1st Term, A.

Y 2020 - 2021
COST ACCOUNTING AND CONTROL

Topic 2: Cost Behavior

Self-Review Test

NAME: (surname first)______________________________ SCORE:__________________

YR./ SEC.: _________________ DATE:
___________________

General Instruction: Write your answer on the space provided for each item.
(The Self-Review Test is not recorded)

Part I. High and Low Points Method.

A controller is interested in analyzing the fixed and variable costs of indirect labor as related
to direct labor hours. The following data have been accumulated:
Month Indirect Labor Cost Direct Labor Hours
March $2,880 425
April 3,256 545
May 2,820 440
June 3,225 560
July 3,200 540
August 3,200 495

Required: Determine the amount of the fixed portion of indirect labor expense and the
variable rate for indirect labor expense, using the high and low points method. (Round off the
variable rate to three decimal places and the fixed cost to the nearest whole dollar)

Part I. Solution

Step 1: Select the highest and lowest activity base or direct labor hours (x or
independent variable) and their corresponding cost (y or dependent variable).

Step 2: Subtract the highest and lowest direct labor hours and the highest and lowest
cost.

Indirect Labor Direct Labor

Cost (Y) Hours (X)
High $ 3,225 560
Low 2,880 425
Difference 345 135

1
Step 3: Divide the difference of the cost by the difference of the direct labor hours
(activity base) to get the variable cost per unit part of the indirect labor cost per direct
labor hours.

Variable rate = b = $345 / 135 = $2.556 per direct labor hour

Step 4: Compute the fixed cost part of the indirect labor cost. You may select either
the lowest or highest point/pair of data.

Use the Total Cost Formula/function: Y = a + bX

Where:
Y = Total cost
a = Total fixed cost
b = variable cost per unit
x = activity base

To compute for the fixed cost, rearrange the formula to this: a = Y - bX

Using the highest point/data: a = Yhigh - bXhigh

Fixed cost = $3,225 - ($2.556 x 560) = $1,794

Using the lowest point/data: a = Ylow – bXlow

Fixed cost = $2,880 – ($2.556 x 425) = $1,794

Whichever you choose, either the highest or lowest point, you will arrive with the
same answer.

Part II. Statistical Scatter-graph method

Dale Company management is interested in determining the fixed and variable components
of electricity expense, a semi-variable cost, as measured against machine hours. Data for
the first eight months of the current year follow:

Month Machine Hours (X) Electricity Cost (Y)

January 4,500 650
February 4,750 600
March 5,000 750
April 5,500 700
May 7,250 900
June 7,500 800
July 6,750 825
August 5,250 725

Part II.

COST ACCOUNTING AND CONTROL 2

 X Y
n Month Machine Hours Electricity Cost
1 January 4,500 650
2 February 4,750 600
3 March 5,000 750
4 April 5,500 700
5 May 7,250 900
6 June 7,500 800
7 July 6,750 825
8 August 5,250 725
Y-Intercept (based on - 331
least-square method)

Step 1: Plot each of the data/coordinates in a graph. The machine hours (X) is plotted
in the x-axis and the cost is plotted in the y-axis. Each set of data corresponds to a
point in the graph.

Step 2: Create a regression line or a line that fits most of the points or a line that has
the same number of points above and below it. Make sure to extend the line up to the
y-axis. The point where the line intersects with the y-axis corresponds to the total
fixed cost.

Here it is slightly above $300 but we assume it to be equal to $300. But the more
accurate estimate is $331 based on the least-square method

Electricity Cost
1,000
900
800 f(x) = 0.07 x + 330.71
R² = 0.92
700
Step
4:
Electricity Cost

600
500
400
300
200
100
-
- 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
Machine Hours

Compute the average total cost by adding all the cost and dividing it by the number of
data which is 8.

Step 5: Subtract the estimated fixed cost from the average total cost to get the
average variable cost.

COST ACCOUNTING AND CONTROL 3

Step 6: Compute the average machine hours (activity) by adding the machine hours
and divide it by 8.

Step 7: Divide the average total variable cost by the average machine hours to get the
estimated variable cost per unit or the electricity cost per machine hour.

The variable cost per unit corresponds to the slope or b in the total cost formula.
To get a more accurate variable cost per unit you should use the least square method.
Based on the least-square method it is equal to $0.071 per machine hour.

