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Exercise 1-13 (20 minutes)
1. Traditional income statement
The Alpine House, Inc.
Traditional Income Statement
Sales ................................................................
$150,000
Cost of goods sold
($30,000 + $100,000 – $40,000) .....................
90,000
Gross margin .....................................................
60,000
Selling and administrative expenses:
Selling expenses (($50 per unit × 200 pairs of
skis*) + $20,000) .........................................
30,000
Administrative expenses (($10 per unit × 200
pairs of skis) + $20,000)...............................
22,000
52,000
Net operating income ........................................
$ 8,000
2. Contribution format income statement
The Alpine House, Inc.
Contribution Format Income Statement
Sales ................................................................
$150,000
Variable expenses:
Cost of goods sold
($30,000 + $100,000 – $40,000) ..................
$90,000
Selling expenses
($50 per unit × 200 pairs of skis) ..................
10,000
Administrative expenses
($10 per unit × 200 pairs of skis) ..................
2,000
102,000
Contribution margin ...........................................
48,000
Fixed expenses:
Selling expenses .............................................
20,000
Administrative expenses ..................................
20,000
40,000
Net operating income ........................................
$ 8,000
Exercise 1-13 (continued)
2. Since 200 pairs of skis were sold and the contribution margin totaled
Exercise 1-14 (30 minutes)
1.
Guest-
Days
Custodial
Supplies
Expense
High activity level (July) ...............
12,000
$13,500
Low activity level (March) ............
4,000
7,500
Change .......................................
8,000
$ 6,000
Variable cost per guest-day:
Change in expense $6,000
Custodial supplies expense at high activity level ....
$13,500
Less variable cost element:
12,000 guest-days × $0.75 per guest-day ..........
9,000
Total fixed cost ....................................................
$ 4,500
The cost formula is $4,500 per month plus $0.75 per guest-day or
Y = $4,500 + $0.75X
2. Custodial supplies expense for 11,000 guest-days:
Variable cost:
11,000 guest-days × $0.75 per guest-day .
$ 8,250
Fixed cost ..................................................
4,500
Total cost ...................................................
$12,750
Exercise 1-14 (continued)
3. The scattergraph appears below.
4. The high-low estimate of fixed costs is $526.90 higher than the estimate
provided by least-squares regression. The high-low estimate of the
5. Expected custodial supplies expense for 11,000 guest-days:
Variable cost: 11,000 guest-days × $0.77 per day .....
$ 8,470.00
Fixed cost ...............................................................
3,973.10
Total cost ................................................................
$12,443.10
Exercise 1-15 (15 minutes)
Selling and
Cost Behavior
Administrative
Product
Cost Item
Variable
Fixed
Cost
Cost
1.
Hamburger buns at a
Wendy’s outlet ........
X
X
2.
Advertising by a dental
office ......................
X
X
3.
Apples processed and
canned by Del Monte
X
X
4.
Shipping canned
apples from a Del
Monte plant to
customers ...............
X
X
5.
Insurance on a Bausch
& Lomb factory
producing contact
lenses .....................
X
X
6.
Insurance on IBM’s
corporate
headquarters ..........
X
X
7.
Salary of a supervisor
overseeing
production of
printers at Hewlett-
Packard ..................
X
X
8.
Commissions paid to
automobile
salespersons ...........
X
X
9.
Depreciation of factory
lunchroom facilities
at a General Electric
plant ......................
X
X
10.
Steering wheels
installed in BMWs ....
X
X
Problem 1-16A (45 minutes)
1.
Cost of goods sold ...................
Variable
Advertising expense ................
Fixed
Shipping expense ....................
Mixed
Salaries and commissions ........
Mixed
Insurance expense ..................
Fixed
Depreciation expense ..............
Fixed
2. Analysis of the mixed expenses:
Units
Shipping
Expense
Salaries and
Commissions
Expense
High level of activity .....
5,000
$38,000
$90,000
Low level of activity ......
4,000
34,000
78,000
Change ........................
1,000
$ 4,000
$12,000
Shipping
Expense
Salaries and
Commissions
Expense
Cost at high level of activity ....
$38,000
$90,000
Less variable cost element:
5,000 units × $4 per unit .....
20,000
5,000 units × $12 per unit ...
60,000
Fixed cost element .................
$18,000
$30,000
Problem 1-16A (continued)
The cost formulas are:
Shipping expense:
3.
Morrisey & Brown, Ltd.
Income Statement
For the Month Ended September 30
Sales (5,000 units × $100 per unit) ...........
$500,000
Variable expenses:
Cost of goods sold
(5,000 units × $60 per unit) ...............
$300,000
Shipping expense
(5,000 units × $4 per unit) ..................
20,000
Salaries and commissions expense
(5,000 units × $12 per unit) ................
