ACC 561
Question 3-38, Mixed Cost, Choosing Cost Drivers, and High-Low and Visual-Fit Methods, on p. 121-122
Cedar Rapids Implements Company produces farm implements. Cedar Rapids
is in the process of measuring its manufacturing costs and is
particularly interested in the costs of the manufacturing maintenance
activity, since maintenance is a significant mixed cost. Activity
analysis indicates that maintenance activity consists primarily of
maintenance labor setting up machines using certain supplies. A setup
consists of preparing the necessary machines for a particular production
run of a product. During setup, machines must still be running, which
consumes energy. Thus, the costs associated with maintenance include
labor, supplies, and energy. Unfortunately, Cedar Rapid’s cost
accounting system does not trace these costs to maintenance activity
separately. Cedar Rapids employs two fulltime maintenance mechanics to
perform maintenance. The annual salary of a maintenance mechanic is
$25,000 and is considered a fixed cost. Two plausible cost drivers have
been suggested: “units produced” and “number of setups.” Data had been
collected for the past 12 months and a plot made for the cost
driver—units of production. The maintenance cost figures collected
include estimates for labor, supplies, and energy. Cory Fielder,
controller at Cedar Rapids, noted that some types of activities are
performed each time a batch of goods is processed rather than each time a
unit is produced. Based on this concept, he has gathered data on the
number of setups performed over the past 12 months. The plots of monthly
maintenance costs versus the two potential cost drivers follow on page
122.
1. Find monthly fixed maintenance cost and the variable maintenance
cost per driver unit using the visual-fit method based on each potential
cost driver. Explain how you treated the April data.
2. Find monthly fixed maintenance cost and the variable maintenance
cost per driver unit using the high-low method based on each potential
cost driver.
3. Which cost driver best meets the criteria for choosing cost functions? Explain.
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