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3-38 Mixed Cost, Choosing Cost Drivers, and High-Low and Visual-Fit

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3-38 Mixed Cost, Choosing Cost Drivers, and High-Low and Visual-Fit Methods
Cedar Rapids Implements Company produces farm implements. Cedar Rapids is in the process of
measuring its manufacturing costs and is particularly interested in the costs of the manufacturing
maintenance activity, since maintenance is a significant mixed cost. Activity analysis indicates that
maintenance activity consists primarily of maintenance labor setting up machines using certain supplies.
A setup consists of preparing the necessary machines for a particular production run of a product.
During setup, machines must still be running, which consumes energy. Thus, the costs associated
with maintenance include labor, supplies, and energy. Unfortunately, Cedar Rapid’s cost accounting
system does not trace these costs to maintenance activity separately. Cedar Rapids employs two fulltime
maintenance mechanics to perform maintenance. The annual salary of a maintenance mechanic
is $25,000 and is considered a fixed cost. Two plausible cost drivers have been suggested: “units produced”
and “number of setups.”
Data had been collected for the past 12 months and a plot made for the cost driver—units of production.
The maintenance cost figures collected include estimates for labor, supplies, and energy.
Cory Fielder, controller at Cedar Rapids, noted that some types of activities are performed each time
a batch of goods is processed rather than each time a unit is produced. Based on this concept, he has
gathered data on the number of setups performed over the past 12 months. The plots of monthly maintenance
costs versus the two potential cost drivers follow on page 122.
1. Find monthly fixed maintenance cost and the variable maintenance cost per driver unit using
the visual-fit method based on each potential cost driver. Explain how you treated the April
data.
2. Find monthly fixed maintenance cost and the variable maintenance cost per driver unit using the
high-low method based on each potential cost driver.
3. Which cost driver best meets the criteria for choosing cost functions? Explain.
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