Test-Bank-Chapter-5-Cost-Behavior-Analysis.doc

Chapter 5 Cost Behavior: Analysis and Use

True/False 1. T Easy

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

2. F Medium

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

3. T Easy

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. F Easy

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

5. F Medium

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

6. T Easy

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

7. T Easy

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

8. F Easy

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. F Easy

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

10. T Easy

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

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11. T Easy

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

12. F Easy

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

13. F Easy

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

14. T Easy

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

15. T Easy

A mixed cost is partially variable and partially fixed.

Multiple Choice 16. C Medium

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. B Easy

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. B Medium

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.

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19. D Medium

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. B Easy CPA 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. A Medium

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. C Easy

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. C Easy

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. D Easy

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. B Medium

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.

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26. B Easy

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 statement. d. can be used only by manufacturing companies.

at the bottom of the

27. D Easy CMA 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. B Easy

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. C Medium CMA 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. C Medium

The following data pertain to activity and costs for two recent months: Activity level in units

October November 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.

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31. C Medium

The following data pertains to activity and costs for two months: June 10,000

July 20,000

Variable costs ................ P20,000 Fixed costs ................... 15,000 Mixed costs ................... 10,000 Total costs ................... P45,000

P ? ? ? _ P70,000

Activity level in units

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. B Easy

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. D Medium

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. A Medium

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. P2,000 b. P400 c. P2,250 d. P1,740

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35. D Medium

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. C Hard

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 machinehours. 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. D Medium CMA 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 in units March 450,000 April 540,000 May 480,000

Manufacturing supplies P723,060 853,560 766,560

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. P805,284 b. P1,188,756 c. P755,196 d. P752,060

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38. D Hard

(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. C Easy

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. B Easy

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. D Easy

Reddy Company has the following cost formulas for overhead: Cost Indirect materials Maintenance Machine setup Utilities Depreciation

Cost Formula P2,000 plus P0.40 per machine hour P1,500 plus P0.60 per machine hour P0.30 per machine hour P200 plus P0.10 per machine hour 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.

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42. C Medium

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. D Easy

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. D Easy

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. D Easy

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.

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46. C Easy

Bell Company has provided the following data for maintenance costs: April Machine hours incurred 12,000 Maintenance cost incurred P24,000

May 16,000 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. C Medium

Buckeye Company has provided the following data for maintenance cost: Prior Year Machine hours ..... 12,500 Maintenance cost .. P27,000

Current Year 15,000 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. A Hard

Selected information about Buehler Corporation's operations at high and at low levels of activity follow: Level of Activity Low High Number of units produced ............ 25,000 30,000 Total manufacturing costs ........... P575,000 P680,000 Direct material cost per unit ....... P5 P5 Direct 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 unit b. P50,000 per period plus P21 per unit c. P50,000 per period plus P22 per unit d. P347,000 per period plus P0.10 per unit

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49. D Hard

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. B Hard

(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. Period 1 Period 2 Period 3 Period 4

Activity 24 25 20 22

Cost P174 179 165 169

Using the least-squares regression method, what is the cost formula for this cost? a. Y = P 0.00 + P7.55X b. Y = P110.44 + P2.70X c. Y = P103.38 + P3.00X d. Y = P113.35 + P0.89X Reference: 5-1 Rymore Company would like to classify the following costs according to their cost behavior: July Sales in units.. 1,500

August 1,600

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

P36,000 16,000 72,000

51. A Easy Refer To: 51

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

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52. C Easy Refer To: 51

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

53. B Easy Refer To: 51

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

Reference: 5-2 Comparative income statements for Boggs Sports Equipment Company for the last two months are presented below: Sales in Units ............. Sales Revenue .............. Less Cost of Goods Sold .... Gross Margin ............... Less Operating Expenses: Rent ..................... Sales Commissions ........ Maintenance Expenses ..... Clerical Expense ......... Total Operating Expenses ... Net income .................

July 11,000

August 10,000

P165,000 P150,000 72,600 66,000 92,400 84,000 12,000 12,000 13,200 12,000 13,500 13,000 16,000 15,000 54,700 52,000 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. 54. B Easy Refer To: 52

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

55. C Hard Refer To: 52

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

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56. D Medium Refer To: 52

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: 5-3 Gasson 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. A Medium Refer To: 53

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

58. C Easy Refer To: 53

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

59. B Medium Refer To: 53

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

60. C Medium Refer To: 53

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

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Reference: 5-4 In 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. C Hard Refer To: 54

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

62. A Hard Refer To: 54

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

63. B Hard Refer To: 54

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

Reference: 5-5 Maxwell 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. 64. B Medium Refer To: 55

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.

65. C Medium Refer To: 55

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.

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66. C Medium Refer To: 55

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: 5-6 Johnson Company has provided the following data for the first five months of the year: Machine Hours January .... 120 February ... 160 March ...... 200 April ...... 150 May ........ 170

Lubrication Cost P750 P800 P870 P790 P840

67. D Medium Refer To: 56

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.

68. A Medium Refer To: 56

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. B Hard Refer To: 56

(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.

70. A Hard Refer To: 56

(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.

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Reference: 5-7 Gargymal 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.

August ...... September ... October ..... November .... December ....

Machine Hours 1,000 900 1,500 2,000 1,300

Electrical Cost P1,620 1,510 1,870 1,950 1,730

71. A Medium Refer To: 57

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.

