Chapter Cost Behavior: Analysis and Use True/False Questions Within the relevant range, a change in activity results in a change in total variable cost and the per unit fixed cost Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium The reluctance of managers to lay off employees when activity declines in the shortrun leads to an increase in the ratio of variable to fixed costs Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard A variable cost fluctuates in total as activity changes but remains constant on a per unit basis over the relevant range Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy A cost that is classified as variable with respect to one measure of activity could be classified as fixed with respect to a different measure of activity Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Hard Fixed costs remain constant in total, but vary inversely with changes in activity when expressed on a per unit basis Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Committed fixed costs have a short-term planning horizon usually one year Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy The following costs are all examples of committed fixed costs: depreciation on buildings, advertising, insurance, and management development and training Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-5 Chapter Cost Behavior: Analysis and Use The time frame in which discretionary fixed costs are controllable is usually much shorter than the time frame for committed fixed costs Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy The high-low method is generally more accurate than the least-squares regression method in analyzing cost behavior Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3,5 Level: Easy 10 A major problem with the high-low method of cost estimation is that some data are omitted from the analysis Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 11 The high and low points used in the high-low method tend to be unusual and therefore the cost formula may not accurately represent all of the data Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 12 Contribution margin and gross margin mean the same thing Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: Level: Medium 13 Contribution margin equals revenue minus all variable costs Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 14 The traditional income statement organizes costs on the basis of cost behavior Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: Level: Easy 5-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 15 It is necessary to break mixed costs into their variable and fixed cost components in order to construct an income statement using the contribution approach Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy Multiple Choice Questions 16 A is a fixed cost; B is a variable cost During the current year the level of activity has decreased but is still within the relevant range We would expect that: A) The cost per unit of A has remained unchanged B) The cost per unit of B has decreased C) The cost per unit of A has decreased D) The cost per unit of B has remained unchanged Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 17 Which costs will change with an increase in activity within the relevant range? A) Unit fixed cost and total fixed cost B) Unit variable cost and total variable cost C) Unit fixed cost and total variable cost D) Unit fixed cost and unit variable cost Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 18 Salaries of accounts receivable clerks when one clerical worker is needed for every 750 accounts receivable is an example of a: A) fixed cost B) step-variable cost C) mixed cost D) curvilinear cost Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-7 Chapter Cost Behavior: Analysis and Use 19 Limousine Conversion Company purchases ordinary Cadillacs, cuts them in half, and then adds a middle section to the vehicles to create stretch limousines With respect to the number of cars converted, the cost of the Cadillacs purchased for conversion by Limousine Conversion Company would best be described as a: A) fixed cost B) mixed cost C) step-variable cost D) variable cost Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 20 For an automobile manufacturer, the cost of a driver's side air bag purchased from a supplier and installed in every automobile would best be described as a: A) fixed cost B) mixed cost C) step-variable cost D) variable cost Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 21 With respect to a fixed cost, an increase in the activity level within the relevant range results in: A) an increase in fixed cost per unit B) a proportionate increase in total fixed costs C) an unchanged fixed cost per unit D) a decrease in fixed cost per unit Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 22 In the standard cost formula Y = a + bX, what does the “Y” represent? A) total cost B) total fixed cost C) total variable cost D) variable cost per unit Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 5-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 23 In the standard cost formula Y = a + bX, what does the “a” represent? A) total cost B) total fixed cost C) total variable cost D) variable cost per unit Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 24 In the standard cost formula Y = a + bX, what does the “b” represent? A) total cost B) total fixed cost C) total