Identify the cost categories in a traditional format income statement

Cost Accouning

In your monthly Chamber of Commerce meeting you heard that some of your peers running other businesses changed from a traditional income statement approach to a contribution margin approach. Your peers said this helps show the importance of volume levels to the businesses profitability.

You know that by using the contribution format income statement you can change what projected profits look like by changing your classification of fixed vs. variable type costs.

Prepare a memo to your CFO which does the following:

Summarize what a contribution format income statement depicts, as compared to the traditional format.
Using the following company data, show how the two income statement formats would look side by side.
Explain why the contribution approach is more useful to project profits. As an example, show your calculations when using a projected sales increase of 20%.
Using the following data, show how expected profits would be different if there was a sales increase of 10% and she used variable COGS of 50% vs. 60%. As an offset, this implies an increase in fixed COGS of $1,000,000.

Company Data to use for Parts 2 & 4

Last year's sales

$10,000,000

Variable cost as a % of sales

60%

Fixed costs of manufacturing

$2,000,000

Variable selling and administrative costs as % of sales

10%

Fixed selling and administrative costs

$1,000,000

Reported profit

$0

Please submit your assignment.

The following rubric will be used for grading:

Grading Rubric

10%

Explain what a contribution-format income statement depicts as compared with the traditional format.

30%

Using the company data, show how the 2 income statement formats would look side by side.

15%

Explain exactly why the contribution approach is more useful to project profits.

15%

As an example, show your calculations when using a projected sales increase of 20%.

15%

Identify and explain the ethical issues involved when you can change what projected profits look like by changing your classification of fixed versus variable costs.

15%

Using the data, show how expected profits would be different if there were a sales increase of 10% and the CFO used variable COGS of 50% vs. 60%.

Individual Project Introduction to the Subject of the Project

Prepare income statements for a merchandising company using the traditional and contribution formats.

Learning objective number 5 is to prepare income statements for a merchandising company using the traditional and contribution formats.

Contribution Approach Income Statement

The contribution approach income statement organizes costs by behavior, first deducting variable expenses to obtain contribution margin, and then deducting fixed expenses to obtain net operating income.

The traditional approach organizes costs by function, such as production, selling, and administration. Within a functional area, fixed and variable costs are intermingled.

The contribution margin is total sales revenue less total variable expenses.

The Traditional and Contribution Formats

Used primarily for external reporting.

Used primarily by management.

The contribution format allocates costs based on cost behavior. The contribution approach differs from the traditional approach illustrated in an earlier chapter.

The traditional approach organizes costs in a functional format. Costs relating to production, administration, and sales are grouped together without regard to their cost behavior.

The traditional approach is used primarily for external reporting purposes.

Uses of the Contribution Format

The contribution income statement format is used as an internal planning and decision-making tool. We will use this approach for:

Cost-volume-profit analysis

Budgeting

Segmented reporting of profit data

Special decisions such as pricing and make-or-buy analysis

This approach is used as an internal planning and decision-making tool. For example, this approach is useful for and discussed further in Cost-volume-profit analysis (Chapter 5), Budgeting (Chapter 8), Segmented reporting of profit data (Chapter 6), Special decisions such as pricing and make or buy analysis (Chapter 12).

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1. Traditional format income statements are prepared primarily for external reporting purposes.

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True

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2. In a contribution format income statement, sales minus cost of goods sold equals the gross margin.

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False

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3. In a traditional format income statement for a merchandising company, the cost of goods sold reports the product costs attached to the merchandise sold during the period.

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True

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4.Contribution format income statement is useful for external reporting purposes, it has serious limitations when used for internal purposes because it does not distinguish between fixed and variable costs.

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False

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5. In a contribution format income statement for a merchandising company, cost of goods sold is a variable cost that gets included in the "Variable expenses" portion of the income statement.

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True

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6. The traditional format income statement is used as an internal planning and decision-making tool. Its emphasis on cost behavior aids cost-volume-profit analysis, management performance appraisals, and budgeting.