72. D Medium Refer To: 57

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: 5-8 Wilson Company's activity for the first six of the current year is as follows: Machine Month Hours January .... 2,000 February ... 3,000 March ...... 2,400 April ...... 1,900 May ........ 1,800 June ....... 2,100 73. D Medium Refer To: 58

Electrical Cost P1,560 P2,200 P1,750 P1,520 P1,480 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.

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74. A Medium Refer To: 58

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: 5-9 Prater 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 75. A Medium Refer To: 59

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.

76. C Medium Refer To: 59

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: 5-10 The 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 77. B Medium Refer To: 510

What is the best estimate of the company's variable operating expenses per unit? a. P4.17 per unit b. P0.24 per unit c. P0.90 per unit d. P0.71 per unit

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78. D Medium Refer To: 510

What is the best estimate of the company's total fixed operating expenses per year? a. P0 b. P80,000 c. P44,000 d. 174,000

79. A Hard Refer To: 510

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

Reference: 5-11 The 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. D Easy Refer To: 511

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.

81. B Easy Refer To: 511

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.

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Reference: 5-12 Porter 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. 82. A Medium Refer To: 512

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

83. B Medium Refer To: 512

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: 5-13 An 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.

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84. B Hard 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. C Medium Refer To: 513

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. A Hard 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.

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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 Units High level of activity (20,000 units x P1.38).. P27,600 20,000 Low 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) .............. Fixed cost ........................................ Total cost ........................................

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P21,600 3,600 P25,200

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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

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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: Units sold ................

Last year 50,000

This year 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 year. (Remember that this is a manufacturing firm.)

total fixed costs per

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

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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 June Sales in units ................... 4,500 5,250 6,000 Sales revenue .................... P630,000 P735,000 P840,000 Less cost of goods sold ........ 252,000 294,000 336,000 Gross Margin ..................... 378,000 441,000 504,000 Less 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 ... 320,000 346,250 372,500 Net income ....................... P 58,000 P 94,750 P131,500

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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 ..................... Sales revenue ...................... Variable expenses: Cost of goods sold ............ Shipping expense (P10 x 5,250) Salaries & commissions (P25 x 5,250) .......... Contribution margin ................ 92. Medium

5,250 P735,000 P294,000 52,500 131,250

477,750 P257,250

Selected data about Pitkin Company's manufacturing operations at two levels of activity are given below: Number of units produced ....... 10,000 Total manufacturing costs ...... P157,000 Direct material cost per unit P4 Direct labor cost per unit ..... P6

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15,000 P225,000 P4 P6 166

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 Total manufacturing costs ............ P157,000 Less: Direct materials (P4 x 10,000 and P4 x 15,000, respectively) ....... 40,000 Direct labor (P6 x 10,000 and P6 x 15,000, respectively) ....... 60,000 Manufacturing overhead cost ........ P 57,000

High P225,000 60,000 90,000 P 75,000

Cost Activity High level of activity ............... P 75,000 15,000 units Low 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 75,000 Less variable element (P3.60 x 15,000 units) ..... 54,000 Fixed 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.

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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 = P8,250 Total cost at low level of activity: 60,000 x P.0875 = P5,250 Activity High .......... 110,000 Low ........... 60,000 Change ...... 50,000

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Cost P8,250 5,250 P3,000

168

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 fixed cost per month.

seminar and the total

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

per seminar and the

Answer: a. High-Low Method: Month Number of Seminars Costs Incurred April (high activity level) 18 P23,762 January (low activity level) 10 17,000 Change 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

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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=6 X=84 Y=121,662 XY=1,737,816 X^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.

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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 .................................. Variable expenses: Cost of goods sold ................ P250,000 Selling expenses (P35 x 2,000) .... 70,000 Administrative expenses (0.25 x P145,000) .............. 36,250 Contribution margin .................... Fixed expenses: Selling expenses (P195,000-P70,000) 125,000 Administrative expenses (0.75 x P145,000) .............. 108,750 Net income ............................. 96. Hard

P700,000

356,250 343,750

233,750 P110,000

(Appendix) The accounting department of Archer Company, a merchandising company, has prepared the following analysis: Cost Cost of goods sold .......... Sales commissions ........... Advertising expense ......... Administrative salaries ..... Billing expense ............. Depreciation expense ........

Cost Formula P56 per unit 12% of sales P300,000 per month P160,000 per month ? 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 Month (000) January ......... 9 February ....... 11 March .......... 14 April .......... 17 May ............ 15 June ........... 12

Billing Expense P30,000 33,000 36,000 42,000 39,000 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. Managerial Accounting, 9/e

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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 _ January 9 P30,000 P270,000 February 11 33,000 363,000 March 14 36,000 504,000 April 17 42,000 714,000 May 15 39,000 585,000 June 12 35,000 420,000 78 P215,000 P2,856,000 n=6 X=78 Y=215,000 XY=2,856,000 X^2=1,056

X^2 81 121 196 289 225 144 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) ............... P3,000,000 Variable 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 2,083,560 Contribution margin .................. P 916,440 Fixed expenses: Advertising expense ............. P 300,000 Managerial Accounting, 9/e

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Administrative salaries ......... Billing expense ................. Depreciation expense ............ Net income ...........................

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160,000 16,952 62,000

538,952 P 377,488

173

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 Period 1 44 Period 2 42 Period 3 48 Period 4 49

Cost 277 265 284 284

Required: Using the least-squares regression method, estimate the cost formula for this cost. Answer: n=4 X = 183 Y = 1,110 XY = 50,866 X^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.

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