Solution of Managerial Accounting

Chapter 5 approach Behavior Analysis and Use As we shall see in later chapters, the ability to predict how bes respond to smorgasbords in body butt on is vituperative for making decisions, controlling operations, and evaluating per takeance. Three major classifications of approachs were discussed in this chapter covariant, improve, and conflate. Mixed court brood of protean and better atoms and enkindle be expressed in equation form as Y = a + bX, where X is the activeness, Y is the court, a is the fit(p) be element, and b is the variable star terms per unit of measurement of measurement of natural action.several(prenominal) method actings can be used to prognosticate the dogged and variable cost components of a mixed cost use past records of cost and bodily process. If the relation between cost and activity appears to be linear establish on a scatter graph plot, then the variable and frosty components of the mixed cost can be augurd victimisation the q uick-and-dirty method, the high-low method, or the least-squ bes regression method. The quick-and-dirty method is ground on drawing a substantial line and then using the flip and the intercept of the square line to estimate the variable and fixed cost components of the mixed cost.The high-low method implicitly draws a straight line through the points of lowest activity and highest activity. In most situations, the least-squares regression method is preferred to both the quick-and-dirty and high-low methods. Computer software is fullly in stock(predicate) for using the least-squares regression method. These software applications provide a variety of useful statistics along with estimates of the intercept (fixed cost) and slope (variable cost per unit).Nevertheless, even when least-squares regression is used, the data should be plotted to confirm that the relationship is really a straight line. Managers use be harmoniumized by look to help make many decisions. The piece coi ffure income statement can aid decision making because it classifies be by cost doings (i. e. , variable versus fixed) rather than by the functions of production, administration, and gross sales. In this chapter, the following learning objectives give be c everyplaceed In this chapter, the following learning objectives will be covered Understand how fixed and variable be birth and how to use them to predict costs. pic pic pic Use a scattergraph plot to diagnose cost behavior. pic pic pic Analyze a mixed cost using the high-low method. pic pic pic urinate an income statement using the contribution format. pic pic pic (Appendix 5A) Analyze a mixed cost using the least-squares regression method. Key terms Account analysis A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analysts prior knowledge of how the cost in the account be hold ins. pic pic pic action mechanism base A meas ure of some(prenominal) causes the incurrence of a variable cost.For example, the bring cost of roentgen ray film in a hospital will increase as the phone heel of X-rays taken increases. Therefore, the number of X-rays is the activity base that explains the tally cost of X-ray film. pic pic pic Committed fixed costs Investments in facilities, equipment, and basic harmoniumizational structure that cant be significantly cut down even for short periods of fourth dimension without making fundamental changes. pic pic pic Contribution approach An income statement format that organizes costs by their behavior. be are separated into variable and fixed categories rather than being separated jibe to organizational functions. pic pic pic Contribution margin The amount remaining from sales revenues after all variable expenses have been deducted. pic pic pic Cost structure The relative pro raft of fixed, variable, and mixed costs in an organization. pic pic pic Dependent variable A variable that responds to some causal factor add together cost is the subject variable, as represented by the letter Y, in the equation Y = a + bX. pic pic pic Discretionary fixed costs Those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, untold(prenominal) as advertising and research. pic pic pic Engineering approach A detailed analysis of cost behavior based on an industrial engineers evaluation of the inputs that are compulsory to carry out a particular activity and of the equipment casualtys of those inputs. pic pic pic High-low method A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity directs. pic pic pic Independent variable A variable that acts as a causal factor activity is the independent variable, as represented by the letter X, in the equation Y = a + bX. pic pic pic Least-squares regression A method of separating a mixed cost into its fixed and variable elements by fitting a regression line that method minimizes the sum of the square errors. pic pic pic Linear cost behavior