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3-38 Mixed Cost, Choosing Cost Drivers, and High-Low and Visual-Fit Methods Cedar Rapids Implements Company produces farm implements.
3-38 Mixed Cost, Choosing Cost Drivers, and High-Low and Visual-Fit MethodsCedar Rapids Implements Company produces farm implements. Cedar Rapids is in the process ofmeasuring its manufacturing costs and is particularly interested in the costs of the manufacturingmaintenance activity, since maintenance is a significant mixed cost. Activity analysis indicates thatmaintenance 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 associatedwith maintenance include labor, supplies, and energy. Unfortunately, Cedar Rapid’s cost accountingsystem does not trace these costs to maintenance activity separately. Cedar Rapids employs two fulltimemaintenance mechanics to perform maintenance. The annual salary of a maintenance mechanicis $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 timea batch of goods is processed rather than each time a unit is produced. Based on this concept, he hasgathered data on the number of setups performed over the past 12 months. The plots of monthly maintenancecosts versus the two potential cost drivers follow on page 122.1. Find monthly fixed maintenance cost and the variable maintenance cost per driver unit usingthe visual-fit method based on each potential cost driver. Explain how you treated the Aprildata.ISBN: 0-536-47129-0Introduction to Management Accounting: Chapters 1-17, Fourteenth Edition, by Charles T. Horngren, Gary L. Sundem, William O. Stratton,David Burgstahler, and Jeff Schatzberg. Published by Prentice Hall. Copyright © 2008 by Pearson Education, Inc.122 Part 1: Focus on Decision MakingPlant ClosedThree Weeks in AprilDue to Storm Damage$302520151050Units Produced (Thousands)0 1 2 3 4Maintenance Costs (Thousands)Plant ClosedThree Weeks in AprilDue to Storm Damage$302520151050Number of Setups0 5 10 15 20 25 30Maintenance Costs (Thousands)Maintenance Department CostsCost drivers: Production Units & Setups2. Find monthly fixed maintenance cost and the variable maintenance cost per driver unit using thehigh-low method based on each potential cost driver.3. Which cost driver best meets the criteria for choosing cost functions? Explain.
