Using Multiple Regression Results to Construct and Apply a Cost Formula

The controller for Dohini Manufacturing Company felt that the number of purchase orders alone did not explain the monthly purchasing cost. He knew that nonstandard orders (for example, one requiring an overseas supplier) took more time and effort. He collected data on the number of nonstandard orders for the past 12 months and added that information to the data on purchasing cost and total number of purchase orders.

Month      Purchasing Cost      Number of Purchase Orders      Number of Nonstandard Orders
January      $18,860 370       53
February      18,065 330       35
March      19,250 370       61
April      18,050 410       14
May      19,345 400       73
June      19,500 450       55
July      19,670 460       30
August      20,940 560       80
September      19,430 440       51
October      20,020   500       50
November      18,800 470       12
December      19,340 480       27
Multiple regression was run on the above data; the coefficients shown by the regression program are:

Intercept   14,490 (rounded to the nearest dollar)
X variable 1   8.8 (rounded to the nearest cent)
X variable 2   20.37 (rounded to the nearest cent)
Required:

1. Construct the cost formula for the purchasing activity showing the fixed cost and the variable rate.

$fill in the blank 1
+   ($fill in the blank 2
× Purchase orders)   +   ($fill in the blank 3
× Nonstandard orders)
2. If Dohini Manufacturing Company estimates that next month will have 430 total purchase orders and 45 nonstandard orders, what is the total estimated purchasing cost for that month? (Round your answer to the nearest dollar.)

$fill in the blank 4
3. What if Dohini Manufacturing wants to estimate purchasing cost for the coming year and expects 5,340 purchase orders and 600 nonstandard orders?

What will estimated total purchasing cost be? (Round your answer to the nearest dollar.)

$fill in the blank 5
What is the total fixed purchasing cost?

$fill in the blank 6
Why doesn't it equal the fixed cost calculated in Requirement 2 above?

Use the following information to answer questions 1-15.

Consider a firm that daily rents machinery for the cost of $1000 and employs workers at the cost of $100 for a full day of work. The following table describes the production function of the firm. Fill the table such that you can make some production decisions for this firm.

1. What is the level of production when 10 units of labor are employed?

2. What is the fixed cost of production when 10 units of labor are employed?

3. What is the variable cost of production when 10 units of labor are employed?

4. What is the total cost of production when 10 units of labor are employed?

5. What is the average variable cost of production when 10 units of labor are employed?

6. What is the average total cost of production when 10 units of labor are employed?

7. What is the marginal cost of production when 10 units of labor are employed?

8. What is the minimum amount of workers needed to be employed if the firm were to produce 24 units of the good?

9. At what approximate level of production is the marginal cost of production equal to the average total cost?

10. What would be the firm’s level of production if the price of the good was $60?

11. What would be the firm’s profits at equilibrium if the price of the good was $60?

12. What would be the price of the good if the firm is employing 8 workers at equilibrium?

13. What would be the profit of the firm if the firm is employing 8 workers at equilibrium?

14. What would be the price of the good if the firm is employing 9 workers at equilibrium?

15. What would be the profit of the firm if the firm is employing 9 workers at equilibrium?

FIFO Perpetual Inventory

The beginning inventory at Dunne Co. and data on purchases and sales for a three-month period ending June 30 are as follows:

Required:

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3, using the first-in, first-out method. Under FIFO, if units are in inventory at two different costs, enter the units with the LOWER unit cost first in the Cost of Goods Sold Unit Cost column and in the Inventory Unit Cost column.

2. Determine the total sales and the total cost of goods sold for the period. Journalize the entries in the sales and cost of goods sold accounts. Assume that all sales were on account.

3. Determine the gross profit from sales for the period.
$

4. Determine the ending inventory cost as of June 30.
$

5. Based upon the preceding data, would you expect the ending inventory using the last-in, first-out method to be higher or lower?
Lower

Feedback

1. FIFO means that the first units purchased are assumed to be the first to be sold. Therefore, ending inventory is made up of the most recent purchases. Think of your inventory in terms of "layers." The first sale comes from the oldest layer, which is beginning inventory. When deciding which layer to use for costing of the next sale ask yourself: "Is the remaining amount of the beginning inventory layer enough to satisfy the second sale?" If not, the other units sold should be taken from the next purchase layer, which then contains the oldest costs. Continue this process for each transaction. If you have completed the problem correctly, the remaining units making up ending inventory should be costed at the May 25 unit purchase price.

