Test Bank - Chapter 5 Cost Behavior Analysis

Chapter 5

Cost Behavior: Analysis and Use

True/False

1.TEasy

Modern technology is causing shifts away from variable costs toward more fixed costs in many industries.

2.FMedium

In order for a cost to be variable it must vary with either units produced or units sold.

3.TEasy

A cost that is obtainable in large chunks and that increases or decreases only in response to fairly wide changes in the activity level is known as a step-variable cost.

4.FEasy

The concept of the relevant range does not apply to fixed costs.

5.FMedium

Indirect costs, such as manufacturing overhead, are always fixed costs.

6.TEasy

A cost formula may not be valid outside the relevant range of activity.

7.TEasy

Discretionary fixed costs arise from annual decisions by management to spend in certain fixed cost areas.

8.FEasy

Significant reductions in committed fixed costs can usually be made on a temporary basis without seriously impairing the long-run goals of a firm.

9.FEasy

The planning horizons for committed fixed costs and discretionary fixed costs are generally the same.

10.TEasy

The high-low method is generally less accurate than the least-squares regression method for analyzing the behavior of mixed costs.

Managerial Accounting, 9/e 143

11.TEasy

In a scattergraph, the line fitted to the plotted points is known as a regression line.

12.FEasy

The adjusted R2 (i.e., R-squared) indicates the proportion of a mixed cost that is variable.

13.FEasy

In least-squares regression, independent variables are not included in the computations of the slope and intercept.

14.TEasy

The contribution approach to the income statement classifies costs by behavior rather than by function.

15.TEasy

A mixed cost is partially variable and partially fixed.

Multiple Choice

16.CMedium

Expense A is a fixed cost; expense B is a variable cost. During the current year the activity level has increased, but is still within the relevant range. In terms of cost per unit of activity, we would expect that:a. expense A has remained unchanged.b. expense B has decreased.c. expense A has decreased.d. expense B has increased.

17.BEasy

Which costs will change with a decrease in activity within the relevant range?a. Total fixed costs and total variable cost.b. Unit fixed costs and total variable cost.c. Unit variable cost and unit fixed cost.d. Unit fixed cost and total fixed cost.

18.BMedium

Within the relevant range of activity, variable cost per unit will:a. increase in proportion with the level of activity.b. remain constant.c. vary inversely with the level of activity.d. none of these.


19.DMedium

An increase in the activity level within the relevant range results in:a. an increase in fixed cost per unit.b. a proportionate increase in total fixed costs.c. an unchanged fixed cost per unit.d. a decrease in fixed cost per unit.

20.BEasyCPA adapted

The term "relevant range" means the range over which:a. costs may fluctuate.b. a particular cost formula is valid.c. production may vary.d. relevant costs are incurred.

21.AMedium

The linear equation Y = a + bX is often used to express cost formulas. In this equation:a. the b term represents variable cost per unit of activity.b. the a term represents variable cost in total.c. the X term represents total cost.d. the Y term represents total fixed cost.

22.CEasy

An example of a discretionary fixed cost is:a. insurance.b. taxes on real estate.c. management training.d. depreciation of buildings and equipment.

23.CEasy

An example of a committed fixed cost is:a. a training program for salespersons.b. executive travel expenses.c. property taxes on the factory building.d. new product research and development.

24.DEasy

Discretionary fixed costs:a. vary directly and proportionately with the level of activity.b. have a long-term planning horizon, generally encompassing many years.c. are made up of plant, equipment, and basic organizational costs.d. none of the above.

25.BMedium

In describing the cost formula equation Y = a + bX, which of the following statements is correct?a. "X" is the dependent variable.b. "a" is the fixed component.c. In the high-low method, "b" equals change in activity divided by change in costs.d. As "X" increases "Y" decreases.


26.BEasy

The contribution approach to the income statement:a. organizes costs on a functional basis.b. is useful to managers in planning and decision making.c. shows a contribution margin rather than a net income figure at the bottom of the statement.d. can be used only by manufacturing companies.

27.DEasyCMA adapted

Contribution margin is the excess of revenues over:a. cost of goods sold.b. manufacturing cost.c. all direct costs.d. all variable costs.

28.BEasy

An example of a cost that is variable with respect to the number of units produced and sold is:a. insurance on the headquarters building.b. power to run production equipment.c. supervisory salaries.d. depreciation of factory facilities.

29.CMediumCMA adapted

A cost driver is:a. the largest single category of cost in a company.b. a fixed cost that cannot be avoided.c. a factor that causes variations in a cost.d. an indirect cost that is essential to the business.

30.CMedium

The following data pertain to activity and costs for two recent months:

October November Activity level in units 5,000 10,000

Variable costs ............ P10,000 ? Fixed costs ............... 30,000 ? Mixed costs ............... 20,000 ? _ Total costs ............... P60,000 P75,000

Assuming that these activity levels are within the relevant range, the mixed costs for November were:a. P40,000.b. P35,000.c. P25,000.d. P20,000.


