Cost Behavior: Analysis and Use
True/False Questions
1. Within the relevant range, a change in activity results in a change in total variable cost and the per unit fixed cost.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
2. The reluctance of managers to lay off employees when activity declines in the short-run leads to an increase in the ratio of variable to fixed costs.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard
3. A variable cost fluctuates in total as activity changes but remains constant on a per unit basis over the relevant range.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
4. A cost that is classified as variable with respect to one measure of activity could be classified as fixed with respect to a different measure of activity.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard
5. Fixed costs remain constant in total, but vary inversely with changes in activity when expressed on a per unit basis.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
6. Committed fixed costs have a short-term planning horizon--usually one year.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
7. The following costs are all examples of committed fixed costs: depreciation on buildings, advertising, insurance, and management development and training.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
8. The time frame in which discretionary fixed costs are controllable is usually much shorter than the time frame for committed fixed costs.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
9. The high-low method is generally more accurate than the least-squares regression method in analyzing cost behavior.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,5 Level: Easy
10. A major problem with the high-low method of cost estimation is that some data are omitted from the analysis.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
11. The high and low points used in the high-low method tend to be unusual and therefore the cost formula may not accurately represent all of the data.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
12. Contribution margin and gross margin mean the same thing.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Medium
13. Contribution margin equals revenue minus all variable costs.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
14. The traditional income statement organizes costs on the basis of cost behavior.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: 4 Level: Easy
15. It is necessary to break mixed costs into their variable and fixed cost components in order to construct an income statement using the contribution approach.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Multiple Choice Questions
16. A is a fixed cost; B is a variable cost. During the current year the level of activity has decreased but is still within the relevant range. We would expect that:
A) The cost per unit of A has remained unchanged.
B) The cost per unit of B has decreased.
C) The cost per unit of A has decreased.
D) The cost per unit of B has remained unchanged.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
17. Which costs will change with an increase in activity within the relevant range?
A) Unit fixed cost and total fixed cost
B) Unit variable cost and total variable cost
C) Unit fixed cost and total variable cost
D) Unit fixed cost and unit variable cost
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
18. Salaries of accounts receivable clerks when one clerical worker is needed for every 750 accounts receivable is an example of a:
A) fixed cost
B) step-variable cost
C) mixed cost
D) curvilinear cost
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
19. Limousine Conversion Company purchases ordinary Cadillacs, cuts them in half, and then adds a middle section to the vehicles to create stretch limousines. With respect to the number of cars converted, the cost of the Cadillacs purchased for conversion by Limousine Conversion Company would best be described as a:
A) fixed cost
B) mixed cost
C) step-variable cost
D) variable cost
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
20. For an automobile manufacturer, the cost of a driver's side air bag purchased from a supplier and installed in every automobile would best be described as a:
A) fixed cost.
B) mixed cost.
C) step-variable cost.
D) variable cost.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
21. With respect to a fixed cost, 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.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
22. In the standard cost formula Y = a + bX, what does the “Y” represent?
A) total cost
B) total fixed cost
C) total variable cost
D) variable cost per unit
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
23. In the standard cost formula Y = a + bX, what does the “a” represent?
A) total cost
B) total fixed cost
C) total variable cost
D) variable cost per unit
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
24. In the standard cost formula Y = a + bX, what does the “b” represent?
A) total cost
B) total fixed cost
C) total variable cost
D) variable cost per unit
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
25. In the standard cost formula Y = a + bX, what does the “X” represent?
A) total cost
B) total fixed cost
C) units of activity
D) variable cost per unit
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
26. Which of the following would usually be considered a discretionary fixed cost for a soft drink bottling company?
A) the cost of advertising its products
B) the cost of fire insurance on its factory building
C) depreciation on its manufacturing equipment
D) both a and b above
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
27. Which of the following is a weakness of the quick-and-dirty scattergraph method of analyzing mixed cost?
A) It is impossible to determine variable cost per unit.
B) Only two data points are used and the rest are ignored in drawing the scattergraph.
C) Different people will have different answers even though they are analyzing the same set of data.
D) Both B and C above
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
28. Which of the following statements is true when referring to the high-low method of cost analysis?
A) The high-low method has no major weaknesses.
B) The high-low method is very hard to apply.
C) In essence, the high-low method draws a straight line through two data points.
D) None of the above is true.
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
29. Contribution margin is computed as sales revenue minus:
A) fixed expenses
B) variable expenses
C) cost of goods sold
D) cost of goods manufactured
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
30. Which of the following approaches to preparing an income statement calculates gross margin?
| |Traditional |Contribution |
| |Approach |Approach |
|A) |Yes |Yes |
|B) |Yes |No |
|C) |No |Yes |
|D) |No |No |
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: 4 Level: Medium
31. The least-squares regression method:
A) fits a regression line by minimizing the sum of the squared errors from the regression line.
B) is generally less accurate than the scattergraph method.
C) can be used only if the fixed cost element is larger than the variable cost element.
D) is the only method acceptable under generally accepted accounting principles.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
32. Multiple regression analysis is used when:
A) more than one cost category must be analyzed.
B) when more than one factor causes variation in a cost.
C) the high-low method cannot be used because there is only one observation.
D) all of the points on a scattergraph fall exactly on a regression line.
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
33. Iacono Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $127.20 per unit.
| |Sales volume (units) |5,000 |6,000 |
| |Cost of sales |$419,000 |$502,800 |
| |Selling and administrative costs |$186,500 |$202,200 |
The best estimate of the total contribution margin when 5,300 units are sold is:
A) $230,020
B) $51,410
C) $146,810
D) $32,330
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3,4 Level: Hard
Solution:
Variable component of cost of goods sold:
Variable cost = Change in costs/Change in units
Variable cost = ($502,800 − $419,000)/(6,000 − 5,000)
Variable cost = $83.80 per unit
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($202,200 − $186,500)/(6,000 − 5,000)
Variable cost = $15.70 per unit
|Sales revenue ($127.20 × 5,300) | |$674,160 |
|Variable expenses: | | |
|Variable cost of goods sold ($83.80 × 5,300) |$444,140 | |
|Variable selling and administrative expense ($15.70 × 5,300) | 83,210 | 527,350 |
|Contribution margin | |$ 146,810 |
34. Utility costs at Service, Inc. are a mixture of fixed and variable components. Records indicate that utility costs are an average of $0.40 per hour at an activity level of 9,000 machine hours and $0.25 per hour at an activity level of 18,000 machine hours. Assuming that this activity is within the relevant range, what is the expected total utility cost if the company works 13,000 machine hours?
A) $4,225
B) $5,200
C) $4,000
D) $3,250
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
| |Machine-Hours |Average Cost |Total Utility Cost (machine-hours ×|
| | |per Hour |average cost per hour) |
|High activity level |18,000 |$0.25 |$4,500 |
|Low activity level |9,000 |$0.40 |$3,600 |
Variable cost = Change in cost ÷ Change in activity
= ($4,500 − $3,600) ÷ (18,000 – 9,000) = $0.10
Fixed cost element = Total cost − Variable cost element
= $4,500 − ($0.10 × 18,000) = $2,700
Therefore, the cost formula for total utility cost is $2,700 per period plus $0.10 per machine-hour, or Y = $2,700 + $0.10X.
At an activity level of 13,000 machine-hours, total cost is estimated to be:
Y = $2,700 + ($0.10 × 13,000) = $4,000
35. Clerical costs in the billing department of Craig Company are a mixture of variable and fixed components. Records indicate that average unit processing costs are $0.50 per account processed at an activity level of 32,000 accounts. When only 22,000 accounts are processed, the total cost of processing is $12,500. Assuming that this activity is within the relevant range, at a budgeted level of 25,000 accounts:
A) processing costs are expected to total $8,750.
B) fixed processing costs are expected to be $10,400.
C) the variable processing costs are expected to be $0.35 per account processed.
D) processing costs are expected to total $14,975.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
| |Accounts |Average Cost per |Total Utility Cost (accounts × |
| | |Account Processed |average cost per account |
| | | |processed) |
|High activity level |32,000 |$0.50 |$16,000 |
|Low activity level |22,000 | |$12,500* |
*Given
Variable cost = Change in cost ÷ Change in activity
= ($16,000 − $12,500) ÷ (32,000 – 22,000) = $0.35
Fixed cost element = Total cost − Variable cost element
= $16,000 − ($0.35 × 32,000) = $4,800
Therefore, the cost formula for total utility cost is $4,800 per period plus $0.35 per account processed, or Y = $4,800 + $0.35X.
At an activity level of 25,000 accounts, total cost is estimated to be:
Y = $4,800 + ($0.35 × 25,000) = $13,550
36. Shipping cost at Junk Food Imports is a mixed cost with variable and fixed components. Past records indicate total shipping cost was $18,000 for 16,000 pounds shipped and $22,500 for 22,000 pounds shipped. Assuming that this activity is within the relevant range, if the company plans to ship 18,000 pounds next month, the expected shipping cost is:
A) $18,500
B) $20,400
C) $19,500
D) $24,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
| |Pounds Shipped |Shipping Cost |
|High activity level |22,000 |$22,500 |
|Low activity level |16,000 |$18,000 |
Variable cost = Change in cost ÷ Change in activity
= ($22,500 − $18,000) ÷ (22,000 − 16,000) = $0.75
Fixed cost element = Total cost − Variable cost element
= $22,500 − ($0.75 × 22,000) = $6,000
Therefore, the cost formula for total shipping cost is $6,000 per period plus $0.75 per pound shipped, or Y = $6,000 + $0.75X.
At an activity level of 18,000 pounds shipped, total cost is estimated to be:
Y = $6,000 + ($0.75 × 18,000) = $19,500
37. Larson Brothers, Inc., used the high-low method to derive its cost formula for electrical power cost. According to the cost formula, the variable cost per unit of activity is $3 per machine-hour. Total electrical power cost at the high level of activity was $7,600 and at the low level of activity was $7,300. If the high level of activity was 1,200 machine hours, then the low level of activity was:
A) 800 machine hours
B) 900 machine hours
C) 1,000 machine hours
D) 1,100 machine hours
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($7,600 − $7,300) ÷ (1,200 − X) = $3, where X = low level of activity
=> $300 ÷ (1,200 – X) = $3
=> $300 = $3 × (1,200 – X)
=> $100 = $1,200 – X
=> X = $1,100
38. The following production and average cost data for a month's operations have been supplied by a company that produces a single product.
| |Production volume |1,000 units |2,000 units |
| |Direct materials |$4.00 per unit |$4.00 per unit |
| |Direct labor |$3.50 per unit |$3.50 per unit |
| |Manufacturing overhead |$10.00 per unit |$6.20 per unit |
The total fixed manufacturing cost and variable manufacturing cost per unit are as follows:
A) $3,600; $7.50
B) $3,600; $9.90
C) $7,600; $7.50
D) $7,600; $9.90
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Source: CIMA, adapted
Solution:
First, calculate the variable manufacturing cost per unit:
| |Production Volume |Average Cost |Total Manufacturing Overhead Cost |
| |(Units) |per Unit |(units × average cost per unit) |
|High activity level |2,000 |$6.20 |$12,400 |
|Low activity level |1,000 |$10.00 |$10,000 |
Variable manufacturing overhead cost = Change in cost ÷ Change in activity
= ($12,400 − $10,000) ÷ (2,000 – 1,000) = $2.40
Fixed cost element of manufacturing overhead = Total cost − Variable cost element
= $12,400 − ($2.40 × 2,000) = $7,600
Total variable cost per unit = Direct material + Direct labor + Variable manufacturing overhead = $4.00 + $3.50 + $2.40 = $9.90
There are no fixed direct materials or direct labor, so the total fixed costs would be equal to the fixed cost portion of manufacturing overhead, or $7,600.
