SM Ray H. Garrison 2e

7/25/2019 SM Ray H. Garrison 2e

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Chapter 2

Managerial Accounting and Cost

Concepts

Solutions to Questions

© The McGraw-Hill Companies, Inc., 2015. All rights resere!.

"ol#tions Man#al, Chapter 2 1



2-1 The three ma$or elements o%pro!#ct costs in a man#%act#ring compan&are !irect materials, !irect la'or, an!man#%act#ring oerhea!.

2-2

a. (irect materials are an integral parto% a )nishe! pro!#ct an! their costs can'e conenientl& trace! to it.

b. In!irect materials are generall&small items o% material s#ch as gl#e an!nails. The& ma& 'e an integral part o% a)nishe! pro!#ct '#t their costs can 'etrace! to the pro!#ct onl& at great cost orinconenience.

c. (irect la'or consists o% la'or coststhat can 'e easil& trace! to partic#lar

pro!#cts. (irect la'or is also calle! *to#chla'or.+

d. In!irect la'or consists o% the la'orcosts o% $anitors, s#perisors, materialshan!lers, an! other %actor& worers thatcannot 'e conenientl& trace! topartic#lar pro!#cts. These la'or costs areinc#rre! to s#pport pro!#ction, '#t theworers inole! !o not !irectl& wor onthe pro!#ct.

e. Man#%act#ring oerhea! incl#!es all

man#%act#ring costs ecept !irectmaterials an! !irect la'or. Conse#entl&,man#%act#ring oerhea! incl#!es in!irectmaterials an! in!irect la'or as well asother man#%act#ring costs.

2-3 A pro!#ct cost is an& cost inole!in p#rchasing or man#%act#ring goo!s. Inthe case o% man#%act#re! goo!s, thesecosts consist o% !irect materials, !irectla'or, an! man#%act#ring oerhea!. Aperio! cost is a cost that is taen !irectl&to the income statement as an epense in

the perio! in which it is inc#rre!.

2-4a. /aria'le cost The aria'le cost per

#nit is constant, '#t total aria'le costchanges in !irect proportion tochanges in ol#me.

'. ie! cost The total )e! cost is

constant within the releant range. The average )e! cost per #nit ariesinersel& with changes in ol#me.

c. Mie! cost A mie! cost contains 'otharia'le an! )e! cost elements.

2-5a. nit )e! costs !ecrease as ol#me

increases.'. nit aria'le costs remain constant as

ol#me increases.c. Total )e! costs remain constant as

ol#me increases.

!. Total aria'le costs increase as ol#meincreases.

2-6a. Cost 'ehaior Cost 'ehaior re%ers to

the wa& in which costs change inresponse to changes in a meas#re o%actiit& s#ch as sales ol#me,pro!#ction ol#me, or or!ersprocesse!.

'. 3eleant range The releant range isthe range o% actiit& within whichass#mptions a'o#t aria'le an! )e!

cost 'ehaior are ali!.

2-7 An actiit& 'ase is a meas#re o%whateer ca#ses the inc#rrence o% aaria'le cost. 4amples o% actiit& 'asesincl#!e #nits pro!#ce!, #nits sol!, letterst&pe!, 'e!s in a hospital, meals sere! ina ca%e, serice calls ma!e, etc.

2- The linear ass#mption isreasona'l& ali! proi!ing that the cost%orm#la is #se! onl& within the releant

range.

2-! A !iscretionar& )e! cost has a%airl& short planning horion6#s#all& a&ear. "#ch costs arise %rom ann#al!ecisions '& management to spen! oncertain )e! cost items, s#ch asa!ertising, research, an! management!eelopment. A committe! )e! cost has


2 Managerial Acco#nting, 15th e!ition



a long planning horion6generall& man&&ears. "#ch costs relate to a compan&7sinestment in %acilities, e#ipment, an!'asic organiation. 8nce s#ch costs hae'een inc#rre!, the& are *loce! in+ %orman& &ears.

2-1" 9es. As the anticipate! leel o%actiit& changes, the leel o% )e! costsnee!e! to s#pport operations ma& alsochange. Most )e! costs are a!$#ste!#pwar! an! !ownwar! in large steps,rather than 'eing a'sol#tel& )e! at oneleel %or all ranges o% actiit&.

2-11 The high-low metho! #ses onl& twopoints to !etermine a cost %orm#la. Thesetwo points are liel& to 'e less than t&pical'eca#se the& represent etremes o%

actiit&.

2-12 The %orm#la %or a mie! cost is 9 :a ; '<. In cost anal&sis, the *a+ termrepresents the )e! cost an! the *'+ termrepresents the aria'le cost per #nit o%actiit&.

2-13 The term *least-s#aresregression+ means that the s#m o% thes#ares o% the !eiations %rom the plotte!points on a graph to the regression line issmaller than co#l! 'e o'taine! %rom an&other line that co#l! 'e )tte! to the !ata.

2-14 The contri'#tion approach incomestatement organies costs '& 'ehaior,)rst !e!#cting aria'le epenses to o'taincontri'#tion margin, an! then !e!#cting)e! epenses to o'tain net operatingincome. The tra!itional approachorganies costs '& %#nction, s#ch aspro!#ction, selling, an! a!ministration.=ithin a %#nctional area, )e! an! aria'lecosts are intermingle!.

2-15 The contri'#tion margin is total

sales reen#e less total aria'le epenses.

2-16 A !i>erential cost is a cost that!i>ers 'etween alternaties in a !ecision.An opport#nit& cost is the potential 'ene)tthat is gien #p when one alternatie isselecte! oer another. A s#n cost is acost that has alrea!& 'een inc#rre! an!cannot 'e altere! '& an& !ecision taennow or in the %#t#re.

2-17 ?o, !i>erential costs can 'e eitheraria'le or )e!. or eample, the

alternaties might consist o% p#rchasingone machine rather than another to maea pro!#ct. The !i>erence 'etween the)e! costs o% p#rchasing the twomachines is a !i>erential cost.


"ol#tions Man#al, Chapter 2 @



#he $oundational 15

1. (irect materials................................................ B.00

(irect la'[email protected]

/aria'le man#%act#ring oerhea!..................... 1.50

/aria'le man#%act#ring cost per #nit................11.00

/aria'le man#%act#ring cost per #nitaD...................................................................

11.00

?#m'er o% #nits pro!#ce! 'D..........................10,000

Total aria'le man#%act#ring cost aD E'D..................................................................

110,000

Aerage )e! man#%act#ring oerhea!per #nit cD.....................................................F.00

?#m'er o% #nits pro!#ce! !D..........................10,000

Total )e! man#%act#ring cost cD E !D............ F0,00

0

Total pro!#ct man#%act#ringD cost...................150,00

0

?ote The aerage )e! man#%act#ring oerhea! cost per #nito% F.00 is ali! %or onl& one leel o% actiit&610,000 #nitspro!#ce!.

2. "ales commissions............................................1.00

/aria'le a!ministratie epense....................... 0.50

/aria'le selling an! a!ministratie per#nit.................................................................

1.50


"ol#tions Man#al, Chapter 2 F



/aria'le selling an! a!min. per #nit aD.............1.50

?#m'er o% #nits sol! 'D..................................10,000

Total aria'le selling an! a!min.epense aD E 'D....................................................... 15,000

Aerage )e! selling an!a!ministratie epense per #nit @)e! selling ; 2 )e! a!min.D cD................5.00

?#m'er o% #nits sol! !D..................................10,000

Total )e! selling an! a!ministratieepense cD E !D............................................ 5 0,000

Total perio! nonman#%act#ringD cost................ B5,000

?ote The aerage )e! selling an! a!ministratie epense per#nit o% 5.00 is ali! %or onl& one leel o% actiit&610,000 #nitssol!.





#he $oundational 15 %continued&

@. (irect materials................................................ B.00



"ales commissions............................................1.00


/aria'le cost per #nit sol!.................................12.50

F. (irect materials................................................ B.00



"ales commissions............................................1.00


/aria'le cost per #nit sol!.................................12.50

5. /aria'le cost per #nit sol! aD...........................12.50

?#m'er o% #nits sol! 'D...................................,000

Total aria'le costs aD E 'D............................. 100,00

0

B. /aria'le cost per #nit sol! aD...........................12.50

?#m'er o% #nits sol! 'D...................................12,500

Total aria'le costs aD E 'D............................. 15B,25

0

.