2. Total sales are obtained by taking the number of units sold times their sale prices for all sales and adding these amounts together. The total cost of merchandise sold can be obtained by adding the FIFO costs in the perpetual inventory record.
When the perpetual inventory system is used, revenue is recorded each time a sale is made along with an entry to record the cost of the merchandise sold. For this problem, however, prepare one journal entry for the sale on account and one for the cost of merchandise sold.

3. Sales minus cost of merchandise sold equals gross profit.

4. The ending inventory is what is left after subtracting the cost of goods sold from the goods available for sale. Multiply the units remaining after the last sale by their corresponding most recent layer cost to determine the FIFO cost of the ending inventory.

5. Consider how prices were moving. Remember FIFO reports higher gross profit, net income, and ending inventory than the LIFO method when costs (prices) are increasing.

Learning Objective 2, Learning Objective 3.

Check My Work

Job Cost Sheet

Remnant Carpet Company sells and installs commercial carpeting for office buildings. Remnant Carpet Company uses a job order cost system. When a prospective customer asks for a price quote on a job, the estimated cost data are inserted on an unnumbered job cost sheet. If the offer is accepted, a number is assigned to the job, and the costs incurred are recorded in the usual manner on the job cost sheet. After the job is completed, reasons for the variances between the estimated and actual costs are noted on the sheet. The data are then available to management in evaluating the efficiency of operations and in preparing quotes on future jobs. On October 1, Remnant Carpet Company gave Jackson Consulting an estimate of $3,136 to carpet the consulting firm’s newly leased office. The estimate was based on the following data:

Estimated direct materials:

40 meters at $35 per meter$ 1,400

Estimated direct labor:

24 hours at $20 per hour480

Estimated factory overhead (75% of direct labor cost)360

Total estimated costs$2,240

Markup (40% of production costs)896

Total estimate$3,136

On October 3, Jackson Consulting signed a purchase contract, and the delivery and installation were completed on October 10.

The related materials requisitions and time tickets are summarized as follows:

Materials Requisition No.Description    Amount

11220 meters at $35$700

11424 meters at $35840

Time Ticket No.Description    Amount

H1012 hours at $20$240

H1116 hours at $20320

Required:

Enter amounts as positive numbers.

1. Complete that portion of the job order cost sheet that would be prepared when the estimate is given to the customer.

2. Record the costs incurred, and complete the job order cost sheet.

JOB ORDER COST SHEET

CustomerJackson Consulting DateOctober 1

Date wantedOctober 10

  Date completedOctober 10

Job. No.

ESTIMATE

Direct MaterialsDirect LaborSummary

Amount Amount Amount

40 Meters at $35$24 Hours at $20$Direct Materials$

    Direct Labor

    Factory Overhead

Total$Total$Total cost$

ACTUAL

Direct MaterialsDirect LaborSummary

Mat. Req. No.DescriptionAmountTime Ticket No.DescriptionAmountItemAmount

11220 Meters at $35$H1012 Hours at $20$Direct Materials$

Direct Labor

11424 Meters at $35H1116 Hours at $20Factory Overhead

Total $Total $Total Cost$

Feedback

1 & 2. Include the estimated and actual direct materials and direct labor. Include the estimated and applied factory overhead.

What is the best explanation for the variances between actual costs and estimated costs. (For this purpose, assume that the additional meters of material used in the job were spoiled, the factory overhead rate has proven to be satisfactory, and an inexperienced employee performed the work.)

The direct materials cost exceeded the estimate by $140 because 4 meters of materials were spoiled. The direct labor cost exceeded the estimate by $80 because an additional 4 hours of labor were used by an inexperienced employee. The factory overhead cost exceeded the estimate because an additional $60 of factory overhead was allocated because of the increase in direct labor.

Management didn't provide enough direction to complete tasks on budget.

The direct materials cost exceeded the estimate by $75 because 3 meters of materials were spoiled.

The direct labor cost exceeded the estimate by $120 because an additional 4 hours of labor were used by an inexperienced employee.

Select the correct answer from the above choices.
a

Job Cost Sheet

Remnant Carpet Company sells and installs commercial carpeting for office buildings. Remnant Carpet Company uses a job order cost system. When a prospective customer asks for a price quote on a job, the estimated cost data are inserted on an unnumbered job cost sheet. If the offer is accepted, a number is assigned to the job, and the costs incurred are recorded in the usual manner on the job cost sheet. After the job is completed, reasons for the variances between the estimated and actual costs are noted on the sheet. The data are then available to management in evaluating the efficiency of operations and in preparing quotes on future jobs. On October 1, Remnant Carpet Company gave Jackson Consulting an estimate of $2,418 to carpet the consulting firm’s newly leased office. The estimate was based on the following data:

On October 3, Jackson Consulting signed a purchase contract, and the delivery and installation were completed on October 10.