39. Anderst Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.
| |Production volume |2,000 units |4,000 units |
| |Direct materials |$50.20 per unit |$50.20 per unit |
| |Direct labor |$45.10 per unit |$45.10 per unit |
| |Manufacturing overhead |$100.90 per unit |$58.30 per unit |
The best estimate of the total monthly fixed manufacturing cost is:
A) $201,800
B) $233,200
C) $170,400
D) $392,400
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
First, calculate the variable manufacturing cost per unit:
| |Production Volume |Average Cost |Total Manufacturing Overhead Cost |
| |(Units) |per Unit |(units × average cost per unit) |
|High activity level |4,000 |$58.30 |$233,200 |
|Low activity level |2,000 |$100.90 |$201,800 |
Variable manufacturing overhead cost = Change in cost ÷ Change in activity
= ($233,200 − $201,800) ÷ (4,000 – 2,000) = $15.70
Fixed cost element of manufacturing overhead = Total cost − Variable cost element
= $233,200 − ($15.70 × 4,000) = $170,400
40. Bakeman Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.
| |Production volume |2,000 units |3,000 units |
| |Direct materials |$36.10 per unit |$36.10 per unit |
| |Direct labor |$48.00 per unit |$48.00 per unit |
| |Manufacturing overhead |$51.00 per unit |$40.90 per unit |
The best estimate of the total variable manufacturing cost per unit is:
A) $104.80
B) $36.10
C) $20.70
D) $84.10
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
To calculate the variable manufacturing cost per unit:
| |Production Volume |Average Cost |Total Manufacturing Overhead Cost |
| |(Units) |per Unit |(units × average cost per unit) |
|High activity level |3,000 |$40.90 |$122,700 |
|Low activity level |2,000 |$51.00 |$102,000 |
Variable manufacturing overhead cost = Change in cost ÷ Change in activity
= ($122,700 − $102,000) ÷ (3,000 – 2,000) = $20.70
Total variable manufacturing cost per unit
= Direct materials + Direct labor + Manufacturing overhead
= $36.10 + $48.00 + $20.70 = $104.80
41. Carcia Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.
| |Production volume |6,000 units |7,000 units |
| |Direct materials |$89.40 per unit |$89.40 per unit |
| |Direct labor |$11.20 per unit |$11.20 per unit |
| |Manufacturing overhead |$107.70 per unit |$95.70 per unit |
The best estimate of the total cost to manufacture 6,300 units is closest to:
A) $1,274,490
B) $1,287,090
C) $1,312,290
D) $1,236,690
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
To calculate the variable manufacturing cost per unit:
| |Production Volume |Average Cost |Total Manufacturing Overhead Cost |
| |(Units) |per Unit |(units × average cost per unit) |
|High activity level |7,000 |$95.70 |$669,900 |
|Low activity level |6,000 |$107.70 |$646,200 |
Variable manufacturing overhead cost
= Change in cost ÷ Change in activity
= ($669,900 − $646,200) ÷ (7,000 – 6,000) = $23.70
Fixed cost element of manufacturing overhead
= Total cost − Variable cost element
= $669,900 − ($23.70 × 7,000) = $504,000
| |Per Unit Cost |Number of Units |Total Cost |
|Direct materials |$89.40 |6,300 |$ 563,220 |
|Direct labor |$11.20 |6,300 |70,560 |
|Variable manufacturing overhead |$23.70 |6,300 |149,310 |
|Fixed manufacturing overhead | | | 504,000 |
|Total cost to manufacture 6,300 units | |$1,287,090 |
42. Daar Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.
| |Production volume |2,000 units |3,000 units |
| |Direct materials |$188,400 |$282,600 |
| |Direct labor |$91,800 |$137,700 |
| |Manufacturing overhead |$110,400 |$127,800 |
The best estimate of the total monthly fixed manufacturing cost is:
A) $75,600
B) $390,600
C) $469,350
D) $548,100
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
To calculate the variable manufacturing cost per unit:
| |Production Volume |Total Manufacturing Overhead Cost |
| |(Units) | |
|High activity level |3,000 |$127,800 |
|Low activity level |2,000 |$110,400 |
Variable manufacturing overhead cost
= Change in cost ÷ Change in activity
= ($127,800 − $110,400) ÷ (3,000 – 2,000) = $17.40
Fixed cost element of manufacturing overhead
= Total cost − Variable cost element
= $127,800 − ($17.40 × 3,000) = $75,600
43. Edde Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.
| |Production volume |4,000 units |5,000 units |
| |Direct materials |$291,200 |$364,000 |
| |Direct labor |$219,600 |$274,500 |
| |Manufacturing overhead |$320,400 |$343,000 |
The best estimate of the total variable manufacturing cost per unit is:
A) $127.70
B) $150.30
C) $22.60
D) $72.80
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Direct material cost per unit = $291,200 ÷ 4,000 = $72.80
(Alternatively, direct material cost per unit = $364,000 ÷ 5,000 = $72.80)
Direct labor cost per unit = $219,600 ÷ 4,000 = $54.90
(Alternatively, direct labor cost per unit = $274,500 ÷ 5,000 = $54.90)
Variable manufacturing overhead cost = Change in cost ÷ Change in activity
= ($343,000 − $320,400) ÷ (5,000 – 4,000) = $22.60
Total variable manufacturing cost per unit = $72.80 + $54.90 + $22.60 = $150.30
44. Farah Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.
| |Production volume |2,000 units |3,000 units |
| |Direct materials |$146,200 |$219,300 |
| |Direct labor |$37,200 |$55,800 |
| |Manufacturing overhead |$146,600 |$158,100 |
The best estimate of the total cost to manufacture 2,300 units is closest to:
A) $332,120
B) $379,500
C) $355,810
D) $360,960
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
To calculate the variable manufacturing cost per unit:
| |Production Volume |Total Manufacturing Overhead Cost |
| |(Units) | |
|High activity level |3,000 |$158,100 |
|Low activity level |2,000 |$146,600 |
Variable manufacturing overhead cost
= Change in cost ÷ Change in activity
= ($158,100 − $146,600) ÷ (3,000 – 2,000) = $11.50
Fixed cost element of manufacturing overhead
= Total cost − Variable cost element
= $158,100 − ($11.50 × 3,000) = $123,600
| |Per Unit Cost |Number of Units |Total Cost |
|Direct materials |$73.10* |2,300 |$168,130 |
|Direct labor |$18.60** |2,300 |42,780 |
|Variable manufacturing overhead |$11.50 |2,300 |26,450 |
|Fixed manufacturing overhead | | | 123,600 |
| Total cost to manufacture 2,300 units | |$360,960 |
*$219,300 ÷ 3,000 units = $73.10 per unit
**$55,800 ÷ 3,000 units = $18.60 per unit
45. Gamad Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $131.00 per unit.
| |Sales volume (units) |4,000 |5,000 |
| |Cost of sales |$262,800 |$328,500 |
| |Selling and administrative costs |$230,400 |$244,500 |
The best estimate of the total monthly fixed cost is:
A) $174,000
B) $533,100
C) $493,200
D) $573,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Variable component of cost of goods sold:
Variable cost = Change in costs/Change in units
Variable cost = ($328,500 − $262,800)/(5,000 − 4,000)
Variable cost = $65.70
Fixed cost:
High volume: $328,500 − $65.70 × 5,000 = $0
Low volume: $262,800 − $65.70 × 4,000 = $0
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($244,500 − $230,400)/(5,000 − 4,000)
Variable cost = $14.10 per unit
Fixed cost:
High volume: $244,500 − $14.10 × 5,000 = $174,000
Low volume: $230,400 − $14.10 × 4,000 = $174,000
Total variable cost per unit:
$65.70 + $14.10 = $79.80
Total fixed cost:
$0 + $174,000 = $174,000
46. Harada Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $88.70 per unit.
| |Sales volume (units) |4,000 |5,000 |
| |Cost of sales |$273,600 |$342,000 |
| |Selling and administrative costs |$56,800 |$68,000 |
The best estimate of the total variable cost per unit is:
A) $68.40
B) $79.60
C) $82.60
D) $82.00
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Variable component of cost of goods sold:
Variable cost = Change in costs/Change in units
Variable cost = ($342,000 − $273,600)/(5,000 − 4,000)
Variable cost = $68.40 per unit
Fixed cost:
High volume: $342,000 − $68.40 × 5,000 = $0
Low volume: $273,600 − $68.40 × 4,000 = $0
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($68,000 − $56,800)/(5,000 − 4,000)
Variable cost = $11.20
Fixed cost:
High volume: $68,000 − $11.20 × 5,000 = $12,000
Low volume: $56,800 − $11.20 × 4,000 = $12,000
Total variable cost per unit:
$68.40 + $11.20 = $79.60
Total fixed cost:
$0 + $12,000 = $12,000
47. A company produces a single product. The following volume and average cost data for two accounting periods have been provided by management:
| |Number of units |500 |800 |
| |Direct materials |$2.00 |$2.00 |
| |Direct labor |$1.50 |$1.50 |
| |Manufacturing overhead |$2.50 |$1.75 |
| |Other overhead |$1.00 |$0.625 |
The best estimate for the cost formula for the total cost of producing and selling the product (where X is the number of units produced and sold in a period) is:
A) $1,000 + $1.125 X
B) $1,000 + $3.50 X
C) $1,500 + $3.50 X
D) $1,500 + $4.00 X
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Source: CIMA, adapted
Solution:
Variable component of manufacturing overhead:
Variable cost = Change in costs/Change in units
Variable cost = ($1,400* − $1,250**)/(800 − 500)
Variable cost = $0.50
*$1.75 × 800 = $1,400
**$2.50 × 500 = $1,250
Fixed cost:
High volume: $1,400 − $0.50 × 800 = $1,000
Low volume: $1,250 − $0.50 × 500 = $1,000
Variable component of other overhead:
Variable cost = Change in costs/Change in units
Variable cost = ($500* − $500**)/(800 − 500)
Variable cost = $0
*$0.625 × 800 = $500
**$1.00 × 500 = $500
Fixed cost:
High volume: $500 − $0 × 800 = $500
Low volume: $500 − $0 × 500 = $500
Total variable cost per unit (includes direct material, direct labor, variable manufacturing overhead, and variable other overhead):
$2.00 + $1.50 + $0.50 + $0 = $4.00
Total fixed cost:
$1,000 + $500 = $1,500
48. The employees at Mobile Sun Lotion Company roam the beaches with a tank of premium suntan lotion strapped on their backs. For a $2 charge, the employees will spray sunbathers with suntan lotion. Last year, Mobile sprayed 250,000 customers and incurred the following costs:
| |Total variable costs |$175,000 |
| |Total fixed costs | 50,000 |
| |Total costs |$225,000 |
Assuming that this activity is within the relevant range, what would Mobile's total contribution margin have been last year if only 240,000 customers were sprayed?
A) $255,000
B) $262,000
C) $305,000
D) $312,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,4 Level: Medium
Solution:
Variable cost per unit: $175,000 ÷ 250,000 customers = $0.70 per customer
|Sales ($2 × 240,000) |$480,000 |
|Variable costs ($0.70 × 240,000) |168,000 |
|Contribution margin |$312,000 |
49. The following costs are budgeted for Ghana Corporation for next year:
| |Total variable costs |$350,000 |
| |Total fixed costs | 240,000 |
| |Total costs |$590,000 |
The costs above are based on a level of activity of 10,000 units. Assuming that this activity is within the relevant range, what would total costs be for Ghana if the level of activity was 12,000 units?
A) $590,000
B) $638,000
C) $660,000
D) $708,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Variable cost per unit: $350,000 ÷ 10,000 units = $35 per unit
The cost function is:
Y = $240,000 + $35X
Y = $240,000 + $35(12,000)
Y = $660,000
50. The following costs are budgeted for Harlow Corporation for next year:
| |Total variable costs |$270,000 |
| |Total fixed costs | 630,000 |
| |Total costs |$900,000 |
The costs above are based on a level of activity of 20,000 units. Assuming that this activity is within the relevant range, what would total cost per unit be for Harlow if the level of activity was only 18,000 units?
