Chapter Cost Behavior: Analysis and Use True/False T Easy Modern technology is causing shifts away from variable costs toward more fixed costs in many industries F Medium In order for a cost to be variable it must vary with either units produced or units sold T Easy A cost that is obtainable in large chunks and that increases or decreases only in response to fairly wide changes in the activity level is known as a step-variable cost F Easy The concept of the relevant range does not apply to fixed costs F Medium Indirect costs, such as manufacturing overhead, are always fixed costs T Easy A cost formula may not be valid outside the relevant range of activity T Easy Discretionary fixed costs arise from annual decisions by management to spend in certain fixed cost areas F Easy Significant reductions in committed fixed costs can usually be made on a temporary basis without seriously impairing the long-run goals of a firm F Easy The planning horizons for committed fixed costs and discretionary fixed costs are generally the same 10 T Easy The high-low method is generally less accurate than the least-squares regression method for analyzing the behavior of mixed costs Managerial Accounting, 9/e 143 11 T Easy In a scattergraph, the line fitted to the plotted points is known as a regression line 12 F Easy The adjusted R2 (i.e., R-squared) indicates the proportion of a mixed cost that is variable 13 F Easy In least-squares regression, independent variables are not included in the computations of the slope and intercept 14 T Easy The contribution approach to the income statement classifies costs by behavior rather than by function 15 T Easy A mixed cost is partially variable and partially fixed Multiple Choice 16 C Medium Expense A is a fixed cost; expense B is a variable cost During the current year the activity level has increased, but is still within the relevant range In terms of cost per unit of activity, we would expect that: a expense A has remained unchanged b expense B has decreased c expense A has decreased d expense B has increased 17 B Easy Which costs will change with a decrease in activity within the relevant range? a Total fixed costs and total variable cost b Unit fixed costs and total variable cost c Unit variable cost and unit fixed cost d Unit fixed cost and total fixed cost 18 B Medium Within the relevant range of activity, variable cost per unit will: a increase in proportion with the level of activity b remain constant c vary inversely with the level of activity d none of these Managerial Accounting, 9/e 144 19 D Medium 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 20 B Easy CPA adapted The term "relevant range" means the range over which: a costs may fluctuate b a particular cost formula is valid c production may vary d relevant costs are incurred 21 A Medium The linear equation Y = a + bX is often used to express cost formulas In this equation: a the b term represents variable cost per unit of activity b the a term represents variable cost in total c the X term represents total cost d the Y term represents total fixed cost 22 C Easy An example of a discretionary fixed cost is: a insurance b taxes on real estate c management training d depreciation of buildings and equipment 23 C Easy An example of a committed fixed cost is: a a training program for salespersons b executive travel expenses c property taxes on the factory building d new product research and development 24 D Easy Discretionary fixed costs: a vary directly and proportionately with the level of activity b have a long-term planning horizon, generally encompassing many years c are made up of plant, equipment, and basic organizational costs d none of the above 25 B Medium In describing the cost formula equation Y = a + bX, which of the following statements is correct? a "X" is the dependent variable b "a" is the fixed component c In the high-low method, "b" equals change in activity divided by change in costs d As "X" increases "Y" decreases