29

CHAPTER 2

Cost Behavior
30 Management Accounting

CHAPTER 2

Cost Behavior

Learning objectives:
After studying this chapter, you should be able to:
1. Understand how fixed and variable costs behave and how to use them to
predict costs.

2. Use a scattergraph plot to diagnose cost behavior.

3. Analyze a mixed cost using the high-low method.

4. Prepare an income statement using the contribution format.

5. Analyze a mixed cost using the least-squares regression method.

2.1 Cost behavior

Some costs are changed in terms of production and some costs are fixed upto a specific level of
production, then changed in terms of production. Again, some costs are not changed at all.
Characteristics of the costs are called cost behavior.

On the other hand, cost behavior refers to the way different types of production costs change
when there is a change in level of production.

2.2 Elements of cost behavior

There are three main types of costs according to their behavior:

Fixed Costs:
Fixed costs are those which do not change .with the level of activity within the relevant range.
These costs will incur even if no units are produced. For example rent expense, straight-line
depreciation expense, etc.
 Chapter 2: Cost Behavior 31
Variable Costs:
Variable costs change in direct proportion to the level of production. This means that total
variable cost increase when more units are produced and decreases when less units are produced.
Although variable in total, these costs are constant per unit.

Mixed Costs:
Mixed costs or semi-variable costs have properties of both fixed and variable costs due to
presence of both variable and fixed components in them. An example of mixed cost is telephone
expense because it usually consists of a fixed component such as line rent and fixed subscription
charges as well as variable cost charged per minute cost. Another example of mixed cost is
delivery cost which has a fixed component of depreciation cost of trucks and a variable
component of fuel expense.

2.3 The main features of fixed cost

The main features of fixed cost are:
(ii) A fixed cost is a cost that does not vary in the short term, irrespective of changes in
production or sales levels, or other measures of activity. For example, the rent on a building will
not change until the lease runs out or is re-negotiated, irrespective of the level of business activity
within that building. Examples of other fixed costs are insurance, depreciation, and property
taxes.

(iii) When a company has a large fixed cost component, it must generate a significant amount of
sales volume in order to have sufficient contribution margin to offset the fixed cost. Once that
sales level has been reached, however, this type of business generally has a relatively low
variable cost per unit, and so can generate outsized profits above the breakeven level.

(iv) Fixed costs are allocated under the absorption basis of cost accounting. Under this
arrangement, fixed manufacturing overhead costs are proportionally assigned to the units
produced in a reporting period, and so are recorded as assets. Once the units are sold, the costs are
charged to the cost of goods sold. Thus, there can be a delay in the recognition of those fixed
costs that are allocated to inventory.

2.4 The main features of variable costing

The main characteristics of variable costing are as follows:
(1) All the costs like production, administration, selling and distribution costs are classified into
fixed and variable cost.
32 Management Accounting
(2) Variable costs are charged to production cost. Fixed costs are not charged to production costs.
Rather, it is charged to contribution margin.

(3) All the fixed costs are taken as periodical cost and it is charged to the profit and loss account
of that year when it occurred.

(4) Finished goods and work in progress are valued by taking variable manufacturing cost only.

(5) It has its own method of calculation of profit. The profit is determined by deducting total
fixed cost from contribution margin. The contribution margin is ascertained by deducting total
variable cost from sales.

2.5 The methods of segregating mixed cost

To segregate semi variable cost into fixed cost and variable cost is necessary because with this,
we can add fixed cost proportion in total fixed cost and variable cost proportion in total variable
cost. So, with following method, we can carry out this.

1. Graphical Method:
With graphical method, we draw the graphic line of semi variable cost by taking output on x-axis
and total semi variable cost at y-axis. After this, we do judgment and select a point where will be
our fixed cost in semi variable cost. After this, we draw the line of best fit. This line shows the
fixed cost which will not be changed after changing output.

2. High Points and Low Points Method:

Under this method, we calculate total sale and total cost at highest level of production. Then we
calculate total sale and total cost at lowest level of production. Because, semi variable cost have
both variable and fixed cost. We first calculate variable rate with following formula:
Highest value - Lowest value
Variable Cost (b) =
Highest activity - Lowest activity

Estimate the fixed Cost Level:

Fixed Cost (a) = Total Cost - Variable Cost.

