Ch5 Cost Behavior

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True/False Questions

1. Within the relevant range, a change in activity results in a change in total variable cost and the per unit fixed cost.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

2. The reluctance of managers to lay off employees when activity declines in the short-run leads to an increase in the ratio of variable to fixed costs.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

3. A variable cost fluctuates in total as activity changes but remains constant on a per unit basis over the relevant range.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

4. A cost that is classified as variable with respect to one measure of activity could be classified as fixed with respect to a different measure of activity.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

5. Fixed costs remain constant in total, but vary inversely with changes in activity when expressed on a per unit basis.


6. Committed fixed costs have a short-term planning horizon--usually one year.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

7. The following costs are all examples of committed fixed costs: depreciation on buildings, advertising, insurance, and management development and training.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

8. The time frame in which discretionary fixed costs are controllable is usually much shorter than the time frame for committed fixed costs.


9. The high-low method is generally more accurate than the least-squares regression method in analyzing cost behavior.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,5 Level: Easy

10. A major problem with the high-low method of cost estimation is that some data are omitted from the analysis.


11. The high and low points used in the high-low method tend to be unusual and therefore the cost formula may not accurately represent all of the data.


12. Contribution margin and gross margin mean the same thing.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Medium

13. Contribution margin equals revenue minus all variable costs.


14. The traditional income statement organizes costs on the basis of cost behavior.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: 4 Level: Easy

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15. It is necessary to break mixed costs into their variable and fixed cost components in order to construct an income statement using the contribution approach.


Multiple Choice Questions

16. A is a fixed cost; B is a variable cost. During the current year the level of activity has decreased but is still within the relevant range. We would expect that:A) The cost per unit of A has remained unchanged.B) The cost per unit of B has decreased.C) The cost per unit of A has decreased.D) The cost per unit of B has remained unchanged.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

17. Which costs will change with an increase in activity within the relevant range?A) Unit fixed cost and total fixed costB) Unit variable cost and total variable costC) Unit fixed cost and total variable costD) Unit fixed cost and unit variable cost

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

18. Salaries of accounts receivable clerks when one clerical worker is needed for every 750 accounts receivable is an example of a:A) fixed costB) step-variable costC) mixed costD) curvilinear cost

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

19. Limousine Conversion Company purchases ordinary Cadillacs, cuts them in half, and then adds a middle section to the vehicles to create stretch limousines. With respect to the number of cars converted, the cost of the Cadillacs purchased for conversion by Limousine Conversion Company would best be described as a:A) fixed costB) mixed costC) step-variable costD) variable cost

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

20. For an automobile manufacturer, the cost of a driver's side air bag purchased from a supplier and installed in every automobile would best be described as a:A) fixed cost.B) mixed cost.C) step-variable cost.D) variable cost.


21. With respect to a fixed cost, an increase in the activity level within the relevant range results in:A) an increase in fixed cost per unit.B) a proportionate increase in total fixed costs.C) an unchanged fixed cost per unit.D) a decrease in fixed cost per unit.


22. In the standard cost formula Y = a + bX, what does the “Y” represent?A) total costB) total fixed costC) total variable costD) variable cost per unit

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

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23. In the standard cost formula Y = a + bX, what does the “a” represent?A) total costB) total fixed costC) total variable costD) variable cost per unit

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

24. In the standard cost formula Y = a + bX, what does the “b” represent?A) total costB) total fixed costC) total variable costD) variable cost per unit

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

25. In the standard cost formula Y = a + bX, what does the “X” represent?A) total costB) total fixed costC) units of activityD) variable cost per unit

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

26. Which of the following would usually be considered a discretionary fixed cost for a soft drink bottling company?A) the cost of advertising its productsB) the cost of fire insurance on its factory buildingC) depreciation on its manufacturing equipmentD) both a and b above

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

27. Which of the following is a weakness of the quick-and-dirty scattergraph method of analyzing mixed cost?A) It is impossible to determine variable cost per unit.B) Only two data points are used and the rest are ignored in drawing the

scattergraph.C) Different people will have different answers even though they are analyzing the

same set of data.D) Both B and C above


28. Which of the following statements is true when referring to the high-low method of cost analysis?A) The high-low method has no major weaknesses.B) The high-low method is very hard to apply.C) In essence, the high-low method draws a straight line through two data points.D) None of the above is true.


29. Contribution margin is computed as sales revenue minus:A) fixed expensesB) variable expensesC) cost of goods soldD) cost of goods manufactured

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

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30. Which of the following approaches to preparing an income statement calculates gross margin?

Traditional ContributionApproach Approach

A) Yes YesB) Yes NoC) No YesD) No No

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: 4 Level: Medium

31. The least-squares regression method:A) fits a regression line by minimizing the sum of the squared errors from the

regression line.B) is generally less accurate than the scattergraph method.C) can be used only if the fixed cost element is larger than the variable cost

element.D) is the only method acceptable under generally accepted accounting principles.

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

32. Multiple regression analysis is used when:A) more than one cost category must be analyzed.B) when more than one factor causes variation in a cost.C) the high-low method cannot be used because there is only one observation.D) all of the points on a scattergraph fall exactly on a regression line.

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

33. Iacono Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $127.20 per unit.

Sales volume (units)................................... 5,000 6,000Cost of sales............................................... $419,000 $502,800Selling and administrative costs................. $186,500 $202,200

The best estimate of the total contribution margin when 5,300 units are sold is:A) $230,020B) $51,410C) $146,810D) $32,330

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3,4 Level: Hard

Solution:

Variable component of cost of goods sold:Variable cost = Change in costs/Change in unitsVariable cost = ($502,800 − $419,000)/(6,000 − 5,000)Variable cost = $83.80 per unit

Variable component of selling and administrative expenses:Variable cost = Change in costs/Change in unitsVariable cost = ($202,200 − $186,500)/(6,000 − 5,000)Variable cost = $15.70 per unit

Sales revenue ($127.20 × 5,300)......................... $674,160Variable expenses:

Variable cost of goods sold ($83.80 × 5,300). . $444,140Variable selling and administrative expense

($15.70 × 5,300)........................................... 83,210 527,350

Contribution margin............................................ $ 146,810

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34. Utility costs at Service, Inc. are a mixture of fixed and variable components. Records indicate that utility costs are an average of $0.40 per hour at an activity level of 9,000 machine hours and $0.25 per hour at an activity level of 18,000 machine hours. Assuming that this activity is within the relevant range, what is the expected total utility cost if the company works 13,000 machine hours?A) $4,225B) $5,200C) $4,000D) $3,250

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard

Solution:

Machine-Hours

Average Cost per

Hour

Total Utility Cost (machine-hours ×

average cost per hour)High activity level...... 18,000 $0.25 $4,500Low activity level...... 9,000 $0.40 $3,600

Variable cost = Change in cost ÷ Change in activity= ($4,500 − $3,600) ÷ (18,000 – 9,000) = $0.10

Fixed cost element = Total cost − Variable cost element= $4,500 − ($0.10 × 18,000) = $2,700

Therefore, the cost formula for total utility cost is $2,700 per period plus $0.10 per machine-hour, or Y = $2,700 + $0.10X.

At an activity level of 13,000 machine-hours, total cost is estimated to be:Y = $2,700 + ($0.10 × 13,000) = $4,000

35. Clerical costs in the billing department of Craig Company are a mixture of variable and fixed components. Records indicate that average unit processing costs are $0.50 per account processed at an activity level of 32,000 accounts. When only 22,000 accounts are processed, the total cost of processing is $12,500. Assuming that this activity is within the relevant range, at a budgeted level of 25,000 accounts:A) processing costs are expected to total $8,750.B) fixed processing costs are expected to be $10,400.C) the variable processing costs are expected to be $0.35 per account processed.D) processing costs are expected to total $14,975.


Solution:

Accounts

Average Cost per Account

Processed

Total Utility Cost (accounts × average

cost per account processed)

High activity level...... 32,000 $0.50 $16,000 Low activity level...... 22,000 $12,500*

*Given

Variable cost = Change in cost ÷ Change in activity= ($16,000 − $12,500) ÷ (32,000 – 22,000) = $0.35


Therefore, the cost formula for total utility cost is $4,800 per period plus $0.35 per account processed, or Y = $4,800 + $0.35X.

At an activity level of 25,000 accounts, total cost is estimated to be:Y = $4,800 + ($0.35 × 25,000) = $13,550

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36. Shipping cost at Junk Food Imports is a mixed cost with variable and fixed components. Past records indicate total shipping cost was $18,000 for 16,000 pounds shipped and $22,500 for 22,000 pounds shipped. Assuming that this activity is within the relevant range, if the company plans to ship 18,000 pounds next month, the expected shipping cost is:A) $18,500B) $20,400C) $19,500D) $24,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium

Solution:

Pounds ShippedShipping

CostHigh activity level...... 22,000 $22,500Low activity level...... 16,000 $18,000

Variable cost = Change in cost ÷ Change in activity= ($22,500 − $18,000) ÷ (22,000 − 16,000) = $0.75


Therefore, the cost formula for total shipping cost is $6,000 per period plus $0.75 per pound shipped, or Y = $6,000 + $0.75X.

At an activity level of 18,000 pounds shipped, total cost is estimated to be:Y = $6,000 + ($0.75 × 18,000) = $19,500

37. Larson Brothers, Inc., used the high-low method to derive its cost formula for electrical power cost. According to the cost formula, the variable cost per unit of activity is $3 per machine-hour. Total electrical power cost at the high level of activity was $7,600 and at the low level of activity was $7,300. If the high level of activity was 1,200 machine hours, then the low level of activity was:A) 800 machine hoursB) 900 machine hoursC) 1,000 machine hoursD) 1,100 machine hours

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard

Solution:

Variable cost = Change in cost ÷ Change in activity= ($7,600 − $7,300) ÷ (1,200 − X) = $3, where X = low level of activity=> $300 ÷ (1,200 – X) = $3=> $300 = $3 × (1,200 – X)=> $100 = $1,200 – X=> X = $1,100

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38. The following production and average cost data for a month's operations have been supplied by a company that produces a single product.