"ol#tions Man#al, Chapter 2 B



Total )e! man#%act#ring costsee re#irement 1D aD...................................F0,000

?#m'er o% #nits pro!#ce! 'D...........................,000

Aerage )e! man#%act#ring costper #nit pro!#ce! aD 'D.............................5.00

. Total )e! man#%act#ring cost

see re#irement 1D aD...................................F0,000

?#m'er o% #nits pro!#ce! 'D...........................12,500

Aerage )e! man#%act#ring costper #nit pro!#ce! aD '[email protected]

J. Total )e! man#%act#ring cost

see re#irement 1D........................................F0,000


"ol#tions Man#al, Chapter 2




10. Total )e! man#%act#ring cost

see re#irement 1D........................................ F0,000

11./aria'le oerhea! per #nit aD...........................1.50

?#m'er o% #nits pro!#ce! 'D..........................,000

Total aria'le oerhea! cost aD E 'D............... 12,000

Total )e! oerhea! see re#irement1D.................................................................... F0,000

Total man#%act#ring oerhea! cost................... 52,000

Total man#%act#ring oerhea! cost aD......... 52,000

?#m'er o% #nits pro!#ce! 'D...................... ,000

Man#%act#ring oerhea! per #nit aD 'D.................................................................. B.50

12./aria'le oerhea! per #nit aD...........................1.50

?#m'er o% #nits pro!#ce! 'D..........................12,500

Total aria'le oerhea! cost aD E 'D............... 1,50

Total )e! oerhea! see re#irement1D.................................................................... F0,000

Total man#%act#ring oerhea! cost................... 5,50

Total man#%act#ring oerhea! cost aD......... 5,50

?#m'er o% #nits pro!#ce! 'D...................... 12,500





Man#%act#ring oerhea! per #nit aD 'D.................................................................. F.0

1@."elling price per #nit......................................... 22.00

/aria'le cost per #nit sol!see re#irement FD........................................ 12.50

Contri'#tion margin per #nit............................. J. 50


"ol#tions Man#al, Chapter 2 J




1F.(irect materials per #nit...................................B.00

(irect la'or per #nit......................................... @.50

(irect man#%act#ring cost per #nit aD..............J.50

?#m'er o% #nits pro!#ce! 'D...........................11,000

Total !irect man#%act#ring cost aD E'D..................................................................

10F,500

/aria'le oerhea! per #nit aD......................1.50

?#m'er o% #nits pro!#ce! 'D..................... 11,00

0

Total aria'le oerhea! cost aD E 'D..........1B,50

0

Total )e! oerhea! see re#irement1D....................................................................

F0,000

Total in!irect man#%act#ring cost.................5B,50

0

15.(irect materials per #nit................................... B.00

(irect la'or per #nit......................................... @.50

/aria'le man#%act#ring oerhea! per#nit.................................................................

1 .50

Incremental cost per #nit pro!#ce!.................. 11.00

?ote /aria'le selling an! a!ministratie epenses are aria'lewith respect to the n#m'er o% #nits sol!, not the n#m'er o%#nits pro!#ce!.



'(ercise 2-1 15 min#tesD

Cost Cost Object

Direct

Cost

Indirec

t Cost

1.

The wages o%pe!iatric n#rses

The pe!iatric!epartment <

2.

Krescription !r#gs A partic#lar patient<

@.

Heating the hospital The pe!iatric!epartment <

F.

The salar& o% thehea! o% pe!iatrics

The pe!iatric!epartment <

5.

The salar& o% thehea! o% pe!iatrics

A partic#lar pe!iatricpatient <

B.

Hospital chaplain7ssalar&

A partic#lar patient<

.

La' tests '& o#tsi!econtractor

A partic#lar patient<

.

La' tests '& o#tsi!econtractor

A partic#lar!epartment <






1. The cost o% a har! !rie installe! in a comp#ter !irectmaterials.

2. The cost o% a!ertising in the Puget Sound Computer User newspaper selling.

@. The wages o% emplo&ees who assem'le comp#ters %romcomponents !irect la'or.

F. "ales commissions pai! to the compan&7s salespeople selling.

5. The wages o% the assem'l& shop7s s#perisor man#%act#ringoerhea!.

B. The wages o% the compan&7s acco#ntant a!ministratie.

. (epreciation on e#ipment #se! to test assem'le! comp#ters'e%ore release to c#stomers man#%act#ring oerhea!.

. 3ent on the %acilit& in the in!#strial par a com'ination o%man#%act#ring oerhea!, selling, an! a!ministratie. The rentwo#l! most liel& 'e prorate! on the 'asis o% the amo#nt o%space occ#pie! '& man#%act#ring, selling, an! a!ministratieoperations.




Product Cost

Period

Cost

1. (epreciation on salespersons7 cars................ <

2. 3ent on e#ipment #se! in the %actor&.......... <

@. L#'ricants #se! %or machine maintenance..... <

F. "alaries o% personnel who wor in the)nishe! goo!s wareho#se........................... <

5. "oap an! paper towels #se! '& %actor&

worers at the en! o% a shi%t........................ <

B. actor& s#perisors7 salaries.......................... <

. Heat, water, an! power cons#me! in the%actor&......................................................... <

. Materials #se! %or 'oing pro!#cts %orshipment oerseas #nits are not normall&'oe!D......................................................... <

J. A!ertising costs............................................ <

10. =orers7 compensation ins#rance %or %actor&emplo&ees................................................... <

11. (epreciation on chairs an! ta'les in the%actor& l#nchroom........................................ <

12. The wages o% the receptionist in thea!ministratie oces.................................. <

1@. Cost o% leasing the corporate $et #se! '& thecompan&Ns eec#ties.................................. <

1F. The cost o% renting rooms at a lori!a resort%or the ann#al sales con%erence................... <

15. The cost o% pacaging the compan&7s pro!#ct <


"ol#tions Man#al, Chapter 2 1@






1.

Cups of Coee Served in a Week

2, 2,! 2,2

ie! cost............................. 1,200 1,200 1,200

/aria'le cost........................ FF0 FB2 FF

Total cost.............................. 1,BF0 1,BB2 1,BF

Aerage cost per c#p sere!

O

0.20 0.J1 0.B

5

O Total cost c#ps o% co>ee sere! in a wee

2. The aerage cost o% a c#p o% co>ee !eclines as the n#m'er o%c#ps o% co>ee sere! increases 'eca#se the )e! cost issprea! oer more c#ps o% co>ee.






1. Occupanc "#Da"s

$%ectrica%Costs

High actiit& leelA#g#stD........................ 2,F0B 5,1F

Low actiit& leel8cto'erD...................... 12F 1,5

Change........................... 2,22 @,5B0

/aria'le cost : Change in cost Change in actiit&

: @,5B0 2,22 occ#panc&-!a&s

: 1.5B per occ#panc&-!a&

Total cost A#g#stD.............................................. 5,1F

/aria'le cost element1.5B per occ#panc&-!a& E 2,F0B occ#panc&-!a&sD................................................................ @,5@

ie! cost element.............................................. 1,@J5

2. 4lectrical costs ma& rePect seasonal %actors other than $#st theariation in occ#panc& !a&s. or eample, common areas s#chas the reception area m#st 'e lighte! %or longer perio!s !#ringthe winter than in the s#mmer. This will res#lt in seasonalP#ct#ations in the )e! electrical costs.

A!!itionall&, )e! costs will 'e a>ecte! '& the n#m'er o%

!a&s in a month. In other wor!s, costs lie the costs o% lightingcommon areas are aria'le with respect to the n#m'er o% !a&sin the month, '#t are )e! with respect to how man& rooms areocc#pie! !#ring the month.

8ther, less s&stematic, %actors ma& also a>ect electricalcosts s#ch as the %r#galit& o% in!ii!#al g#ests. "ome g#estswill t#rn o> lights when the& leae a room. 8thers will not.








1. Tra!itional income statement

Cheroee, Inc.

Tra!itional Income "tatement

"ales @0 per #nit E 20,000 #nitsD............B00,00

0

Cost o% goo!s sol!

2F,000 ; 10,000 Q FF,000D.............. 1B0,000Gross margin............................................... FF0,000

"elling an! a!ministratie epenses

"elling epensesF per #nit E 20,000 #nitsD ; F0,000D.............................................................. 120,000

A!ministratie epenses

2 per #nit E 20,000 #nitsD ; @0,000D.............................................................. 0,000 1J0,000

?et operating income.................................250,00

0

2. Contri'#tion %ormat income statement

Cheroee, Inc.Contri'#tion ormat Income "tatement

"ales...........................................................B00,00

0



/aria'le epenses

Cost o% goo!s sol!2F,000 ; 10,000 Q FF,000D...........

1B0,000

"elling epenses F per #nit E 20,000#nitsD...................................................... 0,000

A!ministratie epenses2 per #nit E 20,000 #nitsD................... F0,000 20,000

Contri'#tion margin.................................... @20,000

ie! epenses

"elling epenses....................................... F0,000

A!ministratie epenses........................... @0,000 0,000

?et operating income.................................250,00

0


"ol#tions Man#al, Chapter 2 1J




ItemDierenti

a% Cost Opportunit

" Cost Sunk Cost

1.

