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Solutions Manual, Chapter 2 41
Problem 2-24 (30 minutes)
1. A cost that is classified as a period cost will be recognized on the income
statement as an expense in the current period. A cost that is classified
reclassifying period costs as product costs, the company is able to carry
2. The discussion below is divided into two parts—Gallant’s actions to
postpone expenditures and the actions to reclassify period costs as
product costs.
The decision to postpone expenditures is questionable. It is one thing to
postpone expenditures due to a cash bind; it is quite another to
Gallant’s decision to reclassify period costs is not ethical—assuming that
there is no intention of disclosing in the financial reports this
reclassification. Such a reclassification would be a violation of the
42 Managerial Accounting for Managers, 4th Edition
Problem 2-25 (45 minutes)
1.
Cost Behavior
Selling or
Administrative
Product Cost
Cost Item
Variable
Fixed
Cost
Direct
Indirect
Direct labor ...............................
$118,000
$118,000
Advertising ................................
$50,000
$50,000
Factory supervision ....................
40,000
$40,000
Property taxes, factory building ..
3,500
3,500
Sales commissions .....................
80,000
80,000
Insurance, factory .....................
2,500
2,500
Depreciation, administrative
office equipment .....................
4,000
4,000
Lease cost, factory equipment ....
12,000
12,000
Indirect materials, factory ..........
6,000
6,000
Depreciation, factory building .....
10,000
10,000
Administrative office supplies .....
3,000
3,000
Administrative office salaries ......
60,000
60,000
Direct materials used .................
94,000
94,000
Utilities, factory .........................
20,000
20,000
Total costs ................................
$321,000
$182,000
$197,000
$212,000
$94,000
Solutions Manual, Chapter 2 43
Problem 2-25 (continued)
2. The average product cost for one patio set would be:
Direct .................................................
$212,000
Indirect ...............................................
94,000
Total ...................................................
$306,000
$306,000 ÷ 2,000 sets = $153 per set
3. The average product cost per set would increase if the production
4. a. Yes, the president may expect a minimum price of $153, which is the
average cost to manufacture one set. He might expect a price even
a set to the brother-in-law.
44 Managerial Accounting for Managers, 4th Edition
Case 2-26 (60 minutes)
1. High-low method:
Hours
Cost
High level of activity ........
25,000
$99,000
Low level of activity ........
10,000
64,500
Change ..........................
15,000
$34,500
Variable element: $34,500 ÷ 15,000 DLH = $2.30 per DLH
Fixed element:
Total cost—25,000 DLH .........................
$99,000
Less variable element:
25,000 DLH × $2.30 per DLH ..............
57,500
Fixed element .......................................
$41,500
Therefore, the cost formula is: Y = $41,500 + $2.30X.
2. The scattergraph is shown below:
$60,000
$65,000
$70,000
$75,000
$80,000
$85,000
$90,000
$95,000
$100,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
26,000
Direct Labor-Hours
Y
X
Overhead
Costs
Solutions Manual, Chapter 2 45
Case 2-26 (continued)
2. The scattergraph shows that there are two relevant ranges—one below
19,500 DLH and one above 19,500 DLH. The change in equipment lease
3. The cost formulas computed with the high-low and regression methods
4. High-low method:
Hours
Cost
High level of activity ........
25,000
$99,000
Low level of activity ........
20,000
80,000
Change ..........................
5,000
$19,000
Total cost—25,000 DLH .........................
$99,000
Less variable element:
25,000 DLH × $3.80 per DLH ..............
95,000
Fixed element .......................................
$4,000
Expected overhead costs when 22,500 machine-hours are used:
Variable cost: 22,500 hours × $3.80 per hour ...........
$85,500
Fixed cost ...............................................................
4,000
Total cost ................................................................
$89,500
5. The high-low estimate of fixed costs is $6,090 lower than the estimate
provided by least-squares regression. The high-low estimate of the
variable cost per unit is lower than the high-low method.
46 Managerial Accounting for Managers, 4th Edition
Case 2-27 (30 minutes)
1. The scattergraph of direct labor cost versus the number of units
produced is presented below:
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
050 100 150
Thousands of Units Produced
Direct Labor Cost
X
Y
Case 2-27 (continued)
2. The scattergraph of the direct labor cost versus the number of paid days
© The McGraw-Hill Companies, Inc., 2017. All rights reserved.
48 Managerial Accounting for Managers, 4th Edition
Case 2-27 (continued)
3. The number of paid days should be used as the activity base rather than
the number of units produced. The scattergraphs reveal a much
stronger relation (i.e., higher correlation) between direct labor costs and
number of paid days than between direct labor costs and number of
units produced. Variations in the direct labor costs apparently occur
because of the number of paid days in the month and have little to do
with the number of units that are produced. It appears that the direct
labor costs are basically fixed with respect to how many units are
produced in a month. This would happen if the direct labor workers are
treated as full-time employees who are paid even if there is insufficient
work to keep them busy. Moreover, for planning purposes, the company
is likely to be able to predict the number of paid days in the month with
much greater accuracy than the number of units that will be produced.
Solutions Manual, Appendix 2A 49
Appendix 2A
Least-Squares Regression Computations
Exercise 2A-1 (20 minutes)
1. and 2.
month, and the slope provides the estimate of the variable cost element,
where X is the number of rental returns.
returns.