Managerial Accounting, 9/e 145 26 B Easy The contribution approach to the income statement: a organizes costs on a functional basis b is useful to managers in planning and decision making c shows a contribution margin rather than a net income figure statement d can be used only by manufacturing companies at the bottom of the 27 D Easy CMA adapted Contribution margin is the excess of revenues over: a cost of goods sold b manufacturing cost c all direct costs d all variable costs 28 B Easy An example of a cost that is variable with respect to the number of units produced and sold is: a insurance on the headquarters building b power to run production equipment c supervisory salaries d depreciation of factory facilities 29 C Medium CMA adapted A cost driver is: a the largest single category of cost in a company b a fixed cost that cannot be avoided c a factor that causes variations in a cost d an indirect cost that is essential to the business 30 C Medium The following data pertain to activity and costs for two recent months: Activity level in units October November 5,000 10,000 Variable costs P10,000 ? Fixed costs 30,000 ? Mixed costs 20,000 ? _ Total costs P60,000 P75,000 Assuming that these activity levels are within the relevant range, the mixed costs for November were: a P40,000 b P35,000 c P25,000 d P20,000 Managerial Accounting, 9/e 146 31 C Medium The following data pertains to activity and costs for two months: June 10,000 July 20,000 Variable costs P20,000 Fixed costs 15,000 Mixed costs 10,000 Total costs P45,000 P ? ? ? _ P70,000 Activity level in units Assuming that these activity levels are within the relevant range, the mixed costs for July were: a P10,000 b P35,000 c P15,000 d P40,000 32 B Easy At an activity level of 10,000 units, variable costs totaled P35,000 and fixed costs totaled P20,800 If 16,000 units are produced and this activity is within the relevant range, then: a total cost would equal P89,280 b total unit cost would equal P4.80 c fixed cost per unit would equal P5.58 d total costs would equal P55,800 33 D Medium Anaconda Mining Company shipped 9,000 tons of copper concentrate for P450,000 in March and 11,000 tons for P549,000 in April Shipping costs for 12,000 tons to be shipped in May would be expected to be: a P548,780 b P549,020 c P594,000 d P598,500 34 A Medium An analysis of past maintenance costs indicates that maintenance cost is an average of P0.20 per machine-hour at an activity level of 10,000 machine-hours and P0.25 per machine-hour at an activity level of 8,000 machine-hours Assuming that this activity is within the relevant range, what is the total expected maintenance cost if the activity level is 8,700 machine-hours? a P2,000 b P400 c P2,250 d P1,740 Managerial Accounting, 9/e 147 35 D Medium Shipping expense is P9,000 for 8,000 pounds shipped and P11,250 for 11,000 pounds shipped Assuming that this activity is within the relevant range, if the company ships 9,000 pounds, its expected shipping expense is closest to: a P10,125 b P8,583 c P9,972 d P9,750 36 C Hard Average maintenance costs are P1.50 per machine-hour at an activity level of 8,000 machine-hours and P1.20 per machine-hour at an activity level of 13,000 machinehours Assuming that this activity is within the relevant range, total expected maintenance cost for a budgeted activity level of 10,000 machine-hours would be closest to: a P16,128 b P15,000 c P13,440 d P11,433 37 D Medium CMA adapted The controller of JoyCo has requested a quick estimate of the manufacturing supplies needed for the month of July when production is expected to be 470,000 units Below are actual data from the prior three months of operations Production in units March 450,000 April 540,000 May 480,000 Manufacturing supplies P723,060 853,560 766,560 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.) a P805,284 b P1,188,756 c P755,196 d P752,060 Managerial Accounting, 9/e 148 38 D Hard (Appendix) The following activity and cost data were provided by