Cost o% the ol! <-ra&machine............................. <

2. The salar& o% the hea! o% the

3a!iolog& (epartment.......

@. The salar& o% the hea! o% the

Ke!iatrics (epartment........

F.

Cost o% the new color laserprinter................................ <

5.

3ent on the space occ#pie!'& 3a!iolog&......................

B. The cost o% maintaining the

ol! machine....................... <

.

Rene)ts %rom a new (?Aanal&er............................. <

.

Cost o% electricit& to r#n the

<-ra& machines.................. <

?ote The costs o% the salaries o% the hea! o% the 3a!iolog&

(epartment an! Ke!iatrics (epartment an! the rent on the space

occ#pie! '& 3a!iolog& are neither !i>erential costs, nor

opport#nit& costs, nor s#n costs. These costs !o not !i>er

'etween the alternaties an! there%ore are irreleant in the

!ecision, '#t the& are not s#n costs 'eca#se the& occ#r in the%#t#re.



'(ercise 2- 20 min#tesD

1.&i%ometer s Driven

'ota% (nnua%

Cost)

High leel o% actiit&................... 105,000 11,J0

Low leel o% actiit&.................... 0,000 J,@0

Change....................................... @5,000 2,5J0

105,000 ilometers E 0.11F per ilometer :11,J0

0,000 ilometers E 0.1@F per ilometer :J,@0

/aria'le cost per ilometer

Change in cost A2,5J0: :A0.0F per ilometer

Change in actiit& @5,000 ilometers

ie! cost per &ear

Total cost at 105,000 ilometers.............. 11,J0

Less aria'le portion105,000 ilometers E 0.0F perilometer.............................................. ,0

ie! cost per &ear.................................. F,200

2. 9 : F,200 ; 0.0F<

@. ie! cost.................................................... F,200





/aria'le cost0,000 ilometers E 0.0F perilometer.................................................. 5,J20

Total ann#al cost......................................... 10,120



'(ercise 2-! 10 min#tesD

1. Kro!#ct costs

(irect materials....................... 0,000

(irect la'or............................. F2,000

Man#%act#ring oerhea!......... 1J,000

Total pro!#ct costs.................. 1F1,000

2. Kerio! costs

"elling epenses..................... 22,000

A!ministratie epenses......... @5,000

Total perio! costs.................... 5,000

@. Conersion costs

(irect la'or............................. F2,000

Man#%act#ring oerhea!......... 1J,000

Total conersion costs............. B1,000

F. Krime costs

(irect materials....................... 0,000

(irect la'or............................. F2,000

Total prime costs..................... 122,000







'(ercise 2-1" 20 min#tesD

1. The compan&7s aria'le cost per #nit is

A1G0,000:AB per #nit.

@0,000 #nits

In accor!ance with the 'ehaior o% aria'le an! )e! costs, thecomplete! sche!#le is

Units produced and so%d

*, +, ,

Total costs

/aria'le costs.........10,00

0 2F0,000@00,00

0

ie! costs.............. @00,000 @00,000 @00,000

Total costs...............F0,00

0 5F0,000B00,00

0

Cost per #nit/aria'le cost........... B.00 B.00 B.00

ie! cost................ 10.00 .50 B.00

Total cost per #nit.. . 1B.00 [email protected] 12.00

2. The compan&7s income statement in the contri'#tion %ormat is

"ales F5,000 #nits E 1B per #nitD................ 20,000

/aria'le epenses F5,000 #nits E B per#nitD.............................................................. 20,000

Contri'#tion margin........................................ F50,000





ie! epense................................................. @00,000

?et operating income..................................... 150,000



'(ercise 2-11 F5 min#tesD

1. The scattergraph appears 'elow

1 2 @ F 5 B J0

500

1,000

1,500

2,000

2,500

@,000

)nits Shipped

Shipping '(pense

9es, there is an approimatel& linear relationship 'etween the

n#m'er o% #nits shippe! an! the total shipping epense.





'(ercise 2-11 contin#e!D

2. The high-low estimates an! cost %orm#la are comp#te! as

%ollows

UnitsS-ipped

S-ipping$.pense

High actiit& leel #neD. 2,00

Low actiit& leel #l&D. . . 2 1,200

Change........................... B 1,500

/aria'le cost element

Change in epense A1,500: :A250 per #nit.

Change in actiit& B #nits

ie! cost element

"hipping epense at high actiit& leel............. 2,00

Less aria'le cost element 250 per #nit E #nitsD.............................................................. 2,000

Total )e! cost.................................................. 00

The cost %orm#la is 00 per month pl#s 250 per #nit shippe!or

Y = $700 + $250X,

where < is the n#m'er o% #nits shippe!.

The scattergraph on the %ollowing page shows the straight line



!rawn thro#gh the high an! low !ata points.






1 2 @ F 5 B J0

500

1,000

1,500

2,000

2,500

@,000

)nits Shipped

Shipping '(pense

@. The high-low estimate o% )e! costs is 210.1 lower than theestimate proi!e! '& least-s#ares regression. The high-lowestimate o% the aria'le cost per #nit is @2.1F higher than theestimate proi!e! '& least-s#ares regression. A straight linethat minimie! the s#m o% the s#are! errors wo#l! intersectthe 9-ais at J10.1 instea! o% 00. It wo#l! also hae a

Patter slope 'eca#se the estimate! aria'le cost per #nit islower than the high-low metho!.

F. The cost o% shipping #nits is liel& to !epen! on the weight an!ol#me o% the #nits shippe! an! the !istance traele! as wellas on the n#m'er o% #nits shippe!. In a!!ition, higher cost



shipping might 'e necessar& to meet a !ea!line.


"ol#tions Man#al, Chapter 2 @1



'(ercise 2-12 @0 min#tesD

Product Cost

Period/Se%%in

g

0ame of t-e Cost 1ariab%e Cost

i.e

dCost

Direct

3ateria%s

Direc

t 4abor

3anu#facturing

Over-ead

and

(dmin 5 Cost

Oppor #

tunit" Cost

Sun

k Cost

3ental reen#e %orgone,@0,000 per &ear................... <

(irect materials cost, 0 per#nit........................................ < <

3ental cost o% wareho#se,500 per month..................... < <

3ental cost o% e#ipment,

F,000 per month.................. < <(irect la'or cost, B0 per #nit.. < <

(epreciation o% the annespace, ,000 per &ear.......... < < <

A!ertising cost, 50,000 per&ear....................................... < <





"#perisorNs salar&, 1,500per month.............................. < <

4lectricit& %or machines, 1.20per #nit.................................. < <

"hipping cost, J per #nit........ < <

3et#rn earne! oninestments, @,000 per&ear....................................... <


"ol#tions Man#al, Chapter 2 @@




1. Tra!itional income statement

The Alpine Ho#se, Inc.

Tra!itional Income "tatement

"ales...........................................................150,00

0

Cost o% goo!s sol!

@0,000 ; 100,000 Q F0,000D.............. J0,000Gross margin............................................... B0,000


"elling epenses 50 per #nit E 200 pairso% sisOD ; 20,000D............................... @0,000

A!ministratie epenses 10 per #nit E200 pairs o% sisD ; 20,000D................. 22,000 52,000

?et operating income................................. ,000

O150,000 sales 50 per pair o% sis : 200 pairs o% sis.

2. Contri'#tion %ormat income statement

The Alpine Ho#se, Inc.

Contri'#tion ormat Income "tatement

"ales...........................................................150,00

0


"ol#tions Man#al, Chapter 2 @F



/aria'le epenses

Cost o% goo!s sol!@0,000 ; 100,000 Q F0,000D........... J0,000

"elling epenses50 per #nit E 200 pairs o% sisD........... 10,000

A!ministratie epenses10 per #nit E 200 pairs o% sisD........... 2,000 102,000

Contri'#tion margin.................................... F,000

ie! epenses

"elling epenses....................................... 20,000

A!ministratie epenses........................... 20,000 F0,000







2. "ince 200 pairs o% sis were sol! an! the contri'#tion margin

totale! F,000 %or the #arter, the contri'#tion o% each pair o% sis towar! )e! epenses an! pro)ts was 2F0 F,000 200 pair o% sis : 2F0 per pair o% sisD.