31.CMedium

The following data pertains to activity and costs for two months:

June July Activity level in units 10,000 20,000

Variable costs ................ P20,000 P ? Fixed costs ................... 15,000 ? Mixed costs ................... 10,000 ? _ Total costs ................... P45,000 P70,000

Assuming that these activity levels are within the relevant range, the mixed costs for July were:a. P10,000.b. P35,000.c. P15,000.d. P40,000.

32.BEasy

At an activity level of 10,000 units, variable costs totaled P35,000 and fixed costs totaled P20,800. If 16,000 units are produced and this activity is within the relevant range, then:a. total cost would equal P89,280.b. total unit cost would equal P4.80.c. fixed cost per unit would equal P5.58.d. total costs would equal P55,800.

33.DMedium

Anaconda Mining Company shipped 9,000 tons of copper concentrate for P450,000 in March and 11,000 tons for P549,000 in April. Shipping costs for 12,000 tons to be shipped in May would be expected to be:a. P548,780.b. P549,020.c. P594,000.d. P598,500.

34.AMedium

An analysis of past maintenance costs indicates that maintenance cost is an average of P0.20 per machine-hour at an activity level of 10,000 machine-hours and P0.25 per machine-hour at an activity level of 8,000 machine-hours. Assuming that this activity is within the relevant range, what is the total expected maintenance cost if the activity level is 8,700 machine-hours?a. P2,000b. P400c. P2,250d. P1,740


35.DMedium

Shipping expense is P9,000 for 8,000 pounds shipped and P11,250 for 11,000 pounds shipped. Assuming that this activity is within the relevant range, if the company ships 9,000 pounds, its expected shipping expense is closest to:a. P10,125.b. P8,583.c. P9,972.d. P9,750.

36.CHard

Average maintenance costs are P1.50 per machine-hour at an activity level of 8,000 machine-hours and P1.20 per machine-hour at an activity level of 13,000 machine-hours. Assuming that this activity is within the relevant range, total expected maintenance cost for a budgeted activity level of 10,000 machine-hours would be closest to:a. P16,128.b. P15,000.c. P13,440.d. P11,433.

37.DMediumCMA adapted

The controller of JoyCo has requested a quick estimate of the manufacturing supplies needed for the month of July when production is expected to be 470,000 units. Below are actual data from the prior three months of operations.

Production Manufacturing in units supplies March 450,000 P723,060 April 540,000 853,560 May 480,000 766,560

Using these data and the high-low method, what is the best estimate of the cost of manufacturing supplies that would be needed for July? (Assume that this activity is within the relevant range.)a. P805,284b. P1,188,756c. P755,196d. P752,060


38.DHard

(Appendix) The following activity and cost data were provided by Hammer Corp., which would like help in estimating its future maintenance costs:

Units Maintenance Cost 3 P450 7 P530 11 P640 15 P700

Using the least-squares regression method to estimate the cost formula, the expected total cost for an activity level of 10 units would be closest to:a. P612.50.b. P581.82.c. P595.84.d. P601.50.

39.CEasy

Given the cost formula Y = P15,000 + P5X, total cost at an activity level of 8,000 units would be:a. P23,000.b. P15,000.c. P55,000.d. P40,000.

40.BEasy

Given the cost formula Y = P12,000 + P6X, total cost at an activity level of 8,000 units would be:a. P20,000.b. P60,000.c. P12,000.d. P48,000.

41.DEasy

Reddy Company has the following cost formulas for overhead:

Cost Cost Formula Indirect materials P2,000 plus P0.40 per machine hour Maintenance P1,500 plus P0.60 per machine hour Machine setup P0.30 per machine hour Utilities P200 plus P0.10 per machine hour Depreciation P800

Based on these cost formulas, the total overhead cost at 600 machine hours is expected to be:a. P4,500.b. P5,200.c. P5,620.d. P5,340.


42.CMedium

Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500?a. 10,625 units.b. 4,375 units.c. 6,250 units.d. 5,250 units.

43.DEasy

The following data pertains to activity and utility costs for two recent years:

Year 2 Year 1 Activity level in units 12,000 8,000 Utilities cost P15,000 P12,000

Using the high-low method, the cost formula for utilities is:a. P1.50 per unit.b. P8,000 plus P0.50 per unit.c. P1.25 per unit.d. P6,000 plus P0.75 per unit.

44.DEasy

The following data pertains to activity and utility costs for two recent years:

Year 2 Year 1 Activity level in units 10,000 6,000 Utilities cost observed P12,000 P9,000

Using the high-low method, the cost formula for utilities is:a. P1.50 per unit.b. P1.20 per unit.c. P3,000 plus P3.00 per unit.d. P4,500 plus P0.75 per unit.

