Accounting ACCT 2620 Lecture Notes - Lecture 5: Missing Data, Scatter Plot, Univariate

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oliveleopard31

14 Feb 2017

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Detailed review of each account in the cost item. Classify items as variable, fixed, or semi variable. Use when you have no idea about cost behavior patterns. Total variable cost = total cost - total fixed cost. Uses two data points only for an activity within the relevant range. Variable cost per unit = (highest - lowest costs) / (highest - lowest activity levels) Fixed costs = total cost - unit variable cost * units. Objective, but other data points are ignored. Statistical approach that is both objective and considers all data points. Univariate regression: y = a + bx. Tc = total cost, fc = fixed cost. Vc = variable cost per unit, a = activity. Multivariate regression: y = a + bx + cz. X and z are independent variables (different activities) I. e. electricity used to run machines and for light in the facility. Function of machine hours and square meters of facility.

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PROBLEM 2-22 High-Low and Scattergraph Analysis (L02-4, LO2-5) Pleasant View Hospital of British Columbia has just hired a new chief administrator who is anx- ious to employ sound management and planning techniques in the business affairs of the hospital. Accordingly, she has directed her assistant to summarize the cost structure of the various depart- ments so that data will be available for planning purposes. The assistant is unsure how to classify the utilities costs in the Radiology Department because these costs do not exhibit either strictly variable or fixed cost behavior. Utilities costs are very high in the department due to a CAT scanner that draws a large amount of power and is kept running at all times. The scanner can't be turned off due to the long warm-up period required for its use. When the scanner is used to scan a patient, it consumes an additional burst of power. The assistant has accumulated the following data on utilities costs and use of the scanner since the first of the year. Month Number of Scans Utilities Cost [ 60 January February .... March April May ....... June July ........- August September October $2,200 $2,600 $2,900 $3,300 $3,000 $3,600 $4,000 $3,600 $3,100 $2,500 130 150 140 The chief administrator has informed her assistant that the utilities cost is probably a mixed cost that will have to be broken down into its variable and fixed cost elements by use of a scatter- graph. The assistant feels, however, that if an analysis of this type is necessary, then the high-low method should be used, since it is easier and quicker. The controller has suggested that there may be a better approach. Required: 1. Using the high-low method, estimate a cost formula for utilities. Express the formula in the form Y = a + bx. (The variable rate should be stated in terms of cost per scan.) 2. Prepare a scattergraph by plotting the number of scans and utility cost on a graph. Draw a straight line though the two data points that correspond to the high and low levels of activity. Make sure your line intersects the Y-axis. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis estimated the total fixed costs to be $1,170.90 per month and the variable cost to be $18.18 per scan. How would the straight line that you drew in requirement 2 differ from a straight line that minimizes the sum of the squared errors?

Accounting ACCT 2620 Lecture Notes - Lecture 5: Missing Data, Scatter Plot, Univariate

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