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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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Chapter 23 l.jpg

Chapter 23

Includes Supplements 9, 10, 11

Accounting Version


Supplement nine l.jpg

Supplement Nine

Using linear regression to separate fixed and variable labor costs


Graph of cost equation y a bx l.jpg
Graph of Cost Equation: y = a + bX

Y = Costs

Variable

Costs

Total Costs

Fixed Costs

X = Workunits


Example l.jpg
Example

Separate total labor costs into fixed and variable labor components


Microsoft excel l.jpg
Microsoft Excel

  • From the menu select

    • Tools

    • Data analysis

    • Regression

      • Y range is total dollars

      • X range is total work units

    • Okay


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Regression Output

Intercept is fixed costs, X variable 1 is variable cost per unit.


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Cost Equation

Y = 460.10 + 3.73X

A lab test with 5 RVUs would have a standard labor cost of:

5 x $3.73 = $18.65


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Supplement Ten

Determined with

RVU methodology

Determine by

pulling invoices

for materials

Will be determined

through the use of

an overhead rate after

service department

costs have been

allocated to revenue

departments



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Overhead Allocation Methods

  • Direct allocation method

  • Sequential step-down method

  • Double apportionment method

  • Reciprocal method



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First Allocation

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.


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Second Allocation

The second time through, we only allocate to departments to the right, similar to the sequential or step-down method.


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Supplement Eleven

Ratio of Costs to Charges (RCC)


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RCC Steps

  • Calculate total department costs including allocated overhead

  • Calculate total department charges

  • Divide department cost by department charges to get ratio of costs to charges

  • Multiple existing procedure price by RCC to determine procedure cost


Example16 l.jpg
Example

The lab at Community Hospital only performs 5 tests, data for which is shown below:


Example17 l.jpg
Example

The lab does not know the cost of each procedure, however, total department costs are shown below.


Example18 l.jpg
Example

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.



Ratio of costs to charges rcc l.jpg
Ratio of Costs to Charges (RCC)

  • The fallacy with RCC is that it assumes that there was a uniform markup to start with.

  • Since charges were not always based on good cost data, this may not be true.


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