Production volume......................... 1,000 units 2,000 unitsDirect materials.............................. $4.00 per unit $4.00 per unitDirect labor.................................... $3.50 per unit $3.50 per unitManufacturing overhead................ $10.00 per unit $6.20 per unit

The total fixed manufacturing cost and variable manufacturing cost per unit are as follows:A) $3,600; $7.50B) $3,600; $9.90C) $7,600; $7.50D) $7,600; $9.90

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Source: CIMA, adapted

Solution:

First, calculate the variable manufacturing cost per unit:

Production Volume (Units)

Average Cost per

Unit

Total Manufacturing Overhead Cost (units

× average cost per unit)

High activity level...... 2,000 $6.20 $12,400Low activity level...... 1,000 $10.00 $10,000

Variable manufacturing overhead cost = Change in cost ÷ Change in activity= ($12,400 − $10,000) ÷ (2,000 – 1,000) = $2.40

Fixed cost element of manufacturing overhead = Total cost − Variable cost element= $12,400 − ($2.40 × 2,000) = $7,600

Total variable cost per unit = Direct material + Direct labor + Variable manufacturing overhead = $4.00 + $3.50 + $2.40 = $9.90

There are no fixed direct materials or direct labor, so the total fixed costs would be equal to the fixed cost portion of manufacturing overhead, or $7,600.

39. Anderst Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.


The best estimate of the total monthly fixed manufacturing cost is:A) $201,800B) $233,200C) $170,400D) $392,400


Solution:

First, calculate the variable manufacturing cost per unit:


Average Cost per

Unit






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40. Bakeman Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.


The best estimate of the total variable manufacturing cost per unit is:A) $104.80B) $36.10C) $20.70D) $84.10

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard

Solution:

To calculate the variable manufacturing cost per unit:


Average Cost per

Unit

Total Manufacturing Overhead Cost

(units × average cost per unit)



Total variable manufacturing cost per unit = Direct materials + Direct labor + Manufacturing overhead= $36.10 + $48.00 + $20.70 = $104.80

41. Carcia Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.


The best estimate of the total cost to manufacture 6,300 units is closest to:A) $1,274,490B) $1,287,090C) $1,312,290D) $1,236,690

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard

Solution:



Average Cost per

Unit






Per Unit Cost

Number of Units Total Cost

Direct materials................................... $89.40 6,300 $ 563,220Direct labor.......................................... $11.20 6,300 70,560Variable manufacturing overhead....... $23.70 6,300 149,310Fixed manufacturing overhead............ 504,000 Total cost to manufacture 6,300 units $1,287,090

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42. Daar Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume......................... 2,000 units 3,000 unitsDirect materials.............................. $188,400 $282,600Direct labor.................................... $91,800 $137,700Manufacturing overhead................ $110,400 $127,800

The best estimate of the total monthly fixed manufacturing cost is:A) $75,600B) $390,600C) $469,350D) $548,100

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium

Solution:




High activity level...... 3,000 $127,800Low activity level...... 2,000 $110,400



43. Edde Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.


The best estimate of the total variable manufacturing cost per unit is:A) $127.70B) $150.30C) $22.60D) $72.80

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium

Solution:

Direct material cost per unit = $291,200 ÷ 4,000 = $72.80(Alternatively, direct material cost per unit = $364,000 ÷ 5,000 = $72.80)

Direct labor cost per unit = $219,600 ÷ 4,000 = $54.90(Alternatively, direct labor cost per unit = $274,500 ÷ 5,000 = $54.90)


Total variable manufacturing cost per unit = $72.80 + $54.90 + $22.60 = $150.30

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44. Farah Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.


The best estimate of the total cost to manufacture 2,300 units is closest to:A) $332,120B) $379,500C) $355,810D) $360,960

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium

Solution:




High activity level...... 3,000 $158,100Low activity level...... 2,000 $146,600



Per Unit Cost

Number of Units Total Cost

Direct materials................................... $73.10* 2,300 $168,130Direct labor.......................................... $18.60** 2,300 42,780Variable manufacturing overhead....... $11.50 2,300 26,450Fixed manufacturing overhead............ 123,600

Total cost to manufacture 2,300 units $360,960

*$219,300 ÷ 3,000 units = $73.10 per unit**$55,800 ÷ 3,000 units = $18.60 per unit

45. Gamad Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $131.00 per unit.

Sales volume (units)............................. 4,000 5,000Cost of sales......................................... $262,800 $328,500Selling and administrative costs........... $230,400 $244,500

The best estimate of the total monthly fixed cost is:A) $174,000B) $533,100C) $493,200D) $573,000


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Solution:

Variable component of cost of goods sold:Variable cost = Change in costs/Change in unitsVariable cost = ($328,500 − $262,800)/(5,000 − 4,000)Variable cost = $65.70

Fixed cost:High volume: $328,500 − $65.70 × 5,000 = $0Low volume: $262,800 − $65.70 × 4,000 = $0

Variable component of selling and administrative expenses:Variable cost = Change in costs/Change in unitsVariable cost = ($244,500 − $230,400)/(5,000 − 4,000)Variable cost = $14.10 per unit

Fixed cost:High volume: $244,500 − $14.10 × 5,000 = $174,000Low volume: $230,400 − $14.10 × 4,000 = $174,000

Total variable cost per unit:$65.70 + $14.10 = $79.80

Total fixed cost:$0 + $174,000 = $174,000

46. Harada Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $88.70 per unit.

Sales volume (units)............................. 4,000 5,000Cost of sales......................................... $273,600 $342,000Selling and administrative costs........... $56,800 $68,000

The best estimate of the total variable cost per unit is:A) $68.40B) $79.60C) $82.60D) $82.00


Solution:

Variable component of cost of goods sold:Variable cost = Change in costs/Change in unitsVariable cost = ($342,000 − $273,600)/(5,000 − 4,000)Variable cost = $68.40 per unit


Variable component of selling and administrative expenses:Variable cost = Change in costs/Change in unitsVariable cost = ($68,000 − $56,800)/(5,000 − 4,000)Variable cost = $11.20



Total fixed cost:$0 + $12,000 = $12,000

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47. A company produces a single product. The following volume and average cost data for two accounting periods have been provided by management:

Number of units............................. 500 800Direct materials.............................. $2.00 $2.00Direct labor.................................... $1.50 $1.50Manufacturing overhead................ $2.50 $1.75Other overhead............................... $1.00 $0.625

The best estimate for the cost formula for the total cost of producing and selling the product (where X is the number of units produced and sold in a period) is:A) $1,000 + $1.125 XB) $1,000 + $3.50 XC) $1,500 + $3.50 XD) $1,500 + $4.00 X

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Source: CIMA, adapted

Solution:

Variable component of manufacturing overhead:Variable cost = Change in costs/Change in unitsVariable cost = ($1,400* − $1,250**)/(800 − 500)Variable cost = $0.50

*$1.75 × 800 = $1,400**$2.50 × 500 = $1,250

Fixed cost:High volume: $1,400 − $0.50 × 800 = $1,000Low volume: $1,250 − $0.50 × 500 = $1,000

Variable component of other overhead:Variable cost = Change in costs/Change in unitsVariable cost = ($500* − $500**)/(800 − 500)Variable cost = $0

*$0.625 × 800 = $500**$1.00 × 500 = $500

Fixed cost:High volume: $500 − $0 × 800 = $500Low volume: $500 − $0 × 500 = $500

Total variable cost per unit (includes direct material, direct labor, variable manufacturing overhead, and variable other overhead):$2.00 + $1.50 + $0.50 + $0 = $4.00

Total fixed cost:$1,000 + $500 = $1,500

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48. The employees at Mobile Sun Lotion Company roam the beaches with a tank of premium suntan lotion strapped on their backs. For a $2 charge, the employees will spray sunbathers with suntan lotion. Last year, Mobile sprayed 250,000 customers and incurred the following costs:

Total variable costs............ $175,000Total fixed costs................. 50,000 Total costs.......................... $225,000

Assuming that this activity is within the relevant range, what would Mobile's total contribution margin have been last year if only 240,000 customers were sprayed?A) $255,000B) $262,000C) $305,000D) $312,000


Solution:

Variable cost per unit: $175,000 ÷ 250,000 customers = $0.70 per customerSales ($2 × 240,000)........................................... $480,000Variable costs ($0.70 × 240,000)....................... 168,000Contribution margin........................................... $312,000

49. The following costs are budgeted for Ghana Corporation for next year:


The costs above are based on a level of activity of 10,000 units. Assuming that this activity is within the relevant range, what would total costs be for Ghana if the level of activity was 12,000 units?A) $590,000B) $638,000C) $660,000D) $708,000


Solution:

Variable cost per unit: $350,000 ÷ 10,000 units = $35 per unitThe cost function is:Y = $240,000 + $35XY = $240,000 + $35(12,000)Y = $660,000

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50. The following costs are budgeted for Harlow Corporation for next year:


The costs above are based on a level of activity of 20,000 units. Assuming that this activity is within the relevant range, what would total cost per unit be for Harlow if the level of activity was only 18,000 units?A) $45.00B) $46.50C) $48.50D) $50.00


Solution:

Variable cost per unit: $270,000 ÷ 20,000 units = $13.50 per unitThe cost function is:Y = $630,000 + $13.50XY = $630,000 + $13.50(18,000)Y = $873,000Total cost ÷ number of units = total cost per unit$873,000 ÷ 18,000 = $48.50

