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Chapter 6 Cost Behavior
(continued) P6-60A
Req. 5
Cost
Activity
Variable cost:
High pt.
$579,000
32,000
Nov
Low pt.
$420,000
20,000
Sep
Difference
$159,000
12,000
Change in cost / change in volume = variable cost
$159,000 / 12,000 = $13.25 (rounded)
Using high point
Total cost
=
Variable cost component + fixed cost component
y
=
vx + f
$579,000
=
32,000 ($13.25) + f
$579,000
=
$424,000 + f
$155,000
=
f
Total fixed costs = $155,000
y = $13.25x + $155,000
Req. 6
January’s estimated manufacturing overhead costs are $499,500.
y = vx + f
y = 26,000 ($13.25) + $155,000
Total costs = $499,500 (some rounding so answers may vary slightly)
Chapter 6 Cost Behavior
(30-45 min.) P6-62A
Req. 1
Gross Profit
Sales ($115.00 x 1,900)
$218,500
Less: Cost of goods sold (1,900* violins × $103**)
195,700
Gross profit
$ 22,800
Sales
$ 218,500
Less: Variable costs
(162,100)
Contribution margin
$ 56,400
*(131,300 + $55,000 + $27,000)/2,700 = $79
$12,000/1,900 = $6.31579
$79.00 + ($6.322x 1,900) = $162,100 (rounded)
Req. 3
Total Expenses Shown Below the Gross Profit Line
Variable selling and administrative expenses
$12,000
+ Fixed selling and administrative expenses
12,900
Total expenses below the gross profit line
$24,900
All fixed expenses:
Fixed manufacturing
$64,800
Fixed selling and administrative
12,900
Total fixed expenses
$77,700
Req. 5
The dollar value of ending inventory under absorption costing is $82,400 ($103 x 800).
Req. 6
The dollar value of ending inventory under variable costing is $63,200 ($79 x 800).
The absorption (traditional) income statement will have a higher operating income by $19,200, [($64,800/2,700) x
800].
Under absorption costing, more fixed manufacturing overhead costs are trapped on the balance sheet when inventory
increases. Under variable costing, these costs are expensed as part of cost of goods sold in the current period.
(25-35 min.) P6-63A
Req. 1
January
February
Absorption
Costing
Variable
Costing
Absorption
Costing
Variable
Costing
Variable manufacturing expense per meal
$5.00
$5.00
$5.00
$5.00
Fixed MOH (Absorption only) ($800/2,000; $800/1,600)
$0.40
$0.00
$0.50
$0.00
Total product cost.…………………...
$5.40
$5.00
$5.50
$5.00
Managerial Accounting 4e Solutions Manual
(continued) P6-63A
Req. 2a
Nicky’s Entrees
Income Statement (Absorption Costing)
Months Ended
Jan. 31
Feb. 28
Sales revenue 1,600 and 1,900 x $8
$12,800
$15,200
Cost of goods sold (1,600 x $5.40); (400 x $5.40) + (1,500 x $5.50)
(8,640)
(10,410)
Gross profit
4,160
4,790
Operating expenses [($2 x 1,600) +$600]; [($2 x 1,900) +$600]
(3,800)
(4,400)
Operating income
$ 360
$ 390
Req. 2b
Nicky’s Entrees
Income Statement (Variable Costing)
Months Ended
January 31
February 28
Sales revenue
$12,800
$15,200
Variable expenses:
Variable cost of goods sold (1,600 and 1,900 x $5)
8,000
9,500
Sales commission expense (1,600 x $2; 1,900 x $2)
3,200
(11,200)
3,800
(13,300)
Contribution margin
1,600
1,900
Fixed expenses:
Fixed manufacturing overhead
800
800
Fixed marketing and administrative expenses
600
(1,400)
600
(1,400)
Operating income
$200
$500
Req. 3
In January, absorption costing operating income exceeds variable costing income. This situation is because units
produced were greater than units sold.
Absorption costing defers some of January’s fixed manufacturing overhead costs in the units of ending inventory. These
costs will not be expensed until those units are sold. Deferring these fixed manufacturing overhead costs to the future
increases January’s absorption costing income.
In February, absorption costing operating income is less than variable costing operating income. This is because units
produced were less than units sold for the month.
As inventory declines, as was the case this February, January’s fixed manufacturing overhead costs that absorption
Copyright © 2015 Pearson Education, Inc.
6-43
(45-60 min.) P6-64B
Req. 1
The hospital’s overhead appears to be a mixed cost. If it were a fixed cost, it would remain constant each month. If it
Managerial Accounting 4e Solutions Manual
(continued) P6-64B
Req. 5
Cost
Activity
Variable cost:
High pt.
$574,000
31,500
Nov
Low pt.
