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Transcript of SM Ray H. Garrison 2e
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Chapter 2
Managerial Accounting and Cost
Concepts
Solutions to Questions
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"ol#tions Man#al, Chapter 2 1
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2-1 The three ma$or elements o%pro!#ct costs in a man#%act#ring compan&are !irect materials, !irect la'or, an!man#%act#ring oerhea!.
2-2
a. (irect materials are an integral parto% a )nishe! pro!#ct an! their costs can'e conenientl& trace! to it.
b. In!irect materials are generall&small items o% material s#ch as gl#e an!nails. The& ma& 'e an integral part o% a)nishe! pro!#ct '#t their costs can 'etrace! to the pro!#ct onl& at great cost orinconenience.
c. (irect la'or consists o% la'or coststhat can 'e easil& trace! to partic#lar
pro!#cts. (irect la'or is also calle! *to#chla'or.+
d. In!irect la'or consists o% the la'orcosts o% $anitors, s#perisors, materialshan!lers, an! other %actor& worers thatcannot 'e conenientl& trace! topartic#lar pro!#cts. These la'or costs areinc#rre! to s#pport pro!#ction, '#t theworers inole! !o not !irectl& wor onthe pro!#ct.
e. Man#%act#ring oerhea! incl#!es all
man#%act#ring costs ecept !irectmaterials an! !irect la'or. Conse#entl&,man#%act#ring oerhea! incl#!es in!irectmaterials an! in!irect la'or as well asother man#%act#ring costs.
2-3 A pro!#ct cost is an& cost inole!in p#rchasing or man#%act#ring goo!s. Inthe case o% man#%act#re! goo!s, thesecosts consist o% !irect materials, !irectla'or, an! man#%act#ring oerhea!. Aperio! cost is a cost that is taen !irectl&to the income statement as an epense in
the perio! in which it is inc#rre!.
2-4a. /aria'le cost The aria'le cost per
#nit is constant, '#t total aria'le costchanges in !irect proportion tochanges in ol#me.
'. ie! cost The total )e! cost is
constant within the releant range. The average )e! cost per #nit ariesinersel& with changes in ol#me.
c. Mie! cost A mie! cost contains 'otharia'le an! )e! cost elements.
2-5a. nit )e! costs !ecrease as ol#me
increases.'. nit aria'le costs remain constant as
ol#me increases.c. Total )e! costs remain constant as
ol#me increases.
!. Total aria'le costs increase as ol#meincreases.
2-6a. Cost 'ehaior Cost 'ehaior re%ers to
the wa& in which costs change inresponse to changes in a meas#re o%actiit& s#ch as sales ol#me,pro!#ction ol#me, or or!ersprocesse!.
'. 3eleant range The releant range isthe range o% actiit& within whichass#mptions a'o#t aria'le an! )e!
cost 'ehaior are ali!.
2-7 An actiit& 'ase is a meas#re o%whateer ca#ses the inc#rrence o% aaria'le cost. 4amples o% actiit& 'asesincl#!e #nits pro!#ce!, #nits sol!, letterst&pe!, 'e!s in a hospital, meals sere! ina ca%e, serice calls ma!e, etc.
2- The linear ass#mption isreasona'l& ali! proi!ing that the cost%orm#la is #se! onl& within the releant
range.
2-! A !iscretionar& )e! cost has a%airl& short planning horion6#s#all& a&ear. "#ch costs arise %rom ann#al!ecisions '& management to spen! oncertain )e! cost items, s#ch asa!ertising, research, an! management!eelopment. A committe! )e! cost has
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2 Managerial Acco#nting, 15th e!ition
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a long planning horion6generall& man&&ears. "#ch costs relate to a compan&7sinestment in %acilities, e#ipment, an!'asic organiation. 8nce s#ch costs hae'een inc#rre!, the& are *loce! in+ %orman& &ears.
2-1" 9es. As the anticipate! leel o%actiit& changes, the leel o% )e! costsnee!e! to s#pport operations ma& alsochange. Most )e! costs are a!$#ste!#pwar! an! !ownwar! in large steps,rather than 'eing a'sol#tel& )e! at oneleel %or all ranges o% actiit&.
2-11 The high-low metho! #ses onl& twopoints to !etermine a cost %orm#la. Thesetwo points are liel& to 'e less than t&pical'eca#se the& represent etremes o%
actiit&.
2-12 The %orm#la %or a mie! cost is 9 :a ; '<. In cost anal&sis, the *a+ termrepresents the )e! cost an! the *'+ termrepresents the aria'le cost per #nit o%actiit&.
2-13 The term *least-s#aresregression+ means that the s#m o% thes#ares o% the !eiations %rom the plotte!points on a graph to the regression line issmaller than co#l! 'e o'taine! %rom an&other line that co#l! 'e )tte! to the !ata.
2-14 The contri'#tion approach incomestatement organies costs '& 'ehaior,)rst !e!#cting aria'le epenses to o'taincontri'#tion margin, an! then !e!#cting)e! epenses to o'tain net operatingincome. The tra!itional approachorganies costs '& %#nction, s#ch aspro!#ction, selling, an! a!ministration.=ithin a %#nctional area, )e! an! aria'lecosts are intermingle!.
2-15 The contri'#tion margin is total
sales reen#e less total aria'le epenses.
2-16 A !i>erential cost is a cost that!i>ers 'etween alternaties in a !ecision.An opport#nit& cost is the potential 'ene)tthat is gien #p when one alternatie isselecte! oer another. A s#n cost is acost that has alrea!& 'een inc#rre! an!cannot 'e altere! '& an& !ecision taennow or in the %#t#re.
2-17 ?o, !i>erential costs can 'e eitheraria'le or )e!. or eample, the
alternaties might consist o% p#rchasingone machine rather than another to maea pro!#ct. The !i>erence 'etween the)e! costs o% p#rchasing the twomachines is a !i>erential cost.
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"ol#tions Man#al, Chapter 2 @
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#he $oundational 15
1. (irect materials................................................ B.00
(irect la'[email protected]
/aria'le man#%act#ring oerhea!..................... 1.50
/aria'le man#%act#ring cost per #nit................11.00
/aria'le man#%act#ring cost per #nitaD...................................................................
11.00
?#m'er o% #nits pro!#ce! 'D..........................10,000
Total aria'le man#%act#ring cost aD E'D..................................................................
110,000
Aerage )e! man#%act#ring oerhea!per #nit cD.....................................................F.00
?#m'er o% #nits pro!#ce! !D..........................10,000
Total )e! man#%act#ring cost cD E !D............ F0,00
0
Total pro!#ct man#%act#ringD cost...................150,00
0
?ote The aerage )e! man#%act#ring oerhea! cost per #nito% F.00 is ali! %or onl& one leel o% actiit&610,000 #nitspro!#ce!.
2. "ales commissions............................................1.00
/aria'le a!ministratie epense....................... 0.50
/aria'le selling an! a!ministratie per#nit.................................................................
1.50
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/aria'le selling an! a!min. per #nit aD.............1.50
?#m'er o% #nits sol! 'D..................................10,000
Total aria'le selling an! a!min.epense aD E 'D....................................................... 15,000
Aerage )e! selling an!a!ministratie epense per #nit @)e! selling ; 2 )e! a!min.D cD................5.00
?#m'er o% #nits sol! !D..................................10,000
Total )e! selling an! a!ministratieepense cD E !D............................................ 5 0,000
Total perio! nonman#%act#ringD cost................ B5,000
?ote The aerage )e! selling an! a!ministratie epense per#nit o% 5.00 is ali! %or onl& one leel o% actiit&610,000 #nitssol!.
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#he $oundational 15 %continued&
@. (irect materials................................................ B.00
(irect la'[email protected]
/aria'le man#%act#ring oerhea!..................... 1.50
"ales commissions............................................1.00
/aria'le a!ministratie epense....................... 0.50
/aria'le cost per #nit sol!.................................12.50
F. (irect materials................................................ B.00
(irect la'[email protected]
/aria'le man#%act#ring oerhea!..................... 1.50
"ales commissions............................................1.00
/aria'le a!ministratie epense....................... 0.50
/aria'le cost per #nit sol!.................................12.50
5. /aria'le cost per #nit sol! aD...........................12.50
?#m'er o% #nits sol! 'D...................................,000
Total aria'le costs aD E 'D............................. 100,00
0
B. /aria'le cost per #nit sol! aD...........................12.50
?#m'er o% #nits sol! 'D...................................12,500
Total aria'le costs aD E 'D............................. 15B,25
0
.
