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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

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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**Separate total labor costs into fixed and variable labor components**Microsoft Excel**• From the menu select • Tools • Data analysis • Regression • Y range is total dollars • X range is total work units • Okay**Regression Output**Intercept is fixed costs, X variable 1 is variable cost per unit.**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**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**Overhead Allocation Methods**• Direct allocation method • Sequential step-down method • Double apportionment method • Reciprocal method**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.**Second Allocation**The second time through, we only allocate to departments to the right, similar to the sequential or step-down method.**Supplement Eleven**Ratio of Costs to Charges (RCC)**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**Example**The lab at Community Hospital only performs 5 tests, data for which is shown below:**Example**The lab does not know the cost of each procedure, however, total department costs are shown below.**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)**• 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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