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# Chapter 02 Managerial Accounting and Cost Concepts

Chapter 2
Managerial Accounting and Cost Concepts
Solutions to Questions
2-1 The three major elements of product costs in a manufacturing company are direct materials, direct labor, and
2-2
a. Direct materials are an integral part of a fnished product and their costs can be conveniently traced to it.
b. Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a
fnished product but their costs can be traced to the product only at great cost or inconvenience.
c. Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is also called
touch labor.
d. Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory worers
that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but the worers
involved do not directly wor on the product.
e. !anufacturing overhead includes all manufacturing costs e"cept direct materials and direct labor. #onse\$uently,
manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs.
2-3 % product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured goods, these
costs consist of direct materials, direct labor, and manufacturing overhead. % period cost is a cost that is taen directly to the
income statement as an e"pense in the period in which it is incurred.
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Chapter 02 Managerial Accounting and Cost Concepts
2-4
a. &ariable cost' The variable cost per unit is constant, but total variable cost changes in direct proportion to changes in
volume.
b. (i"ed cost' The total f"ed cost is constant within the relevant range. The average f"ed cost per unit varies inversely with
changes in volume.
c. !i"ed cost' % mi"ed cost contains both variable and f"ed cost elements.
2-5
a. )nit f"ed costs decrease as volume increases.
b. )nit variable costs remain constant as volume increases.
c. Total f"ed costs remain constant as volume increases.
d. Total variable costs increase as volume increases.
2-6
a. #ost behavior' #ost behavior refers to the way in which costs change in response to changes in a measure of activity such as
sales volume, production volume, or orders processed.
b. *elevant range' The relevant range is the range of activity within which assumptions about variable and f"ed cost behavior
are valid.
2-7 %n activity base is a measure of whatever causes the incurrence of a variable cost. +"amples of activity bases include
units produced, units sold, letters typed, beds in a hospital, meals served in a cafe, service calls made, etc.
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Chapter 02 Managerial Accounting and Cost Concepts
2- The linear assumption is reasonably valid providing that the cost formula is used only within the relevant range.
2-! % discretionary f"ed cost has a fairly short planning hori,on-usually a year. .uch costs arise from annual decisions by
management to spend on certain f"ed cost items, such as advertising, research, and management development. % committed
f"ed cost has a long planning hori,on-generally many years. .uch costs relate to a company/s investment in facilities,
e\$uipment, and basic organi,ation. 0nce such costs have been incurred, they are loced in for many years.
2-1" 1es. %s the anticipated level of activity changes, the level of f"ed costs needed to support operations may also change.
!ost f"ed costs are adjusted upward and downward in large steps, rather than being absolutely f"ed at one level for all ranges
of activity.
2-11 The high2low method uses only two points to determine a cost formula. These two points are liely to be less than typical
because they represent e"tremes of activity.
2-12 The formula for a mi"ed cost is 1 3 a 4 b5. In cost analysis, the a term represents the f"ed cost and the b term
represents the variable cost per unit of activity.
2-13 The term least2s\$uares regression means that the sum of the s\$uares of the deviations from the plotted points on a
graph to the regression line is smaller than could be obtained from any other line that could be ftted to the data.
2-14 The contribution approach income statement organi,es costs by behavior, frst deducting variable e"penses to obtain
contribution margin, and then deducting f"ed e"penses to obtain net operating income. The traditional approach organi,es
costs by function, such as production, selling, and administration. 6ithin a functional area, f"ed and variable costs are
intermingled.
2-15 The contribution margin is total sales revenue less total variable e"penses.
2-16 % di7erential cost is a cost that di7ers between alternatives in a decision. %n opportunity cost is the potential beneft that
is given up when one alternative is selected over another. % sun cost is a cost that has already been incurred and cannot be
altered by any decision taen now or in the future.
2-17 8o, di7erential costs can be either variable or f"ed. (or e"ample, the alternatives might consist of purchasing one
machine rather than another to mae a product. The di7erence between the f"ed costs of purchasing the two machines is a
di7erential cost.
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Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-1 9:; minutes<
:. The wages of employees who build the sailboats' direct labor cost.
=. The cost of advertising in the local newspapers' mareting and selling cost.
>. The cost of an aluminum mast installed in a sailboat' direct materials cost.
?. The wages of the assembly shop/s supervisor' manufacturing overhead cost.
@. *ent on the boathouse' a combination of manufacturing overhead, administrative, and
mareting and selling cost. The rent would most liely be prorated on the basis of the
amount of space occupied by manufacturing, administrative, and mareting operations.
A. The wages of the company/s booeeper' administrative cost.
B. .ales commissions paid to the company/s salespeople' mareting and selling cost.
C. Depreciation on power tools' manufacturing overhead cost.
2-4
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-2 9:@ minutes<
Product
Cost
Period
Cost
:. The cost of the memory chips used in
=. (actory heating costs............................. 5
>. (actory e\$uipment maintenance costs... 5
?. Training costs for new administrative
employees........................................... 5
@. The cost of the solder that is used in
A. The travel costs of the company/s
salespersons........................................ 5
B. 6ages and salaries of factory security
personnel............................................. 5
C. The cost of air2conditioning
e"ecutive oDces.................................. 5
E. 6ages and salaries in the department
that handles billing customers............. 5
:;. Depreciation on the e\$uipment in the
ftness room used by factory worers. . 5
::. Telephone e"penses incurred by
factory management........................... 5
:=. The costs of shipping completed radar
sets to customers................................ 5
:>. The wages of the worers who
:?. The president/s salary............................ 5
2-5
Chapter 02 Managerial Accounting and Cost Concepts
:@. Fealth insurance premiums for factory
personnel............................................. 5
2-6
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-3 9:@ minutes<
:
.
