HMCost1e_SM_ch03
CHAPTER 3 COST BEHAVIOR DISCUSSION QUESTIONS
1. Knowledge of cost behavior allows a man-
ager to assess changes in costs that result
from changes in activity. This allows a man-
ager to assess the effects of choices that
change activity. For example, if excess ca-
pacity exists, bids that minimally cover vari-
able costs may be totally appropriate.
Knowing what costs are variable and what
costs are fixed can help a manager make
better bids.
2.The longer the time period, the more likely
that a cost will be variable. The short run is
a period of time for which at least one cost is
fixed. In the long run, all costs are variable. 3.Resource spending is the cost of acquiring
the capacity to perform an activity, whereas
resource usage is the amount of activity ac-
tually used. It is possible to use less of the
activity than what is supplied. Only the cost
of the activity actually used should be as-
signed to products.
4. Flexible resources are those acquired from
outside sources and do not involve any long-term commitment for any given amount
of resource. Thus, the cost of these re-
sources increases as the demand for them
increases, and they are variable costs (vary-
ing in proportion to the associated activity
driver).
https://www.sodocs.net/doc/4b16173787.html,mitted resources are acquired by the
use of either explicit or implicit contracts to
obtain a given quantity of resources, regard-
less of whether the quantity of resources
available is fully used or not. For multiperiod
commitments, the cost of these resources
essentially corresponds to committed fixed
expenses. Other resources acquired in ad-
vance are short term in nature, and they es-
sentially correspond to discretionary fixed expenses.
6. A variable cost increases in direct proportion
to changes in activity usage. A one-unit in-
crease in activity usage produces an in-
crease in cost. A step-variable cost, however, increases only as activity usage
changes in small blocks or chunks. An in-
crease in cost requires an increase in sev-
eral units of activity. When a step-variable
cost changes over relatively narrow ranges
of activity, it may be more convenient to
treat it as a variable cost.
7.Mixed costs are usually reported in total in
the accounting records. The amount of the
cost that is fixed and the amount that is vari-
able are unknown and must be estimated. 8. A scattergraph allows a visual portrayal of
the relationship between cost and activity. It
reveals to the investigator whether a rela-
tionship may exist and, if so, whether a lin-
ear function can be used to approximate the
relationship.
9.Since the scatterplot method is not restricted
to the high and low points, it is possible to
select two points that better represent the
relationship between activity and costs, pro-
ducing a better estimate of fixed and vari-
able costs. The main advantage of the high-
low method is the fact that it removes sub-
jectivity from the choice process. The same
line will be produced by two different per-
sons.
10. Assuming that a scattergraph reveals that a
linear cost function is suitable, then the me-
thod of least squares selects a line that best
fits the data points. The method also pro-
vides a measure of goodness of fit so that
the strength of the relationship between cost
and activity can be assessed.
11.The best-fitting line is the one that is “clos-
est” to the data points. This is usually meas-
ured by the line that has the smallest sum of
squared deviations. No, the best-fitting line
may not explain much of the total cost vari-
ability. There must be a strong relationship
as well.
12.If the variation in cost is not well explained
by activity usage (coefficient of determina-
tion is low) as measured by a single driver,
then other explanatory variables may be
needed in order to build a good cost for-
mula.
13.The learning curve describes a situation in
which the labor hours worked per unit de-
crease as the volume produced increases.
The rate of learning is determined empiri-
cally. In other words, managers use their
knowledge of previous similar situations to
estimate a likely rate of learning.
14.You would prefer a learning rate of 80 per-
cent because that would lead to a faster de-
crease in the cumulative average time it takes
to perform the service. (To see this, rework
Cornerstone 3-8 with an 85 percent learning
rate. Note that the cumulative-average time
for two systems would be 850 hours rather
than 800 hours.)
15.If the mixed costs are immaterial, then the
method of decomposition is unimportant.
Furthermore, sometimes managerial judg-
ment may be more useful for assigning
costs than the use of formal statistical meth-
odology.
CORNERSTONE EXERCISES
Cornerstone Exercise 3–1
1. Total labor cost = Fixed labor cost + (Variable rate × Classes taught)
= $500 + $25(Classes taught)
2. Total variable labor cost = Variable rate × Classes taught
= $25 × 100
=$2,500
3. Total labor cost = $500 + ($25 × Classes taught) = $500 + $2,500 = $3,000
4. Unit labor cost = Total labor cost/Classes taught
=$3,000/100
=$30
5. New total classes = 100 + (1.00 × 100) = 200
Total labor cost = $500 + ($25 × 200) = $5,500
Unit labor cost = $5,500/200 = $27.50
The unit labor cost went down because the fixed cost, which stays the same, is spread over a greater number of classes taught.