Hammer Corp., which would like help in estimating its future maintenance costs: Units Maintenance Cost P450 P530 11 P640 15 P700 Using the least-squares regression method to estimate the cost formula, the expected total cost for an activity level of 10 units would be closest to: a P612.50 b P581.82 c P595.84 d P601.50 39 C Easy Given the cost formula Y = P15,000 + P5X, total cost at an activity level of 8,000 units would be: a P23,000 b P15,000 c P55,000 d P40,000 40 B Easy Given the cost formula Y = P12,000 + P6X, total cost at an activity level of 8,000 units would be: a P20,000 b P60,000 c P12,000 d P48,000 41 D Easy Reddy Company has the following cost formulas for overhead: Cost Indirect materials Maintenance Machine setup Utilities Depreciation Cost Formula P2,000 plus P0.40 per machine hour P1,500 plus P0.60 per machine hour P0.30 per machine hour P200 plus P0.10 per machine hour P800 Based on these cost formulas, the total overhead cost at 600 machine hours is expected to be: a P4,500 b P5,200 c P5,620 d P5,340 Managerial Accounting, 9/e 149 42 C Medium Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500? a 10,625 units b 4,375 units c 6,250 units d 5,250 units 43 D Easy The following data pertains to activity and utility costs for two recent years: Year Year Activity level in units 12,000 8,000 Utilities cost P15,000 P12,000 Using the high-low method, the cost formula for utilities is: a P1.50 per unit b P8,000 plus P0.50 per unit c P1.25 per unit d P6,000 plus P0.75 per unit 44 D Easy The following data pertains to activity and utility costs for two recent years: Year Year Activity level in units 10,000 6,000 Utilities cost observed P12,000 P9,000 Using the high-low method, the cost formula for utilities is: a P1.50 per unit b P1.20 per unit c P3,000 plus P3.00 per unit d P4,500 plus P0.75 per unit 45 D Easy At an activity level of 6,000 units the cost for maintenance is P7,200 and at 10,000 units the cost for maintenance is P11,600 Using the high-low method, the cost formula for maintenance is: a P1.20 per unit b P1.16 per unit c P1,200 plus P1.10 per unit d P600 plus P1.10 per unit Managerial Accounting, 9/e 150 46 C Easy Bell Company has provided the following data for maintenance costs: April Machine hours incurred 12,000 Maintenance cost incurred P24,000 May 16,000 P26,000 Using the high-low method, the cost formula for maintenance cost would be: a P2.00 per machine hour b P1.625 per machine hour c P18,000 plus P0.50 per machine hour d P24,000 plus P0.50 per machine hour 47 C Medium Buckeye Company has provided the following data for maintenance cost: Prior Year Machine hours 12,500 Maintenance cost P27,000 Current Year 15,000 P31,000 The best estimate of the cost formula for maintenance would be: a P21,625 per year plus P0.625 per machine hour b P7,000 per year plus P0.625 per machine hour c P7,000 per year plus P1.60 per machine hour d P27,000 per year plus P1.60 per machine hour 48 A Hard Selected information about Buehler Corporation's operations at high and at low levels of activity follow: Level of Activity Low High Number of units produced 25,000 30,000 Total manufacturing costs P575,000 P680,000 Direct material cost per unit P5 P5 Direct labor cost per unit P6 P6 Using the high-low method, what is the cost formula for manufacturing overhead? a P50,000 per period plus P10 per unit b P50,000 per period plus P21 per unit c P50,000 per period plus P22 per unit d P347,000 per period plus P0.10 per unit Managerial Accounting, 9/e 151 49 D Hard At a sales level of P300,000, James Company's gross margin is P15,000 less than its contribution margin, its net income is P50,000, and its selling and administrative expenses total P120,000 At this sales level, its contribution margin would be: a P250,000 b P155,000 c P170,000 d P185,000 50 B Hard (Appendix) Your boss would like you to estimate the fixed and variable components of a particular cost Actual data for this cost for four recent periods appear below