45.DEasy

At an activity level of 6,000 units the cost for maintenance is P7,200 and at 10,000 units the cost for maintenance is P11,600. Using the high-low method, the cost formula for maintenance is:a. P1.20 per unit.b. P1.16 per unit.c. P1,200 plus P1.10 per unit.d. P600 plus P1.10 per unit.


46.CEasy

Bell Company has provided the following data for maintenance costs:

April May Machine hours incurred 12,000 16,000 Maintenance cost incurred P24,000 P26,000

Using the high-low method, the cost formula for maintenance cost would be:a. P2.00 per machine hour.b. P1.625 per machine hour.c. P18,000 plus P0.50 per machine hour.d. P24,000 plus P0.50 per machine hour.

47.CMedium

Buckeye Company has provided the following data for maintenance cost:

Prior Year Current Year Machine hours ..... 12,500 15,000 Maintenance cost .. P27,000 P31,000

The best estimate of the cost formula for maintenance would be:a. P21,625 per year plus P0.625 per machine hour.b. P7,000 per year plus P0.625 per machine hour.c. P7,000 per year plus P1.60 per machine hour.d. P27,000 per year plus P1.60 per machine hour.

48.AHard

Selected information about Buehler Corporation's operations at high and at low levels of activity follow:

Level of Activity Low HighNumber of units produced ............ 25,000 30,000 Total manufacturing costs ........... P575,000 P680,000Direct material cost per unit ....... P5 P5Direct labor cost per unit .......... P6 P6

Using the high-low method, what is the cost formula for manufacturing overhead?a. P50,000 per period plus P10 per unitb. P50,000 per period plus P21 per unitc. P50,000 per period plus P22 per unitd. P347,000 per period plus P0.10 per unit


49.DHard

At a sales level of P300,000, James Company's gross margin is P15,000 less than its contribution margin, its net income is P50,000, and its selling and administrative expenses total P120,000. At this sales level, its contribution margin would be:a. P250,000.b. P155,000.c. P170,000.d. P185,000.

50.BHard

(Appendix) Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost for four recent periods appear below.

Activity Cost Period 1 24 P174 Period 2 25 179 Period 3 20 165 Period 4 22 169

Using the least-squares regression method, what is the cost formula for this cost?a. Y = P 0.00 + P7.55Xb. Y = P110.44 + P2.70Xc. Y = P103.38 + P3.00Xd. Y = P113.35 + P0.89X

Reference: 5-1Rymore Company would like to classify the following costs according to their cost behavior:

July August Sales in units.. 1,500 1,600

Cost A ......... P35,000 P36,000 Cost B ......... 16,000 16,000 Cost C ......... 67,500 72,000

51.AEasyRefer To: 5-1

Which of the following classifications best describes the behavior of Cost A?a. Mixed.b. Variable.c. Fixedd. none of the above.


52.CEasyRefer To: 5-1

Which of the following classifications best describes the behavior of Cost B?a. Mixed.b. Variable.c. Fixed.d. none of the above.

53.BEasyRefer To: 5-1

Which of the following classifications best describes the behavior of Cost C?a. Mixed.b. Variable.c. Fixed.d. none of the above.

Reference: 5-2Comparative income statements for Boggs Sports Equipment Company for the last two months are presented below:

July August Sales in Units ............. 11,000 10,000

Sales Revenue .............. P165,000 P150,000 Less Cost of Goods Sold .... 72,600 66,000 Gross Margin ............... 92,400 84,000 Less Operating Expenses: Rent ..................... 12,000 12,000 Sales Commissions ........ 13,200 12,000 Maintenance Expenses ..... 13,500 13,000 Clerical Expense ......... 16,000 15,000 Total Operating Expenses ... 54,700 52,000 Net income ................. P 37,700 P 32,000

All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). Assume that the relevant range includes all of the activity levels mentioned in this problem.


Which of the operating expenses of the company is variable?a. Rent.b. Sales Commissions.c. Maintenance Expense.d. Clerical Expense.

55.CHardRefer To: 5-2

The total monthly fixed cost for Boggs Sporting Equipment Company is:a. P12,000.b. P22,500.c. P25,000.d. P40,000.


56.DMediumRefer To: 5-2

If sales are projected to be 8,000 units in September, total expected operating expenses would be:a. P49,300.b. P41,600.c. P44,750.d. P46,600.

Reference: 5-3Gasson Company is a merchandising firm. Next month the company expects to sell 800 units. The following data describe the company's revenue and cost structure:

Selling price per unit ....... P40 Sales commission ............. 5% Purchase price (cost) per unit P18 Advertising expense .......... P4,000 per month Administrative expense ....... P4,500 per month plus 15% of sales

Assume that all activity mentioned in this problem is within the relevant range.