Cost behavior is said to be linear whenever a straight line is a reasonable approximation for the relation between cost and activity. pic pic pic Mixed cost A cost that contains both variable and fixed cost elements. pic pic pic Multiple regression An analytical method required when variations in a dependent variable are caused by more than one factor. pic pic pic R 2 A measure of fairness of fit in least-squares regression analysis. It is the percentage of the variation in the dependent variable that is explained by variation in the independent variable. pic pic pic Relevant range The range of activity deep down which assumptions about variable and fixed cost behavior are reasonably valid. pic pic pic Step-variable cost The cost of a resource that is obtainab le only in large chunks and that increases and decreases only in response to fairly wide changes in activity. check over Problem 1 Cost behavior Neptune Rentals offers a boat rental service. experience the following costs of the company over the relevant range of 5,000 to 8,000 hours of run time for the boats Hours of operating time 5,000 6,000 7,000 8,000 rack up costs variable quantity costs $20,000 $ ? $ ? $ ? Fixed costs $1,68,000 $ ? $ ? $ ? get costs $1,88,000 $ ? $ ? $ ? Cost per hour uncertain cost $ ? $ ? $ ? $ ? Fixed cost $ ? $ ? $ ? $ ? Total cost per hour $ ? $ ? $ ? $ ? Required Compute the wanting amount assuring that cost behavior patterns remain same within the relevant range of 5,000 to 8,000 hours. theme to Review Problem 1 Per Unit unsettled Cost = 20,000/5,000= 4. 00 per Unit. Hours of operating time 5,000hr 6,000hr 7,000hr 8,000hr Total Costs inconstant costs $20,000 $24,000 $28,000 $32,000 Fixed costs 1,68,000 1,68,000 1, 68,000 1,68,000 Total costs $1,88,000 $1,92,000 $1,96,000 $2,00,000 Cost per hour $4. 0 $4. 00 $4. 00 $4. 00 Variable cost Fixed cost 33. 60 28. 00 24. 00 21. 00 Total cost per hour $37. 60 $32. 00 $28. 00 $25. 0 Review problem 2 High Low Method The administrative of azalea hills hospitals would like a cost verbalism linking the costs involved in admitting patients to the number of patients admitted during a calendar month. The admitting departments costs and number of patients admitted during the nowadays preceding eight month are given in the following table calendar month number of patients admitted dep.Costs May 1,800 14,700 June 1,900 15,200 July 1,700 13,700 August 1,600 14,000 September 1,500 14,300 October 1,300 13, degree Celsius Nov 1,100 12,800 Dec 1,500 14,600 Required 1. Use the high low method to establish the fixed and variable components of admitting costs. 2. Express the fixed and variable components of admitting costs as a command i n the linear equation form Y= a+bx. termination to Review Problem 2 1. Number of Patients Admitted Admitting Department cost High activity aim (June) $1,900 15,200 Low activity take (November) 1,100 12,800 veer $800 $2,400 Variable cost per unit of activity Variable Cost = 2,400 / 800 = 3 Fixed cost = Total cost variable cost = 15,200 (3*1,900) = 9,500 2. The cost formula expressed in the linear equation form isY= $9,500+$3X Problem 5-12 House of Organs, Inc purchases variety meat from a well-known manufacturer and sells them at the retail level. The variety meat sell, on the average, for $2500 each. The average cost of an organ from the manufacturer is $1500. House of Organs, Inc has always kept careful records of its costs. The costs that the company incurs in a typical month are presented below in the form of a spreadsheet Costs Cost Formula Selling publicise $950 per month Delivery of organs $60 per organ sold Sales salaries and commissions $4,600 per month prescribed 4% interest Utilities $650 per month Depreciation of sales facilities $5,000 per month Administrative Executive salaries $13,500 per month Depreciation of equipment $900 per month Clinical $2,500 per month plus $40 per organ sold Insurance $700 per month During November, the company sold and delivered 60 organs. Required 1.Prepare an income statement for November using the traditional format with costs organized by function. 2. Redo (1) above, this time using the contribution format with costs organized by behavior. Show costs and revenues on both a tally and per unit tush down through contribution margin. 3. Refer to the income statement prepared in (2) above. wherefore top executive it be misleading to show the fixed costs on a per unit basis? Solution 5-12 1. House of Organs, Inc. Income Statement For the Month Ended November 30 Sales (60 organs ? $2,500 per organ) $1,50,000 Cost of goods sold (60 organs ? 1,500 per organ) 90,000 Gross margin 60 ,000 Selling and administrative expenses Selling expenses Advertising $950 Delivery of organs (60 organs ? $60 per organ) 3,600 Sales salaries and commissions $4,800 + (4% ? 