variable cost D) variable cost per unit Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 25 In the standard cost formula Y = a + bX, what does the “X” represent? A) total cost B) total fixed cost C) units of activity D) variable cost per unit Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 26 Which of the following would usually be considered a discretionary fixed cost for a soft drink bottling company? A) the cost of advertising its products B) the cost of fire insurance on its factory building C) depreciation on its manufacturing equipment D) both a and b above Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-9 Chapter Cost Behavior: Analysis and Use 27 Which of the following is a weakness of the quick-and-dirty scattergraph method of analyzing mixed cost? A) It is impossible to determine variable cost per unit B) Only two data points are used and the rest are ignored in drawing the scattergraph C) Different people will have different answers even though they are analyzing the same set of data D) Both B and C above Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 28 Which of the following statements is true when referring to the high-low method of cost analysis? A) The high-low method has no major weaknesses B) The high-low method is very hard to apply C) In essence, the high-low method draws a straight line through two data points D) None of the above is true Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 29 Contribution margin is computed as sales revenue minus: A) fixed expenses B) variable expenses C) cost of goods sold D) cost of goods manufactured Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: Level: Easy 5-10 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 30 Which of the following approaches to preparing an income statement calculates gross margin? A) B) C) D) Traditional Contribution Approach Approach Yes Yes Yes No No Yes No No Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement LO: Level: Medium 31 The least-squares regression method: A) fits a regression line by minimizing the sum of the squared errors from the regression line B) is generally less accurate than the scattergraph method C) can be used only if the fixed cost element is larger than the variable cost element D) is the only method acceptable under generally accepted accounting principles Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium 32 Multiple regression analysis is used when: A) more than one cost category must be analyzed B) when more than one factor causes variation in a cost C) the high-low method cannot be used because there is only one observation D) all of the points on a scattergraph fall exactly on a regression line Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-11 Chapter Cost Behavior: Analysis and Use 33 Iacono Corporation is a wholesaler that sells a single product Management has provided the following cost data for two levels of monthly sales volume The company sells the product for $127.20 per unit Sales volume (units) 5,000 6,000 Cost of sales $419,000 $502,800 Selling and administrative costs $186,500 $202,200 The best estimate of the total contribution margin when 5,300 units are sold is: A) $230,020 B) $51,410 C) $146,810 D) $32,330 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3,4 Level: Hard Solution: Variable component of cost of goods sold: Variable cost = Change in costs/Change in units Variable cost = ($502,800 − $419,000)/(6,000 − 5,000) Variable cost = $83.80 per unit Variable component of selling and administrative expenses: Variable cost = Change in costs/Change in units Variable cost = ($202,200 − $186,500)/(6,000 − 5,000) Variable cost = $15.70 per unit Sales revenue ($127.20 × 5,300) $674,160 Variable expenses: Variable cost of goods sold ($83.80 × 5,300) $444,140 Variable selling and administrative expense 83,210 527,350 ($15.70 × 5,300) Contribution margin $ 146,810 5-12 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 34 Utility costs at Service, Inc are a mixture of fixed and variable components Records indicate that utility costs are an average of $0.40 per hour at an activity level of 9,000 machine hours and $0.25 per hour at an activity level of 18,000 machine hours Assuming that this activity is within the relevant range, what is the expected total utility cost if the company works 13,000 machine hours? A) $4,225 B) $5,200 C) $4,000 D) $3,250 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Solution: MachineHours High activity level 18,000 Low activity level 9,000 Average Cost per Hour $0.25 $0.40 Total Utility Cost (machine-hours × average cost per hour) $4,500 $3,600 Variable cost = Change in cost ÷ Change in activity = ($4,500 − $3,600) ÷ (18,000 – 9,000) = $0.10 Fixed cost element = Total cost − Variable cost element = $4,500 − ($0.10 × 18,000) = $2,700 Therefore, the cost formula for total utility cost is $2,700 per period plus $0.10 per machine-hour, or Y = $2,700 + $0.10X At an activity level of 13,000 machine-hours, total cost is estimated to be: Y = $2,700 + ($0.10 × 13,000) = $4,000 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-13 Chapter Cost Behavior: Analysis and Use 35 Clerical costs in the billing department of Craig Company are a mixture of variable and fixed components Records indicate that average unit processing costs are $0.50 per account processed at an activity level of 32,000 accounts When only 