Cups of Cofee Served
in a Week
1,800 1,900 2,000
(i"ed cost G:,:;; G:,:;; G:,:;
;
&ariable cost ?AC ?E? @=;
Total cost G:,@AC G:,@E? G:,A=
;
%verage cost per cup
servedH
G;.CB: G;.C>E G;.C:
;
H Total cost I cups of co7ee served in a wee
=. The average cost of a cup of co7ee declines as the number of cups of co7ee served
increases because the f"ed cost is spread over more cups of co7ee.
2-7
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-4 9=; minutes<
:. Occupanc
y-ays
!"ectrica"
Costs
Figh activity level
9%ugust<........................
>,A;C GC,:::
Jow activity level
90ctober<......................
:CA :,B:=
#hange........................... >,?== GA,>EE
&ariable cost 3 #hange in cost I #hange in activity
3 GA,>EE I >,?== occupancy2days
3 G:.CB per occupancy2day
Total cost 9%ugust<.............................................. GC,:::
&ariable cost element
9G:.CB per occupancy2day K >,A;C occupancy2
days<................................................................ A,B?B
(i"ed cost element.............................................. G:,>A?
=. +lectrical costs may reLect seasonal factors other than just the variation in occupancy
days. (or e"ample, common areas such as the reception area must be lighted for longer
periods during the winter. This will result in seasonal e7ects on the f"ed electrical costs.
%dditionally, f"ed costs will be a7ected by how many days are in a month. In other
words, costs lie the costs of lighting common areas are variable with respect to the
number of days in the month, but are f"ed with respect to how many rooms are
occupied during the month.
0ther, less systematic, factors may also a7ect electrical costs such as the frugality of
individual guests. .ome guests will turn o7 lights when they leave a room. 0thers will
not.
2-8
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-5 9:@ minutes<
*edhaw, Inc.
.ales 9G:@ per unit K :;,;;; units<............
G:@;,;;
;
#ost of goods sold
9G:=,;;; 4 GE;,;;; M G==,;;;<................ C;,;;;
Nross margin............................................... B;,;;;
.elling e"penses
99G= per unit K :;,;;; units< 4 G=;,;;;<
.............................................................. ?;,;;;
%dministrative e"penses
99G: per unit K :;,;;; units< 4 G:@,;;;<
.............................................................. =@,;;; A@,;;;
8et operating income................................. G @,;;;
=. #ontribution format income statement
*edhaw, Inc.
#ontribution (ormat Income .tatement
.ales...........................................................
G:@;,;;
;
&ariable e"penses'
#ost of goods sold GC;,;;;
2-9
Chapter 02 Managerial Accounting and Cost Concepts
9G:=,;;; 4 GE;,;;; M G==,;;;<.............
.elling e"penses 9G= per unit K :;,;;;
units<...................................................... =;,;;;
%dministrative e"penses
9G: per unit K :;,;;; units<................... :;,;;; ::;,;;;
#ontribution margin.................................... ?;,;;;
(i"ed e"penses'
.elling e"penses....................................... =;,;;;
%dministrative e"penses........................... :@,;;; >@,;;;
8et operating income................................. G @,;;;
2-10
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-6 9:@ minutes<
ire
ct
#ndirect
Cost Cost O\$%ect Cost Cost
:
.
The salary of the
The hotel/s
restaurant
5
=
.
The salary of the
% particular
restaurant
customer
5
>
.
*oom cleaning
supplies
% particular hotel
guest
5
?
.
(lowers for the
reception des
% particular hotel
guest
5
@
.
The wages of the
doorman
% particular hotel
guest
5
A
.
*oom cleaning
supplies
The housecleaning
department
5
B
.
(ire insurance on the
hotel building
The hotel/s gym 5
C
.
Towels used in the
gym
The hotel/s gym 5
8ote' The room cleaning supplies would most liely be considered an indirect cost of a
particular hotel guest because it would not be practical to eep trac of e"actly how
much of each cleaning supply was used in the guest/s room.
2-11
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-7 9:@ minutes<
iferentia"
Opportunit
y
Sun
k
#te&
Cost Cost
Cos
t
:
.
#ost of the new Lat2panel
displays............................ 5
=
.
#ost of the old computer
terminals.......................... 5
>
.
*ent on the space occupied
by the registration des....
?
.
6ages of registration des
personnel.........................
@
.
Oenefts from a new
free,er.............................. 5
A
.
#osts of maintaining the
old computer terminals... . 5
B
.
#ost of removing the old
computer terminals.......... 5
C
.
#ost of e"isting registration
des wiring....................... 5
8ote' The costs of the rent on the space occupied by the registration des and the wages
of registration des personnel are neither di7erential costs, opportunity costs, nor sun
costs. These are costs that do not di7er between the alternatives and are therefore
irrelevant in the decision, but they are not sun costs since they occur in the future.
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Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2- 9=; minutes<
:. The company/s variable cost per unit would be'
G:@;,;;;
3G=.@; per unit.
A;,;;; units
In accordance with the behavior of variable and f"ed costs, the completed schedule is'
'nits produced and so"d
A;,;;; C;,;;; :;;,;;;
Total costs'
&ariable costs................... G:@;,;;; G=;;,;;; G=@;,;;;
(i"ed costs........................ >A;,;;; >A;,;;; >A;,;;;
Total costs........................... G@:;,;;; G@A;,;;; GA:;,;;;
#ost per unit'
&ariable cost..................... G=.@; G=.@; G=.@;
(i"ed cost.......................... A.;; ?.@; >.A;
Total cost per unit................ GC.@; GB.;; GA.:;
=. The company/s income statement in the contribution format is'
.ales 9E;,;;; units K GB.@; per unit<...................
