Exam 3: Cost Behaviour: Analysis and Use

Sorter Company has provided the following data for the third quarter of the most recent year: Sales \ 500,000 Fixed Manufacturing Overhead 55,000 Direct Labour 72,500 Fixed Selling Expenses 46,250 Variable Manufacturing Overhead 41,000 Variable Administrative Expenses 48,000 Direct Materials 51,500 Fixed Administrative Expenses 44,500 Variable Selling Expenses 49,750 Assume that direct labour is a variable cost and that there was no beginning or ending inventories. -Suppose the sales for the third quarter was the equivalent of 1,000 units and that the fixed manufacturing and non-manufacturing costs were valid between the relevant range of 800 and 1,200 units.If Sorter Company had sold 100 additional units,it would have reported what amount of additional operating income?

Bell Company has provided the following data for maintenance costs: April May Machine Hours Incurred 12,000 16,000 Maintenance Cost Incurred \ 24,000 \ 26,000 Using the high-low method,what is the cost formula for maintenance cost?

Given the cost formula Y = $12,000 + $6X,what is the total cost at an activity level of 8,000 units?

The following information has been provided by the Evans Retail Stores, Inc., for the first quarter of the year: Sales \ 350,000 Variable Selling Expenses \ 35,000 Fixed Selling Expenses \ 25,000 Cost of Goods Sold \ 160,000 Fixed Administrative Expenses \ 55,000 Variable Administrative Expenses \ 15,000 -What is the gross margin of Evans Retail Stores,Inc.,for the first quarter?

The controller of Joy Co has requested a quick estimate of the manufacturing supplies needed for July when production is expected to be 470,000 units.Below are actual data from the prior three months of operations: Production in units Manufacturing supplies March 450,000 \ 723,060 April 540,000 853,560 May 480,000 766,560 Using these data and the high-low method,what is the best estimate of the cost of manufacturing supplies that would be needed for July? (Assume that this activity is within the relevant range.)

Which of the following assumptions is implicit in the simplified contribution approach income statement?

Jenson Manufacturing is developing cost formula for future planning and cost control.Utilities is one of the mixed costs associated with production.The cost analyst has suggested that units produced be used as the activity base to determine the fixed and variable costs and the cost formula for utility costs.The controller feels the most appropriate cost base is direct labour hours.Below is information collected over the past 8 months: Month Units Produced Direct Labour Hours Utilities Cost 1 1,100 500 \ 7,200 2 900 300 6,500 3 1,300 400 7,100 4 1,500 600 7,500 5 1,720 1,000 10,800 6 1,700 900 10,000 7 1,700 800 9,200 8 1,670 1,100 12,000 Required: Use the least squares regression method to determine the cost formula for utilites cost assuming units produced is the independent variable.Calculate the R-squared.Use the same method to determine the cost formula and R-squared assuming direct labour hours is the independent variable.Use a spreadsheet or calculator to determine the slope and intercept.Do you recommend the company use units produced or direct labour hours as a cost base? Explain. Answer: Units Produced Direct Labour Hours Intercept 1174.559719 4074.166667 Slope 5.254833671 6.733333333 R-squared 0.680142544 0.962287567 Cost Formula Y=1174.56+5.25 =4074.17+6.73x

The engineering approach can be very time consuming and is typically used in situations where no past experience is available on activity and costs.

Comparative income statements for Boggs Sporting Equipment Company for the last two months are presented below: July August Sales in Units 11,000 10,000 Sales Revenue \ 165,000 \ 150,000 Less: Cost of Goods Sold Gross Margin 92,400 84,000 Less: Operating Expenses: Rent 12,000 12,000 Sales Commissions 13,200 12,000 Maintenance Expenses 13,500 13,000 Clerical Expenses Total Operating Expenses Operating Income All of the company's costs are either fixed, variable, or a mixture of the two (that is, mixed). Assume that the relevant range includes all of the activity levels mentioned in this problem. -What is the total monthly fixed cost for Boggs Sporting Equipment Company?

What is an activity base?

Which of the following best describes the contribution approach to the income statement?

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 presented below: Utilities (V) \ 54,000 Supervisory salaries (F) 62,000 Maintenance (M) 78,000 Total overhead costs \ 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,using the separate estimates you obtained for its components. d)Estimate the total overhead cost at an activity level of 55,000 machine hours,independent of the separate estimates you obtained for its components.

Given the cost formula Y = $17,500 + $4X,at what level of activity will total cost be $42,500?

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 amortization was $60,000 (all fixed). The balance of the overhead costs 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. -If 110,000 machine hours of activity are projected for next period,what would be total expected overhead cost?

An income statement for Crandall's Bookstore for the first quarter of the current year is presented below: CRANDALL's BOOKSTORE Income Statement for the First Quarter of the Current Year Sales \ 800,000 Less: Cost of Goods Sold - all variable Gross Margin 240,000 Less: Operating Expenses: Selling \ 98,000 Administrative 98,000 Operating Income 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. -Using the contribution approach,what is the operating income for the first quarter?

Which of the following statements about contribution format income statement is incorrect?

When analysing mixed costs with the high-low method,begin by identifying the period with the lowest level of activity and the period with the highest level of activity.

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

Which of the following is an example of a discretionary fixed cost?

The 4 * 4 Shop is a large retailer of equipment for pickup trucks.An income statement for the company's Bed Liner Department for the most recent quarter is presented below: Income Statement - Liner Deparment for First Quarter of Current Year Sales \ 700,000 Less: Cost of goods sold 250,000 Gross margin \ 450,000 Less: Operating expenses: Selling expenses \ 195,000 Administrative expenses 145,000 340,000 Net income \ 110,000 The liners sell,on average,for $350 each.The department's variable selling expenses are $35 per liner sold.The remaining selling expenses are fixed.The administrative expenses are 25% variable and 75% fixed.The company purchases its liners from a supplier at a cost of $125 per liner. Required: Prepare an income statement for the quarter,using the contribution approach.