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False

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7.When finished goods are sold, there is an increase in which of the following accounts?

A- Finished Goods Inventory

B- Cost of Goods Sold

C- Work-in-Process Inventory

D- Cost of Goods Manufactured

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B

Explaining the Individual Project

Part 1: Summarize what a contribution format income statement depicts, as compared to the traditional format.

Please discuss

Explaining the Individual Project

Part 2: Using the following company data, show how the two income statement formats would look side by side.

Traditional- versus contribution-format statements are as follows:

Explaining the Individual Project

Explaining the Individual Project

Part 3: Explain why the contribution approach is more useful to project profits. As an example, show your calculations when using a projected sales increase of 20%.

Please discuss and make the following calculation

Explaining the Individual Project

Part 4: Using the following data, show how expected profits would be different if there was a sales increase of 10% and she used variable COGS of 50% vs. 60%. As an offset, this implies an increase in fixed COGS of $1,000,000.

WEEK 1 LECTURE

Cost Accounting and Cost Concepts

Learning Objectives

1-Identify and give examples of each of the three basic manufacturing cost categories.

2-Distinguish between product costs and period costs and give examples of each.

3-Understand cost behavior patterns including variable costs, fixed costs, and mixed costs.

4-Analyze a mixed cost using a scattergraph plot and the high-low method.

5- Prepare income statements for a merchandising company using the traditional and contribution formats.

Learning Objective

6-Understand the differences between direct and indirect costs.

7-Understand cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.

The Product

Direct Materials

Direct Labor

Manufacturing Overhead

Classifications of Manufacturing Costs

Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and manufacturing overhead. These costs are incurred to make a product.

Manufacturing Costs

Direct materials are an integral part of a finished product and their costs can be conveniently traced to it.

Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience.

Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is also called “touch labor.”

Manufacturing Costs

Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but the workers involved do not directly work on the product.

Manufacturing overhead includes all manufacturing costs except direct materials and direct labor.

Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs.

Learning Objective 1

Identify and give examples of each of the three basic manufacturing cost categories.

Learning objective number 1 is to identify and give examples of each of the three basic manufacturing cost categories.

Example of Direct Materials

Raw materials that become an integral part of the product and that can be conveniently traced directly to it.

Example: A radio installed in an automobile

Direct materials are raw materials that become an integral part of the finished product and whose costs can be conveniently traced to it. Examples include the aircraft engines on a Boeing 777, the Intel processing chip in a personal computer, the blank video cassette in a pre-recorded video, and a radio in an automobile.

Example of Direct Labor

Those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers

Direct labor consists of that portion of labor cost that can be easily traced to a product. Direct labor is sometimes referred to as “touch labor,” since it consists of the costs of workers who “touch” the product as it is being made.

Example of Manufacturing Overhead

Manufacturing costs that cannot be easily traced directly to specific units produced.

Examples: Indirect materials and indirect labor

Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors, and security guards.

Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. These costs cannot be easily traced to specific units produced (also called indirect manufacturing cost, factory overhead, and factory burden).

Manufacturing overhead includes indirect materials that are part of the finished product, but that cannot be easily traced to it. It includes indirect labor costs that cannot be conveniently traced to the creation of products.

Other examples of manufacturing overhead include: maintenance and repairs on production equipment, heat and light, property taxes, depreciation and insurance on manufacturing facilities, etc.

Example of Nonmanufacturing Costs

Selling Costs

Costs necessary to secure the order and deliver the product.

Administrative Costs

All executive, organizational, and clerical costs.

A manufacturing company incurs many other costs in addition to manufacturing costs. For financial reporting purposes, most of these other costs are typically classified as selling costs and administrative costs. These costs are also called selling, general and administrative costs, or SG&A. Selling and administrative costs are incurred in both manufacturing and merchandising firms.

Selling costs include all costs necessary to secure customer orders and get the finished product into the hands of the customer. These costs are also referred to as order-getting and order-filling costs. Examples of selling costs include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses.