51. At a volume of 20,000 direct labor hours, Tirso Company incurs $50,000 in factory overhead costs, including $10,000 in fixed costs. Assuming that this activity is within the relevant range, if volume increases to 25,000 direct labor hours, Tirso Company would expect to incur total factory overhead costs of:A) $50,000B) $60,000C) $62,500D) $72,500

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Variable cost per direct labor hour: $40,000 ÷ 20,000 direct labor hours = $2.00 per direct labor hourThe cost function is:Y = $10,000 + $2.00XY = $10,000 + $2.00(25,000)Y = $60,000

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52. The Frandsen Company has estimated the following cost formulas for overhead:

Cost FormulaLubricants.............. $1,500 plus $0.50 per machine-hourUtilities................... $2,000 plus $0.60 per machine-hourDepreciation........... $1,000Maintenance........... $200 plus $0.10 per machine-hourMachine setup........ $0.30 per machine-hour

Based on these cost formulas, the total overhead cost expected at an activity level of 300 machine hours is:A) $4,950B) $5,000C) $4,700D) $5,150


Solution:Fixed Cost

Portion

Variable Cost

Portion Total CostLubricants

(variable cost = $0.50 × 300)........ $1,500 $150 $1,650Utilities

(variable cost = $0.60 × 300)........ $2,000 $180 2,180Depreciation...................................... $1,000 1,000Maintenance

(variable cost = $0.10 × 300)........ $200 $30 230Machine setup

(variable cost = $0.30 × 300)........ $90 90 Total cost........................................... $5,150

53. Erg Manufacturing Company has developed the following overhead cost formulas:

Cost FormulaDepreciation........... $500Set-up..................... $400 plus $0.20 per machine-hourLubrication............. $50 plus $0.25 per machine-hourUtilities................... $0.40 per machine-hour

Based on these cost formulas, the total overhead cost expected for Erg Manufacturing Company if 200 machine hours are worked is:A) $620B) $900C) $170D) $1,120


Solution:Fixed Cost

Portion

Variable Cost

PortionTotal Cost

Lubricants (variable cost = $0.25 × 200). $50 $50 $ 100Utilities (variable cost = $0.40 × 200)..... $80 80Depreciation............................................. $500 500Setup (variable cost = $0.20 × 200)......... $400 $40 440 Total cost.................................................. $1,120

54. Vicuna Wool Company manufactures and sells sweaters. Last year, Vicuna operated at 100% of capacity and had the following cost formula for total manufacturing costs:

Y = $50,000 + $400X

Assuming no change in cost structure, what would Vicuna's cost formula have been last year if they only operated at 90% of production capacity?A) Y = $45,000 + $360XB) Y = $45,000 + $400XC) Y = $50,000 + $360XD) Y = $50,000 + $400X


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55. Timchak Corporation reports that at an activity level of 9,900 units, its total variable cost is $919,116 and its total fixed cost is $259,974. What would be the total cost, both fixed and variable, at an activity level of 10,100 units? Assume that this level of activity is within the relevant range.A) $1,197,658B) $1,191,000C) $1,179,090D) $1,202,910

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Variable cost per unit: $919,116 ÷ 9,900 units = $92.84 per unitThe cost function is:Y = $259,974 + $92.84XY = $259,974 + $92.84(10,100)Y = $1,197,658

56. At an activity level of 8,400 machine-hours in a month, Braughton Corporation's total variable maintenance and repair cost is $697,284 and its total fixed maintenance and repair cost is $464,100. What would be the total maintenance and repair cost, both fixed and variable, at an activity level of 8,500 units in a month? Assume that this level of activity is within the relevant range.A) $1,175,210B) $1,169,685C) $1,161,384D) $1,168,297


Solution:

Variable cost per machine-hour: $697,284 ÷ 8,400 hours = $83.01 per unitThe cost function is:Y = $464,100 + $83.01XY = $464,100 + $83.01(8,500)Y = $1,169,685

57. At an activity level of 7,200 machine-hours in a month, Falks Corporation's total variable production engineering cost is $556,416 and its total fixed production engineering cost is $226,008. What would be the total production engineering cost per unit, both fixed and variable, at an activity level of 7,300 units in a month? Assume that this level of activity is within the relevant range.A) $107.93B) $107.18C) $108.67D) $108.24


Solution:

Variable cost per machine-hour: $556,416 ÷ 7,200 hours = $77.28 per hourThe cost function is:Y = $226,008 + $77.28XY = $226,008 + $77.28(7,300)Y = $790,152

58. You are applying the scattergraph method and find that the regression line you have drawn passes through a data point with the following coordinates: 7,500 units and $10,000. The regression line passes through the Y axis at the $4,000 point. Which of the following is the cost formula that represents the slope of this line?A) Y=$4,000+$1.25XB) Y=$4,000+$0.80XC) Y=$10,000+$1.33XD) None of the above is true


Solution:

Variable cost = Change in cost ÷ Change in activity= ($10,000 – $4,000) ÷ (7,500 – 0) = $0.80Since the regression line passes through the Y axis at the $4,000 point, the $4,000 represents the fixed costs.Therefore, the cost formula would be Y=$4,000+$0.80X.

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59. Wright Company has observed that at an activity level of 5,000 units the cost for maintenance is $6,500, and at 10,000 units the cost for maintenance is $9,000. Using the high-low method, the cost formula for maintenance is:A) $4,000 plus $.50 per unitB) $3,000 plus $.60 per unitC) $.90 per unitD) $1.30 per unit


Solution:

Variable cost = Change in cost ÷ Change in activity= ($9,000 – $6,500) ÷ (10,000 – 5,000) = $0.50

Fixed cost element = Total cost – Variable cost element= $9,000 – ($0.50 × 10,000) = $4,000

Therefore, the cost formula for total maintenance cost is $4,000 per period plus $0.50 per unit, or Y = $4,000 + $0.50X.

60. Jackson, Inc., is preparing a budget for next year and requires a breakdown of the cost of steam used in its factory into fixed and variable components. The following data on the cost of steam used and direct labor hours worked are available for the last six months:

Cost of Steam Direct Labor-HoursJuly................... $ 15,850 3,000 August.............. 13,400 2,050 September........ 16,370 2,900 October............. 19,800 3,650 November......... 17,600 2,670 December......... 18,500 2,650 Total................. $101,520 16,920

If Jackson uses the high-low method of analysis, the estimated variable cost of steam per direct labor hour would be:A) $4.00B) $5.42C) $5.82D) $6.00

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted

Solution:


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61. Shown below are units produced and total manufacturing costs for the past four months at Minga Manufacturing Corporation:

Units Produced Total CostJul............... 120 $446,000Aug............. 150 $508,000Sep.............. 180 $668,000Oct.............. 160 $574,000

What is Minga's cost formula for total manufacturing cost under the high-low method?A) Y = $2,000 + $3,700XB) Y = $3,700 + $2,000XC) Y = $14,000 + $3,600XD) Y = $62,000 + $3,200X

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

Solution:

Variable cost = Change in cost ÷ Change in activity= ($668,000 – $446,000) ÷ (180 – 120) = $3,700

Fixed cost element = Total cost – Variable cost element= $668,000 – ($3,700 × 180) = $2,000

Therefore, the cost formula for total cost is $2,000 per period plus $3,700 per unit, or Y = $2,000 + $3,700X.

62. A consulting company would like to develop a method of predicting its total costs in a period. The following past costs have been recorded by the company in two periods:

Number of client-hours.................. 420 515Total cost........................................ $82,200 $90,275

The best estimate of the cost formula for the company (where X is the number of client-hours) is:A) Y = $46,500 + $85 XB) Y = $42,000 + $95 XC) Y = $46,500 – $85 XD) Y = $51,500 – $95 X

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Source: CIMA, adapted

Solution:

Variable cost = Change in cost ÷ Change in activity= ($90,275 – $82,200) ÷ (515 – 420) = $85

Fixed cost element = Total cost – Variable cost element= $90,275 – ($85 × 515) = $46,500

Therefore, the cost formula for total cost is $46,500 per period plus $85 per client-hour, or Y = $46,500 + $85X.

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63. Electrical costs at one of Finfrock Corporation's factories are listed below:

Machine-Hours Electrical CostMarch..................... 3,642 $40,537April....................... 3,616 $40,319May........................ 3,667 $40,706June........................ 3,634 $40,462July......................... 3,665 $40,703August.................... 3,659 $40,680September.............. 3,644 $40,547October................... 3,612 $40,268November............... 3,624 $40,364

Management believes that electrical cost is a mixed cost that depends on machine-hours. Using the high-low method to estimate the variable and fixed components of this cost, these estimates would be closest to:A) $7.96 per machine-hour; $11,517 per monthB) $11.13 per machine-hour; $40,510 per monthC) $9.61 per machine-hour; $5,533 per monthD) $0.13 per machine-hour; $40,246 per month


Solution:



Therefore, the cost formula for total electrical cost is $11,517 per period plus $7.96 per machine-hour, or Y = $11,517 + $7.96X

64. Maintenance costs at a Straiton Corporation factory are listed below:

Machine-Hours Maintenance CostMarch..................... 3,627 $54,384April....................... 3,588 $53,980May........................ 3,637 $54,453June........................ 3,638 $54,491July......................... 3,572 $53,843August.................... 3,611 $54,196September.............. 3,644 $54,550October................... 3,609 $54,181November............... 3,669 $54,767

Management believes that maintenance cost is a mixed cost that depends on machine-hours. Using the high-low method to estimate the variable and fixed components of this cost, these estimates would be closest to:A) $0.10 per machine-hour; $54,382 per monthB) $15.00 per machine-hour; $54,316 per monthC) $9.12 per machine-hour; $21,309 per monthD) $9.53 per machine-hour; $19,801 per month