GAB@,;;
;
&ariable e"penses 9E;,;;; units K G=.@; per
unit<.................................................................... ==@,;;;
#ontribution margin.............................................. ?@;,;;;
(i"ed e"penses..................................................... >A;,;;;
8et operating income...........................................
G
E;,;;;
2-13
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-! 9>; minutes<
(a&e of t)e Cost
*aria\$"
e Cost
+i,ed
Cost
Product Cost
Period
-Se""ing
and
.d&in/0
Opportuni
ty Cost
Sunk
Cost
irect
1ateria
"s
irect
2a\$or
1fg/
Over)ea
d
*ental revenue forgone,
G?;,;;; per year................... 5
Direct materials cost, G?; per
unit........................................ 5 5
.upervisor/s salary, G=,@;;
per month.............................. 5 5
Direct labor cost, G:C per unit.. 5 5
*ental cost of warehouse,
G:,;;; per month.................. 5 5
*ental cost of e\$uipment,
G>,;;; per month.................. 5 5
Depreciation of the building,
G:;,;;; per year................... 5 5 5
%dvertising cost, G@;,;;; per
year....................................... 5 5
.hipping cost, G:; per unit...... 5 5
+lectrical costs, G= per unit...... 5 5
*eturn earned on
investments, GA,;;; per
year....................................... 5
2-14
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-1" 9?@ minutes<
:. The scattergraph appears below'
2-15
Chapter 02 Managerial Accounting and Cost Concepts
1es, there is an appro"imately linear relationship between the number of units shipped
and the total shipping e"pense.
2-16
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-1" 9continued<
=.
'nits
S)ipped
S)ipping
!,pense
Figh activity level....... C G>,A;;
Jow activity level........ = :,@;;
#hange ...................... A G=,:;;
&ariable cost element'
#hange in cost G=,:;;
3 3G>@; per unit
#hange in activity A units
(i"ed cost element'
.hipping e"pense at the high activity level......... G>,A;;
Jess variable cost element 9G>@; per unit K C
units<................................................................ =,C;;
Total f"ed cost.................................................... GC;;
The cost formula is GC;; per month plus G>@; per unit shipped, or'
1 3 GC;; 4 G>@;5,
where 5 is the number of units shipped.
The scattergraph on the following page shows the straight line drawn through the high
and low data points.
#\$ercise 2-1" 9continued<
2-17
Chapter 02 Managerial Accounting and Cost Concepts
>. The high2low estimate of f"ed costs is G=:;.B: lower than the estimate provided by
least2s\$uares regression. The high2low estimate of the variable cost per unit is G>=.:?
lower than the estimate provided by least2s\$uares regression. % straight line that
2-18
Chapter 02 Managerial Accounting and Cost Concepts
minimi,ed the sum of the s\$uared errors would intersect the 12a"is at G:,;:;.B: instead
of GC;;. It would also have a Latter slope because the estimated variable cost per unit is
lower than the high2low method.
?. The cost of shipping units is liely to depend on the weight and volume of the units
shipped and the distance traveled as well as on the number
2-19
Chapter 02 Managerial Accounting and Cost Concepts
of units shipped. In addition, higher cost shipping might be necessary to meet a deadline.
#\$ercise 2-11 9=; minutes<
Faai .hop, Inc.
.ales...........................................................
GC;;,;;
;
#ost of goods sold
9GC;,;;; 4 G>=;,;;; M G:;;,;;;<............ >;;,;;;
Nross margin............................................... @;;,;;;
.elling e"penses 99G@; per unit K =,;;;
surfboardsH< 4 G:@;,;;;<...................... =@;,;;;
%dministrative e"penses 99G=; per unit K
=,;;; units< 4 G:=;,;;;<....................... :A;,;;; ?:;,;;;
8et operating income................................. G E;,;;;
HGC;;,;;; sales I G?;; per surfboard 3 =,;;; surfboards.
=. #ontribution format income statement
Faai .hop, Inc.
#ontribution (ormat Income .tatement
.ales...........................................................
GC;;,;;
;
&ariable e"penses'
#ost of goods sold
9GC;,;;; 4 G>=;,;;; M G:;;,;;;<.........
G>;;,;;
;
2-20
Chapter 02 Managerial Accounting and Cost Concepts
.elling e"penses
9G@; per unit K =,;;; surfboards<.......... :;;,;;;
%dministrative e"penses
9G=; per unit K =,;;; surfboards<.......... ?;,;;; ??;,;;;
#ontribution margin.................................... >A;,;;;
(i"ed e"penses'
.elling e"penses....................................... :@;,;;;
%dministrative e"penses........................... :=;,;;; =B;,;;;
8et operating income................................. G E;,;;;
2-21
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-11 9continued<
=. .ince =,;;; surfboards were sold and the contribution margin totaled G>A;,;;; for the
\$uarter, the contribution of each surfboard toward f"ed e"penses and profts was G:C;
9G>A;,;;; I =,;;; surfboards 3 G:C; per surfboard<.
2-22
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-12 9=; minutes<
:.
1i"es
riven
3ota"
.nnua"
Cost4
Figh level of activity.......