"ol#tions Man#al, Chapter 2 @B



'(ercise 2-14 @0 min#tesD

1.6uest

#

Da"s

Custodia%

Supp%ies

$.pense

High actiit& leel #l&D.......... 12,000 1@,500

Low actiit& leel MarchD....... F,000 ,500

Change................................... ,000 B,000

/aria'le cost per g#est-!a&

Change in epense AB,000: :A0.H5 per g#est-!a&Change in actiit& G,000 g#est-!a&s

ie! cost per month

C#sto!ial s#pplies epense at high actiit&leel............................................................ 1@,500

Less aria'le cost element

12,000 g#est-!a&s E 0.5 per g#est-!a&. . J,000

Total )e! cost.............................................. F,500

The cost %orm#la is F,500 per month pl#s 0.5 per g#est-!a&or

Y = $4,500 + $0.75X

2. C#sto!ial s#pplies epense %or 11,000 g#est-!a&s

/aria'le cost11,000 g#est-!a&s E 0.5 perg#est-!a&........................................... ,250





ie! cost.............................................. F,500

Total cost............................................... 12,50






@. The scattergraph appears 'elow.

F. The high-low estimate o% )e! costs is 52B.J0 higher than theestimate proi!e! '& least-s#ares regression. The high-lowestimate o% the aria'le cost per #nit is 0.02 lower than theestimate proi!e! '& least-s#ares regression. A straight linethat minimie! the s#m o% the s#are! errors wo#l! intersectthe 9-ais at @,[email protected] instea! o% F,500. It wo#l! also hae asteeper slope 'eca#se the estimate! aria'le cost per #nit is

higher than the high-low metho!.

5. 4pecte! c#sto!ial s#pplies epense %or 11,000 g#est-!a&s

/aria'le cost 11,000 g#est-!a&s E 0. per ,F0.0


"ol#tions Man#al, Chapter 2 @J



!a&................................................................. 0

ie! cost.......................................................... @,[email protected]

Total cost...........................................................

12,[email protected]

0


"ol#tions Man#al, Chapter 2 F0




Se%%ing and

Cost 7e-avior

(dministrati

ve

Produc

t

Cost Item 1ariab%e i.ed Cost Cost

1. Ham'#rger '#ns ata =en!&7s o#tlet. . < <

2. A!ertising '& a!ental oce......... < <

@. Apples processe!

an! canne! '& (elMonte................... < <

F. "hipping canne!apples %rom a (elMonte plant toc#stomers............ < <

5. Ins#rance on aRa#sch U Lom'

%actor& pro!#cingcontact lenses...... < <

B. Ins#rance on IRM7scorporatehea!#arters........ < <

. "alar& o% as#perisoroerseeingpro!#ction o%printers atHewlett-Kacar!.. . < <

. Commissions pai!to a#tomo'ilesalespersons........ < <





J. (epreciation o%%actor& l#nchroom%acilities at aGeneral 4lectricplant..................... < <

10."teering wheels

installe! in RM=s. < <





*roble+ 2-16 F5 min#tesD

1. Cost o% goo!s sol!.............../aria'le

A!ertising epense............ ie!

"hipping epense................ Mie!

"alaries an! commissions...Mie!

Ins#rance epense..............ie!

(epreciation epense......... ie!

2. Anal&sis o% the mie! epenses

UnitsS-ipping$.pense

Sa%aries andCommissions

$.pense

High leel o% actiit&.. 5,000 @,000 J0,000

Low leel o% actiit&... F,000 @F,000 ,000

Change...................... 1,000 F,000 12,000


Change in cost/aria'le rate :

Change in actiit&

AF,000"hipping epense : AF per #nit

1,000 #nits

A12,000"alaries an! commissions epense : A12 per #nit1,000 #nits

ie! cost element

S-ipping Sa%aries and


"ol#tions Man#al, Chapter 2 F@



$.penseCommissions

$.pense

Cost at high leel o%actiit&............................ @,000 J0,000

Less aria'le costelement

5,000 #nits E F per#nit............................... 20,000

5,000 #nits E 12 per#nit............................... B0,000

ie! cost element............. 1,000 @0,000


"ol#tions Man#al, Chapter 2 FF



*roble+ 2-16 contin#e!D

The cost %orm#las are

"hipping epense

1,000 per month pl#s F per #nit

or

9 : 1,000 ; F<

"alaries an! commissions epense

@0,000 per month pl#s 12 per #nit

or

9 : @0,000 ; 12<

@.

Morrise& U Rrown, Lt!.

Income "tatement

or the Month 4n!e! "eptem'er @0

"ales 5,000 #nits E 100 per #nitD... . 500,000

/aria'le epenses

Cost o% goo!s sol!5,000 #nits E B0 per #nitD.......... @00,000

"hipping epense5,000 #nits E F per #nitD............. 20,000

"alaries an! commissions epense5,000 #nits E 12 per #nitD........... B0,000 @0,000

Contri'#tion margin............................ 120,000

ie! epenses





A!ertising epense......................... 21,000

"hipping epense............................. 1,000

"alaries an! commissions epense. . @0,000

Ins#rance epense............................ B,000

(epreciation epense....................... 15,000 J0,000

?et operating income......................... @0,000


"ol#tions Man#al, Chapter 2 FB



*roble+ 2-17 @0 min#tesD

1. Maintenance cost at the 5,000 !irect la'or-ho#r leel o%actiit& can 'e isolate! as %ollows

4eve% of (ctivit"

,D48s

9,D48s

Total %actor& oerhea! cost...........1F,250,00

0 1,B25,000

(e!#ct

In!irect materials V 100 per(LHO......................................... 5,000,000 ,500,000

3ent............................................ B,000,000 B,000,000

Maintenance cost.......................... @,250,000 F,125,000

O 5,000,000 50,000 (LHs : 100 per (LH

2. High-low anal&sis o% maintenance cost

Direct 4abor#8ours

3aintenanceCost

High leel o% actiit&. . . 5,000 F,125,000

Low leel o% actiit&. . .. 50,000 @,250,000

Change........................ 25,000 5,000






Change in cost AG5,000: :A@5 per (LH

Change in actiit& 25,000 (LH

ie! cost element

Total cost at the high leel o% actiit&.......... F,125,000

Less aria'le cost element5,000 (LHs E @5 per (LHD.................. 2,B25,000

ie! cost element...................................... 1,500,000

There%ore, the cost %orm#la %or maintenance is 1,500,000 per

&ear pl#s @5 per !irect la'or-ho#r orY = $1,500,000 + $35X






@. Total %actor& oerhea! cost at 0,000 !irect la'or-ho#rs is

In!irect materials0,000 (LHs E 100 per (LHD.... ..

,000,000

3ent.................................................. B,000,000

Maintenance

/aria'le cost element0,000 (LHs E @5 per (LHD......

2,F50,000

ie! cost element......................... 1,500,000

@,J50,00

0

Total %actor& oerhea! cost...............1B,J50,00

0


"ol#tions Man#al, Chapter 2 FJ



*roble+ 2-1 20 min#tesD

Direct or Indirect Cost of t-e 3ea%s#On#

W-ee%s

Program

Direct or Indirect Cost of

Particu%ar Seniors Servedb" t-e 3ea%s#

On#W-ee%s

Program

1ariab%e or i.ed:it- ;espect tot-e 0umber of Seniors Served

b" t-e 3ea%s#On#

W-ee%s Program

Item Description Direct Indirect Direct Indirect 1ariab%

e i.ed

a. The cost o% leasing the Meals-8n-=heels

an........................................................... < < <

'. The cost o% inci!ental s#pplies s#ch as salt,

pepper, napins, an! so on...................... < <O <

c. The cost o% gasoline cons#me! '& the

Meals-8n-=heels an............................... < < <

!. The rent on the %acilit& that ho#ses

Ma!ison "eniors Care Center, incl#!ing

the Meals-8n-=heels program................. < <O <

e. The salar& o% the part-time manager o% the

Meals-8n-=heels program....................... < < <

%. (epreciation on the itchen e#ipment

#se! in the Meals-8n-=heels program..... < < <





g. The ho#rl& wages o% the caregier who

!ries the an an! !eliers the meals..... < < <

h. The costs o% compl&ing with health sa%et&

reg#lations in the itchen......................... < < <

i. The costs o% mailing letters soliciting

!onations to the Meals-8n-=heels

program.................................................... < < <

OThese costs co#l! 'e !irect costs o% sering partic#lar seniors.





*roble+ 2-1! F5 min#tesD

1. Marwic7s Kianos, Inc. Tra!itional Income "tatement

or the Month o% A#g#st

"ales F0 pianos E @,125 per pianoD.......125,00

0

Cost o% goo!s sol!F0 pianos E 2,F50 per pianoD..............