Solution:



Therefore, the cost formula for total maintenance cost is $19,801 per period plus $9.53 per machine-hour, or Y = $19,801 + $9.53X

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65. Supply costs at Coulthard Corporation's chain of gyms are listed below:

Client-Visits Supply CostMarch..................... 12,855 $23,598April....................... 12,283 $23,278May........................ 13,104 $23,742June........................ 12,850 $23,607July......................... 12,493 $23,415August.................... 12,794 $23,562September.............. 12,686 $23,496October................... 12,765 $23,541November............... 13,018 $23,687

Management believes that supply cost is a mixed cost that depends on client-visits. Using the high-low method to estimate the variable and fixed components of this cost, those estimates would be closest to:A) $1.85 per client-visit; $23,547 per monthB) $1.77 per client-visit; $557 per monthC) $0.55 per client-visit; $16,579 per monthD) $0.57 per client-visit; $16,273 per month


Solution:



Therefore, the cost formula for total maintenance cost is $16,273 per period plus $0.57 per client visit, or Y = $16,273 + $0.57X

66. A jewelry manufacturer incurred the following costs: 15,000 units produced with costs of $557,500, and 5,000 units produced with costs of $292,500. Which cost formula would you estimate using the high-low method?A) Y=$265,000+$37.17XB) Y=$160,000+$17.67XC) Y=$265,000+$58.50XD) Y=$160,000+$26.50X


Solution:



Therefore, the cost formula for total utility cost is $160,000 per period plus $26.50 per unit, or Y = $160,000 + $26.50X

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67. Sales for a retail store were $250,000. Net operating income totaled $30,000 and cost of goods sold was $110,000. If the contribution margin was $100,000, total variable selling and administrative expenses must have been:A) $40,000B) $100,000C) $70,000D) $150,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard

Solution:

Sales........................................................................... $250,000Variable cost of goods sold........................................ $110,000Variable selling and administrative expenses............ ? ? Contribution margin................................................... $100,000

To solve this problem, it must be worked backwards. First, calculate what total variable expenses must be by subtracting the contribution margin from sales ($250,000 − $100,000 = $150,000). Of the total variable expenses, $110,000 is given in the problem as the variable cost of goods sold, so we would have:Variable selling and administrative expenses = $150,000 − $110,000 = $40,000.

68. Glory Company's gross margin exceeded its contribution margin by $25,000. If sales totaled $175,000 when net operating income equaled $20,000 and total selling and administrative expenses equaled $55,000, then the contribution margin equaled:A) $75,000B) $80,000C) $30,000D) $50,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard

Solution:

Partial traditional income statement:Gross margin.............................................. $ ?Less selling and administrative expenses. . 55,000 Net operating income................................. $20,000

Solving backwards, gross margin is $20,000 + $55,000 = $75,000.Since the information given in the problem states that the gross margin exceeds the contribution margin by $25,000, the contribution margin must be $75,000 − $25,000 = $50,000.

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69. Kramer Company is a retailer. At a sales level of $450,000, Kramer Company's gross margin is $90,000 less than its contribution margin, its net operating income is $30,000, and its selling and administrative expenses total $140,000. The company's total fixed expenses are:A) $360,000B) $230,000C) $190,000D) $280,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard

Solution:

Sales............................................................... $450,000Cost of goods sold ($450,000 − $170,000).... 280,000 Gross margin ($140,000 + $30,000............... 170,000Selling and administrative expenses.............. 140,000 Net operating income..................................... $ 30,000

Since the gross margin is $90,000 less than the contribution margin, the contribution margin is $170,000 + $90,000, or $260,000.

Sales................................................................. $450,000Variable expenses ($450,000 − $260,000)...... 190,000 Contribution margin........................................ 260,000Fixed expenses ($260,000 − $30,000)............. 230,000 Net operating income...................................... $ 30,000

70. Gudwill Corporation, a manufacturing company, has provided the following financial data for April:

Sales........................................................... $340,000Variable production expense...................... $43,000Variable selling expense............................ $21,000Variable administrative expense................ $33,000Fixed production expense.......................... $62,000Fixed selling expense................................. $67,000Fixed administrative expense..................... $88,000

The company had no beginning or ending inventories. The contribution margin for April was:A) $243,000B) $235,000C) $26,000D) $123,000


Solution:

Sales........................................................... $340,000Less variable expenses:

Variable production expense.................. 43,000Variable selling expense......................... 21,000Variable administrative expense............. 33,000

Contribution margin................................... $243,000

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71. The management of Bushovisky Corporation, a manufacturing company, has provided the following financial data for January:

Sales........................................................... $230,000Variable production expense...................... $31,000Fixed production expense.......................... $47,000Variable selling expense............................ $19,000Fixed selling expense................................. $27,000Variable administrative expense................ $26,000Fixed administrative expense..................... $65,000

The contribution margin for January was:A) $15,000B) $152,000C) $91,000D) $154,000


Solution:




72. The management of Gilmartin Corporation, a manufacturing company, has provided the following data for February:


The contribution margin for February was:A) $366,000B) $210,000C) $26,000D) $324,000


Solution:




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73. Stuart Company is a merchandising company. During the next month, the company expects to sell 450 units. The company has the following revenue and cost structure:

Selling price per unit.......... $230Cost per unit....................... $120Sales commission............... 12% of salesAdvertising expense........... $18,000 per monthAdministrative expense...... $32,500 per month

What is the expected contribution margin next month?A) $66,420B) $37,080C) $50,500D) $53,000


Solution:

Sales ($230 × 450)............................................... $103,500Less variable expenses:

Variable production expense ($120 × 450)....... 54,000Sales commissions (12% × $103,500).............. 12,420

Contribution margin............................................. $ 37,080

74. Cranbrook Company has the following data for the month of March:

Sales........................................................... $30,000Fixed manufacturing overhead.................. $5,500Direct labor................................................ $7,250Fixed selling expense................................. $4,625Variable manufacturing overhead.............. $4,100Variable administrative expense................ $4,800Direct materials.......................................... $5,150Fixed administrative expense..................... $4,450Variable selling expense............................ $4,975

Assume that direct labor is variable and all units are produced and sold in the same month. What was the total contribution margin in March for Cranbrook Company?A) $3,725B) $8,875C) $15,425D) $16,125


Solution:


Direct materials....................................... 5,150Direct labor............................................. 7,250Variable manufacturing overhead........... 4,100Variable administrative expense............. 4,800Variable selling expense......................... 4,975

Contribution margin................................... $ 3,725

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75. The management of Dinky Tree Trimming believes that the number of trees trimmed each month is an appropriate activity measure for total operating cost. Shown below are the number of trees trimmed and operating costs in each of the last three months:

Trees Trimmed Operating CostMarch..................... 12 $2,600April....................... 18 $2,990May........................ 20 $3,250

What is Dinky's cost formula for monthly operating cost using the least-squares regression method?A) Y = $478.40 + $176.80XB) Y = $1,625 + $81.25XC) Y = $1,655 + $77.50XD) Y = $8,840 + $176.80X

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard

Solution:

The solution using Microsoft Excel functions is:slope = $77.50 per treeintercept = $1,655 per month

76. Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost over four recent periods appear below:

Activity CostPeriod 1...... 26 $269Period 2...... 29 $285Period 3...... 25 $256Period 4...... 24 $254

Using the least-squares regression method, what is the cost formula for this cost?A) Y = $0.00 + $10.23XB) Y = $97.00 + $6.50XC) Y = $91.40 + $6.72XD) Y = $99.10 + $5.11X

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard

Solution:

The solution using Microsoft Excel functions is:slope = $6.50 per activity unitintercept = $97.00 per period

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77. Seifer Inc.'s inspection costs are listed below:

Units Produced Inspection CostsApril....................... 119 $8,558May........................ 117 $8,535June........................ 113 $8,415July......................... 125 $8,736August.................... 152 $9,357September.............. 108 $8,320October................... 120 $8,603November............... 192 $10,337

Management believes that inspection cost is a mixed cost that depends on the number of units produced. Using the least-squares regression method, the estimates of the variable and fixed components of inspection cost would be closest to:A) $24.08 per unit plus $5,709 per monthB) $67.74 per unit plus $8,858 per monthC) $24.37 per unit plus $5,658 per monthD) $24.01 per unit plus $5,727 per month

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard

Solution:

The solution using Microsoft Excel functions is:slope = $24.08 per unitintercept = $5,709 per month

78. The management of Hamano Corporation would like for you to analyze their repair costs, which are listed below:

Machine-Hours Repair CostsApril....................... 4,459 $98,523May........................ 4,426 $98,296June........................ 4,493 $98,781July......................... 4,417 $98,207August.................... 4,432 $98,349September.............. 4,446 $98,420October................... 4,489 $98,749November............... 4,475 $98,654

Management believes that repair cost is a mixed cost that depends on the number of machine-hours. Using the least-squares regression method, the estimates of the variable and fixed components of repair cost would be closest to:A) $22.11 per machine-hour plus $98,497 per monthB) $7.37 per machine-hour plus $65,670 per monthC) $8.19 per machine-hour plus $62,015 per monthD) $7.55 per machine-hour plus $64,859 per month


Solution:

The solution using Microsoft Excel functions is:slope = $7.37 per machine-hourintercept = $65,670 per month

Use the following to answer questions 79-81:

Callaghan Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $138.20 per unit.