:=;,;;
;
G:>,E=
;
Jow level of activity........ C;,;;; :;,CC;
#hange........................... ?;,;;; G >,;?;
H :=;,;;; miles K G;.::A per mile 3
G:>,E=;
C;,;;; miles K G;.:>A per mile 3
G:;,CC;
&ariable cost per mile'
#hange in cost G>,;?;
3 3G;.;BA per mile
#hange in activity ?;,;;; miles
(i"ed cost per year'
Total cost at :=;,;;; miles............................ G:>,E=;
Jess variable cost element'
:=;,;;; miles K G;.;BA per mile................ E,:=;
(i"ed cost per year........................................ G?,C;;
=. 1 3 G?,C;; 4 G;.;BA5
>. (i"ed cost.......................................................... G?,C;;
&ariable cost' :;;,;;; miles K G;.;BA per
mile................................................................ B,A;;
2-23
Chapter 02 Managerial Accounting and Cost Concepts
Total annual cost............................................... G:=,?;;
2-24
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-13 9>; minutes<
:. 5-rays 3aken 5-ray Costs
Figh activity level 9(ebruary<. . B,;;; G=E,;;;
Jow activity level 9Qune<.......... >,;;; :B,;;;
#hange................................... ?,;;; G:=,;;;
&ariable cost per 52ray'
#hange in cost G:=,;;;
3 3G>.;; per 52ray
#hange in activity ?,;;; 52rays
(i"ed cost per month'
52ray cost at the high activity level............... G=E,;;;
Jess variable cost element'
B,;;; 52rays K G>.;; per 52ray................... =:,;;;
Total f"ed cost.............................................. G C,;;;
The cost formula is GC,;;; per month plus G>.;; per 52ray taen or'
1 3 GC,;;; 4 G>.;;5
=. +"pected 52ray costs when ?,A;; 52rays are taen'
&ariable cost' ?,A;; 52rays K G>.;; per 52ray... G:>,C;;
(i"ed cost.......................................................... C,;;;
Total cost........................................................... G=:,C;;
#\$ercise 2-13 9continued<
>. The scattergraph appears below.
2-25
Chapter 02 Managerial Accounting and Cost Concepts
#\$ercise 2-13
9continued<
?. The high2low estimate of f"ed costs is G:,?B;.@E higher than the estimate provided by
least2s\$uares regression. The high2low estimate of the variable cost per unit is G;.=E
lower than the estimate provided by least2s\$uares regression. % straight line that
minimi,ed the sum of the s\$uared errors would intersect the 12a"is at GA,@=E.?: instead
2-26
Chapter 02 Managerial Accounting and Cost Concepts
of GC,;;;. It would also have a steeper slope because the estimated variable cost per
unit is higher than the high2low method.
@. +"pected 52ray costs when ?,A;; 52rays are taen'
&ariable cost' ?,A;; 52rays K G>.=E per 52ray... G:@,:>?
2-27
Chapter 02 Managerial Accounting and Cost Concepts
(i"ed cost 9rounded<.......................................... A,@=E
Total cost........................................................... G=:,AA>
2-28
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-14 9?@ minutes<
:.
Fouse 0f 0rgans, Inc.
(or the !onth +nded 8ovember >;
.ales 9A; organs K G=,@;; per organ<........
G:@;,;;
;
#ost of goods sold
9A; organs K G:,@;; per organ<............... E;,;;;
Nross margin............................................... A;,;;;
.elling e"penses'
%dvertising............................................. G E@;
Delivery of organs
9A; organs K GA; per organ<............... >,A;;
.ales salaries and commissions
RG?,C;; 4 9?S K G:@;,;;;<T............... :;,C;;
)tilities................................................... A@;
Depreciation of sales facilities................ @,;;;
Total selling e"penses............................... =:,;;;
%dministrative e"penses'
+"ecutive salaries.................................. :>,@;;
Depreciation of oDce e\$uipment........... E;;
#lerical
RG=,@;; 4 9A; organs K G?; per
organ<T................................................. ?,E;;
Insurance............................................... B;;
2-29
Chapter 02 Managerial Accounting and Cost Concepts
Total selling and administrative e"penses... ?:,;;;
8et operating income.................................
G
:E,;;;
%roble& 2-14 9continued<
=. Fouse 0f 0rgans, Inc.
#ontribution (ormat Income .tatement
(or the !onth +nded 8ovember >;
2-30
Chapter 02 Managerial Accounting and Cost Concepts
3ota"
Per
'nit
.ales 9A; organs K G=,@;; per organ<........ G:@;,;;; G=,@;;
&ariable e"penses'
#ost of goods sold
9A; organs K G:,@;; per organ<............. E;,;;; :,@;;
Delivery of organs
9A; organs K GA; per organ<.................. >,A;; A;
.ales commissions 9?S K G:@;,;;;<........ A,;;; :;;
#lerical 9A; organs K G?; per organ<........ =,?;; ?;
Total variable e"penses.......................... :;=,;;; :,B;;
#ontribution margin.................................... ?C,;;; G C;;
(i"ed e"penses'
%dvertising............................................... E@;
.ales salaries............................................ ?,C;;
)tilities..................................................... A@;
Depreciation of sales facilities.................. @,;;;
+"ecutive salaries..................................... :>,@;;
Depreciation of oDce e\$uipment.............. E;;
#lerical..................................................... =,@;;
Insurance.................................................. B;;
Total f"ed e"penses.................................... =E,;;;
8et operating income................................. G :E,;;;
>. (i"ed costs remain constant in total but vary on a per unit basis with changes in the
activity level. (or e"ample, as the activity level increases, f"ed costs decrease on a per
unit basis. .howing f"ed costs on a per unit basis on the income statement mae them
2-31
Chapter 02 Managerial Accounting and Cost Concepts
appear to be variable costs. That is, management might be misled into thining that the
per unit f"ed costs would be the same regardless of how many organs were sold during
the month. (or this reason, f"ed costs should be shown only in totals on a contribution2
type income statement.