A) $45.00
B) $46.50
C) $48.50
D) $50.00
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Variable cost per unit: $270,000 ÷ 20,000 units = $13.50 per unit
The cost function is:
Y = $630,000 + $13.50X
Y = $630,000 + $13.50(18,000)
Y = $873,000
Total cost ÷ number of units = total cost per unit
$873,000 ÷ 18,000 = $48.50
51. At a volume of 20,000 direct labor hours, Tirso Company incurs $50,000 in factory overhead costs, including $10,000 in fixed costs. Assuming that this activity is within the relevant range, if volume increases to 25,000 direct labor hours, Tirso Company would expect to incur total factory overhead costs of:
A) $50,000
B) $60,000
C) $62,500
D) $72,500
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Variable cost per direct labor hour: $40,000 ÷ 20,000 direct labor hours = $2.00 per direct labor hour
The cost function is:
Y = $10,000 + $2.00X
Y = $10,000 + $2.00(25,000)
Y = $60,000
52. The Frandsen Company has estimated the following cost formulas for overhead:
| | |Cost Formula |
| |Lubricants |$1,500 plus $0.50 per machine-hour |
| |Utilities |$2,000 plus $0.60 per machine-hour |
| |Depreciation |$1,000 |
| |Maintenance |$200 plus $0.10 per machine-hour |
| |Machine setup |$0.30 per machine-hour |
Based on these cost formulas, the total overhead cost expected at an activity level of 300 machine hours is:
A) $4,950
B) $5,000
C) $4,700
D) $5,150
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
| | |Fixed Cost |Variable Cost | |
| | |Portion |Portion | |
| | | | |Total Cost |
| |Lubricants |$1,500 |$150 |$1,650 |
| |(variable cost = $0.50 × 300) | | | |
| |Utilities |$2,000 |$180 |2,180 |
| |(variable cost = $0.60 × 300) | | | |
| |Depreciation |$1,000 | |1,000 |
| |Maintenance |$200 |$30 |230 |
| |(variable cost = $0.10 × 300) | | | |
| |Machine setup | |$90 | 90 |
| |(variable cost = $0.30 × 300) | | | |
| |Total cost | | |$5,150 |
53. Erg Manufacturing Company has developed the following overhead cost formulas:
| | |Cost Formula |
| |Depreciation |$500 |
| |Set-up |$400 plus $0.20 per machine-hour |
| |Lubrication |$50 plus $0.25 per machine-hour |
| |Utilities |$0.40 per machine-hour |
Based on these cost formulas, the total overhead cost expected for Erg Manufacturing Company if 200 machine hours are worked is:
A) $620
B) $900
C) $170
D) $1,120
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
| | |Fixed Cost |Variable Cost |Total Cost |
| | |Portion |Portion | |
| |Lubricants (variable cost = $0.25 × 200) |$50 |$50 |$ 100 |
| |Utilities (variable cost = $0.40 × 200) | |$80 |80 |
| |Depreciation |$500 | |500 |
| |Setup (variable cost = $0.20 × 200) |$400 |$40 | 440 |
| |Total cost | | |$1,120 |
54. Vicuna Wool Company manufactures and sells sweaters. Last year, Vicuna operated at 100% of capacity and had the following cost formula for total manufacturing costs:
Y = $50,000 + $400X
Assuming no change in cost structure, what would Vicuna's cost formula have been last year if they only operated at 90% of production capacity?
A) Y = $45,000 + $360X
B) Y = $45,000 + $400X
C) Y = $50,000 + $360X
D) Y = $50,000 + $400X
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
55. Timchak Corporation reports that at an activity level of 9,900 units, its total variable cost is $919,116 and its total fixed cost is $259,974. What would be the total cost, both fixed and variable, at an activity level of 10,100 units? Assume that this level of activity is within the relevant range.
A) $1,197,658
B) $1,191,000
C) $1,179,090
D) $1,202,910
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Variable cost per unit: $919,116 ÷ 9,900 units = $92.84 per unit
The cost function is:
Y = $259,974 + $92.84X
Y = $259,974 + $92.84(10,100)
Y = $1,197,658
56. At an activity level of 8,400 machine-hours in a month, Braughton Corporation's total variable maintenance and repair cost is $697,284 and its total fixed maintenance and repair cost is $464,100. What would be the total maintenance and repair cost, both fixed and variable, at an activity level of 8,500 units in a month? Assume that this level of activity is within the relevant range.
A) $1,175,210
B) $1,169,685
C) $1,161,384
D) $1,168,297
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Variable cost per machine-hour: $697,284 ÷ 8,400 hours = $83.01 per unit
The cost function is:
Y = $464,100 + $83.01X
Y = $464,100 + $83.01(8,500)
Y = $1,169,685
57. At an activity level of 7,200 machine-hours in a month, Falks Corporation's total variable production engineering cost is $556,416 and its total fixed production engineering cost is $226,008. What would be the total production engineering cost per unit, both fixed and variable, at an activity level of 7,300 units in a month? Assume that this level of activity is within the relevant range.
A) $107.93
B) $107.18
C) $108.67
D) $108.24
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Variable cost per machine-hour: $556,416 ÷ 7,200 hours = $77.28 per hour
The cost function is:
Y = $226,008 + $77.28X
Y = $226,008 + $77.28(7,300)
Y = $790,152
58. You are applying the scattergraph method and find that the regression line you have drawn passes through a data point with the following coordinates: 7,500 units and $10,000. The regression line passes through the Y axis at the $4,000 point. Which of the following is the cost formula that represents the slope of this line?
A) Y=$4,000+$1.25X
B) Y=$4,000+$0.80X
C) Y=$10,000+$1.33X
D) None of the above is true
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($10,000 – $4,000) ÷ (7,500 – 0) = $0.80
Since the regression line passes through the Y axis at the $4,000 point, the $4,000 represents the fixed costs.
Therefore, the cost formula would be Y=$4,000+$0.80X.
59. Wright Company has observed that at an activity level of 5,000 units the cost for maintenance is $6,500, and at 10,000 units the cost for maintenance is $9,000. Using the high-low method, the cost formula for maintenance is:
A) $4,000 plus $.50 per unit
B) $3,000 plus $.60 per unit
C) $.90 per unit
D) $1.30 per unit
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($9,000 – $6,500) ÷ (10,000 – 5,000) = $0.50
Fixed cost element = Total cost – Variable cost element
= $9,000 – ($0.50 × 10,000) = $4,000
Therefore, the cost formula for total maintenance cost is $4,000 per period plus $0.50 per unit, or Y = $4,000 + $0.50X.
60. Jackson, Inc., is preparing a budget for next year and requires a breakdown of the cost of steam used in its factory into fixed and variable components. The following data on the cost of steam used and direct labor hours worked are available for the last six months:
| | |Cost of Steam |Direct Labor-Hours |
| |July |$ 15,850 |3,000 |
| |August |13,400 |2,050 |
| |September |16,370 |2,900 |
| |October |19,800 |3,650 |
| |November |17,600 |2,670 |
| |December | 18,500 | 2,650 |
| |Total |$101,520 |16,920 |
If Jackson uses the high-low method of analysis, the estimated variable cost of steam per direct labor hour would be:
A) $4.00
B) $5.42
C) $5.82
D) $6.00
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($19,800 – $13,400) ÷ (3,650 – 2,050) = $4.00
61. Shown below are units produced and total manufacturing costs for the past four months at Minga Manufacturing Corporation:
| | |Units Produced |Total Cost |
| |Jul |120 |$446,000 |
| |Aug |150 |$508,000 |
| |Sep |180 |$668,000 |
| |Oct |160 |$574,000 |
What is Minga's cost formula for total manufacturing cost under the high-low method?
A) Y = $2,000 + $3,700X
B) Y = $3,700 + $2,000X
C) Y = $14,000 + $3,600X
D) Y = $62,000 + $3,200X
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($668,000 – $446,000) ÷ (180 – 120) = $3,700
Fixed cost element = Total cost – Variable cost element
= $668,000 – ($3,700 × 180) = $2,000
Therefore, the cost formula for total cost is $2,000 per period plus $3,700 per unit, or Y = $2,000 + $3,700X.
62. A consulting company would like to develop a method of predicting its total costs in a period. The following past costs have been recorded by the company in two periods:
| |Number of client-hours |420 |515 |
| |Total cost |$82,200 |$90,275 |
The best estimate of the cost formula for the company (where X is the number of client-hours) is:
A) Y = $46,500 + $85 X
B) Y = $42,000 + $95 X
C) Y = $46,500 – $85 X
D) Y = $51,500 – $95 X
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Source: CIMA, adapted
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($90,275 – $82,200) ÷ (515 – 420) = $85
Fixed cost element = Total cost – Variable cost element
= $90,275 – ($85 × 515) = $46,500
Therefore, the cost formula for total cost is $46,500 per period plus $85 per client-hour, or Y = $46,500 + $85X.
63. Electrical costs at one of Finfrock Corporation's factories are listed below:
| | |Machine-Hours |Electrical Cost |
| |March |3,642 |$40,537 |
| |April |3,616 |$40,319 |
| |May |3,667 |$40,706 |
| |June |3,634 |$40,462 |
| |July |3,665 |$40,703 |
| |August |3,659 |$40,680 |
| |September |3,644 |$40,547 |
| |October |3,612 |$40,268 |
| |November |3,624 |$40,364 |
Management believes that electrical cost is a mixed cost that depends on machine-hours. Using the high-low method to estimate the variable and fixed components of this cost, these estimates would be closest to:
A) $7.96 per machine-hour; $11,517 per month
B) $11.13 per machine-hour; $40,510 per month
C) $9.61 per machine-hour; $5,533 per month
D) $0.13 per machine-hour; $40,246 per month
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($40,706 − $40,268) ÷ (3,667 − 3,612) = $7.96
Fixed cost element = Total cost − Variable cost element
= $40,706 − ($7.96 × 3,667) = $11,517
Therefore, the cost formula for total electrical cost is $11,517 per period plus $7.96 per machine-hour, or Y = $11,517 + $7.96X
64. Maintenance costs at a Straiton Corporation factory are listed below:
| | |Machine-Hours |Maintenance Cost |
| |March |3,627 |$54,384 |
| |April |3,588 |$53,980 |
| |May |3,637 |$54,453 |
| |June |3,638 |$54,491 |
| |July |3,572 |$53,843 |
| |August |3,611 |$54,196 |
| |September |3,644 |$54,550 |
| |October |3,609 |$54,181 |
| |November |3,669 |$54,767 |
Management believes that maintenance cost is a mixed cost that depends on machine-hours. Using the high-low method to estimate the variable and fixed components of this cost, these estimates would be closest to:
A) $0.10 per machine-hour; $54,382 per month
B) $15.00 per machine-hour; $54,316 per month
C) $9.12 per machine-hour; $21,309 per month
D) $9.53 per machine-hour; $19,801 per month
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($54,767 − $53,843) ÷ (3,669 − 3,572) = $9.53
Fixed cost element = Total cost − Variable cost element
= $54,767 − ($9.53 × 3,669) = $19,801
Therefore, the cost formula for total maintenance cost is $19,801 per period plus $9.53 per machine-hour, or Y = $19,801 + $9.53X
65. Supply costs at Coulthard Corporation's chain of gyms are listed below:
| | |Client-Visits |Supply Cost |
| |March |12,855 |$23,598 |
| |April |12,283 |$23,278 |
| |May |13,104 |$23,742 |
| |June |12,850 |$23,607 |
| |July |12,493 |$23,415 |
| |August |12,794 |$23,562 |
| |September |12,686 |$23,496 |
| |October |12,765 |$23,541 |
| |November |13,018 |$23,687 |
Management believes that supply cost is a mixed cost that depends on client-visits. Using the high-low method to estimate the variable and fixed components of this cost, those estimates would be closest to:
A) $1.85 per client-visit; $23,547 per month
B) $1.77 per client-visit; $557 per month
C) $0.55 per client-visit; $16,579 per month
D) $0.57 per client-visit; $16,273 per month
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($23,742 − $23,278) ÷ (13,104 − 12,283) = $0.57
Fixed cost element = Total cost − Variable cost element
= $23,742 − ($0.57 × 13,104) = $16,273
Therefore, the cost formula for total maintenance cost is $16,273 per period plus $0.57 per client visit, or Y = $16,273 + $0.57X
66. A jewelry manufacturer incurred the following costs: 15,000 units produced with costs of $557,500, and 5,000 units produced with costs of $292,500. Which cost formula would you estimate using the high-low method?