Sales volume (units)....................... 6,000 7,000Cost of sales................................... $499,200 $582,400Selling and administrative costs..... $285,600 $303,800

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79. The best estimate of the total monthly fixed cost is:A) $176,400B) $835,500C) $784,800D) $886,200


Solution:






Total fixed cost:$0 + $176,400 = $176,400

80. The best estimate of the total variable cost per unit is:A) $83.20B) $126.60C) $101.40D) $130.80


Solution:






Total fixed cost:$0 + $176,400 = $176,400

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81. The best estimate of the total contribution margin when 6,300 units are sold is:A) $73,080B) $231,840C) $46,620D) $346,500

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3,4 Level: Medium

Solution:






Total fixed cost:$0 + $176,400 = $176,400

Sales revenue ($138.20 × 6,300)......................... $870,660Variable expenses:

Variable cost of goods sold ($83.20 × 6,300). . $524,160Variable selling and administrative expense

($18.20 × 6,300)........................................... 114,660 638,820 Contribution margin............................................ $ 231,840


Comparative income statements for Boggs Sports Equipment Company for the last two months are presented below:

July AugustSales in units.................................................... 11,000 10,000Sales................................................................. $165,000 $150,000Cost of goods sold............................................ 72,600 66,000 Gross margin.................................................... 92,400 84,000 Selling and administrative expenses:

Rent............................................................... 12,000 12,000Sales commissions........................................ 13,200 12,000Maintenance expenses.................................. 13,500 13,000Clerical expense............................................ 16,000 15,000

Total selling and administrative expenses....... 54,700 52,000 Net operating income....................................... $ 37,700 $ 32,000

All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). Assume that the relevant range includes all of the activity levels mentioned in this problem.

82. Which of the selling and administrative expenses of the company is variable?A) RentB) Sales CommissionsC) Maintenance ExpenseD) Clerical Expense


83. The total monthly fixed cost for Boggs Sporting Equipment Company is:A) $12,000B) $22,500C) $25,000D) $40,000


五

Solution:

Variable component of sales commissions:Variable cost = Change in costs/Change in unitsVariable cost = ($13,200 − $12,000)/(11,000 − 10,000)Variable cost = $1.20

Fixed cost of sales commissions:High volume: $13,200 − $1.20 × 11,000 = $0 (answer will be zero fixed costs, because these sales commissions are variable, not mixed)Low volume: $12,000 − $1.20 × 10,000 = $0

Variable component of maintenance expenses:Variable cost = Change in costs/Change in unitsVariable cost = ($13,500 − $13,000)/(11,000 − 10,000)Variable cost = $0.50

Fixed cost of maintenance expenses:High volume: $13,500 − $0.50 × 11,000 = $8,000Low volume: $13,000 − $0.50 × 10,000 = $8,000

Variable component of clerical expense:Variable cost = Change in costs/Change in unitsVariable cost = ($16,000 − $15,000)/(11,000 − 10,000)Variable cost = $1.00

Fixed cost of clerical expense:High volume: $16,000 − $1.00 × 11,000 = $5,000Low volume: $15,000 − $1.00 × 10,000 = $5,000

Total variable cost per unit:$1.20 + $0.50 + $1.00 = $2.70

Total fixed cost:$0 + $8,000 + $5,000 + $12,000* = $25,000*Rent

84. If sales are projected to be 8,000 units in September, total expected selling and administrative expenses would be:A) $49,300B) $41,600C) $44,750D) $46,600


Solution:

Variable component of sales commissions:Variable cost = Change in costs/Change in unitsVariable cost = ($13,200 − $12,000)/(11,000 − 10,000)Variable cost = $1.20

Fixed cost of sales commissions:High volume: $13,200 − $1.20 × 11,000 = $0 (answer will be zero fixed costs, because these sales commissions are variable, not mixed)Low volume: $12,000 − $1.20 × 10,000 = $0

Variable component of maintenance expenses:Variable cost = Change in costs/Change in unitsVariable cost = ($13,500 − $13,000)/(11,000 − 10,000)Variable cost = $0.50

Fixed cost of maintenance expenses:High volume: $13,500 − $0.50 × 11,000 = $8,000Low volume: $13,000 − $0.50 × 10,000 = $8,000

Variable component of clerical expense:Variable cost = Change in costs/Change in unitsVariable cost = ($16,000 − $15,000)/(11,000 − 10,000)Variable cost = $1.00

Fixed cost of clerical expense:High volume: $16,000 − $1.00 × 11,000 = $5,000Low volume: $15,000 − $1.00 × 10,000 = $5,000

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Total variable cost per unit:$1.20 + $0.50 + $1.00 = $2.70

Total fixed cost:$0 + $8,000 + $5,000 + $12,000* = $25,000*Rent


The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:


85. The best estimate of the total monthly fixed manufacturing cost is:A) $227,200B) $185,000C) $435,400D) $290,500


Solution:



Average Cost per

Unit






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86. The best estimate of the total variable manufacturing cost per unit is:A) $21.10B) $125.20C) $104.10D) $75.70


Solution:



Average Cost per

Unit






Total variable manufacturing cost per unit = (Direct materials + Direct labor + Manufacturing overhead)= $75.70 + $28.40 + $21.10 = $125.20

87. The best estimate of the total cost to manufacture 2,200 units is closest to:A) $356,840B) $460,440C) $417,890D) $478,940


Solution:



Average Cost per

Unit






Total variable manufacturing cost per unit = (Direct materials + Direct labor + Manufacturing overhead)= $75.70 + $28.40 + $21.10 = $125.20

Y = $185,000 + $125.20(2,200)Y = $460,440

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Gasson Company is a merchandising firm. Next month the company expects to sell 800 units. The following data describe the company's revenue and cost structure:

Selling price per unit.................................. $40Sales commission....................................... 5%Purchase price (cost) per unit..................... $18Advertising expense................................... $4,000 per monthAdministrative expense.............................. $4,500 per month plus 15% of sales

Assume that all activity mentioned in this problem is within the relevant range.

88. The expected gross margin next month is:A) $17,600B) $11,200C) $14,400D) $16,000


Solution:

Sales........................................................... $32,000Cost of goods sold...................................... 14,400 Gross margin.............................................. $17,600

89. The expected total administrative expense next month is:A) $4,800B) $13,300C) $9,300D) $14,900

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,4 Level: Easy

Solution:

Fixed administrative expenses (given)........................... $4,500Variable administrative expenses (15% × $32,000*)..... 4,800 Total administrative expenses......................................... $9,300*$40 × 800 = $32,000

90. The expected contribution margin next month is:A) $17,600B) $11,200C) $14,400D) $16,000


Solution:

Sales ($40 × 800)....................................... $32,000Variable expenses:

Cost of goods sold ($18 × 800)............... $14,400Sales commissions (5% × $32,000)........ 1,600Administrative (15% × $32,000)............ 4,800 20,800


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91. The expected net operating income next month is:A) $7,500B) $5,100C) $2,700D) $11,200


Solution:

Sales ($40 × 800)....................................... $32,000Variable expenses:

Cost of goods sold ($18 × 800)............... $14,400Sales commissions (5% × $32,000)........ 1,600Administrative (15% × $32,000)............ 4,800 20,800

Contribution margin................................... 11,200Fixed expenses:

Advertising expense................................ 4,000Administrative........................................ 4,500 8,500

Net operating income................................. $ 2,700


In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs were $223,000. Of this amount, utilities were $48,000 (all variable) and depreciation was $60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were $130,000. Assume that all of the activity levels mentioned in this problem are within the relevant range.

92. The variable cost for maintenance per machine hour is:A) $1.30B) $1.44C) $0.75D) $1.35

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Variable maintenance cost = Change in cost ÷ Change in activity= ($130,000 – $115,000) ÷ (100,000 – 80,000) = $0.75

93. The total fixed overhead cost for O'Donnell is:A) $115,000B) $130,000C) $60,000D) $55,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

Solution:

Variable maintenance cost = Change in cost ÷ Change in activity= ($130,000 − $115,000) ÷ (100,000 − 80,000) = $0.75

Fixed cost element of maintenance cost = Total cost − Variable cost element= $115,000 − ($0.75 × 80,000) = $55,000

Total fixed overhead cost will be the total of the fixed maintenance cost and the fixed depreciation cost, or $55,000 + $60,000 = $115,000

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94. If 110,000 machine hours of activity are projected for next period, total expected overhead cost would be:A) $256,000B) $263,500C) $306,625D) $242,500


Solution:

Variable maintenance cost = Change in cost ÷ Change in activity= ($130,000 − $115,000) ÷ (100,000 − 80,000) = $0.75

Fixed cost element of maintenance cost = Total cost − Variable cost element= $115,000 − ($0.75 × 80,000) = $55,000

Total fixed overhead cost will be the total of the fixed maintenance cost and the fixed depreciation cost, or $55,000 + $60,000 = $115,000

Variable utilities cost per machine hour = $48,000 ÷ 80,000 = $0.60

Total variable cost per machine hour is the total of the variable utilities cost per machine hour and the variable maintenance cost per machine hour, or $0.60 + $0.75 = $1.35

Y = $115,000 + $1.35 (110,000)Y = $263,500


Oerther Corporation reports that at an activity level of 5,000 units, its total variable cost is $131,750 and its total fixed cost is $31,200.

95. What would be the total variable cost at an activity level of 5,200 units? Assume that this level of activity is within the relevant range.A) $137,020B) $131,750C) $162,950D) $32,448


Solution:

Variable cost per unit: $131,750 ÷ 5,000= $26.35Total variable cost = 5,200 × $26.35 = $137,020

96. What would be the average fixed cost per unit at an activity level of 5,200 units? Assume that this level of activity is within the relevant range.A) $6.24B) $6.00C) $14.94D) $32.59


Solution:

Average fixed cost per unit = Total fixed costs ÷ total unitsAverage fixed cost per unit = $31,200 ÷ 5,200 = $6.00


At an activity level of 9,000 machine-hours in a month, Moffatt Corporation's total variable maintenance cost is $390,240 and its total fixed maintenance cost is $368,280.

