1. Demonstration Problem
Chapter 12 – Exercise 4
Estimating Costs Based on
Behavior Patterns

2. Problem Definition
The following table shows the amount of cost incurred in March for the cost items indicated. During March 4,000 units of the firm’s single product were manufactured.
Raw materials $20,800
Factory depreciation expense ,500
Direct labor ,600
Production supervisor’s salary ,600
Computer rental expanse ,100
Maintenance supplies used

3. Problem Requirements
How much cost would you expect to be incurred for each of the above items during April when 5,600 units of product are planned for production?
Calculate the average total cost per unit for the 4,000 units manufactured in March. Explain why this figure would not be useful to a manager interested in predicting the cost of producing 5,600 units in April.

4. Problem Solution
Step 1 – Determine the probable cost behavior pattern for each cost item:
Cost Behavior
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used

5. Is the cost item a variable cost or a fixed cost?
Problem Solution
Step 1 – Determine the probable cost behavior pattern for each cost item:
Cost Behavior
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Is the cost item a variable cost or a fixed cost?

6. Variable costs change as activity changes.
Problem Solution
Step 1 – Determine the probable cost behavior pattern for each cost item:
Cost Behavior
Raw materials Variable
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Variable costs change as activity changes.

7. Fixed costs remain constant as activity changes.
Problem Solution
Step 1 – Determine the probable cost behavior pattern for each cost item:
Cost Behavior
Raw materials Variable
Factory depreciation expense Fixed
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Fixed costs remain constant as activity changes.

8. Problem Solution
Step 1 – Determine the probable cost behavior pattern for each cost item:
Cost Behavior
Raw materials Variable
Factory depreciation expense Fixed
Direct labor Variable
Production supervisor’s salary
Computer rental expense
Maintenance supplies used

9. Problem Solution
Step 1 – Determine the probable cost behavior pattern for each cost item:
Cost Behavior
Raw materials Variable
Factory depreciation expense Fixed
Direct labor Variable
Production supervisor’s salary Fixed
Computer rental expense
Maintenance supplies used

10. Problem Solution
Step 1 – Determine the probable cost behavior pattern for each cost item:
Cost Behavior
Raw materials Variable
Factory depreciation expense Fixed
Direct labor Variable
Production supervisor’s salary Fixed
Computer rental expense Fixed
Maintenance supplies used

11. Problem Solution
Step 1 – Determine the probable cost behavior pattern for each cost item:
Cost Behavior
Raw materials Variable
Factory depreciation expense Fixed
Direct labor Variable
Production supervisor’s salary Fixed
Computer rental expense Fixed
Maintenance supplies used Variable

12. Problem Solution
Step 2 - Determine the fixed amount or variable rate for each cost item at 4,000 units of activity:
4,000 units
Cost Behavior
Fixed Amount
Variable Rate/Unit
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
$ 20,800
40,500
49,600
5,000
3,100
600
$119,600
Variable
Fixed

13. Problem Solution
Step 2 - Determine the fixed amount or variable rate for each cost item at 4,000 units of activity:
4,000 units
Cost Behavior
Fixed Amount
Variable Rate/Unit
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
$ 20,800
40,500
49,600
5,000
3,100
600
$119,600
Variable
Fixed
$ 5.20
Variable rate calculation:
$20,800 / 4,000 units = $ 5.20/unit

14. Problem Solution
Step 2 - Determine the fixed amount or variable rate for each cost item at 4,000 units of activity:
4,000 units
Cost Behavior
Fixed Amount
Variable Rate/Unit
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
$ 20,800
40,500
49,600
5,000
3,100
600
$119,600
Variable
Fixed
40,500
$ 5.20
Fixed costs items will remain constant regardless of the level of activity (within the relevant range).

15. Problem Solution
Step 2 - Determine the fixed amount or variable rate for each cost item at 4,000 units of activity:
4,000 units
Cost Behavior
Fixed Amount
Variable Rate/Unit
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
$ 20,800
40,500
49,600
5,000
3,100
600
$119,600
Variable
Fixed
40,500
$ 5.20
12.40
Variable rate calculation:
$49,600 / 4,000 units = $12.40/unit

16. Problem Solution
Step 2 - Determine the fixed amount or variable rate for each cost item at 4,000 units of activity:
4,000 units
Cost Behavior
Fixed Amount
Variable Rate/Unit
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
$ 20,800
40,500
49,600
5,000
3,100
600
$119,600
Variable
Fixed
40,500
5,000
$ 5.20
12.40

17. Problem Solution
Step 2 - Determine the fixed amount or variable rate for each cost item at 4,000 units of activity:
4,000 units
Cost Behavior
Fixed Amount
Variable Rate/Unit
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
$ 20,800
40,500
49,600
5,000
3,100
600
$119,600
Variable
Fixed
40,500
5,000
3,100
$ 5.20
12.40