22,000 accounts are processed, the total cost of processing is $12,500 Assuming that this activity is within the relevant range, at a budgeted level of 25,000 accounts: A) processing costs are expected to total $8,750 B) fixed processing costs are expected to be $10,400 C) the variable processing costs are expected to be $0.35 per account processed D) processing costs are expected to total $14,975 Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,3 Level: Hard Solution: Accounts High activity level 32,000 Low activity level 22,000 *Given Average Cost per Account Processed $0.50 Total Utility Cost (accounts × average cost per account processed) $16,000 $12,500* Variable cost = Change in cost ÷ Change in activity = ($16,000 − $12,500) ÷ (32,000 – 22,000) = $0.35 Fixed cost element = Total cost − Variable cost element = $16,000 − ($0.35 × 32,000) = $4,800 Therefore, the cost formula for total utility cost is $4,800 per period plus $0.35 per account processed, or Y = $4,800 + $0.35X At an activity level of 25,000 accounts, total cost is estimated to be: Y = $4,800 + ($0.35 × 25,000) = $13,550 5-14 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use Ans: a Variable component of cost of goods sold: Variable cost = Change in costs/Change in units Variable cost = ($710,000 − $550,000)/(70,000 − 50,000) Variable cost = $8.00 Fixed cost: High volume: $710,000 − $8.00×70,000 = $150,000 Low volume: $550,000 − $8.00×50,000 = $150,000 Variable component of selling and administrative expenses: Variable cost = Change in costs/Change in units Variable cost = ($190,000 − $150,000)/(70,000 − 50,000) Variable cost = $2.00 Fixed cost: High volume: $190,000 − $2.00×70,000 = $50,000 Low volume: $150,000 − $2.00×50,000 = $50,000 Total variable cost per unit: $8.00 + $2.00 = $10.00 Total fixed cost: $150,000 + $50,000 = $200,000 b Sales revenue $1,120,000 Variable expenses: Variable cost of goods sold $560,000 Variable selling and administrative expense 140,000 700,000 Contribution margin $ 420,000 AACSB: Analytic AICPA BB: Critical Thinking LO: 3,4 Level: Medium 5-102 AICPA FN: Reporting Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 135 Selected data about Pitkin Company's manufacturing operations at two levels of activity are given below: Number of units produced 10,000 15,000 Total manufacturing costs $157,000 $225,000 Direct material cost per unit $4 $4 Direct labor cost per unit $6 $6 Required: Using the high-low method, estimate the cost formula for manufacturing overhead Assume that both direct material and direct labor are variable costs Ans: Low High Total manufacturing costs $157,000 $225,000 Less: Direct materials ($4 × 10,000 and $4 × 15,000, respectively) 40,000 60,000 Direct labor ($6 × 10,000 and $6 × 15,000, respectively) 60,000 90,000 Manufacturing overhead cost $ 57,000 $ 75,000 Cost Activity High level of activity $75,000 15,000 units Low level of activity 57,000 10,000 units Change $18,000 5,000 units $18,000 ÷ 5,000 units = $3.60 per unit Total cost at the high level of activity Less variable element ($3.60 per unit × 15,000 units) Fixed cost element $75,000 54,000 $21,000 Therefore, the cost formula for manufacturing overhead is $21,000 per period plus $3.60 per unit produced, or Y = $21,000 + $3.60X AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition AICPA FN: Reporting 5-103 Chapter Cost Behavior: Analysis and Use 136 Utility costs at one of Hannemann Corporation's factories are listed below: March April May June July August September October November Machine-Hours Utility Cost 5,021 $52,824 5,076 $53,287 5,074 $53,263 5,040 $52,991 5,087 $53,371 5,073 $53,251 5,075 $53,252 5,034 $52,916 5,062 $53,137 Management believes that utility cost is a mixed cost that depends on machine-hours Required: Estimate the variable cost per machine-hour and the fixed cost per month using the high-low method Show your work! Ans: High activity level Low activity level Machine-Hours 5,087 5,021 Utility Cost $53,371 $52,824 Variable cost = Change in cost ÷ Change in activity = ($53,371 − $52,824) ÷ (5,087 − 5,021) = $8.29 Fixed cost element = Total cost − Variable cost element = $52,824 − ($8.29 × 5,021) = $11,200 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy 5-104 AICPA FN: Reporting Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 137 Swofford Inc has provided the following data concerning its maintenance costs: March April May June July August September October November Machine-Hours Maintenance Cost 4,440 $50,950 4,431 $50,877 4,412 $50,696 4,460 $51,113 4,414 $50,711 4,433 $50,900 4,443 $50,976 4,415 $50,730 4,391 $50,530 Management believes that maintenance cost is a mixed cost that depends on machinehours Required: Estimate the variable cost per machine-hour and the fixed cost per month using the high-low method Show your work! Ans: Machine-Hours Maintenance Cost High activity level 4,460 $51,113 Low activity level 4,391 $50,530 Variable cost = Change in cost ÷ Change in activity = ($51,113 − $50,530) ÷ (4,460 − 4,391) = $8.45 Fixed cost element = Total cost − Variable cost element = $50,530 − ($8.45 × 4,391) = $13,426 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition AICPA FN: Reporting 5-105 Chapter Cost Behavior: Analysis and Use 138 The management of Dethlefsen Corporation would like to have a better understanding of the behavior of its inspection costs The company has provided the