Administrative costs include all executive, organizational, and clerical costs associated with the general management of an organization. Examples of administrative costs include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall general administration of the organization as a whole.

Review Questions T/F

1. Managerial accounting is primarily concerned with the organization as a whole rather than with segments of the organization.

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False

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2. Managerial accounting places less emphasis on nonmonetary data than financial accounting.

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False

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3. Direct labor is a part of both prime cost and conversion cost.

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True

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4. Direct material cost combined with manufacturing overhead cost is known as conversion cost.

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False

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5. Wages paid to production supervisors would be considered direct labor.

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False

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6. Advertising is a product cost as long as it promotes specific products.

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False

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7. For a lamp manufacturing company, the cost of the insurance on its vehicles that deliver lamps to customers is best described as a: A. prime cost. B. manufacturing overhead cost. C. period cost. D. differential (incremental) cost of a lamp.

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C. period cost

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8. Manufacturing overhead consists of: A. all manufacturing costs. B. indirect materials but not indirect labor. C. all manufacturing costs, except direct materials and direct labor. D. indirect labor but not indirect materials.

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C. all manufacturing costs, except direct materials and direct labor.

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9. Which of the following costs would not be included as part of manufacturing overhead? A. Insurance on sales vehicles. B. Depreciation of production equipment. C. Lubricants for production equipment. D. Direct labor overtime premium.

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A. Insurance on sales vehicles.

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10. Conversion cost consists of which of the following? A. Manufacturing overhead cost. B. Direct materials and direct labor cost. C. Direct labor cost. D. Direct labor and manufacturing overhead cost.

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D. Direct labor and manufacturing overhead cost.

Learning Objective 2

Distinguish between product costs and period costs and give examples of each.

Learning objective number 2 is to distinguish between product costs and period costs and give examples of each.

Product Costs

The three major elements of product costs in a manufacturing company are

1.direct materials,

2.direct labor, and

3.manufacturing overhead.

A product cost is any cost involved in purchasing or manufacturing goods.

In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.

A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred.

Examples of Product Costs Versus Period Costs

Product costs include direct materials, direct labor, and manufacturing overhead.

Period costs include all selling costs and administrative costs.

Inventory

Cost of Good Sold

Balance Sheet

Income Statement

Sale

Expense

Income Statement

Costs can also be classified as product or period costs.

Product costs include all the costs that are involved in acquiring or making a product. More specifically, it includes direct materials, direct labor, and manufacturing overhead. Consistent with the matching principle, product costs are recognized as expenses when the products are sold. This can result in a delay of one or more periods between the time in which the cost is incurred and when it appears as an expense on the income statement. Product costs are also known as inventoriable costs. The discussion in the chapter follows the usual interpretation of GAAP in which all manufacturing costs are treated as product costs.

Period costs include all selling costs and administrative costs. These costs are expensed on the income statement in the period incurred. All selling and administrative costs are typically considered to be period costs. The usual rules of accrual accounting apply to period costs. For example, administrative salary costs are “incurred” when they are earned by the employees and not necessarily when they are paid to employees.

Classifications of Costs

Manufacturing costs are often classified as follows:

Direct Material

Direct Labor

Manufacturing Overhead

Prime Cost

Conversion Cost

Two more cost categories are often used in discussions of manufacturing costs—prime cost and conversion cost. Prime cost is the sum of direct materials cost and direct labor cost. Conversion cost is the sum of direct labor cost and manufacturing overhead cost. The term conversion cost is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product.

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11. Although depreciation is always a period cost in a merchandising firm, it can be a product cost in a manufacturing firm.

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True

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12. In a manufacturing firm, all costs are product costs.

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False

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13. The cost of shipping parts from a supplier is considered a product cost.

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True

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14.The costs of acquiring inventory are reported on the balance sheet as an asset labeled “inventory” and are expensed only when products are sold.

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True

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15.The cost of selling goods and administrative costs are reported on the income statement as expenses when inventory is sold.

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False – The cost of selling goods and administrative costs are reported on the income statement as expenses when they are incurred.

