Charlene is the owner of Charlene’s Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just over five years. 3C‘s primary clients are local businesses but include some residential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs associated with the service prior to commencing work.
Their approach has proven successful, but competition is getting much stiffer, and Charlene is concerned that her approach to determining costs and prices for any particular job is not correctly incorporating all of the company's costs. She has heard about the concept of cost allocation and asks her accountant to create an allocation system for the business.
Her accountant decides to implement a single-driver allocation system and needs to develop a reliable cost function to estimate total indirect costs. She will use this estimate for the numerator of the single driver "overhead" rate, and she will use service hours as the cost driver and denominator in the "overhead" rate.
To estimate the parameters of this cost function, the accountant first studied the behavior of last month's costs, when the company spent 316 service hours repairing 39 computer systems. Here are the results of her analysis:
Cost Item |
Fixed Cost |
Variable Cost |
Utilities |
$208 |
$75 |
Office rent |
$3,610 |
$0 |
Administration |
$3,134 |
$192 |
Supplies |
$0 |
$3,492 |
Training |
$370 |
$346 |
Total |
$7,322 |
$4,105 |
Concerned that last month may not have been a typical month and her breakdown of fixed and variable costs not completely correct, the accountant decided to use the high-low method to create another cost function. She gathered individual cost and service hour data from the last six months; the following were for the two months when costs and service hours were the lowest and the highest:
Cost Item |
low month |
high month |
Utilities |
$212 |
$305 |
Office rent |
$2,994 |
$2,994 |
Administration |
$3,132 |
$3,524 |
Supplies |
$1,519 |
$3,513 |
Training |
$605 |
$745 |
Total |
$8,462 |
$11,081 |
Service hours |
247 |
573 |
Customers |
31 |
73 |
Next month, Charlene expects the company to spend 430 hours solving clients' computer system problems.
REQUIRED [ROUND ALL PER-UNIT COSTS TO TWO DECIMAL
PLACES AND TOTAL COSTS TO THE NEAREST DOLLAR.]
Part A (6 tries; 5 points)
What is the accountant's estimate of total "overhead" next month if
she uses the cost function based on her analysis of last month's
cost data?
Tries 0/6 |
Part B (6 tries; 5 points)
What is the accountant's estimate of total "overhead" next month if
she uses the cost function based on the high-low
method?
Variable overhead per hour = 4105/316 = $12.99 per hour
Total overhead based on last month = Fixed overhead + variable overhead
= 7322 + 12.99*430
= $12,907.7
I.e. $12,908
b.Variable cost per unit as per high low method = Difference in cost/Difference in hours
= (11081-8462)/(573-247)
= $8.03 per hour
Fixed cost = 8462 – 247*8.03 = $6478.59
Overhead next month = 6478.59 + 8.03*430
= $9931.49
Charlene is the owner of Charlene’s Computer Care (3C) and has been in the business of...
Charlene is the owner of Charlene’s Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just over five years. 3C‘s primary clients are local businesses but include some residential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs associated with the service prior to commencing work. Their approach has proven...
Charlene is the owner of Charlene's Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just pver five years. 3C's primary dients are local businesses but include spme residential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs associated with the service prior to commencing work. Their approach has proven...
Charlene is the owner of Charlene's Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just over five years. 3C's primary clients are local businesses but include some residential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs associated with the service prior to commencing work. Their approach has proven...
Charlene is the owner of Charlene's Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just over five years. 3C's primary clients are local businesses but include some residential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs associated with the service prior to commencing work. Their approach has proven...
Charlene is the owner of Charlene's Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just over five years. 3C's primary clients are local businesses but include some residential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs associated with the service prior to commencing work Their approach has proven...
Charlene is the owner of Charlene's Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just over five years. 3C's primary clients are local businesses but include some residential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs associated with the service prior to commencing work. Their approach has proven...
Need help answering A. The answer in there right now is
incorrect.
Charlene is the owner of Charlene's Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just over five years. 3C's primary clients are local businesses but include some residential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs...
To estimate the parameters of this cost function, the accountant first studied the behavior of last month's costs, when the company spent 318 service hours repairing 45 computer systems. Here are the results of her analysis: Cost Item Fixed Cost Variable Cost Utilities $229 $149 Office rent $3,819 $0 Administration $3,249 $165 Supplies $0 $3,437 Training $350 $308 Total $7,647 $4,059 Concerned that last month may not have been a typical month and her breakdown of fixed and variable costs...
Mears Production Company makes several products and sells them for an average price of $80. Mears' accountant is considering two different approaches to estimating the firm's total monthly cost function, 1) account analysis, and 2) high-low. In both cases, she used units of production as the independent variable. For the account analysis approach, she developed the cost function by analyzing each cost item in June, when production was 1,550 units. The following are the results of that analysis: Cost Item...
Mears Production Company makes several products and sells them for an average price of $70. Mears' accountant is considering two different approaches to estimating the firm's total monthly cost function, 1) account analysis, and 2) high-low. In both cases, she used units of production as the independent variable. For the account analysis approach, she developed the cost function by analyzing each cost item in June, when production was 1,550 units. The following are the results of that analysis: Cost Item...