following data: January February March April May June July August September Direct Labor-Hours Inspection Cost 5,089 $33,122 5,042 $32,929 5,026 $32,870 5,073 $33,065 5,029 $32,906 5,040 $32,913 5,070 $33,050 5,027 $32,875 4,995 $32,746 Management believes that inspection cost is a mixed cost that depends on direct laborhours Required: Estimate the variable cost per direct labor-hour and the fixed cost per month using the high-low method Show your work! Ans: High activity level Low activity level Direct Labor-Hours Inspection Cost 5,089 $33,122 4,995 $32,746 Variable cost = Change in cost ÷ Change in activity = ($33,122 − $32,746) ÷ (5,089 − 4,995) = $4.00 Fixed cost element = Total cost − Variable cost element = $32,746 − ($4.00 × 4,995) = $12,766 AACSB: Analytic AICPA BB: Critical Thinking LO: Level: Easy 5-106 AICPA FN: Reporting Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 139 The accounting department of Archer Company, a merchandising company, has prepared the following analysis: Cost of goods sold Sales commissions Advertising expense Administrative salaries Billing expense Depreciation expense Cost Formula $56 per unit 12% of sales $300,000 per month $160,000 per month ? $62,000 per month The accounting department feels that billing expense is a mixed cost, containing both fixed and variable cost elements The billing expenses and sales in units over the last several months follow: January February March April May June Units Sold (000) 11 14 17 15 12 Billing Expense $30,000 $33,000 $36,000 $42,000 $39,000 $35,000 The accounting department now plans to develop a cost formula for billing expense so that a contribution format income statement can be prepared for management's use Required: a Using the least-squares method, estimate the cost formula for billing expense b Assume that the company plans to sell 30,000 units during July at a selling price of $100 per unit Prepare a budgeted income statement for the month, using the contribution format Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-107 Chapter Cost Behavior: Analysis and Use Ans: a Using least-squares regression, the cost formula is Y = $16,952 + $1,452X, where X is a thousand units b Sales ($100 × 30,000) Variable expenses: Cost of goods sold ($56 × 30,000) Commissions (0.12 × $3,000,000) Billing expense ($1,452 × 30) Contribution margin Fixed expenses: Advertising expense Administrative salaries Billing expense Depreciation expense Net operating income $3,000,000 $1,680,000 360,000 43,560 300,000 160,000 16,952 62,000 AACSB: Analytic AICPA BB: Critical Thinking Appendix: 5A LO: 4,5 Level: Hard 2,083,560 916,440 538,952 $ 377,488 AICPA FN: Reporting 140 In January, Verba Corporation, a manufacturing company, reported the following financial data: Sales $460,000 Variable production expense $84,000 Fixed production expense $100,000 Variable selling expense $12,000 Fixed selling expense $47,000 Variable administrative expense $33,000 Fixed administrative expense $132,000 The company had no beginning or ending inventories Required: a Prepare an income statement in good form for January using the traditional approach b Prepare an income statement in good form for January using the contribution approach 5-108 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use Ans: a Traditional approach Sales Cost of goods sold Gross margin Selling and administrative expenses: Selling Administrative Net operating income b Contribution approach Sales Variable expenses: Variable production expense Variable selling expense Variable administrative expense Contribution margin Fixed expenses: Fixed production expense Fixed selling expense Fixed administrative expense Net operating income $460,000 184,000 276,000 $ 59,000 165,000 224,000 $ 52,000 $460,000 $84,000 12,000 33,000 100,000 47,000 132,000 129,000 331,000 279,000 $ 52,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-109 Chapter Cost Behavior: Analysis and Use 141 Novakovich Inc., a manufacturing company, has provided the following financial data for January: Sales $430,000 Variable production expense $84,000 Variable selling expense $16,000 Variable administrative expense $28,000 Fixed production expense $102,000 Fixed selling expense $44,000 Fixed administrative expense $121,000 The company had no beginning or ending inventories Required: a Prepare an income statement in good form for January using the traditional approach b Prepare an income statement in good form for January using the contribution approach 5-110 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use Ans: a Traditional approach Sales $430,000 Cost of goods sold 186,000 Gross margin 244,000 Selling and administrative expenses: Selling $ 60,000 Administrative 149,000 209,000 Net operating income $ 35,000 b Contribution approach Sales Variable expenses: Variable production expense Variable selling expense Variable administrative expense Contribution margin Fixed expenses: Fixed production expense Fixed selling expense Fixed administrative expense Net operating income $430,000 $84,000 16,000 28,000 102,000 44,000 121,000 128,000 302,000 267,000 $ 35,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-111 Chapter Cost Behavior: Analysis and Use 142 In July, Haertel Corporation, a manufacturing company, reported the following financial data: Sales $390,000 Variable production expense $74,000 Fixed production expense $67,000 Variable selling