150,000) 10,800 Utilities 650 Depreciation of sales facilities 5,000 Total selling expenses 21,000 Administrative expenses Executive salaries 13,500 Depreciation of office equipment 900 clerical $2,500 + (60 organs ? 40 per organ) 4,900 Insurance 700 Total administrative expenses 20,000 Total selling and administrative expenses 41,000 Net operating income $? 19,000 2. House of Organs, Inc. Income Statement For the Month Ended November 30 Total Per Unit Sales (60 organs $2,500 per organ) $1,50,000 $2,500 Variable expenses Cost of goods sold (60 organs ? $1,500 per organ) 90,000 1,500 Delivery of organs (60 organs ? $60 per organ) 3,600 60 Sales commissions (4% ? $150,000) 6,000 100 Clerical (60 organs ? 40 per organ) 2,400 40 Total variable expenses 1,02,000 1,700 Contribution margin 48,000 $800 Fixed expenses Advertising 950 Sales salaries 4,800 Utilities 650 Depreciation of sales facilities 5,000 Executive salaries 13,500 Depreciation of office equipment 900 Clerical 2,500 Insurance 700 Total fixed expenses 29,000 Net operating income $19,000 3. Fixed costs remain constant in total but alter on a per unit basis with changes in the activity level. Problem 5-15 High-Low Method, Predicting Cost Golden fraternitys total belt costs at various levels of activity are presented below Month Machine-Hours Total overhead Costs blemish 50,000 $1,94,000 April 40,000 1,70,200 May 60,000 2,17,800 June 70,000 2,41,600 Assume that the overhead costs above consist of utilities, supervisory salaries, and tutelage. The crack-up of these costs at the 40000 machine-hour level of activity is as follows Utilities (variable).. $52,000 Supervisory salaries (fixed). 60,000 Maintenance (mixed).. 58,200 Total overh ead costs. $1,70,200 The company wants to break down the maintenance cost into its basic variable and fixed cost elements. Required 1. As shown above overhead costs in June amounted to $241600. Estimate how much of this consisted of maintenance cost. (Hint to do this, it may be helpful to first determine how much of the $241600 consisted of utilities and supervisory salaries. 2. utilize the high-low method, estimate a cost formula for maintenance. 3. Express the companys total overhead costs in the linear equation form Y=a+bx. 4. What total overhead costs would expect to be incurred at an operating activity level of 45000 machine-hours. Solution 5-15 . Maintenance cost at the 70,000 machine-hour level of activity can be isolated as follows Level of Activity 40,000 MH 70,000 MH Total factory overhead cost $1,70,200 $2,41,600 Deduct Utilities cost $1. 0 per MH* 52,000 91,000 Supervisory salaries 60,000 60,000 Total maintenance cost at the low activity level $58,200 $9 0,600 $58,200 *$52,000 ? 40,000 = $1. 30 per MH 2.High-low analysis of maintenance cost Maintenance Cost Machine-Hours High activity level $90,600 70,000 Low activity level 58,200 40,000 Change $32,400 30,000 Variable cost per unit of activity pic Total fixed cost Therefore, the cost formula is $15,000 per month plus $1. 8 per machine-hour or Y = $15,000 + $1. 08X, where X represents machine-hours. 3. Variable Rate per Machine-Hour Fixed Cost Maintenance cost $1. 08 $15,000 Utilities cost 1. 30 Supervisory salaries cost 60,000 Totals $2. 8 $75,000 Therefore, the cost formula would be $75,000 plus $2. 38 per machine-hour, or Y = $75,000 + $2. 38X. 4. Fixed costs $? 75,000 Variable costs $2. 38 per MH ? 45,000 MHs 1,07,100 Total overhead costs $1,82,100 Problem 5-17 High-Low Method cost of Goods Manufactured. NuWay. Inc, manufactures a one product. Selected data from the companys cost records for two recent months are given below. Level of Activity Ju ly-Low October-High Number of units produced 9,000 12,000 Cost of goods manufactured $2,85,000 survey in process inventory, parentage 3,90,000 Work in process inventory, ending 14,000 22,000 Direct materials cost per unit 25,000 Direct labor cost per unit 15,000 Manufacturing overhead cost, total 15 15 6 6 ? ? The companys manufacturing overhead cost consists of both variable and fixed cost elements. In order to have data available for planning, management wants to determine how much of the overhead cost is variable with units produced and how much of it is fixed per year. Required 1. For both July and October, estimate the amount of manufacturing overhead cost added to production. The company had no under-or over applied overhead in either month. Hint A useful way to proceed might be to construct a schedule of cost goods manufactured. ) 2. utilize the high low method of cost analysis, estimate a cost form ula for manufacturing overhead. Express the variable portion of the formula in terms of a variable rate per unit of product. 