J,000

Gross margin............................................. 2,000


"elling epenses

A!ertising........................................... 00

"ales salaries an! commissionsWJ50 ; X E 125,000DY................ 10,J50

(elier& o% pianosF0 pianos E @0 per pianoD.............. 1,200

tilities................................................. @50(epreciation o% sales %acilities.............. 00

Total selling epenses............................. 1F,000

A!ministratie epenses

4ec#tie salaries................................ 2,500

Ins#rance............................................. F00

ClericalW1,000 ; F0 pianos E 20 perpianoDY............................................... 1,00

(epreciation o% oce e#ipment......... @00

Total a!ministratie epenses................ 5,000





Total selling an! a!ministratie epenses. 1J,00

0

?et operating income...............................

,000





*roble+ 2-1! contin#e!D

2. Marwic7s Kianos, Inc.Contri'#tion ormat Income "tatement

or the Month o% A#g#st

'ota%Per

Piano

"ales F0 pianos E @,125 per pianoD......... 125,000 @,125

/aria'le epenses

Cost o% goo!s sol!F0 pianos E 2,F50 per pianoD.............. J,000 2,F50

"ales commissions X E 125,000D........ 10,000 250

(elier& o% pianos F0 pianos E @0 perpianoD..................................................... 1,200 @0

Clerical F0 pianos E 20 per pianoD........ 00 20

Total aria'le epenses............................... 110,000 2,50

Contri'#tion margin.................................... 15,000 @5

ie! epenses

A!ertising............................................... 00

"ales salaries............................................ J50

tilities..................................................... @50

(epreciation o% sales %acilities.................. 00

4ec#tie salaries..................................... 2,500

Ins#rance.................................................. F00

Clerical..................................................... 1,000

(epreciation o% oce e#ipment.............. @00


"ol#tions Man#al, Chapter 2 5F



Total )e! epenses.................................... ,000


@. ie! costs remain constant in total '#t ar& on a per #nit 'asisinersel& with changes in the actiit& leel. As the actiit& leelincreases, %or eample, the )e! costs will !ecrease on a per#nit 'asis. "howing )e! costs on a per #nit 'asis on theincome statement might mislea! management into thiningthat the )e! costs 'ehae in the same wa& as the aria'lecosts. That is, management might 'e misle! into thining thatthe per #nit )e! costs wo#l! 'e the same regar!less o% howman& pianos were sol! !#ring the month. or this reason, )e!

costs generall& are shown onl& in totals on a contri'#tion%ormat income statement.

*roble+ 2-2" F5 min#tesD

1. Maintenance cost at the J0,000 machine-ho#r leel o% actiit&can 'e isolate! as %ollows

4eve% of (ctivit"

<, 38s=,

38s

Total %actor& oerhea! cost. .. 1F,000 2FB,000

(e!#ct

tilities cost V 0.0 perMHO.................................. F,000 2,000

"#perisor& salaries............ 21,000 21,000

Maintenance cost.................. 105,000 15@,000

OF,000 B0,000 MHs : 0.0 per MH





2. High-low anal&sis o% maintenance cost

3ac-ine#8ours 3aintenance Cost

High actiit& leel............... J0,000 15@,000

Low actiit& leel................ B0,000 105,000

Change................................ @0,000 F,000

/aria'le rate

Change in cost AFG,000: : A1.B0 per MH

Change in actiit& @0,000 MHs

Total )e! cost

Total maintenance cost at the high actiit&leel..........................................................

15@,000

Less aria'le cost elementJ0,000 MHs E 1.B0 per MHD................... 1FF,000

ie! cost element...................................... J,000

There%ore, the cost %orm#la %or maintenance is J,000 permonth pl#s 1.B0 per machine-ho#r or

Y = $9,000 + $1.60X.


"ol#tions Man#al, Chapter 2 5B



*roble+ 2-2" contin#e!D

@. 1ariab%e Cost per 3ac-ine#

8our i.edCost

tilities cost................ 0.0

"#perisor& salariescost.......................... 21,000

Maintenance cost........ 1.B0 J,000

Total oerhea! cost..... 2.F0 @0,000

Th#s, the cost %orm#la wo#l! 'e 9 : @0,000 ; 2.F0<.

F. Total oerhea! cost at an actiit& leel o% 5,000 machine-ho#rs

ie! costs............................................ @0,000

/aria'le costs 5,000 MHs E 2.F0

per MH................................................ 10,000

Total oerhea! costs............................. 210,000






?ote to the Instr#ctor There ma& 'e some eceptions to the answers 'elow. The p#rpose o% this pro'lem is to get the st#!ent to start t-inking a'o#t cost 'ehaior an! cost p#rposesZtr& to aoi! length& !isc#ssions a'o#t how a partic#lar cost is classi)e!.

1ariab%eor Se%%ing

(dministrativ e

3anufacturing

/Product5Cost

Cost Item i.ed Cost Cost Direc

t Indirect

1. Kropert& taes, %actor&.......................... <

2. Roes #se! %or pacaging !etergentpro!#ce! '& the compan&.................. / <

@. "alespersons7 commissions................... / <F. "#perisor7s salar&, %actor&................... <

5. (epreciation, eec#tie a#tos............... <

B. =ages o% worers assem'lingcomp#ters.......................................... / <

. Ins#rance, )nishe! goo!s wareho#ses.. <





. L#'ricants %or pro!#ction e#ipment.... / <

J. A!ertising costs................................... <

10. Microchips #se! in pro!#cingcalc#lators.......................................... / <

11. "hipping costs on merchan!ise sol!..... / <

12. Magaine s#'scriptions, %actor&l#nchroom.......................................... <

1@. Threa! in a garment %actor&................. / <

1F. Rilling costs........................................... / <O

15. 4ec#tie li%e ins#rance........................ <






1ariab%eor Se%%ing

(dministrativ e

3anufacturing

/Product5Cost

Cost Item i.ed Cost Cost Direc

t Indirect

1B. In #se! in tet'oo pro!#ction............ / <

1. ringe 'ene)ts, assem'l&-line worers. / <OO

1. 9arn #se! in sweater pro!#ction........... / <

1J. =ages o% receptionist, eec#tieoces................................................. <

* Could be administati!e "ost.

** Could be indie"t "ost.


"ol#tions Man#al, Chapter 2 B0




1. High-low metho!

0umber of

Scans

Uti%itiesCost

High leel o%actiit&................ 150 F,000

Low leel o%actiit&................ B0 2,200

Change.................. J0 1,00

Change in cost A1,G00/aria'le rate : :A20 per scan

Change in actiit& J0 scans

ie! costTotal cost at high leel o% actiit&..... F,000

Less aria'le element150 scans E 20 per scan............. @,000

ie! cost element........................... 1,000

There%ore, the cost %orm#la is 9 : 1,000 ; 20<.

2. The scattergraph plot appears as %ollows










@. The high-low estimate o% )e! costs is 10.J0 lower than theestimate proi!e! '& least-s#ares regression. The high-lowestimate o% the aria'le cost per #nit is 1.2 higher than the

estimate proi!e! '& least-s#ares regression. A straight linethat minimie! the s#m o% the s#are! errors wo#l! intersectthe 9-ais at 1,10.J0 instea! o% 1,000. It wo#l! also hae aPatter slope 'eca#se the estimate! aria'le cost per #nit islower than the high-low metho!.


"ol#tions Man#al, Chapter 2 B@




1. High-low metho!

Units

So%d

S-ipping

$.pense

High actiit& leel......... 20,000210,00

0

Low actiit& leel.......... 10,000

11J,00

0Change.......................... 10,000 J1,000

Change in cost/aria'le cost per #nit :

Change in actiit&

AJ1,000: : AJ.10 per #nit

10,000 #nits

#ied "ost element%

Total shipping epense at highactiit& leel....................................

210,000

Less aria'le element

20,000 #nits E J.10 per #nit.......... 12,00

0

ie! cost element............................. 2,000

There%ore, the cost %orm#la is 9 : 2,000 ; J.10<.


"ol#tions Man#al, Chapter 2 BF




2. Mil!en Compan&R#!gete! Contri'#tion ormat Income "tatement

or the irst [#arter, 9ear @

"ales 12,000 #nits E 100 per #nitD.. ..1,200,00

0

/aria'le epenses

Cost o% goo!s sol!12,000 #nits E @5 #nitD.................

F20,000

"ales commission BX E

1,200,000D..................................... 2,000

"hipping epense12,000 #nits E J.10 per #nitD........ 10J,200

Total aria'le epenses......................... B01,20

0

Contri'#tion margin.............................. 5J,00

ie! epenses

A!ertising epense........................... 210,000

"hipping epense............................... 2,000

A!ministratie salaries....................... 1F5,000

Ins#rance epense.............................. J,000

(epreciation epense......................... B,000

Total )e! epenses.............................. FB,00

0

?et operating income........................... 1@0,0

0






1. A cost that is classi)e! as a perio! cost will 'e recognie! onthe income statement as an epense in the c#rrent perio!. Acost that is classi)e! as a pro!#ct cost will 'e recognie! on

the income statement as an epense i.e., cost o% goo!s sol!Donl& when the associate! #nits o% pro!#ct are sol!. I% some#nits are #nsol! at the en! o% the perio!, the costs o% those#nsol! #nits are treate! as assets. There%ore, '& reclassi%&ingperio! costs as pro!#ct costs, the compan& is a'le to carr&some costs %orwar! in inentories that wo#l! hae 'een treate!as c#rrent epenses.