Period Period Period Period Activity 24 25 20 22 Cost P174 179 165 169 Using the least-squares regression method, what is the cost formula for this cost? a Y = P 0.00 + P7.55X b Y = P110.44 + P2.70X c Y = P103.38 + P3.00X d Y = P113.35 + P0.89X Reference: 5-1 Rymore Company would like to classify the following costs according to their cost behavior: July Sales in units 1,500 August 1,600 Cost A P35,000 Cost B 16,000 Cost C 67,500 P36,000 16,000 72,000 51 A Easy Refer To: 51 Which of the following classifications best describes the behavior of Cost A? a Mixed b Variable c Fixed d none of the above Managerial Accounting, 9/e 152 Reference: 5-12 Porter Company has provided the following data for the second quarter of the most recent year: Sales P300,000 Fixed manufacturing overhead 55,000 Direct labor 72,500 Fixed selling expense 46,250 Variable manufacturing overhead 41,000 Variable administrative expense 48,000 Direct materials 51,500 Fixed administrative expense 44,500 Variable selling expense 49,750 Assume that direct labor is a variable cost and that there were no beginning or ending inventories 82 A Medium Refer To: 512 The total contribution margin of Porter Company for the second quarter was: a P37,250 b P87,000 c P176,000 d P211,000 83 B Medium Refer To: 512 The gross margin for Porter Company for the second quarter was: a P(12,500) b P80,000 c P131,500 d P135,000 Reference: 5-13 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 P800,000 Less cost of goods sold 560,000 Gross margin 240,000 Less operating expenses: Selling P98,000 Administrative 98,000 196,000 Net income P 44,000 On average, a book sells for P50 Variable selling expenses are P5.50 per book, with the remaining selling expenses being fixed The variable administrative expenses are 3% of sales, with the remainder being fixed Managerial Accounting, 9/e 160 84 B Hard Refer To: 5-13 The contribution margin for Crandall's Bookstore for the first quarter is: a P688,000 b P128,000 c P152,000 d P240,000 85 C Medium Refer To: 513 The net income using the contribution approach for the first quarter is: a P240,000 b P152,000 c P44,000 d P128,000 86 A Hard Refer To: 5-13 The cost formula for operating expenses with "X" equal to the number of books sold is: a Y = P84,000 + P7.00X b Y = P84,000 + P8.50X c Y = P98,000 + P7.00X d Y = P98,000 + P8.50X Essay 87 Easy The following information summarizes the company's cost structure: Variable cost per unit P1.30 Fixed cost per unit 4.50 Total cost per unit P5.80 Units produced and sold 48,000 Assume that all of the activity levels mentioned in this problem are within the relevant range Required: Prepare a schedule showing predictions for the following items at the 40,000 unit level of activity: a Total variable cost b Total fixed cost c Variable cost per unit d Fixed cost per unit Managerial Accounting, 9/e 161 Answer: Note: The total fixed cost is P4.50 x 48,000 = P216,000 Total costs: Variable (P1.30 x 40,000 units) P 52,000 Fixed 216,000 Costs per unit: Variable (unchanged) P1.30 Fixed (P216,000 ÷ 40,000 units) 5.40 88 Medium Mateo Company's average cost per unit is P1.425 at the 16,000 unit level of activity and P1.38 at the 20,000 unit level of activity Assume that all of the activity levels mentioned in this problem are within the relevant range Required: Predict the following items for Mateo Company: a Variable cost per unit b Total fixed cost per period c Total expected costs at the 18,000 unit level of activity Answer: Cost Units High level of activity (20,000 units x P1.38) P27,600 20,000 Low level of activity (16,000 units x P1.425) 22,800 16,000 Change P 4,800 4,000 a P4,800 ÷ 4,000 units = P1.20 per unit variable cost b Total cost at the high level P27,600 Less variable element (P1.20 x 20,000 units) 24,000 Fixed element P 3,600 c Variable cost (P1.20 x 18,000 units) Fixed cost Total cost Managerial Accounting, 9/e P21,600 3,600 P25,200 162 89 Hard ABC Company's total overhead costs at various levels of