五

97. What would be the total variable maintenance cost at an activity level of 9,300 machine-hours in a month? Assume that this level of activity is within the relevant range.A) $758,520B) $403,248C) $390,240D) $380,556


Solution:

Variable cost per unit: $390,240 ÷ 9,000 hours = $43.36 per hourTotal variable cost = 9,300 × $43.36 = $403,248

98. What would be the average fixed maintenance cost per unit at an activity level of 9,300 units in a month? Assume that this level of activity is within the relevant range.A) $40.92B) $84.28C) $39.60D) $54.93

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Average fixed cost per unit = Total fixed costs ÷ total unitsAverage fixed cost per unit = $368,280 ÷ 9,300 = $39.60


Schuler Inc. reports that at an activity level of 2,100 machine-hours in a month, its total variable inspection cost is $69,846 and its total fixed inspection cost is $9,072.

99. What would be the average fixed inspection cost per unit at an activity level of 2,400 units in a month? Assume that this level of activity is within the relevant range.A) $37.58B) $4.32C) $15.23D) $3.78


Solution:

Total fixed costs ÷ total units = Average fixed cost per unit$9,072 ÷ 2,400 units = $3.78 per unit

100. What would be the total variable inspection cost at an activity level of 2,400 machine-hours in a month? Assume that this level of activity is within the relevant range.A) $78,918B) $69,846C) $79,824D) $10,368


Solution:

First, calculate the variable inspection cost per hour by:Total variable inspection costs ÷ total machine hours = variable inspection cost per unit$69,846 ÷ 2,100 machine-hours = $33.26 per machine-hourNext, calculate the total variable inspection costs by:Total variable inspection costs @ 2,400 machine-hours = $33.26 × 2,400 = $79,824

五


Johnson Company has provided the following data for the first five months of the year:

Machine Hours Lubrication CostJanuary................... 120 $750February................. 160 $800March..................... 200 $870April....................... 150 $790May........................ 170 $840

101. Using the high-low method of analysis, the estimated variable lubrication cost per machine hour is closest to:A) $1.40B) $1.25C) $0.67D) $1.50


Solution:

Variable cost = Change in cost ÷ Change in activity= ($870 – $750) ÷ (200 – 120) = $1.50

102. Using the high-low method of analysis, the estimated monthly fixed component of lubrication cost is closest to:A) $570B) $560C) $585D) $565


Solution:

Variable cost = Change in cost ÷ Change in activity= ($870 − $750) ÷ (200 − 120) = $1.50

Fixed cost element = Total cost − Variable cost element= $870 − ($1.50 × 200) = $570

103. Using the least-squares regression method of analysis, the estimated variable lubrication cost per machine hour is closest to:A) $0.80B) $1.56C) $1.40D) $1.28


Solution:

The solution using Microsoft Excel functions is:slope = $1.56 per machine-hour

五

104. Using the least-squares regression method of analysis, the estimated monthly fixed component of lubrication cost is closest to:A) $561B) $580C) $525D) $572

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard

Solution:

The solution using Microsoft Excel functions is:intercept = $561 per month


Wilson Company's activity for the first six of the current year is as follows:

Month Machine Hours Electrical CostJanuary................... 2,000 $1,560February................. 3,000 $2,200March..................... 2,400 $1,750April....................... 1,900 $1,520May........................ 1,800 $1,480June........................ 2,100 $1,600

105. Using the high-low method, the variable cost per machine hour would be:A) $0.67B) $0.64C) $0.40D) $0.60


Solution:


106. Using the high-low method, the fixed portion of the electrical cost each month would be:A) $400B) $760C) $280D) $190


Solution:


Fixed cost element = Total cost − Variable cost element= $2,200 − ($0.60 × 3,000) = $400


Electrical costs at one of Rome Corporation's factories are listed below:

Machine-Hours Electrical CostMarch..................... 458 $1,007April....................... 423 $934May........................ 440 $979June........................ 409 $902July......................... 426 $952August.................... 372 $822September.............. 414 $926October................... 431 $949November............... 468 $1,025

Management believes that electrical cost is a mixed cost that depends on machine-hours.

五

107. Using the high-low method, the estimate of the variable component of electrical cost per machine-hour is closest to:A) $2.11B) $1.80C) $2.21D) $0.47


Solution:

Variable cost = Change in cost ÷ Change in activity= ($1,025 – $822) ÷ (468 – 372) = $2.11

108. Using the high-low method, the estimate of the fixed component of electrical cost per month is closest to:A) $822B) $743C) $38D) $944


Solution:

Variable cost = Change in cost ÷ Change in activity= ($1,025 − $822) ÷ (468 − 372) = $2.11

Fixed cost element = Total cost − Variable cost element= $1,025 − ($2.11 × 468) = $37.52 = $38 (rounded)


Inspection costs at one of Ratulowski Corporation's factories are listed below:

Units Produced Inspection CostApril....................... 777 $10,176May........................ 807 $10,404June........................ 798 $10,355July......................... 835 $10,665August.................... 822 $10,542September.............. 795 $10,313October................... 805 $10,409November............... 853 $10,795December............... 796 $10,310

Management believes that inspection cost is a mixed cost that depends on units produced.

109. Using the high-low method, the estimate of the variable component of inspection cost per unit produced is closest to:A) $8.14B) $7.05C) $0.12D) $12.89


Solution:

Variable cost = Change in cost ÷ Change in activity= ($10,795 – $10,176) ÷ (853 – 777) = $8.14

五

110. Using the high-low method, the estimate of the fixed component of inspection cost per month is closest to:A) $10,344B) $10,441C) $3,852D) $10,176


Solution:

Variable cost = Change in cost ÷ Change in activity= ($10,795 − $10,176) ÷ (853 − 777) = $8.14

Fixed cost element = Total cost − Variable cost element= $10,795 − ($8.14 × 853) = $3,851.58 = $3,852 (rounded)


Wuensch Inc., an escrow agent, has provided the following data concerning its office expenses:

Escrows Completed Office ExpensesApril....................... 53 $7,427May........................ 94 $9,201June........................ 37 $6,769July......................... 87 $8,902August.................... 40 $6,875September.............. 38 $6,797October................... 82 $8,681November............... 35 $6,678December............... 62 $7,836

Management believes that office expense is a mixed cost that depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.

111. Using the high-low method, the estimate of the variable component of office expense per escrow completed is closest to:A) $45.44B) $42.76C) $88.22D) $131.00


Solution:

Variable cost = Change in cost ÷ Change in activity= ($9,201 – $6,678) ÷ (94 – 35) = $42.76

112. Using the high-low method, the estimate of the fixed component of office expense per month is closest to:A) $7,685B) $7,182C) $6,678D) $5,182


Solution:

Variable cost = Change in cost ÷ Change in activity= ($9,201 − $6,678) ÷ (94 − 35) = $42.76

Fixed cost element = Total cost − Variable cost element= $9,201 − ($42.76 × 94) = $5,181.56 = $5,182 (rounded)

五


The following information has been provided by the Evans Retail Stores, Inc., for the first quarter of the year:

Sales........................................................... $350,000Variable selling expense............................ $35,000Fixed selling expenses............................... $25,000Cost of goods sold...................................... $160,000Fixed administrative expenses................... $55,000Variable administrative expenses.............. $15,000

113. The gross margin of Evans Retail Stores, Inc. for the first quarter is:A) $210,000B) $140,000C) $220,000D) $190,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

Solution:

Sales................................... $350,000Cost of goods sold.............. 160,000 Gross margin...................... 190,000

114. The contribution margin of Evans Retail Stores, Inc. for the first quarter is:A) $300,000B) $140,000C) $210,000D) $190,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

Solution:

Sales................................... $350,000Variable expenses:

Cost of goods sold........... $160,000Selling expense............... 35,000Administrative expense... 15,000 210,000

Contribution margin........... $140,000


An income statement for Crandall's Bookstore for the first quarter of the current year is presented below:

Sales........................................................... $800,000Cost of goods sold...................................... 560,000 Gross margin.............................................. 240,000Selling and administrative expenses:

Selling..................................................... $98,000Administrative........................................ 98,000 196,000


On average, a book sells for $50. Variable selling expenses are $5.50 per book, with the remaining selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder being fixed.

五

115. The contribution margin for Crandall's Bookstore for the first quarter is:A) $688,000B) $128,000C) $152,000D) $240,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Hard

Solution:

Sales........................................................... $800,000Variable expenses:

Cost of goods sold................................... $560,000Administrative (3% × $800,000)............ 24,000Selling expense ($5.50 × 16,000*)......... 88,000 672,000

Contribution margin................................... $128,000* $800,000 ÷ $50 average price per unit = 16,000 units sold

116. The net operating income using the contribution approach for the first quarter is:A) $240,000B) $152,000C) $44,000D) $128,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Medium

Solution:

Sales......................................................................... $800,000Variable expenses:

Cost of goods sold................................................ $560,000Administrative (3% × $800,000).......................... 24,000Selling expense ($5.50 × 16,000*)....................... 88,000 672,000

Contribution margin................................................ 128,000Fixed expenses:

Administrative expense ($98,000 − $24,000)...... 74,000Selling expense ($98,000 − $88,000)................... 10,000 84,000

Net operating income.............................................. $ 44,000 * $800,000 ÷ $50 average price per unit = 16,000 units sold

117. The cost formula for selling and administrative expenses with “X” equal to the number of books sold is:A) Y = $84,000 + $35XB) Y = $84,000 + $42XC) Y = $98,000 + $35XD) Y = $98,000 + $42X


Solution:

Sales...................................................................... $800,000Variable expenses:

Cost of goods sold............................................. $560,000Administrative (3% × $800,000)....................... 24,000Selling expense ($5.50 × 16,000*).................... 88,000 672,000

Contribution margin............................................. 128,000Fixed expenses:

Administrative expense ($98,000 − $24,000).. . 74,000Selling expense ($98,000 − $88,000)................ 10,000 84,000

Net operating income........................................... $ 44,000 * $800,000 ÷ $50 average sales price = 16,000 units sold

Total variable cost per unit = $672,000 ÷ 16,000 units = $42 per unitTotal fixed costs = $10,000 + $74,000 = $84,000

Y = $84,000 + $42X

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In December, Barkes Corporation, a manufacturing company, reported the following financial data:


The company had no beginning or ending inventories.