A) Y=$265,000+$37.17X
B) Y=$160,000+$17.67X
C) Y=$265,000+$58.50X
D) Y=$160,000+$26.50X
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($557,500 − $292,500) ÷ (15,000 − 5,000) = $26.50
Fixed cost element = Total cost − Variable cost element
= $557,500 − ($26.50 × 15,000) = $160,000
Therefore, the cost formula for total utility cost is $160,000 per period plus $26.50 per unit, or Y = $160,000 + $26.50X
67. Sales for a retail store were $250,000. Net operating income totaled $30,000 and cost of goods sold was $110,000. If the contribution margin was $100,000, total variable selling and administrative expenses must have been:
A) $40,000
B) $100,000
C) $70,000
D) $150,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard
Solution:
| |Sales | |$250,000 |
| |Variable cost of goods sold |$110,000 | |
| |Variable selling and administrative expenses | ? | ? |
| |Contribution margin | |$100,000 |
To solve this problem, it must be worked backwards. First, calculate what total variable expenses must be by subtracting the contribution margin from sales ($250,000 − $100,000 = $150,000). Of the total variable expenses, $110,000 is given in the problem as the variable cost of goods sold, so we would have:
Variable selling and administrative expenses = $150,000 − $110,000 = $40,000.
68. Glory Company's gross margin exceeded its contribution margin by $25,000. If sales totaled $175,000 when net operating income equaled $20,000 and total selling and administrative expenses equaled $55,000, then the contribution margin equaled:
A) $75,000
B) $80,000
C) $30,000
D) $50,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard
Solution:
| |Partial traditional income statement: | |
| |Gross margin |$ ? |
| |Less selling and administrative expenses | 55,000 |
| |Net operating income |$20,000 |
Solving backwards, gross margin is $20,000 + $55,000 = $75,000.
Since the information given in the problem states that the gross margin exceeds the contribution margin by $25,000, the contribution margin must be $75,000 − $25,000 = $50,000.
69. Kramer Company is a retailer. At a sales level of $450,000, Kramer Company's gross margin is $90,000 less than its contribution margin, its net operating income is $30,000, and its selling and administrative expenses total $140,000. The company's total fixed expenses are:
A) $360,000
B) $230,000
C) $190,000
D) $280,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard
Solution:
| |Sales |$450,000 |
| |Cost of goods sold ($450,000 − $170,000) | 280,000 |
| |Gross margin ($140,000 + $30,000 |170,000 |
| |Selling and administrative expenses | 140,000 |
| |Net operating income |$ 30,000 |
Since the gross margin is $90,000 less than the contribution margin, the contribution margin is $170,000 + $90,000, or $260,000.
| |Sales |$450,000 |
| |Variable expenses ($450,000 − $260,000) | 190,000 |
| |Contribution margin |260,000 |
| |Fixed expenses ($260,000 − $30,000) | 230,000 |
| |Net operating income |$ 30,000 |
70. Gudwill Corporation, a manufacturing company, has provided the following financial data for April:
| |Sales |$340,000 |
| |Variable production expense |$43,000 |
| |Variable selling expense |$21,000 |
| |Variable administrative expense |$33,000 |
| |Fixed production expense |$62,000 |
| |Fixed selling expense |$67,000 |
| |Fixed administrative expense |$88,000 |
The company had no beginning or ending inventories. The contribution margin for April was:
A) $243,000
B) $235,000
C) $26,000
D) $123,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| |Sales |$340,000 |
| |Less variable expenses: | |
| |Variable production expense |43,000 |
| |Variable selling expense |21,000 |
| |Variable administrative expense | 33,000 |
| |Contribution margin |$243,000 |
71. The management of Bushovisky Corporation, a manufacturing company, has provided the following financial data for January:
| |Sales |$230,000 |
| |Variable production expense |$31,000 |
| |Fixed production expense |$47,000 |
| |Variable selling expense |$19,000 |
| |Fixed selling expense |$27,000 |
| |Variable administrative expense |$26,000 |
| |Fixed administrative expense |$65,000 |
The contribution margin for January was:
A) $15,000
B) $152,000
C) $91,000
D) $154,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| |Sales |$230,000 |
| |Less variable expenses: | |
| |Variable production expense |31,000 |
| |Variable selling expense |19,000 |
| |Variable administrative expense | 26,000 |
| |Contribution margin |$154,000 |
72. The management of Gilmartin Corporation, a manufacturing company, has provided the following data for February:
| |Sales |$550,000 |
| |Variable production expense |$104,000 |
| |Fixed production expense |$122,000 |
| |Variable selling expense |$24,000 |
| |Fixed selling expense |$102,000 |
| |Variable administrative expense |$56,000 |
| |Fixed administrative expense |$116,000 |
The contribution margin for February was:
A) $366,000
B) $210,000
C) $26,000
D) $324,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| |Sales |$550,000 |
| |Less variable expenses: | |
| |Variable production expense |104,000 |
| |Variable selling expense |24,000 |
| |Variable administrative expense | 56,000 |
| |Contribution margin |$366,000 |
73. Stuart Company is a merchandising company. During the next month, the company expects to sell 450 units. The company has the following revenue and cost structure:
| |Selling price per unit |$230 |
| |Cost per unit |$120 |
| |Sales commission |12% of sales |
| |Advertising expense |$18,000 per month |
| |Administrative expense |$32,500 per month |
What is the expected contribution margin next month?
A) $66,420
B) $37,080
C) $50,500
D) $53,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
| |Sales ($230 × 450) |$103,500 |
| |Less variable expenses: | |
| |Variable production expense ($120 × 450) |54,000 |
| |Sales commissions (12% × $103,500) | 12,420 |
| |Contribution margin |$ 37,080 |
74. Cranbrook Company has the following data for the month of March:
| |Sales |$30,000 |
| |Fixed manufacturing overhead |$5,500 |
| |Direct labor |$7,250 |
| |Fixed selling expense |$4,625 |
| |Variable manufacturing overhead |$4,100 |
| |Variable administrative expense |$4,800 |
| |Direct materials |$5,150 |
| |Fixed administrative expense |$4,450 |
| |Variable selling expense |$4,975 |
Assume that direct labor is variable and all units are produced and sold in the same month. What was the total contribution margin in March for Cranbrook Company?
A) $3,725
B) $8,875
C) $15,425
D) $16,125
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
| |Sales |$30,000 |
| |Less variable expenses: | |
| |Direct materials |5,150 |
| |Direct labor |7,250 |
| |Variable manufacturing overhead |4,100 |
| |Variable administrative expense |4,800 |
| |Variable selling expense | 4,975 |
| |Contribution margin |$ 3,725 |
75. The management of Dinky Tree Trimming believes that the number of trees trimmed each month is an appropriate activity measure for total operating cost. Shown below are the number of trees trimmed and operating costs in each of the last three months:
| | |Trees Trimmed |Operating Cost |
| |March |12 |$2,600 |
| |April |18 |$2,990 |
| |May |20 |$3,250 |
What is Dinky's cost formula for monthly operating cost using the least-squares regression method?
A) Y = $478.40 + $176.80X
B) Y = $1,625 + $81.25X
C) Y = $1,655 + $77.50X
D) Y = $8,840 + $176.80X
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
Solution:
The solution using Microsoft Excel functions is:
slope = $77.50 per tree
intercept = $1,655 per month
76. Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost over four recent periods appear below:
| | |Activity |Cost |
| |Period 1 |26 |$269 |
| |Period 2 |29 |$285 |
| |Period 3 |25 |$256 |
| |Period 4 |24 |$254 |
Using the least-squares regression method, what is the cost formula for this cost?
A) Y = $0.00 + $10.23X
B) Y = $97.00 + $6.50X
C) Y = $91.40 + $6.72X
D) Y = $99.10 + $5.11X
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
Solution:
The solution using Microsoft Excel functions is:
slope = $6.50 per activity unit
intercept = $97.00 per period
77. Seifer Inc.'s inspection costs are listed below:
| | |Units Produced |Inspection Costs |
| |April |119 |$8,558 |
| |May |117 |$8,535 |
| |June |113 |$8,415 |
| |July |125 |$8,736 |
| |August |152 |$9,357 |
| |September |108 |$8,320 |
| |October |120 |$8,603 |
| |November |192 |$10,337 |
Management believes that inspection cost is a mixed cost that depends on the number of units produced. Using the least-squares regression method, the estimates of the variable and fixed components of inspection cost would be closest to:
A) $24.08 per unit plus $5,709 per month
B) $67.74 per unit plus $8,858 per month
C) $24.37 per unit plus $5,658 per month
D) $24.01 per unit plus $5,727 per month
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
Solution:
The solution using Microsoft Excel functions is:
slope = $24.08 per unit
intercept = $5,709 per month
78. The management of Hamano Corporation would like for you to analyze their repair costs, which are listed below:
| | |Machine-Hours |Repair Costs |
| |April |4,459 |$98,523 |
| |May |4,426 |$98,296 |
| |June |4,493 |$98,781 |
| |July |4,417 |$98,207 |
| |August |4,432 |$98,349 |
| |September |4,446 |$98,420 |
| |October |4,489 |$98,749 |
| |November |4,475 |$98,654 |
Management believes that repair cost is a mixed cost that depends on the number of machine-hours. Using the least-squares regression method, the estimates of the variable and fixed components of repair cost would be closest to:
A) $22.11 per machine-hour plus $98,497 per month
B) $7.37 per machine-hour plus $65,670 per month
C) $8.19 per machine-hour plus $62,015 per month
D) $7.55 per machine-hour plus $64,859 per month
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
Solution:
The solution using Microsoft Excel functions is:
slope = $7.37 per machine-hour
intercept = $65,670 per month
Use the following to answer questions 79-81:
Callaghan Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $138.20 per unit.
| |Sales volume (units) |6,000 |7,000 |
| |Cost of sales |$499,200 |$582,400 |
| |Selling and administrative costs |$285,600 |$303,800 |
79. The best estimate of the total monthly fixed cost is:
A) $176,400
B) $835,500
C) $784,800
D) $886,200
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Variable component of cost of goods sold:
Variable cost = Change in costs/Change in units
Variable cost = ($582,400 − $499,200)/(7,000 − 6,000)
Variable cost = $83.20
Fixed cost:
High volume: $582,400 − $83.20 × 7,000 = $0
Low volume: $499,200 − $83.20 × 6,000 = $0
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($303,800 − $285,600)/(7,000 − 6,000)
Variable cost = $18.20
Fixed cost:
High volume: $303,800 − $18.20 × 7,000 = $176,400
Low volume: $285,600 − $18.20 × 6,000 = $176,400
Total variable cost per unit:
$83.20 + $18.20 = $101.40
Total fixed cost:
$0 + $176,400 = $176,400
80. The best estimate of the total variable cost per unit is:
A) $83.20
B) $126.60
C) $101.40
D) $130.80
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Variable component of cost of goods sold:
Variable cost = Change in costs/Change in units
Variable cost = ($582,400 − $499,200)/(7,000 − 6,000)
Variable cost = $83.20
Fixed cost:
High volume: $582,400 − $83.20 × 7,000 = $0
Low volume: $499,200 − $83.20 × 6,000 = $0
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($303,800 − $285,600)/(7,000 − 6,000)
Variable cost = $18.20
Fixed cost:
High volume: $303,800 − $18.20 × 7,000 = $176,400
Low volume: $285,600 − $18.20 × 6,000 = $176,400
Total variable cost per unit:
$83.20 + $18.20 = $101.40
Total fixed cost:
$0 + $176,400 = $176,400
81. The best estimate of the total contribution margin when 6,300 units are sold is:
A) $73,080
B) $231,840
C) $46,620
D) $346,500
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3,4 Level: Medium
Solution:
Variable component of cost of goods sold:
Variable cost = Change in costs/Change in units
Variable cost = ($582,400 − $499,200)/(7,000 − 6,000)
Variable cost = $83.20
Fixed cost:
High volume: $582,400 − $83.20 × 7,000 = $0
Low volume: $499,200 − $83.20 × 6,000 = $0
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($303,800 − $285,600)/(7,000 − 6,000)
Variable cost = $18.20
Fixed cost:
High volume: $303,800 − $18.20 × 7,000 = $176,400
Low volume: $285,600 − $18.20 × 6,000 = $176,400
Total variable cost per unit:
$83.20 + $18.20 = $101.40
Total fixed cost:
$0 + $176,400 = $176,400
| |Sales revenue ($138.20 × 6,300) | |$870,660 |
| |Variable expenses: | | |
| |Variable cost of goods sold ($83.20 × 6,300) |$524,160 | |
| |Variable selling and administrative expense ($18.20 × 6,300) | 114,660 | 638,820 |
| |Contribution margin | |$ 231,840 |
Use the following to answer questions 82-84:
Comparative 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 |$165,000 |$150,000 |
| |Cost of goods sold | 72,600 | 66,000 |
| |Gross margin | 92,400 | 84,000 |
| |Selling and administrative expenses: | | |
| |Rent |12,000 |12,000 |
| |Sales commissions |13,200 |12,000 |
| |Maintenance expenses |13,500 |13,000 |
| |Clerical expense | 16,000 | 15,000 |
| |Total selling and administrative expenses | 54,700 | 52,000 |
| |Net operating income |$ 37,700 |$ 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.
