Chapter 23. Includes Supplements 9, 10, 11 Accounting Version. Supplement Nine. Using linear regression to separate fixed and variable labor costs. Graph of Cost Equation: y = a + bX. Y = Costs. Variable Costs. Total Costs. Fixed Costs. X = Workunits. Example.
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Includes Supplements 9, 10, 11
Using linear regression to separate fixed and variable labor costs
Y = Costs
X = Workunits
Separate total labor costs into fixed and variable labor components
Intercept is fixed costs, X variable 1 is variable cost per unit.
Y = 460.10 + 3.73X
A lab test with 5 RVUs would have a standard labor cost of:
5 x $3.73 = $18.65
Will be determined
through the use of
an overhead rate after
costs have been
allocated to revenue
Allocate this amount to individual products using an overhead rate
Unlike the sequential method, we allocate costs to all other departments in the first allocation.
The second time through, we only allocate to departments to the right, similar to the sequential or step-down method.
Ratio of Costs to Charges (RCC)
The lab at Community Hospital only performs 5 tests, data for which is shown below:
The lab does not know the cost of each procedure, however, total department costs are shown below.
First we calculate the ratio of costs to charges (RCC):
$297,000/$312,632 = 95%
Then we multiply the RCC by the current price (as shown on the next slide) to determine the procedure cost.