3. Analytical Method:
Under this method, cost accountant does some analysis for dividing semi variable cost into fixed
cost and variable cost. After this, he calculate fixed cost on that rate which analyzed. Suppose, a
cost accountant says that in the total semi variable cost, there may be 30% fixed cost and 70 %
variable cost. Now total semi variable cost will be divided on this basis.
 Chapter 2: Cost Behavior 33
If production level will increase, variable cost's proportion will increase with same rate. But fixed
cost will not change.

4. Level of Activity Method

In this method, we compare two level of production with the amount of expenses in these levels.
Variable cost will be calculated with following method

Change in semi variable cost

Level of Activity =
Change in production volume

5. Least Square Method:

This is statistical method in which we use this method for calculating a line of best fit. This
method is based on the linear equation y = mx +c , y is total cost, x is volume of output and c is
total fixed cost. By solving this equation mathematically, we can calculate variable cost(M) at
different level of production.

2.6 Classification of fixed cost according to its behavior

Fixed Cost:
The terminology of CIMA defines fixed cost as "the cost which accrues in relation to the passage
of time and which, within certain limits, tends to be unaffected by fluctuations in the level of
activity".

A going business should have physical facilities and an organization for use. These things provide
the capacity to manufacture and sell. The continuing costs of having capacity incurred in
anticipation of future activity are termed as "capacity costs". In case capacity is utilized,
additional costs are incurred. Such additional costs of manufacturing and selling are controllable
with current activity, while capacity costs tend to continue regardless of the current rate of
activity as long as the same capacity is maintained.

Fixed costs are those which are not expected to change in total within the current budget year,
irrespective of variations in the volume of activity. Such costs are fixed for a given period over a
relevant range of output, on the assumption that technology and methods of" manufacturing
remain unchanged. For the purpose of cost analysis, fixed costs may be classified as follows:

1. Committed Costs: These costs cannot be eliminated instantly. These costs are incurred to
maintain basic facilities. Example: Rent, rates, taxes, insurance.
34 Management Accounting
2. Policy and managed costs: Policy costs are incurred in enforcing management policies.
Example: Housing scheme for employees. Managed costs are incurred to ensure the operating
existence of the company. Example: Staff services.

3. Discretionary costs: These are not related to operations. These can be controlled by the
management. These occur at the discretion of the management.
 Chapter 2: Cost Behavior 35

Master Demos
Problem 1
The administrator of Azalea Hills Hospital would like a cost formula linking the costs involved in
admitting patients to the number of patients admitted during a month. The admitting department's
costs and the number of patients admitted during the immediately preceding eight V months are
given in the following table:
Month Number of Patients Admitted Admitting Department Costs
May 1,800 Tk 14,700
June 1,900 15,200
July 1,700 13,700
August 1,600 14,000
September 1,500 14,300
October 1,300 13,100
November 1,100 12,800
December 1,500 14,600
Required:
(i) Use the high-low method to establish the fixed and variable components of admitting
costs.
(ii) Express the fixed and variable components of admitting costs as a cost formula in the
linear equation form Y = a + bX.
(iii) Express the fixed and variable components of admitting costs as a cost formula in the
least square regression form Y = a + bX.
Solution:
Req-(i): The periods of the lowest at November 1,100 patients and highest activity at June 1,900
patients.
The second step is to compute the variable cost per unit using those two points:

Number of Patients Admitting Department

Month Admitted Costs
High activity level (June) 1,900 Tk 15,200
Low activity level (November) 1,100 12,800
Change 800 Tk 2,400

Change in cos t Tk 2,400

Variable cost per patient = = = Tk 3
Change in activity 800

Fixed cost element = Total cost - Variable cost element

= Tk 15,200 - (Tk 3 X 1,900 patients)
= Tk 9,500
36 Management Accounting
Req-(ii): The cost formula expressed in the linear equation form is Y = 9,500 + 3X.
Req- (iii) Using regression/least square regression method:
Here, Y = a + bX
n ( YX )  (  X )( Y )
Variable cost per patient (b) =
n ( X 2 )  ( X) 2
(  Y )  b(  X )
Fixed cost (a) =
n

