Exercise 2-13 (continued)
4. The high-low estimate of fixed costs is $1,470.59 higher than the
estimate provided by least-squares regression. The high-low estimate of
5. Expected X-ray costs when 4,600 X-rays are taken:
Variable cost: 4,600 X-rays × $3.29 per X-ray …………
$15,134
Fixed cost (rounded) …………………………………………
6,529
Total cost ……………………………………………………….
$21,663
Problem 2-14 (45 minutes)
1.
House Of Organs, Inc.
Traditional Income Statement
For the Month Ended November 30
Sales (60 organs × $2,500 per organ) …………….
$150,000
Cost of goods sold
(60 organs × $1,500 per organ) ………………….
90,000
Gross margin …………………………………………….
60,000
Selling and administrative expenses:
Selling expenses:
Advertising …………………………………………..
$ 950
10,800
Utilities ………………………………………………..
Depreciation of sales facilities …………………..
5,000
Administrative expenses:
Depreciation of office equipment ……………….
Total administrative expenses ……………………..
Total selling and administrative expenses …………
41,000
Net operating income ………………………………….
Problem 2-14 (continued)
2.
House Of Organs, Inc.
Contribution Format Income Statement
For the Month Ended November 30
Total
Per Unit
$150,000
$2,500
90,000
1,500
3,600
6,000
40
102,000
950
4,800
650
13,500
900
2,500
700
29,000
$ 19,000
3. Fixed costs remain constant in total but vary on a per unit basis with
changes in the activity level. For example, as the activity level increases,
Problem 2-15 (30 minutes)
1.
a.
6
b.
11
c.
1
4
3
7
2. Without an understanding of the underlying cost behavior patterns, it
would be difficult, if not impossible for a manager to properly analyze
the firm’s cost structure. The reason is that all costs don’t behave in the
Problem 2-16 (20 minutes)
Direct or Indirect
Cost of the
Immunization
Center
Direct or Indirect
Cost of Particular
Patients
Variable or Fixed
with Respect to the
Number of
Immunizations
Administered
Item
Description
Direct
Indirect
Direct
Indirect
Variable
Fixed
a.
The salary of the head nurse in the
Immunization Center …………………………………
X
X
X
b.
Costs of incidental supplies consumed in the
Immunization Center such as paper towels …….
X
X
X
c.
The cost of lighting and heating the
Immunization Center …………………………………
X
X
X
The cost of disposable syringes used in the
Immunization Center …………………………………
X
X
The salary of the Central Area Well-Baby Clinic’s
Information Systems manager …………………….
X
X
X
The costs of mailing letters soliciting donations
to the Central Area Well-Baby Clinic ……………..
X
X
X
The wages of nurses who work in the
Immunization Center* …………………………..…..
X
X
X
Depreciation on the fixtures and equipment in
the Immunization Center …………………………...
X
X
X
Problem 2-17 (30 minutes)
1. Maintenance cost at the 80,000 machine-hour level of activity can be
isolated as follows:
Level of Activity
60,000 MH
80,000 MH
Total factory overhead cost ..
274,000
pesos
312,000
pesos
Deduct:
Rent …………………………...
130,000
130,000
Maintenance cost …………….
pesos
pesos
2. High-low analysis of maintenance cost:
Machine-Hours
Maintenance Cost
High activity level …………..
80,000
62,000
pesos
Low activity level ……………
60,000
54,000
Change observed ……………
20,000
8,000
pesos
54,000
pesos
pesos
Change in cost
Variable cost = Change in activity
Problem 2-17 (continued)
3. Total factory overhead cost at 65,000 machine-hours is:
Indirect materials (65,000 MHs ×
1.50 pesos per MH) …………………..
97,500
pesos
Rent …………………………………………
130,000
Maintenance:
pesos
Total factory overhead cost ……………
283,500
pesos
Problem 2-18 (45 minutes)
1.
Cost of goods sold ………………..
Variable
Shipping expense …………………
Mixed
Advertising expense ……………..
Fixed
Salaries and commissions ………
Mixed
Insurance expense ……………….
Depreciation expense ……………
2. Analysis of the mixed expenses:
Units
Shipping
Expense
Salaries and
Comm. Expense
High level of activity …..
4,500
£56,000
£143,000
Low level of activity ……
3,000
44,000
107,000
Change ……………………
1,500
£12,000
£ 36,000
Variable cost element:
Salaries and
Comm. Expense
Cost at high level of activity …
Less variable cost element:
Fixed cost element …………….
Change in cost
Variable cost per unit = Change in activity
Problem 2-18 (continued)
The cost formulas are:
Shipping expense: £20,000 per month plus £8 per unit or
3.
Frankel Ltd.
Income Statement
For the Month Ended June 30
Sales revenue ……………………………………..
£630,000
Variable expenses:
Cost of goods sold
(4,500 units × £56 per unit) ………………
£252,000
Salaries and commissions expense
(4,500 units × £24 per unit) ………………
Contribution margin ………………………………
Fixed expenses:
Net operating income …………………………...
