Managerial Accounting 11th Canadian Edition Solutions Chapter 3 PDF

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ACCT 153 COST ACCOUNTING CHAPTERS SOLUTIONS...

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Chapter 3 Cost Behaviour: Analysis and Use Exercise 3-4 (20 minutes) The Rhythm Shop Income Statement—Acoustic Guitar Department For the Quarter Ended March 31 Sales ...................................................... Variable expenses: Cost of goods sold ($400 per guitar × 2,000 guitars*) .................................. Selling expenses ($75 per guitar × 2,000 guitars).............................................. Administrative expenses (25% × $200,000) .......................................... Contribution margin ................................. Fixed expenses: Selling expenses (400,000-150,000)....... Administrative expenses(75% x 200,000) Operating income ....................................

$1,600,000 $800,000 150,000 50,000

1,000,000 600,000

250,000 150,000

400,000 $ 200,000

*$1,600,000 sales ÷ $800 per guitar = 2,000 guitars. 2. Since 2,000 guitars were sold and the contribution margin totaled $600,000 for the quarter, the contribution of each guitar toward fixed expenses and profits was $300 ($600,000 ÷ 2,000 guitars = $300 per guitar). Another way to compute the $300 is: Selling price per guitar ....................... Less variable expenses: Cost per guitar ................................ Selling expenses ............................. Administrative expenses ($50,000 ÷ 2,000 guitar) .............. Contribution margin per guitar............

$800 $400 75 25

500 $300

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Exercise 3-4 (continued) 3. If the Rhythm Shop sells 100 more guitars in the quarter ending June 30, than they did for the quarter ending March 31, profits will increase by: 100 x $300* per guitar = $30,000 *$800 selling price - $500 total variable cost per guitar

Total operating income for the quarter ended June 30 will be: Operating income for the Quarter ended March 31 Contribution margin from additional unit sales Total operating income**

$200,000 30,000 $230,000

** Check: 2,100 guitars sold x $300/guitar Less fixed expenses Total operating income

$630,000 400,000 $230,000

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Exercise 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:

Operating Hours 12,000

14,000

Total costs: Variable costs .................... $54,000 * $63,000 Fixed costs ........................ 504,000 * 504,000 Total costs ........................... $558,000 *$567,000 Cost per hour: Variable cost...................... $4.50 $4.50 Fixed cost.......................... 42.00 36.00 Total cost per unit ................ $46.50 $40.50 *Given.

16,000

18,000

$72,000 $81,000 504,000 504,000 $576,000 $585,000 $4.50 31.50 $36.00

$4.50 28.00 $32.50

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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Exercise 3-6 (15 minutes) 1.Account Production supervision1 Utilities2 Sales staff wages3 Quality control inspections4

Fixed Cost

Variable Cost

Total

$120,000 $42,000 $162,000 $ 12,000 $67,200$ 79,200 $140,000 $84,000 $224,000 $ 36,000 $ 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

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Exercise 3-7 (20 minutes) 1.

Kilometers Total Annual Driven Cost* High level of activity ......................... Low level of activity .......................... Change............................................

105,000 70,000 35,000

$11,970 9,380 $ 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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Exercise 3-8 (20 minutes) 1. High activity level (February) ........ Low activity level (June) ............... Change........................................

Blood Tests

Costs

3,500 1,500 2,000

$14,500 8,500 $ 6,000

Variable cost per blood test: Change in cost = $6,000 = $3 per blood test Change in activity 2,000 blood tests

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 ................................................................

$6,900 4,000 $10,900

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Exercise 3-10 (30 minutes) 1. Monthly operating costs at 70% occupancy: 2,000 rooms × 70% = 1,400 rooms; 1,400 rooms × $42 per room per day × 30 days .. $1,764,000 Monthly operating costs at 45% occupancy (given) . 1,584,000 Change in cost ...................................................... $180,000 Difference in rooms occupied: 70% occupancy (2,000 rooms × 70%) ................ 45% occupancy (2,000 rooms × 45%) ................ Difference in rooms (change in activity) .................. Change in cost = Change in activity

$180,000 500 rooms

1,400 900 500

= $360 per room

$360 per room ÷ 30 days = $12 per room per day. 2. Monthly operating costs at 70% occupancy (above) .. Less variable costs: 1,400 rooms × $12 per room per day × 30 days .... Fixed operating costs per month ..............................