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16.Product costs are the costs related to inventory and period costs are the costs related to the selling and administrative functions.

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True

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17. Product costs are any costs that a company incurs to acquire raw materials and convert them to finished goods ready for sale.

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True

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18. The advertising costs that Pepsi incurred to air its commercials during the Super Bowl can best be described as a: A. variable cost. B. fixed cost. C. product cost. D. prime cost.

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B. fixed cost.

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19. Each of the following would be a period cost except: A. the salary of the company president's secretary. B. the cost of a general accounting office. C. depreciation of a machine used in manufacturing. D. sales commissions.

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C. depreciation of a machine used in manufacturing.

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20. Which of the following costs is an example of a period rather than a product cost? A. Depreciation on production equipment. B. Wages of salespersons. C. Wages of production machine operators. D. Insurance on production equipment.

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B. Wages of salespersons.

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21. Which of the following would be considered a product cost for external financial reporting purposes? A. Cost of a warehouse used to store finished goods. B. Cost of guided public tours through the company's facilities. C. Cost of travel necessary to sell the manufactured product. D. Cost of sand spread on the factory floor to absorb oil from manufacturing machines.

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D. Cost of sand spread on the factory floor to absorb oil from manufacturing machines.

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22. Which of the following would NOT be treated as a product cost for external financial reporting purposes? A. Depreciation on a factory building. B. Salaries of factory workers. C. Indirect labor in the factory. D. Advertising expenses.

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D. Advertising expenses.

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23. The salary of the president of a manufacturing company would be classified as which of the following? A. Product cost B. Period cost C. Manufacturing overhead D. Direct labor

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B. Period cost

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24. Conversion costs do NOT include: A. depreciation. B. direct materials. C. indirect labor. D. indirect materials.

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B. direct materials.

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Conversion costs during the month totaled: A. $50,000 B. $59,000 C. $137,000 D. $67,000

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A. $50,000 Conversion cost = Direct labor + Manufacturing overhead = $29,000 + $21,000 = $50,000

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Prime costs during the month totaled: A. $79,000 B. $120,000 C. $62,000 D. $40,000

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C. $62,000 Prime cost = Direct materials + Direct labor = $39,000 + $23,000 = $62,000

Learning Objective 3

Understand cost behavior patterns including variable costs, fixed costs, and mixed costs.

Learning objective number 3 is to understand cost behavior patterns including variable costs, fixed costs, and mixed costs.

Cost Classifications for Predicting Cost Behavior

Cost behavior refers to how a cost will react to changes in the level of activity. The most common classifications are:

Variable costs.

Fixed costs

Mixed costs.

Quite frequently, it is necessary to predict how a certain cost will behave in response to a change in activity. For example, a manager may want to estimate the impact that a 5% increase in sales would have on the company’s total electric bill. Cost behavior refers to how a cost will react to changes in the level of activity within the relevant range. The most commonly used classifications of cost behavior are variable and fixed costs.

Variable Cost

Your total texting bill is based on how many texts you send.

Number of Texts Sent

Total Texting Bill

A variable cost varies, in total, in direct proportion to changes in the level of activity. For example, if you don’t have a texting plan on your cell phone, text messaging costs 5 cents per text. Your total texting bill increases with the number of texts you send.

Variable Cost Per Unit

The cost per text sent is constant at

5 cents per text message.

Number of Texts Sent

Cost Per Text Sent

Although variable costs change in total as the activity level rises and falls, variable cost per unit is constant. For example, the cost per text message sent is constant at 5 cents per text.

The Activity Base (Cost Driver)

A measure of what causes the incurrence of a variable cost

Units produced

Miles driven

Machine hours

Labor hours

An activity base (also called a cost driver) is a measure of what causes the incurrence of variable costs. As the level of the activity base increases, the total variable cost increases proportionally.

Units produced (or sold) is not the only activity base within companies. A cost can be considered variable if it varies with activity bases such as miles driven, machine hours, or labor hours.

