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Chapter 23

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

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  1. Chapter 23 Includes Supplements 9, 10, 11 Accounting Version

  2. Supplement Nine Using linear regression to separate fixed and variable labor costs

  3. Graph of Cost Equation: y = a + bX Y = Costs Variable Costs Total Costs Fixed Costs X = Workunits

  4. Example Separate total labor costs into fixed and variable labor components

  5. Microsoft Excel • From the menu select • Tools • Data analysis • Regression • Y range is total dollars • X range is total work units • Okay

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

  7. 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

  8. 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

  9. Overhead Expense

  10. Overhead Allocation Methods • Direct allocation method • Sequential step-down method • Double apportionment method • Reciprocal method

  11. Double Apportionment

  12. 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.

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

  14. Supplement Eleven Ratio of Costs to Charges (RCC)

  15. 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

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

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

  18. 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.

  19. Example

  20. 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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