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"ol#tions Man#al, Chapter 2 B
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Total )e! man#%act#ring costsee re#irement 1D aD...................................F0,000
?#m'er o% #nits pro!#ce! 'D...........................,000
Aerage )e! man#%act#ring costper #nit pro!#ce! aD 'D.............................5.00
. Total )e! man#%act#ring cost
see re#irement 1D aD...................................F0,000
?#m'er o% #nits pro!#ce! 'D...........................12,500
Aerage )e! man#%act#ring costper #nit pro!#ce! aD '[email protected]
J. Total )e! man#%act#ring cost
see re#irement 1D........................................F0,000
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#he $oundational 15 %continued&
10. Total )e! man#%act#ring cost
see re#irement 1D........................................ F0,000
11./aria'le oerhea! per #nit aD...........................1.50
?#m'er o% #nits pro!#ce! 'D..........................,000
Total aria'le oerhea! cost aD E 'D............... 12,000
Total )e! oerhea! see re#irement1D.................................................................... F0,000
Total man#%act#ring oerhea! cost................... 52,000
Total man#%act#ring oerhea! cost aD......... 52,000
?#m'er o% #nits pro!#ce! 'D...................... ,000
Man#%act#ring oerhea! per #nit aD 'D.................................................................. B.50
12./aria'le oerhea! per #nit aD...........................1.50
?#m'er o% #nits pro!#ce! 'D..........................12,500
Total aria'le oerhea! cost aD E 'D............... 1,50
Total )e! oerhea! see re#irement1D.................................................................... F0,000
Total man#%act#ring oerhea! cost................... 5,50
Total man#%act#ring oerhea! cost aD......... 5,50
?#m'er o% #nits pro!#ce! 'D...................... 12,500
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Man#%act#ring oerhea! per #nit aD 'D.................................................................. F.0
1@."elling price per #nit......................................... 22.00
/aria'le cost per #nit sol!see re#irement FD........................................ 12.50
Contri'#tion margin per #nit............................. J. 50
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#he $oundational 15 %continued&
1F.(irect materials per #nit...................................B.00
(irect la'or per #nit......................................... @.50
(irect man#%act#ring cost per #nit aD..............J.50
?#m'er o% #nits pro!#ce! 'D...........................11,000
Total !irect man#%act#ring cost aD E'D..................................................................
10F,500
/aria'le oerhea! per #nit aD......................1.50
?#m'er o% #nits pro!#ce! 'D..................... 11,00
0
Total aria'le oerhea! cost aD E 'D..........1B,50
0
Total )e! oerhea! see re#irement1D....................................................................
F0,000
Total in!irect man#%act#ring cost.................5B,50
0
15.(irect materials per #nit................................... B.00
(irect la'or per #nit......................................... @.50
/aria'le man#%act#ring oerhea! per#nit.................................................................
1 .50
Incremental cost per #nit pro!#ce!.................. 11.00
?ote /aria'le selling an! a!ministratie epenses are aria'lewith respect to the n#m'er o% #nits sol!, not the n#m'er o%#nits pro!#ce!.
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'(ercise 2-1 15 min#tesD
Cost Cost Object
Direct
Cost
Indirec
t Cost
1.
The wages o%pe!iatric n#rses
The pe!iatric!epartment <
2.
Krescription !r#gs A partic#lar patient<
@.
Heating the hospital The pe!iatric!epartment <
F.
The salar& o% thehea! o% pe!iatrics
The pe!iatric!epartment <
5.
The salar& o% thehea! o% pe!iatrics
A partic#lar pe!iatricpatient <
B.
Hospital chaplain7ssalar&
A partic#lar patient<
.
La' tests '& o#tsi!econtractor
A partic#lar patient<
.
La' tests '& o#tsi!econtractor
A partic#lar!epartment <
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'(ercise 2-2 10 min#tesD
1. The cost o% a har! !rie installe! in a comp#ter !irectmaterials.
2. The cost o% a!ertising in the Puget Sound Computer User newspaper selling.
@. The wages o% emplo&ees who assem'le comp#ters %romcomponents !irect la'or.
F. "ales commissions pai! to the compan&7s salespeople selling.
5. The wages o% the assem'l& shop7s s#perisor man#%act#ringoerhea!.
B. The wages o% the compan&7s acco#ntant a!ministratie.
. (epreciation on e#ipment #se! to test assem'le! comp#ters'e%ore release to c#stomers man#%act#ring oerhea!.
. 3ent on the %acilit& in the in!#strial par a com'ination o%man#%act#ring oerhea!, selling, an! a!ministratie. The rentwo#l! most liel& 'e prorate! on the 'asis o% the amo#nt o%space occ#pie! '& man#%act#ring, selling, an! a!ministratieoperations.
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'(ercise 2-3 15 min#tesD
Product Cost
Period
Cost
1. (epreciation on salespersons7 cars................ <
2. 3ent on e#ipment #se! in the %actor&.......... <
@. L#'ricants #se! %or machine maintenance..... <
F. "alaries o% personnel who wor in the)nishe! goo!s wareho#se........................... <
5. "oap an! paper towels #se! '& %actor&
worers at the en! o% a shi%t........................ <
B. actor& s#perisors7 salaries.......................... <
. Heat, water, an! power cons#me! in the%actor&......................................................... <
. Materials #se! %or 'oing pro!#cts %orshipment oerseas #nits are not normall&'oe!D......................................................... <
J. A!ertising costs............................................ <
10. =orers7 compensation ins#rance %or %actor&emplo&ees................................................... <
11. (epreciation on chairs an! ta'les in the%actor& l#nchroom........................................ <
12. The wages o% the receptionist in thea!ministratie oces.................................. <
1@. Cost o% leasing the corporate $et #se! '& thecompan&Ns eec#ties.................................. <
1F. The cost o% renting rooms at a lori!a resort%or the ann#al sales con%erence................... <
15. The cost o% pacaging the compan&7s pro!#ct <
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'(ercise 2-4 15 min#tesD
1.
Cups of Coee Served in a Week
2, 2,! 2,2
ie! cost............................. 1,200 1,200 1,200
/aria'le cost........................ FF0 FB2 FF
Total cost.............................. 1,BF0 1,BB2 1,BF
Aerage cost per c#p sere!
O
0.20 0.J1 0.B
5
O Total cost c#ps o% co>ee sere! in a wee
2. The aerage cost o% a c#p o% co>ee !eclines as the n#m'er o%c#ps o% co>ee sere! increases 'eca#se the )e! cost issprea! oer more c#ps o% co>ee.
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'(ercise 2-5 20 min#tesD
1. Occupanc "#Da"s
$%ectrica%Costs
High actiit& leelA#g#stD........................ 2,F0B 5,1F
Low actiit& leel8cto'erD...................... 12F 1,5
Change........................... 2,22 @,5B0
/aria'le cost : Change in cost Change in actiit&
: @,5B0 2,22 occ#panc&-!a&s
: 1.5B per occ#panc&-!a&
Total cost A#g#stD.............................................. 5,1F
/aria'le cost element1.5B per occ#panc&-!a& E 2,F0B occ#panc&-!a&sD................................................................ @,5@
ie! cost element.............................................. 1,@J5
2. 4lectrical costs ma& rePect seasonal %actors other than $#st theariation in occ#panc& !a&s. or eample, common areas s#chas the reception area m#st 'e lighte! %or longer perio!s !#ringthe winter than in the s#mmer. This will res#lt in seasonalP#ct#ations in the )e! electrical costs.
A!!itionall&, )e! costs will 'e a>ecte! '& the n#m'er o%
!a&s in a month. In other wor!s, costs lie the costs o% lightingcommon areas are aria'le with respect to the n#m'er o% !a&sin the month, '#t are )e! with respect to how man& rooms areocc#pie! !#ring the month.
8ther, less s&stematic, %actors ma& also a>ect electricalcosts s#ch as the %r#galit& o% in!ii!#al g#ests. "ome g#estswill t#rn o> lights when the& leae a room. 8thers will not.
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'(ercise 2-6 15 min#tesD
1. Tra!itional income statement
Cheroee, Inc.
Tra!itional Income "tatement
"ales @0 per #nit E 20,000 #nitsD............B00,00
0
Cost o% goo!s sol!
2F,000 ; 10,000 Q FF,000D.............. 1B0,000Gross margin............................................... FF0,000
"elling an! a!ministratie epenses
"elling epensesF per #nit E 20,000 #nitsD ; F0,000D.............................................................. 120,000
A!ministratie epenses
2 per #nit E 20,000 #nitsD ; @0,000D.............................................................. 0,000 1J0,000
?et operating income.................................250,00
0
2. Contri'#tion %ormat income statement
Cheroee, Inc.Contri'#tion ormat Income "tatement
"ales...........................................................B00,00
0
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/aria'le epenses
Cost o% goo!s sol!2F,000 ; 10,000 Q FF,000D...........
