Garrison (CDN), Managerial Accounting, 12ce CHAPTER 3 Solutions PDF

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Chapter 3Cost Behaviour: Analysis and UseDiscussion Case 3 -The relevant range in this example is 1,000 admissions to 2, admissions.Management could use this information to predict costs in the follow way:  If the number of patient admissions is expected to exceed 2, per month on a regular basis th...

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Chapter 3 Cost Behaviour: Analys Analysis is and Use Discussion Case 3-1 The relevant range in this example is 1,000 admissions to 2,000 admissions. Management could use this information to predict costs in the follow way:  If the number of patient admissions is expected to exceed 2,000 per month on a regular basis then an additional staff member would need to be hired. If that individual is paid the same as the existing staff members, this would result in fixed costs increasing by $4,750 per month. The actual amount would depend on factors such as the experience or education of the new staff member.  If the number of patient admissions is expected to fall below 1,000 on a regular basis, then one staff member would need to be let go. This would have the effect of reducing costs by $4,750.  Note that there is no information provided to suggest that the $3 per admission variable costs would change if admissions exceed 2,000 or fall below 1,000 per month. This suggests that if only 900 patients were admitted per month on a regular basis, the variable cost per admission would still be $3, or $2,700 in total per month.

Solutions Manual, Chapter 3

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Solutions to Questions 3-1 Examples of variable costs in a restaurant include food and beverages, some types of labour (e.g., employees paid an hourly wage), cleaning supplies such as dishwasher soap, and a portion of utility costs. 3-2 a. Unit fixed costs decrease as volume increases. b. Unit variable costs remain constant as volume increases. c. Total fixed costs remain constant as volume increases. d. Total variable costs increase as volume increases. 3-3 The activity base is what causes a variable cost to be incurred. The activity base would likely either be sales dollars or unit sales achieved by the salesperson. It would depend on whether the commission is bases on revenues or unit sales. 3-4 A non-linear variable cost is one where the cost per unit amount increases or decreases at some point as the activity level changes. Acquiring materials at a lower cost per unit until the amount purchased exceeds a predefined threshold is an example of a non-linear variable cost. 3-5 A true variable cost change in direct proportion to the activity level. Conversely, a step-variable cost only changes in response to fairly wide changes in the activity level. Maintenance staff expenses at a hospital or cleaning staff expenses at a hotel would be examples of step-variable expenses. 3-6 A non-linear variable cost is one where the per unit amount changes as volume increases or

decreases. An example is direct materials where the per unit purchase price decreases as a higher volume of materials is purchased. 3-7 A mixed cost has both variable and fixed elements. Examples include some types of wages such as sales employees paid a fixed wage plus commissions, utilities, and internet plans with a base amount of data plus overage charges. 3-8 a. Committed d. Discretionary b. Committed e. Committed c. Discretionary f. Discretionary 3-9 Knowing the relevant range will help managers more accurately predict fixed costs when activity levels are expected to fall above or below that range. For example, if the activity level is expected to exceed the maximum amount in the relevant range for an extended period, fixed costs will likely increase. This is because more of the resources represented by the fixed cost (e.g., plant capacity) will be needed to meet demand. The opposite is true if activity levels are expected to fall below the minimum amount in the relevant range. As such, understanding the relevant range is very important when estimating fixed costs. 3-10 One advantage is that it likely doesn’t take much time to use since managers are employing their knowledge to estimate cost behavior. As such, it is likely a lowcost approach. A disadvantage is that it may not be accurate if the manager’s knowledge is limited or

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if something related to how the costs being estimated are incurred has changed and the manager is unaware of this. 3-11 The purpose of preparing a scattergraph is to allow managers to evaluate whether or not the relationship between two variables (independent and dependent) is linear. 3-12 It is problematic because the high and low levels of activity employed by the high-low method may not be representative of normal activity levels. As such, the cost function may be inaccurate. The scattergraph should visually show this potential problem. 3-13 The formula for a mixed cost is Y = a + bX. In cost analysis, the “a” term represents the fixed cost, and the “b” term represents the variable cost per unit of activity. 3-14 The gross margin is the difference between sales and the cost of goods sold (CGS) where CGS includes both variable and fixed manufacturing costs. The contribution margin is the difference between sales and total variable costs including manufacturing and nonmanufacturing costs (see Exhibit 3-11).