82. Which of the selling and administrative expenses of the company is variable?
A) Rent
B) Sales Commissions
C) Maintenance Expense
D) Clerical Expense
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
83. The total monthly fixed cost for Boggs Sporting Equipment Company is:
A) $12,000
B) $22,500
C) $25,000
D) $40,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
Variable component of sales commissions:
Variable cost = Change in costs/Change in units
Variable cost = ($13,200 − $12,000)/(11,000 − 10,000)
Variable cost = $1.20
Fixed cost of sales commissions:
High volume: $13,200 − $1.20 × 11,000 = $0 (answer will be zero fixed costs, because these sales commissions are variable, not mixed)
Low volume: $12,000 − $1.20 × 10,000 = $0
Variable component of maintenance expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($13,500 − $13,000)/(11,000 − 10,000)
Variable cost = $0.50
Fixed cost of maintenance expenses:
High volume: $13,500 − $0.50 × 11,000 = $8,000
Low volume: $13,000 − $0.50 × 10,000 = $8,000
Variable component of clerical expense:
Variable cost = Change in costs/Change in units
Variable cost = ($16,000 − $15,000)/(11,000 − 10,000)
Variable cost = $1.00
Fixed cost of clerical expense:
High volume: $16,000 − $1.00 × 11,000 = $5,000
Low volume: $15,000 − $1.00 × 10,000 = $5,000
Total variable cost per unit:
$1.20 + $0.50 + $1.00 = $2.70
Total fixed cost:
$0 + $8,000 + $5,000 + $12,000* = $25,000
*Rent
84. If sales are projected to be 8,000 units in September, total expected selling and administrative expenses would be:
A) $49,300
B) $41,600
C) $44,750
D) $46,600
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Variable component of sales commissions:
Variable cost = Change in costs/Change in units
Variable cost = ($13,200 − $12,000)/(11,000 − 10,000)
Variable cost = $1.20
Fixed cost of sales commissions:
High volume: $13,200 − $1.20 × 11,000 = $0 (answer will be zero fixed costs, because these sales commissions are variable, not mixed)
Low volume: $12,000 − $1.20 × 10,000 = $0
Variable component of maintenance expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($13,500 − $13,000)/(11,000 − 10,000)
Variable cost = $0.50
Fixed cost of maintenance expenses:
High volume: $13,500 − $0.50 × 11,000 = $8,000
Low volume: $13,000 − $0.50 × 10,000 = $8,000
Variable component of clerical expense:
Variable cost = Change in costs/Change in units
Variable cost = ($16,000 − $15,000)/(11,000 − 10,000)
Variable cost = $1.00
Fixed cost of clerical expense:
High volume: $16,000 − $1.00 × 11,000 = $5,000
Low volume: $15,000 − $1.00 × 10,000 = $5,000
Total variable cost per unit:
$1.20 + $0.50 + $1.00 = $2.70
Total fixed cost:
$0 + $8,000 + $5,000 + $12,000* = $25,000
*Rent
Use the following to answer questions 85-87:
The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:
| |Production volume |2,000 units |5,000 units |
| |Direct materials |$75.70 per unit |$75.70 per unit |
| |Direct labor |$28.40 per unit |$28.40 per unit |
| |Manufacturing overhead |$113.60 per unit |$58.10 per unit |
85. The best estimate of the total monthly fixed manufacturing cost is:
A) $227,200
B) $185,000
C) $435,400
D) $290,500
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
To calculate the variable manufacturing cost per unit:
| |Production Volume |Average Cost |Total Manufacturing Overhead Cost |
| |(Units) |per Unit |(units × average cost per unit) |
|High activity level |5,000 |$58.10 |$290,500 |
|Low activity level |2,000 |$113.60 |$227,200 |
Variable manufacturing overhead cost
= Change in cost ÷ Change in activity
= ($290,500 − $227,200) ÷ (5,000 – 2,000) = $21.10
Fixed cost element of manufacturing overhead
= Total cost − Variable cost element
= $290,500 − ($21.10 × 5,000) = $185,000
86. The best estimate of the total variable manufacturing cost per unit is:
A) $21.10
B) $125.20
C) $104.10
D) $75.70
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
To calculate the variable manufacturing cost per unit:
| |Production Volume |Average Cost |Total Manufacturing Overhead Cost |
| |(Units) |per Unit |(units × average cost per unit) |
|High activity level |5,000 |$58.10 |$290,500 |
|Low activity level |2,000 |$113.60 |$227,200 |
Variable manufacturing overhead cost
= Change in cost ÷ Change in activity
= ($290,500 − $227,200) ÷ (5,000 – 2,000) = $21.10
Fixed cost element of manufacturing overhead
= Total cost − Variable cost element
= $290,500 − ($21.20 × 5,000) = $185,000
Total variable manufacturing cost per unit
= (Direct materials + Direct labor + Manufacturing overhead)
= $75.70 + $28.40 + $21.10 = $125.20
87. The best estimate of the total cost to manufacture 2,200 units is closest to:
A) $356,840
B) $460,440
C) $417,890
D) $478,940
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
To calculate the variable manufacturing cost per unit:
| |Production Volume |Average Cost |Total Manufacturing Overhead Cost |
| |(Units) |per Unit |(units × average cost per unit) |
|High activity level |5,000 |$58.10 |$290,500 |
|Low activity level |2,000 |$113.60 |$227,200 |
Variable manufacturing overhead cost
= Change in cost ÷ Change in activity
= ($290,500 − $227,200) ÷ (5,000 – 2,000) = $21.10
Fixed cost element of manufacturing overhead
= Total cost − Variable cost element
= $290,500 − ($21.10 × 5,000) = $185,000
Total variable manufacturing cost per unit
= (Direct materials + Direct labor + Manufacturing overhead)
= $75.70 + $28.40 + $21.10 = $125.20
Y = $185,000 + $125.20(2,200)
Y = $460,440
Use the following to answer questions 88-91:
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 |$40 |
| |Sales commission |5% |
| |Purchase price (cost) per unit |$18 |
| |Advertising expense |$4,000 per month |
| |Administrative expense |$4,500 per month plus 15% of sales |
Assume that all activity mentioned in this problem is within the relevant range.
88. The expected gross margin next month is:
A) $17,600
B) $11,200
C) $14,400
D) $16,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,4 Level: Medium
Solution:
| |Sales |$32,000 |
| |Cost of goods sold | 14,400 |
| |Gross margin |$17,600 |
89. The expected total administrative expense next month is:
A) $4,800
B) $13,300
C) $9,300
D) $14,900
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,4 Level: Easy
Solution:
| |Fixed administrative expenses (given) |$4,500 |
| |Variable administrative expenses (15% × $32,000*) | 4,800 |
| |Total administrative expenses |$9,300 |
| |*$40 × 800 = $32,000 | |
90. The expected contribution margin next month is:
A) $17,600
B) $11,200
C) $14,400
D) $16,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,4 Level: Medium
Solution:
| |Sales ($40 × 800) | |$32,000 |
| |Variable expenses: | | |
| |Cost of goods sold ($18 × 800) |$14,400 | |
| |Sales commissions (5% × $32,000) |1,600 | |
| |Administrative (15% × $32,000) | 4,800 | 20,800 |
| |Contribution margin | |$11,200 |
91. The expected net operating income next month is:
A) $7,500
B) $5,100
C) $2,700
D) $11,200
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,4 Level: Medium
Solution:
| |Sales ($40 × 800) | |$32,000 |
| |Variable expenses: | | |
| |Cost of goods sold ($18 × 800) |$14,400 | |
| |Sales commissions (5% × $32,000) |1,600 | |
| |Administrative (15% × $32,000) | 4,800 | 20,800 |
| |Contribution margin | |11,200 |
| |Fixed expenses: | | |
| |Advertising expense |4,000 | |
| |Administrative | 4,500 | 8,500 |
| |Net operating income | |$ 2,700 |
Use the following to answer questions 92-94:
In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs were $223,000. Of this amount, utilities were $48,000 (all variable) and depreciation was $60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were $130,000. Assume that all of the activity levels mentioned in this problem are within the relevant range.
92. The variable cost for maintenance per machine hour is:
A) $1.30
B) $1.44
C) $0.75
D) $1.35
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Variable maintenance cost = Change in cost ÷ Change in activity
= ($130,000 – $115,000) ÷ (100,000 – 80,000) = $0.75
93. The total fixed overhead cost for O'Donnell is:
A) $115,000
B) $130,000
C) $60,000
D) $55,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Variable maintenance cost = Change in cost ÷ Change in activity
= ($130,000 − $115,000) ÷ (100,000 − 80,000) = $0.75
Fixed cost element of maintenance cost = Total cost − Variable cost element
= $115,000 − ($0.75 × 80,000) = $55,000
Total fixed overhead cost will be the total of the fixed maintenance cost and the fixed depreciation cost, or $55,000 + $60,000 = $115,000
94. If 110,000 machine hours of activity are projected for next period, total expected overhead cost would be:
A) $256,000
B) $263,500
C) $306,625
D) $242,500
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Variable maintenance cost = Change in cost ÷ Change in activity
= ($130,000 − $115,000) ÷ (100,000 − 80,000) = $0.75
Fixed cost element of maintenance cost = Total cost − Variable cost element
= $115,000 − ($0.75 × 80,000) = $55,000
Total fixed overhead cost will be the total of the fixed maintenance cost and the fixed depreciation cost, or $55,000 + $60,000 = $115,000
Variable utilities cost per machine hour = $48,000 ÷ 80,000 = $0.60
Total variable cost per machine hour is the total of the variable utilities cost per machine hour and the variable maintenance cost per machine hour, or $0.60 + $0.75 = $1.35
Y = $115,000 + $1.35 (110,000)
Y = $263,500
Use the following to answer questions 95-96:
Oerther Corporation reports that at an activity level of 5,000 units, its total variable cost is $131,750 and its total fixed cost is $31,200.
95. What would be the total variable cost at an activity level of 5,200 units? Assume that this level of activity is within the relevant range.
A) $137,020
B) $131,750
C) $162,950
D) $32,448
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Variable cost per unit: $131,750 ÷ 5,000= $26.35
Total variable cost = 5,200 × $26.35 = $137,020
96. What would be the average fixed cost per unit at an activity level of 5,200 units? Assume that this level of activity is within the relevant range.
A) $6.24
B) $6.00
C) $14.94
D) $32.59
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Average fixed cost per unit = Total fixed costs ÷ total units
Average fixed cost per unit = $31,200 ÷ 5,200 = $6.00
Use the following to answer questions 97-98:
At an activity level of 9,000 machine-hours in a month, Moffatt Corporation's total variable maintenance cost is $390,240 and its total fixed maintenance cost is $368,280.