The related materials requisitions and time tickets are summarized as follows:

Required:

Enter amounts as positive numbers.

1. Complete that portion of the job order cost sheet that would be prepared when the estimate is given to the customer.

2. Record the costs incurred, and complete the job order cost sheet.

What is the best explanation for the variances between actual costs and estimated costs. (For this purpose, assume that the additional meters of material used in the job were spoiled, the factory overhead rate has proven to be satisfactory, and an inexperienced employee performed the work.)

1. The direct materials cost exceeded the estimate by $136 because 4 meters of materials were spoiled. The direct labor cost exceeded the estimate by $120 because an additional 4 hours of labor were used by an inexperienced employee. The factory overhead cost exceeded the estimate because an additional $90 of factory overhead was allocated because of the increase in direct labor.
2. Management didn't provide enough direction to complete tasks on budget.
3. The direct materials cost exceeded the estimate by $75 because 3 meters of materials were spoiled.
4. The direct labor cost exceeded the estimate by $120 because an additional 4 hours of labor were used by an inexperienced employee.

Select the correct answer from the above choices.
a, b, c, d

Job Cost Sheet

Remnant Carpet Company sells and installs commercial carpeting for office buildings. Remnant Carpet Company uses a job order cost system. When a prospective customer asks for a price quote on a job, the estimated cost data are inserted on an unnumbered job cost sheet. If the offer is accepted, a number is assigned to the job, and the costs incurred are recorded in the usual manner on the job cost sheet. After the job is completed, reasons for the variances between the estimated and actual costs are noted on the sheet. The data are then available to management in evaluating the efficiency of operations and in preparing quotes on future jobs. On October 1, Remnant Carpet Company gave Jackson Consulting an estimate of $2,632 to carpet the consulting firm’s newly leased office. The estimate was based on the following data:

On October 3, Jackson Consulting signed a purchase contract, and the delivery and installation were completed on October 10.

The related materials requisitions and time tickets are summarized as follows:

Required:

Enter amounts as positive numbers.

1. Complete that portion of the job order cost sheet that would be prepared when the estimate is given to the customer.

2. Record the costs incurred, and complete the job order cost sheet.

What is the best explanation for the variances between actual costs and estimated costs. (For this purpose, assume that the additional meters of material used in the job were spoiled, the factory overhead rate has proven to be satisfactory, and an inexperienced employee performed the work.)

1. The direct materials cost exceeded the estimate by $120 because 4 meters of materials were spoiled. The direct labor cost exceeded the estimate by $80 because an additional 4 hours of labor were used by an inexperienced employee. The factory overhead cost exceeded the estimate because an additional $60 of factory overhead was allocated because of the increase in direct labor.
2. Management didn't provide enough direction to complete tasks on budget.
3. The direct materials cost exceeded the estimate by $75 because 3 meters of materials were spoiled.
4. The direct labor cost exceeded the estimate by $120 because an additional 4 hours of labor were used by an inexperienced employee.

Select the correct answer from the above choices.

Job Cost Sheet

Remnant Carpet Company sells and installs commercial carpeting for office buildings. Remnant Carpet Company uses a job order cost system. When a prospective customer asks for a price quote on a job, the estimated cost data are inserted on an unnumbered job cost sheet. If the offer is accepted, a number is assigned to the job, and the costs incurred are recorded in the usual manner on the job cost sheet. After the job is completed, reasons for the variances between the estimated and actual costs are noted on the sheet. The data are then available to management in evaluating the efficiency of operations and in preparing quotes on future jobs. On October 1, Remnant Carpet Company gave Jackson Consulting an estimate of $2,520 to carpet the consulting firm’s newly leased office. The estimate was based on the following data:

On October 3, Jackson Consulting signed a purchase contract, and the delivery and installation were completed on October 10.

The related materials requisitions and time tickets are summarized as follows:

Required:

Enter amounts as positive numbers.

1. Complete that portion of the job order cost sheet that would be prepared when the estimate is given to the customer.

2. Record the costs incurred, and complete the job order cost sheet.

What is the best explanation for the variances between actual costs and estimated costs. (For this purpose, assume that the additional meters of material used in the job were spoiled, the factory overhead rate has proven to be satisfactory, and an inexperienced employee performed the work.)

