ACCT WEEK 3 TUTORIAL ANSWER

ACCT2522 Management Accounting 1

Session 1, 2012

Tutorial Week 3 – Cost basics

Suggested Solutions

Langfield-Smith, Chapter 3, Case 3.41 Q3-8 only

Please note that all numbers in the cost functions should be rounded off to 2 dec places.

3 This analysis is based on the costs and activity within the relevant range, that is between 600

and 1200 patients.

Variable cost per unit cost of driver = ($11 100 - $8 300)/(1 200 – 600) = $4.67

Total cost at 1 200 patients of cost driver = $ 11 100

Total variable cost at 1 200 patients of cost driver = 1 200 x $4.67

= $5 604

Fixed cost = $5 496

Cost equation based on high-low method:

Administrative cost, Y = $5 496 + $4.67X

where X denotes the number of patients during the period

Note: Due to rounding, students who use different points may get slightly different answers for the

fixed cost, but no more than ± 4. If students used $4.66666667, then they would get $5,500 for the

fixed cost regardless of the points used.

4 Cost when 800 patients visit the hospital:

Total cost = 5 496 + (4.67 x 800) = $9 232

Cost when 300 patients visit the hospital (mathematically correct, but conceptually wrong):

Total cost = 5 496 + (4.67 x 300) = $6 897

However, it is not appropriate to use this cost function to estimate the administrative costs at

300 patients, as this is well below the relevant range.

5 Note: this table is not required, simple counting by students will do.

emergency

Patient load Administrative cost

of

Month Number

proc.

000

10

April 10

1000

$ June 14 900 $ 9 200

200

10

$

1100 July 8

September 12 700 $ 9 400

100

11

$ October 12

1200

November 8 600 $ 8 300

6 (a) If only patient load is considered as a determinant of administration costs and only the

historical patient load data that falls within the relevant range (patient load between 600 and 1200) are considered, then the simple regression can be used, utilising Excel. The output is reproduced below

Regression Statistics

Multiple R 0.927088078

R Square 0.859492304

Adjusted R Square 0.824365379

Standard Error 401.9749382

Observations 6

ANOVA

df SS MS F Significance F

Regression 1 3 953 664.596 395 3665 24.468191 0.00778042

Residual 4

646

335.4037

161583.9

Total 5 4 600 000

Coefficients Standard error t Stat P-value Lower 95% Upper 95%

Intercept 6 181.36646 730.0175478 8.467422 0.0010661 4 154.51281

8 208.220107

Patients 3.838509317

0.775999898

4.946533

0.0077804 1.6839882

5.993030436

From this, the equation to explain administrative cost behaviour is as follows.

Y = a + bX, where:

X = the independent variable (patient load for one month)

Y = the dependent variable (administrative cost for one month)

Y = $6 181 + $3.84X

This can be expressed as total cost = fixed costs of $6 181 plus $3.84 per patient

(b) The clinic’s administrative cost during the month when 800 patients visit the hospital would

be $ 6181 + $3.84 x 800 = $9 253

(c) When both patient load and the number of emergency procedures are considered as

determinants of administrative cost, multiple regression must be used. Utilising Excel, the regression statistics are reproduced below

Regression Statistics

Multiple R 0.92919029

R Square 0.86339459

Adjusted R Square 0.77232432

Standard Error 457.669779

Observations 6

ANOVA

df SS MS F

Significance

F Regression 2 3 971 615.12 1 985 808 9.480532 0.05048959

Residual 3 628 384.8797 209 461.6

Total 5 4 600 000

Coefficients Standard

Error t Stat P-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept 5943.986251161.190869 5.1188710.01443 2 248.5586659 639.4142 248.5599 639.414 Emergency 24.914089385.10570782 0.2927430.788799-245.930256295.7584-245.932 95.7584 Patients 3.807560140.889819838

4.2790240.0234430.975756281 6.6393640.9757566.639364

From this, the equation to explain administrative cost behaviour is as follows:

Y = a + b1X1 + b2X2, where:

X1= the independent variable (the number of emergency procedures for one month)

X2= the independent variable (patient load for one month)

Y = the dependent variable (administrative cost for one month)

i.e. Administrative cost = $5 944 + $24.91 per emergency procedure + $3.81 per patient

(d) Clinic’s administrative cost during the month when 800 patients visit the hospital and 12

emergency procedures taken place would be $9 290.92

(calculated as $5 944 + $24.91 x 12 + $3.81 x 800 = $9 290.92)

Hint for Q7

Look at adjusted R2, F-statistic and the associated p-value (Sig F), and t-statistic and the associated p-value.