$1,764,000 504,000 $1,260,000

3. 2,000 rooms × 50% = 1,000 rooms occupied. Fixed costs .............................................................. Variable costs: 1,000 rooms × $12 per room per day × 30 days .... Total expected costs ................................................

$1,260,000 360,000 $1,620,000

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Problem 3-11 (45 minutes) 1. Home Entertainment Income Statement For the Month Ended April 30 Sales (150 televisions × $1,500 per set) ............. Cost of goods sold (150 televisions × $900 per set) ...................... Gross margin .................................................... Selling and administrative expenses: Selling expenses: Advertising .................................................. Delivery of televisions (150 televisions × $40 per set) .................. Sales salaries and commissions [$2,900 + (4% × $225,000)] ..................... Utilities ........................................................ Depreciation of sales facilities ....................... Total selling expenses ..................................... Administrative expenses: Executive salaries......................................... Depreciation of office equipment................... Clerical [$1,500 + (150 televisions × $40 per set)] . Insurance .................................................... Total administrative expenses .......................... Total selling and administrative expenses............ Operating income ..............................................

$225,000 135,000 90,000

$

950 6,000

11,900 400 3,000 22,250 8,000 500 7,500 400 16,400 38,650 $ 51,350

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Problem 3-11 (continued) 2.

Home Entertainment Income Statement For the Month Ended April 30

Total Sales (150 televisions × $1,500 per set) ............. Variable expenses: Cost of goods sold (150 televisions × $900 per set) ................... Delivery of televisions (150 televisions × $40 per set) ..................... Sales commissions (4% × $225,000) ............... Clerical (150 televisions × $40 per set) ............ Total variable expenses ................................ Contribution margin .......................................... Fixed expenses: Advertising ..................................................... Sales salaries ................................................. Utilities .......................................................... Depreciation of sales facilities .......................... Executive salaries ........................................... Depreciation of office equipment ..................... Clerical........................................................... Insurance....................................................... Total fixed expenses .......................................... Operating income ..............................................

Per Unit

$225,000

$1,500

135,000

900

6,000 9,000 6,000 156,000 69,000

40 60 40 1,040 $ 460

950 2,900 400 3,000 8,000 500 1,500 400 17,650 $ 51,350

3. Fixed costs remain constant in total but vary on a per unit basis with changes in the activity level. For example, as the activity level increases, fixed costs decrease on a per unit basis. Showing fixed costs on a per unit basis on the income statement make them appear to be variable costs. That is, management might be misled into thinking that the per unit fixed costs would be the same regardless of how many televisions were sold during the month. For this reason, fixed costs should be shown only in totals on a contribution-type income statement.

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Problem 3-12 (45 minutes) 1. Traditional income statement Haaki Shop, Inc. Traditional Income Statement Quarter ended May 31 Sales ................................................................ Cost of goods sold ($80,000 + $320,000 – $100,000) ................... Gross margin .................................................... Selling and administrative expenses: Selling expenses (($50 per unit × 2,000 surfboards*) + $150,000) .................................. Administrative expenses (($20 per unit × 2,000 units) + $120,000) ....................................... Operating income ..............................................

$800,000 300,000 500,000

250,000 160,000

410,000 $ 90,000

*$800,000 sales ÷ $400 per surfboard = 2,000 surfboards. 2. Contribution format income statement Haaki Shop, Inc. Contribution Format Income Statement Quarter ended May 31 Sales ................................................................ Variable expenses: Cost of goods sold ($80,000 + $320,000 – $100,000) ................ Selling expenses ($50 per unit × 2,000 surfboards) ................. Administrative expenses ($20 per unit × 2,000 surfboards) ................. Contribution margin........................................... Fixed expenses: Selling expenses ............................................. Administrative expenses .................................. Operating income ..............................................

$800,000

$300,000 100,000 40,000

150,000 120,000

440,000 360,000

270,000 $ 90,000

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Exercise 3-12 (continued) 3. Since 2,000 surfboards were sold and the contribution margin totaled $360,000 for the quarter, the contribution of each surfboard toward fixed expenses and profits was $180 ($360,000 ÷ 2,000 surfboards = $180 per surfboard). Alternate calculation: Selling price $400 – $220 variable costs (production $150* + Selling $50 + admin $20) = $180 *($300,000 ÷ 2,000)

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Problem 3-15 (45 minutes) 1. Maintenance cost at the 90,000 machine-hour level of activity can be isolated as follows:

Level of Activity 60,000 MHs 90,000 MHs Total factory overhead cost ........ Deduct: Utilities cost @ $0.80 per MH*. Supervisory salaries ................ Maintenance cost ......................

