Question

Account Analysis to Determine Cost Behavior

Darnell Poston, owner of Poston Manufacturing, Inc., wants to determine the cost behavior of labor and overhead. Darnell pays his workers a salary; during busy times, everyone works to get the orders out. Temps (temporary workers hired through an agency) may be hired to pack and prepare completed orders for shipment. During slower times, Darnell catches up on bookkeeping and administrative tasks while the salaried workers do preventive maintenance, clean the lines and building, etc. Temps are not hired during slow times. Darnell found that workers' salaries, temp agency payments, rentals, utilities, and plant and equipment depreciation are the largest dollar accounts. He believes that workers' salaries and plant and equipment depreciation are fixed, temp agency payments are associated with the number of orders (since temp workers are used to pack and prepare completed orders for shipment), and electricity is associated with the number of machine hours. When the number of different parts stored by Poston exceeds the space in the materials storeroom, Darnell rents nearby warehouse space. He can rent as much or as little space as he wants on a month-to-month basis. Therefore, he believes warehouse rental payments are variable with the number of parts purchased and stored. The account balances for the past six months as well as the six-month total are as follows:

		Workers’ Salaries		Temp Agency Payments		Warehouse Rental		Electricity		Plant & Equipment Depreciation
January		$7,000		$0		$150		$275		$2,200
February		7,000		600		350		385		2,200
March		7,000		1,100		325		705		2,200
April		7,000		1,350		340		745		2,200
May		7,000		1,750		335		765		2,200
June		7,000		1,500		210		725		2,200
Total		$42,000		$6,300		$1,710		$3,600		$13,200

Information on number of machine hours, orders, and parts for the six-month period follows:

		Machine Hours		Number of Orders		Number of Parts
January		2,000		10		200
February		3,100		40		600
March		5,800		350		550
April		6,200		400		580
May		6,900		490		570
June		6,000		390		350
Total		30,000		1,680		2,850

Required:

1. Calculate the monthly average account balance for each account. When required, round your answers to the nearest dollar and use your rounded answers in all subsequent computations.

Average workers' salaries	$
Average temp agency payment	$
Average warehouse rental	$
Average electricity	$
Average depreciation	$

Calculate the average monthly amount for each of the three drivers. When required, round your answers to the nearest whole number.

Average machine hours
Average number of orders
Average number of parts

2. Calculate fixed monthly cost and the variable rates for temp agency payments, warehouse rent, and electricity. If required, round your answers to the nearest cent and use the rounded answers in subsequent computations.

Average fixed monthly cost	$
Variable rate for temp agency	$	per order
Variable rate for warehouse rental	$	per part
Variable rate for electricity	$	per machine hour

Express the results in the form of an equation for total cost.

Monthly cost

=

$

+

$(orders)

+

$(parts)

+

$(machine hours)

3. In July, Darnell predicts there will be 420 orders, 240 parts, and 6,000 machine hours. What is the total labor and overhead cost for July? Round interim computations to 1 decimal place and round final answer to the nearest dollar.
$

4. What if Darnell buys a new machine in July for $24,000? The machine is expected to last 10 years and will have no salvage value at the end of that time. What part of the cost equation will be affected?

How will this part of the cost equation be affected?

What is the new expected cost in July? When required, round your answer to the nearest dollar.
$

Answer 1

1.

Average workers' salaries ($42000/6)	$       7,000
Average temp agency payment ($6300/6)	$       1,050
Average warehouse rental ($1710/6)	$           285
Average electricity ($3600/6)	$           600
Average depreciation ($13200/6)	$       2,200
Average machine hours (30000/6)	5000
Average number of orders (1680/6)	280
Average number of parts (2850/6)	475

2.

Average fixed monthly cost ($7000 + $2200)	9200
Variable rate for temp agency ($1050/280)	3.75	per order
Variable rate for warehouse rental ($285/475)	0.60	per part
Variable rate for electricity ($600/5000)	0.12	per machine hour

Monthly cost = $9200 + $3.75 (orders) + $0.60 (parts) + $0.12 (machine hours)

3. Total labor and overhead cost for July = $9200 + ($3.75 x 420) + ($0.60 x 240) + ($0.12 x 6000) = $9200 + $1575 + $144 + $720 = $11639

4. The fixed monthly cost will be affected.

The fixed monthly cost will increase due to an increase in the depreciation on account of the new machine.

Monthly depreciation on new machine = $24000/120 = $200

New expected cost in July = $11639 + $200 = $11839