57.AMediumRefer To: 5-3

The expected gross margin next month is:a. P17,600.b. P11,200.c. P14,400.d. P16,000.

58.CEasyRefer To: 5-3

The expected total administrative expense next month is:a. P 4,800.b. P13,300.c. P 9,300.d. P14,900.

59.BMediumRefer To: 5-3

The expected contribution margin next month is:a. P17,600.b. P11,200.c. P14,400.d. P16,000.

60.CMediumRefer To: 5-3

The expected net income next month is:a. P 7,500.b. P 5,100.c. P 2,700.d. P11,200.


Reference: 5-4In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs were P223,000. Of this amount, utilities were P48,000 (all variable) and depreciation was P60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were P130,000. Assume that all of the activity levels mentioned in this problem are within the relevant range.

61.CHardRefer To: 5-4

The variable cost for maintenance per machine hour is:a. P1.30.b. P1.44.c. P0.75.d. P1.35.

62.AHardRefer To: 5-4

The total fixed overhead cost for O'Donnell is:a. P115,000.b. P130,000.c. P 60,000.d. P 55,000.

63.BHardRefer To: 5-4

If 110,000 machine hours of activity are projected for next period, total expected overhead cost would be:a. P256,000b. P263,500.c. P306,625.d. P242,500.

Reference: 5-5Maxwell Company has a total expense per unit of P2.00 per unit at the 16,000 level of activity and total expense per unit of P1.95 at the 21,000 unit level of activity.


The best estimate of the variable cost per unit for Maxwell Company is:a. P0.56.b. P1.79.c. P2.00.d. P1.95.


The best estimate of the total fixed cost per period for Maxwell Company is:a. P40,950.b. P32,000.c. P3,360.d. P29,190.



The best estimate of the total expected costs at the 19,000 level of activity for Maxwell Company is:a. P37,050.b. P38,000.c. P37,370.d. P39,830.

Reference: 5-6Johnson Company has provided the following data for the first five months of the year:

Machine Hours Lubrication Cost January .... 120 P750 February ... 160 P800 March ...... 200 P870 April ...... 150 P790 May ........ 170 P840


Using the high-low method of analysis, the estimated variable lubrication cost per machine hour is closest to:a. P1.40.b. P1.25.c. P0.67.d. P1.50.


Using the high-low method of analysis, the estimated monthly fixed component of lubrication cost is closest to:a. P570.b. P560.c. P585.d. P565.

69.BHardRefer To: 5-6

(Appendix) Using the least-squares regression method of analysis, the estimated variable lubrication cost per machine hour is closest to:a. P0.80.b. P1.56.c. P1.40.d. P1.28.


(Appendix) Using the least-squares regression method of analysis, the estimated monthly fixed component of lubrication cost is closest to:a. P561.b. P580.c. P525.d. P572.


Reference: 5-7Gargymal Company would like to estimate the variable and fixed components of its electrical costs and has compiled the following data for the last five months of operations.

Machine Electrical Hours Cost August ...... 1,000 P1,620 September ... 900 1,510 October ..... 1,500 1,870 November .... 2,000 1,950 December .... 1,300 1,730


Using the high-low method of analysis, the estimated variable cost per machine hour for electricity is closest to:a. P0.40.b. P2.50.c. P0.98.d. P1.68.


Using the high-low method of analysis, the estimated fixed cost per month for electricity is closest to:a. P1,306.50.b. P 870.00.c. P1,290.00.d. P1,150.00.

Reference: 5-8Wilson Company's activity for the first six of the current year is as follows:

Machine Electrical Month Hours Cost January .... 2,000 P1,560 February ... 3,000 P2,200 March ...... 2,400 P1,750 April ...... 1,900 P1,520 May ........ 1,800 P1,480 June ....... 2,100 P1,600


Using the high-low method, the variable cost per machine hour would be:a. P0.67.b. P0.64.c. P0.40.d. P0.60.



Using the high-low method, the fixed portion of the electrical cost each month would be:a. P400.b. P760.c. P280.d. P190.

Reference: 5-9Prater Company has provided the following data:

This Year Last Year Units sold ................ 300,000 250,000 Sales revenue ............. P1,300,000 P1,050,000 Less cost of goods sold ... 910,000 735,000 Gross margin .............. 390,000 315,000 Less operating expenses ... 272,000 260,000 Net income ................ P 118,000 P 55,000


The best estimate of the company's variable operating expense per unit is:a. P0.24 per unit.b. P4.17 per unit.c. P0.91 per unit.d. P0.96 per unit.


The best estimate of the company's total fixed operating expense per year is:a. P188,000.b. P72,000.c. P200,000.d. P212,000.