2. The !isc#ssion 'elow is !ii!e! into two parts6Gallant7sactions to postpone epen!it#res an! the actions to reclassi%&perio! costs as pro!#ct costs.

The !ecision to postpone epen!it#res is #estiona'le. It is onething to postpone epen!it#res !#e to a cash 'in!Z it is #iteanother to postpone epen!it#res in or!er to hit a pro)t target.Kostponing these epen!it#res ma& hae the e>ect o%#ltimatel& increasing %#t#re costs an! re!#cing %#t#re pro)ts. I%

or!ers to the compan&7s s#ppliers are change!, it ma& !isr#ptthe s#ppliers7 operations. The a!!itional costs ma& 'e passe!on to Gallant7s compan& an! ma& create ill will an! a %eeling o%mistr#st. Kostponing maintenance on e#ipment is partic#larl&#estiona'le. The res#lt ma& 'e 'rea!owns, inecient an!\or#nsa%e operations, an! a shortene! li%e %or the machiner&.

Gallant7s !ecision to reclassi%& perio! costs is not ethical6ass#ming that there is no intention o% !isclosing in the )nancialreports this reclassi)cation. "#ch a reclassi)cation wo#l! 'e aiolation o% the principle o% consistenc& in )nancial reportingan! is a clear attempt to mislea! rea!ers o% the )nancialreports. Altho#gh some ma& arg#e that the oerall e>ect o%Gallant7s action will 'e a *wash+6that is, pro)ts gaine! in this


"ol#tions Man#al, Chapter 2 BB



perio! will simpl& 'e taen %rom the net perio!6the tren! o%earnings will 'e a>ecte!. Hope%#ll&, the a#!itors wo#l!!iscoer an& s#ch attempt to manip#late ann#al earnings an!wo#l! re%#se to iss#e an #n#ali)e! opinion !#e to the lac o%

consistenc&. Howeer, recent acco#nting scan!als ma& lea! tosome septicism a'o#t how %orce%#l a#!itors hae 'een inen%orcing tight acco#nting stan!ar!s.


"ol#tions Man#al, Chapter 2 B




1.

Cost 7e-avior

Se%%ing or (dministrati

ve Product Cost

Cost Item1ariab%

e i.ed Cost Direct Indirec

t

(irect la'or........................... 11,000

11,000

A!ertising............................ 50,000 50,000

actor& s#perision...............F0,000

F0,000

Kropert& taes, %actor&'#il!ing............................... @,500 @,500

"ales commissions................ 0,000 0,000Ins#rance, %actor&................. 2,500 2,500

(epreciation, a!ministratieoce e#ipment................. F,000 F,000

Lease cost, %actor&e#ipment.......................... 12,000 12,000


B Managerial Acco#nting, 15th 4!ition



In!irect materials, %actor&..... B,000 B,000

(epreciation, %actor&'#il!ing............................... 10,000 10,000

A!ministratie oces#pplies.............................. @,000 @,000

A!ministratie oce salaries B0,000 B0,000(irect materials #se!............ JF,000 JF,000

tilities, %actor&..................... 20,000

20,000

Total costs............................. @21,000

12,000 1J,000

212,000

JF,000


"ol#tions Man#al, Chapter 2 BJ




2. The aerage pro!#ct cost %or one patio set wo#l! 'e

(irect............................................. 212,000

In!irect........................................... JF,000

Total............................................... @0B,000

@0B,000 2,000 sets : 15@ per

set

@. The aerage pro!#ct cost per set wo#l! increase i% thepro!#ction !rops. This is 'eca#se the )e! costs wo#l! 'esprea! oer %ewer #nits, ca#sing the aerage cost per #nit torise.

F. a. 9es, the presi!ent ma& epect a minim#m price o% 15@,which is the aerage cost to man#%act#re one set. He mightepect a price een higher than this to coer a portion o% thea!ministratie costs as well. The 'rother-in-law pro'a'l& isthining o% cost as incl#!ing onl& !irect materials, or, atmost, !irect materials an! !irect la'or. (irect materials alonewo#l! 'e onl& F per set, an! !irect materials an! !irectla'or wo#l! 'e onl& 10B.

'. The term is opport#nit& cost. The %#ll, reg#lar price o% a setmight 'e appropriate here, 'eca#se the compan& isoperating at %#ll capacit&, an! this is the amo#nt that m#st'e gien #p 'ene)t %orgoneD to sell a set to the 'rother-in-law.









Case 2-26 B0 min#tesD

1. High-low metho!

8ours Cost

High leel o% actiit&. . . 25,000 JJ,000

Low leel o% actiit&. .. . 10,000 BF,500

Change....................... 15,000 @F,500

/aria'le element @F,500 15,000 (LH : 2.@0 per (LH

ie! element

Total cost625,000 (LH................... JJ,000

Less aria'le element25,000 (LH E 2.@0 per (LH........ 5,500

ie! element.................................. F1,500

There%ore, the cost %orm#la is 9 : F1,500 ; 2.@0<.

2. The scattergraph is shown 'elow





$60,000

$65,000

$70,000

$75,000

$&0,000

$&5,000

$90,000

$95,000

$100,000

&,000 10,000 12,000 14,000 16,000 1&,000 20,000 22,000 24,000 26,000

'ie"t (abo)ous

Y

X



Over

head

Cost

s



Case 2-26 contin#e!D

2. The scattergraph shows that there are two releant ranges6one 'elow 1J,500 (LH an! one a'oe 1J,500 (LH. The changein e#ipment lease cost %rom a )e! %ee to an ho#rl& rate

ca#ses the slope o% the regression line to 'e steeper a'oe1J,500 (LH, an! to 'e !iscontin#o#s 'etween the )e! %ee an!ho#rl& rate points.

@. The cost %orm#las comp#te! with the high-low an! regressionmetho!s are %a#lt& since the& are 'ase! on the ass#mptionthat a single straight line proi!es the 'est )t to the !ata.Creating two !ata sets relate! to the two releant ranges willena'le more acc#rate cost estimates.

F. High-low metho!

8ours Cost

High leel o% actiit&. . . 25,000 JJ,000

Low leel o% actiit&. .. . 20,000 0,000

Change....................... 5,000 1J,000

/aria'le element 1J,000 5,000 (LH : @.0 per (LH

ie! element

Total cost625,000 (LH................... JJ,000

Less aria'le element25,000 (LH E @.0 per (LH........ J5,000

ie! element.................................. F,000

4pecte! oerhea! costs when 22,500 machine-ho#rs are#se!





/aria'le cost 22,500 ho#rs E @.0 per ho#r.. . 5,500

ie! cost.......................................................... F,000

Total cost........................................................... J,500

5. The high-low estimate o% )e! costs is B,0J0 lower than theestimate proi!e! '& least-s#ares regression. The high-lowestimate o% the aria'le cost per machine ho#r is 0.2 higherthan the estimate proi!e! '& least-s#ares regression. Astraight line that minimie! the s#m o% the s#are! errorswo#l! intersect the 9-ais at 10,0J0 instea! o% F,000. Itwo#l! also hae a Patter slope 'eca#se the estimate! aria'lecost per #nit is lower than the high-low metho!.





Case 2-27 @0 min#tesD

1. The scattergraph o% !irect la'or cost ers#s the n#m'er o%#nits pro!#ce! is presente! 'elow






2. The scattergraph o% the !irect la'or cost ers#s the n#m'er o%pai! !a&s is presente! 'elow






@. The n#m'er o% pai! !a&s sho#l! 'e #se! as the actiit& 'aserather than the n#m'er o% #nits pro!#ce!. The scattergraphsreeal a m#ch stronger relation i.e., higher correlationD'etween !irect la'or costs an! n#m'er o% pai! !a&s than'etween !irect la'or costs an! n#m'er o% #nits pro!#ce!./ariations in the !irect la'or costs apparentl& occ#r 'eca#se o%the n#m'er o% pai! !a&s in the month an! hae little to !o withthe n#m'er o% #nits that are pro!#ce!. It appears that the!irect la'or costs are 'asicall& )e! with respect to how man&#nits are pro!#ce! in a month. This wo#l! happen i% the !irectla'or worers are treate! as %#ll-time emplo&ees who are pai!een i% there is ins#cient wor to eep them '#s&. Moreoer,%or planning p#rposes, the compan& is liel& to 'e a'le topre!ict the n#m'er o% pai! !a&s in the month with m#ch



,u+ber o *aid



greater acc#rac& than the n#m'er o% #nits that will 'epro!#ce!.





