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Exercise On Segregation of Costs

The document provides warranty cost data for Exodus Corporation over several months. There are two key pieces of information: 1) The number of product returns and the warranty costs for each month. This shows costs ranging from $3,648 to $4,782 with returns between 30 and 48 products. 2) Management believes warranty cost depends on the number of product returns, with some variable cost per return and some fixed monthly cost. The solution estimates the variable and fixed costs using two methods: 1) High-low point estimates the variable cost as $63 per return and fixed cost as $1,758 per month. 2) Least squares regression estimates the variable cost as $63.59 per return

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Kathlene Balico
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583 views3 pages

Exercise On Segregation of Costs

The document provides warranty cost data for Exodus Corporation over several months. There are two key pieces of information: 1) The number of product returns and the warranty costs for each month. This shows costs ranging from $3,648 to $4,782 with returns between 30 and 48 products. 2) Management believes warranty cost depends on the number of product returns, with some variable cost per return and some fixed monthly cost. The solution estimates the variable and fixed costs using two methods: 1) High-low point estimates the variable cost as $63 per return and fixed cost as $1,758 per month. 2) Least squares regression estimates the variable cost as $63.59 per return

Uploaded by

Kathlene Balico
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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The management of Exodus Corporation would like to better understand the behavior of the

company's warranty costs. Those costs are listed below for a number of recent months:

Product Returns Warranty Cost


March..................... 30 P3,648
April....................... 37 4,074
May........................ 43 4,460
June........................ 41 4,330
July......................... 32 3,756
August.................... 48 4,782
September.............. 35 3,932
October................... 33 3,823

Management believes that warranty cost is a mixed cost that depends on the number of
product returns.

Required:

Estimate the variable cost per product return and the fixed cost per month using
1.High low point method
2.Least-squares regression method.

Solution:
1. High low point method

a) Variable Cost per product = Cost @ High- Cost @ Low


Acitvity @ High- Activity @ Low

= 4,782-3,648
48-30

= 1,134
18

Variable Cost per product = 63

b) Fixed Cost per month

HIGH LOW
Total Cost 4,782 3648
Less: Variable Cost
VC* activity @ high (63 x 48) 3,024
VC* activity @ low (63 x 30) 1,890
FIXED COST 1,758 1,758
FIXED COST = 1758

Total Estimated Cost y= a +bx


Y= 1758+(63)(299)
Y= 1,758+18,837

Total Estimated Cost/Y= 20,595

2. Least square method

Product returns Warranty XY X2


(X) Cost (Y)

March 30 P3,648 109440 900

April 37 4,074 150738 1369

May 43 4,460 191780 1849

June 41 4,330 177530 1681

July 32 3,756 120192 1024

August 48 4,782 229536 2304

September 35 3,932 137620 1225

October 33 3,823 126159 1089

1242995 11441
TOTAL

[n( xy  ( x )(  y )]
[ n( x 2 )  ( x ) 2 ]
Variable Cost per product =

[8(1,242,995)  (299)(32,805)]
= [8(11,441)  (299) 2 ]

Variable Cost per product b=63.59

[( xy )  b( x )]

Fixed Cost n
[(32,805)  63.59(299)]

8

Fixed Cost a=
1,723.95 or 1,724

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