$412,000
19,500
Sep
Difference
$162,000
12,000
Change in cost / change in volume = variable cost
$162,000 / 12,000 = $13.50
Using high point
Total cost
=
Variable cost component + fixed cost component
y
=
vx + f
$574,000
=
31,500 ($13.50) + f
$574,000
=
$425,250 + f
$148,750
=
f
Total fixed costs = $148,750
Total costs = Variable costs + fixed costs
y = vx + f
y = 24,500 ($13.50) + $148,750
Total costs = $479,500
Req. 6
y = $13.12x + $173,670.16
y = $13.12(24,500) + $173,670.16
y = $495,110.16
Req. 7
y = $51.37x + $270,606.28
y = $51.37(3,640) + $270,606.28
y = $457,593. 08
Req. 8
We have the most confidence in the cost equation using nursing hours. The R-square value for that equation was the
highest.
Chapter 6 Cost Behavior
(45-60 min.) P6-65B
Req. 1
Carmichael’s manufacturing overhead appears to be a mixed cost. If it were a fixed cost, it would remain constant each
Managerial Accounting 4e Solutions Manual
Req. 5
Cost
Activity
Variable cost:
High pt.
$527,000
27,000
Nov
Low pt.
$425,000
19,000
Sep
Difference
$102,000
8,000
Change in cost / change in volume = variable cost
$102,000 / 8,000 = $12.75
Using high point
Total cost
=
Variable cost component + fixed cost component
y
=
vx + f
$527,000
=
27,000 ($12.75) + f
$527,000
=
$344,250 + f
$182,750
=
f
Total fixed costs = $182,750
y = $12.75x + $182,750
Req. 6
January’s estimated manufacturing overhead costs are $495,125.
y = vx + f
y = 24,500 ($12.75) + $182,750
y = $495,125
(15-20 min.) P6-66B
Req. 1
Darla’s Ice Cream Shoppe
Income Statement
For the Month Ended June 30
Sales revenue (9,400 × $5.00)
$47,000
Cost of goods sold (9,400 × $0.60*)
(5,640)
Gross profit
41,360
Operating expenses:
Lease expense
$ 2,000
Depreciation expense
240
Other operating expenses
2,600
Total operating expenses
(4,840)
Operating income
$ 36,520
*$14 per tub ÷ 35 servings = $0.40 for ice cream + $0.20 per ice cream cone = $0.60
Req. 2
Darla’s Ice Cream Shoppe
Contribution Margin Income Statement
For the Month Ended June 30
Sales revenue (9,400 × $5.00)
$47,000
Variable expenses:
Cost of goods sold (9,400 × 0.60*)
$5,640
Other variable operating expenses
650a
(6,290)
Contribution margin
$40,710
Fixed expenses:
Lease expense
$2,000
Depreciation expense
240
Other fixed operating expenses
1,950b
(4,190)
Operating income
$ 36,520
a $2,600 × 25% variable = $650
b $2,600 × 75% fixed = $1,950
Managerial Accounting 4e Solutions Manual
Copyright © 2015 Pearson Education, Inc.
6-48
(30-45 min.) P6-67B
1. Gross Profit
Sales
$198,000
Less: Cost of goods sold (1,650* violins × $103**)
169,950
Gross profit
$ 28,050
2. Contribution Margin
Sales
$ 198,000
Less: Variable expenses *
(147,250)
Contribution margin
$ 50,750
*($104,500 + $60,000 +$31,000)/2,300 = $85
$7,000/1,650 = $4.242
($85 + $4.242) x 1,650 = $147,250
3. Total Expenses Shown Below the Gross Profit Line
Variable selling and administrative expenses
$7,000
+ Fixed selling and administrative expenses
13,100
Total expenses below the gross profit line
$20,100
4. Total Expenses Shown Below the Contribution Margin Line
Fixed manufacturing overhead
$41,400
+ Fixed selling and administrative expenses
13,100
Total expenses below the contribution margin line
$54,500
5. The dollar value of ending inventory under absorption costing is $66,950 ($103 x 650).
6. The dollar value of ending inventory under variable costing is $55,250 ($85 x 650).
(25-35 min.) P6-68B
Req. 1
January
February
Absorption
Costing
Variable
Costing
Absorption
Costing
Variable
Costing
Variable manufacturing expense per meal
$3.00
$3.00
$3.00
$3.00
Fixed MOH (Absorption only) $1,200/1,600; $1,200/1,500
0.75
0.00
0.80
0.00
Total product cost……….…………...