Cornerstone Exercise 3–2
1. Activity rate = Total cost of purchasing agents/Number of purchase orders
= (4 × $30,000)/(4 × 3,000)
=
$10/purchase
order
2. a. Total activity availability = 4 × 3,000 = 12,000 purchase orders
b. Unused capacity = 12,000 – 10,000 = 2,000 purchase orders
3. a. Total activity availability = $10(4 × 3,000) = $120,000
b. Unused capacity = $10(12,000 – 10,000) = $20,000
4. Total activity availability = Activity capacity used + Unused capacity
12,000 = 10,000 + 2,000
or
$120,000 = $100,000 + $20,000
5. Three purchasing agents working full time and another working half time
could process 10,500 purchase orders (3.5 × 3,000). Since 10,000 purchase orders are processed, the unused capacity would be 500 purchase orders (10,500 – 10,000).
1. Average workers’ salaries = $37,800/6 = $6,300
Average temp agency payment = $6,020/6 = $1,003 (rounded)
Average warehouse rental = $2,210/6 = $368 (rounded)
Average electricity = $3,560/6 = $593 (rounded)
Average depreciation = $16,800/6 = $2,800
Average machine hours = 29,600/6 = 4,933 (rounded)
Average number of orders = 1,720/6 = 287 (rounded)
Average number of parts = 2,560/6 = 427 (rounded)
2. Average fixed monthly cost = $6,300 + $2,800 = $9,100
Variable rate for temp agency = $1,003/287 = $3.50 (rounded) per order
Variable rate for warehouse rental = $368/427 = $0.86 (rounded) per part =
Variable rate for electricity = $593/4,933 = $0.12 (rounded) per mach. hr.
Monthly cost = $9,100 + $3.50(orders) + $0.86(parts) + $0.12(machine hours) 3. July cost = $9,100 + $3.50(400 orders) + $0.86(280 parts) + $0.12(5,900 mhrs.)
= $9,100 + $1,400 + $240.80 + $708
(rounded)
$11,449
4. New machine depreciation = ($18,000 – 0)/10 years = $1,800
New machine depreciation per month = $1,800/12 = $150
Only the fixed cost will be affected since depreciation is part of fixed cost.
New fixed cost per month = $9,100 + $150 = $9,250
New July cost = $9,250 + $1,400 + $240.80 + $708 = $11,599 (rounded)
1. Month with high number of purchase orders = July
Month with low number of purchase orders = January
2. Variable rate = (High cost – Low cost)/(High purchase orders – Low
purchase
orders)
= ($23,426 – $20,068)/(560 – 330) = $3,358/230
= $14.60 per PO
3. Fixed cost = Total cost – (Variable rate × Purchase orders)
Let’s choose the high point with cost of $23,426 and 560 purchase orders.
Fixed cost = $23,426 – ($14.60 × 560)
=$15,250
(Hint: Check your work by computing fixed cost using the low point.)
4. If the variable rate is $14.60 per purchase order and fixed cost is $15,250 per
month, then the formula for monthly purchasing cost is:
Total purchasing cost = $15,250 + ($14.60 × Purchase orders)
5. Purchasing cost = $15,250 + $14.60(430) = $21,528
6. Purchasing cost for the year = 12($15,250) + $14.60(5,340)
= $183,000 + $77,964 = $260,964
The fixed cost for the year is 12 times the fixed cost for the month. Thus, in-stead of $15,250, the yearly fixed cost is $183,000.
Cornerstone Exercise 3–5
1. Rounding the regression estimates to the nearest cent, the formula for
monthly purchasing cost is:
Total purchasing cost = $16,403.85 + ($11.69 × Purchase orders)
2. Purchasing cost = $16,40
3.85 + $11.69(430) = $21,431 (rounded)
3. Purchasing cost for the year = 12($16,403.85) + $11.69(5,340)
= $196,846.20 + $62,424.60 = $259,271 (rounded) The fixed cost for the year is 12 times the fixed cost for the month. Thus, in-stead of $16,403.85, the yearly fixed cost is $196,846 (rounded).