2-32
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-15 9>; minutes<
:. a. A
b. ::
c. :
d. ?
e. =
f. :;
g. >
h. B
i. E
=. 6ithout an understanding of the underlying cost behavior patterns, it would be diDcult,
if not impossible for a manager to properly analy,e the frm/s cost structure. The reason
is that all costs don/t behave in the same way. 0ne cost might move in one direction as a
result of a particular action, and another cost might move in an opposite direction.
)nless the behavior pattern of each cost is clearly understood, the impact of a frm/s
activities on its costs will not be nown until after the activity has occurred.
2-33
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-16 9=; minutes<
irect or
#ndirect Cost of
t)e
#&&uni6ation
Center
irect or
#ndirect Cost of
Particu"ar
Patients
*aria\$"e or +i,ed
7it) 8espect to
t)e (u&\$er of
#&&uni6ations
.d&inistered
#te& escription irect #ndirect irect #ndirect
*aria\$"
e +i,ed
a. The salary of the head nurse in the
Immuni,ation #enter................................. 5 5 5
b. #osts of incidental supplies consumed in
the Immuni,ation #enter such as paper
towels........................................................ 5 5 5
c. The cost of lighting and heating the
Immuni,ation #enter................................. 5 5 5
d. The cost of disposable syringes used in
the Immuni,ation #enter........................... 5 5 5
e. The salary of the #entral %rea 6ell2Oaby
#linic/s Information .ystems manager...... 5 5 5
f. The costs of mailing letters soliciting
donations to the #entral %rea 6ell2Oaby
#linic.......................................................... 5 5 5
g. The wages of nurses who wor in the
Immuni,ation #enterH............................... 5 5 5
h. The cost of medical malpractice insurance
for the #entral %rea 6ell2Oaby #linic......... 5 5 5
2-34
Chapter 02 Managerial Accounting and Cost Concepts
i. Depreciation on the f"tures and
e\$uipment in the Immuni,ation #enter..... 5 5 5
H The wages of the nurses could be variable and a direct cost of serving particular patients.
%roble& 2-17 9>; minutes<
:. !aintenance cost at the C;,;;; machine2hour level of activity can be isolated as follows'
2eve" of .ctivity
90,000 1: 80,000 1:
cost............................... =B?,;;; pesos >:=,;;; pesos
Deduct'
Indirect materials U
:.@; pesos per !FH.... E;,;;; :=;,;;;
*ent.............................. :>;,;;; :>;,;;;
!aintenance cost............ @?,;;; pesos A=,;;; pesos
H E;,;;; pesos I A;,;;; !Fs 3 :.@; pesos per !F
=. Figh2low analysis of maintenance cost'
1ac)ine-:ours
1aintenance
Cost
Figh activity level......... C;,;;; A=,;;; pesos
Jow activity level.......... A;,;;; @?,;;;
#hange observed.......... =;,;;; C,;;; pesos
2-35
Chapter 02 Managerial Accounting and Cost Concepts
#hange in cost
&ariable cost 3
#hange in activity
C,;;; pesos
3 3 ;.?; peso per !F
=;,;;; !Fs
2-36
Chapter 02 Managerial Accounting and Cost Concepts
(i"ed cost element'
Total cost at the high level of activity.......... @?,;;; pesos
Jess variable cost element
9A;,;;; !Fs K ;.?; pesos per !F<.......... =?,;;;
(i"ed cost element...................................... >;,;;; pesos
Therefore, the cost formula is >;,;;; pesos per year, plus ;.?; peso per
2-37
Chapter 02 Managerial Accounting and Cost Concepts
machine2hour or
1 3 >;,;;; pesos 4 ;.?; peso 5.
%roble& 2-17 9continued<
>. Total factory overhead cost at A@,;;; machine2hours is'
Indirect materials 9A@,;;; !Fs
K :.@; pesos per !F<............... EB,@;; pesos
*ent............................................ :>;,;;;
!aintenance'
&ariable cost element 9A@,;;;
!Fs K ;.?; peso per !F<....... =A,;;; pesos
(i"ed cost element.................... >;,;;; @A,;;;
Total factory overhead cost......... =C>,@;; pesos
2-38
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-1 9?@ minutes<
:. #ost of goods sold................ &ariable
.hipping e"pense................. !i"ed
%dvertising e"pense............. (i"ed
.alaries and commissions.... !i"ed
Insurance e"pense............... (i"ed
Depreciation e"pense.......... (i"ed
=. %nalysis of the mi"ed e"penses'
'nits
S)ipping
!,pense
Sa"aries and
Co&&/
!,pense
Figh level of activity. ?,@;; V@A,;;; V:?>,;;;
Jow level of activity. . >,;;; ??,;;; :;B,;;;
#hange...................... :,@;; V:=,;;; V>A,;;;
&ariable cost element'
#hange in cost
&ariable cost per unit 3
#hange in activity
V:=,;;;
.hipping e"pense' 3 VC per unit
:,@;; units
V>A,;;;
.alaries and comm. e"pense' 3 V=? per unit
:,@;; units
(i"ed cost element'
S)ipping Sa"aries and
2-39
Chapter 02 Managerial Accounting and Cost Concepts
!,pense
Co&&/
!,pense
#ost at high level of
activity............................ V@A,;;; V:?>,;;;
Jess variable cost
element'
?,@;; units K VC per unit >A,;;;
2-40
Chapter 02 Managerial Accounting and Cost Concepts
?,@;; units K V=? per
unit............................... :;C,;;;
(i"ed cost element............ V=;,;;; V >@,;;;
%roble& 2-1 9continued<
The cost formulas are'
.hipping e"pense' V=;,;;; per month plus VC per unit or
1 3 V=;,;;; 4 VC5.