expense $15,000 Fixed selling expense $72,000 Variable administrative expense $52,000 Fixed administrative expense $86,000 Required: Prepare an income statement in good form for July using the contribution approach Ans: Sales Variable expenses: Variable production expense Variable selling expense Variable administrative expense Contribution margin Fixed expenses: Fixed production expense Fixed selling expense Fixed administrative expense Net operating income $390,000 $74,000 15,000 52,000 67,000 72,000 86,000 141,000 249,000 225,000 $ 24,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: Level: Easy 5-112 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 143 Crabbe Inc., a manufacturing company, has provided the following data for October: Sales $270,000 Variable production expense $53,000 Variable selling expense $23,000 Variable administrative expense $16,000 Fixed production expense $50,000 Fixed selling expense $34,000 Fixed administrative expense $77,000 Required: Prepare an income statement in good form for October using the contribution approach Ans: Sales $270,000 Variable expenses: Variable production expense $53,000 Variable selling expense 23,000 Variable administrative expense 16,000 92,000 Contribution margin 178,000 Fixed expenses: Fixed production expense 50,000 Fixed selling expense 34,000 Fixed administrative expense 77,000 161,000 Net operating income $ 17,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-113 Chapter Cost Behavior: Analysis and Use 144 Below are cost and activity data for a particular cost over the last four periods Your boss has asked you to analyze this cost so that management will have a better understanding of how this cost changes in response to changes in activity Period Period Period Period Activity 40 47 45 41 Cost $637 $693 $675 $646 Required: Using the least-squares regression method, estimate the cost formula for this cost Ans: Using least-squares regression, the cost formula is Y = $324 + $7.82X AACSB: Analytic AICPA BB: Critical Thinking Appendix: 5A LO: Level: Hard AICPA FN: Reporting 145 Grawburg Inc maintains a call center to take orders, answer questions, and handle complaints The costs of the call center for a number of recent months are listed below: April May June July August September October November Calls Taken 9,030 9,017 9,035 9,065 9,015 9,061 9,070 9,067 Call Center Cost $112,323 $112,278 $112,341 $112,458 $112,290 $112,419 $112,463 $112,439 Management believes that the cost of the call center is a mixed cost that depends on the number of calls taken Required: Estimate the variable cost per call and fixed cost per month using the least-squares regression method 5-114 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use Ans: The solution using Microsoft Excel functions is: slope = $3.27 per call intercept = $82,758 per month AACSB: Analytic AICPA BB: Critical Thinking Appendix: 5A LO: Level: Hard AICPA FN: Reporting 146 The management of Rutledge Corporation would like to better understand the behavior of the company's warranty costs Those costs are listed below for a number of recent months: March April May June July August September October Product Returns Warranty Cost 30 $3,648 37 $4,074 43 $4,460 41 $4,330 32 $3,756 48 $4,782 35 $3,932 33 $3,823 Management believes that warranty cost is a mixed cost that depends on the number of product returns Required: Estimate the variable cost per product return and the fixed cost per month using the least-squares regression method Ans: The solution using Microsoft Excel functions is: slope = $63.59 per product return intercept = $1,724 per month AACSB: Analytic AICPA BB: Critical Thinking Appendix: 5A LO: Level: Hard Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition AICPA FN: Reporting 5-115 Chapter Cost Behavior: Analysis and Use 147 Furlan Printing Corp., a book printer, has provided the following data: May June July August September October November December Titles Printed Press Setup Cost 40 $6,649 38 $6,438 25 $5,307 28 $5,564 33 $6,030 27 $5,505 39 $6,551 36 $6,275 Management believes that the press setup cost is a mixed cost that depends on the number of titles printed (A specific book that is to be printed is called a “title” Typically, thousands of copies will be printed of each title Specific steps must be taken to setup the presses for printing each title-for example, changing the printing plates The costs of these steps are the press setup costs.) Required: Estimate the variable cost per title printed and the fixed cost per month using the leastsquares regression method Ans: The solution using Microsoft Excel functions is: slope = $88.21 per title printed intercept = $3,107 per month AACSB: Analytic AICPA BB: Critical Thinking Appendix: 5A LO: Level: Hard 5-116 AICPA FN: Reporting Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition ... BB: Critical Thinking AICPA FN: Measurement LO: Level: Easy 5-6 Garrison/ Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 15 It is necessary to break... AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Medium Garrison/ Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-7 Chapter Cost Behavior: Analysis and Use 19 Limousine Conversion... AICPA BB: Critical Thinking AICPA FN: Reporting LO: Level: Easy 5-8 Garrison/ Noreen/Brewer, Managerial Accounting, Twelfth Edition Chapter Cost Behavior: Analysis and Use 23 In the standard cost