1. Degrees of freedom = Number of observations – Number of variables
= 12 – 2 = 10
The
t-value from Exhibit 3-14 for 95 percent and 10 degrees of freedom is
2.228.
2. Predicted purchasing cost = $16,40
3.85 + ($11.69 × Purchase orders)
= $16,403.85 + $11.69(430)
=$21,430.55
Confidence interval = Predicted cost ± (t-value × Standard error)
= $21,430.55 ± (2.228 × $476.58)
= $21,430.55 ± $1,061.82
$20,369
≤ Predicted value ≤ $22,492
3. For a lower confidence level, the confidence interval will be smaller (nar-
rower) since only a 90 percent degree of confidence is required. For a 90 per-cent confidence level with 10 degrees of freedom, the t-value is 1.812.
Confidence interval = Predicted cost ± (t-value × Standard error)
= $21,430.55 ± (1.812 × $476.58)
= $21,430.55 ± $863.56
$20,567
≤ Predicted value ≤ $22,294
Cornerstone Exercise 3–7
1. Rounding the regression estimates to the nearest cent, the formula for
monthly purchasing cost is:
Total purchasing cost = $15,866.55 + ($10.90 × Purchase orders) + ($19.54 × Nonstandard orders)
2. Purchasing cost = $15,866.55 + $10.90(430) + $19.54(45) = $21,433 (rounded)
3. Purchasing cost for the year = 12($15,866.55) + $10.90(5,340) + $19.54(580)
= $190,398.60 + $58,206 + $11,333.20
=
$259,938
(rounded)
The fixed cost for the year is 12 times the fixed cost for the month. Thus, in-stead of $15,866.55, the yearly fixed cost is $190,399 (rounded).
1. Cumulative Cumulative Cumulative
Number Average Time Total Time:
of Units per Unit in Hours Labor Hours
(column
1) (column
2) (3) = (1) × (2)
1 400 400
2 340 (0.85 × 400) 680
4 289 (0.8
5 × 340) 1,156
8 245.65 (0.85 × 289) 1,965.20
16 208.80 (0.85 × 245.65) 3,340.80
32 177.48 (0.85 × 208.80) 5,679.36
=
Notice that every time the number of engines produced doubles, the cumula-tive average time per unit (in column 2) is just 85 percent of the previous amount.
2. Cost for installing one engine = 400 hours × $30 = $12,000
Cost for installing four engines = 1,156 hours × $30 = $34,680
Cost for installing sixteen engines = 3,340.80 hours × $30 = $100,224
Average cost per system for one engine = $12,000/1 = $12,000
Average cost per system for four engines = $34,680/4 = $8,670
Average cost per system for sixteen engines = $100,224/16 = $6,264
3. Budgeted labor cost for experienced team = (5,679.36 – 3,340.80) × $30
$70,157
Budgeted labor cost for new team = 3,340.80 × $30 = $100,224
EXERCISES
Exercise 3–9
Behavior Driver Activity Cost
a. Vaccinating patients Variable Number of flu shots
b. Moving materials Mixed Number of moves
c. Filing claims Variable Number of claims
d. Purchasing goods Mixed Number of orders
e. Selling products Variable Number of circulars
f. Maintaining equipment Mixed Maintenance hours
g. Sewing Variable Machine hours
h. Assembling Variable Units produced
i. Selling goods Fixed Units sold
j. Selling goods Variable Units sold
k. Delivering orders Variable Mileage
l. Storing goods Fixed Square feet
m. Moving materials Fixed Number of moves
n. X-raying patients Variable Number of X-rays
o. Transporting clients Mixed Miles driven
Exercise 3–10
1. Driver for overhead activity: Number of smokers
2. Total overhead cost = $720,000 + $0.90(25,000) = $742,500
3. Total fixed overhead cost = $720,000
4. Total variable overhead cost = $0.90(25,000) = $22,500
5. Unit cost = $742,500/25,000 = $29.70 per unit
6. Unit fixed cost = $720,000/25,000 = $28.80 per unit
7. Unit variable cost = $0.90 per unit
Units
8. a. and b. 22,000 Units 27,000
cost a $33.63*
Unit
$27.57* Unit fixed cost b 32.73* 26.67* Unit variable cost c 0.90 0.90
a[$720,000 + $0.90(22,000)]/22,000; [$720,000 + $0.90(27,000)]/27,000
b$720,000/22,000; $720,000/27,000
c($33.63 – $32.73); ($27.57 – $26.67)
*Rounded.