Reference: 5-10The following data have been provided by a retailer that sells a single product. This Year Last Year Units sold ................. 200,000 150,000 Sales revenue .............. P1,000,000 P750,000 Less cost of goods sold .... 700,000 525,000 Gross margin ............... P 300,000 P225,000 Less operating expenses .... 222,000 210,000 Net income ................. P 78,000 P 15,000


What is the best estimate of the company's variable operating expenses per unit?a. P4.17 per unitb. P0.24 per unitc. P0.90 per unitd. P0.71 per unit



What is the best estimate of the company's total fixed operating expenses per year?a. P0b. P80,000c. P44,000d. 174,000


What is the best estimate of the company's contribution margin for this year?a. P252,000b. P300,000c. P158,000d. P120,000

Reference: 5-11The following information has been provided by the Evans Retail Stores, Inc., for the first quarter of the year:

Sales............................. P350,000 Variable selling expense......... . 35,000 Fixed selling expenses............ 25,000 Cost of goods sold................ 160,000 Fixed administrative expenses... 55,000 Variable administrative expenses 15,000

80.DEasyRefer To: 5-11

The gross margin of Evans Retail Stores, Inc. for the first quarter is:a. P210,000.b. P140,000.c. P220,000.d. P190,000.


The contribution margin of Evans Retail Stores, Inc. for the first quarter is:a. P300,000.b. P140,000.c. P210,000.d. P190,000.


Reference: 5-12Porter Company has provided the following data for the second quarter of the most recent year:

Sales .............................. P300,000 Fixed manufacturing overhead ....... 55,000 Direct labor ....................... 72,500 Fixed selling expense .............. 46,250 Variable manufacturing overhead .... 41,000 Variable administrative expense .... 48,000 Direct materials ................... 51,500 Fixed administrative expense ....... 44,500 Variable selling expense ........... 49,750

Assume that direct labor is a variable cost and that there were no beginning or ending inventories.


The total contribution margin of Porter Company for the second quarter was:a. P37,250.b. P87,000.c. P176,000.d. P211,000.


The gross margin for Porter Company for the second quarter was:a. P(12,500).b. P80,000.c. P131,500.d. P135,000.

Reference: 5-13An income statement for Crandall's Bookstore for the first quarter of the current year is presented below:

Crandall's Bookstore Income Statement For the First Quarter of the Current Year Sales ...................... P800,000 Less cost of goods sold .... 560,000 Gross margin ............... 240,000 Less operating expenses: Selling ................. P98,000 Administrative .......... 98,000 196,000 Net income ................. P 44,000

On average, a book sells for P50. Variable selling expenses are P5.50 per book, with the remaining selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder being fixed.


84.BHard Refer To: 5-13

The contribution margin for Crandall's Bookstore for the first quarter is:a. P688,000.b. P128,000.c. P152,000.d. P240,000.

85.CMedium Refer To: 5-13

The net income using the contribution approach for the first quarter is:a. P240,000.b. P152,000.c. P44,000.d. P128,000.

86.AHard Refer To: 5-13

The cost formula for operating expenses with "X" equal to the number of books sold is:a. Y = P84,000 + P7.00X.b. Y = P84,000 + P8.50X.c. Y = P98,000 + P7.00X.d. Y = P98,000 + P8.50X.

Essay

87.Easy

The following information summarizes the company's cost structure:

Variable cost per unit ....... P1.30 Fixed cost per unit .......... 4.50 Total cost per unit ....... P5.80

Units produced and sold ...... 48,000

Assume that all of the activity levels mentioned in this problem are within the relevant range.

Required:

Prepare a schedule showing predictions for the following items at the 40,000 unit level of activity:

a. Total variable cost.

b. Total fixed cost.

c. Variable cost per unit.

d. Fixed cost per unit.


Answer:Note: The total fixed cost is P4.50 x 48,000 = P216,000.

Total costs: Variable (P1.30 x 40,000 units) ....... P 52,000 Fixed ................................. 216,000

Costs per unit: Variable (unchanged) .................. P1.30 Fixed (P216,000 ÷ 40,000 units)........ 5.40

88.Medium

Mateo Company's average cost per unit is P1.425 at the 16,000 unit level of activity and P1.38 at the 20,000 unit level of activity. Assume that all of the activity levels mentioned in this problem are within the relevant range.

Required:

Predict the following items for Mateo Company:

a. Variable cost per unit.

b. Total fixed cost per period.

c. Total expected costs at the 18,000 unit level of activity.

