Practice Problems

Advantages of the high-low method:

 Objectivity—Any two people using a particular set of data will come up with the
same answer.
 Quick estimation—Only two points of data are needed.
Disadvantage of the high-low method:
 The high and low points may not be representative of the cost-activity relationship.

Q1.Antz Industries has provided you with the following data for its materials storeroom:
Month Number of Shipments Storeroom Costs
January...................... 175 $3,000
February .................... 225 3,600
March ........................ 275 4,300
April ........................... 175 3,800
May ........................... 200 2,700
June .......................... 225 3,200
July ............................ 300 4,250
August ....................... 325 4,400
September ................. 275 4,100
October...................... 200 3,150
November .................. 150 2,650
December .................. 175 2,750

Required:
1. Determine the cost behavior using the high-low method and Linear Regression
Method
Q2.
Q3.
.

Q4.

Q5.
Q6.

Q7.
Coffeeworks Limited manufactures coffee machines for domestic use. The management of the
company is considering next year’s production and has asked you to help with certain financial
decisions.
The following information is available:
Selling price (per machine) £80
Direct materials (per machine) £25
Direct labour (per machine) £20
Fixed production overheads £270,000 per year
The company is planning to manufacture 15,000 coffee machines next year.
(a) calculate the marginal/Variabe cost per coffee machine
(b) calculate the absorption cost per coffee machine
(c) prepare a statement of profit or loss to show the profit or loss if 15,000 coffee machines are
Sold
Q8.
Cook-It Limited makes garden barbecues. The management of the company is considering the
production for next year and has asked for help with certain financial decisions.
The following information is available:
Selling price (per barbecue) £90
Direct materials (per barbecue) £30
Direct labour (per barbecue) £25
Fixed production overheads £150,000 per year
The company is planning to manufacture 10,000 barbecues next year.
required
You are to calculate:
• the marginal cost per barbecue
• the absorption cost per barbecue
• the profit or loss if 10,000 barbecues are sold
Q9
Durning Limited manufactures one product, the Durn. For the month of April 20-4 the following
information is available:
Number of units manufactured 10,000
Number of units sold 8,000
Selling price £4 per unit
Direct materials for month £8,000
Direct labour for month £16,000
Fixed production overheads for month £10,000
There was no finished goods inventory at the start of the month. Both direct materials and direct
labour are variable costs.
required
(a) produce statements of profit or loss for April 20-4, using:
• marginal costing and absorption costing
Q10
Playa Company produces chocolate candies. The chocolates sell for $14 per box. During its first
quarter of operations, the company produced 12,000 boxes of chocolates and sold 9,000 boxes
of the candies. The company’s cost information includes the following:

Direct materials $ 4.00 per unit

Direct labor $ 2.50 per unit
Fixed manufacturing overhead $21,000
Fixed selling and administrative expenses $15,000
Variable manufacturing overhead $ 1.00 per unit
Variable selling and administrative expenses $ 2.00 per unit
 (a) Compute the unit product cost under absorption costing.
(b) Compute the unit product cost under variable costing.
(c) Prepare an income statement using absorption costing.
(d) Prepare an income statement using variable costing.
(e) Explain the difference in the net operating income determined under the absorption and
variable costing methods.

Q11.
Q12.