The unit cost increases in the first case and decreases in the second. This is because fixed costs are spread over fewer units in the first case and over more units in the second. The unit variable cost stays constant.
Exercise 3–11
1. a. Graph of equipment depreciation:
Equipment Depreciation
$0
$5,000
$10,000$15,000
$20,0000
5,000
10,000
15,000
20,000
25,000
Number of Units
C o s t
b. Graph of supervisors’ wages:
Supervisors' Wages
$0
$20,000
$40,000$60,000$80,000$100,000
$120,000$140,000$160,0000
5,000
10,000
15,000
20,000
25,000
Number of Units
C o s
t
c. Graph of direct materials and power:
Direct Materials and Power
$0
$20,000
$40,000$60,000$80,000$100,0000
5,000
10,000
15,000
20,000
25,000
Number of Units
C o s t
2. Equipment depreciation: Fixed
Supervisors’ wages: Fixed (Although if the step were small enough, the cost might be classified as variable—notice the cost follows a linear pattern; 5,000 units is a relatively wide step.) The normal operating range of the company falls entirely into the last step.
Direct materials and power: Variable
Activity
Cost Driver
Flexible (F) or
Committed (C)
Variable or Fixed
Maintenance
Maintenance hours
Equipment: C Labor: C Parts: F Fixed
Fixed Variable Inspection Number of batches
Equipment: C Inspectors: C Units: F Fixed Fixed Variable Packing Number of boxes
Materials: F Labor: C Belt: C Variable Fixed Fixed Payable
processing
Number of bills
Clerks: C Materials: F Equipment: C Facility: C Fixed Variable Fixed Fixed Assembly Units produced
Belt: C Supervisors: C Direct labor: F Materials: F Fixed Fixed Variable Variable
Note: Resources acquired as needed are classified as short-term resources. The time horizon for as-needed resources, however, is much shorter than short term in advance resources (hours or days compared to months or a year).
1. Committed resources: Lab facility, equipment, and salaries of technicians Flexible resources: Chemicals and supplies
2. Depreciation on lab facility = $250,000/10 = $25,000
Depreciation on equipment = $245,500/5 = $49,100 Total salaries for technicians = 8 × $24,000 = $192,000
Total water testing rate = ($25,000 + $49,100 + $192,000 + $60,000)/100,000
= $3.261 per test
Variable activity rate = $60,000/100,000 = $0.60 per test
Fixed activity rate = ($25,000 + $49,100 + $192,000)/100,000 = $266,100/100,000
= $2.661 per test
3. Activity availability = Activity usage + Unused activity Test capacity available = Test capacity used + Unused test capacity 100,000 tests = 86,000 tests + 14,000 tests
4. Cost of activity supplied = Cost of activity used + Cost of unused activity Cost of activity supplied = Cost of 86,000 tests + Cost of 14,000 tests [$266,100 + ($0.60 × 86,000)]= ($3.261 × 86,000) + ($2.661 × 14,000) $317,700 = $280,446 + $37,254
Note: The analysis is restricted to resources acquired in advance of usage.
Only this type of resource will ever have any unused capacity. (In this case, the capacity to perform 100,000 tests was acquired—facilities, people, and equipment—but only 86,000 tests were actually processed.)
1. a. Graph of direct labor cost:
Direct Labor Cost
$0
$50,000
$100,000$150,000$200,000
$250,0000
1,000
2,000
3,000
4,000
5,000
Units Produced
C o s
t
b. Graph of cost of supervision:
Cost of Supervision
$0
$20,000
$40,000$60,000$80,000$100,000$120,000$140,0000
1,000
2,000
3,000
4,000
5,000
Units Produced
C o s t
Exercise 3–14 (Concluded)
2. Direct labor cost is a step-variable cost because of the small width of the
step. The steps are small enough that we might be willing to view the re-
source as one acquired as needed and, thus, treated simply as a variable
cost.
Supervision is a step-fixed cost because of the large width of the step. This is
a resource acquired in advance of usage, and since the step width is large,
supervision would be treated as a fixed cost (discretionary—acquired in
lumpy amounts).
3. Currently, direct labor cost is $125,000 (in the 2,001 to 2,500 range). If produc-
tion increases by 400 units next year, the company will need to hire one addi-
tional direct laborer (the production range will be between 2,501 and 3,000),
increasing direct labor cost by $25,000. This increase in activity will require
the hiring of one new machinist. Supervision costs will remain the same as
the increase in units does not require a new supervisor.