60,000
380,000
Contribution margin ..................................
120,000
Fixed expenses:
Advertising expense ...............................
21,000
Shipping expense ..................................
18,000
Salaries and commissions expense ..........
30,000
Insurance expense .................................
6,000
Depreciation expense .............................
15,000
90,000
Net operating income ...............................
$ 30,000
Problem 1-17A (30 minutes)
1. Maintenance cost at the 75,000 direct labor-hour level of activity can be
isolated as follows:
Level of Activity
50,000 DLHs
75,000 DLHs
Total factory overhead cost .................
$14,250,000
$17,625,000
Deduct:
Indirect materials @ $100 per DLH* .
5,000,000
7,500,000
Rent ................................................
6,000,000
6,000,000
Maintenance cost ...............................
$ 3,250,000
$ 4,125,000
* $5,000,000 ÷ 50,000 DLHs = $100 per DLH
2. High-low analysis of maintenance cost:
Direct
Labor-Hours
Maintenance
Cost
High level of activity ........
75,000
$4,125,000
Low level of activity .........
50,000
3,250,000
Change ...........................
25,000
$ 875,000
Variable cost element:
Change in cost $875,000
= =$35 per DLH
Change in activity 25,000 DLH
Fixed cost element:
Total cost at the high level of activity ..................
$4,125,000
Less variable cost element
(75,000 DLHs × $35 per DLH) .........................
2,625,000
Fixed cost element ............................................
$1,500,000
Therefore, the cost formula for maintenance is $1,500,000 per year plus
$35 per direct labor-hour or
Y = $1,500,000 + $35X
Problem 1-17A (continued)
3. Total factory overhead cost at 70,000 direct labor-hours is:
Indirect materials
(70,000 DLHs × $100 per DLH) ............
$ 7,000,000
Rent ......................................................
6,000,000
Maintenance:
Variable cost element
(70,000 DLHs × $35 per DLH) ...........
$2,450,000
Fixed cost element ...............................
1,500,000
3,950,000
Total factory overhead cost .....................
$16,950,000
Problem 1-18A (20 minutes)
Direct or Indirect
Cost of the Meals-
On-Wheels
Program
Direct or Indirect
Cost of Particular
Seniors Served
by the Meals-On-
Wheels Program
Variable or Fixed
with Respect to the
Number of Seniors
Served by the
Meals-On-Wheels
Program
Item
Description
Direct
Indirect
Direct
Indirect
Variable
Fixed
a.
The cost of leasing the Meals-On-Wheels van.....
X
X
X
b.
The cost of incidental supplies such as salt,
pepper, napkins, and so on ............................
X
X*
X
c.
The cost of gasoline consumed by the Meals-On-
Wheels van ...................................................
X
X
X
d.
The rent on the facility that houses Madison
Seniors Care Center, including the Meals-On-
Wheels program ............................................
X
X*
X
e.
The salary of the part-time manager of the
Meals-On-Wheels program .............................
X
X
X
f.
Depreciation on the kitchen equipment used in
the Meals-On-Wheels program .......................
X
X
X
g.
The hourly wages of the caregiver who drives
the van and delivers the meals .......................
X
X
X
h.
The costs of complying with health safety
regulations in the kitchen ...............................
X
X
X
i.
The costs of mailing letters soliciting donations
to the Meals-On-Wheels program ...................
X
X
X
*These costs could be direct costs of serving particular seniors.
Problem 1-19A (45 minutes)
1.
Marwick’s Pianos, Inc.
Traditional Income Statement
For the Month of August
Sales (40 pianos × $3,125 per piano) ...............
$125,000
Cost of goods sold
(40 pianos × $2,450 per piano) .....................
98,000
Gross margin ..................................................
27,000
Selling and administrative expenses:
Selling expenses:
Advertising ................................................
$ 700
Sales salaries and commissions
[$950 + (8% × $125,000)] ......................
10,950
Delivery of pianos
(40 pianos × $30 per piano).....................
1,200
Utilities ......................................................
350
Depreciation of sales facilities .....................
800
Total selling expenses ...................................
14,000
Administrative expenses:
Executive salaries .......................................
2,500
Insurance ..................................................
400
Clerical
[$1,000 + (40 pianos × $20 per piano)] ...
1,800
Depreciation of office equipment .................
300
Total administrative expenses ........................
5,000
Total selling and administrative expenses ..........
19,000
Net operating income ......................................
$ 8,000
Problem 1-19A (continued)
2.
Marwick’s Pianos, Inc.
Contribution Format Income Statement
For the Month of August
Total
Per
Piano
Sales (40 pianos × $3,125 per piano) .................
$125,000
$3,125
Variable expenses:
Cost of goods sold
(40 pianos × $2,450 per piano) ....................
98,000
2,450
Sales commissions (8% × $125,000) ...............