Calculation of Least Square Regression

Month Patient Days Maintenance

(X) Costs (Y) XY X2
January 5,600 Tk 7,900 Tk 4,42,40,000 3,13,60,000
February 7,100 8,500 6,03,50,000 5,04,10,000
March 5,000 7,400 3,70,00,000 2,50,00,000
April 6,500 8,200 5,33,00,000 4,25,50,000
May 7,300 9,100 6,64,30,000 5,32,90,000
June 8,000 9,800 7,84,00,000 64,000,000
July 6,200 7,800 4,83,60,000 38,440,000
Total 45,700 Tk 58,700 Tk 38,80,80,000 304,750,000

From this table:

∑X = 45,700
∑Y = Tk 58,700
∑XY = Tk 38,80,80,000
∑X2 = 30,47,50,000
n=7

7(Tk 388,080,000)  ( 45,700)(Tk 58,700)

Now, b= = Tk 0.759
7(304,750,000)  (45,700) 2

(Tk 58,700)  Tk 0.759(45,700)

a= = Tk 3,431
7
Therefore, the cost formula for maintenance cost is as follows:
Y = a + bX
Y= 3,431 + 0.759X
 Chapter 2: Cost Behavior 37

Problem 2
The following data relating to units shipped and total shipping expense have been
assembled by Archer Company, a manufacturer of large, custom-built air-conditioning
units for commercial buildings:
Units Total Shipping
Month Shipped Expense
January 3 $1,800
February 6 2,300
March 4 1,700
April 5 2,000
May 7 2,300
June 8 2,700
July 2 1,200
Required:
1. Using the high-low method, estimate a cost formula for shipping expense.
2. For the scattergraph method, do the following:
a. Prepare a scattergraph, using the data given above. Plot cost on the vertical axis and
activity on the horizontal axis. Fit a regression line to your plotted points by visual
inspection.
b, Using your scattergraph, estimate the approximate variable cost per unit shipped and
the approximate fixed cost per month.
3. What factors, other than the number of units shipped, are likely to affect the company's
total shipping expense? Explain

Solution:
1.
Units Shipped Shipping Expense
High activity level (June). 8 Tk 2,700
Low activity level (July 2 1,200
Change 6 Tk 1,500
Variable cost element:
change in exp ense Tk1,500
= = Tk 250/unit
change in activity 6
Fixed cost element:
Shipping expense at high activity level Tk 2,700
Less variable cost element (Tk 250 x 8 units) 2,000
Total fixed cost Tk 700
The cost formula is Tk 700 per month plus Tk 250 per unit shipped or Y = Tk 700 + Tk 250X.
38 Management Accounting
2. a. The scattergraph :

(b) Students' answers will vary, depending on their visual fit of the regression line to the data.

Total cost at 5 units shipped per month [a point falling on the

regression line in (a)] Tk 2,000
Less fixed cost element (intersection of the Y axis) 1,000
Variable cost element Tk 1,000

Tk 1,000 / 5 units = Tk 200 per unit.

The cost formula is Tk 1,000 per month plus Tk 200 per unit shipped or
Y = Tk 1,000 + Tk 200X.

3. The cost of shipping units is likely to depend on the weight and volume of the units and the
distance traveled as well as on the number of units shipped.

