minusvariable expenses.

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ACC 113 Chapter Notes - Chapter 1: Income Statement, Variable Cost, Financial Statement

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