Solutions Manual, Chapter 3

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Foundational Ex Exercises ercises 1. High activity level............ Low activity level.............

Units Shipped 8 2

Shipping Expense $3,600 1,500

2. Variable cost element: Change in cost $2,100 = =$350 per unit Change in activity 6 units 3. Fixed cost element: Shipping expense at the high activity level................... Less variable cost element ($350 per unit × 8 units)..... Total fixed cost...........................................................

$3,600 2,800 $ 800

4. The cost formula is $800 per month plus $350 per unit shipped or Y = $800 + $350X, 5. Total shipping expense = $800 + $350(7) = $3,250 6. Fixed expense is $800. 7. Variable expense = $350(10) = $3,500 8. Price per unit Less variable costs: Variable manufacturing Variable overhead Variable selling & admin. Variable shipping expense Contribution margin per unit

$5,000 $2,500 500 200 350

3,550 $1,450

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Foundational Ex Exercises ercises (continued) 9. Total contribution margin = 7 x $1,450 per unit = $10,150. 10. Operating income = Contribution margin – fixed costs = $10,150 - $3,000 - $800 (shipping) = $6,350 11. Contribution margin would decrease by: $5,000 x 5% x 7 = $1,750 12. Operating income would decrease by the same $1,750 as per part 11. 13. Variable shipping expenses for 12 units: ($350 x 10) + [($350 x 90%) x 2] $3,500 + $630 = $4,130 14. Total shipping expenses for 12 units: $4,130 (per part 13) + $800 = $4,930 15. Non-linear because variable shipping expenses per unit are decreasing as the volume shipped increases.

Solutions Manual, Chapter 3

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Exerc Exercise ise 3-1 (15 minutes) 1.

Fixed cost Variable cost ($0.75 per cup) Total cost Cost per smoothie served *

Smoothies Served in a Week 2,100 2,800 3,500 $2,500 $2,500 $2,500 1,575 2,100 2,625 $4,075 $4,600 $5,125 $1.94 $1.64 $1.46

* Total cost ÷ smoothies served in a week 2. The average cost of a smoothie declines as the number of smoothies served increases because the fixed cost is spread over more units.

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Exerc Exercise ise 3-2 (30 minutes) 1. The completed scattergraph is presented below: $6,000

Shipping Expense

$5,000

$4,000

$3,000

$2,000

$1,000

$0 0

1

2

3

4

5

6

7

8

9

Units Shipped

2. It appears that shipping expenses are linearly related to the number of units shipped. As the number of units shipped increases there is a very linear increase in shipping expenses. 3. Based on a visual inspection of the scattergraph it seems that shipping expenses are a mixed cost. This is because it appears that if a straight line was drawn through the plotted points it would intersect the vertical axis at a cost above $0 (likely less than $1,000). This indicates that there must be some fixed shipping expenses along with some variable expenses since the total shipping expenses increase as the number of units shipped increases.

Solutions Manual, Chapter 3

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Exerc Exercise ise 3-3 (20 minutes) 1.

Month High activity level (June)...... Low activity level (August). . . Change...............................

Units Shipped 8 1 7

Shipping Expenses $5,400 $1,200 $4,200

Variable cost = Change in cost ÷ Change in activity = $4,200 ÷ 7 units shipped = $600 per unit shipped Total cost (June)........................................................ Variable cost element ($600 per unit shipped × 8 units)............................. Fixed cost element.....................................................

$5,400 4,800 $600

2. The cost formula is Y = $600 + $600X Where Y = total shipping expenses and X = the number of units shipped. 3. I would not feel comfortable estimating shipping costs using the cost formula from part 2 because it appears that 20 units would likely be outside the relevant range for expenses. That is, 20 units is 150% more than the highest level of activity used to estimate the cost formula.

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Exerc Exercise ise 3-4 (20 minutes) 1 .