1B0,000
"elling epenses F per #nit E 20,000#nitsD...................................................... 0,000
A!ministratie epenses2 per #nit E 20,000 #nitsD................... F0,000 20,000
Contri'#tion margin.................................... @20,000
ie! epenses
"elling epenses....................................... F0,000
A!ministratie epenses........................... @0,000 0,000
?et operating income.................................250,00
0
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'(ercise 2-7 15 min#tesD
ItemDierenti
a% Cost Opportunit
" Cost Sunk Cost
1.
Cost o% the ol! <-ra&machine............................. <
2. The salar& o% the hea! o% the
3a!iolog& (epartment.......
@. The salar& o% the hea! o% the
Ke!iatrics (epartment........
F.
Cost o% the new color laserprinter................................ <
5.
3ent on the space occ#pie!'& 3a!iolog&......................
B. The cost o% maintaining the
ol! machine....................... <
.
Rene)ts %rom a new (?Aanal&er............................. <
.
Cost o% electricit& to r#n the
<-ra& machines.................. <
?ote The costs o% the salaries o% the hea! o% the 3a!iolog&
(epartment an! Ke!iatrics (epartment an! the rent on the space
occ#pie! '& 3a!iolog& are neither !i>erential costs, nor
opport#nit& costs, nor s#n costs. These costs !o not !i>er
'etween the alternaties an! there%ore are irreleant in the
!ecision, '#t the& are not s#n costs 'eca#se the& occ#r in the%#t#re.
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'(ercise 2- 20 min#tesD
1.&i%ometer s Driven
'ota% (nnua%
Cost)
High leel o% actiit&................... 105,000 11,J0
Low leel o% actiit&.................... 0,000 J,@0
Change....................................... @5,000 2,5J0
105,000 ilometers E 0.11F per ilometer :11,J0
0,000 ilometers E 0.1@F per ilometer :J,@0
/aria'le cost per ilometer
Change in cost A2,5J0: :A0.0F per ilometer
Change in actiit& @5,000 ilometers
ie! cost per &ear
Total cost at 105,000 ilometers.............. 11,J0
Less aria'le portion105,000 ilometers E 0.0F perilometer.............................................. ,0
ie! cost per &ear.................................. F,200
2. 9 : F,200 ; 0.0F<
@. ie! cost.................................................... F,200
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/aria'le cost0,000 ilometers E 0.0F perilometer.................................................. 5,J20
Total ann#al cost......................................... 10,120
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'(ercise 2-! 10 min#tesD
1. Kro!#ct costs
(irect materials....................... 0,000
(irect la'or............................. F2,000
Man#%act#ring oerhea!......... 1J,000
Total pro!#ct costs.................. 1F1,000
2. Kerio! costs
"elling epenses..................... 22,000
A!ministratie epenses......... @5,000
Total perio! costs.................... 5,000
@. Conersion costs
(irect la'or............................. F2,000
Man#%act#ring oerhea!......... 1J,000
Total conersion costs............. B1,000
F. Krime costs
(irect materials....................... 0,000
(irect la'or............................. F2,000
Total prime costs..................... 122,000
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'(ercise 2-1" 20 min#tesD
1. The compan&7s aria'le cost per #nit is
A1G0,000:AB per #nit.
@0,000 #nits
In accor!ance with the 'ehaior o% aria'le an! )e! costs, thecomplete! sche!#le is
Units produced and so%d
*, +, ,
Total costs
/aria'le costs.........10,00
0 2F0,000@00,00
0
ie! costs.............. @00,000 @00,000 @00,000
Total costs...............F0,00
0 5F0,000B00,00
0
Cost per #nit/aria'le cost........... B.00 B.00 B.00
ie! cost................ 10.00 .50 B.00
Total cost per #nit.. . 1B.00 [email protected] 12.00
2. The compan&7s income statement in the contri'#tion %ormat is
"ales F5,000 #nits E 1B per #nitD................ 20,000
/aria'le epenses F5,000 #nits E B per#nitD.............................................................. 20,000
Contri'#tion margin........................................ F50,000
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ie! epense................................................. @00,000
?et operating income..................................... 150,000
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'(ercise 2-11 F5 min#tesD
1. The scattergraph appears 'elow
1 2 @ F 5 B J0
500
1,000
1,500
2,000
2,500
@,000
)nits Shipped
Shipping '(pense
9es, there is an approimatel& linear relationship 'etween the
n#m'er o% #nits shippe! an! the total shipping epense.
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'(ercise 2-11 contin#e!D
2. The high-low estimates an! cost %orm#la are comp#te! as
%ollows
UnitsS-ipped
S-ipping$.pense
High actiit& leel #neD. 2,00
Low actiit& leel #l&D. . . 2 1,200
Change........................... B 1,500
/aria'le cost element
Change in epense A1,500: :A250 per #nit.
Change in actiit& B #nits
ie! cost element
"hipping epense at high actiit& leel............. 2,00
Less aria'le cost element 250 per #nit E #nitsD.............................................................. 2,000
Total )e! cost.................................................. 00
The cost %orm#la is 00 per month pl#s 250 per #nit shippe!or
Y = $700 + $250X,
where < is the n#m'er o% #nits shippe!.
The scattergraph on the %ollowing page shows the straight line
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!rawn thro#gh the high an! low !ata points.
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'(ercise 2-11 contin#e!D
1 2 @ F 5 B J0
500
1,000
1,500
2,000
2,500
@,000
)nits Shipped
Shipping '(pense
@. The high-low estimate o% )e! costs is 210.1 lower than theestimate proi!e! '& least-s#ares regression. The high-lowestimate o% the aria'le cost per #nit is @2.1F higher than theestimate proi!e! '& least-s#ares regression. A straight linethat minimie! the s#m o% the s#are! errors wo#l! intersectthe 9-ais at J10.1 instea! o% 00. It wo#l! also hae a
Patter slope 'eca#se the estimate! aria'le cost per #nit islower than the high-low metho!.
F. The cost o% shipping #nits is liel& to !epen! on the weight an!ol#me o% the #nits shippe! an! the !istance traele! as wellas on the n#m'er o% #nits shippe!. In a!!ition, higher cost
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shipping might 'e necessar& to meet a !ea!line.
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'(ercise 2-12 @0 min#tesD
Product Cost
Period/Se%%in
g
0ame of t-e Cost 1ariab%e Cost
i.e
dCost
Direct
3ateria%s
Direc
t 4abor
3anu#facturing
Over-ead
and
(dmin 5 Cost
Oppor #
tunit" Cost
Sun
k Cost
3ental reen#e %orgone,@0,000 per &ear................... <
(irect materials cost, 0 per#nit........................................ < <
3ental cost o% wareho#se,500 per month..................... < <
3ental cost o% e#ipment,
F,000 per month.................. < <(irect la'or cost, B0 per #nit.. < <
(epreciation o% the annespace, ,000 per &ear.......... < < <
A!ertising cost, 50,000 per&ear....................................... < <
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"#perisorNs salar&, 1,500per month.............................. < <
4lectricit& %or machines, 1.20per #nit.................................. < <
"hipping cost, J per #nit........ < <
3et#rn earne! oninestments, @,000 per&ear....................................... <
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'(ercise 2-13 20 min#tesD
1. Tra!itional income statement
The Alpine Ho#se, Inc.
Tra!itional Income "tatement
"ales...........................................................150,00
0
Cost o% goo!s sol!
@0,000 ; 100,000 Q F0,000D.............. J0,000Gross margin............................................... B0,000
"elling an! a!ministratie epenses
"elling epenses 50 per #nit E 200 pairso% sisOD ; 20,000D............................... @0,000
A!ministratie epenses 10 per #nit E200 pairs o% sisD ; 20,000D................. 22,000 52,000
?et operating income................................. ,000
O150,000 sales 50 per pair o% sis : 200 pairs o% sis.
2. Contri'#tion %ormat income statement
The Alpine Ho#se, Inc.
Contri'#tion ormat Income "tatement
"ales...........................................................150,00
0
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/aria'le epenses
Cost o% goo!s sol!@0,000 ; 100,000 Q F0,000D........... J0,000
"elling epenses50 per #nit E 200 pairs o% sisD........... 10,000
A!ministratie epenses10 per #nit E 200 pairs o% sisD........... 2,000 102,000
Contri'#tion margin.................................... F,000
ie! epenses
"elling epenses....................................... 20,000
A!ministratie epenses........................... 20,000 F0,000
?et operating income................................. ,000
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'(ercise 2-13 contin#e!D
2. "ince 200 pairs o% sis were sol! an! the contri'#tion margin
totale! F,000 %or the #arter, the contri'#tion o% each pair o% sis towar! )e! epenses an! pro)ts was 2F0 F,000 200 pair o% sis : 2F0 per pair o% sisD.