118. The contribution margin for December was:A) $201,000B) $181,000C) $32,000D) $121,000


Solution:


Production expense......... $27,000Selling expense............... 28,000Administrative expense... 34,000 89,000


119. The gross margin for December was:A) $121,000B) $32,000C) $181,000D) $201,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

Solution:

Sales........................................................... $270,000Cost of goods sold ($27,000 + $42,000).... 69,000 Gross margin.............................................. $201,000


The management of Edrington Corporation, a manufacturing company, would like your help in contrasting the traditional and contribution approaches to the income statement. The company has provided the following financial data for April:



五

120. The gross margin for April was:A) $193,000B) $11,000C) $102,000D) $189,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

Solution:


121. The contribution margin for April was:A) $102,000B) $189,000C) $11,000D) $193,000


Solution:


Cost of goods sold .......... $30,000Selling expense............... 27,000Administrative expense... 34,000 91,000



Monsivais Corporation, a manufacturing company, has provided the following financial data for February:



122. The gross margin for February was:A) $338,000B) $303,000C) $172,000D) $40,000


Solution:


五

123. The contribution margin for February was:A) $338,000B) $303,000C) $172,000D) $40,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

Solution:


Cost of goods sold................................... $81,000Selling expense....................................... 11,000Administrative expense........................... 40,000 132,000



(Appendix 5A) Lacourse Inc.'s inspection costs are listed below:

Units Produced Inspection CostsJanuary................... 647 $15,309February................. 724 $15,965March..................... 694 $15,715April....................... 645 $15,271May........................ 696 $15,745June........................ 665 $15,442July......................... 718 $15,933August.................... 699 $15,739

Management believes that inspection cost is a mixed cost that depends on units produced.

124. Using the least-squares regression method, the estimate of the variable component of inspection cost per unit produced is closest to:A) $22.80B) $8.82C) $8.27D) $8.78


Solution:

The solution using Microsoft Excel functions is:slope = $8.82 per unit produced

125. Using the least-squares regression method, the estimate of the fixed component of inspection cost per month is closest to:A) $9,608B) $15,640C) $9,587D) $15,271


Solution:

The solution using Microsoft Excel functions is:intercept = $9,587 per month

五


(Appendix 5A) Recent maintenance costs of Divers Corporation are listed below:

Machine-Hours Maintenance CostsFebruary................. 527 $5,144March..................... 499 $5,033April....................... 542 $5,220May........................ 541 $5,196June........................ 489 $4,973July......................... 543 $5,200August.................... 558 $5,288September.............. 513 $5,060

Management believes that maintenance cost is a mixed cost that depends on machine-hours.

126. Using the least-squares regression method, the estimate of the variable component of maintenance cost per machine-hour is closest to:A) $9.76B) $6.00C) $4.43D) $4.57


Solution:


127. Using the least-squares regression method, the estimate of the fixed component of maintenance cost per month is closest to:A) $5,139B) $2,806C) $4,973D) $2,738


Solution:



(Appendix 5A) Gaumer Corporation's recent utility costs are listed below:

Machine-Hours Utility CostsMay........................ 1,708 $20,511June........................ 1,770 $21,016July......................... 1,703 $20,449August.................... 1,734 $20,699September.............. 1,787 $21,142October................... 1,756 $20,912November............... 1,731 $20,693December............... 1,798 $21,252

Management believes that utility cost is a mixed cost that depends on machine-hours.

五

128. Using the least-squares regression method, the estimate of the variable component of utility cost per machine-hour is closest to:A) $8.45B) $8.23C) $11.92D) $8.31


Solution:


129. Using the least-squares regression method, the estimate of the fixed component of utility cost per month is closest to:A) $20,834B) $20,449C) $6,059D) $6,314


Solution:


Essay Questions

130. ABC Company's total overhead costs at various levels of activity are presented below:

Machine Hours Total Overhead CostsMarch......... 60,000 $216,800April........... 50,000 $194,000May............ 70,000 $239,600June............ 80,000 $262,400

Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance. At the 50,000 machine-hour level of activity these costs are:

Utilities (V).................................... $ 54,000Supervisory salaries (F)................. 62,000Maintenance (M)............................ 78,000 Total overhead cost........................ $194,000

V = Variable; F = Fixed; M = Mixed

The company wants to break down the maintenance cost into its basic variable and fixed cost elements.

Required:

a. Estimate the maintenance cost for June.b. Use the high-low method to estimate the cost formula for maintenance cost.c. Estimate the total overhead cost at an activity level of 55,000 machine hours.

五

Ans:

a. Total overhead cost at 80,000 machine hours....................... $262,400Less:

Utilities ($54,000/50,000) × 80,000................................... 86,400Supervisory salaries (fixed)................................................ 62,000

Portion of overhead for June that represents maintenance.... $114,000

b. High-low analysis of maintenance cost:Maintenance Cost Machine-Hours

High point.................... $114,000 80,000Low point..................... 78,000 50,000Change observed.......... $ 36,000 30,000

Variable cost:Change in cost/Change in activity = $36,000/30,000 MHs = $1.20 per MHs

Total fixed cost:Total maintenance cost at the low point.................................. $78,000Less variable cost element (50,000 MHs × $1.20 per MH)..... 60,000 Fixed cost element................................................................... $18,000

The cost formula is: Y = $18,000 + $1.20X

c. Total overhead at 55,000 machine hours:Utilities ($54,000/50,000) × 55,000................. $ 59,400Supervisory salaries......................................... 62,000Maintenance cost:

Variable (55,000 MHs × $1.20 per MH)...... $66,000Fixed............................................................. 18,000 84,000

Total overhead cost at 55,000 MH................... $205,400

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard

131. Hinrichs Corporation reports that at an activity level of 2,400 units, its total variable cost is $174,504 and its total fixed cost is $55,080.

Required:

For the activity level of 2,700 units, compute: (a) the total variable cost; (b) the total fixed cost; (c) the total cost; (d) the average variable cost per unit; (e) the average fixed cost per unit; and (f) the average total cost per unit. Assume that this activity level is within the relevant range.

Ans:

Variable cost = $174,504/2,400 units = $72.71 per unitActivity level................................................................... 2,700Total cost:

Variable cost (a) [2,700 units × $72.71 per unit]......... $196,317Fixed cost (b)................................................................ 55,080 Total (c)........................................................................ $251,397

Cost per unit:Variable cost (d)........................................................... $72.71Fixed cost (e) [$55,080/2,700 units]............................. 20.40 Total (f)......................................................................... $93.11

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

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132. At an activity level of 6,800 units, Henkes Corporation's total variable cost is $125,188 and its total fixed cost is $164,152.

Required:

For the activity level of 7,100 units, compute: (a) the total variable cost; (b) the total fixed cost; (c) the total cost; (d) the average variable cost per unit; (e) the average fixed cost per unit; and (f) the average total cost per unit. Assume that this activity level is within the relevant range.

Ans:

Variable cost = $125,188/6,800 units = $18.41 per unitActivity level................................................................... 7,100Total cost:

Variable cost (a) [7,100 units × $18.41 per unit]......... $130,711Fixed cost (b)................................................................ 164,152 Total (c)........................................................................ $294,863

Cost per unit:Variable cost (d)........................................................... $18.41Fixed cost (e) [$164,152/7,100 units]........................... 23.12 Total (f)......................................................................... $41.53


133. The Pate Company reported the following:

Month 1 Month 2Units sold...... 6,000 8,000Cost A........... $35,000 $36,000Cost B............ $16,000 $16,000Cost C............ $1,500 $2,000Cost D........... $12,000 $16,000Cost E............ $6,000 $8,000Cost F............ $2,000 $2,000Cost G........... $4,200 $8,400Cost H........... $37,300 $44,600Cost I............. $13,000 $13,500Cost J............. $10,000 $12,200

Required:

Indicate whether each of the costs above is probably a variable, mixed or fixed cost.

Cost A _______________Cost B _______________Cost C _______________Cost D _______________Cost E _______________Cost F _______________Cost G _______________Cost H _______________Cost I _______________Cost J _______________

Ans:Cost A: MixedCost B: FixedCost C: VariableCost D: VariableCost E: VariableCost F: FixedCost G: MixedCost H: MixedCost I: MixedCost J: Mixed


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134. Stuart Manufacturing produces metal picture frames. The company's income statements for the last two years are given below:

Last year This yearUnits sold................................................... 50,000 70,000Sales........................................................... $800,000 $1,120,000Cost of goods sold...................................... 550,000 710,000 Gross margin.............................................. 250,000 410,000Selling and administrative expense............ 150,000 190,000 Net operating income................................. $100,000 $ 220,000

The company has no beginning or ending inventories.

Required:

a. Estimate the company's total variable cost per unit and its total fixed costs per year. (Remember that this is a manufacturing firm.)

b. Compute the company's contribution margin for this year.