Crazy Canucks Income Statement—Ski Department For the Month Ended January 31 Sales................................................................ Variable expenses: Cost of goods sold ($900 per pair of skis $180,000 × 200 pairs*)............................................... Selling expenses ($150 per pair × 200 30,000 pairs)........................................................... Administrative expenses (20% × 4,000 $20,000)...................................................... Contribution margin........................................... Fixed expenses: Selling expenses (60,000-30,000).................... 30,000 Administrative expenses(80% x 20,000)........... 16,000 Operating income..............................................

$300,000

214,000 86,000 46,000 $ 40,000

*$300,000 sales ÷ $1,500 per pair of skis = 200 pairs. 2. Since 200 pairs of skis were sold and the contribution margin totaled $86,000 for the month, the contribution of each pair of skis toward fixed expenses and profits was $430 ($86,000 ÷ 200 pairs). Another way to compute the $430 is: Selling price per pair of skis................. Less variable expenses: Cost per pair of skis......................... Selling expenses.............................. Administrative expenses ($4,000 ÷ 200 pairs)..................... Contribution margin per pair...............

$1,500 $900 150 20

1,070 $430

3. If 150 pairs of skis were sold in a month then the total contribution margin would be: 150 x $430 = $64,500.

Solutions Manual, Chapter 3

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Exerc Exercise ise 3-5 (20 minutes) 1. The company’s variable cost per hour would be:

$54,000 =$4.50 per hour. 12,000 hours Taking into account the difference in behaviour between variable and fixed costs, the completed schedule would be: 12,000

Operating Hours 14,000 16,000

18,000

Total costs: Variable costs........................ $54,000 * $63,000 $72,000 $81,000 Fixed costs............................ 504,000 * 504,000 504,000 504,000 Total costs...............................$558,000 * $567,000 $576,000 $585,000 Cost per hour: Variable cost......................... $4.50 $4.50 $4.50 $4.50 Fixed cost............................. 42.00 36.00 31.50 28.00 Total cost per unit.................... $46.50 $40.50 $36.00 $32.50 *Given. Sales (15,000 hours × $40 per hour)............................. $600,000 Variable expenses (15,000 hours × $4.50 per hour)....... 67,500 Contribution margin..................................................... 532,500 Fixed expenses............................................................ 504,000 Operating income......................................................... $ 28,500

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Exerc Exercise ise 3-6 (15 minutes)

1.Account Production supervision1 Utilities2 Sales staff wages3 Quality control inspections4

Fixed Cost $120,000 $ 12,000 $140,000 $ 36,000

Variable Total Cost $42,000 $162,000 $67,200$ 79,200 $84,000 $224,000 $ 5,600$ 41,600

1

Fixed: $150,000 x .8; Variable ($150,000 x .2)/500 x 700 Fixed: $60,000 x .2; Variable ($60,000 x .8)/500 x 700 3 Fixed: $200,000 x .7; Variable ($200,000 x .3)/(500 x $2,000) x (700 x $2,000) 4 Fixed: $40,000 x .9; Variable ($40,000 x .1)/(500 x .5) x (700 x .5)

2

2. Contribution margin: Sales (700 x $2,000)

$1,400,000

Variable Costs: Direct materials (700 x $500) $350,000 Direct labour (700 x $250) 175,000 Production supervision 42,000 Utilities 67,200 Sales staff wages 84,000 Quality control inspections 5,600 723,800 Contribution margin $676,200

Solutions Manual, Chapter 3

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Exerc Exercise ise 3-7 (20 minutes) 1. High level of activity......................... Low level of activity.......................... Change............................................

Kilometers Total Annual Driven Cost* 105,000 $11,970 70,000 9,380 35,000 $ 2,590

105,000 kilometers × $0.114 per kilometer = $11,970 70,000 kilometers × $0.134 per kilometer = $9,380 Variable cost per kilometer:

Change in cost $2,590 = =$0.074 per kilometer Change in activity 35,000 kilometers Fixed cost per year: Total cost at 105,000 kilometers..................... Less variable portion: 105,000 kilometers × $0.074 per kilometer... Fixed cost per year........................................

$11,970 7,770 $ 4,200

2. Y = $4,200 + $0.074X 3. Fixed cost......................................................... Variable cost: 80,000 kilometers × $0.074 per kilometer........ Total annual cost...............................................