10,000
250
Delivery of pianos (40 pianos × $30 per piano)
1,200
30
Clerical (40 pianos × $20 per piano) ................
800
20
Total variable expenses ......................................
110,000
2,750
Contribution margin ...........................................
15,000
$ 375
Fixed expenses:
Advertising .....................................................
700
Sales salaries ..................................................
950
Utilities ...........................................................
350
Depreciation of sales facilities ..........................
800
Executive salaries ...........................................
2,500
Insurance .......................................................
400
Clerical ...........................................................
1,000
Depreciation of office equipment .....................
300
Total fixed expenses ..........................................
7,000
Net operating income ........................................
$ 8,000
3. Fixed costs remain constant in total but vary on a per unit basis
inversely with changes in the activity level. As the activity level
increases, for example, the fixed costs will decrease on a per unit basis.
Problem 1-20A (45 minutes)
1. Maintenance cost at the 90,000 machine-hour level of activity can be
isolated as follows:
Level of Activity
60,000 MHs
90,000 MHs
Total factory overhead cost ........
$174,000
$246,000
Deduct:
Utilities cost @ $0.80 per MH* .
48,000
72,000
Supervisory salaries ................
21,000
21,000
Maintenance cost ......................
$105,000
$153,000
*$48,000 ÷ 60,000 MHs = $0.80 per MH
2. High-low analysis of maintenance cost:
Machine-
Hours
Maintenance
Cost
High activity level ....................
90,000
$153,000
Low activity level .....................
60,000
105,000
Change ...................................
30,000
$ 48,000
Variable rate:
Change in cost $48,000
= = $1.60 per MH
Change in activity 30,000 MHs
Total fixed cost:
Total maintenance cost at the high activity level ..
$153,000
Less variable cost element
(90,000 MHs × $1.60 per MH) .........................
144,000
Fixed cost element ............................................
$ 9,000
Therefore, the cost formula for maintenance is $9,000 per month plus
$1.60 per machine-hour or
Problem 1-20A (continued)
3.
Variable Cost per
Machine-Hour
Fixed Cost
Utilities cost ....................
$0.80
Supervisory salaries cost ..
$21,000
Maintenance cost ............
1.60
9,000
Total overhead cost .........
$2.40
$30,000
Thus, the cost formula would be: Y = $30,000 + $2.40X.
4. Total overhead cost at an activity level of 75,000 machine-hours:
Fixed costs .................................................
$ 30,000
Variable costs: 75,000 MHs × $2.40 per MH
180,000
Total overhead costs ...................................
$210,000
Problem 1-21A (30 minutes)
Note to the Instructor: There may be some exceptions to the answers below. The purpose of this
problem is to get the student to start
thinking
about cost behavior and cost purposes; try to avoid
lengthy discussions about how a particular cost is classified.
Variable or
Selling
Administrative
Manufacturing
(Product) Cost
Cost Item
Fixed
Cost
Cost
Direct
Indirect
1.
Property taxes, factory ................................
F
X
2.
Boxes used for packaging detergent
produced by the company .........................
V
X
3.
Salespersons’ commissions ..........................
V
X
4.
Supervisor’s salary, factory ..........................
F
X
5.
Depreciation, executive autos ......................
F
X
6.
Wages of workers assembling computers .....
V
X
7.
Insurance, finished goods warehouses .........
F
X
8.
Lubricants for production equipment ............
V
X
9.
Advertising costs .........................................
F
X
10.
Microchips used in producing calculators ......
V
X
11.
Shipping costs on merchandise sold .............
V
X
12.
Magazine subscriptions, factory lunchroom ...
F
X
13.
Thread in a garment factory ........................
V
X
14.
Billing costs ................................................
V
X*
15.
Executive life insurance ...............................
F
X
Problem 1-21A (continued)
Variable or
Selling
Administrative
Manufacturing
(Product) Cost
Cost Item
Fixed
Cost
Cost
Direct
Indirect
16.
Ink used in textbook production ...................
V
X
17.
Fringe benefits, assembly-line workers .........
V
X**
18.
Yarn used in sweater production ..................
V
X
19.
Wages of receptionist, executive offices .......
F
X
* Could be administrative cost.
** Could be indirect cost.
Problem 1-22A (45 minutes)
1. High-low method:
Number of
Scans
Utilities Cost
High level of activity .
150
$4,000
Low level of activity ..
60
2,200
Change ....................
90
$1,800
Change in cost $1,800
Variable rate: = =$20 per scan
Change in activity 90 scans
Fixed cost:
Total cost at high level of activity ...........
$4,000
Less variable element:
150 scans × $20 per scan ...................
3,000
Fixed cost element ................................
$1,000
Therefore, the cost formula is: Y = $1,000 + $20X.
2. The scattergraph plot appears as follows:
