Chapter 6 Cost Behavior
Copyright © 2015 Pearson Education, Inc.
6-1
Chapter 6
Cost Behavior
Quick Check
Answers:
QC-1. a
QC-3. c
QC-5. d
QC-7. c
QC-9. b
QC-2. b
QC-4. d
QC-6. b
QC-8. c
QC-10. c
Short Exercises
(5-10 min.) S6-1
(5-10 min.) S6-2
Total fixed cost
÷
Number of basketballs
produced
=
$18,000
÷
18,000
=
(5-10 min.) S6-3
Total manufacturing costs $120,000 – $50,000 variable expenses = $70,000 fixed expenses
=
$83,250*
=
Managerial Accounting 4e Solutions Manual
(5-10 min.) S6-4
Req. 1
a. Call for 30 minutes
(5-10 min.) S6-5
a.
Depreciation on equipment
Fixed
b.
Shoe laces
Variable
c.
Patents
Fixed
d.
Rice husk filler
Variable
e.
Recycled polyester fibers
Variable
f.
Glue
Variable
g.
Quality inspector’s salary
Fixed
(10-15 min.) S6-6
Req. 1
Req. 2
There appears to be a very strong relationship between the company’s operating expenses and the number of oil
Managerial Accounting 4e Solutions Manual
(5-10 min.) S6-7
First, identify the formula and calculate the variable cost component (slope).
Change in costs
÷
Change in volume
=
$5,100*
÷
1,000*
=
$37,000
=
Change in costs
÷
Change in volume
=
Variable cost per unit
÷
=
$27,700
=
(5-10 min.) S6-9
First, identify the formula and calculate the variable cost component (slope).
Change in costs
÷
Change in volume
=
$9,500a
÷
475b
=
=
Chapter 6 Cost Behavior
(10-15 min.) S6-14
Patricia’s Quilt Shoppe
Income Statement
Month Ended February 28
Sales revenue (100 × $410)
$41,000
Less: Cost of goods sold (100 × $240)
(24,000)
Gross profit
17,000
Less: Operating expenses
Sales commissions (4% × $41,000)
$ (1,640)
Payroll costs
(2,100)
Lease
(1,600)
($5,340)
Operating income
$ 11,660
Patricia’s Quilt Shoppe
Contribution Margin Income Statement
Month Ended February 28
Sales revenue (100 × $410)
$41,000
Less variable expenses:
Cost of goods sold (100 × $240)
($24,000)
Sales commissions (4% × $41,000)
($1,640)
(25,640)
Contribution margin
15,360
Less fixed expenses:
Payroll costs
(2,100)
Lease
(1,600)
(3,700)
Operating income
$ 11,660
(10-15 min.) S6-15
Req. 1
O’Neill’s Products
Income Statement (Variable Costing)
Variable cost per unit (given)
$ 35
Sales revenue ($65 x 12,000)
$780,000
Less Variable Expenses:
Variable Cost of Goods Sold ($35 x 12,000)
$420,000
Variable Operating Expenses ($2 x 12,000)
$ 24,000
Contribution Margin
$336,000
Less Fixed Expenses:
Fixed MOH
$132,000
Fixed Operating Expenses
$ 85,000
Operating Income
$ 119,000
Managerial Accounting 4e Solutions Manual
(continued) S6-15
Req. 2
O’Neill’s Products
Income Statement (Absorption Costing)
Cost per unit
Variable cost per unit (given)
$35
Fixed MOH per unit ($132,000 / 12,000 units)
$11
Total cost per unit
$46
Sales revenue
$780,000
Less: Cost of Goods Sold ($46 x 12,000)
($552,000)
Gross profit
$228,000
Less: Operating expenses [($2 x 12,000) + $85,000]
($109,000)
Operating income
$ 119,000
(15 min.) S6-16
Req. 1
Allen Manufacturing
Income Statement (Variable Costing)
Variable cost per unit
$26
Sales revenue ($49 x 13,000)
$637,000
Less Variable Expenses:
Variable Cost of Goods Sold ($26 x 13,000)
($338,000)
Variable Operating Expenses ($3 x 13,000)
($39,000)
Contribution Margin
$260,000
Less Fixed Expenses:
Fixed MOH
($187,000)
Fixed Operating Expenses
($ 47,000)
Operating income
$ 26,000
Req. 2
Allen Manufacturing
Income Statement (Absorption Costing)
Variable cost per unit (given)
$26
Fixed MOH per unit ($187,000/17,000 units)
$11
Total cost per unit
$37
Sales revenue
$637,000
Less: Cost of Goods Sold
($481,000)
Gross profit
$156,000
Less Operating Expenses
($86,000)
Operating income
$ 70,000
Req. 3
When inventory levels increase, operating income will be greater under absorption costing than it is under variable
costing. This situation is because under variable costing, fixed MOH is expensed immediately as a period cost
(operating expense). Under absorption costing, fixed MOH becomes part of the inventoriable cost of the product,
which isn’t expensed (as Cost of Goods Sold) until the inventory is sold, leaving a higher operating income due to less
being expensed.
(15 min.) S6-17
(a)
(b)
(c)
Variable Expenses
Mixed Expenses
Fixed Expenses
$50
Cost
(thou-
sands)
$100
Cost
(thou-
sands)
$40
Cost
(thou-
sands)
$40
$ 80
$30
$30
$ 60
$20
$20
$ 40
$10
$10
$ 20
0 2 4 6 8 10
0 2 4 6 8 10
0 2 4 6 8 10
Volume
(thousands of
units)
Volume
(thousands of
units)
Volume
(thousands of
units)
(5-10 min.) S6-18
a. Graph 2
b. Graph 2
c. Graph 9
d. Graph 2
Managerial Accounting 4e Solutions Manual
(5 min.) S6-20
1.
The CEO of a small company visits a competitor’s dumpster and
takes several trash bags containing discarded papers and reports.
The CEO directs Ivan to go through the competitor’s trash to find
any information about the competitor’s costs for a contract coming
up for bid. Ivan goes through the papers to find the information
because he does not want to lose his job.
Integrity – Abstain from engaging in
or supporting any activity that might
discredit the profession.
2.
Blue Heron Mobile operates in a highly competitive environment.
Cost information is highly confidential since most jobs are obtained
through a bidding process based on variable costing, or in some
cases absorption costing. Steve Nunez is the manager of the
Accounting Department of Blue Heron Mobile. He neglects to talk
with his new hires about the confidentiality of data, nor is there a
formal policy in place about non-disclosure.
Confidentiality – Inform all relevant
parties regarding appropriate use of
confidential information. Monitor
subordinates’ activities to ensure
compliance.
3.
Natasha is an accountant for Red Box Consulting. At a party, she
overhears a man about an upcoming contract his company will be
bidding on. She listens closer and hears specific variable cost
information that the man shares. She returns to work the next day
and shares this competitor’s cost information with her friend who
is working on preparing Red Box Consulting’s bid.
Confidentiality – Refrain from using
confidential information for
unethical or illegal advantage.
4.
Curtis struggled through regression analysis in his college courses.
Now his manager has asked him to run a regression analysis to
create a model for predicting overhead costs. He runs the
regression and creates the model. He gives his manager the cost
equation for overhead costs, even though he does not really
understand it or have any way of checking to see if he did it
correctly. He is hesitant to ask for help because he just started this
job and he wants to look impressive.
Competence – Recognize and
communicate professional
limitations or other constraints that
would preclude responsible
judgment or successful
performance of an activity.
5.
Alyssa does not disclose on the financial statements that variable
costing, rather than absorptions costing, was used.
Credibility – Disclose all relevant
information that could reasonably
be expected to influence an
intended user’s understanding of
the reports, analyses, or
recommendations.
Chapter 6 Cost Behavior
Exercises (Group A)
(15 min.) E6-21A
Req. 1
2,000
Garments
3,500
Garments
5,000
Garments
Total variable costs
$1,200
$2,100*
$ 3,000
Total fixed costs
7,000
7,000
7,000
Total operating costs
$8,200
$9,100
$10,000
Variable cost per garment
$0.60
$0.60
$0.60
Fixed cost per garment
3.50
2.00*
1.40
Average cost per garment
$4.10
$2.60
$2.00
*given
Req. 2
The average cost per garment changes as volume changes, due to the fixed component of the dry cleaner’s costs. The
fixed cost per unit decreases as volume increases, while the variable cost per unit remains constant.
Req. 3
He would underestimate his costs by $4,200*.
Cost from Req. 1 for 2,000 units: $8,200
Estimated costs @2,000 using $2.00: $4,000
Underestimation of costs $4,200
(15 min.) E6-22A
Princeton Drycleaners
Projected Income Statement
Month Ended March 31
Dry cleaning revenue (4,300 × $8)
$34,400
Less: Operating expenses [$7,000 + (4,300 × $0.60)]
(9,580)
Operating income (loss)
$24,820
Princeton Drycleaners
Projected Contribution Margin Income Statement
Month Ended March 31
Dry cleaning revenue (4,300 × $8)
$34,400
Less: Variable expenses (4,300 × $0.60)
(2,580)
Contribution margin
31,820
Less: Fixed expenses
(7,000)
Operating income (loss)
$24,820
Managerial Accounting 4e Solutions Manual
(15 min.) E6-23A
Req. 1
High – June; Low – March
(15 min.) E6-24A
Req. 1
Average cost per unit = Total cost ÷ number of units
$20.43 = Total cost ÷ 1,000 units
($10.00 x 1,100) + $10,430 = $21,430
Req. 6
Chapter 6 Cost Behavior
(10-15 min.) E6-25A
Req. 1
Cost
Activity
Variable cost:
High pt.
$800,000
740,000
Q3
Low pt.
$672,700
550,000
Q1
Difference
$127,300
190,000
Chapter 6 Cost Behavior
Copyright © 2015 Pearson Education, Inc.
6-15
(20-30 min.) E6-28A
Req. 1 and 2
y
=
$0.28x
+
$908.93
Req. 3
(5-10 min.) E6-29A
Req. 1
y
=
$0.19x
+
$2,250.74
Req. 2
(10-15 min.) E6-30A
Req. 1
Managerial Accounting 4e Solutions Manual
(10-15min.) E6-31A
Req. 1
Cost
Activity
Variable cost:
High pt.
$31,100
4,600
April
Low pt.
$22,000
2,000
June
Difference
$9,100
2,600
Change in cost / change in volume = variable costs
$9,100 / 2,600 = $3.50
Req. 2
Using high point
Total cost
=
Variable cost component + fixed cost component
y
=
vx + f
$31,100
=
4,600 ($3.50) + f
$31,100
=
$16,100 + f
$15,000
=
f
Total fixed costs = $15,000
Req. 3
Total costs = Variable costs + fixed costs
y = vx + f
y = 2,800 ($3.50) + $15,000
Total costs = $24,800
(5-10 min.) E6-32A
Req. 1
y = $4.94x + $10,637.34
(15-20 min.) E6-33A
Req. 1
Student prepares regression using Excel. Answers shown below under related requirements.
Req. 2
y = $6.57x + $1,626.72
Managerial Accounting 4e Solutions Manual
(10-20 min.) E6-35A
Two Lizards
Contribution Margin Income Statement
For the Year Ended December 31
Sales revenue
$1,014,000
Variable expenses:
Cost of goods sold
665,000
Variable selling and marketing expenses
28,520
Variable web site maintenance expenses
14,875
Other variable operating expenses
1,840
Total variable expenses
710,235
Contribution margin
303,765
Fixed expenses:
Fixed selling and marketing expenses
32,480
Fixed web site maintenances expenses
44,625
Other fixed operating expenses
16,560
Total fixed expenses
93,665
Operating income
$210,100
Calculations for selling and marketing expenses:
Total selling and marketing expenses
$ 61,000
Variable freight-out
(20,400)
Remaining selling and marketing expenses
$ 40,600
(15-20 min.) E6-36A
Req. 1
Hatcher Carriage Company
Contribution Margin Income Statement
For the Month Ended May 31
Sales revenue (13,050 × 85% × $21.00) +
(13,050 × 15% × $13.00)
$258,390
Variable expenses:
Fee paid to city (15% × $258,390)
$38,759
Complimentary postcards (13,050 × $0.85)
11,093
Brokerage fee (13,050 × 60% × $1.50)
11,745
Carriage driver wages (13,050 × $3.80)
49,590
Total variable expenses
111,187
Contribution margin
$147,203
Fixed expenses:
Leasing and boarding horses
$48,000
Non-carriage driver payroll expense
7,500
Depreciation expense
2,100
Other fixed operating expenses
7,400
Total fixed expenses
65,000
Operating income
$82,203
Req. 2
If passenger volume increases by 10% in May, we would expect all variable expenses to increase by 10%. This is
because revenues and variable costs change in direct proportion to changes in volume. As a result, the contribution
margin would also increase by 10%.
Assuming that a 10% increase in volume is still in the same relevant range, we would expect all fixed costs to remain at
their present level.
(15-20 min.) E6-37A
Req. 1
Absorption Costing
Year 1
Year 2
Units sold
12,000
18,000
Direct material
$31
$31
Direct labor
$8
$8
Variable MOH
$3
$3
Fixed MOH per unit ($135,000 ÷15,000 units produced)
$9
$9
Cost per unit
$51
$51
Year 1
Year 2
Sales revenue
12,000 X $69
$828,000
18,000 X $69
$1,242,000
Less: Cost of Goods Sold (12,000 and 18,000 x $51)
$612,000
$918,000
Gross profit
$216,000
$324,000
Less: Operating expenses [$83,000 + (12,000 x $6)]; [$83,000 +
(18,000 x $6)]
$155,000
$191,000
Operating income
$61,000
$133,000
Managerial Accounting 4e Solutions Manual
(continued) E6-37A
Req. 2
Year 1
Year 2
Direct Material
Direct Labor
$8
$8
Variable MOH
Cost per unit
Year 1
Year 2
Sales revenue
12,000 X $69
18,000 X $69
Less Variable Expenses:
Contribution Margin
Less Fixed Expenses:
Change in inventory (in units)
Year 1
Year 2
Fixed MOH cost per unit
$9
$9