Appendi( 2A

0east-Suares egression

Co+putations

'(ercise 2A-1 20 min#tesD

1. an! 2.

The scattergraph plot an! least-s#ares regression estimates o%

)e! an! aria'le costs #sing Microso%t 4cel are shown 'elow

The intercept proi!es the estimate o% the )e! cost element,1,@ per month, an! the slope proi!es the estimate o% thearia'le cost element, F.0F per rental ret#rn. 4presse! as ane#ation in the %orm > :a ;b? , the relation 'etween car washcosts an! rental ret#rns is



9 : 1,@ ; F.0F<

where < is the n#m'er o% rental ret#rns.

?ote that the 32 is approimatel& 0.J0, which is #ite high,

an! in!icates a strong linear relationship 'etween car wash costsan! rental ret#rns.


"ol#tions Man#al, Appen!i 2A 1



'(ercise 2A-2 20 min#tesD

1. an! 2.

The scattergraph plot an! regression estimates o% )e! an!

aria'le costs #sing Microso%t 4cel are shown 'elow

?ote that the 32 is approimatel& 0.JF, which means that JFX

o% the ariation in etching costs is eplaine! '& the n#m'er o%#nits etche!. This is a er& high 32 which in!icates a er& goo!)t.

The regression e#ation, in the %orm > :a ;b?, is as %ollowswhere a is ro#n!e! to nearest !ollar an! b is ro#n!e! to thenearest centD

9 : 12.@2 ; 1.5F<

@. Total epecte! etching cost i% 5 #nits are processe!



/aria'le cost 5 #nits E 1.5F per#nit................................................. .0

ie! cost.......................................... 12.@2

Total epecte! cost............................ 20.02


"ol#tions Man#al, Appen!i 2A @



*roble+ 2A-3 @0 min#tesD

1. The scattergraph plot an! regression estimates o% )e! an!aria'le costs #sing Microso%t 4cel are shown 'elow

The cost %orm#la, in the %orm > :a ;b? , #sing tons mine! asthe actiit& 'ase is 2,@52 per #arter pl#s 2.5 per tonmine!, or

9 : 2,@52 ; 2.5<.

?ote that the 32 is approimatel& 0.F, which means that onl&FX o% the ariation in #tilit& costs is eplaine! '& the n#m'ero% tons mine!.



*roble+ 2A-3 contin#e!D

2. The scattergraph plot an! regression estimates o% )e! an!aria'le costs #sing Microso%t 4cel are shown 'elow

The cost %orm#la, in the %orm > :a ;b? , #sing !irect la'or-ho#rs as the actiit& 'ase is 1,000 per #arter pl#s J.00 per!irect la'or-ho#r, or

9 : 1,000 ; J.00<.

?ote that the 32 is approimatel& 0.J@, which means that J@Xo% the ariation in #tilit& costs is eplaine! '& !irect la'or-ho#rs. This is a er& high 32 which is an in!ication o% a er&goo! )t.

@. The compan& sho#l! pro'a'l& #se !irect la'or-ho#rs as theactiit& 'ase, since the )t o% the regression line to the !ata ism#ch tighter than it is with tons mine!. The 32 %or the


"ol#tions Man#al, Appen!i 2A 5



regression #sing !irect la'or-ho#rs as the actiit& 'ase is twiceas large as %or the regression #sing tons mine! as the actiit&'ase. Howeer, managers sho#l! loo more closel& at the costsan! tr& to !etermine wh& #tilities costs are more closel& tie! to!irect la'or-ho#rs than to the n#m'er o% tons mine!.



*roble+ 2A-4 @0 min#tesD

1. an! 2.

The scattergraph plot an! regression estimates o% )e! an!aria'le costs #sing Microso%t 4cel are shown 'elow

The cost %orm#la, in the %orm > :a ;b? , #sing n#m'er o%sections o>ere! as the actiit& 'ase is @,00 per #arter pl#s1,50 per section o>ere!, or

9 : @,00 ; 1,50<.

?ote that the 32 is approimatel& 0.JB, which means that JBXo% the ariation in cost is eplaine! '& the n#m'er o% sections.

This is a er& high 32 which in!icates a er& goo! )t.


"ol#tions Man#al, Appen!i 2A





*roble+ 2A-4 contin#e!D

@. 4pecte! total cost wo#l! 'e

ie! cost.................................................. @,00

/aria'le cost sections E 1,50 persectionD................................................... 1F,000

Total cost...................................................1,0

0

The pro'lem with #sing the cost %orm#la %rom 2D to !erie total

cost is that an actiit& leel o% sections ma& lie o#tsi!e thereleant range6the range o% actiit& within which the )e!cost is approimatel& @,00 per term an! the aria'le cost isapproimatel& 1,50 per section o>ere!. Theseapproimations appear to 'e reasona'l& acc#rate within therange o% 2 to B sections, '#t the& ma& 'e inali! o#tsi!e thisrange.


"ol#tions Man#al, Appen!i 2A J



CAS' 2A-5 F5 min#tesD

1. an! 2.

The scattergraph plot an! regression estimates o% )e! an!aria'le costs #sing Microso%t 4cel are shown 'elow

The scattergraph reeals three interesting )n!ings. irst, itin!icates the relation 'etween oerhea! epense an! la'orho#rs is approimate! reasona'l& well '& a straight line.Howeer, there appears to 'e a slight !ownwar! 'en! in theplot as the la'or-ho#rs increase6ei!ence o% increasing ret#rns

to scale. This is a common occ#rrence in practice. "ee ?oreenU "o!erstrom, *Are oerhea! costs strictl& proportional toactiit&]+ @ourna% of (ccounting and $conomics, ol. 1, 1JJF,pp. 255-2.D

"econ!, the !ata points are all %airl& close to the straight line.



This in!icates that most o% the ariation in oerhea! epensesis eplaine! '& la'or ho#rs. As a conse#ence, there pro'a'l&wo#l!n7t 'e m#ch 'ene)t to inestigating other possi'le cost!riers %or the oerhea! epenses.

Thir!, most o% the oerhea! epense appears to 'e )e!. Mariasho#l! as hersel% i% this is reasona'le. (oes the compan& haelarge )e! epenses s#ch as rent, !epreciation, an! salaries]


"ol#tions Man#al, Appen!i 2A J1



CAS' 2A-5 contin#e!D

The cost %orm#la, in the %orm > :a ;b? , #sing la'or-ho#rs asthe actiit& 'ase is F,12B per month pl#s @.J5 per la'or-

ho#r, or

9 : F,12B ; @.J5<.

?ote that the 32 is approimatel& 0.JB, which means that JBXo% the ariation in cost is eplaine! '& la'or-ho#rs. This is aer& high 32 which in!icates a er& goo! )t.

@. sing the least-s#ares regression estimate o% the aria'leoerhea! cost, the total aria'le cost per g#est is comp#te! as%ollows

oo! an! 'eerages........................ 15.00

La'or 0.5 ho#r V 10 per ho#rD..... 5.00

8erhea! 0.5 ho#r V @.J5 per

ho#rD............................................ 1.J Total aria'le cost per g#est........... 21.J

The total contri'#tion %rom 10 g#ests pa&ing @1 each iscomp#te! as %ollows

"ales 10 g#ests V @1.00 per g#estD.... ..

5,50.0

0

/aria'le cost 10 g#ests V 21.J perg#estD....................................................... @,J5B.F0

Contri'#tion to pro)t..................................1,[email protected]

0



ie! costs are not incl#!e! in the a'oe comp#tation 'eca#sethere is no in!ication that an& a!!itional )e! costs wo#l! 'einc#rre! as a conse#ence o% catering the coctail part&. I%a!!itional )e! costs were inc#rre!, the& sho#l! also 'es#'tracte! %rom reen#e.

F. Ass#ming that no a!!itional )e! costs are inc#rre! as a res#lto% catering the charit& eent, an& price greater than thearia'le cost per g#est o% ro#ghl& 22 wo#l! contri'#te topro)ts.


"ol#tions Man#al, Appen!i 2A J@





Appendi( 2

Cost o Qualit/


1. [#alit& o% con%ormance

2. [#alit& costs

@. [#alit& circles

F. Kreention costs, appraisal costs

5. Internal %ail#re costs, eternal %ail#re costs

B. 4ternal %ail#re costs

. Appraisal costs

. Kreention costs

J. Internal %ail#re costs

10. 4ternal %ail#re costs

11. Kreention costs, appraisal costs

12. [#alit& cost report


"ol#tions Man#al, Appen!i 2R J5




1.