Answer: Cost UnitsHigh level of activity (20,000 units x P1.38).. P27,600 20,000Low level of activity (16,000 units x P1.425).. 22,800 16,000 Change....................................... P 4,800 4,000

a. P4,800 ÷ 4,000 units = P1.20 per unit variable cost

b. Total cost at the high level ...................... P27,600 Less variable element (P1.20 x 20,000 units) ...... 24,000 Fixed element ..................................... P 3,600

c. Variable cost (P1.20 x 18,000 units) .............. P21,600 Fixed cost ........................................ 3,600 Total cost ........................................ P25,200


89.Hard

ABC Company's total overhead costs at various levels of activity are presented below:

Month Machine Hours Total Overhead Costs March ... 60,000 P216,800 April ... 50,000 194,000 May ..... 70,000 239,600 June .... 80,000 262,400

Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance. At the 50,000 machine-hour level of activity these costs are:

Utilities (V) ................ P 54,000 Supervisory salaries (F) ..... 62,000 Maintenance (M) .............. 78,000 Total overhead costs ......... P194,000

V = Variable; F = Fixed; M = Mixed.

The company wants to break down the maintenance cost into its basic variable and fixed cost elements.

Required:

a. Estimate the maintenance cost for June.

b. Use the high-low method to estimate the cost formula for maintenance cost.

c. Estimate the total overhead cost at an activity level of 55,000 machine hours.

Answer:a. Total overhead cost at 80,000 machine hours ....... P262,400 Less: Utilities (P54,000 50,000) x 80,000 .......... 86,400 Supervisory salaries (fixed) ................... 62,000 Portion of overhead for June that represents maintenance ...................................... P114,000

b. High-low analysis of maintenance cost:

Maintenance Cost Machine-Hours High point ............... P114,000 80,000 Low point ................ 78,000 50,000 Change observed......... .P 36,000 30,000


Variable rate:

Change in cost = P36,000 = P1.20 per machine hr Change in activity 30,000 MH

Total fixed cost: Total maintenance cost at the low point......... P78,000 Less variable cost element (50,000 x P1.20)..... 60,000 Fixed cost element ............................. P18,000

The cost formula is: Y = P18,000 + P1.20X

c. Total overhead at 55,000 machine hours: Utilities (P54,000 50,000) x 55,000 .. P 59,400 Supervisory salaries ................... 62,000 Maintenance cost: Variable: (55,000 x P1.20) ........... P66,000 Fixed ................................ 18,000 84,000 Total overhead cost at 55,000 MH ....... P205,400

90.Medium

Stuart Manufacturing produces metal picture frames. The company's income statements for the last two years are given below:

Last year This year Units sold ................ 50,000 70,000

Sales ..................... P800,000 P1,120,000 Less cost of goods sold ... 550,000 710,000 Gross margin .............. 250,000 410,000 Less operating expenses ... 150,000 190,000 Net income ................ P100,000 P 220,000

The company has no beginning or ending inventories.

Required:

a. Estimate the company's total variable cost per unit, and its total fixed costs per year. (Remember that this is a manufacturing firm.)

b. Compute the company's contribution margin for this year.

Answer:a. Variable component of cost of goods sold:

Variable rate = Change in costs/Change in units Variable rate = (P710,000 - P550,000)/(70,000 - 50,000) Variable rate = P8.00 per unit


Fixed cost: High units: P710,000 - P8.00(70,000) = P150,000 Low units: P550,000 - P8.00(50,000) = P150,000

Variable component of operating expenses: Variable rate = Change in costs/Change in units Variable rate = (P190,000 - P150,000)/(70,000 - 50,000) Variable rate = P2.00 per unit

Fixed cost: High units: P190,000 - P2.00(70,000) = P50,000 Low units: P150,000 - P2.00(50,000) = P50,000

Total variable cost per unit: P8.00 + P2.00 = P10.00 per unit

Total fixed cost: P150,000 + P50,000 = P200,000

b. Sales revenue ................... P1,120,000 Less variable expenses: Variable cost of goods sold .. P560,000 Variable operating expenses .. 140,000 700,000 Contribution margin ............ P 420,000

91.Hard

The Central Valley Company is a merchandising firm that sells a single product. The company's revenues and expenses for the last three months are given below:

Central Valley Company Comparative Income Statement For the Second Quarter

April May JuneSales in units ................... 4,500 5,250 6,000Sales revenue .................... P630,000 P735,000 P840,000Less cost of goods sold ........ 252,000 294,000 336,000Gross Margin ..................... 378,000 441,000 504,000Less operating expenses: Shipping expense .............. 56,000 63,500 71,000 Advertising expense ........... 70,000 70,000 70,000 Salaries and commissions . 143,000 161,750 180,500 Insurance expense ............. 9,000 9,000 9,000 Depreciation expense .......... 42,000 42,000 42,000 Total operating expenses ... 320,000 346,250 372,500Net income ....................... P 58,000 P 94,750 P131,500


Required:

a. Determine which expenses are mixed and, by use of the high- low method, separate each mixed expense into its variable and fixed components. State the cost formula for each mixed expense.

b. Compute the company's total contribution margin for May.

Answer:a. The cost of goods sold for this company is a variable cost and is P56 per unit. The Shipping Expense and the Salaries and Commissions Expense are mixed. All other expenses are constant for each of the months shown and are therefore

fixed.

