Chapter 05

Cost Estimation

1. The following manufacturing costs were incurred by the RST Company in 2011 :

Direct materials $112,500

Direct labor 175,000
Manufacturing overhead 235,000

These costs were incurred to produce 25,000 units of product. Variable manufacturing
overhead was 80% of the direct materials cost.
In 2012, the direct material and variable overhead costs per unit will increase by 15%, but the
direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected
to increase by 7.5%.
Required:
(a) Prepare a cost estimate for an activity level of 20,000 units of product in 2012.
(b) Determine the total product costs per unit for 2011 and 2012.

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 Chapter 05
Cost Estimation

1. The following manufacturing costs were incurred by the RST Company in 2011 :

Direct materials $112,500

Direct labor 175,000
Manufacturing overhead 235,000

These costs were incurred to produce 25,000 units of product. Variable manufacturing
overhead was 80% of the direct materials cost.
In 2012, the direct material and variable overhead costs per unit will increase by 15%, but the
direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected
to increase by 7.5%.
Required:
(a) Prepare a cost estimate for an activity level of20,000 units of product in 2012.
(b) Determine the total product costs per unit for 2011 and 2012.

(a) $482,175
(b) 2011 unit cost: $522,500/25,000 = $20.90; 2012 unit cost: $482,175/20,000 = $24.11

Feedback: (a) Variable overhead costs (2011) = .80($112,500) = $90,000

Fixed overhead costs (2011) = $235,000 - $90,000 = $145,000

2011 2012
Direct materials $112,500 $103,500 (1)
Direct labor 175,000 140,000 (2)
Variable overhead costs 90,000 82,800 (3)
Fixed overhead costs 145,000! ~5lli (4)
Total $522,500 C!482:iji0
(1) [($1 12,500)/25,000)(l.15)](20,000) = $103,500
(2) ($175,000125,000)(20,000) = $140,000
(3) [($90,000)125,000)(1.15)](20,000) = $82,800
(4) ($145,000)(l.075) = $155,875

AACSB: Analytic
A/CPA: FN-Decision Making
Bloom's: Analysis
Difficulty: Medium
Learning Objective: 3
Topic Area: Account Analysis Me/hod

5-1
 2. Hagler's Toupees has the following machine hours and production costs for the last six

months of last year: ~ \) D::. r l ose _ ~ lc ~

Machine
r
Production

r"LA-v-'

Moclh Co~

July .$+~
AUGust
L.~ September
t~1' '-..;::..:c;.::to::.b.::;
: er~_ _ _-..;~~_ _--:-~~
ovember
December

If Hagler expects to incur 14,000 machine hours in January, what will be the estimated total
production cost using the high-low method?

A~nr
B.. $i~ i4~50
c. , .00
::> --
D. $10,889.10

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1 2
2. Hagler's Toupees has the following machine hours and production costs for the last six
months of last year:

1'vlachine Production
Month Hours Cost
July 15,000 $12,075
August 13,500 10,800
September 11,500 9,580
October 15,500 12,080
November 14,800 11,692
December 12,100 9,922

If Hagler expects to incur 14,000 machine hours in January, what will be the estimated total
production cost using the high-low method?
A. $8,750.00
B. $11,142.50
C. $22,400.00
D. $10,889.10

VC per unit = ($12,080 - 9,580)/(15,500 - 11,500) = $.625; FC = $12,080 - $.625(15,500) =

$2,392.50; TC = $2,392.50 + $.625(14,000) = $11,142.50

AACSB: Analytic
A/CPA: FN-Decision Making
Bloom's: Application
Difficulty: Hard
Learning Objective: 4
Topic Area: High-Low Cost Estimation

5-2
3. The Teal Company's total overhead cost~ various levels of activity are presented bel[;j]
(F ) eM)
Direct Total (v)
s~ M~
Month Labor Hours Overhead ~ Su ____

~
July ..$.:W,QQ& (
August L.,-vJ 234~000 - \/:;!,") - ~1i>1 £>(7'0 =­ ~ 7.( 2-\lO
( q(, 3~
September 9,000 319,000 / 15.3 '\
October H-t.3"- ~ 340,500 - ~ IO,SW ) - ~o,Q1) ~ Cf'tr~
(lbo,(,9>J
Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. The breakdown of these costs at the 9,000 direct labor hour level of activity is
as follows:
..
Utilities (V) /5. 3 $137,700

Supervisory Salaries (F) 80,000

Maintenance (M) 101,300

3191000

Required: /
(a) Using the high-low method, determin( the cost formula for maintenance)
(b) Express the company's total overhead costs in linear equation form.
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3. The Teal Company's total overhead costs at various levels of activity are presented below:

Direct Total
Month Labor Hours Overhead
July 7,500 $272,000
August 6,000 234,000
September 9,000 319,000
October 10,500 340,500

Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. The breakdown of these costs at the 9,000 direct labor hour level of activity is
as follows:

Utilities (V) $1]7,700

Supervisory Salaries (F) 80,000
Maintenance (M) 101,300
319,000
Required:
(a) Using the high-low method, determine the cost formula for maintenance.
(b) Express the company's total overhead costs in linear equation form .

(a) $12,000 + 8.36667 x Direct Labor Hour

(b) $92,000 + 23.6667 x Direct Labor Hour

Feedback: (A) Utilities per hour = $137,700/9,000 = $15.30 per direct labor hour
Utility cost at the high point = $15.30(10,500) = $160,650
Utility cost at the low point = $15.30(6,000) = $91,800
Maintenance cost at the high point = $340,500 - 80,000 - 160,650 = $99,850
Maintenance cost at the low point = $234,000 - 80,000 - 91,800 = $62,200
Maintenance cost per hour = ($99,850 - 62,200)/(10,500 - 6,000) = $8.36667
Fixed Maintenance costs per month = $99,850 - ($8.36667) x (10,500) = $12,000
Total maintenance costs = $12,000 + $8.36667 per Direct Labor Hour
(B) Total overhead costs = ($80,000 + 12,000) + ($15.30 + 8.36667) x Direct Labor Hours =
$92,000 + $23.66667 x Direct Labor Hours

AACSB: Analytic
AICPA: FN-Decision Making
Bloom's: Analysis
Difficulty: Medium
Learning Objective: 4
Topic Area: High-Low Cost Estimation

5-3

4. A company ran a regression analysis using direct labor hours as the independent variable
and manufacturing overhead costs as the dependent variable. The results are summarized
below:

Intercept $14,600

Slope $ 12.55

Correlation coefficient .931

R-squared .867

The company is planning on operating at a level that would requir@,OOO direct labor hou!V

per month in the upcoming year.

Required:

(a) Use the information from the regression analysis to write the cost estimation equation for
the manufacturing overhead costs.
(b) Compute the estimated manufacturing overhead costs per month for the upcoming year.

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4
4. A company ran a regression analysis using direct labor hours as the independent variable
and manufacturing overhead costs as the dependent variable. The results are summarized
below:

Intercept $14,600
Slope $ 12.55
Correlation coefficient .931
R-squared .867

The company is planning on operating at a level that would require 12,000 direct labor hours

per month in the upcoming year.

Required:

(a) Use the information from the regression analysis to write the cost estimation equation for
the manufacturing overhead costs.
(b) Compute the estimated manufacturing overhead costs per month for the upcoming year.

(a) Total manufacturing overhead costs = $14,600 + ($12.55 x Direct Labor Hours)
(b) $165,200

Feedback: (b) Total manufacturing overhead costs = $14,600 + ($12.55)(12,000) = $165,200

AACSB: Analytic
A/CPA: FN-Decision Making
Bloom's: Analysis
Difficulty: Easy
Learning Objective: 5
Topic Area: Obtaining Regression Estimates

5-4
5. The Grind Company has been having some difficulties estimating their manufacturing
overhead costs. In the past, manufacturing overhead costs have been related to production
levels. However, some production managers have indicated that the size of their production
lots might also be having an impact on the amount of their monthly manufacturing overhead
costs. In order to investigate this possibility, the company collected information on their
monthly manufacturing overhead costs, production in units, and average production lot size
for 2011.