Average total cost 743.75

Less Fixed cost per month (est. based on the graph) 300.00
Average total variable cost 443.75
Divided by average machine hours per month 5,813
Electricity cost per machine hour 0.08

Slope (electricity cost per machine hour based on least square method) 0.071061093

Part III. Least-square method

The management of Rainbow Inc. would like to separate the fixed and variable components of
electricity as measured against machine hours in one of its plants. Data collected over the most
recent six months follow:

Electricity Machine
Month Cost Hours
January $1,100 4,500
February 1,110 4,700
March 1,050 4,100
April 1,200 5,000
May 1,060 4,000
June 1,120 4,600

Required:

a. Using the method of least squares, compute the fixed cost and the variable cost rate for
electricity expense. (Round estimates to the nearest cent.)
b. Compute the coefficient of correlation ( r ) and the coefficient of determination ( r 2 ) for the
independent variable.

Part III. Solution

COST ACCOUNTING AND CONTROL 4

 Step 1: Create a table for the electricity cost and the corresponding machine hours.
Step 2: Compute the sum of the electricity cost (Yi) and the sum of the machine hours
(Xi).
Step 3: Compute the average electricity cost ( Ý ) and the average machine hours ( X́ ).
Step 4: Compute the cost deviation by subtracting from each electricity cost the

average electricity cost. (Y i−Ý ). Then get the sum of it.

Step 5: Compute the activity deviation by subtracting from each machine hours the

average machine hours. ( X i− X́ ). Then get the sum of it.

Step 6: Multiply the cost deviation by the activity deviation. (Y i−Ý )( X i− X́ ). Then get
the sum of it.

a. Variable cost per machine hour (b) = 0.13365

Total Fixed cost (a) = 507.85

1 2 3 4 5 6
Y i−Ý X i − X́ ¿¿ ( X i− X́ )(Y i−Ý )
Electricity Cost Machine Activity
Month Cost (Y i ) Deviation Hours ( X i ) Deviation (4) Squared (4) x (2)
January 1,100 (7) 4,500 17 289 (119)
February 1,110 3 4,700 217 47,089 651
March 1,050 (57) 4,100 (383) 146,689 21,831
April 1,200 93 5,000 517 267,289 48,081
May 1,060 (47) 4,000 (483) 233,289 22,701
June 1,120 13 4,600 117 13,689 1,521
SUM (∑) 6,640 26,900 708,334 94,666
AVERAGE Ý 1,107 X́ 4,483

Step 7: Compute the variable cost per unit using the formula below:

^ Σ ( X i− X́ )(Y i −Ý ) = 94,666 =0.13365

b= 2
Σ (X i− X́) 708,334

Step 8: Compute the fixed cost using the formula below:

a^ =Ý − b^ X́=1,107−( 0.13365 × 4,483 )=507.85

COST ACCOUNTING AND CONTROL 5

 Step 9: To get the coefficient of correlation, add an additional column in the table for
the square of the activity deviation ( X i− X́ )2 and the square of the cost deviation
(Y i−Ý )2. Then get the sum of each square of deviation.

b. Coefficient of correlation ( r ) = 0.93949

Coefficient of determination = 0.88269

1 2 3 4 5 6 7
Y i−Ý
X i − X́
( X i− X́ )2
( X i− X́ )(Y i−Ý ) (Y i−Ý )2
Electricity Cost Machine Activity
Month Cost (Yi) Deviation Hours (Xi) Deviation (4) Squared (4) x (2) (2)Squared
January 1,100 (7) 4,500 17 289 (119) 49
February 1,110 3 4,700 217 47,089 651 9
March 1,050 (57) 4,100 (383) 146,689 21,831 3,249
April 1,200 93 5,000 517 267,289 48,081 8,649
May 1,060 (47) 4,000 (483) 233,289 22,701 2,209
∑ 1,120 13 4,600 117 13,689 1,521 169

Sum 6,640 (0) 26,900 0 708,334 94,666 14,334

Average Ý = 1,107 X́ =¿
4,483

Step 10: To get the coefficient of correlation use the formula below:

Coefficient of correrlation=r=
∑ (X i− X́ ¿ )(Y i−Ý ) ¿
√¿¿ ¿

Step 11: To get the coefficient of determination use the formula below:

Coefficient of determination=r 2=0.88264

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COST ACCOUNTING AND CONTROL 7