97. What would be the total variable maintenance cost at an activity level of 9,300 machine-hours in a month? Assume that this level of activity is within the relevant range.
A) $758,520
B) $403,248
C) $390,240
D) $380,556
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Variable cost per unit: $390,240 ÷ 9,000 hours = $43.36 per hour
Total variable cost = 9,300 × $43.36 = $403,248
98. What would be the average fixed maintenance cost per unit at an activity level of 9,300 units in a month? Assume that this level of activity is within the relevant range.
A) $40.92
B) $84.28
C) $39.60
D) $54.93
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Average fixed cost per unit = Total fixed costs ÷ total units
Average fixed cost per unit = $368,280 ÷ 9,300 = $39.60
Use the following to answer questions 99-100:
Schuler Inc. reports that at an activity level of 2,100 machine-hours in a month, its total variable inspection cost is $69,846 and its total fixed inspection cost is $9,072.
99. What would be the average fixed inspection cost per unit at an activity level of 2,400 units in a month? Assume that this level of activity is within the relevant range.
A) $37.58
B) $4.32
C) $15.23
D) $3.78
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Total fixed costs ÷ total units = Average fixed cost per unit
$9,072 ÷ 2,400 units = $3.78 per unit
100. What would be the total variable inspection cost at an activity level of 2,400 machine-hours in a month? Assume that this level of activity is within the relevant range.
A) $78,918
B) $69,846
C) $79,824
D) $10,368
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
First, calculate the variable inspection cost per hour by:
Total variable inspection costs ÷ total machine hours = variable inspection cost per unit
$69,846 ÷ 2,100 machine-hours = $33.26 per machine-hour
Next, calculate the total variable inspection costs by:
Total variable inspection costs @ 2,400 machine-hours = $33.26 × 2,400 = $79,824
Use the following to answer questions 101-104:
Johnson Company has provided the following data for the first five months of the year:
| | |Machine Hours |Lubrication Cost |
| |January |120 |$750 |
| |February |160 |$800 |
| |March |200 |$870 |
| |April |150 |$790 |
| |May |170 |$840 |
101. Using the high-low method of analysis, the estimated variable lubrication cost per machine hour is closest to:
A) $1.40
B) $1.25
C) $0.67
D) $1.50
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($870 – $750) ÷ (200 – 120) = $1.50
102. Using the high-low method of analysis, the estimated monthly fixed component of lubrication cost is closest to:
A) $570
B) $560
C) $585
D) $565
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($870 − $750) ÷ (200 − 120) = $1.50
Fixed cost element = Total cost − Variable cost element
= $870 − ($1.50 × 200) = $570
103. Using the least-squares regression method of analysis, the estimated variable lubrication cost per machine hour is closest to:
A) $0.80
B) $1.56
C) $1.40
D) $1.28
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
Solution:
The solution using Microsoft Excel functions is:
slope = $1.56 per machine-hour
104. Using the least-squares regression method of analysis, the estimated monthly fixed component of lubrication cost is closest to:
A) $561
B) $580
C) $525
D) $572
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
Solution:
The solution using Microsoft Excel functions is:
intercept = $561 per month
Use the following to answer questions 105-106:
Wilson Company's activity for the first six of the current year is as follows:
| |Month |Machine Hours |Electrical Cost |
| |January |2,000 |$1,560 |
| |February |3,000 |$2,200 |
| |March |2,400 |$1,750 |
| |April |1,900 |$1,520 |
| |May |1,800 |$1,480 |
| |June |2,100 |$1,600 |
105. Using the high-low method, the variable cost per machine hour would be:
A) $0.67
B) $0.64
C) $0.40
D) $0.60
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($2,200 – $1,480) ÷ (3,000 – 1,800) = $0.60
106. Using the high-low method, the fixed portion of the electrical cost each month would be:
A) $400
B) $760
C) $280
D) $190
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($2,200 − $1,480) ÷ (3,000 − 1,800) = $0.60
Fixed cost element = Total cost − Variable cost element
= $2,200 − ($0.60 × 3,000) = $400
Use the following to answer questions 107-108:
Electrical costs at one of Rome Corporation's factories are listed below:
| | |Machine-Hours |Electrical Cost |
| |March |458 |$1,007 |
| |April |423 |$934 |
| |May |440 |$979 |
| |June |409 |$902 |
| |July |426 |$952 |
| |August |372 |$822 |
| |September |414 |$926 |
| |October |431 |$949 |
| |November |468 |$1,025 |
Management believes that electrical cost is a mixed cost that depends on machine-hours.
107. Using the high-low method, the estimate of the variable component of electrical cost per machine-hour is closest to:
A) $2.11
B) $1.80
C) $2.21
D) $0.47
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($1,025 – $822) ÷ (468 – 372) = $2.11
108. Using the high-low method, the estimate of the fixed component of electrical cost per month is closest to:
A) $822
B) $743
C) $38
D) $944
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($1,025 − $822) ÷ (468 − 372) = $2.11
Fixed cost element = Total cost − Variable cost element
= $1,025 − ($2.11 × 468) = $37.52 = $38 (rounded)
Use the following to answer questions 109-110:
Inspection costs at one of Ratulowski Corporation's factories are listed below:
| | |Units Produced |Inspection Cost |
| |April |777 |$10,176 |
| |May |807 |$10,404 |
| |June |798 |$10,355 |
| |July |835 |$10,665 |
| |August |822 |$10,542 |
| |September |795 |$10,313 |
| |October |805 |$10,409 |
| |November |853 |$10,795 |
| |December |796 |$10,310 |
Management believes that inspection cost is a mixed cost that depends on units produced.
109. Using the high-low method, the estimate of the variable component of inspection cost per unit produced is closest to:
A) $8.14
B) $7.05
C) $0.12
D) $12.89
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($10,795 – $10,176) ÷ (853 – 777) = $8.14
110. Using the high-low method, the estimate of the fixed component of inspection cost per month is closest to:
A) $10,344
B) $10,441
C) $3,852
D) $10,176
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($10,795 − $10,176) ÷ (853 − 777) = $8.14
Fixed cost element = Total cost − Variable cost element
= $10,795 − ($8.14 × 853) = $3,851.58 = $3,852 (rounded)
Use the following to answer questions 111-112:
Wuensch Inc., an escrow agent, has provided the following data concerning its office expenses:
| | |Escrows Completed |Office Expenses |
| |April |53 |$7,427 |
| |May |94 |$9,201 |
| |June |37 |$6,769 |
| |July |87 |$8,902 |
| |August |40 |$6,875 |
| |September |38 |$6,797 |
| |October |82 |$8,681 |
| |November |35 |$6,678 |
| |December |62 |$7,836 |
Management believes that office expense is a mixed cost that depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.
111. Using the high-low method, the estimate of the variable component of office expense per escrow completed is closest to:
A) $45.44
B) $42.76
C) $88.22
D) $131.00
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($9,201 – $6,678) ÷ (94 – 35) = $42.76
112. Using the high-low method, the estimate of the fixed component of office expense per month is closest to:
A) $7,685
B) $7,182
C) $6,678
D) $5,182
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Variable cost = Change in cost ÷ Change in activity
= ($9,201 − $6,678) ÷ (94 − 35) = $42.76
Fixed cost element = Total cost − Variable cost element
= $9,201 − ($42.76 × 94) = $5,181.56 = $5,182 (rounded)
Use the following to answer questions 113-114:
The following information has been provided by the Evans Retail Stores, Inc., for the first quarter of the year:
| |Sales |$350,000 |
| |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 |
113. The gross margin of Evans Retail Stores, Inc. for the first quarter is:
A) $210,000
B) $140,000
C) $220,000
D) $190,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
Solution:
| |Sales |$350,000 |
| |Cost of goods sold | 160,000 |
| |Gross margin |190,000 |
114. The contribution margin of Evans Retail Stores, Inc. for the first quarter is:
A) $300,000
B) $140,000
C) $210,000
D) $190,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
Solution:
| |Sales | |$350,000 |
| |Variable expenses: | | |
| |Cost of goods sold |$160,000 | |
| |Selling expense |35,000 | |
| |Administrative expense | 15,000 | 210,000 |
| |Contribution margin | |$140,000 |
Use the following to answer questions 115-117:
An income statement for Crandall's Bookstore for the first quarter of the current year is presented below:
| |Sales | |$800,000 |
| |Cost of goods sold | | 560,000 |
| |Gross margin | |240,000 |
| |Selling and administrative expenses: | | |
| |Selling |$98,000 | |
| |Administrative | 98,000 | 196,000 |
| |Net operating income | |$ 44,000 |
On average, a book sells for $50. Variable selling expenses are $5.50 per book, with the remaining selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder being fixed.
115. The contribution margin for Crandall's Bookstore for the first quarter is:
A) $688,000
B) $128,000
C) $152,000
D) $240,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Hard
Solution:
| |Sales | |$800,000 |
| |Variable expenses: | | |
| |Cost of goods sold |$560,000 | |
| |Administrative (3% × $800,000) |24,000 | |
| |Selling expense ($5.50 × 16,000*) | 88,000 | 672,000 |
| |Contribution margin | |$128,000 |
* $800,000 ÷ $50 average price per unit = 16,000 units sold
116. The net operating income using the contribution approach for the first quarter is:
A) $240,000
B) $152,000
C) $44,000
D) $128,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Medium
Solution:
| |Sales | |$800,000 |
| |Variable expenses: | | |
| |Cost of goods sold |$560,000 | |
| |Administrative (3% × $800,000) |24,000 | |
| |Selling expense ($5.50 × 16,000*) | 88,000 | 672,000 |
| |Contribution margin | |128,000 |
| |Fixed expenses: | | |
| |Administrative expense ($98,000 − $24,000) |74,000 | |
| |Selling expense ($98,000 − $88,000) | 10,000 | 84,000 |
| |Net operating income | |$ 44,000 |
* $800,000 ÷ $50 average price per unit = 16,000 units sold
117. The cost formula for selling and administrative expenses with “X” equal to the number of books sold is:
A) Y = $84,000 + $35X
B) Y = $84,000 + $42X
C) Y = $98,000 + $35X
D) Y = $98,000 + $42X
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard
Solution:
| |Sales | |$800,000 |
| |Variable expenses: | | |
| |Cost of goods sold |$560,000 | |
| |Administrative (3% × $800,000) |24,000 | |
| |Selling expense ($5.50 × 16,000*) | 88,000 | 672,000 |
| |Contribution margin | |128,000 |
| |Fixed expenses: | | |
| |Administrative expense ($98,000 − $24,000) |74,000 | |
| |Selling expense ($98,000 − $88,000) | 10,000 | 84,000 |
| |Net operating income | |$ 44,000 |
* $800,000 ÷ $50 average sales price = 16,000 units sold
Total variable cost per unit = $672,000 ÷ 16,000 units = $42 per unit
Total fixed costs = $10,000 + $74,000 = $84,000
Y = $84,000 + $42X
Use the following to answer questions 118-119:
In December, Barkes Corporation, a manufacturing company, reported the following financial data:
| |Sales |$270,000 |
| |Variable production expense |$27,000 |
| |Fixed production expense |$42,000 |
| |Variable selling expense |$28,000 |
| |Fixed selling expense |$43,000 |
| |Variable administrative expense |$34,000 |
| |Fixed administrative expense |$64,000 |
The company had no beginning or ending inventories.
118. The contribution margin for December was:
A) $201,000
B) $181,000
C) $32,000
D) $121,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
Solution:
| |Sales | |$270,000 |
| |Variable expenses: | | |
| |Production expense |$27,000 | |
| |Selling expense |28,000 | |
| |Administrative expense | 34,000 | 89,000 |
| |Contribution margin | |$181,000 |
119. The gross margin for December was:
A) $121,000
B) $32,000
C) $181,000
D) $201,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
Solution:
| |Sales |$270,000 |
| |Cost of goods sold ($27,000 + $42,000) | 69,000 |
| |Gross margin |$201,000 |
Use the following to answer questions 120-121:
The management of Edrington Corporation, a manufacturing company, would like your help in contrasting the traditional and contribution approaches to the income statement. The company has provided the following financial data for April:
| |Sales |$280,000 |
| |Variable production expense |$30,000 |
| |Fixed production expense |$57,000 |
| |Variable selling expense |$27,000 |
| |Fixed selling expense |$48,000 |
| |Variable administrative expense |$34,000 |
| |Fixed administrative expense |$73,000 |
The company had no beginning or ending inventories.