1. The direct materials cost exceeded the estimate by $124 because 4 meters of materials were spoiled. The direct labor cost exceeded the estimate by $80 because an additional 4 hours of labor were used by an inexperienced employee. The factory overhead cost exceeded the estimate because an additional $60 of factory overhead was allocated because of the increase in direct labor.
2. Management didn't provide enough direction to complete tasks on budget.
3. The direct materials cost exceeded the estimate by $75 because 3 meters of materials were spoiled.
4. The direct labor cost exceeded the estimate by $120 because an additional 4 hours of labor were used by an inexperienced employee.

Select the correct answer from the above choices.

The budget director of Birding Homes & Feeders Inc., with the assistance of the controller, treasurer, production manager, and sales manager, has gathered the following data for use in developing the budgeted income statement for January:

1. Estimated sales for January:

   Bird house	15,000 units at $25 per unit
   Bird feeder	40,000 units at $15 per unit

2. Estimated inventories at January 1:

   Direct materials:
   Wood	600 ft.
   Plastic	1,000 lbs.
   Finished products:
   Bird house	1,000 units at $15 per unit
   Bird feeder	2,500 units at $8 per unit

3. Desired inventories at January 31:

   Direct materials:
   Wood	500 ft.
   Plastic	1,250 lbs.
   Finished products:
   Bird house	1,500 units at $15 per unit
   Bird feeder	3,000 units at $8 per unit

4. Direct materials used in production:

   In manufacture of Bird House:
   Wood	0.80 ft. per unit of product
   Plastic	0.10 lb. per unit of product
   In manufacture of Bird Feeder:
   Wood	0.20 ft. per unit of product
   Plastic	1.00 lb. per unit of product

5. Anticipated cost of purchases and beginning and ending inventory of direct materials:

   Wood	$2.50 per ft.
   Plastic	$0.80 per lb.

6. Direct labor requirements:

   Bird House:
   Fabrication Department	0.40 hr. at $18 per hr.
   Assembly Department	0.20 hr. at $12 per hr.
   Bird Feeder:
   Fabrication Department	0.25 hr. at $18 per hr.
   Assembly Department	0.10 hr. at $12 per hr.

7. Estimated factory overhead costs for January:

   Indirect factory wages	$40,000
   Depreciation of plant and equipment	20,000
   Power and light	10,000
   Insurance and property tax	5,000

8. Estimated operating expenses for January:

   Sales salaries expense	$125,000
   Advertising expense	80,000
   Office salaries expense	40,000
   Depreciation expense—office equipment	4,000
   Travel expense—selling	25,000
   Office supplies expense	2,500
   Miscellaneous administrative expense	3,500

9. Estimated other revenue and expense for January:

   Interest revenue	$4,540
   Interest expense	3,000

10. Estimated tax rate: 25%

Required:

1. Prepare a sales budget for January.

2. Prepare a production budget for January. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

3. Prepare a direct materials purchases budget for January. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

4. Prepare a direct labor cost budget for January.

5. Prepare a factory overhead cost budget for January.

6. Prepare a cost of goods sold budget for January. Work in process at the beginning of January is estimated to be $9,000, and work in process at the end of January is estimated to be $10,500. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

7. Prepare a selling and administrative expenses budget for January.

8. Prepare a budgeted income statement for January. In the Other revenue and expense section, indicate expenses as negative amounts.

Budgeted Income Statement and Supporting Budgets

The budget director of Birding Homes & Feeders Inc., with the assistance of the controller, treasurer, production manager, and sales manager, has gathered the following data for use in developing the budgeted income statement for January:

1. Estimated sales for January:

   Bird house	15,000 units at $25 per unit
   Bird feeder	40,000 units at $15 per unit

2. Estimated inventories at January 1:

   Direct materials:
   Wood	600 ft.
   Plastic	1,000 lbs.
   Finished products:
   Bird house	1,000 units at $15 per unit
   Bird feeder	2,500 units at $8 per unit

3. Desired inventories at January 31:

   Direct materials:
   Wood	500 ft.
   Plastic	1,250 lbs.
   Finished products:
   Bird house	1,500 units at $15 per unit
   Bird feeder	3,000 units at $8 per unit

4. Direct materials used in production:

   In manufacture of Bird House:
   Wood	0.80 ft. per unit of product
   Plastic	0.10 lb. per unit of product
   In manufacture of Bird Feeder:
   Wood	0.20 ft. per unit of product
   Plastic	1.00 lb. per unit of product

5. Anticipated cost of purchases and beginning and ending inventory of direct materials:

   Wood	$2.50 per ft.
   Plastic	$0.80 per lb.

