Q.

1 Draw a graph of the cost behavior for each of the following costs incurred by the Valley View Hospital.
The hospital measures monthly activity in patient days. Label both axes and the cost line in each graph.
1. The cost of food varies in proportion to the number of patient days of activity. In January, the
hospital provided 2,800 patient days of care, and food costs amounted to $22,400.
2. The cost of salaries and fringe benefits for the administrative staff totals $13,000 per month.
3. The hospital’s laboratory costs include two components: (a ) $40,000 per month for compensation
of personnel and depreciation on equipment, and (b ) $10 per patient day for chemicals and other
materials used in performing the tests.
4. The cost of utilities depends on how many wards the hospital needs to use during a particular
month. During months with activity under 2,000 patient days of care, two wards are used, resulting
in utility costs of $9,000. During months with greater than 2,000 patient days of care, three wards
are used, and utility costs total $14,000.
5. Many of the hospital’s nurses are part-time employees. As a result, the hours of nursing care
provided can be easily adjusted to the amount required at any particular time. The cost of wages
and fringe benefits for nurses is approximately $2,500 for each block of 200 patient days of care
provided during a month. For example, nursing costs total $2,500 for 1 to 200 patient days, $5,000
for 201 to 400 patient days, $7,500 for 401 to 600 patient days, and so forth.

Q.2 Lancaster Meat Company produces one of the best sausage products in southeastern Pennsylvania. The
company’s controller used the account-classification method to compile the following information.
a. Depreciation schedules revealed that monthly depreciation on buildings and equipment is $21,000.
b. Inspection of several invoices from meat packers indicated that meat costs the company $1.20 per
pound of sausage produced.
c. Wage records showed that compensation for production employees’ costs $.85 per pound of sausage
produced.
d. Payroll records showed that supervisory salaries total $11,000 per month.
e. Utility bills revealed that the company incurs utility costs of $5,000 per month plus $.25 per pound
of sausage produced.
Required:
1. Classify each cost item as variable, fixed, or semi-variable.
2. Write a cost formula to express the cost behavior of the firm’s production costs. (Use the form
Y  5  a  1  bX, where Y denotes production cost and X denotes quantity of sausage produced.)

1. cost item behavior/amount

a. Depreciation F.C $21,000

b. Meat V.C $1.2/Pound

c. D.L V.C $ 0.85/ Pound

d. Supervision salary F.C $ 11,000

e. Utility bills M.C $ 5,000 & $ 0.25/Pound

Y = a + bX

Y= total production cost

a= total fixed cost

b=variable rate

X= activity

Y = a+bx

Y = $37,000 + $2.30X
Q.3 The Piedmont School of Music has hired you as a consultant to help in analyzing the behavior of the
school’s costs. Use the account-classification method of cost estimation to classify each of the following
costs as variable, fixed, or semi-variable. Before classifying the costs, choose an appropriate measure for
the school’s activity.
1. Cost of buying books, sheet music, and other academic materials that are supplied to the students
by the school.
2. Repairs on musical instruments. The school employs a full-time repair technician. Repair jobs that
are beyond the technician’s capability are taken to a local musical-instrument dealer for repairs.
3. Fee charged by a local public accounting firm to audit the school’s accounting records.
4. Salaries and fringe benefits of the school’s full-time teachers.
5. Salaries and fringe benefits of the school’s full-time administrative staff.
6. Wages of the school’s part-time assistant recital instructors. These employees are hired on a temporary basis. For each student
enrolled in the school’s music programs, four hours of assistant
instructor time are needed per week.
7. Depreciation on the school’s musical instruments.
8. Rent for the building in which the school operates.
9. Electricity for the school. The school pays a fixed monthly charge plus $.10 per kilowatt-hour of
electricity.

Problem 1. For each of the description, choose a graph that best describes it. The graphs are in
the image file. There are 12 graphs labeled a through l.

1. The salary costs of the shift supervisors at a truck depot. Each shift is eight hours. The depot
perates with one two, or three shifts at various times of the year.

2. The salaries of the security personnel at a fctory. The security gurard are on duty around the
clock.

3. The wages of table-service personnel in a resturant. The employees are part-time workers,
who can be called upon for as little as two hours at a time.

4. The cost of electricity during peak-demand periods is based on teh following schedule.
Up to 9,500 kilowatt-hour (kwh).................$ 10 per kwh
Above 9,500 kilowatt-hours......................R 13 per kwh

5. The cost of sheet metal used to manufature automobiles.

6. The cost of utilities at a university. For low student enrollments,

utility costs increase with enrollment, but at a decreasing rate. For large student enrollments,
utility costs increase at an increasing rate.

7. The cost of telephone service, which is based on the number of message units per month. The
charge is $ 0.8 per message unit, for upt to 700 message units. Additional message units (above
700) are free.
8. The cost of the nursing staff in a hospital. The staf always has a minimum of nine nurses on
duty. Additional nurses are used dependng on the number of patients in the hospital. The hospital
administrator estimates that this additional nursing staff costs approximately $195 per patient per
day.

9. The cost of chartering private airplane. The cost is $390 per hour for the first three hours of a
flight. Then the charge drops to $280 per hour.

10. Under a licensing agreement with a South American import/export company, your firm has
begun shipping machine tools to several countries. The terms of the agreement call for an annual
licensing fee of $100,000 to be paid to the South American import company if total exports are
under $5,000,000. For sale in excess of $5,000,000, an additional licnsing fee of 10 percent of
sales is due.

11. Your winery expots wine to several Pacific Rim countries. In one nationa, you must pay a
tariff for every case of wine brought into the country. The tariff schedule is the following:
0 to 5,500 cases per year...................$12 per case
5,501 to 11,000 per cases per year..........$15 per case
Above 11,000 cases per year.................$20 per case