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Calculating Fixed/Variable Maintenance Costs

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Peoria Implements Company produces farm implements. Peoria 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, Peoria's cost accounting system does not trace these costs to maintenance activity separately. Peoria employs two full-time 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 Peoria, recently attended an activity-based costing seminar where he learned 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 steps performed over the past 12 months. The plots of monthly maintenance costs versus the two potential cost drivers are provided in the attached document.

1. Find the 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 of 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.

** See attached word document, which includes tables/charts, for complete details **

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Solution Summary

This solution clearly explains in a step-wise fashion, how to determine the fixed and variable part of a mixed cost. Part of the solution is enclosed within a Word document which is attached to this response.

Solution Preview

For questions 1 and 2, please view the attached document.

3. Which cost driver best meets the criteria for choosing ...

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