120. The gross margin for April was:
A) $193,000
B) $11,000
C) $102,000
D) $189,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
Solution:
| |Sales |$280,000 |
| |Cost of goods sold ($30,000 + $57,000) | 87,000 |
| |Gross margin |$193,000 |
121. The contribution margin for April was:
A) $102,000
B) $189,000
C) $11,000
D) $193,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
Solution:
| |Sales | |$280,000 |
| |Variable expenses: | | |
| |Cost of goods sold |$30,000 | |
| |Selling expense |27,000 | |
| |Administrative expense | 34,000 | 91,000 |
| |Contribution margin | |$189,000 |
Use the following to answer questions 122-123:
Monsivais Corporation, a manufacturing company, has provided the following financial data for February:
| |Sales |$470,000 |
| |Variable production expense |$81,000 |
| |Variable selling expense |$11,000 |
| |Variable administrative expense |$40,000 |
| |Fixed production expense |$86,000 |
| |Fixed selling expense |$73,000 |
| |Fixed administrative expense |$139,000 |
The company had no beginning or ending inventories.
122. The gross margin for February was:
A) $338,000
B) $303,000
C) $172,000
D) $40,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
Solution:
| |Sales |$470,000 |
| |Cost of goods sold ($81,000 + $86,000) | 167,000 |
| |Gross margin |$303,000 |
123. The contribution margin for February was:
A) $338,000
B) $303,000
C) $172,000
D) $40,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
Solution:
| |Sales | |$470,000 |
| |Variable expenses: | | |
| |Cost of goods sold |$81,000 | |
| |Selling expense |11,000 | |
| |Administrative expense | 40,000 | 132,000 |
| |Contribution margin | |$338,000 |
Use the following to answer questions 124-125:
(Appendix 5A) Lacourse Inc.'s inspection costs are listed below:
| | |Units Produced |Inspection Costs |
| |January |647 |$15,309 |
| |February |724 |$15,965 |
| |March |694 |$15,715 |
| |April |645 |$15,271 |
| |May |696 |$15,745 |
| |June |665 |$15,442 |
| |July |718 |$15,933 |
| |August |699 |$15,739 |
Management believes that inspection cost is a mixed cost that depends on units produced.
124. Using the least-squares regression method, the estimate of the variable component of inspection cost per unit produced is closest to:
A) $22.80
B) $8.82
C) $8.27
D) $8.78
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
The solution using Microsoft Excel functions is:
slope = $8.82 per unit produced
125. Using the least-squares regression method, the estimate of the fixed component of inspection cost per month is closest to:
A) $9,608
B) $15,640
C) $9,587
D) $15,271
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
The solution using Microsoft Excel functions is:
intercept = $9,587 per month
Use the following to answer questions 126-127:
(Appendix 5A) Recent maintenance costs of Divers Corporation are listed below:
| | |Machine-Hours |Maintenance Costs |
| |February |527 |$5,144 |
| |March |499 |$5,033 |
| |April |542 |$5,220 |
| |May |541 |$5,196 |
| |June |489 |$4,973 |
| |July |543 |$5,200 |
| |August |558 |$5,288 |
| |September |513 |$5,060 |
Management believes that maintenance cost is a mixed cost that depends on machine-hours.
126. Using the least-squares regression method, the estimate of the variable component of maintenance cost per machine-hour is closest to:
A) $9.76
B) $6.00
C) $4.43
D) $4.57
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
The solution using Microsoft Excel functions is:
slope = $4.43 per machine-hour
127. Using the least-squares regression method, the estimate of the fixed component of maintenance cost per month is closest to:
A) $5,139
B) $2,806
C) $4,973
D) $2,738
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
The solution using Microsoft Excel functions is:
intercept = $2,806 per month
Use the following to answer questions 128-129:
(Appendix 5A) Gaumer Corporation's recent utility costs are listed below:
| | |Machine-Hours |Utility Costs |
| |May |1,708 |$20,511 |
| |June |1,770 |$21,016 |
| |July |1,703 |$20,449 |
| |August |1,734 |$20,699 |
| |September |1,787 |$21,142 |
| |October |1,756 |$20,912 |
| |November |1,731 |$20,693 |
| |December |1,798 |$21,252 |
Management believes that utility cost is a mixed cost that depends on machine-hours.
128. Using the least-squares regression method, the estimate of the variable component of utility cost per machine-hour is closest to:
A) $8.45
B) $8.23
C) $11.92
D) $8.31
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
The solution using Microsoft Excel functions is:
slope = $8.31 per machine-hour
129. Using the least-squares regression method, the estimate of the fixed component of utility cost per month is closest to:
A) $20,834
B) $20,449
C) $6,059
D) $6,314
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
The solution using Microsoft Excel functions is:
intercept = $6,314 per month
Essay Questions
130. ABC Company's total overhead costs at various levels of activity are presented below:
| | |Machine Hours |Total Overhead Costs |
| |March |60,000 |$216,800 |
| |April |50,000 |$194,000 |
| |May |70,000 |$239,600 |
| |June |80,000 |$262,400 |
Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance. At the 50,000 machine-hour level of activity these costs are:
| |Utilities (V) |$ 54,000 |
| |Supervisory salaries (F) |62,000 |
| |Maintenance (M) | 78,000 |
| |Total overhead cost |$194,000 |
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.
Ans:
|a. |Total overhead cost at 80,000 machine hours |$262,400 |
| |Less: | |
| |Utilities ($54,000/50,000) × 80,000 |86,400 |
| |Supervisory salaries (fixed) | 62,000 |
| |Portion of overhead for June that represents maintenance |$114,000 |
b. High-low analysis of maintenance cost:
| | |Maintenance Cost |Machine-Hours |
| |High point |$114,000 |80,000 |
| |Low point | 78,000 |50,000 |
| |Change observed |$ 36,000 |30,000 |
Variable cost:
Change in cost/Change in activity = $36,000/30,000 MHs = $1.20 per MHs
Total fixed cost:
| |Total maintenance cost at the low point |$78,000 |
| |Less variable cost element (50,000 MHs × $1.20 per MH) | 60,000 |
| |Fixed cost element |$18,000 |
The cost formula is: Y = $18,000 + $1.20X
c. Total overhead at 55,000 machine hours:
| |Utilities ($54,000/50,000) × 55,000 | |$ 59,400 |
| |Supervisory salaries | | 62,000 |
| |Maintenance cost: | | |
| |Variable (55,000 MHs × $1.20 per MH) |$66,000 | |
| |Fixed | 18,000 | 84,000 |
| |Total overhead cost at 55,000 MH | |$205,400 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard
131. Hinrichs Corporation reports that at an activity level of 2,400 units, its total variable cost is $174,504 and its total fixed cost is $55,080.
Required:
For the activity level of 2,700 units, compute: (a) the total variable cost; (b) the total fixed cost; (c) the total cost; (d) the average variable cost per unit; (e) the average fixed cost per unit; and (f) the average total cost per unit. Assume that this activity level is within the relevant range.
Ans:
Variable cost = $174,504/2,400 units = $72.71 per unit
| |Activity level |2,700 |
| |Total cost: | |
| |Variable cost (a) [2,700 units × $72.71 per unit] |$196,317 |
| |Fixed cost (b) | 55,080 |
| |Total (c) |$251,397 |
| |Cost per unit: | |
| |Variable cost (d) |$72.71 |
| |Fixed cost (e) [$55,080/2,700 units] | 20.40 |
| |Total (f) |$93.11 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
132. At an activity level of 6,800 units, Henkes Corporation's total variable cost is $125,188 and its total fixed cost is $164,152.
Required:
For the activity level of 7,100 units, compute: (a) the total variable cost; (b) the total fixed cost; (c) the total cost; (d) the average variable cost per unit; (e) the average fixed cost per unit; and (f) the average total cost per unit. Assume that this activity level is within the relevant range.
Ans:
Variable cost = $125,188/6,800 units = $18.41 per unit
| |Activity level |7,100 |
| |Total cost: | |
| |Variable cost (a) [7,100 units × $18.41 per unit] |$130,711 |
| |Fixed cost (b) | 164,152 |
| |Total (c) |$294,863 |
| |Cost per unit: | |
| |Variable cost (d) |$18.41 |
| |Fixed cost (e) [$164,152/7,100 units] | 23.12 |
| |Total (f) |$41.53 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
133. The Pate Company reported the following:
| | |Month 1 |Month 2 |
| |Units sold |6,000 |8,000 |
| |Cost A |$35,000 |$36,000 |
| |Cost B |$16,000 |$16,000 |
| |Cost C |$1,500 |$2,000 |
| |Cost D |$12,000 |$16,000 |
| |Cost E |$6,000 |$8,000 |
| |Cost F |$2,000 |$2,000 |
| |Cost G |$4,200 |$8,400 |
| |Cost H |$37,300 |$44,600 |
| |Cost I |$13,000 |$13,500 |
| |Cost J |$10,000 |$12,200 |
Required:
Indicate whether each of the costs above is probably a variable, mixed or fixed cost.
Cost A _______________
Cost B _______________
Cost C _______________
Cost D _______________
Cost E _______________
Cost F _______________
Cost G _______________
Cost H _______________
Cost I _______________
Cost J _______________
Ans:
Cost A: Mixed
Cost B: Fixed
Cost C: Variable
Cost D: Variable
Cost E: Variable
Cost F: Fixed
Cost G: Mixed
Cost H: Mixed
Cost I: Mixed
Cost J: Mixed
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
134. 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 |$800,000 |$1,120,000 |
| |Cost of goods sold | 550,000 | 710,000 |
| |Gross margin |250,000 |410,000 |
| |Selling and administrative expense | 150,000 | 190,000 |
| |Net operating income |$100,000 |$ 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.
Ans:
a. Variable component of cost of goods sold:
Variable cost = Change in costs/Change in units
Variable cost = ($710,000 − $550,000)/(70,000 − 50,000)
Variable cost = $8.00
Fixed cost:
High volume: $710,000 − $8.00×70,000 = $150,000
Low volume: $550,000 − $8.00×50,000 = $150,000
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($190,000 − $150,000)/(70,000 − 50,000)
Variable cost = $2.00
Fixed cost:
High volume: $190,000 − $2.00×70,000 = $50,000
Low volume: $150,000 − $2.00×50,000 = $50,000
Total variable cost per unit:
$8.00 + $2.00 = $10.00
Total fixed cost:
$150,000 + $50,000 = $200,000
|b. |Sales revenue | |$1,120,000 |
| |Variable expenses: | | |
| |Variable cost of goods sold |$560,000 | |
| |Variable selling and administrative expense | 140,000 | 700,000 |
| |Contribution margin | |$ 420,000 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,4 Level: Medium
135. 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 |$157,000 |$225,000 |
| |Direct material cost per unit |$4 |$4 |
| |Direct labor cost per unit |$6 |$6 |
Required:
Using the high-low method, estimate the cost formula for manufacturing overhead. Assume that both direct material and direct labor are variable costs.
Ans:
| |Low |High |
|Total manufacturing costs |$157,000 |$225,000 |
|Less: | | |
|Direct materials |40,000 |60,000 |
|($4 × 10,000 and $4 × 15,000, respectively) | | |
|Direct labor | 60,000 | 90,000 |
|($6 × 10,000 and $6 × 15,000, respectively) | | |
|Manufacturing overhead cost |$ 57,000 |$ 75,000 |
| |Cost |Activity |
|High level of activity |$75,000 |15,000 units |
|Low level of activity |57,000 |10,000 units |
|Change |$18,000 |5,000 units |
$18,000 ÷ 5,000 units = $3.60 per unit
|Total cost at the high level of activity |$75,000 |
|Less variable element ($3.60 per unit × 15,000 units) |54,000 |
|Fixed cost element |$21,000 |
Therefore, the cost formula for manufacturing overhead is $21,000 per period plus $3.60 per unit produced, or Y = $21,000 + $3.60X.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
136. Utility costs at one of Hannemann Corporation's factories are listed below:
| | |Machine-Hours |Utility Cost |
| |March |5,021 |$52,824 |
| |April |5,076 |$53,287 |
| |May |5,074 |$53,263 |
| |June |5,040 |$52,991 |
| |July |5,087 |$53,371 |
| |August |5,073 |$53,251 |
| |September |5,075 |$53,252 |
| |October |5,034 |$52,916 |
| |November |5,062 |$53,137 |
Management believes that utility cost is a mixed cost that depends on machine-hours.
