the process of determining

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Chapter 3 Solutions
RQ 3.1 (a) Cost estimation: the process of determining how a particular cost behaves.
(b) Cost behaviour: the relationship between cost and the level of activity (that is, cost
driver).
(c) Cost prediction: using knowledge of cost behaviour to forecast the level of a cost at a
particular level of activity.
Cost estimation is the process used to determine what the cost behaviour is for a particular
cost item. The cost behaviour pattern is used to make a cost prediction about the cost at a
particular level of activity.
RQ 3.2 A cost driver is an activity or factor that causes costs to be incurred. In identifying cost
behaviour, the management accountant identifies the relationship between a particular cost
and the level of its cost driver (also called ‘level of activity’ when the cost driver relates to an
activity).
RQ 3.3 Volume-based cost drivers are used in traditional management accounting systems. This
assumes that variable costs vary in proportion to production volume and that fixed costs do
not change with production volume. ABC allows a range of cost drivers—such as unit level,
batch level, product level, and facility level—so that for these various types of cost there is a
more realistic link between the cost and its cost driver. The conventional approach only
examines variability with production volume—that is, at the unit level.
RQ 3.12 1 Monthly cost of a multiyear contract to maintain a national highway: committed cost.
(Once the highway has been built, it must be maintained. The transportation authorities
are largely committed to spending the necessary funds to maintain the highway
adequately.)
2 Cost of ingredients used to produce strawberry yoghurt: engineered cost.
3 Cost of advertising for a credit card company: discretionary cost.
4 Depreciation on a courier company’s fleet of delivery trucks: committed cost.
5 Cost of charitable donations that are budgeted as 1 per cent of sales revenue: discretionary
cost.
6 Product research and development costs at a leading travel goods manufacturer:
discretionary cost.
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E3.25 Account classification method; manufacturer.
1
(a)
Fixed; does not change for different levels of production.
(b)
Variable: varies proportionately with the number of kilograms
sausages produced.
(c)
Variable: varies proportionately with the number of kilograms
of sausages produced
(d)
Fixed: does not change for different levels of production.
(e)
Semivariable (or mixed): includes a fixed element ($4000 per
month) and a variable element ($0.20 per kilogram of sausages
produced).
2
Production cost per month = $33 000* + $2.00X †
*33 000 = $19 000 + $10 000 + $4 000
†$2.00 = $1.10 + $0.70 + $0.20
E3.26 Estimating cost behaviour; high–low method: manufacturer
1 Variable cost per number of machine hours = $36150 -$33150
61500 -31500
= $0.10
Total cost at 61 500 machine hours
$36 150
Variable cost at 61 500 machine hours (61 500  $0.10 per
machine hour)
6 150
Fixed cost
$30 000
Cost equation:
Total utilities cost = $30 000 + $0.10X, where X denotes machine hours.
2 Cost prediction when 39 000 machine hours are consumed:
Utilities cost = $30 000 + ($0.10)(39 000) = $33 900
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E3.32 Cost behaviour patterns in a variety of settings
1
h
5
b
9
d
2
i
6
g
10
j
3
f
7
c
11
l
4
e
8
a
Note that k was not used.
P3.34 Account classification; cost drivers: school
Answers to this question will vary. Rather than looking for a right answer, students should seek an
understanding of the concepts.
(a)
The cost of paper used in The Sunshine Times is a variable cost. If the number of pages varied for
each edition, the number of pages would be an appropriate cost driver. However since the number
of pages for each edition is constant, the cost varies per newspaper printed—the cost driver is units
of production.
(b) The number of business cards printed is the cost driver for this variable cost.
(c) No cost driver; a fixed cost.
(d) The number of units of production is the cost driver of this variable cost.
(e) No cost driver; a fixed cost.
(f) If each set up consumes the same amount of resources the cost driver would be the number of set
ups. As the set ups are for different kinds of jobs it is likely that set up time would be a suitable
cost driver for this variable cost.
(g)
A semivariable cost, partly fixed (lease charge) and partly driven by the distance travelled or
number of deliveries.
(h) Fixed; no cost driver.
(i) A variable cost; the cost driver is the number of business card designs undertaken.
(j) Variable, advertising revenue is the cost driver.

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