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'(ercise 2-14 @0 min#tesD
1.6uest
#
Da"s
Custodia%
Supp%ies
$.pense
High actiit& leel #l&D.......... 12,000 1@,500
Low actiit& leel MarchD....... F,000 ,500
Change................................... ,000 B,000
/aria'le cost per g#est-!a&
Change in epense AB,000: :A0.H5 per g#est-!a&Change in actiit& G,000 g#est-!a&s
ie! cost per month
C#sto!ial s#pplies epense at high actiit&leel............................................................ 1@,500
Less aria'le cost element
12,000 g#est-!a&s E 0.5 per g#est-!a&. . J,000
Total )e! cost.............................................. F,500
The cost %orm#la is F,500 per month pl#s 0.5 per g#est-!a&or
Y = $4,500 + $0.75X
2. C#sto!ial s#pplies epense %or 11,000 g#est-!a&s
/aria'le cost11,000 g#est-!a&s E 0.5 perg#est-!a&........................................... ,250
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ie! cost.............................................. F,500
Total cost............................................... 12,50
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'(ercise 2-14 contin#e!D
@. The scattergraph appears 'elow.
F. The high-low estimate o% )e! costs is 52B.J0 higher than theestimate proi!e! '& least-s#ares regression. The high-lowestimate o% the aria'le cost per #nit is 0.02 lower than theestimate proi!e! '& least-s#ares regression. A straight linethat minimie! the s#m o% the s#are! errors wo#l! intersectthe 9-ais at @,[email protected] instea! o% F,500. It wo#l! also hae asteeper slope 'eca#se the estimate! aria'le cost per #nit is
higher than the high-low metho!.
5. 4pecte! c#sto!ial s#pplies epense %or 11,000 g#est-!a&s
/aria'le cost 11,000 g#est-!a&s E 0. per ,F0.0
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!a&................................................................. 0
ie! cost.......................................................... @,[email protected]
Total cost...........................................................
0
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'(ercise 2-15 15 min#tesD
Se%%ing and
Cost 7e-avior
(dministrati
ve
Produc
t
Cost Item 1ariab%e i.ed Cost Cost
1. Ham'#rger '#ns ata =en!&7s o#tlet. . < <
2. A!ertising '& a!ental oce......... < <
@. Apples processe!
an! canne! '& (elMonte................... < <
F. "hipping canne!apples %rom a (elMonte plant toc#stomers............ < <
5. Ins#rance on aRa#sch U Lom'
%actor& pro!#cingcontact lenses...... < <
B. Ins#rance on IRM7scorporatehea!#arters........ < <
. "alar& o% as#perisoroerseeingpro!#ction o%printers atHewlett-Kacar!.. . < <
. Commissions pai!to a#tomo'ilesalespersons........ < <
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J. (epreciation o%%actor& l#nchroom%acilities at aGeneral 4lectricplant..................... < <
10."teering wheels
installe! in RM=s. < <
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*roble+ 2-16 F5 min#tesD
1. Cost o% goo!s sol!.............../aria'le
A!ertising epense............ ie!
"hipping epense................ Mie!
"alaries an! commissions...Mie!
Ins#rance epense..............ie!
(epreciation epense......... ie!
2. Anal&sis o% the mie! epenses
UnitsS-ipping$.pense
Sa%aries andCommissions
$.pense
High leel o% actiit&.. 5,000 @,000 J0,000
Low leel o% actiit&... F,000 @F,000 ,000
Change...................... 1,000 F,000 12,000
/aria'le cost element
Change in cost/aria'le rate :
Change in actiit&
AF,000"hipping epense : AF per #nit
1,000 #nits
A12,000"alaries an! commissions epense : A12 per #nit1,000 #nits
ie! cost element
S-ipping Sa%aries and
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$.penseCommissions
$.pense
Cost at high leel o%actiit&............................ @,000 J0,000
Less aria'le costelement
5,000 #nits E F per#nit............................... 20,000
5,000 #nits E 12 per#nit............................... B0,000
ie! cost element............. 1,000 @0,000
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*roble+ 2-16 contin#e!D
The cost %orm#las are
"hipping epense
1,000 per month pl#s F per #nit
or
9 : 1,000 ; F<
"alaries an! commissions epense
@0,000 per month pl#s 12 per #nit
or
9 : @0,000 ; 12<
@.
Morrise& U Rrown, Lt!.
Income "tatement
or the Month 4n!e! "eptem'er @0
"ales 5,000 #nits E 100 per #nitD... . 500,000
/aria'le epenses
Cost o% goo!s sol!5,000 #nits E B0 per #nitD.......... @00,000
"hipping epense5,000 #nits E F per #nitD............. 20,000
"alaries an! commissions epense5,000 #nits E 12 per #nitD........... B0,000 @0,000
Contri'#tion margin............................ 120,000
ie! epenses
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A!ertising epense......................... 21,000
"hipping epense............................. 1,000
"alaries an! commissions epense. . @0,000
Ins#rance epense............................ B,000
(epreciation epense....................... 15,000 J0,000
?et operating income......................... @0,000
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*roble+ 2-17 @0 min#tesD
1. Maintenance cost at the 5,000 !irect la'or-ho#r leel o%actiit& can 'e isolate! as %ollows
4eve% of (ctivit"
,D48s
9,D48s
Total %actor& oerhea! cost...........1F,250,00
0 1,B25,000
(e!#ct
In!irect materials V 100 per(LHO......................................... 5,000,000 ,500,000
3ent............................................ B,000,000 B,000,000
Maintenance cost.......................... @,250,000 F,125,000
O 5,000,000 50,000 (LHs : 100 per (LH
2. High-low anal&sis o% maintenance cost
Direct 4abor#8ours
3aintenanceCost
High leel o% actiit&. . . 5,000 F,125,000
Low leel o% actiit&. . .. 50,000 @,250,000
Change........................ 25,000 5,000
/aria'le cost element
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Change in cost AG5,000: :A@5 per (LH
Change in actiit& 25,000 (LH
ie! cost element
Total cost at the high leel o% actiit&.......... F,125,000
Less aria'le cost element5,000 (LHs E @5 per (LHD.................. 2,B25,000
ie! cost element...................................... 1,500,000
There%ore, the cost %orm#la %or maintenance is 1,500,000 per
&ear pl#s @5 per !irect la'or-ho#r orY = $1,500,000 + $35X
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*roble+ 2-17 contin#e!D
@. Total %actor& oerhea! cost at 0,000 !irect la'or-ho#rs is
In!irect materials0,000 (LHs E 100 per (LHD.... ..
,000,000
3ent.................................................. B,000,000
Maintenance
/aria'le cost element0,000 (LHs E @5 per (LHD......
2,F50,000
ie! cost element......................... 1,500,000
@,J50,00
0
Total %actor& oerhea! cost...............1B,J50,00
0
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*roble+ 2-1 20 min#tesD
Direct or Indirect Cost of t-e 3ea%s#On#
W-ee%s
Program
Direct or Indirect Cost of
Particu%ar Seniors Servedb" t-e 3ea%s#
On#W-ee%s
Program
1ariab%e or i.ed:it- ;espect tot-e 0umber of Seniors Served
b" t-e 3ea%s#On#
W-ee%s Program
Item Description Direct Indirect Direct Indirect 1ariab%
e i.ed
a. The cost o% leasing the Meals-8n-=heels
an........................................................... < < <
'. The cost o% inci!ental s#pplies s#ch as salt,
pepper, napins, an! so on...................... < <O <
c. The cost o% gasoline cons#me! '& the
Meals-8n-=heels an............................... < < <
!. The rent on the %acilit& that ho#ses
Ma!ison "eniors Care Center, incl#!ing
the Meals-8n-=heels program................. < <O <
e. The salar& o% the part-time manager o% the
Meals-8n-=heels program....................... < < <
%. (epreciation on the itchen e#ipment
#se! in the Meals-8n-=heels program..... < < <
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g. The ho#rl& wages o% the caregier who
!ries the an an! !eliers the meals..... < < <
h. The costs o% compl&ing with health sa%et&
reg#lations in the itchen......................... < < <
i. The costs o% mailing letters soliciting
!onations to the Meals-8n-=heels
program.................................................... < < <
OThese costs co#l! 'e !irect costs o% sering partic#lar seniors.
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*roble+ 2-1! F5 min#tesD
1. Marwic7s Kianos, Inc. Tra!itional Income "tatement
or the Month o% A#g#st
"ales F0 pianos E @,125 per pianoD.......125,00
0
Cost o% goo!s sol!F0 pianos E 2,F50 per pianoD..............