.alaries and #omm. e"pense' V>@,;;; per month plus V=? per unit or
2-41
Chapter 02 Managerial Accounting and Cost Concepts
1 3 V>@,;;; 4 V=?5.
>. (ranel Jtd.
Income .tatement
(or the !onth +nded Qune >;
.ales revenue....................................... VA>;,;;;
&ariable e"penses'
#ost of goods sold
9?,@;; units K V@A per unit<............. V=@=,;;;
.hipping e"pense
9?,@;; units K VC per unit<............... >A,;;;
.alaries and commissions e"pense
9?,@;; units K V=? per unit<............. :;C,;;; >EA,;;;
#ontribution margin.............................. =>?,;;;
(i"ed e"penses'
.hipping e"pense............................... =;,;;;
%dvertising......................................... B;,;;;
.alaries and commissions................... >@,;;;
Insurance............................................ E,;;;
Depreciation....................................... ?=,;;; :BA,;;;
8et operating income........................... V @C,;;;
2-42
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-1! 9?@ minutes<
:. Figh2low method'
(u&\$er of
#ngots
Po7er
Cost
Figh activity level......... :>; GA,;;;
Jow activity level.......... ?; =,?;;
#hange.......................... E; G>,A;;
#hange in cost
&ariable cost per unit 3
#hange in activity
G>,A;;
3 3 G?; per ingot
E; ingots
(i"ed cost' Total power cost at high activity level GA,;;;
Jess variable element'
:>; ingots K G?; per ingot.............. @,=;;
(i"ed cost element............................. G C;;
Therefore, the cost formula is' 1 3 GC;; 4 G?;5.
=. The scattergraph with a straight line drawn through the high and low data points is
shown at the top of the ne"t page.
%roble& 2-1! 9continued<
2-43
Chapter 02 Managerial Accounting and Cost Concepts
2-44
Chapter 02 Managerial Accounting and Cost Concepts
>. The high2low estimate of f"ed costs is G>C@.?@ lower than the estimate provided by
least2s\$uares regression. The high2low estimate of the variable cost per unit is G=.:C
higher than the estimate provided by least2s\$uares regression. % straight line that
minimi,ed the sum of the s\$uared errors would intersect the 12a"is at G:,:C@.?@ instead
of GC;;. It would also have a Latter slope because the estimated variable cost
per unit is lower than the high2low method.
2-45
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-2" 9>; minutes<
:. !r. *ichart/s frst action was to direct that discretionary e"penditures be delayed until
the frst of the new year. Wroviding that these discretionary e"penditures can be
delayed without hampering operations, this is a good business decision. Oy delaying
e"penditures, the company can eep its cash a bit longer and thereby earn a bit more
interest. There is nothing unethical about such an action. The second action was to as
that the order for the parts be cancelled. .ince the cler/s order was a mistae, there is
The third action was to as the accounting department to delay recognition of the
delivery until the bill is paid in Qanuary. This action is dubious. %sing the accounting
department to ignore transactions stries at the heart of the integrity of the accounting
system. If the accounting system cannot be trusted, it is very diDcult to run a business
or obtain funds from outsiders. Fowever, in !r. *ichart/s defense, the purchase of the
raw materials really shouldn/t be recorded as an e"pense. Fe has been placed in an
e"tremely awward position because the company/s accounting policy is Lawed.
=. The company/s accounting policy with respect to raw materials is incorrect. *aw
materials should be recorded as an asset when delivered rather than as an e"pense. If
the correct accounting policy were followed, there would be no reason for !r. *ichart to
as the accounting department to delay recognition of the delivery of the raw materials.
This Lawed accounting policy creates incentives for managers to delay deliveries of raw
materials until after the end of the fscal year. This could lead to raw materials shortages
and poor relations with suppliers who would lie to record t)eir sales before the end of
the year.
The company/s manage2by2the2numbers approach does not foster ethical behavior-
particularly when managers are told to do anything so long as you hit the target profts
for the year. .uch no e"cuses pressure from the top too often leads to unethical
2-46
Chapter 02 Managerial Accounting and Cost Concepts
behavior when managers have diDculty meeting target profts.
2-47
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-21 9?@ minutes<
:. !aintenance cost at the B;,;;; machine2hour level of activity can be isolated as follows'
2eve" of .ctivity
;0,000
1:
<0,000
1:
Total factory overhead cost....... G:B;,=;; G=?:,A;;
Deduct'
)tilities cost U G:.>; per !FH @=,;;; E:,;;;
.upervisory salaries................ A;,;;; A;,;;;
!aintenance cost...................... G @C,=;; G E;,A;;
HG@=,;;; I ?;,;;; !Fs 3 G:.>; per !F
=. Figh2low analysis of maintenance cost'
1ac)ine-
:ours
1aintenanc
e Cost
Figh activity level......... B;,;;; GE;,A;;
Jow activity level.......... ?;,;;; @C,=;;
#hange.......................... >;,;;; G>=,?;;
&ariable cost per unit of activity'
#hange in cost G>=,?;;
3 3G:.;C per !F
#hange in activity >;,;;; !Fs
Total f"ed cost'
Total maintenance cost at the low activity level. . G@C,=;;
Jess the variable cost element ?>,=;;
2-48
Chapter 02 Managerial Accounting and Cost Concepts
9?;,;;; !Fs K G:.;C per !F<...........................
