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Brick by Brick (BBB) is a building business that provides a range of building services to the public
Brick by Brick (BBB) is a building business that provides a range of building services to the public. Recently they have been asked to quote for garage conversions (GC) and extensions to properties (EX) and have found that they are winning fewer GC contracts than expected. BBB has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis. BBB thinks that a switch to activity based costing (ABC) to absorb overheads would reduce the cost associated to GC and hence make them more competitive.
Overheads Annual Costs Activity Drivers Number of Activities
K
Supervisors 90,000 Site Visits 500
Planners 70,000 plannining documents 250
Property related 240,000 Labour hours 40,000
Total 400,000
A typical GC costs K3,500 in materials and takes 300 labour hours to complete. A GC requires only one site visit by a supervisor and needs only one planning document to be raised. The typical EX costs K8,000 in materials and takes 500 hours to complete. An EX requires six site visits and ?ve planning documents. In all cases labour is paid K15 per hour.
Required
A. Calculate the cost and quoted price of a GC and of an EX using labour hours to absorb the overheads. (8 Marks)
Brick by Brick
Costs and quoted prices for the GC and the Ex using ABC to absorb overheads;
GC
EX
$
$
Materials
3,500
8,000
Labour:
300hours x $15/hr
500hours x $15/hr
4,500
7,500
Overheads:(W2 & W3)
Supervisor
Planners
Property
180
280
1,800
1,080
1,400
3,000
Total Cost
10,260
20,980
Quoted price
15,390
31,470
Working 2: Number Cost per
Costs of drivers driver
Supervisor 90,000.00 500 180
Planners 70,000.00 250 280
Property 240,000.00 40,000 6
Working 3:
Supervisor Planner Property
Cost per driver (W2) 180 280 6
GC 180 x1 = 180 280 x 1 = 280 300 x 6 = 1,800
EX 180 x 6 = 1,080 280 x 5 = 1,400 500 x 6 = 3,000
B. Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the overheads. (17 Marks)
QUESTION TWO
Alta Production, Inc., reported the following production costs for the 12 months January through December.
Reporting Period
(Month)
Total Production
Costs
Level of Activity
(Units Produced)
K
January
460,000
300
February
300,000
220
March
480,000
330
April
550,000
390
May
570,000
410
June
310,000
240
July
440,000
290
August
455,000
320
September
530,000
380
October
250,000
150
November
700,000
450
December
490,000
350
Required
A. Using this information, define the cost function using regression analysis.
Y = a + bx
B. Assume Alta Production, Inc., will produce 400 units next month. Calculate total production costs for the month.
C. Accepting that the coefficient of determination arising from the data given in the question is approximately 0.86, interpret the significant of this fact.
Expert Solution
Answer:
Here,
n = 12
Σxy = 1,883,600,000
Σx = 3,830
Σy = 5,535,000
Σx2 = 1,303,500
The formula to determine variable costing is derived by using "b" as follows :
b = [(n * Σxy) - (Σx * Σy)] / [(n * Σx2 ) - (Σx)2]
b = [(12 * 1,883,600,000) - (3,830 * 5,535,000)] / [(12 * 1,303,500) - (3,830)2]
b = 1,404,150,000 / 973,100
b = 1,443 approx.
Therefore, variable cost per unit will be K1,443 approximately.
The formula to determine fixed costing is derived by using "a" as follows :
a = {[Σy - (b * Σx)] / n}
a = {[5,535,000 - (1,443 * 3,830)] / 12}
a = K692.5
Therefore, fixed cost per unit will be K693 approximately.
The cost function will be :
y = a + bx
y = K693 + K1,443x
PART 2 :
When the company produces 400 units, the total cost by using cost function will be :
Total cost = K693 + (K1,443 * 400 units)
= K577,893
Therefore, the total cost of producing 400 units will be K577,893 by the method of regression analysis.
PART 3 :
Coefficient of determination means the total degree of change (or variability) one variable would have due to the relation with another variable. Over here the coefficient of determination is 0.86 which means that the model used to determine the variability between the two factors (or variables) is quite fit for future projections and is a reliable forecast.
PFA
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