J,000
Gross margin............................................. 2,000
"elling an! a!ministratie epenses
"elling epenses
A!ertising........................................... 00
"ales salaries an! commissionsWJ50 ; X E 125,000DY................ 10,J50
(elier& o% pianosF0 pianos E @0 per pianoD.............. 1,200
tilities................................................. @50(epreciation o% sales %acilities.............. 00
Total selling epenses............................. 1F,000
A!ministratie epenses
4ec#tie salaries................................ 2,500
Ins#rance............................................. F00
ClericalW1,000 ; F0 pianos E 20 perpianoDY............................................... 1,00
(epreciation o% oce e#ipment......... @00
Total a!ministratie epenses................ 5,000
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Total selling an! a!ministratie epenses. 1J,00
0
?et operating income...............................
,000
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*roble+ 2-1! contin#e!D
2. Marwic7s Kianos, Inc.Contri'#tion ormat Income "tatement
or the Month o% A#g#st
'ota%Per
Piano
"ales F0 pianos E @,125 per pianoD......... 125,000 @,125
/aria'le epenses
Cost o% goo!s sol!F0 pianos E 2,F50 per pianoD.............. J,000 2,F50
"ales commissions X E 125,000D........ 10,000 250
(elier& o% pianos F0 pianos E @0 perpianoD..................................................... 1,200 @0
Clerical F0 pianos E 20 per pianoD........ 00 20
Total aria'le epenses............................... 110,000 2,50
Contri'#tion margin.................................... 15,000 @5
ie! epenses
A!ertising............................................... 00
"ales salaries............................................ J50
tilities..................................................... @50
(epreciation o% sales %acilities.................. 00
4ec#tie salaries..................................... 2,500
Ins#rance.................................................. F00
Clerical..................................................... 1,000
(epreciation o% oce e#ipment.............. @00
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Total )e! epenses.................................... ,000
?et operating income................................. ,000
@. ie! costs remain constant in total '#t ar& on a per #nit 'asisinersel& with changes in the actiit& leel. As the actiit& leelincreases, %or eample, the )e! costs will !ecrease on a per#nit 'asis. "howing )e! costs on a per #nit 'asis on theincome statement might mislea! management into thiningthat the )e! costs 'ehae in the same wa& as the aria'lecosts. That is, management might 'e misle! into thining thatthe per #nit )e! costs wo#l! 'e the same regar!less o% howman& pianos were sol! !#ring the month. or this reason, )e!
costs generall& are shown onl& in totals on a contri'#tion%ormat income statement.
*roble+ 2-2" F5 min#tesD
1. Maintenance cost at the J0,000 machine-ho#r leel o% actiit&can 'e isolate! as %ollows
4eve% of (ctivit"
<, 38s=,
38s
Total %actor& oerhea! cost. .. 1F,000 2FB,000
(e!#ct
tilities cost V 0.0 perMHO.................................. F,000 2,000
"#perisor& salaries............ 21,000 21,000
Maintenance cost.................. 105,000 15@,000
OF,000 B0,000 MHs : 0.0 per MH
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2. High-low anal&sis o% maintenance cost
3ac-ine#8ours 3aintenance Cost
High actiit& leel............... J0,000 15@,000
Low actiit& leel................ B0,000 105,000
Change................................ @0,000 F,000
/aria'le rate
Change in cost AFG,000: : A1.B0 per MH
Change in actiit& @0,000 MHs
Total )e! cost
Total maintenance cost at the high actiit&leel..........................................................
15@,000
Less aria'le cost elementJ0,000 MHs E 1.B0 per MHD................... 1FF,000
ie! cost element...................................... J,000
There%ore, the cost %orm#la %or maintenance is J,000 permonth pl#s 1.B0 per machine-ho#r or
Y = $9,000 + $1.60X.
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*roble+ 2-2" contin#e!D
@. 1ariab%e Cost per 3ac-ine#
8our i.edCost
tilities cost................ 0.0
"#perisor& salariescost.......................... 21,000
Maintenance cost........ 1.B0 J,000
Total oerhea! cost..... 2.F0 @0,000
Th#s, the cost %orm#la wo#l! 'e 9 : @0,000 ; 2.F0<.
F. Total oerhea! cost at an actiit& leel o% 5,000 machine-ho#rs
ie! costs............................................ @0,000
/aria'le costs 5,000 MHs E 2.F0
per MH................................................ 10,000
Total oerhea! costs............................. 210,000
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*roble+ 2-21 @0 min#tesD
?ote to the Instr#ctor There ma& 'e some eceptions to the answers 'elow. The p#rpose o% this pro'lem is to get the st#!ent to start t-inking a'o#t cost 'ehaior an! cost p#rposesZtr& to aoi! length& !isc#ssions a'o#t how a partic#lar cost is classi)e!.
1ariab%eor Se%%ing
(dministrativ e
3anufacturing
/Product5Cost
Cost Item i.ed Cost Cost Direc
t Indirect
1. Kropert& taes, %actor&.......................... <
2. Roes #se! %or pacaging !etergentpro!#ce! '& the compan&.................. / <
@. "alespersons7 commissions................... / <F. "#perisor7s salar&, %actor&................... <
5. (epreciation, eec#tie a#tos............... <
B. =ages o% worers assem'lingcomp#ters.......................................... / <
. Ins#rance, )nishe! goo!s wareho#ses.. <
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. L#'ricants %or pro!#ction e#ipment.... / <
J. A!ertising costs................................... <
10. Microchips #se! in pro!#cingcalc#lators.......................................... / <
11. "hipping costs on merchan!ise sol!..... / <
12. Magaine s#'scriptions, %actor&l#nchroom.......................................... <
1@. Threa! in a garment %actor&................. / <
1F. Rilling costs........................................... / <O
15. 4ec#tie li%e ins#rance........................ <
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*roble+ 2-21 contin#e!D
1ariab%eor Se%%ing
(dministrativ e
3anufacturing
/Product5Cost
Cost Item i.ed Cost Cost Direc
t Indirect
1B. In #se! in tet'oo pro!#ction............ / <
1. ringe 'ene)ts, assem'l&-line worers. / <OO
1. 9arn #se! in sweater pro!#ction........... / <
1J. =ages o% receptionist, eec#tieoces................................................. <
* Could be administati!e "ost.
** Could be indie"t "ost.
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*roble+ 2-22 F5 min#tesD
1. High-low metho!
0umber of
Scans
Uti%itiesCost
High leel o%actiit&................ 150 F,000
Low leel o%actiit&................ B0 2,200
Change.................. J0 1,00
Change in cost A1,G00/aria'le rate : :A20 per scan
Change in actiit& J0 scans
ie! costTotal cost at high leel o% actiit&..... F,000
Less aria'le element150 scans E 20 per scan............. @,000
ie! cost element........................... 1,000
There%ore, the cost %orm#la is 9 : 1,000 ; 20<.
2. The scattergraph plot appears as %ollows
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*roble+ 2-22 contin#e!D
@. The high-low estimate o% )e! costs is 10.J0 lower than theestimate proi!e! '& least-s#ares regression. The high-lowestimate o% the aria'le cost per #nit is 1.2 higher than the
estimate proi!e! '& least-s#ares regression. A straight linethat minimie! the s#m o% the s#are! errors wo#l! intersectthe 9-ais at 1,10.J0 instea! o% 1,000. It wo#l! also hae aPatter slope 'eca#se the estimate! aria'le cost per #nit islower than the high-low metho!.
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*roble+ 2-23 F5 min#tesD
1. High-low metho!
Units
So%d
S-ipping
$.pense
High actiit& leel......... 20,000210,00
0
Low actiit& leel.......... 10,000
11J,00
0Change.......................... 10,000 J1,000
Change in cost/aria'le cost per #nit :
Change in actiit&
AJ1,000: : AJ.10 per #nit
10,000 #nits
#ied "ost element%
Total shipping epense at highactiit& leel....................................
210,000
Less aria'le element
20,000 #nits E J.10 per #nit.......... 12,00
0
ie! cost element............................. 2,000
There%ore, the cost %orm#la is 9 : 2,000 ; J.10<.
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*roble+ 2-23 contin#e!D
2. Mil!en Compan&R#!gete! Contri'#tion ormat Income "tatement
or the irst [#arter, 9ear @
"ales 12,000 #nits E 100 per #nitD.. ..1,200,00
0
/aria'le epenses
Cost o% goo!s sol!12,000 #nits E @5 #nitD.................
