ACC 561 Question 3-38,

ACC 561 Question 3-38, Mixed Cost, Choosing Cost Drivers,
and High-Low and Visual-Fit Methods

Introduction to Management Accounting: Horngren, C. T.,
Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2008).

Introduction to Management Accounting (14th ed.). Upper
Saddle River, New Jersey: Pearson-Prentice Hall.

Axia College of University of Phoenix (UoP)

Question 3-38, Mixed Cost, Choosing Cost Drivers, and
High-Low and Visual-Fit Methods, on p. 121-122

4. Individual Assignment: Practice Text Exercises

Complete the following problem sets from the Introduction to
Management Accounting text:

ACC 561 Question 3-38, Mixed Cost

Question 3-38, Mixed Cost, Choosing Cost Drivers, and High-Low
and Visual-Fit Methods

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.