Solutions to University Questions

 Chapter 2: Cost Behavior 39

Problem 3 BBA (Professional) 2005

Memotech Inc. operates a fleet of delivery trucks in a large metropolitan area. A careful study by
the company’s cost analyst has determined that if a truck is driven 120000 miles during a year,
the average operating cost is 11.6 cents per mile. If a truck is driven only 80000 miles during a
year, the average operating cost increases to 13.6 cents per mile.
Required:
(a) Using the high-low method, estimate the variable and fixed cost elements of the annual cost
of truck operation.
(b) If a truck were driven 100000 miles during a year, what total cost would you expect to be
incurred?
Solution: (a) Given Total cost @$0.116 = 1200000.116 = 13920
Total cost @$0.136 = 800000.136 = 10880
Using high-low method, we know
High Cost  Low Cost
The variable rate (b) = High Unit  Low Unit
13920  10880
=
120000  80000
= 0.076
The fixed cost (a) = High Cost – (High Unit  Variable Rate)
= 13920 – (120000  0.076)
= 4800
 The cost formula is Y = a + bX
 Y = 4800 + 0.076X [Ans.]
(b) When X = 100000, then
The total cost (Y) = 4800 + 0.076X
= 4800 + 0.076(100000)
= $12400 [Ans.]
Problem 4 BBA (Professional) 2006
The Lakeshore Hotel’s guest-days of occupancy and custodial supplies expense over the
last seven months were:
Month Guest-Days of Occupancy Custodial Supplies (in Tk)
March 4000 7500
April 6500 8250
May 8000 10500
June 10500 12000
July 12000 13500
August 9000 10750
September 7500 9750
Guest-day is a measure of the overall activity at the hotel. For example, a guest who stays at the
hotel for three days is counted as three guest-days.
Required:
40 Management Accounting
(a) Using the high-low method, estimate a cost formula for the custodial supplies expense.
(b) Express the variable and fixed costs in the form Y = a + bX.
(c) Using the cost formula you derived above, what amount of custodial supplies expense
would you expect to be incurred at an occupancy level of 11000 guest-days?

Solution: (a) Using high-low method, we know

High Cost  Low Cost
The variable rate (b) = High Unit  Low Unit
13500  7500
=
12000  4000
= 0.75
The fixed cost (a) = High Cost – (High Unit  Variable Rate)
= 13500 – (12000  0.75)
= 4500

(b) The cost formula is Y = a + bX

 Y = 4500 + 0.75X [Ans.]

(c) When X = 11000, then

The total cost (Y) = 4500 + 0.75X
= 4500 + 0.75(11000)
= Tk 12750 [Ans.]

Problem 5 BBA (Professional) 2006

The maintenance cost and patient days for the first seven months of X hospital are as
follows:
Month Activity Level: Patient days Maintenance Cost Incurred
January 5600 7900
February 7100 8500
March 5000 7400
April 6500 8200
May 7300 9100
June 8000 9800
July 6200 7800
Required:
(a) Using the least-squares regression method, estimate the variable cost per patient.
(b) From the data in (a) above, express the cost formula in the linear equation form Y = a + bX.
(c) Using the derived cost formula, determine the expense expected to be incurred for 9000
patients.

Solution:
(a) Fitting Cost Equation by the Method of Least Squares
 Chapter 2: Cost Behavior 41
2
X Y XY X
5600 7900 44240000 31360000
7100 8500 60350000 50410000
5000 7400 37000000 25000000
6500 8200 53300000 42250000
7300 9100 66430000 53290000
8000 9800 78400000 64000000
6200 7800 48360000 38440000
2
∑X = 45700 ∑Y = 58700 ∑XY = 388080000 ∑ X = 304750000
n ( XY)  ( X)( Y ) 7(388080000)  (45700)(58700)
Here b  2 2
  0.759
n ( X )  (  X) 7(304750000)  ( 45700) 2
( Y )  b( X) 58700  0.759(45700)
a   3431
n 7
(b) The equation of straight line trend is Y = a + bX
 Y = 3431 + 0.759X (Ans).
(c) When X = 9000, then
The total cost (Y) = 3431 + 0.759X
= 3431 + 0.759(9000)
= Tk 10262 [Ans.]
Problem 6 BBA (Professional) 2007
The following information relating to production and mixed cost are extracted from the
books of a manufacturing firm:
Productio Mixed
n Cost
(Units) Taka
January 6800 31580
February 6400 30420
March 7200 32740
April 8000 35060
May 6600 31000
June 7000 32160
Required:
(i) Calculate variable cost per unit and total fixed cost by using Least Square Method.
(ii) What will be the mixed cost of producing 7500 units of the month of July?
Solution: Try yourself.