18. Problem Solution
Step 2 - Determine the fixed amount or variable rate for each cost item at 4,000 units of activity:
4,000 units
Cost Behavior
Fixed Amount
Variable Rate/Unit
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
$ 20,800
40,500
49,600
5,000
3,100
600
$119,600
Variable
Fixed
40,500
5,000
3,100
$ 5.20
12.40
0.15
Variable rate calculation:
$600 / 4,000 units = $ 0.15/unit

19. Problem Solution
Step 2 - Determine the fixed amount or variable rate for each cost item at 4,000 units of activity:
4,000 units
Cost Behavior
Fixed Amount
Variable Rate/Unit
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
$ 20,800
40,500
49,600
5,000
3,100
600
$119,600
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.75

20. Cost formula = $48,600 fixed cost + $17.75 per unit variable cost
Problem Solution
Step 2 - Determine the fixed amount or variable rate for each cost item at 4,000 units of activity:
4,000 units
Cost Behavior
Fixed Amount
Variable Rate/Unit
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
$ 20,800
40,500
49,600
5,000
3,100
600
$119,600
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.75
Cost formula = $48,600 fixed cost + $17.75 per unit variable cost

21. Problem Solution
Step 3 – Calculate the cost expected to be incurred in April when 5,600 units are manufactured using the cost formula determined in Step 2:
Cost Behavior
Fixed Amount
Variable Rate/Unit
5,600 units
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.25

22. Problem Solution
Step 3 – Calculate the cost expected to be incurred in April when 5,600 units are manufactured using the cost formula determined in Step 2:
Cost Behavior
Fixed Amount
Variable Rate/Unit
5,600 units
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.25
$ 29,100
Calculation:
5,600 units * $5.20 per unit

23. Problem Solution
Step 3 – Calculate the cost expected to be incurred in April when 5,600 units are manufactured using the cost formula determined in Step 2:
Cost Behavior
Fixed Amount
Variable Rate/Unit
5,600 units
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.25
$ 29,100
40,500
Fixed costs do not change at 5,600 units.

24. Problem Solution
Step 3 – Calculate the cost expected to be incurred in April when 5,600 units are manufactured using the cost formula determined in Step 2:
Cost Behavior
Fixed Amount
Variable Rate/Unit
5,600 units
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.25
$ 29,100
40,500
69,440
Calculation:
5,600 units * $12.40 per unit

25. Problem Solution
Step 3 – Calculate the cost expected to be incurred in April when 5,600 units are manufactured using the cost formula determined in Step 2:
Cost Behavior
Fixed Amount
Variable Rate/Unit
5,600 units
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.25
$ 29,100
40,500
69,440
5,000

26. Problem Solution
Step 3 – Calculate the cost expected to be incurred in April when 5,600 units are manufactured using the cost formula determined in Step 2:
Cost Behavior
Fixed Amount
Variable Rate/Unit
5,600 units
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.25
$ 29,100
40,500
69,440
5,000
3,100

27. Problem Solution
Step 3 – Calculate the cost expected to be incurred in April when 5,600 units are manufactured using the cost formula determined in Step 2:
Cost Behavior
Fixed Amount
Variable Rate/Unit
5,600 units
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.25
$ 29,100
40,500
69,440
5,000
3,100
840
Calculation:
5,600 units * $0.15 per unit

28. Problem Solution
Step 3 – Calculate the cost expected to be incurred in April when 5,600 units are manufactured using the cost formula determined in Step 2:
Cost Behavior
Fixed Amount
Variable Rate/Unit
5,600 units
Raw materials
Factory depreciation expense
Direct labor
Production supervisor’s salary
Computer rental expense
Maintenance supplies used
Total Cost
Variable
Fixed
40,500
5,000
3,100
$ 48,600
$ 5.20
12.40
0.15
$17.25
$ 29,100
40,500
69,440
5,000
3,100
840
$148,000

29. Problem Requirements
How much cost would you expect to be incurred for each of the above items during April when 5,600 units of product are planned for production?
Calculate the average total cost per unit for the 4,000 units manufactured in March. Explain why this figure would not be useful to a manager interested in predicting the cost of producing 5,600 units in April.

30. Problem Solution Average total cost for March:
It would not be meaningful to use this average total cost figure to predict costs in the subsequent months; that would involve unitizing the fixed expenses – and they do not behave on a per unit basis.
$119,000 / 4,000 = $29.20 per unit

31. Total Cost = $48,600 fixed cost + $17.75 per unit variable cost
Problem Solution
Average total cost calculations are only valid for the number of units used in the calculation. Average total cost for any other number of units produced would be different because the fixed expenses per unit would decrease for each additional unit produced.
Using the average total cost of $29.90 to estimate the cost of producing 5,600 units would give an estimate of $167,440, which is significantly higher than the $148,000 calculated in part a using the cost formula:
Total Cost = $48,600 fixed cost + $17.75 per unit variable cost

32. Accounting: What the Numbers Mean, 5e