Required:
Estimate the variable cost per machine-hour and the fixed cost per month using the high-low method. Show your work!
Ans:
| |Machine-Hours |Utility Cost |
|High activity level |5,087 |$53,371 |
|Low activity level |5,021 |$52,824 |
Variable cost = Change in cost ÷ Change in activity
= ($53,371 − $52,824) ÷ (5,087 − 5,021) = $8.29
Fixed cost element = Total cost − Variable cost element
= $52,824 − ($8.29 × 5,021) = $11,200
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
137. Swofford Inc. has provided the following data concerning its maintenance costs:
| | |Machine-Hours |Maintenance Cost |
| |March |4,440 |$50,950 |
| |April |4,431 |$50,877 |
| |May |4,412 |$50,696 |
| |June |4,460 |$51,113 |
| |July |4,414 |$50,711 |
| |August |4,433 |$50,900 |
| |September |4,443 |$50,976 |
| |October |4,415 |$50,730 |
| |November |4,391 |$50,530 |
Management believes that maintenance cost is a mixed cost that depends on machine-hours.
Required:
Estimate the variable cost per machine-hour and the fixed cost per month using the high-low method. Show your work!
Ans:
| |Machine-Hours |Maintenance Cost |
|High activity level |4,460 |$51,113 |
|Low activity level |4,391 |$50,530 |
Variable cost = Change in cost ÷ Change in activity
= ($51,113 − $50,530) ÷ (4,460 − 4,391) = $8.45
Fixed cost element = Total cost − Variable cost element
= $50,530 − ($8.45 × 4,391) = $13,426
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
138. The management of Dethlefsen Corporation would like to have a better understanding of the behavior of its inspection costs. The company has provided the following data:
| | |Direct Labor-Hours |Inspection Cost |
| |January |5,089 |$33,122 |
| |February |5,042 |$32,929 |
| |March |5,026 |$32,870 |
| |April |5,073 |$33,065 |
| |May |5,029 |$32,906 |
| |June |5,040 |$32,913 |
| |July |5,070 |$33,050 |
| |August |5,027 |$32,875 |
| |September |4,995 |$32,746 |
Management believes that inspection cost is a mixed cost that depends on direct labor-hours.
Required:
Estimate the variable cost per direct labor-hour and the fixed cost per month using the high-low method. Show your work!
Ans:
| | |Direct Labor-Hours |Inspection Cost |
| |High activity level |5,089 |$33,122 |
| |Low activity level |4,995 |$32,746 |
Variable cost = Change in cost ÷ Change in activity
= ($33,122 − $32,746) ÷ (5,089 − 4,995) = $4.00
Fixed cost element = Total cost − Variable cost element
= $32,746 − ($4.00 × 4,995) = $12,766
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
139. The accounting department of Archer Company, a merchandising company, has prepared the following analysis:
| | |Cost Formula |
| |Cost of goods sold |$56 per unit |
| |Sales commissions |12% of sales |
| |Advertising expense |$300,000 per month |
| |Administrative salaries |$160,000 per month |
| |Billing expense |? |
| |Depreciation expense |$62,000 per month |
The accounting department feels that billing expense is a mixed cost, containing both fixed and variable cost elements. The billing expenses and sales in units over the last several months follow:
| | |Units Sold |Billing |
| | |(000) |Expense |
| |January |9 |$30,000 |
| |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 format 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 $100 per unit. Prepare a budgeted income statement for the month, using the contribution format.
Ans:
a. Using least-squares regression, the cost formula is Y = $16,952 + $1,452X, where X is a thousand units
b
| |Sales ($100 × 30,000) | |$3,000,000 |
| |Variable expenses: | | |
| |Cost of goods sold ($56 × 30,000) |$1,680,000 | |
| |Commissions (0.12 × $3,000,000) |360,000 | |
| |Billing expense ($1,452 × 30) | 43,560 | 2,083,560 |
| |Contribution margin | |916,440 |
| |Fixed expenses: | | |
| |Advertising expense |300,000 | |
| |Administrative salaries |160,000 | |
| |Billing expense |16,952 | |
| |Depreciation expense | 62,000 | 538,952 |
| |Net operating income | |$ 377,488 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 4,5 Level: Hard
140. In January, Verba Corporation, a manufacturing company, reported the following financial data:
| |Sales |$460,000 |
| |Variable production expense |$84,000 |
| |Fixed production expense |$100,000 |
| |Variable selling expense |$12,000 |
| |Fixed selling expense |$47,000 |
| |Variable administrative expense |$33,000 |
| |Fixed administrative expense |$132,000 |
The company had no beginning or ending inventories.
Required:
a. Prepare an income statement in good form for January using the traditional approach.
b. Prepare an income statement in good form for January using the contribution approach.
Ans:
a. Traditional approach
| |Sales | |$460,000 |
| |Cost of goods sold | | 184,000 |
| |Gross margin | |276,000 |
| |Selling and administrative expenses: | | |
| |Selling |$ 59,000 | |
| |Administrative | 165,000 | 224,000 |
| |Net operating income | |$ 52,000 |
b. Contribution approach
| |Sales | |$460,000 |
| |Variable expenses: | | |
| |Variable production expense |$84,000 | |
| |Variable selling expense |12,000 | |
| |Variable administrative expense | 33,000 | 129,000 |
| |Contribution margin | |331,000 |
| |Fixed expenses: | | |
| |Fixed production expense |100,000 | |
| |Fixed selling expense |47,000 | |
| |Fixed administrative expense |132,000 | 279,000 |
| |Net operating income | |$ 52,000 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
141. Novakovich Inc., a manufacturing company, has provided the following financial data for January:
| |Sales |$430,000 |
| |Variable production expense |$84,000 |
| |Variable selling expense |$16,000 |
| |Variable administrative expense |$28,000 |
| |Fixed production expense |$102,000 |
| |Fixed selling expense |$44,000 |
| |Fixed administrative expense |$121,000 |
The company had no beginning or ending inventories.
Required:
a. Prepare an income statement in good form for January using the traditional approach.
b. Prepare an income statement in good form for January using the contribution approach.
Ans:
a. Traditional approach
| |Sales | |$430,000 |
| |Cost of goods sold | | 186,000 |
| |Gross margin | |244,000 |
| |Selling and administrative expenses: | | |
| |Selling |$ 60,000 | |
| |Administrative | 149,000 | 209,000 |
| |Net operating income | |$ 35,000 |
b. Contribution approach
| |Sales | |$430,000 |
| |Variable expenses: | | |
| |Variable production expense |$84,000 | |
| |Variable selling expense |16,000 | |
| |Variable administrative expense | 28,000 | 128,000 |
| |Contribution margin | |302,000 |
| |Fixed expenses: | | |
| |Fixed production expense |102,000 | |
| |Fixed selling expense |44,000 | |
| |Fixed administrative expense | 121,000 | 267,000 |
| |Net operating income | |$ 35,000 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
142. In July, Haertel Corporation, a manufacturing company, reported the following financial data:
| |Sales |$390,000 |
| |Variable production expense |$74,000 |
| |Fixed production expense |$67,000 |
| |Variable selling expense |$15,000 |
| |Fixed selling expense |$72,000 |
| |Variable administrative expense |$52,000 |
| |Fixed administrative expense |$86,000 |
Required:
Prepare an income statement in good form for July using the contribution approach.
Ans:
| |Sales | |$390,000 |
| |Variable expenses: | | |
| |Variable production expense |$74,000 | |
| |Variable selling expense |15,000 | |
| |Variable administrative expense | 52,000 | 141,000 |
| |Contribution margin | |249,000 |
| |Fixed expenses: | | |
| |Fixed production expense |67,000 | |
| |Fixed selling expense |72,000 | |
| |Fixed administrative expense | 86,000 | 225,000 |
| |Net operating income | |$ 24,000 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
143. Crabbe Inc., a manufacturing company, has provided the following data for October:
| |Sales |$270,000 |
| |Variable production expense |$53,000 |
| |Variable selling expense |$23,000 |
| |Variable administrative expense |$16,000 |
| |Fixed production expense |$50,000 |
| |Fixed selling expense |$34,000 |
| |Fixed administrative expense |$77,000 |
Required:
Prepare an income statement in good form for October using the contribution approach.
Ans:
| |Sales | |$270,000 |
| |Variable expenses: | | |
| |Variable production expense |$53,000 | |
| |Variable selling expense |23,000 | |
| |Variable administrative expense | 16,000 | 92,000 |
| |Contribution margin | |178,000 |
| |Fixed expenses: | | |
| |Fixed production expense |50,000 | |
| |Fixed selling expense |34,000 | |
| |Fixed administrative expense | 77,000 | 161,000 |
| |Net operating income | |$ 17,000 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy
144. 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 |40 |$637 |
| |Period 2 |47 |$693 |
| |Period 3 |45 |$675 |
| |Period 4 |41 |$646 |
Required:
Using the least-squares regression method, estimate the cost formula for this cost.
Ans: Using least-squares regression, the cost formula is Y = $324 + $7.82X.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
145. Grawburg Inc. maintains a call center to take orders, answer questions, and handle complaints. The costs of the call center for a number of recent months are listed below:
| | |Calls Taken |Call Center Cost |
| |April |9,030 |$112,323 |
| |May |9,017 |$112,278 |
| |June |9,035 |$112,341 |
| |July |9,065 |$112,458 |
| |August |9,015 |$112,290 |
| |September |9,061 |$112,419 |
| |October |9,070 |$112,463 |
| |November |9,067 |$112,439 |
Management believes that the cost of the call center is a mixed cost that depends on the number of calls taken.
Required:
Estimate the variable cost per call and fixed cost per month using the least-squares regression method.
Ans:
The solution using Microsoft Excel functions is:
slope = $3.27 per call
intercept = $82,758 per month
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
146. The management of Rutledge Corporation would like to better understand the behavior of the company's warranty costs. Those costs are listed below for a number of recent months:
| | |Product Returns |Warranty Cost |
| |March |30 |$3,648 |
| |April |37 |$4,074 |
| |May |43 |$4,460 |
| |June |41 |$4,330 |
| |July |32 |$3,756 |
| |August |48 |$4,782 |
| |September |35 |$3,932 |
| |October |33 |$3,823 |
Management believes that warranty cost is a mixed cost that depends on the number of product returns.
Required:
Estimate the variable cost per product return and the fixed cost per month using the least-squares regression method.
Ans:
The solution using Microsoft Excel functions is:
slope = $63.59 per product return
intercept = $1,724 per month
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
147. Furlan Printing Corp., a book printer, has provided the following data:
| | |Titles Printed |Press Setup Cost |
| |May |40 |$6,649 |
| |June |38 |$6,438 |
| |July |25 |$5,307 |
| |August |28 |$5,564 |
| |September |33 |$6,030 |
| |October |27 |$5,505 |
| |November |39 |$6,551 |
| |December |36 |$6,275 |
Management believes that the press setup cost is a mixed cost that depends on the number of titles printed. (A specific book that is to be printed is called a “title”. Typically, thousands of copies will be printed of each title. Specific steps must be taken to setup the presses for printing each title-for example, changing the printing plates. The costs of these steps are the press setup costs.)
Required:
Estimate the variable cost per title printed and the fixed cost per month using the least-squares regression method.
Ans:
The solution using Microsoft Excel functions is:
slope = $88.21 per title printed
intercept = $3,107 per month
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
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