Problem 7 BBA (Professional) 2009

St. Paul’s Hospital contains 450 beds. The average occupancy rate is 80% per month. In other
words, on average, 80% of the hospital’s beds are occupied by patients. At this level of
occupancy, the hospital’s operating costs are Tk 32 per occupied bed per day, assuming a 30-day
month. This Tk 32 figure contains both variable and fixed cost elements. During June, the
42 Management Accounting
hospital’s occupancy rate was only 60%. A total of Tk 326700 in operating cost was incurred
during the month.
Required:
(i) Using the high-low method, estimate:
(a) The variable cost per occupied bed on a daily basis.
(b) The total fixed operating costs per month.
(ii) Assume an occupancy rate of 70% per month. What amount of total operating cost would
you expect the hospital to incur?
Solution: (i) Given Total cost at 80% occupancy rate = 45080%3230 = 345600
Total cost at 60% occupancy rate (given) = 326700
Total beds at 80% occupancy rate = 45080%30 = 10800
Total beds at 60% occupancy rate = 45060%30 = 8100
Using high-low method, we know
High Cost  Low Cost
(a) The variable rate = High Unit  Low Unit
345600  326700
=
10800  8100
= Tk 7 per bed-day [Ans.]
(b) The fixed cost at 80% = High Cost – (High Unit  Variable Rate)
= 345600 – (10800  7)
= 270000
 The cost formula is Y = a + bX
 Y = 270000 + 7X [Ans.]
(ii) When X = 70%45030 = 9450, then
The total cost (Y) = 270000 + 7X
= 270000 + 7(9450)
= Tk 336150 [Ans.]
Problem 8 BBA (Professional) 2009
The following data relating to units shipped and total shipping expense has assembled by
Arche Company, a wholesaler of large, custom-built air-conditioning units for
commercial buildings:
Month Units Shipped Total Shipping Expense (Taka)
January 3 1800
February 6 2300
March 4 1700
April 5 2000
May 7 2300
June 8 2700
July 2 1200
Required:
(i) Using the least-square regression method, estimate the variable and fixed elements of
shipping expense.
(ii) Express the cost data in (i) above in the form Y = a + bX.
 Chapter 2: Cost Behavior 43

Solution:
(i) Fitting Cost Equation by the Method of Least Squares
X Y XY X2
3 1800 5400 9
6 2300 13800 36
4 1700 6800 16
5 2000 10000 25
7 2300 16100 49
8 2700 21600 64
2 1200 2400 4
∑X = 35 ∑Y = 14000 ∑XY = 76100 ∑ X2 = 203
n (  XY )  ( X)(  Y) 7(76100)  (35)(14000)
Here b  2 2
  217.86
n ( X )  ( X) 7(203)  (35) 2
( Y )  b( X) 14000  217.86(35)
a   911
n 7
(ii) The equation of straight line trend is Y = a + bX
 Y = 3431 + 0.759X (Ans).
Problem 9 BBA (Professional) 2010
The Big Star Hotel in Dhaka has accumulated records of the total electrical costs of the
hotel and the number of occupancy-days over the last year. An occupancy-day represents
a room rented out for one day. The hotel’s business is highly seasonal, with peak
occurring during the ski season and in the summer.
Month Occupancy- Electrical costs
days
January 1736 4127
February 1904 4207
March 2356 5083
April 960 2857
May 360 1871
June 744 2696
July 2108 4670
August 2406 5148
September 840 2691
October 124 1588
November 720 2454
December 1364 3529
Required:
(i) Using the high-low method estimate the fixed cost of electricity per month and the
variable cost of electricity per occupancy-day. Almost estimate a cost formula for
electrical cost.
44 Management Accounting
(ii) Using the cost formula you derived above, what amount of electrical costs would you
expect to be incurred at an occupancy level of 1100 occupancy-day?

Solution: (i) Using high-low method, we know

High Cost  Low Cost
The variable rate (b) = High Unit  Low Unit
5148  1588
=
2406  124
= 1.56
The fixed cost (a) = High Cost – (High Unit  Variable Rate)
= 5148 – (2406  1.56)
= 1395
The cost formula is Y = a + bX
 Y = 1395 + 1.56X [Ans.]