Production Manufacturing Average Monthly

Month (Units) Overhead Cost Production Lot Size
1 75,000 $ 925,800 20
2 90,000 843,875 19
3 65,000 910,125 24
4 80,000 946,000 19
5 55,000 879,000 24
6 50,000 825,000 18
7 85,000 960,000 22
8 105,000 1,053,500 25
9 102,000 1,020,000 23
10 68,000 905,000 20
11 75,000 938,000 22
12 95,000 995,000 24

Regression analysis results of the information presented above are as follows:

Ordinary regression: C t£.,) -----------k~---""
Equation: ~,741 + $3.0692 x units . '( -::: b Q( ,1 't(+ 3, obq'2..-\..'1v,~
r-square: ~~ vJo-r~ i t ~
Multiple re ression: '1 ~ q 1 +, I 0 1
Equation: , ~171 + $2.4918 x units + $11,770.93 x lot size
r-square : ~ b€ttf~
Required:
(a) Use the results from the ordinary regression and estimate ext month's manufacturing
overhead costs, assuming the company is planning to produc 2 000 units.
(b) Use the results from the multiple regression an~the next month's manufacturing

, assuming the company is planning to produ~its with an average lot size of

21.
c) Comment on which regression seems to be more appropriate under these circumstances.

What additional information would you like to see? Be specific.

(!1 'I ; ;. 471, ,,1+ (z. 4'1' Y' )L '!>-t1lI1l ') -1-0 /,17 o . 13'1 x:: ...;')

G~ r $4<)?,bD~
( } ,vtolJ- ­

5
5. The Grind Company has been having some difficulties estimating their manufacturing
overhead costs. In the past, manufacturing overhead costs have been related to production
levels. However, some production managers have indicated that the size of their production ·
lots might also be having an impact on the amount of their monthly manufacturing overhead
costs. In order to investigate this possibility, the company collected information on their
monthly manufacturing overhead costs, production in units, and average production lot size
for 2011.

Production Manufacturing Average Monthly

Month (Units) Overhead Cost Production Lot Size
1 75,000 $ 925,800 20
2 90,000 843,875 19
"-' 65 ,000 910,125 24
4 80,000 946,000 19
5 55,000 879,000 24
6 50,000 825,000 18
7 85,000 960,000 22
8 105,000 1,053,500 25
9 102,000 1,020,000 23
10 68,000 905,000 20
11 75,000 938,000 22
12 95,000 995,000 24

Regression analysis results of the information presented above are as follows:

Ordinary regression:
Equation: $691,741 + $3.0692 x units
r-square: .628
Multiple regression:
Equation: $482,171 + $2.4918 x units + $11,770.939 x lot size
r-square: .777
Required:
(a) Use the results from the ordinary regression and estimate next month's manufacturing
overhead costs, assuming the company is platming to produce 92,000 units.
(b) Use the results from the multiple regression and estimate the next month's manufacturing
costs, assuming the company is planning to produce 92,000 units with an average lot size of
21.
(c) Comment on which regression seems to be more appropriate under these circumstances.
What additional infonnation would you like to see? Be specific.

5-5
(a) $974,107
(b) $958,606
(c) The mUltiple regression improves the fit over the ordinary regression. The r-square
improves from .628 to .777. Additional information may include tests to determine the
significance of the coefficients.