activity are presented below: Month Machine Hours Total Overhead Costs March 60,000 P216,800 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: Utilities (V) P 54,000 Supervisory salaries (F) 62,000 Maintenance (M) 78,000 Total overhead costs P194,000 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 Answer: a Total overhead cost at 80,000 machine hours P262,400 Less: Utilities (P54,000  50,000) x 80,000 86,400 Supervisory salaries (fixed) 62,000 Portion of overhead for June that represents maintenance P114,000 b High-low analysis of maintenance cost: Maintenance Cost Machine-Hours High point P114,000 80,000 Low point 78,000 50,000 Change observed .P 36,000 30,000 Managerial Accounting, 9/e 163 Variable rate: Change in cost = P36,000 = P1.20 per machine hr Change in activity 30,000 MH Total fixed cost: Total maintenance cost at the low point P78,000 Less variable cost element (50,000 x P1.20) 60,000 Fixed cost element P18,000 The cost formula is: Y = P18,000 + P1.20X c Total overhead at 55,000 machine hours: Utilities (P54,000  50,000) x 55,000 P 59,400 Supervisory salaries 62,000 Maintenance cost: Variable: (55,000 x P1.20) P66,000 Fixed 18,000 84,000 Total overhead cost at 55,000 MH P205,400 90 Medium Stuart Manufacturing produces metal picture frames The company's income statements for the last two years are given below: Units sold Last year 50,000 This year 70,000 Sales P800,000 P1,120,000 Less cost of goods sold 550,000 710,000 Gross margin 250,000 410,000 Less operating expenses 150,000 190,000 Net income P100,000 P 220,000 The company has no beginning or ending inventories Required: a Estimate the company's total variable cost per unit, and its year (Remember that this is a manufacturing firm.) total fixed costs per b Compute the company's contribution margin for this year Answer: a Variable component of cost of goods sold: Variable rate = Change in costs/Change in units Variable rate = (P710,000 - P550,000)/(70,000 - 50,000) Variable rate = P8.00 per unit Managerial Accounting, 9/e 164 Fixed cost: High units: P710,000 - P8.00(70,000) = P150,000 Low units: P550,000 - P8.00(50,000) = P150,000 Variable component of operating expenses: Variable rate = Change in costs/Change in units Variable rate = (P190,000 - P150,000)/(70,000 - 50,000) Variable rate = P2.00 per unit Fixed cost: High units: P190,000 - P2.00(70,000) = P50,000 Low units: P150,000 - P2.00(50,000) = P50,000 Total variable cost per unit: P8.00 + P2.00 = P10.00 per unit Total fixed cost: P150,000 + P50,000 = P200,000 b Sales revenue P1,120,000 Less variable expenses: Variable cost of goods sold P560,000 Variable operating expenses 140,000 700,000 Contribution margin P 420,000 91 Hard The Central Valley Company is a merchandising firm that sells a single product The company's revenues and expenses for the last three months are given below: Central Valley Company Comparative Income Statement For the Second Quarter April May June Sales in units 4,500 5,250 6,000 Sales revenue P630,000 P735,000 P840,000 Less cost of goods sold 252,000 294,000 336,000 Gross Margin 378,000 441,000 504,000 Less operating expenses: Shipping expense 56,000 63,500 71,000 Advertising expense 70,000 70,000 70,000 Salaries and commissions 143,000 161,750 180,500 Insurance expense 9,000 9,000 9,000 Depreciation expense 42,000 42,000 42,000 Total operating expenses 320,000 346,250 372,500 Net income P 58,000 P 94,750 P131,500 Managerial Accounting, 9/e 165 Required: a Determine which expenses are mixed and, by use of the high- low method, separate each mixed expense into its variable and fixed components State the cost formula for each mixed expense b Compute the company's total contribution margin for May Answer: a The cost of goods sold for this company is a variable cost and is P56 per unit The Shipping Expense and the Salaries and Commissions Expense are mixed All other expenses are constant for each of the months shown and are therefore fixed Shipping Expense: P71,000 - P56,000 = P15,000 = P10 per unit 6,000 - 4,500 1,500 P56,000 - (4,500 x P10) = P11,000 Cost formula = P11,000 per month plus P10 per unit Salaries and Commissions: P180,500 - 143,000 = P37,500 = P25 per unit 6,000 - 4,500 1,500 P143,000 - (4,500 x P25) = P30,500 Cost formula = P30,500 per month plus P25 per unit b Contribution margin for May: Sales in units Sales revenue Variable expenses: Cost of goods sold Shipping expense (P10 x 5,250) Salaries & commissions (P25 x 5,250) Contribution margin 92 Medium 5,250 P735,000 P294,000 52,500 131,250 477,750 P257,250 Selected data about Pitkin Company's manufacturing operations at two levels of activity are given below: Number of units produced 10,000 Total manufacturing costs P157,000 Direct material cost per unit P4 Direct labor cost per unit P6 Managerial Accounting, 9/e 15,000 P225,000 P4 P6 166 Required: Using the high-low method, estimate the cost formula for manufacturing overhead Assume that both direct material and direct labor are variable costs Answer: Low Total manufacturing costs P157,000 Less: Direct materials (P4 x 10,000 and P4 x 15,000, respectively) 40,000 Direct labor (P6 x 10,000 and P6 x 15,000, respectively) 60,000 Manufacturing overhead cost P 57,000 High P225,000 60,000 90,000 P 75,000 Cost Activity High level of activity P 75,000 15,000 units Low level of activity 57,000 10,000 units Change P 18,000 5,000 units P18,000 ÷ 5,000 units = P3.60 per unit variable cost Total cost at the high level of activity P 75,000 Less variable element (P3.60 x 15,000 units) 54,000 Fixed cost element P 21,000 Therefore, the cost formula for manufacturing overhead is P21,000 per period plus P3.60 per unit produced, or Y = P21,000 + P3.60X Managerial Accounting, 9/e 167 93 Medium Unified Parcel, Inc., operates a local parcel delivery service The company keeps detailed records relating to operating costs of trucks, and has found that if a truck is driven 110,000 miles per year the operating cost is 7.5 cents per mile This cost increases to 8.75 cents per mile if a truck is driven 60,000 miles per year Required: Estimate the cost formula for truck operating costs using the high-low method Answer: Total cost at high level of activity: 110,000 x P.075 = P8,250 Total cost at low level of activity: 60,000 x P.0875 = P5,250 Activity High 110,000 Low 60,000 Change 50,000 Managerial Accounting, 9/e Cost P8,250 5,250 P3,000 168 Variable cost = Change in cost ÷ Change in activity = P3,000 ÷ 50,000 miles = P0.06 per mile Fixed cost element = P8,250 - (P0.06 x 110,000) = P1,650 The cost formula is P1,650 per year plus P0.06 per mile 94 Hard (Appendix) The Stephens Leadership Center provides training seminars in personal development and time management The company is relatively new and management is seeking information regarding the Center's cost structure The following information has been gathered since the inception of the business in January of the current year: Month Seminars Offered Costs Incurred January 10 P17,000 February 12 18,800 March 15 20,900 April 18 23,762 May 16 21,800 June 13 19,400 Required: a Using the high-low method, estimate the variable cost per fixed cost per month seminar and the total b Using the least-squares method, estimate the variable cost total fixed cost per month per seminar and the Answer: a High-Low Method: Month Number of Seminars Costs Incurred April (high activity level) 18 P23,762 January (low activity level) 10 17,000 Change observed P 6,762 Variable cost = Change in Cost = P6,762 = P845.25 per seminar Change in activity Fixed cost element = Total cost - Variable cost element = P23,762 - (18 x P845.25) = P8,547.50 Cost formula for seminar costs: P8,547.50 per month plus P845.25 per seminar held Managerial Accounting, 9/e 169 b Least-Squares Method: Month Seminars Costs Incurred XY _ X^2 _ January 10 P 17,000 170,000 100 February 12 18,800 225,600 144 March 15 20,900 313,500 225 April 18 23,762 427,716 324 May 16 21,800 348,800 256 June 13 19,400 252,200 