(ii) When X = 1100, then

The total cost (Y) = 1395 + 1.56X
= 1395 + 1.56(1100)
= Tk 3111 [Ans.]
Problem 10 BBA (Professional) 2011, 2012
ABC Co. Ltd. operates a fleet of delivery trucks in Malaysia. The Co. has determined that if a
truck is driven 105,000 kilometers during a year, the average operating costs is Tk. 11.40 per
kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating costs
increases to Tk. 13.4 per kilometer.
Required:
(i) Using the high-low method, estimate the variable and fixed costs element of the Annual cost
of truck operations.
(ii) Express the variable and fixed costs in the form Y= a + bx
(iii) If a truck were driven 80,000 kilometers during a year, what total costs would you expect to
be incurred?

Solution:
Req-(i):
Using high-low method:
Calculation of level of activity and cost
Details Kilometers Driven (Activity) Total Cost
High level of activity 1,05,000 11,97,000*
Low level of activity 70,000 9,38,000**

Note: * Tk 11,97,000 = 1,05,000 x Tk 11.40

** Tk 9,38,000 = 70,000 x Tk 13.40
 Chapter 2: Cost Behavior 45

High Cost  Low Cost

Variable cost per kilometer (b) =
High Kilometer  Low Kilometer
11,97,000  9,38,000
=
1,05,000  70,000
= Tk 7.4
The fixed cost (a) = High Cost – (High Kilometer  Variable cost per kilometer)
= Tk 11,97,000 – (1,05,000  Tk 7.4)
= Tk 4,20,000
Req-(ii):

The cost formula is Y = a + bX

 Y = 4,20,000 + 7.4X
Req-(iii):
Total Cost = Fixed cost + Variable cost
= 4,20,000 + (80,000 x Tk 7.4) = Tk 10,12,000

Problem-8: BBA (Professional) 2013

Dancun Ltd. Operates a fleet of delivery trucks in Thailand. The company has determined that if a
truck is driven 1,05,000 kilometers during a year , the average operating costs is Tk.11.40 per
kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating costs
increase to Tk.13.4 per kilometer during a year , the average operating costs increases to Tk.13.4
per kilometer.
Required:
(i) Using the high-low method, estimate the variable and fixed costs element of the annual costs
of truck operations.
(ii) Express the variable cost and fixed cost in the form Y=a+bx.
(iii) If a truck were driven 80,000 kilometers during a year, what total costs would you expect to
be incurred?
Solution:
Same as Problem-10

Questions
1. What do you mean by cost behavior? Classify fixed cost according to its behavior. (2007)
2. Mention the methods of segregating mixed cost. (2006, 2010)
3. State the main features of fixed cost and variable cost. (2006)
4. Distinguish between product cost and period cost. Why are product costs sometimes
called inventorable costs? (2006, 2009)
5. Explain the elements of costs.
6. What is scattergraph? What does it indicate?
46 Management Accounting
7. Only variable costs can be differential costs. Do you agree? Explain. (2011)
8. How will you classify cost according to managerial decision making? (2010)
9. Distinguish between variable cost, fixed cost and mixed cost. (2010)
10. “The relevant range pertains to fixed cost, not variable cost.” Do you agree? Explain. (2009)
Exercises

Exercise 1
The administrator of Azalea Hills Hospital would like a cost formula linking the administrative
costs involved in admitting patients to the number of patients admitted during a month. The
admitting department's costs and the number of patients admitted during the immediately
preceding eight months are given in the following table:

Month Number of Admitting

Patients Department
Admitted Costs
May 1,800 Tk 14,700
June 1,900 Tk 15,200
July 1,700 Tk 13,700
August 1,600 Tk 14,000
September 1,500 Tk 14,300
October 1,300 Tk 13,100
November 1,100 Tk 12,800
December 1,500 Tk 14,800

Required:
(i) Use the high-low method to establish the fixed and variable components of admitting costs.
(ii) Express the fixed and variable components of admitting costs as a cost formula (high-low) in
the form Y = a + bX.
(iii) Use least square method to express the cost formula Y = a + bX.
(iv) Draw a scatter graph
(v) Using your scatter graph, estimate the approximate variable cost per unit shipped and the
approximate fixed cost per month with the quick-and-dirty method.