Prevention Cost

(ppraisa% Cost

Interna%

ai%ureCost

$.terna%

ai%ureCost

a. Kro!#ct testing................ <

'. Kro!#ct recalls................ <

c. 3ewor la'or an!oerhea!...................... <

!. [#alit& circles................. <

e. (owntime ca#se! '&!e%ects......................... <

%. Cost o% )el! sericing..... <

g. Inspection o% goo!s......... <

h. [#alit& engineering........ <

i. =arrant& repairs............. <

$. "tatistical processcontrol.......................... <

. ?et cost o% scrap............. <

l. (epreciation o% teste#ipment.................... <

m. 3et#rns an! allowancesarising %rom poor#alit&.......................... <

n. (isposal o% !e%ectiepro!#cts....................... <

o. Technical s#pport tos#ppliers....................... <



p. "&stems !eelopment.. .. <

. =arrant& replacements... <

r. iel! testing at c#stomer

site............................... <s. Kro!#ct !esign................. <

2. Kreention costs an! appraisal costs are inc#rre! in an e>ort toeep poor #alit& o% con%ormance %rom occ#rring. Internal an!eternal %ail#re costs are inc#rre! 'eca#se poor #alit& o%con%ormance has occ#rre!.


"ol#tions Man#al, Appen!i 2R J



*roble+ 2-3 B0 min#tesD

1. An anal&sis o% the compan&7s #alit& cost report is presente!'elow

4ast >ear '-is >ear

(mount Percent)

(mount Percent)

Kreention costs

Machinemaintenance......... 0 1. 10.F 120 2.5 20.@

Training s#ppliers..... 0 0.0 0.0 10 0.2 1.

[#alit& circles.......... 0 0.0 0.0 20 0.F @.F

Total preentioncosts........................ 0 1. 10.F 150 @.1 25.F

Appraisal costs

Incoming

inspection.............. 20 0.5 @.0 F0 0. B.

inal testing............. 0 1.J 11.J J0 1.J 15.@

Total appraisal costs... 100 2.F 1F.J 1@0 2. 22.0

Internal %ail#re costs

3ewor..................... 50 1.2 .5 1@0 2. 22.0

"crap....................... F0 1.0 B.0 0 1.5 11.J

Total internal %ail#recosts........................ J0 2.1 [email protected] 200 F.2 @@.J

4ternal %ail#re


"ol#tions Man#al, Appen!i 2R J



costs

=arrant& repairs...... J0 2.1 [email protected] @0 0.B 5.1

C#stomer ret#rns..... @20 .B F. 0 1. [email protected]

Total eternal %ail#recosts........................ F10 J. B1.2 110 2.@ 1.B

Total #alit& cost........ B01B.

0100.

0 5J012.

@100.

0

Total pro!#ction cost. .F,20

0F,0

0

O Kercentage )g#res ma& not a!! !own !#e to ro#n!ing.


"ol#tions Man#al, Appen!i 2R JJ




rom the a'oe anal&sis it wo#l! appear that Merc#r&, Inc.7sprogram has 'een s#ccess%#l.

• Total #alit& costs hae !ecline! %rom 1B.0X to 12.@X as apercentage o% total pro!#ction cost. In !ollar amo#nt, total#alit& costs went %rom B0,000 last &ear to 5J0,000 this&ear.

• 4ternal %ail#re costs, those costs signaling c#stomer!issatis%action, hae !ecline! %rom J.X o% total pro!#ctioncosts to 2.@X. These !eclines in warrant& repairs an!

c#stomer ret#rns sho#l! res#lt in increase! sales in the%#t#re.

• Appraisal costs hae increase! %rom 2.FX to 2.X o% totalpro!#ction cost.

• Internal %ail#re costs hae increase! %rom 2.1X to F.2X o%pro!#ction costs. This increase has pro'a'l& res#lte! %rom

the increase in appraisal actiities. (e%ectie #nits are now'eing spotte! more %re#entl& 'e%ore the& are shippe! toc#stomers.

• Kreention costs hae increase! %rom 1.X o% totalpro!#ction cost to @.1X an! %rom 10.FX o% total #alit& coststo 25.FX. The 0,000 increase is more than o>set '&!ecreases in other #alit& costs.

2. The initial e>ect o% emphasiing preention an! appraisal wasto re!#ce eternal %ail#re costs an! increase internal %ail#recosts. The increase in appraisal actiities res#lte! in catchingmore !e%ectie #nits 'e%ore the& were shippe! to c#stomers.As a conse#ence, rewor an! scrap costs increase!. In the%#t#re, an increase! emphasis on preention sho#l! res#lt in a


"ol#tions Man#al, Appen!i 2R 100



!ecrease in internal %ail#re costs. An! as !e%ect rates arere!#ce!, reso#rces !eote! to appraisal can 'e re!#ce!.

@. To meas#re the cost o% not implementing the #alit& program,management co#l! ass#me that sales an! maret share wo#l!contin#e to !ecline an! then calc#late the lost pro)t. 8r,management might ass#me that the compan& will hae to c#tits prices to hang on to its maret share. The impact on pro)tso% lowering prices co#l! 'e estimate!.


"ol#tions Man#al, Appen!i 2R 101



*roble+ 2-4 B0 min#tesD

1. lore Compan&[#alit& Cost 3eport

4ast >ear '-is >ear

(mount/in

t-ousands 5

Percent of

Sa%es

(mount/in

t-ousands 5

Percent of

Sa%es

Kreention costs

[#alit& engineering..... F20 0.5B 50 0.B

"&stems !eelopment. F0 0.BF 50 1.00

"tatistical processcontrol....................... 0 0.00 10 0.2F

Total preention costs... . J00 1.20 1,500 2.00

Appraisal costs

Inspection.................... 50 1.00 J00 1.20

Kro!#ct testing............ 10 1.0 1,200 1.B0

"#pplies #se! intesting....................... @0 0.0F B0 0.0

(epreciation o%testing e#ipment..... 210 0.2 2F0 0.@2

Total appraisal costs.. . . 1,00 2.F0 2,F00 @.20

Internal %ail#re costs

?et cost o% scrap.......... B@0 0.F 1,125 1.50

3ewor la'or................ 1,050 1.F0 1,500 2.00

(isposal o% !e%ectie 20 0.JB J5 1.@0



pro!#cts....................

Total internal %ail#recosts............................ 2,F00 @.20 @,B00 F.0

4ternal %ail#re costs

Cost o% )el! sericing. . 1,200 1.B0 J00 1.20

=arrant& repairs.......... @,B00 F.0 1,050 1.F0

Kro!#ct recalls............. 2,100 2.0 50 1.00

Total eternal %ail#recosts............................ B,J00 J.20 2,00 @.B0

Total #alit& cost............ 12,000 1B.00 10,200 [email protected]


"ol#tions Man#al, Appen!i 2R




2.

Last Year This Year $0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

External Failure Internal Failure !!raisal "reventionQuality Costs (in thousands)

Last YearThis Year 0#

2#

4#

6#

8#

10#

12#

14#

16#

18#

External Failure Internal Failure !!raisal "reventionQuality Costs as a Percentage of Sales




"ol#tions Man#al, Appen!i 2R




@. The oerall impact o% the compan&7s increase! emphasis on#alit& oer the past &ear has 'een positie in that total #alit&costs hae !ecrease! %rom 1BX o% sales to [email protected] o% sales.

(espite this improement, the compan& still has a poor!istri'#tion o% #alit& costs. The '#l o% the #alit& costs in'oth &ears is tracea'le to internal an! eternal %ail#re, ratherthan to preention an! appraisal. Altho#gh the !istri'#tion o%these costs is poor, the tren! this &ear is towar! morepreention an! appraisal as the compan& has gien moreemphasis on #alit&.

Kro'a'l& !#e to the increase! spen!ing on preention an!

appraisal actiities !#ring the past &ear, internal %ail#re costshae increase! '& one hal%, going %rom 2.F million to @.Bmillion. The reason internal %ail#re costs hae gone #p is that,thro#gh increase! appraisal actiit&, !e%ects are 'eing ca#ghtan! correcte! 'e%ore pro!#cts are shippe! to c#stomers. Th#s,the compan& is inc#rring more cost %or scrap, rewor, an! so%orth, '#t it is saing h#ge amo#nts in )el! sericing, warrant&repairs, an! pro!#ct recalls. 4ternal %ail#re costs hae %allensharpl&, !ecreasing %rom B.J million last &ear to $#st 2.

million this &ear.

I% the compan& contin#es its emphasis on preention an!appraisal6an! partic#larl& on preention6its total #alit&costs sho#l! contin#e to !ecrease in %#t#re &ears. Altho#gh

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