2-49
Chapter 02 Managerial Accounting and Cost Concepts
(i"ed cost element.............................................. G:@,;;;
Therefore, the cost formula is G:@,;;; per month plus G:.;C per machine2hour or'
1 3 G:@,;;; 4 G:.;C5
%roble& 2-21 9continued<
>. *aria\$"e 8ate
per 1ac)ine-
:our +i,ed Cost
!aintenance cost.......... G:.;C G:@,;;;
)tilities cost.................. :.>;
.upervisory salaries
cost............................ A;,;;;
Totals............................ G=.>C GB@,;;;
Thus, the cost formula is' 1 3 GB@,;;; 4 G=.>C5.
?. Total overhead cost at an activity level of ?@,;;; machine2hours'
(i"ed costs.................................................... GB@,;;;
&ariable costs' G=.>C per !F K ?@,;;; !Fs. :;B,:;;
2-50
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-22 9>; minutes<
8ote to the Instructor' .ome of the answers below are debatable.
Cost #te&
*aria\$"e
or +i,ed
Se""ing
Cost
.d&ini
s-
trative
Cost
1anufacturin
g -Product0
Cost
irec
t
#ndirec
t
:. Depreciation, e"ecutive jet..................................... ( 5
=. #osts of shipping fnished goods to customers....... & 5
>. 6ood used in manufacturing furniture.................... & 5
?. .ales manager/s salary........................................... ( 5
@. +lectricity used in manufacturing furniture............. & 5
A. .ecretary to the company president....................... ( 5
B. %erosol attachment placed on a spray can
produced by the company.................................... & 5
C. Oilling costs............................................................. & 5H
E. Wacing supplies for shipping products overseas.... & 5
:;. .and used in manufacturing concrete.................... & 5
::. .upervisor/s salary, factory..................................... ( 5
:=. +"ecutive life insurance.......................................... ( 5
:>. .ales commissions.................................................. & 5
:?. (ringe benefts, assembly line worers................... & 5HH
:@. %dvertising costs..................................................... ( 5
:A. Wroperty ta"es on fnished goods warehouses........ ( 5
2-51
Chapter 02 Managerial Accounting and Cost Concepts
:B. Jubricants for production e\$uipment...................... & 5
HH#ould be an indirect cost.
2-52
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-23 9?@ minutes<
:. Figh2low method'
'nits
So"d
S)ippin
g
!,pens
e
Figh activity level......... =@,;;;
G=>=,;;
;
Jow activity level.......... :A,;;;
:A;,;;
;
#hange.......................... E,;;; GB=,;;;
#hange in cost
&ariable cost per unit 3
#hange in activity
GB=,;;;
3 3 GC per unit
E,;;; units
(i"ed cost element'
Total shipping e"pense at high
activity level....................................
G=>=,;;
;
Jess variable element'
=@,;;; units K GC per unit...............
=;;,;;
;
(i"ed cost element.............................
G >=,;;
;
Therefore, the cost formula is' 1 3 G>=,;;; 4 GC5.
2-53
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-23 9continued<
=. %lden #ompany
Oudgeted Income .tatement
(or the (irst Xuarter of 1ear >
.ales 9=:,;;; units K G@; per unit<............
G:,;@;,;;
;
&ariable e"penses'
2-54
Chapter 02 Managerial Accounting and Cost Concepts
#ost of goods sold
9=:,;;; units K G=; per unit<.................
G?=;,;;
;
.hipping e"pense
9=:,;;; units K GC.;; per unit<.............. :AC,;;;
.ales commission 9G:,;@;,;;; K ;.;@<.... @=,@;;
Total variable e"penses...............................
A?;,@;
;
#ontribution margin.................................... ?;E,@;;
(i"ed e"penses'
.hipping e"penses.................................... >=,;;;
%dvertising e"pense................................. :B;,;;;
%dministrative salaries............................. C;,;;;
Depreciation e"pense............................... @;,;;;
Total f"ed e"penses....................................
>>=,;;
;
8et operating income.................................
G BB,@;
;
2-55
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-24 9?@ minutes<
:.
Se""ing or
Cost =e)avior .d&inistrati
ve
Product Cost
Cost #te& *aria\$"e +i,ed Cost irect #ndirect
Direct materials used 9wood,
glass<..........................................
G?>;,;;; G?>;,;;
;
%dministrative oDce salaries........ G::;,;;
;
G::;,;;;
(actory supervision....................... B;,;;; G B;,;;;
.ales commissions........................ A;,;;; A;,;;;
Depreciation, factory building....... :;@,;;; :;@,;;;
e\$uipment..................................
=,;;; =,;;;
Indirect materials, factory............. :C,;;; :C,;;;
(actory labor 9cutting and
assembly<...................................
E;,;;; E;,;;;
%dvertising.................................... :;;,;;; :;;,;;;
Insurance, factory......................... A,;;; A,;;;
%dministrative oDce supplies....... ?,;;; ?,;;;
Wroperty ta"es, factory.................. =;,;;; =;,;;;
)tilities, factory............................. ?@,;;; ?@,;;;
Total costs..................................... GA?B,;;; G?:>,;;
;
G=BA,;;; G@=;,;;
;
G=A?,;;;
2-56
Chapter 02 Managerial Accounting and Cost Concepts
%roble& 2-24 9continued<
=. The average product cost per boocase will be'
Direct............................... G@=;,;;
;
Indirect............................ =A?,;;;
Total................................. GBC?,;;
;
GBC?,;;; I ?,;;; boocases 3 G:EA per boocase
>. The average product cost per boocase would increase if the
production drops. This is because the f"ed costs would be
spread over fewer units, causing the average cost per unit to
rise.