Ans:

a. Variable component of cost of goods sold:Variable cost = Change in costs/Change in unitsVariable cost = ($710,000 − $550,000)/(70,000 − 50,000)Variable cost = $8.00

Fixed cost:High volume: $710,000 − $8.00×70,000 = $150,000Low volume: $550,000 − $8.00×50,000 = $150,000


Fixed cost:High volume: $190,000 − $2.00×70,000 = $50,000Low volume: $150,000 − $2.00×50,000 = $50,000


Total fixed cost:$150,000 + $50,000 = $200,000

b. Sales revenue....................................................... $1,120,000Variable expenses:

Variable cost of goods sold.............................. $560,000Variable selling and administrative expense.... 140,000 700,000

Contribution margin............................................ $ 420,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Medium

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135. Selected data about Pitkin Company's manufacturing operations at two levels of activity are given below:

Number of units produced............. 10,000 15,000Total manufacturing costs.............. $157,000 $225,000Direct material cost per unit........... $4 $4Direct labor cost per unit................ $6 $6

Required:

Using the high-low method, estimate the cost formula for manufacturing overhead. Assume that both direct material and direct labor are variable costs.

Ans:

Low HighTotal manufacturing costs..............................................................................$157,000 $225,000Less:

Direct materials ($4 × 10,000 and $4 × 15,000, respectively)...........................................40,000 60,000

Direct labor ($6 × 10,000 and $6 × 15,000, respectively)........................................... 60,000 90,000

Manufacturing overhead cost $ 57,000 $ 75,000

Cost ActivityHigh level of activity..................... $75,000 15,000 unitsLow level of activity...................... 57,000 10,000 unitsChange........................................... $18,000 5,000 units

$18,000 ÷ 5,000 units = $3.60 per unit

Total cost at the high level of activity.............................. $75,000Less variable element ($3.60 per unit × 15,000 units)..... 54,000Fixed cost element........................................................... $21,000

Therefore, the cost formula for manufacturing overhead is $21,000 per period plus $3.60 per unit produced, or Y = $21,000 + $3.60X.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

136. Utility costs at one of Hannemann Corporation's factories are listed below:

Machine-Hours Utility CostMarch..................... 5,021 $52,824April....................... 5,076 $53,287May........................ 5,074 $53,263June........................ 5,040 $52,991July......................... 5,087 $53,371August.................... 5,073 $53,251September.............. 5,075 $53,252October................... 5,034 $52,916November............... 5,062 $53,137

Management believes that utility cost is a mixed cost that depends on machine-hours.

Required:

Estimate the variable cost per machine-hour and the fixed cost per month using the high-low method. Show your work!

Ans:

Machine-Hours Utility CostHigh activity level...... 5,087 $53,371Low activity level...... 5,021 $52,824




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137. Swofford Inc. has provided the following data concerning its maintenance costs:

Machine-Hours Maintenance CostMarch..................... 4,440 $50,950April....................... 4,431 $50,877May........................ 4,412 $50,696June........................ 4,460 $51,113July......................... 4,414 $50,711August.................... 4,433 $50,900September.............. 4,443 $50,976October................... 4,415 $50,730November............... 4,391 $50,530

Management believes that maintenance cost is a mixed cost that depends on machine-hours.

Required:

Estimate the variable cost per machine-hour and the fixed cost per month using the high-low method. Show your work!

Ans:

Machine-Hours Maintenance CostHigh activity level.............. 4,460 $51,113Low activity level.............. 4,391 $50,530




138. The management of Dethlefsen Corporation would like to have a better understanding of the behavior of its inspection costs. The company has provided the following data:

Direct Labor-Hours Inspection CostJanuary................... 5,089 $33,122February................. 5,042 $32,929March..................... 5,026 $32,870April....................... 5,073 $33,065May........................ 5,029 $32,906June........................ 5,040 $32,913July......................... 5,070 $33,050August.................... 5,027 $32,875September.............. 4,995 $32,746

Management believes that inspection cost is a mixed cost that depends on direct labor-hours.

Required:

Estimate the variable cost per direct labor-hour and the fixed cost per month using the high-low method. Show your work!

Ans:

Direct Labor-Hours Inspection CostHigh activity level.............. 5,089 $33,122Low activity level.............. 4,995 $32,746




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139. The accounting department of Archer Company, a merchandising company, has prepared the following analysis:

Cost FormulaCost of goods sold.......................... $56 per unitSales commissions......................... 12% of salesAdvertising expense....................... $300,000 per monthAdministrative salaries................... $160,000 per monthBilling expense............................... ?Depreciation expense..................... $62,000 per month

The accounting department feels that billing expense is a mixed cost, containing both fixed and variable cost elements. The billing expenses and sales in units over the last several months follow:

Units Sold Billing(000) Expense

January................... 9 $30,000February................. 11 $33,000March..................... 14 $36,000April....................... 17 $42,000May........................ 15 $39,000June........................ 12 $35,000

The accounting department now plans to develop a cost formula for billing expense so that a contribution format income statement can be prepared for management's use.

Required:

a. Using the least-squares method, estimate the cost formula for billing expense.b. Assume that the company plans to sell 30,000 units during July at a selling price of

$100 per unit. Prepare a budgeted income statement for the month, using the contribution format.

Ans:

a. Using least-squares regression, the cost formula is Y = $16,952 + $1,452X, where X is a thousand units

bSales ($100 × 30,000)................................ $3,000,000Variable expenses:

Cost of goods sold ($56 × 30,000).......... $1,680,000Commissions (0.12 × $3,000,000).......... 360,000Billing expense ($1,452 × 30)................. 43,560 2,083,560


Advertising expense................................ 300,000Administrative salaries........................... 160,000Billing expense....................................... 16,952Depreciation expense.............................. 62,000 538,952


AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 4,5 Level: Hard

140. In January, Verba Corporation, a manufacturing company, reported the following financial data:



Required:

a. Prepare an income statement in good form for January using the traditional approach.

b. Prepare an income statement in good form for January using the contribution approach.

五

Ans:

a. Traditional approachSales........................................................... $460,000Cost of goods sold...................................... 184,000 Gross margin.............................................. 276,000Selling and administrative expenses:

Selling..................................................... $ 59,000Administrative........................................ 165,000 224,000


b. Contribution approachSales........................................................... $460,000Variable expenses:

Variable production expense.................. $84,000Variable selling expense......................... 12,000Variable administrative expense............. 33,000 129,000


Fixed production expense....................... 100,000Fixed selling expense.............................. 47,000Fixed administrative expense.................. 132,000 279,000


AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy

141. Novakovich Inc., a manufacturing company, has provided the following financial data for January:



Required:

a. Prepare an income statement in good form for January using the traditional approach.

b. Prepare an income statement in good form for January using the contribution approach.

五

Ans:

a. Traditional approachSales........................................................... $430,000Cost of goods sold...................................... 186,000 Gross margin.............................................. 244,000Selling and administrative expenses:

Selling..................................................... $ 60,000Administrative........................................ 149,000 209,000


b. Contribution approachSales........................................................... $430,000Variable expenses:






142. In July, Haertel Corporation, a manufacturing company, reported the following financial data:


Required:

Prepare an income statement in good form for July using the contribution approach.

Ans:







五

143. Crabbe Inc., a manufacturing company, has provided the following data for October:


Required:

Prepare an income statement in good form for October using the contribution approach.

Ans:







144. Below are cost and activity data for a particular cost over the last four periods. Your boss has asked you to analyze this cost so that management will have a better understanding of how this cost changes in response to changes in activity.

Activity CostPeriod 1...... 40 $637Period 2...... 47 $693Period 3...... 45 $675Period 4...... 41 $646

Required:

Using the least-squares regression method, estimate the cost formula for this cost.

Ans: Using least-squares regression, the cost formula is Y = $324 + $7.82X.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard

145. Grawburg Inc. maintains a call center to take orders, answer questions, and handle complaints. The costs of the call center for a number of recent months are listed below:

Calls Taken Call Center CostApril....................... 9,030 $112,323May........................ 9,017 $112,278June........................ 9,035 $112,341July......................... 9,065 $112,458August.................... 9,015 $112,290September.............. 9,061 $112,419October................... 9,070 $112,463November............... 9,067 $112,439

Management believes that the cost of the call center is a mixed cost that depends on the number of calls taken.

Required:

Estimate the variable cost per call and fixed cost per month using the least-squares regression method.

五

Ans:The solution using Microsoft Excel functions is:slope = $3.27 per callintercept = $82,758 per month


146. The management of Rutledge Corporation would like to better understand the behavior of the company's warranty costs. Those costs are listed below for a number of recent months:

Product Returns Warranty CostMarch..................... 30 $3,648April....................... 37 $4,074May........................ 43 $4,460June........................ 41 $4,330July......................... 32 $3,756August.................... 48 $4,782September.............. 35 $3,932October................... 33 $3,823

Management believes that warranty cost is a mixed cost that depends on the number of product returns.

Required:

Estimate the variable cost per product return and the fixed cost per month using the least-squares regression method.

Ans:The solution using Microsoft Excel functions is:slope = $63.59 per product returnintercept = $1,724 per month


147. Furlan Printing Corp., a book printer, has provided the following data:

Titles Printed Press Setup CostMay........................ 40 $6,649June........................ 38 $6,438July......................... 25 $5,307August.................... 28 $5,564September.............. 33 $6,030October................... 27 $5,505November............... 39 $6,551December............... 36 $6,275

Management believes that the press setup cost is a mixed cost that depends on the number of titles printed. (A specific book that is to be printed is called a “title”. Typically, thousands of copies will be printed of each title. Specific steps must be taken to setup the presses for printing each title-for example, changing the printing plates. The costs of these steps are the press setup costs.)

Required:

Estimate the variable cost per title printed and the fixed cost per month using the least-squares regression method.

Ans:The solution using Microsoft Excel functions is:slope = $88.21 per title printedintercept = $3,107 per month


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Ch5 Cost Behavior