$ 4,200 5,920 $10,120

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Exerc Exercise ise 3-8 (20 minutes) 1. High activity level (February)........ Low activity level (June)............... Change........................................

Blood Tests 3,500 1,500 2,000

Costs $14,500 8,500 $ 6,000

Variable cost per blood test: Change in cost Change in activit activity y

= $6,000 2,000 blood tests

= $3 per blood test

Fixed cost per month: Blood test cost at the high activity level................. Less variable cost element: 3,500 blood tests × $3.00 per test...................... Total fixed cost.....................................................

$14,500 10,500 $ 4,000

The cost formula is $4,000 per month plus $3.00 per blood test performed or, in terms of the equation for a straight line: Y = $4,000 + $3.00X where X is the number of blood tests performed. 2. Expected blood test costs when 2,300 tests are performed: Variable cost: 2,300 blood tests × $3.00 per test....... Fixed cost................................................................ Total cost.................................................................

Solutions Manual, Chapter 3

$6,900 4,000 $10,900

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Exerc Exercise ise 3-9 (30 minutes) 1. The scattergraph appears below.

Chart Title 16,000 14,000

Cost of Blood tests

12,000 10,000 8,000 6,000 4,000 2,000 0 1,000

2,000

3,000

4,000

Number of Blood Tests Performed

2. The high-low method would not provide an accurate cost formula in this situation, since a line drawn through the high and low points would have a slope that is too flat. Consequently, the high-low method would overestimate the fixed cost and underestimate the variable cost per unit. Note the Y axis intercept in the chart, representing fixed costs, is approximately $3,000, whereas the high-low method estimated fixed costs of $4,000.

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Exerc Exercise ise 3-10 (30 minutes) 1. Monthly operating costs at 80% occupancy: 4,000 rooms × 80% = 3,200 rooms; 3,200 rooms × $84 per room per day × 30 days... $8,064,000 Monthly operating costs at 40% occupancy (given).. 6,000,000 Change in cost....................................................... $2,064,000 Difference in rooms occupied: 80% occupancy (4,000 rooms × 80%)................. 40% occupancy (4,000 rooms × 40%)................. Difference in rooms (change in activity).................. Change in cost Change in activit activity y

=

$2,064,000 1,600 room roomss

3,200 1,600 1,600

= $1,290 per room

$1,290 per room ÷ 30 days = $43 per room per day. 2. Monthly operating costs at 80% occupancy (above)... $8,064,000 Less variable costs: 3,200 rooms × $43 per room per day × 30 days..... 4,128,000 Fixed operating costs per month............................... $3,936,000 3. 4,000 rooms × 60% = 2,400 rooms occupied. Fixed costs............................................................... $3,936,000 Variable costs: 2,400 rooms × $43 per room per day × 30 days..... 3,096,000 Total expected costs................................................. $7,032,000

Solutions Manual, Chapter 3

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Problem 3-11 (45 minutes) 1. To determine the manufacturing costs incurred in March and June recall from Chapter 2 that: Cost of goods manufactured = Direct materials + direct labour + manufacturing overhead + beginning work in process inventory – ending work in process inventory For March manufacturing overhead cost is: $168,000 = $36,000 (6,000 x $6) + $60,000 (6,000 x $10) + X + $9,000 - $15,000 X = $78,000 For June manufacturing overhead cost is: $257,000 = $54,000 (9,000 x $6) + $90,000 (9,000 x $10) + X + $32,000 - $21,000 X = $102,000

2.

Units 9,000 6,000 3,000

High activity level (June).............. Low activity level (March)............. Change........................................

Overhead Costs $102,000 78,000 $ 24,000

Variable cost per unit: Change in cost Change in activit activity y

=

$24,000 3,000 units

= $8 per unit

Fixed cost per month: Total overhead cost at the high activity level.......... Less variable cost element: 9,000 units × $8.00 per unit.............................. Total fixed cost.....................................................

$102,000 72,000 $ 30,000

The cost formula is Y = $30,000 + $8.00X where X is the number of units produced.

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Problem 3-11 (continued) 3. Cost of goods manufactured if 7,000 units are produced: Direct materials:7,000 x $6…………………… Direct labour: 7,000 x $10......................... Manufacturing overhead......................