Exercise 3–15
1. Supplies & Equipment Tanning Number
Wages Maintenance Depreciation Electricity Minutes of Visits
300 4,100 410
January $1,750 $1,450 $150 $
3,890
380 1,670
1,900 150 410
February
6,710 560
680
150
4,120
March 1,800
Total $5,220 $7,470 $450 $1,390 14,700 1,350 ÷ 3 ÷ 3 ÷ 3 ÷ 3 ÷ 3 ÷ 3
4,900 450
Average $1,740 $2,490 $150 $
463
2. Variable rate for supplies & maintenance = $2,490/450 = $5.53 per visit
Variable rate for electricity = $463/4,900 = $0.09 per minute
Fixed cost per month = $1,740 + $150 = $1,890
Cost = $1,890 + $5.53(visit) + $0.09(minute)
3. April cost = $1,890 + $5.53(360) + $0.09(3,700) = $4,214 (rounded)
4. Monthly depreciation on new tanning bed = [($6,960 – 0)/4]/12 = $145
New fixed cost = $1,890 + $145 = $2,035
New April cost = $2,035 + $5.53(360) + $0.09(3,700) = $4,359 (rounded)
Exercise 3–16
1. Variable rate for food and wages = $175,000/$560,000 = 0.3125 or 31.25% Variable rate for delivery costs = $18,000/8,000 = $
2.25 per mile Variable rate for other costs = $9,520/14 = $680 per product 2. Total cost = $255,000 + 0.3125(sales) + $2.25(miles) + $680(product)
3.
The new menu offering will add $680 to monthly costs.
Exercise 3–17
1. Scattergraph:
Scattergraph of Radiology Tests
$0
$50,000
$100,000$150,000$200,000$250,0000
1,000
2,000
3,000
4,000
5,000
Number of Tests
C o s t
Yes, there appears to be a linear relationship.
2. Low: 2,600, $135,060
High:
4,100,
$195,510
V =(Y2 – Y1)/(X2 – X1)
= ($195,510 – $135,060)/(4,100 – 2,600)
=
$60,450/1,500 = $40.30 per test
F= $195,510 – $40.30(4,100)
=$30,280
Y= $30,280 + $40.30X
3. Y= $30,280 + $40.30(3,500)
= $30,280 + $141,050
=$171,330
Exercise 3–18
1. Regression output from spreadsheet:
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.87621504
R Square 0.7677528
Adjusted R Square 0.73457463
Standard Error 11236.2148
Observations 9
ANOVA
df SS
MS
F Regression 1 2921521154
2.92E+09
23.1403
Residual 7 883767668
1.26E+08
Total 8 3805288822
Coefficients Standard Error t Stat P-value Intercept 36588.8206 28052.2996 1.304307 0.233375
X Variable 1 39.4759139 8.20630605 4.810436 0.001943
Y = $36,588.82 + $39.48X
2. Y= $36,588.82 + $39.48(3,500)
= $36,588.82 + $138,180
=$174,768.82
3. R2 is about 0.73, meaning that about 73 percent of the variability in the radi-
ology services cost is explained by the number of tests. The t statistic for X is
4.81 and is significant, meaning that the number of tests is a good independ-
ent variable for radiology services. However, the t statistic for the intercept term is only 1.30, and is not significant. This, along with an R2 of only 73 per-cent, may mean that one or more other independent variables are missing. Exercise 3–19
1. Forklift depreciation:
V =(Y2 – Y1)/(X2 – X1)
= ($1,800 – $1,800)/(20,000 – 6,500) = $0
F Y2 – VX2
= $1,800 – $0(6,500) = $1,800
Y =$1,800
Indirect
labor:
V =(Y2 – Y1)/(X2 – X1)
= ($135,000 – $74,250)/(20,000 – 6,500) = $4.50
F Y2 – VX2
= $74,250 – $4.50(6,500) = $45,000
Y= $45,000 + $4.50X
Fuel and oil for forklift:
V =(Y2 – Y1)/(X2 – X1)
= ($15,200 – $4,940)/(20,000 – 6,500) = $0.76
F Y2 – VX2
= $15,200 – $0.76(20,000) = $0
Y =$0.76X
2. Forklift depreciation: Y =$1,800
Indirect
labor: Y= $45,000 + $4.50(9,000)
=$85,500
Fuel and oil for forklift: Y =$0.76(9,000)
=$6,840
3. Materials handling cost:
= Forklift depreciation + Indirect labor + Fuel and oil for forklift
= $1,800 + $45,000 + $4.50X + $0.76X
= $46,800 + $5.26X
For 9,000 purchase orders:
Y= $46,800 + $5.26X
= $46,800 + $5.26(9,000)
=
$94,140
Cost formulas can be combined if the activities they share have a common cost driver.