Feedback: (a) Total manufacturing costs = $691,741 + ($3.0692 x 92,000) = $974,107

(b) Total manufacturing costs = [$482,171 + ($2.4918 x 92,000) + ($11,770.939 x 21)] =
$958,606

AACSB: Analytic
A/CPA: FN-Decision Making
Bloom's: Analysis
Difficulty: Medium
Learning Objective : 5
Topic Area: Obtaining Regression Estimates

5-6
6. Cameron Company is interested in establishing the relationship between utility costs and
machine hours. Data has been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Machine Electricity
Month Hours Costs
January 3,250 22,080
Febmary 3,770 25,200
March 2,470 16,200
April 4,030 27,600
May 4,940 33,900
June 4,290 26,400
July 5,330 29,700
August 4,550 27,300
September 2,600 18,600
October 4,810 31 ,200
November 6)10 37,200
December 5,460 33,300

SUlvINIARY OUTPUT
R egression Statistics
Multiple R 96.5%
R Square 93.2%
Adjusted R-Square 92.5 %
Standard Error 1,710.21
Observations 12.00

Standard Lower Upper

Coefficients Error t Stat P-vaille 95% 95%
Intercept 4~ 472.26 2,019.39 2.2.1 0.051 -27 .23 8971.74
Machine Hours

Required:
r
\"
-
"5. 329 J 0.455 (1 1.70 ~ 3.69E-07
'--...<
4.314
s 2-_0
6.343

a. What is the equation for utility costs using the regression analysis?
b. Does the variable "machine hours" have statistically significance? Explain.
c. Prepare an estimate of utility co/.!s for a month when 3,000 machine hours are worked .

(c..) ¥,'il'-'Vb +($" S. 3vt "- VJ\ 11)

11 .70 / 2 .'0 ~/ M J..f 5"j~rh.~

1f, tf12~ U + (r;' ~~/k X :s~):: $~~~

6
(a) $4,472.26 + $5.329 x machine hours
(b) yes, the t-stat of 1l.70 exceeds the rough rule of thumb of2
(c) $20,459.26

Feedback: (c) $4,472.26 + $5.329 x 3,000 = $20,459.26

AACSB: Analytic
A/CPA: FN-Decision Making
Bloom's: Analysis
Difficulty: Medium
Learning Objective: 5
Topic Area: Obtaining Regression Estimates

5-8
7. The Ottawa Company has traditionally estimated manufacturing overhead costs using
production volume. Some of the production managers believe that the number of set ups may
also have an impact on monthly manufacturing overhead costs. In order to investigate this
possibility, the company collected information on their monthly manufacturing overhead
costs, production in units, and number of setups for 2011.

Production Manufacturing
Month (Units} Overhead Cost Number of Setu12s
1 50,000 $800,100 17
2 65,000 752,500 16
-.
.) 40,000 795,100 21
4 55,000 822,750 16
5 30,000 771,225 21
6 25,000 706,200 15
7 60,000 843,000 19
8 80,000 935,200 22
9 77,000 901,750 20
10 43,000 786,400 17
11 50,000 819,600 19
12 70,000 880.900 21
Regression analysis results of the information presented above are as follows:
Ordinary regression:
Equation:$650,398 + $3.1 061 x units
r-square:.707
Multiple regression:
Equation:$464,481 + $2.5356 x units + $11,631.6048 x lot size
r-square:.867
Required:
(a) Use the results from the ordinary regression and estimate next month's manufacturing
overhead costs, assuming the company is planning to produce 75,000 units.
(b) Use the results from the multiple regression and estimate the next month's manufacturing
costs, assuming the company is planning to produce 75,000 units with an average lot size of
18.
(c) Comment on which regression seems to be more appropriate under these circumstances.
What additional information would you like to see? Be specific.

5-9
(a) $883,356
(b) $864,020
(c) The multiple regression improves the fit over the ordinary regression. The r-square
improves from .707 to .867. Additional information may include tests to determine the
significance of the coefficients.

Feedback: (a) Total manufacturing costs = $650,398 + ($3.1061 x 75,000) = $883,356

(b) Total manufacturing costs = [$464,481 + ($2.5356 x 75,000) + ($11,631.6048 x 18)] =
$864,020

AACSB.· Analytic
A/CPA: FN-Decision Making
Bloom's: Analysis
Difficulty: Medium
Learning Objective: 5
Topic Area: Obtaining Regression Estimates

5-\0