Shipping Expense: P71,000 - P56,000 = P15,000 = P10 per unit 6,000 - 4,500 1,500 P56,000 - (4,500 x P10) = P11,000.

Cost formula = P11,000 per month plus P10 per unit.

Salaries and Commissions: P180,500 - 143,000 = P37,500 = P25 per unit 6,000 - 4,500 1,500

P143,000 - (4,500 x P25) = P30,500

Cost formula = P30,500 per month plus P25 per unit.

b. Contribution margin for May:

Sales in units ..................... 5,250 Sales revenue ...................... P735,000 Variable expenses: Cost of goods sold ............ P294,000 Shipping expense (P10 x 5,250) 52,500 Salaries & commissions (P25 x 5,250) .......... 131,250 477,750 Contribution margin ................ P257,250

92.Medium

Selected data about Pitkin Company's manufacturing operations at two levels of activity are given below:

Number of units produced ....... 10,000 15,000 Total manufacturing costs ...... P157,000 P225,000 Direct material cost per unit P4 P4 Direct labor cost per unit ..... P6 P6


Required:

Using the high-low method, estimate the cost formula for manufacturing overhead. Assume that both direct material and direct labor are variable costs.

Answer: Low HighTotal manufacturing costs ............ P157,000 P225,000Less: Direct materials (P4 x 10,000 and P4 x 15,000, respectively) ....... 40,000 60,000 Direct labor (P6 x 10,000 and P6 x 15,000, respectively) ....... 60,000 90,000Manufacturing overhead cost ........ P 57,000 P 75,000

Cost ActivityHigh level of activity ............... P 75,000 15,000 unitsLow level of activity ................ 57,000 10,000 units Change ............................ P 18,000 5,000 units

P18,000 ÷ 5,000 units = P3.60 per unit variable cost

Total cost at the high level of activity ........ P 75,000Less variable element (P3.60 x 15,000 units) ..... 54,000Fixed cost element .............................. P 21,000

Therefore, the cost formula for manufacturing overhead is P21,000 per period plus P3.60 per unit produced, or Y = P21,000 + P3.60X.


93.Medium

Unified Parcel, Inc., operates a local parcel delivery service. The company keeps detailed records relating to operating costs of trucks, and has found that if a truck is driven 110,000 miles per year the operating cost is 7.5 cents per mile. This cost increases to 8.75 cents per mile if a truck is driven 60,000 miles per year.

Required:

Estimate the cost formula for truck operating costs using the high-low method.

Answer:Total cost at high level of activity: 110,000 x P.075 = P8,250Total cost at low level of activity: 60,000 x P.0875 = P5,250

Activity CostHigh .......... 110,000 P8,250Low ........... 60,000 5,250 Change ...... 50,000 P3,000


Variable cost = Change in cost ÷ Change in activity = P3,000 ÷ 50,000 miles = P0.06 per mile

Fixed cost element = P8,250 - (P0.06 x 110,000) = P1,650

The cost formula is P1,650 per year plus P0.06 per mile.

94.Hard

(Appendix) The Stephens Leadership Center provides training seminars in personal development and time management. The company is relatively new and management is seeking information regarding the Center's cost structure. The following information has been gathered since the inception of the business in January of the current year:

Month Seminars Offered Costs Incurred January 10 P17,000 February 12 18,800 March 15 20,900 April 18 23,762 May 16 21,800 June 13 19,400

Required:

a. Using the high-low method, estimate the variable cost per seminar and the total fixed cost per month.

b. Using the least-squares method, estimate the variable cost per seminar and the total fixed cost per month.

Answer:a. High-Low Method:

Month Number of Seminars Costs IncurredApril (high activity level) 18 P23,762January (low activity level) 10 17,000Change observed 8 P 6,762

Variable cost = Change in Cost = P6,762 = P845.25 per seminar Change in activity 8

Fixed cost element = Total cost - Variable cost element = P23,762 - (18 x P845.25) = P8,547.50

Cost formula for seminar costs: P8,547.50 per month plus P845.25 per seminar held


b. Least-Squares Method:

Month Seminars Costs Incurred XY _ X^2 _ January 10 P 17,000 170,000 100 February 12 18,800 225,600 144 March 15 20,900 313,500 225 April 18 23,762 427,716 324 May 16 21,800 348,800 256 June 13 19,400 252,200 169 84 P121,662 1,737,816 1,218

n=6X=84Y=121,662XY=1,737,816X^2=1,218

b = [n(XY)-(X)(Y)]/[n(X^2)-(X)^2] = [6(1,737,816)-(84)(121,662)]/[6(1,218)-(84)^2] = P822.57 (rounded to the nearest whole cent) a = [(Y)-b(X)]/n = [(121,662)- 822.57(84)]/6 = P8,761 (rounded to the nearest whole peso)

The cost formula is P8,761 per month plus P822.57 per seminar.