$174,000

$246,000

48,000 21,000 $105,000

72,000 21,000 $153,000

*$48,000 ÷ 60,000 MHs = $0.80 per MH 2. High-low analysis of maintenance cost:

Machine- Maintenance Hours Cost High activity level .................... Low activity level ..................... Change ...................................

90,000 60,000 30,000

$153,000 105,000 $ 48,000

Variable rate: Change in cost $48,000 = = $1.60 per MH Change in activity 30,000 MHs

Total fixed cost: Total maintenance cost at the high activity level .. Less variable cost element (90,000 MHs × $1.60 per MH) ......................... Fixed cost element ............................................

$153,000 144,000 $ 9,000

Therefore, the cost formula for maintenance is $9,000 per month plus $1.60 per machine-hour or Y = $9,000 + $1.60X.

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Problem 3-15 (continued) 3.

Variable Cost per Machine-Hour Utilities cost .................... Supervisory salaries cost.. Maintenance cost ............ Total overhead cost .........

Fixed Cost

$0.80 1.60 $2.40

$21,000 9,000 $30,000

Thus, the cost formula would be: Y = $30,000 + $2.40X. 4. Total overhead cost at an activity level of 75,000 machine-hours: Fixed costs ................................................. Variable costs: 75,000 MHs × $2.40 per MH . Total overhead costs ...................................

$ 30,000 180,000 $210,000

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Problem 3-16 (45 minutes) 1. Cost of goods sold................... Advertising expense ................ Shipping expense .................... Salaries and commissions ........ Insurance expense .................. Depreciation expense ..............

Variable Fixed Mixed Mixed Fixed Fixed

2. Analysis of the mixed expenses:

Shipping Expense

Units High level of activity ..... Low level of activity ...... Change ........................

5,000 4,000 1,000

$38,000 34,000 $ 4,000

Salaries and Commissions Expense $90,000 78,000 $12,000

Variable cost element: Variable rate =

Change in cost Change in activity

Shipping expense:

$4,000 = $4 per unit 1,000 units

Salaries and commissions expense:

$12,000 = $12 per unit 1,000 units

Fixed cost element:

Shipping Expense Cost at high level of activity ... Less variable cost element: 5,000 units × $4 per unit .... 5,000 units × $12 per unit... Fixed cost element.................

$38,000

Salaries and Commissions Expense $90,000

20,000 $18,000

60,000 $30,000

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Problem 3-16 (continued) The cost formulas are: Shipping expense: $18,000 per month plus $4 per unit or Y = $18,000 + $4X Salaries and commissions expense: $30,000 per month plus $12 per unit or Y = $30,000 + $12X 3. Skate World Income Statement For the Month Ended September 30 Sales (5,000 units × $100 per unit) ........... Variable expenses: Cost of goods sold (5,000 units × $60 per unit) ............... Shipping expense (5,000 units × $4 per unit) .................. Salaries and commissions expense (5,000 units × $12 per unit) ................ Contribution margin ................................. Fixed expenses: Advertising expense ............................... Shipping expense .................................. Salaries and commissions expense ......... Insurance expense ................................ Depreciation expense............................. Operating income .....................................

$500,000

$300,000 20,000 60,000

21,000 18,000 30,000 6,000 15,000

380,000 120,000

90,000 $ 30,000

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Problem 3-17 (30 minutes) 1. Maintenance cost at the 75,000 machine-hour level of activity can be isolated as follows:

Level of Activity 50,000 MHs 75,000 MHs Total factory overhead cost ................. Deduct: Indirect materials @ $100 per MH*... Rent................................................ Maintenance cost ...............................

$14,250,000

$17,625,000

5,000,000 6,000,000 $ 3,250,000

7,500,000 6,000,000 $ 4,125,000

* $5,000,000 ÷ 50,000 MHs = $100 per MH 2. High-low analysis of maintenance cost:

High level of activity ........ Low level of activity ......... Change ...........................

MachineHours

Maintenance Cost

75,000 50,000 25,000

$4,125,000 3,250,000 $ 875,000

Variable cost element:

Change in cost $875,000 =$35 per MH = Change in activity 25,000 MH Fixed cost element: Total cost at the high level of activity .................. Less variable cost ele...