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# BUACC2613 Management Accounting

Published : 02-Sep,2021  |  Views : 10

## Question:

Modesty had used the high-low method when estimating the cost function for supplies. With only three data points it may perhaps be better to consider using quarterly data which would provide more data points and perhaps enable the estimation of a better cost function.

As visits are recorded manually at reception, Modesty was also concerned about the accuracy of the data collected, and that perhaps not all visits were recorded. This could be tracked through the bills issued which could be used as a surrogate estimate of visits however clients (such as parents) may bring their children yet receive only a single bill. She did however wonder if there was an alternative better cost driver available.

Modesty was also aware that different supplies are used by the dentists depending upon the nature of the treatment. For instance, a child may require different dosage and treatment to that of an adult and also dependent upon the procedure being applied. Any allocation premised upon the number of visits assumes that supplies used are the same for each visit. Modesty is aware that the bill for each visit includes charges for supplies and consequently, revenue received per visit varies with the number and type of supplies used. It would be better if revenue was correlated with supplies than number of visits. She also believes that the data for revenue per visit are more accurate because they are recorded by the accounting system when bills are created.

Although believing that revenue may be better correlated with supplies cost than visits, Modesty decides to investigate both drivers to learn more about their behaviour. Appropriate data is as follows:

Required

B1: Utilising Revenue as the cost driver use the Excel regression tool to calculate the following:

• R Square and Standard Error,
• Intercept coefficient, standard error, t-stat and p-value
• Revenue coefficient, standard error, t-stat and p-value

B1a: How confident can Modesty be that the actual fixed cost is greater than zero (i.e. – that there is a fixed cost component in the cost function

B1b: How confident can Modesty be that the actual variable cost per unit of the cost driver is greater than zero. (i.e. that there is a variable component in the cost function

B1c: Overall, how well does the cost driver explain the behaviour (i.e. the variation} in the cost.

B2: Utilising Visits as the cost driver calculate the following:

• R Square and Standard Error,
• Intercept coefficient, standard error, and t-stat
• Revenue coefficient, standard error and t-stat

B2a: How confident can Modesty be that the actual fixed cost is greater than zero (i.e. – that there is a fixed cost component in the cost function

B2b: How confident can Modesty be that the actual variable cost per unit of the cost driver is greater than zero. (i.e. that there is a variable component in the cost function

B2c: Overall, how well does the cost driver explain the behaviour (i.e. the variation} in the cost.

B3: Calculate the Total Cost function that Modesty should use based on B1 and B2 calculated above.

 Item 2014 2015 2016 Visits 2,300 3,000 3,600 Fees \$1,45,000.00 \$1,80,000.00 \$2,10,000.00 Total revenue \$1,45,000.00 \$1,80,000.00 \$2,10,000.00 Expenses Part-Time Dentist \$24,000.00 \$32,800.00 \$43,000.00 Receptionist/Technician \$71,000.00 \$78,000.00 \$78,049.00 Supplies \$3,900.00 \$4,700.00 \$5,100.00 Rent \$8,000.00 \$8,500.00 \$8,750.00 Administration \$37,000.00 \$39,600.00 \$40,200.00 Total Expenses \$1,43,900.00 \$1,63,600.00 \$1,75,099.00 Profit \$1,100.00 \$16,400.00 \$34,901.00 Item High Low Change Total Costs \$1,75,099.00 \$1,43,900.00 \$31,199.00 Number of Visits 3,600 2,300 1,300 Item 2014 2015 2016 Total Costs \$1,43,900.00 \$1,63,600.00 \$1,75,099.00 Variable Costs \$55,198.23 \$71,997.69 \$86,397.23 Fixed Costs \$88,701.77 \$91,602.31 \$88,701.77 Ratio of Fixed Costs to Total Costs 0.62 0.44 0.51 Fixed Supplies Costs \$2,404.01 \$2,068.39 \$2,583.56 Variable Supplies Costs \$1,495.99 \$2,631.61 \$2,516.44 YEAR 2014 2015 2016 Part-Time Dentist \$24,000.00 \$32,800.00 \$43,000.00 Administration Supplies \$8,000.00 \$9,600.00 \$11,200.00 Supplies \$1,495.99 \$2,631.61 \$2,516.44 Total Variable Costs \$33,495.99 \$45,031.61 \$56,716.44 Receptionist/Technician \$71,000.00 \$78,000.00 \$78,049.00 Rent \$8,000.00 \$8,500.00 \$8,750.00 Administrative Costs \$29,000.00 \$30,000.00 \$29,000.00 Supplies \$2,404.01 \$2,068.39 \$2,583.56 Total Fixed Costs \$1,10,404.01 \$1,18,568.39 \$1,18,382.56
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