Fixed Cost

Your monthly contract fee for your cell phone is fixed for the number of monthly minutes in your contract. The monthly contract fee does not change based on the number of calls you make.

Number of Minutes Used Within Monthly Plan

Monthly Cell Phone Contract Fee

A fixed cost is constant within the relevant range. In other words, fixed costs do not change for changes in activity that fall within the “relevant range.” For example, your monthly contract fee for your cell phone is a fixed amount for a certain number of minutes. The monthly contract fee does not change based on the number of calls you make.

Of course, if you go over your monthly minutes allotment, you have exceed the relevant range for your monthly contract and will be charged above and beyond your monthly contract fee.

Fixed Cost Per Unit

Within the monthly contract portion, the average fixed cost per cell phone call made decreases as more calls are made.

Number of Minutes Used Within Monthly Plan

Monthly Cell Phone Contract Fee

However, when expressed on a per unit basis, a fixed cost is inversely related to activity—the per unit cost decreases when activity rises and increases when activity falls. For example, the average fixed cost per cell phone call made decreases as more calls are made in the month.

Examples

Advertising and Research and Development

Examples

Depreciation on Buildings and Equipment and Real Estate Taxes

Types of Fixed Costs

Discretionary

May be altered in the short-term by current managerial decisions

Committed

Long-term, cannot be significantly reduced in the short term.

One type of fixed cost is known as committed fixed costs. These are long-term fixed costs that cannot be significantly reduced in the short term. Some examples include depreciation on buildings and equipment and real estate taxes on factory property.

Another type of fixed cost is known as discretionary fixed costs. These fixed costs may be altered in the short-term by current management decisions. Some examples of discretionary fixed costs include advertising and research and development costs.

A cost may be discretionary or committed depending upon management’s strategy. For example, some construction companies may layoff workers during months with minimal customer demand. However, other construction companies may opt to retain their workers all year.

Fixed Costs and the Relevant Range

Fixed costs would increase in a step fashion at a rate of $30,000 for each additional 1,000 square feet.

For example, assume office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet.

For example, assume office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet.

Fixed costs would increase in a step fashion at a rate of $30,000 for each additional 1,000 square feet.

Relevant range

The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid.

It is the range where the fixed cost remains constant.

Cost Classifications for Predicting Cost Behavior

It is helpful to think about variable and fixed cost behavior in a 2 by 2 matrix, as illustrated here. Take a few minutes and review this summary of cost behavior for variable and fixed costs.

Mixed Costs

Mixed Costs (also called semivariable costs).

A mixed cost contains both variable and fixed elements.

Consider the example of utility cost.

Mixed Costs

The mixed cost line can be expressed with the equation Y = a + bX. This equation should look familiar, from your algebra and statistics classes.

In the equation, Y is the total mixed cost; a is the total fixed cost (or the vertical intercept of the line); b is the variable cost per unit of activity (or the slope of the line), and X is the actual level of activity.

In our utility example, Y is the total mixed cost; a is the total fixed monthly utility charge; b is the cost per kilowatt hour consumed, and X is the number of kilowatt hours consumed.

Mixed Costs – An Example

If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?

Y = a + bX

Y = $40 + ($0.03 × 2,000)

Y =

$100

Read through this short question to see if you can calculate the total utility bill for the month.

The total bill is $100. How did you do?

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27. Differential costs can be either fixed or variable.

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True

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28. A fixed cost is constant per unit of product.

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False

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29. The variable cost per unit is constant and does not depend on how many units are produced.

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True

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30. The cost of napkins put on each person's tray at a fast food restaurant is a fixed cost.

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False

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31. Direct material costs are generally variable costs.

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True

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32. Property taxes and insurance premiums paid on a factory building are examples of manufacturing overhead.

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True

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33. Manufacturing overhead combined with direct materials is known as conversion cost.

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False

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34. All costs incurred in a merchandising firm are considered to be period costs.

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False

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35. Depreciation is always considered a product cost for external financial reporting purposes in a manufacturing firm.