Exercise 2
 Chapter 2: Cost Behavior 47
The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical cost of
the hotel and the number of occupancy-days over the last year. An occupancy-day represents a
room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during
the ski season and in the summer.

Month Occupancy-Days Electrical Costs

January 1,736 Tk 4,127
February 1,904 Tk 4,207
March 2,356 Tk 5,083
April 960 Tk 2,857
May 360 Tk 1,871
June 744 Tk 2,696
July 2,108 Tk 4,670
August. 2,406 Tk 5,148
September 840 Tk 2,691
October 124 Tk 1,588
November 720 Tk 2,454
December 1,364 Tk 3,529
Required:
(a) Using the high-low method, estimate the fixed cost of electricity per month and the variable
cost of electricity per occupancy-day Round off the fixed cost to the nearest whole dollar and the
variable cost to the nearest whole cent.
(b) What other factors other than occupancy-days are likely to affect the variation in electrical
costs from month to month?

Exercise 3
EZ Rental Car offers rental cars in an off-airport location near a major tourist destination in
Florida. Management would like to better understand the behavior of the company's costs. One of
those costs is the cost of washing cars. The company operates its own car wash facility in which
each rental car that is returned is thoroughly cleaned before being released for rental to another
customer. Management believes that the costs of operating the car wash should be related to the
number of rental returns. Accordingly, the following data have been compiled:
Month Rental Returns Car Wash Costs
January 2,310 Tk 10,113
February 2,453 Tk 12,691
March 2,641 Tk 10,905
April 2,874 Tk 12,949
May 3,540 Tk 15,334
June 4,861 Tk 21,455
July 5,432 Tk 21,270
August. 5,268 Tk 19,930
September 4,628 Tk 21,860
October 3,720 Tk 18,383
November 2,106 Tk 9,830
48 Management Accounting
December 2,495 Tk 11,081
Required:
Using least-squares regression, estimate the fixed cost and variable cost elements of monthly car
wash costs. The fixed cost element should be estimated to the nearest dollar and the variable cost
element to the nearest cent.
Exercise 4
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:
Total Shipping
Month Units Shipped Expense
January 3 Tk 1,800
February 6 Tk 2,300
March 4 Tk 1,700
April 5 Tk 2,000
May 7 Tk 2,300
June 8 Tk 2,700
July 2 Tk 1,200
Required:
(a) Using the high-low method, estimate a cost formula for shipping expense.
(b) The president of the company has no confidence in the high-low method and would like you
to check out your results using a scatter graph.
(i) Prepare a scatter graph, using the data given above. Plot cost on the vertical axis and activity
on the horizontal axis. Use a ruler to fit a straight line to your plotted points.
(ii) Using your scatter graph, estimate the approximate variable cost per unit shipped and the
approximate fixed cost per month with the quick-and-dirty method.
(c) What factors, other than the number of units shipped, are likely to affect the company's total
shipping expense? Explain.
(d) Using the least-squares regression method, estimate the cost formula for shipping expense.
(e) Prepare a simple table comparing the variable and fixed cost elements of shipping expense as
computed under the quick-and-dirty scatter graph method, the high-low method, and the least-
squares regression method.
Exercise 5
The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the
last seven months were:
Guest-Days Custodial Supplies
Month of Occupancy Expense
March 4,000 Tk 7,500
April 6,500 Tk 8,250
May 8,000 Tk 10,500
June 10,500 Tk 12,000
July 12,000 Tk 13,500
August. 9,000 Tk 10,750
September 7,500 Tk 9,750
Required:
 Chapter 2: Cost Behavior 49
(a) Prepare a scatter graph using the data cost on the vertical axis and activity on the horizontal
axis. Using a ruler, fit a line to your plotted points.
(b) Using the quick-and-dirty method, what is the approximate monthly fixed cost? The
approximate variable cost per guest-day?
(c) Scrutinize the points on your graph and explain why the high-low method would or would not
yield an accurate cost formula in this situation.