Shipping expense
Problem 2-19 (45 minutes)
1. High-low method:
Number of
Ingots
Power
Cost
High activity level …………..
130
$6,000
Low activity level ……………
40
2,400
Change ………………………..
90
$3,600
Fixed cost:
Total power cost at high activity level …….
$6,000
Less variable element:
130 ingots × $40 per ingot ……………….
5,200
Fixed cost element …………………………….
$ 800
Therefore, the cost formula is: Y = $800 + $40X.
Problem 2-19 (continued)
3. The high-low estimate of fixed costs is $385.45 lower than the estimate
provided by least-squares regression. The high-low estimate of the
variable cost per unit is $2.18 higher than the estimate provided by
least-squares regression. A straight line that minimized the sum of the
squared errors would intersect the Y-axis at $1,185.45 instead of $800.
It would also have a flatter slope because the estimated variable cost
per unit is lower than the high-low method.
Problem 2-20 (30 minutes)
1. Mr. Richart’s first action was to direct that discretionary expenditures be
delayed until the first of the new year. Providing that these
“discretionary expenditures” can be delayed without hampering
operations, this is a good business decision. By delaying expenditures,
2. The company’s accounting policy with respect to raw materials is
incorrect. Raw materials should be recorded as an asset when delivered
rather than as an expense. If the correct accounting policy were
followed, there would be no reason for Mr. Richart to ask the accounting
Problem 2-21 (45 minutes)
1. Maintenance cost at the 70,000 machine-hour level of activity can be
isolated as follows:
Level of Activity
40,000 MH
70,000 MH
Total factory overhead cost ………….
$170,200
$241,600
Deduct:
*$52,000 ÷ 40,000 MHs = $1.30 per MH
2. High-low analysis of maintenance cost:
Machine-
Hours
Maintenance
Cost
High activity level …………..
70,000
$90,600
Low activity level ……………
40,000
58,200
Change ………………………..
30,000
$32,400
Variable cost per unit of activity:
Problem 2-21 (continued)
3.
Variable Rate per
Machine-Hour
Fixed Cost
Maintenance cost …………..
$1.08
$15,000
Utilities cost ………………….
1.30
Supervisory salaries cost ….
60,000
Totals ………………………….
$2.38
$75,000
Fixed costs ………………………………………………….
Variable costs: $2.38 per MH × 45,000 MHs……….
Total overhead costs ……………………………………..
Problem 2-22 (30 minutes)
Note to the Instructor: Some of the answers below are debatable.
Cost Item
Variable
or Fixed
Selling
Cost
Adminis-
trative
Cost
Manufacturing
(Product) Cost
Direct
Indirect
1.
Depreciation, executive jet ……………………………………..
F
X
2.
Costs of shipping finished goods to customers …………….
V
X
3.
Wood used in manufacturing furniture ………………………
V
X
4.
Sales manager’s salary ………………………………………….
F
X
5.
Electricity used in manufacturing furniture ………………….
V
X
6.
Secretary to the company president ………………………….
F
X
7.
Aerosol attachment placed on a spray can produced by
the company …………………………………………………….
V
X
9.
Packing supplies for shipping products overseas ………….
X
Sand used in manufacturing concrete ……………………….
V
X
F
X
Executive life insurance …………………………………………
F
X
Sales commissions………………………………………………..
V
X
Fringe benefits, assembly line workers ………………………
V
Advertising costs ………………………………………………….
F
X
Property taxes on finished goods warehouses ……………..
F
X
Lubricants for production equipment …………………………
V
X
Problem 2-23 (45 minutes)
1. High-low method:
Units
Sold
Shipping
Expense
High activity level …………..
25,000
$232,000
Low activity level ……………
16,000
160,000
Change ………………………..
9,000
$72,000
$232,000
Less variable element:
Change in cost
Variable cost per unit = Change in activity
Problem 2-23 (continued)
2.
Alden Company
Budgeted Income Statement
For the First Quarter of Year 3
$1,050,000
$420,000
168,000
$ 77,500
Problem 2-24 (45 minutes)
1.
Selling or
Cost Behavior
Administrative
Product Cost
Cost Item
Variable
Fixed
Cost
Direct
Indirect
Direct materials used (wood, glass) …..
$430,000
$430,000
Administrative office salaries ……………
$110,000
$110,000
Factory supervision ………………………..
70,000
$ 70,000
Sales commissions …………………………
60,000
60,000
Depreciation, factory building …………..
Depreciation, admin. office equipment .
Indirect materials, factory ……………….
18,000
Factory labor (cutting and assembly) …
90,000
Advertising …………………………………..
100,000
Insurance, factory ………………………….
Administrative office supplies ……………
Property taxes, factory ……………………
Utilities, factory …………………………....
Total costs …………………………………..
$647,000
$413,000
$276,000
$520,000
Problem 2-24 (continued)
2. The average product cost per bookcase will be:
Direct…………………………….
$520,000
3. The average product cost per bookcase would increase if the production
4. a. Yes, there probably would be a disagreement. The president is likely
to want a price of at least $196, which is the average cost per unit to
manufacture 4,000 bookcases. He may
expect an even higher price