95.Medium

The 4 x 4 Shop is a large retailer of equipment for pickup trucks. An income statement for the company's bed liner department for the most recent quarter is presented below:

The 4 x 4 Shop Income Statement--Liner Department For First Quarter of Current Year

Sales ........................ P700,000 Less cost of goods sold ...... 250,000 Gross margin ................. P450,000 Less operating expenses: Selling expenses ........... P195,000 Administrative expenses .... 145,000 340,000 Net income ................... P110,000

The liners sell, on average, for P350 each. The department's variable selling expenses are P35 per liner sold. The remaining selling expenses are fixed. The administrative expenses are 25% variable and 75% fixed. The company purchases its liners from a supplier at a cost of P125 per liner.


Required:Prepare an income statement for the quarter, using the contribution approach.

Answer: The 4 x 4 Shop Income Statement (Contribution Format) For the First Quarter of the Current Year

Sales .................................. P700,000Variable expenses: Cost of goods sold ................ P250,000 Selling expenses (P35 x 2,000) .... 70,000 Administrative expenses (0.25 x P145,000) .............. 36,250 356,250Contribution margin .................... 343,750Fixed expenses: Selling expenses (P195,000-P70,000) 125,000 Administrative expenses (0.75 x P145,000) .............. 108,750 233,750Net income ............................. P110,000

96.Hard

(Appendix) The accounting department of Archer Company, a merchandising company, has prepared the following analysis:

Cost Cost Formula Cost of goods sold .......... P56 per unit Sales commissions ........... 12% of sales Advertising expense ......... P300,000 per month Administrative salaries ..... P160,000 per month Billing expense ............. ? Depreciation expense ........ P62,000 per month

The accounting department feels that billing expense is a mixed cost, containing both fixed and variable cost elements. A tabulation has been made of billing expense and sales in units over the last several months, as follows:

Units Sold Billing Month (000) Expense January ......... 9 P30,000 February ....... 11 33,000 March .......... 14 36,000 April .......... 17 42,000 May ............ 15 39,000 June ........... 12 35,000

The accounting department now plans to develop a cost formula for billing expense so that a contribution-type income statement can be prepared for management's use.


Required:

a. Using the least-squares method, estimate the cost formula for billing expense.b. Assume that the company plans to sell 30,000 units during July at a selling price of P100 per unit. Prepare a budgeted income statement for the month, using the contribution format.

Answer:a. Units Sold (000) Month (X) Billing Expense XY _ X^2 January 9 P30,000 P270,000 81 February 11 33,000 363,000 121 March 14 36,000 504,000 196 April 17 42,000 714,000 289 May 15 39,000 585,000 225 June 12 35,000 420,000 144 78 P215,000 P2,856,000 1,056

n=6X=78Y=215,000XY=2,856,000X^2=1,056

b = [n(XY)-(X)(Y)]/[n(X^2)-(X)^2] = [6(2,856,000)-(78)( 215,000)]/[6(1,056)-(78)^2] = P1,452 (rounded to the nearest whole peso) a = [(Y)-b(X)]/n = [(215,000)- 1,452(84)]/6 = P16,952 (rounded to nearest whole peso)

The cost formula is P16,952 per month plus P1,452 per thousand units.

b. Archer Company Budgeted Income Statement For the month of June

Sales (P100 x 30,000) ............... P3,000,000Variable expenses: Cost of goods sold (P56 x 30,000) P1,680,000 Commissions (0.12 x P3,000,000) 360,000 Billing expense (P1,452 x 30) ... 43,560 2,083,560Contribution margin .................. P 916,440Fixed expenses: Advertising expense ............. P 300,000 Administrative salaries ......... 160,000


Billing expense ................. 16,952 Depreciation expense ............ 62,000 538,952Net income ........................... P 377,488


97.Medium

(Appendix) Below are cost and activity data for a particular cost over the last four periods. Your boss has asked you to analyze this cost so that management will have a better understanding of how this cost changes in response to changes in activity.

Activity Cost Period 1 44 277 Period 2 42 265 Period 3 48 284 Period 4 49 284

Required:

Using the least-squares regression method, estimate the cost formula for this cost.

Answer:n = 4X = 183Y = 1,110XY = 50,866X^2 = 8,405

b = [n(XY)-(X)(Y)]/[n(X^2)-(X)^2] = [4(50,866)-(183)(1,110)]/[4(8,405)-(183)^2] = P2.55 (rounded to nearest whole cent) a = [(Y)-b(X)]/n = [(1,110)- 2.55(183)]/4 = P161 (rounded to nearest whole peso)

Cost formula: Y = P161 + P2.55X.


Test Bank - Chapter 5 Cost Behavior Analysis

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