Exercise 3–20
1. Y= $9,344 + $8.30X
2. Y= $9,344 + $8.30(88)
= $9,344 + $730.40
=
$10,074
From Exhibit 3-14, the t-value for a 95 percent confidence level and degrees of freedom of 102, is 1.96. Thus, the confidence interval is computed as fol-lows:
Y f ± t p S e
$10,074
± 1.96($220)
$9,643
≤Y f≤ $10,505
3. To obtain the percentage explained, the correlation coefficient needs to be
squared: 0.86 × 0.86 = 73.96 percent. The standard error will produce an esti-mate within about $431 of the actual value with 95 percent confidence. The relationship is not bad, but might be improved by finding other explanatory variables. So much unexplained variability (26 percent) may produce less ac-curate predictions.
Exercise 3–21
1. Y= $1,980 + $
2.56X1 + $67.40X2 + $2.20X3
where
Y= Total overhead cost
X1= Number of direct labor hours
X2= Number of wedding cakes
X3= Number of gift baskets
2. Y= $1,980 + $2.56(550) + $67.40(35) + $2.20(20)
=$5,791
3. The t-value for a 95 percent confidence interval and 20 (24 observations – 4
variables) degrees of freedom is 2.086 (see Exhibit 3-14).
Y f ± t p S e
$5,791
± 2.086($65)
$5,791 ± $136 (rounded to the nearest dollar)
$5,655
≤Y f≤ $5,927
4. In this equation, the independent variables explain 92 percent of the variabil-
ity in overhead costs. Overall, the equation is good. R2 is high; the t-values for all independent variables are quite high; and the confidence interval is relatively small giving Della a high degree of confidence that her actual over-head will fall into the range computed.
Della can compare the additional cost of a gift basket ($2.20) to the price charged of $2.50. The cost is close to the price charged and does not seem excessive. If Della feels that the gift basket premium is high compared to what her competitors charge, she might look into less expensive sources of baskets, cellophane, and bows.
Exercise 3–22
1. Y = $378,880 + $676X1 – $3
2.50X2
where
Y= Total monthly cost of audit professional time
X1= Number of not-for-profit audits
X2= Number of hours of audit training
2. Y= $378,880 + $676(12) – $32.50(220)
=
$379,842
3. The t -value for a 99 percent confidence interval and degrees of freedom of 15
is 2.947 (see Exhibit 3-14).
Y f ± t p S e $379,842 ± 2.947($14,030) $379,842 ± $41,346 (rounded) $338,496 ≤ Y f ≤ $421,188
4. The number of not-for-profit audits is positively correlated with audit profes-sional costs. Hours of audit training are negatively correlated with audit pro-fessional costs.
5. In this equation, the independent variables explain 79 percent of the variabil-ity in audit costs. Overall, the equation is not bad. The confidence interval is relatively wide; however, the t -values are high, indicating that the independ-ent variables chosen are predictors of audit costs. In addition, the signs on the independent variables are correct given Callie’s experience with them. As long as the main reason for running the regression is to get some justifi-cation for audit training, the results are good. If Callie wants to predict audit costs, however, she might try to find additional independent variables that would help explain more of the cost.
Exercise 3–23
1. Cumulative Cumulative Cumulative Number Average Time Total Time: of Units per Unit in Hours
Labor Hours (column 1)
(column 2) (3) = (1) × (2)
1 600 600
2 540 (0.90 × 600) 1,080 4 486 (0.90 × 540) 1,944 8 437.4 (0.90 × 486) 3,499.2 16 393.66 (0.90 × 437.4) 6,298.56
2. Cost for making one unit = 600 hours × $25 = $15,000
Cost for making four units = 1,944 hours × $25 = $48,600
Cost for making sixteen units = 6,298.56 hours × $25 = $157,464
Average cost per unit for one unit = $15,000/1 = $15,000
Average cost per unit for four units = $48,600/4 = $12,150
Average cost per unit for sixteen units = $157,464/16 = $9,841.50