F20,000
"ales commission BX E
1,200,000D..................................... 2,000
"hipping epense12,000 #nits E J.10 per #nitD........ 10J,200
Total aria'le epenses......................... B01,20
0
Contri'#tion margin.............................. 5J,00
ie! epenses
A!ertising epense........................... 210,000
"hipping epense............................... 2,000
A!ministratie salaries....................... 1F5,000
Ins#rance epense.............................. J,000
(epreciation epense......................... B,000
Total )e! epenses.............................. FB,00
0
?et operating income........................... 1@0,0
0
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*roble+ 2-24 @0 min#tesD
1. A cost that is classi)e! as a perio! cost will 'e recognie! onthe income statement as an epense in the c#rrent perio!. Acost that is classi)e! as a pro!#ct cost will 'e recognie! on
the income statement as an epense i.e., cost o% goo!s sol!Donl& when the associate! #nits o% pro!#ct are sol!. I% some#nits are #nsol! at the en! o% the perio!, the costs o% those#nsol! #nits are treate! as assets. There%ore, '& reclassi%&ingperio! costs as pro!#ct costs, the compan& is a'le to carr&some costs %orwar! in inentories that wo#l! hae 'een treate!as c#rrent epenses.
2. The !isc#ssion 'elow is !ii!e! into two parts6Gallant7sactions to postpone epen!it#res an! the actions to reclassi%&perio! costs as pro!#ct costs.
The !ecision to postpone epen!it#res is #estiona'le. It is onething to postpone epen!it#res !#e to a cash 'in!Z it is #iteanother to postpone epen!it#res in or!er to hit a pro)t target.Kostponing these epen!it#res ma& hae the e>ect o%#ltimatel& increasing %#t#re costs an! re!#cing %#t#re pro)ts. I%
or!ers to the compan&7s s#ppliers are change!, it ma& !isr#ptthe s#ppliers7 operations. The a!!itional costs ma& 'e passe!on to Gallant7s compan& an! ma& create ill will an! a %eeling o%mistr#st. Kostponing maintenance on e#ipment is partic#larl&#estiona'le. The res#lt ma& 'e 'rea!owns, inecient an!\or#nsa%e operations, an! a shortene! li%e %or the machiner&.
Gallant7s !ecision to reclassi%& perio! costs is not ethical6ass#ming that there is no intention o% !isclosing in the )nancialreports this reclassi)cation. "#ch a reclassi)cation wo#l! 'e aiolation o% the principle o% consistenc& in )nancial reportingan! is a clear attempt to mislea! rea!ers o% the )nancialreports. Altho#gh some ma& arg#e that the oerall e>ect o%Gallant7s action will 'e a *wash+6that is, pro)ts gaine! in this
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perio! will simpl& 'e taen %rom the net perio!6the tren! o%earnings will 'e a>ecte!. Hope%#ll&, the a#!itors wo#l!!iscoer an& s#ch attempt to manip#late ann#al earnings an!wo#l! re%#se to iss#e an #n#ali)e! opinion !#e to the lac o%
consistenc&. Howeer, recent acco#nting scan!als ma& lea! tosome septicism a'o#t how %orce%#l a#!itors hae 'een inen%orcing tight acco#nting stan!ar!s.
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*roble+ 2-25 F5 min#tesD
1.
Cost 7e-avior
Se%%ing or (dministrati
ve Product Cost
Cost Item1ariab%
e i.ed Cost Direct Indirec
t
(irect la'or........................... 11,000
11,000
A!ertising............................ 50,000 50,000
actor& s#perision...............F0,000
F0,000
Kropert& taes, %actor&'#il!ing............................... @,500 @,500
"ales commissions................ 0,000 0,000Ins#rance, %actor&................. 2,500 2,500
(epreciation, a!ministratieoce e#ipment................. F,000 F,000
Lease cost, %actor&e#ipment.......................... 12,000 12,000
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B Managerial Acco#nting, 15th 4!ition
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In!irect materials, %actor&..... B,000 B,000
(epreciation, %actor&'#il!ing............................... 10,000 10,000
A!ministratie oces#pplies.............................. @,000 @,000
A!ministratie oce salaries B0,000 B0,000(irect materials #se!............ JF,000 JF,000
tilities, %actor&..................... 20,000
20,000
Total costs............................. @21,000
12,000 1J,000
212,000
JF,000
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*roble+ 2-25 contin#e!D
2. The aerage pro!#ct cost %or one patio set wo#l! 'e
(irect............................................. 212,000
In!irect........................................... JF,000
Total............................................... @0B,000
@0B,000 2,000 sets : 15@ per
set
@. The aerage pro!#ct cost per set wo#l! increase i% thepro!#ction !rops. This is 'eca#se the )e! costs wo#l! 'esprea! oer %ewer #nits, ca#sing the aerage cost per #nit torise.
F. a. 9es, the presi!ent ma& epect a minim#m price o% 15@,which is the aerage cost to man#%act#re one set. He mightepect a price een higher than this to coer a portion o% thea!ministratie costs as well. The 'rother-in-law pro'a'l& isthining o% cost as incl#!ing onl& !irect materials, or, atmost, !irect materials an! !irect la'or. (irect materials alonewo#l! 'e onl& F per set, an! !irect materials an! !irectla'or wo#l! 'e onl& 10B.
'. The term is opport#nit& cost. The %#ll, reg#lar price o% a setmight 'e appropriate here, 'eca#se the compan& isoperating at %#ll capacit&, an! this is the amo#nt that m#st'e gien #p 'ene)t %orgoneD to sell a set to the 'rother-in-law.
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Case 2-26 B0 min#tesD
1. High-low metho!
8ours Cost
High leel o% actiit&. . . 25,000 JJ,000
Low leel o% actiit&. .. . 10,000 BF,500
Change....................... 15,000 @F,500
/aria'le element @F,500 15,000 (LH : 2.@0 per (LH
ie! element
Total cost625,000 (LH................... JJ,000
Less aria'le element25,000 (LH E 2.@0 per (LH........ 5,500
ie! element.................................. F1,500
There%ore, the cost %orm#la is 9 : F1,500 ; 2.@0<.
2. The scattergraph is shown 'elow
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$60,000
$65,000
$70,000
$75,000
$&0,000
$&5,000
$90,000
$95,000
$100,000
&,000 10,000 12,000 14,000 16,000 1&,000 20,000 22,000 24,000 26,000
'ie"t (abo)ous
Y
X
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"ol#tions Man#al, Chapter 2
Over
head
Cost
s
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Case 2-26 contin#e!D
2. The scattergraph shows that there are two releant ranges6one 'elow 1J,500 (LH an! one a'oe 1J,500 (LH. The changein e#ipment lease cost %rom a )e! %ee to an ho#rl& rate
ca#ses the slope o% the regression line to 'e steeper a'oe1J,500 (LH, an! to 'e !iscontin#o#s 'etween the )e! %ee an!ho#rl& rate points.
@. The cost %orm#las comp#te! with the high-low an! regressionmetho!s are %a#lt& since the& are 'ase! on the ass#mptionthat a single straight line proi!es the 'est )t to the !ata.Creating two !ata sets relate! to the two releant ranges willena'le more acc#rate cost estimates.
F. High-low metho!
8ours Cost
High leel o% actiit&. . . 25,000 JJ,000
Low leel o% actiit&. .. . 20,000 0,000
Change....................... 5,000 1J,000
/aria'le element 1J,000 5,000 (LH : @.0 per (LH
ie! element
Total cost625,000 (LH................... JJ,000
Less aria'le element25,000 (LH E @.0 per (LH........ J5,000
ie! element.................................. F,000
4pecte! oerhea! costs when 22,500 machine-ho#rs are#se!
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/aria'le cost 22,500 ho#rs E @.0 per ho#r.. . 5,500
ie! cost.......................................................... F,000
Total cost........................................................... J,500
5. The high-low estimate o% )e! costs is B,0J0 lower than theestimate proi!e! '& least-s#ares regression. The high-lowestimate o% the aria'le cost per machine ho#r is 0.2 higherthan the estimate proi!e! '& least-s#ares regression. Astraight line that minimie! the s#m o% the s#are! errorswo#l! intersect the 9-ais at 10,0J0 instea! o% F,000. Itwo#l! also hae a Patter slope 'eca#se the estimate! aria'lecost per #nit is lower than the high-low metho!.
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Case 2-27 @0 min#tesD
1. The scattergraph o% !irect la'or cost ers#s the n#m'er o%#nits pro!#ce! is presente! 'elow
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Case 2-27 contin#e!D
2. The scattergraph o% the !irect la'or cost ers#s the n#m'er o%pai! !a&s is presente! 'elow
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Case 2-27 contin#e!D
@. The n#m'er o% pai! !a&s sho#l! 'e #se! as the actiit& 'aserather than the n#m'er o% #nits pro!#ce!. The scattergraphsreeal a m#ch stronger relation i.e., higher correlationD'etween !irect la'or costs an! n#m'er o% pai! !a&s than'etween !irect la'or costs an! n#m'er o% #nits pro!#ce!./ariations in the !irect la'or costs apparentl& occ#r 'eca#se o%the n#m'er o% pai! !a&s in the month an! hae little to !o withthe n#m'er o% #nits that are pro!#ce!. It appears that the!irect la'or costs are 'asicall& )e! with respect to how man&#nits are pro!#ce! in a month. This wo#l! happen i% the !irectla'or worers are treate! as %#ll-time emplo&ees who are pai!een i% there is ins#cient wor to eep them '#s&. Moreoer,%or planning p#rposes, the compan& is liel& to 'e a'le topre!ict the n#m'er o% pai! !a&s in the month with m#ch
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"ol#tions Man#al, Chapter 2
,u+ber o *aid
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greater acc#rac& than the n#m'er o% #nits that will 'epro!#ce!.