6. Direct labor requirements:

   Bird House:
   Fabrication Department	0.40 hr. at $18 per hr.
   Assembly Department	0.20 hr. at $12 per hr.
   Bird Feeder:
   Fabrication Department	0.25 hr. at $18 per hr.
   Assembly Department	0.10 hr. at $12 per hr.

7. Estimated factory overhead costs for January:

   Indirect factory wages	$40,000
   Depreciation of plant and equipment	20,000
   Power and light	10,000
   Insurance and property tax	5,000

8. Estimated operating expenses for January:

   Sales salaries expense	$125,000
   Advertising expense	80,000
   Office salaries expense	40,000
   Depreciation expense—office equipment	4,000
   Travel expense—selling	25,000
   Office supplies expense	2,500
   Miscellaneous administrative expense	3,500

9. Estimated other revenue and expense for January:

   Interest revenue	$4,540
   Interest expense	3,000

10. Estimated tax rate: 25%

Required:

1. Prepare a sales budget for January.

2. Prepare a production budget for January. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

3. Prepare a direct materials purchases budget for January. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

4. Prepare a direct labor cost budget for January.

5. Prepare a factory overhead cost budget for January.

6. Prepare a cost of goods sold budget for January. Work in process at the beginning of January is estimated to be $9,000, and work in process at the end of January is estimated to be $10,500. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

7. Prepare a selling and administrative expenses budget for January.

8. Prepare a budgeted income statement for January. In the Other revenue and expense section, indicate expenses as negative amounts.

Budgeted Income Statement and Supporting Budgets

The budget director of Feathered Friends Inc., with the assistance of the controller, treasurer, production manager, and sales manager, has gathered the following data for use in developing the budgeted income statement for December:

1. Estimated sales for December:

   Bird house	3,200 units at $50 per unit
   Bird feeder	3,000 units at $70 per unit

2. Estimated inventories at December 1:

   Direct materials:
   Wood	200 ft.
   Plastic	240 lbs.
   Finished products:
   Bird house	320 units at $27 per unit
   Bird feeder	270 units at $40 per unit

3. Desired inventories at December 31:

   Direct materials:
   Wood	220 ft.
   Plastic	200 lbs.
   Finished products:
   Bird house	290 units at $27 per unit
   Bird feeder	250 units at $41 per unit

4. Direct materials used in production:

   In manufacture of Bird House:
   Wood	0.80 ft. per unit of product
   Plastic	0.50 lb. per unit of product
   In manufacture of Bird Feeder:
   Wood	1.20 ft. per unit of product
   Plastic	0.75 lb. per unit of product

5. Anticipated cost of purchases and beginning and ending inventory of direct materials:

   Wood	$7.00 per ft.
   Plastic	$1.00 per lb.

6. Direct labor requirements:

   Bird House:
   Fabrication Department	0.20 hr. at $16 per hr.
   Assembly Department	0.30 hr. at $12 per hr.
   Bird Feeder:
   Fabrication Department	0.40 hr. at $16 per hr.
   Assembly Department	0.35 hr. at $12 per hr.

7. Estimated factory overhead costs for December:

   Indirect factory wages	$75,000
   Depreciation of plant and equipment	23,000
   Power and light	6,000
   Insurance and property tax	5,000

8. Estimated operating expenses for December:

   Sales salaries expense	$70,000
   Advertising expense	18,000
   Office salaries expense	21,000
   Depreciation expense—office equipment	600
   Telephone expense—selling	550
   Telephone expense—administrative	250
   Travel expense—selling	4,000
   Office supplies expense	200
   Miscellaneous administrative expense	400

9. Estimated other income and expense for December:

   Interest revenue	$200
   Interest expense	122

10. Estimated tax rate: 30%

Required:

1. Prepare a sales budget for December.

2. Prepare a production budget for December. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

3. Prepare a direct materials purchases budget for December. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

4. Prepare a direct labor cost budget for December.

5. Prepare a factory overhead cost budget for December.

6. Prepare a cost of goods sold budget for December. Work in process at the beginning of December is estimated to be $29,000, and work in process at the end of December is estimated to be $35,400. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

7. Prepare a selling and administrative expenses budget for December.

8. Prepare a budgeted income statement for December. In the Other revenue and expense section, indicate expenses as negative amounts.