3. If 9500 units were produced during a month, what would be the cost of goods manufactured? (Assume that the companys beginning work in process inventory for the month is $16000 and that its ending work in process inventory is $19000. Also, assume that there is no under or over applied overhead cost for the month. Solution 5-17 High Low Method, COGM 1. Nu Way Inc. Schedule of Cost of Goods Manufactured JulyLow OctoberHigh 9,000 Units 12,000 Units Direct materials cost $15 per unit $1,35,000 $1,80,000 Direct labor cost $6 per unit 54,000 72,000 Manufacturing overhead cost 1,07,000 * 1,31,000 * Total manufacturing costs 2,96,000 3,83,000 Add Work in process, beginning 14,000 22,000 3,10,000 4,05,000 Deduct Work in process, ending 25,000 15,000 Cost of goods manufactured $2,85,000 $3,90,000 2. Units Produced Cost Observed October High level of activity 12,000 $1,31,000 JulyLow level of activity 9,000 1,07,000 Change 3,000 $24,000 pic Total cost at the high level of activity $1,31,000 Less variable cost element ($8 per unit ? 12,000 units) 96,000 Fixed cost element $35,000 Therefore, the cost formula is $35,000 per month plus $8 per unit produced, or Y = $35,000 + $8X, where X represents the number of units produced. 1. The cost of goods manufactured if 9,500 units are produced Nu Way Inc. Schedule of Cost of Goods Manufactured Direct materials cost (9,500 units ? $15 per unit) $1,42,500 Direct labor cost (9,500 units ? $6 per unit) 57,000 Manufacturing overhead cost Fixed portion $35,000 Variable portion (9,500 units ? 8 per unit) 76,000 1,11,000 Total manufacturing costs 3,10,500 Add Work in process, beginning 16,000 3,26,500 Deduct Work in process, ending 19,000 Cost of goods manufactured $3,07,500 Edition 11 Problem 5-18 Marwicks pianos inc. purchase pianos from a large ma nf. And sells them at the retail level . the pianos cost on the average $2450 each from the mnf. Marwicks pianos inc. sell the pianos to its customers at an average price of $3125 each . the selling and administrative costs that the company incurs in a typical month are presented below Costs Cost Formula Selling Advertising $700 per month Delivery of organs $30 per organ sold Sales salaries and commissions $950 per month plus 4% interest Utilities $350 per month Depreciation of sales facilities $800 per month Administrative Executive salaries $2,500 per month Depreciation of equipment $400 per month Clinical $1,000 per month plus $20 per organ sold Insurance $300 per month During august, marwicks pianos inc. sold and delivered 40 pianos REQUIRED 1. Prepare income statement for marwicks pianos inc. for august. Use the traditional format, with cost organized by function. 2. Redo 1 above, this time using the contribution format, with cost organized by behavior . Show costs and revenues on both a total and a per unit basisdown through contribution margin. 3. Refer to the income statement you preferred in 2 above. Why might it be misleading to show the fixed costs on a per unit basis? Problem 5-19 Amfac comp. manf. A single product. The company keeps careful records of manufacturing activities from which the following inf. Have been extracted. Level of Activity March low June high Number of units produced 6,000 9,000 Cost of goods manufactured $1,68,000 Work in process inventory, beginning 2,57,000 Work in process inventory, ending 9,000 32,000 Direct materials cost per unit 15,000 Direct labor cost per unit 21,000 Manufacturing overhead cost, total 6 6 10 10 ? ? Required For the both March and June, estimate the amount of manufacturing overhead cost added to production. The comp. had no under O. H . IN either month Using the high low method, estimate a cost fo rmula for manf. O. H. expresses the variable portion of the formula in terms of a variable rate per unit of product. If 7000 units are produced during a month, what would be the cost of good manufacture? Work in process is same. Problem 5-24 High-Low Method Predicting cost L01, L03 Nova Companys total overhead costs at various levels of activity are resented below Month Machine-Hours Total Overhead Costs April 70,000 $1,98,000 May 60,000 1,74,000 June 80,000 2,22,000 July 90,000 2,46,000 Assume that total overhead costs above consist of utilities, supervisory salaries and maintenance. The breakdown of these costs at the 60,000 machine- hour level of activity is Utilities (variable).. $48,000 Supervisory salaries (fixed). $21,000 Maintenance (mixed).. $1,05,000 Total overhead costs. $1,74,000 Nova Companys management wants to break down the maintenance cost into its variable and fixed cost elements. Required 1. Estimate how much of the $246,000 of overhead cost in July was maintenance cost. (Hint to do this, it may be helpful to first determine how much of the $246,000 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs ) 2. Using the high-low method, estimate a cost formula for maintenance. 3. Express the companys total overhead costs in the linear equation form 4. Y=a + bX 5. What total over head costs would you expect to be incurred at an operating activity level of 75,000 machine-hours? Page4