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Appendi( 2A
0east-Suares egression
Co+putations
'(ercise 2A-1 20 min#tesD
1. an! 2.
The scattergraph plot an! least-s#ares regression estimates o%
)e! an! aria'le costs #sing Microso%t 4cel are shown 'elow
The intercept proi!es the estimate o% the )e! cost element,1,@ per month, an! the slope proi!es the estimate o% thearia'le cost element, F.0F per rental ret#rn. 4presse! as ane#ation in the %orm > :a ;b? , the relation 'etween car washcosts an! rental ret#rns is
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9 : 1,@ ; F.0F<
where < is the n#m'er o% rental ret#rns.
?ote that the 32 is approimatel& 0.J0, which is #ite high,
an! in!icates a strong linear relationship 'etween car wash costsan! rental ret#rns.
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"ol#tions Man#al, Appen!i 2A 1
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'(ercise 2A-2 20 min#tesD
1. an! 2.
The scattergraph plot an! regression estimates o% )e! an!
aria'le costs #sing Microso%t 4cel are shown 'elow
?ote that the 32 is approimatel& 0.JF, which means that JFX
o% the ariation in etching costs is eplaine! '& the n#m'er o%#nits etche!. This is a er& high 32 which in!icates a er& goo!)t.
The regression e#ation, in the %orm > :a ;b?, is as %ollowswhere a is ro#n!e! to nearest !ollar an! b is ro#n!e! to thenearest centD
9 : 12.@2 ; 1.5F<
@. Total epecte! etching cost i% 5 #nits are processe!
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/aria'le cost 5 #nits E 1.5F per#nit................................................. .0
ie! cost.......................................... 12.@2
Total epecte! cost............................ 20.02
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"ol#tions Man#al, Appen!i 2A @
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*roble+ 2A-3 @0 min#tesD
1. The scattergraph plot an! regression estimates o% )e! an!aria'le costs #sing Microso%t 4cel are shown 'elow
The cost %orm#la, in the %orm > :a ;b? , #sing tons mine! asthe actiit& 'ase is 2,@52 per #arter pl#s 2.5 per tonmine!, or
9 : 2,@52 ; 2.5<.
?ote that the 32 is approimatel& 0.F, which means that onl&FX o% the ariation in #tilit& costs is eplaine! '& the n#m'ero% tons mine!.
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*roble+ 2A-3 contin#e!D
2. The scattergraph plot an! regression estimates o% )e! an!aria'le costs #sing Microso%t 4cel are shown 'elow
The cost %orm#la, in the %orm > :a ;b? , #sing !irect la'or-ho#rs as the actiit& 'ase is 1,000 per #arter pl#s J.00 per!irect la'or-ho#r, or
9 : 1,000 ; J.00<.
?ote that the 32 is approimatel& 0.J@, which means that J@Xo% the ariation in #tilit& costs is eplaine! '& !irect la'or-ho#rs. This is a er& high 32 which is an in!ication o% a er&goo! )t.
@. The compan& sho#l! pro'a'l& #se !irect la'or-ho#rs as theactiit& 'ase, since the )t o% the regression line to the !ata ism#ch tighter than it is with tons mine!. The 32 %or the
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"ol#tions Man#al, Appen!i 2A 5
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regression #sing !irect la'or-ho#rs as the actiit& 'ase is twiceas large as %or the regression #sing tons mine! as the actiit&'ase. Howeer, managers sho#l! loo more closel& at the costsan! tr& to !etermine wh& #tilities costs are more closel& tie! to!irect la'or-ho#rs than to the n#m'er o% tons mine!.
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*roble+ 2A-4 @0 min#tesD
1. an! 2.
The scattergraph plot an! regression estimates o% )e! an!aria'le costs #sing Microso%t 4cel are shown 'elow
The cost %orm#la, in the %orm > :a ;b? , #sing n#m'er o%sections o>ere! as the actiit& 'ase is @,00 per #arter pl#s1,50 per section o>ere!, or
9 : @,00 ; 1,50<.
?ote that the 32 is approimatel& 0.JB, which means that JBXo% the ariation in cost is eplaine! '& the n#m'er o% sections.
This is a er& high 32 which in!icates a er& goo! )t.
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*roble+ 2A-4 contin#e!D
@. 4pecte! total cost wo#l! 'e
ie! cost.................................................. @,00
/aria'le cost sections E 1,50 persectionD................................................... 1F,000
Total cost...................................................1,0
0
The pro'lem with #sing the cost %orm#la %rom 2D to !erie total
cost is that an actiit& leel o% sections ma& lie o#tsi!e thereleant range6the range o% actiit& within which the )e!cost is approimatel& @,00 per term an! the aria'le cost isapproimatel& 1,50 per section o>ere!. Theseapproimations appear to 'e reasona'l& acc#rate within therange o% 2 to B sections, '#t the& ma& 'e inali! o#tsi!e thisrange.
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CAS' 2A-5 F5 min#tesD
1. an! 2.
The scattergraph plot an! regression estimates o% )e! an!aria'le costs #sing Microso%t 4cel are shown 'elow
The scattergraph reeals three interesting )n!ings. irst, itin!icates the relation 'etween oerhea! epense an! la'orho#rs is approimate! reasona'l& well '& a straight line.Howeer, there appears to 'e a slight !ownwar! 'en! in theplot as the la'or-ho#rs increase6ei!ence o% increasing ret#rns
to scale. This is a common occ#rrence in practice. "ee ?oreenU "o!erstrom, *Are oerhea! costs strictl& proportional toactiit&]+ @ourna% of (ccounting and $conomics, ol. 1, 1JJF,pp. 255-2.D
"econ!, the !ata points are all %airl& close to the straight line.
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This in!icates that most o% the ariation in oerhea! epensesis eplaine! '& la'or ho#rs. As a conse#ence, there pro'a'l&wo#l!n7t 'e m#ch 'ene)t to inestigating other possi'le cost!riers %or the oerhea! epenses.
Thir!, most o% the oerhea! epense appears to 'e )e!. Mariasho#l! as hersel% i% this is reasona'le. (oes the compan& haelarge )e! epenses s#ch as rent, !epreciation, an! salaries]
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CAS' 2A-5 contin#e!D
The cost %orm#la, in the %orm > :a ;b? , #sing la'or-ho#rs asthe actiit& 'ase is F,12B per month pl#s @.J5 per la'or-
ho#r, or
9 : F,12B ; @.J5<.
?ote that the 32 is approimatel& 0.JB, which means that JBXo% the ariation in cost is eplaine! '& la'or-ho#rs. This is aer& high 32 which in!icates a er& goo! )t.
@. sing the least-s#ares regression estimate o% the aria'leoerhea! cost, the total aria'le cost per g#est is comp#te! as%ollows
oo! an! 'eerages........................ 15.00
La'or 0.5 ho#r V 10 per ho#rD..... 5.00
8erhea! 0.5 ho#r V @.J5 per
ho#rD............................................ 1.J Total aria'le cost per g#est........... 21.J
The total contri'#tion %rom 10 g#ests pa&ing @1 each iscomp#te! as %ollows
"ales 10 g#ests V @1.00 per g#estD.... ..
5,50.0
0
/aria'le cost 10 g#ests V 21.J perg#estD....................................................... @,J5B.F0
Contri'#tion to pro)t..................................1,[email protected]
0
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ie! costs are not incl#!e! in the a'oe comp#tation 'eca#sethere is no in!ication that an& a!!itional )e! costs wo#l! 'einc#rre! as a conse#ence o% catering the coctail part&. I%a!!itional )e! costs were inc#rre!, the& sho#l! also 'es#'tracte! %rom reen#e.
F. Ass#ming that no a!!itional )e! costs are inc#rre! as a res#lto% catering the charit& eent, an& price greater than thearia'le cost per g#est o% ro#ghl& 22 wo#l! contri'#te topro)ts.