?. a. 1es, there probably would be a disagreement. The president
is liely to want a price of at least G:EA, which is the average
cost per unit to manufacture ?,;;; boocases. Fe may
e"pect an even higher price than this to cover a portion of
the administrative costs as well. The neighbor will probably
be thining of cost as including only materials used, or
perhaps materials and direct labor.
b. The term is opportunity cost. .ince the company is operating
at full capacity, the president must give up the full, regular
price to sell a boocase to the neighbor. Therefore, the
president/s cost is really the full, regular price.
2-57
Chapter 02 Managerial Accounting and Cost Concepts
Case 2-25 9>; minutes<
:. The scattergraph of janitorial labor cost versus the number of
units produced is presented below'
Case 2-25 9continued<
=. The scattergraph of the janitorial labor cost versus the number
of janitorial wordays is presented below'
2-58
Chapter 02 Managerial Accounting and Cost Concepts
Case 2-25 9continued<
>. The number of wordays should be used as the activity base
rather than the number of units produced. There are several
reasons for this. (irst, the scattergraphs reveal that there is a
much stronger relationship 9i.e., higher correlation< between
janitorial costs and number of wordays than between janitorial
costs and number of units produced. .econd, from the
description of the janitorial costs, one would e"pect that
variations in those costs have little to do with the number of
units produced. Two janitors each wor an eight2hour shift-
apparently irrespective of the number of units produced or how
busy the company is. &ariations in the janitorial labor costs
apparently occur because of the number of wordays in the
month and the number of days the janitors call in sic. Third,
for planning purposes, the company is liely to be able
2-59
Chapter 02 Managerial Accounting and Cost Concepts
to predict the number of woring days in the month with much
greater accuracy than the number of units that will be
produced.
8ote that the scattergraph in part 9:< seems to suggest that
the janitorial labor costs are variable with respect to the
number of units produced. This is false. Qanitorial labor costs do
vary, but the number of units produced isn/t the cause of the
variation. Fowever, since the number of units produced tends
to go up and down with the number of wordays and since the
janitorial labor costs are driven by the number of wordays, it
appears on the scattergraph that the number of units drives
the janitorial labor costs to some e"tent. %nalysts must be
careful not to fall into this trap of using the wrong measure of
activity as the activity base just because it appears there is
some relationship between cost and the measure of activity.
#areful thought and analysis should go into the selection of the
activity base.
2-60
Chapter 02 Managerial Accounting and Cost Concepts
Case 2-26 9A; minutes<
:. Figh2low method'
:ours Cost
Figh level of activity. . . =@,;;; GEE,;;;
Jow level of activity. . . . :;,;;; A?,@;;
#hange....................... :@,;;; G>?,@;;
&ariable element' G>?,@;; I :@,;;; DJF 3 G=.>; per DJF
(i"ed element'
Total cost-=@,;;; DJF................... GEE,;;;
Jess variable element'
=@,;;; DJF K G=.>; per DJF........ @B,@;;
(i"ed element.................................. G?:,@;;
Therefore, the cost formula is' 1 3 G?:,@;; 4 G=.>;5.
=. The scattergraph is shown below'
2-61
\$60,000
\$65,000
\$70,000
\$75,000
\$80,000
\$85,000
\$90,000
\$95,000
\$100,000
8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000
Direct Labor-Hours
Y
X
Chapter 02 Managerial Accounting and Cost Concepts
Case 2-26 9continued<
=. The scattergraph shows that there are two relevant ranges-
one below :E,@;; DJF and one above :E,@;; DJF. The change
in e\$uipment lease cost from a f"ed fee to an hourly rate
causes the slope of the regression line to be steeper above
:E,@;; DJF, and to be discontinuous between the f"ed fee and
hourly rate points.
>. The cost formulas computed with the high2low and regression
methods are faulty since they are based on the assumption
that a single straight line provides the best ft to the data.
#reating two data sets related to the two relevant ranges will
enable more accurate cost estimates.
?. Figh2low method'
:ours Cost
Figh level of activity. . . =@,;;; GEE,;;;
Jow level of activity. . . . =;,;;; C;,;;;
#hange....................... @,;;; G:E,;;;
&ariable element' G:E,;;; I @,;;; DJF 3 G>.C; per DJF
(i"ed element'
Total cost-=@,;;; DJF................... GEE,;;;
Jess variable element'
=@,;;; DJF K G>.C; per DJF........ E@,;;;
(i"ed element.................................. G?,;;;
+"pected overhead costs when ==,@;; machine2hours are
used'
&ariable cost' ==,@;; hours K G>.C; per hour... GC@,@;;
(i"ed cost.......................................................... ?,;;;
Total cost........................................................... GCE,@;;
@. The high2low estimate of f"ed costs is GA,;E; lower than the
estimate provided by least2s\$uares regression. The high2low
estimate of the variable cost per machine hour is G;.=B higher
than the estimate provided by least2s\$uares regression. %
straight line that minimi,ed the
2-62
Chapter 02 Managerial Accounting and Cost Concepts
sum of the s\$uared errors would intersect the 12a"is at G:;,;E;
instead of G?,;;;. It would also have a Latter slope because
the estimated variable cost per unit is lower than the high2low
method.
2-63