169 84 P121,662 1,737,816 1,218 n=6 X=84 Y=121,662 XY=1,737,816 X^2=1,218 b = [n(XY)-(X)(Y)]/[n(X^2)-(X)^2] = [6(1,737,816)-(84)(121,662)]/[6(1,218)-(84)^2] = P822.57 (rounded to the nearest whole cent) a = [(Y)-b(X)]/n = [(121,662)- 822.57(84)]/6 = P8,761 (rounded to the nearest whole peso) The cost formula is P8,761 per month plus P822.57 per seminar 95 Medium The x 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: The x Shop Income Statement Liner Department For First Quarter of Current Year Sales P700,000 Less cost of goods sold 250,000 Gross margin P450,000 Less operating expenses: Selling expenses P195,000 Administrative expenses 145,000 340,000 Net income P110,000 The liners sell, on average, for P350 each The department's variable selling expenses are P35 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 P125 per liner Managerial Accounting, 9/e 170 Required: Prepare an income statement for the quarter, using the contribution approach Answer: The x Shop Income Statement (Contribution Format) For the First Quarter of the Current Year Sales Variable expenses: Cost of goods sold P250,000 Selling expenses (P35 x 2,000) 70,000 Administrative expenses (0.25 x P145,000) 36,250 Contribution margin Fixed expenses: Selling expenses (P195,000-P70,000) 125,000 Administrative expenses (0.75 x P145,000) 108,750 Net income 96 Hard P700,000 356,250 343,750 233,750 P110,000 (Appendix) The accounting department of Archer Company, a merchandising company, has prepared the following analysis: Cost Cost of goods sold Sales commissions Advertising expense Administrative salaries Billing expense Depreciation expense Cost Formula P56 per unit 12% of sales P300,000 per month P160,000 per month ? P62,000 per month The accounting department feels that billing expense is a mixed cost, containing both fixed and variable cost elements A tabulation has been made of billing expense and sales in units over the last several months, as follows: Units Sold Month (000) January February 11 March 14 April 17 May 15 June 12 Billing Expense P30,000 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-type income statement can be prepared for management's use Managerial Accounting, 9/e 171 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 P100 per unit Prepare a budgeted income statement for the month, using the contribution format Answer: a Units Sold (000) Month (X) Billing Expense XY _ January P30,000 P270,000 February 11 33,000 363,000 March 14 36,000 504,000 April 17 42,000 714,000 May 15 39,000 585,000 June 12 35,000 420,000 78 P215,000 P2,856,000 n=6 X=78 Y=215,000 XY=2,856,000 X^2=1,056 X^2 81 121 196 289 225 144 1,056 b = [n(XY)-(X)(Y)]/[n(X^2)-(X)^2] = [6(2,856,000)-(78)( 215,000)]/[6(1,056)-(78)^2] = P1,452 (rounded to the nearest whole peso) a = [(Y)-b(X)]/n = [(215,000)- 1,452(84)]/6 = P16,952 (rounded to nearest whole peso) The cost formula is P16,952 per month plus P1,452 per thousand units b Archer Company Budgeted Income Statement For the month of June Sales (P100 x 30,000) P3,000,000 Variable expenses: Cost of goods sold (P56 x 30,000) P1,680,000 Commissions (0.12 x P3,000,000) 360,000 Billing expense (P1,452 x 30) 43,560 2,083,560 Contribution margin P 916,440 Fixed expenses: Advertising expense P 300,000 Managerial Accounting, 9/e 172 Administrative salaries Billing expense Depreciation expense Net income Managerial Accounting, 9/e 160,000 16,952 62,000 538,952 P 377,488 173 97 Medium (Appendix) 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 Activity Period 44 Period 42 Period 48 Period 49 Cost 277 265 284 284 Required: Using the least-squares regression method, estimate the cost formula for this cost Answer: n=4 X = 183 Y = 1,110 XY = 50,866 X^2 = 8,405 b = [n(XY)-(X)(Y)]/[n(X^2)-(X)^2] = [4(50,866)-(183)(1,110)]/[4(8,405)-(183)^2] = P2.55 (rounded to nearest whole cent) a = [(Y)-b(X)]/n = [(1,110)- 2.55(183)]/4 = P161 (rounded to nearest whole peso) Cost formula: Y = P161 + P2.55X Managerial Accounting, 9/e 174