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Appendi( 2
Cost o Qualit/
'(ercise 2-1 10 min#tesD
1. [#alit& o% con%ormance
2. [#alit& costs
@. [#alit& circles
F. Kreention costs, appraisal costs
5. Internal %ail#re costs, eternal %ail#re costs
B. 4ternal %ail#re costs
. Appraisal costs
. Kreention costs
J. Internal %ail#re costs
10. 4ternal %ail#re costs
11. Kreention costs, appraisal costs
12. [#alit& cost report
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'(ercise 2-2 15 min#tesD
1.
Prevention Cost
(ppraisa% Cost
Interna%
ai%ureCost
$.terna%
ai%ureCost
a. Kro!#ct testing................ <
'. Kro!#ct recalls................ <
c. 3ewor la'or an!oerhea!...................... <
!. [#alit& circles................. <
e. (owntime ca#se! '&!e%ects......................... <
%. Cost o% )el! sericing..... <
g. Inspection o% goo!s......... <
h. [#alit& engineering........ <
i. =arrant& repairs............. <
$. "tatistical processcontrol.......................... <
. ?et cost o% scrap............. <
l. (epreciation o% teste#ipment.................... <
m. 3et#rns an! allowancesarising %rom poor#alit&.......................... <
n. (isposal o% !e%ectiepro!#cts....................... <
o. Technical s#pport tos#ppliers....................... <
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p. "&stems !eelopment.. .. <
. =arrant& replacements... <
r. iel! testing at c#stomer
site............................... <s. Kro!#ct !esign................. <
2. Kreention costs an! appraisal costs are inc#rre! in an e>ort toeep poor #alit& o% con%ormance %rom occ#rring. Internal an!eternal %ail#re costs are inc#rre! 'eca#se poor #alit& o%con%ormance has occ#rre!.
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*roble+ 2-3 B0 min#tesD
1. An anal&sis o% the compan&7s #alit& cost report is presente!'elow
4ast >ear '-is >ear
(mount Percent)
(mount Percent)
Kreention costs
Machinemaintenance......... 0 1. 10.F 120 2.5 20.@
Training s#ppliers..... 0 0.0 0.0 10 0.2 1.
[#alit& circles.......... 0 0.0 0.0 20 0.F @.F
Total preentioncosts........................ 0 1. 10.F 150 @.1 25.F
Appraisal costs
Incoming
inspection.............. 20 0.5 @.0 F0 0. B.
inal testing............. 0 1.J 11.J J0 1.J 15.@
Total appraisal costs... 100 2.F 1F.J 1@0 2. 22.0
Internal %ail#re costs
3ewor..................... 50 1.2 .5 1@0 2. 22.0
"crap....................... F0 1.0 B.0 0 1.5 11.J
Total internal %ail#recosts........................ J0 2.1 [email protected] 200 F.2 @@.J
4ternal %ail#re
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costs
=arrant& repairs...... J0 2.1 [email protected] @0 0.B 5.1
C#stomer ret#rns..... @20 .B F. 0 1. [email protected]
Total eternal %ail#recosts........................ F10 J. B1.2 110 2.@ 1.B
Total #alit& cost........ B01B.
0100.
0 5J012.
@100.
0
Total pro!#ction cost. .F,20
0F,0
0
O Kercentage )g#res ma& not a!! !own !#e to ro#n!ing.
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*roble+ 2-3 contin#e!D
rom the a'oe anal&sis it wo#l! appear that Merc#r&, Inc.7sprogram has 'een s#ccess%#l.
• Total #alit& costs hae !ecline! %rom 1B.0X to 12.@X as apercentage o% total pro!#ction cost. In !ollar amo#nt, total#alit& costs went %rom B0,000 last &ear to 5J0,000 this&ear.
• 4ternal %ail#re costs, those costs signaling c#stomer!issatis%action, hae !ecline! %rom J.X o% total pro!#ctioncosts to 2.@X. These !eclines in warrant& repairs an!
c#stomer ret#rns sho#l! res#lt in increase! sales in the%#t#re.
• Appraisal costs hae increase! %rom 2.FX to 2.X o% totalpro!#ction cost.
• Internal %ail#re costs hae increase! %rom 2.1X to F.2X o%pro!#ction costs. This increase has pro'a'l& res#lte! %rom
the increase in appraisal actiities. (e%ectie #nits are now'eing spotte! more %re#entl& 'e%ore the& are shippe! toc#stomers.
• Kreention costs hae increase! %rom 1.X o% totalpro!#ction cost to @.1X an! %rom 10.FX o% total #alit& coststo 25.FX. The 0,000 increase is more than o>set '&!ecreases in other #alit& costs.
2. The initial e>ect o% emphasiing preention an! appraisal wasto re!#ce eternal %ail#re costs an! increase internal %ail#recosts. The increase in appraisal actiities res#lte! in catchingmore !e%ectie #nits 'e%ore the& were shippe! to c#stomers.As a conse#ence, rewor an! scrap costs increase!. In the%#t#re, an increase! emphasis on preention sho#l! res#lt in a
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!ecrease in internal %ail#re costs. An! as !e%ect rates arere!#ce!, reso#rces !eote! to appraisal can 'e re!#ce!.
@. To meas#re the cost o% not implementing the #alit& program,management co#l! ass#me that sales an! maret share wo#l!contin#e to !ecline an! then calc#late the lost pro)t. 8r,management might ass#me that the compan& will hae to c#tits prices to hang on to its maret share. The impact on pro)tso% lowering prices co#l! 'e estimate!.
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*roble+ 2-4 B0 min#tesD
1. lore Compan&[#alit& Cost 3eport
4ast >ear '-is >ear
(mount/in
t-ousands 5
Percent of
Sa%es
(mount/in
t-ousands 5
Percent of
Sa%es
Kreention costs
[#alit& engineering..... F20 0.5B 50 0.B
"&stems !eelopment. F0 0.BF 50 1.00
"tatistical processcontrol....................... 0 0.00 10 0.2F
Total preention costs... . J00 1.20 1,500 2.00
Appraisal costs
Inspection.................... 50 1.00 J00 1.20
Kro!#ct testing............ 10 1.0 1,200 1.B0
"#pplies #se! intesting....................... @0 0.0F B0 0.0
(epreciation o%testing e#ipment..... 210 0.2 2F0 0.@2
Total appraisal costs.. . . 1,00 2.F0 2,F00 @.20
Internal %ail#re costs
?et cost o% scrap.......... B@0 0.F 1,125 1.50
3ewor la'or................ 1,050 1.F0 1,500 2.00
(isposal o% !e%ectie 20 0.JB J5 1.@0
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pro!#cts....................
Total internal %ail#recosts............................ 2,F00 @.20 @,B00 F.0
4ternal %ail#re costs
Cost o% )el! sericing. . 1,200 1.B0 J00 1.20
=arrant& repairs.......... @,B00 F.0 1,050 1.F0
Kro!#ct recalls............. 2,100 2.0 50 1.00
Total eternal %ail#recosts............................ B,J00 J.20 2,00 @.B0
Total #alit& cost............ 12,000 1B.00 10,200 [email protected]
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*roble+ 2-4 contin#e!D
2.
Last Year This Year $0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
External Failure Internal Failure !!raisal "reventionQuality Costs (in thousands)
Last YearThis Year 0#
2#
4#
6#
8#
10#
12#
14#
16#
18#
External Failure Internal Failure !!raisal "reventionQuality Costs as a Percentage of Sales
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*roble+ 2-4 contin#e!D
@. The oerall impact o% the compan&7s increase! emphasis on#alit& oer the past &ear has 'een positie in that total #alit&costs hae !ecrease! %rom 1BX o% sales to [email protected] o% sales.
(espite this improement, the compan& still has a poor!istri'#tion o% #alit& costs. The '#l o% the #alit& costs in'oth &ears is tracea'le to internal an! eternal %ail#re, ratherthan to preention an! appraisal. Altho#gh the !istri'#tion o%these costs is poor, the tren! this &ear is towar! morepreention an! appraisal as the compan& has gien moreemphasis on #alit&.
Kro'a'l& !#e to the increase! spen!ing on preention an!
appraisal actiities !#ring the past &ear, internal %ail#re costshae increase! '& one hal%, going %rom 2.F million to @.Bmillion. The reason internal %ail#re costs hae gone #p is that,thro#gh increase! appraisal actiit&, !e%ects are 'eing ca#ghtan! correcte! 'e%ore pro!#cts are shippe! to c#stomers. Th#s,the compan& is inc#rring more cost %or scrap, rewor, an! so%orth, '#t it is saing h#ge amo#nts in )el! sericing, warrant&repairs, an! pro!#ct recalls. 4ternal %ail#re costs hae %allensharpl&, !ecreasing %rom B.J million last &ear to $#st 2.
million this &ear.
I% the compan& contin#es its emphasis on preention an!appraisal6an! partic#larl& on preention6its total #alit&costs sho#l! contin#e to !ecrease in %#t#re &ears. Altho#gh