$3.75
$3.00
$3.80
$3.00
Chapter 6 Cost Behavior
(continued) P6-68B
Req. 2a
Marty’s Entrees
Income Statement (Absorption Costing)
Month Ended January 31
Jan. 31
Feb. 28
Sales revenue (1,300 and 1,700 × $9)
$11,700
$15,300
Cost of goods sold*
(4,875)
(6,445)
Gross profit
6,825
8,855
Operating expenses
(3,000)
(3,800)
Operating income
$ 3,825
$ 5,055
Jan: 1,300 x $3.75 = $4,875
Feb: (300 x $3.75) + (1,400 x $3.80) = $6,445
Req. 2b
Marty’s Entrees
Income Statement (Variable Costing)
Months Ended
January 31
February 28
Sales revenue
$11,700
$15,300
Variable expenses:
Variable cost of goods sold
3,900
5,100
Sales commission expense
2,600
(6,500)
3,400
(8,500)
Contribution margin
5,200
6,800
Fixed expenses:
Fixed manufacturing overhead
1,200
1,200
Fixed marketing and administrative expenses
400
(1,600)
400
(1,600)
Operating income
$3,600
$5,200
Req. 3
In January, absorption costing operating income exceeds variable costing income. This situation is because the units
produced were greater than the units sold.
Absorption costing defers some of January’s fixed manufacturing overhead costs in the units of ending inventory. These
costs will not be expensed until those units are sold. Deferring some of these fixed manufacturing overhead costs to
the future increases January’s absorption costing income.
In February, absorption costing operating income is less than variable costing operating income. This situation is
Copyright © 2015 Pearson Education, Inc.
6-50
A6-69
1. Briefly describe an organization with which you are familiar. Describe a situation when a manager in that
organization could use cost behavior information and how the manager could use the information.
2. How are fixed costs similar to step fixed costs? How are fixed costs different from step fixed costs? Give an
example of a step fixed cost and describe why that cost is not considered to be a fixed cost.
3. Describe a specific situation when a scatter plot could be useful to a manager.
The manager of a printing firm could use a scatter plot to analyze the monthly telephone expenses for a year to
4. What is a mixed cost? Give an example of a mixed cost. Sketch a graph of this example.
5. Compare discretionary fixed costs to committed fixed costs. Think of an organization with which you are
familiar. Give two examples of discretionary fixed costs and two examples of committed fixed costs that
Chapter 6 Cost Behavior
Copyright © 2015 Pearson Education, Inc.
6-51
increased or decreased in the short run by managers. Rent and depreciation are examples of committed fixed
costs because they can only be changed in the long run.
6. Define the terms “independent variable” and “dependent variable,” as used in regression analysis. Illustrate the
concepts of independent variables and dependent variables by selecting a cost a company would want to
7. Define the term “relevant range.” Why is it important to managers?
8. Describe the term “R-square.” If a regression analysis for predicting manufacturing overhead using direct labor
hours as the dependent variable has an R-square of .40, why might this be a problem? Given the low R-square
value, describe the options a manager has for predicting manufacturing overhead costs. Which option do you
9. Over the past year, a company’s inventory has increased significantly. The company uses absorption costing for
financial statements, but internally, the company uses variable costing for financial statements. Which set of
10. A company has adopted a lean production philosophy and, as a result, has cut its inventory levels significantly.
Describe the impact on the company’s external financial statements as a result of this inventory reduction. Also
11. What costs might a business incur by not adopting e-billing (paperless) services? Is e-billing only profitable to
large businesses or is it applicable to small business? Explain what might be involved in changing over to
Managerial Accounting 4e Solutions Manual
Copyright © 2015 Pearson Education, Inc.
6-52
over to a paperless billing system requires developing a secure banking website as well as convincing customers to
adopt the new system.
12. How might the principles of sustainability (such as increased efficiency) affect cost behavior overall? Think of an
example of a sustainable change in process or material that could impact the cost equation of that cost (i.e., the
Copyright © 2015 Pearson Education, Inc.
6-53
A6-70
1. Describe the company you selected and the products or services it provides.
2. List ten costs that this company would incur. Include costs from a variety of departments within the company,
including human resources, sales, accounting, production (if a manufacturer), service (if a service company), and
others. Make sure that you have at least one cost from each of the following categories: fixed, variable, and
mixed.
Development of new texts/editions
3. Classify each of the costs you listed as either fixed, variable, or mixed. Justify why you classified each cost as you
did.
Mixed – includes salaried editors (fixed) and authors’ advances
Fixed – scheduled training sessions
4. Describe a potential cost driver for each of the variable and mixed costs you listed. Explain why each cost driver
would be appropriate for its associated cost.
Revision/new book projects
Chapter 6 Cost Behavior
3. Categorized each cost in your list as fixed, variable, or mixed.
4. The number of trips taken by the president in any given year fluctuates and is dependent upon the political
climate, crises, economics, and the like. How useful to you think this cost per hour is?
5. What purpose(s) can the $179,750 cost per hour be used for? Are there any purposes for which that cost is not
representative of the “true” cost?
6. Can you think of a better way to represent/ communicate the cost of Air Force One?
7. Do you think the reimbursement policy is fair to the president? Why or why not?
8. Do you think the reimbursement policy is fair to the taxpayers? Why or why not?