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False

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36. Selling and administrative expenses are product costs under generally accepted accounting principles.

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False

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37. A variable cost is a cost whose cost per unit varies as the activity level rises and falls.

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False

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38. When the level of activity increases, total variable cost will increase.

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True

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39. A decrease in production will ordinarily result in an increase in fixed production costs per unit.

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True

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40. Variable cost: A. increases on a per unit basis as the number of units produced increases. B. remains constant on a per unit basis as the number of units produced increases. C. remains the same in total as production increases. D. decreases on a per unit basis as the number of units produced increases.

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B. remains constant on a per unit basis as the number of units produced increases.

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41. Which of the following statements regarding fixed costs is incorrect? A. Expressing fixed costs on a per unit basis usually is the best approach for decision making. B. Fixed costs expressed on a per unit basis will decrease with increases in activity. C. Total fixed costs are constant within the relevant range. D. Fixed costs expressed on a per unit basis will increase with decreases in activity.

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A. Expressing fixed costs on a per unit basis usually is the best approach for decision making.

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42. The salary paid to the production manager in a factory is: A. a variable cost. B. part of prime cost. C. part of conversion cost. D. both a variable cost and a prime cost.

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C. part of conversion cost.

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43. Within the relevant range, variable cost per unit will: A. increase as the level of activity increases. B. remain constant. C. decrease as the level of activity increases. D. none of these.

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B. remain constant.

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44. The term "relevant range" means the range of activity over which: A. relevant costs are incurred. B. costs may fluctuate. C. production may vary. D. the assumptions about fixed and variable cost behavior are reasonably valid.

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D. the assumptions about fixed and variable cost behavior are reasonably valid.

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45. 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.

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C. property taxes on the factory building.

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46. 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.

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B. "a" is the fixed component.

Learning Objective 4

Analyze a mixed cost using the high-low method.

Learning objective number 4 is to analyze a mixed cost using a scattergraph plot and the high-low method.

The High-Low Method

The high-low method uses only two points to determine a cost formula. These two points are likely to be less than typical because they represent extremes of activity.

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.

The High-Low Method – An Example

The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours.

= $6.00/hour

$2,400 400

The first step is to choose the data points pertaining to the highest and lowest activity levels. In this case, the high level of activity was in June at 850 hours of maintenance and the low level of activity is in February with 450 hours of maintenance. Notice that this method relies upon two data points to estimate the fixed and variable portions of a mixed cost, as opposed to one data point with the scattergraph method.

The second step is to determine the total costs associated with the two chosen points. We incurred costs of $9,800 at the high level of activity and $7,400 at the low level of activity.

The third step is to calculate the change in cost between the two data points. The change in maintenance hours was 400 hours and the change in maintenance dollars was $2,400. Notice, this method relies upon two data points to estimate the fixed and variable portions of a mixed costs, as opposed to one data point with the scattergraph method.

For this example, we divide $2,400 by 400 and determine that the variable cost per hour of maintenance is $6.00.

The High-Low Method – An Example

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($6/hour × 850 hours)

Total Fixed Cost = $9,800 – $5,100

Total Fixed Cost = $4,700

The fourth step is to take the total cost at either activity level (in this case, $9,800).

Deduct the variable cost component ($6 per hour times 850 hours) for the total cost of $5,100.

The difference represents the estimate of total fixed costs ($4,700).

The High-Low Method – An Example

Y = $4,700 + $6.00X

The Cost Equation for Maintenance

The fifth step is to construct an equation that can be used to estimate the total cost at any activity level (Y = $4,700 + $6.00X). The basic equation of Y is equal to $4,700 (the total fixed cost) plus $6 times the actual level of activity.

You can verify the equation by calculating total maintenance costs at 450 hours, the low level of activity. It will be worth your time to make the calculation.

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Using the high-low method, the cost formula for utilities is: A. $1.50 per unit B. $1.20 per unit C. $3,000 plus $3.00 per unit D. $4,500 plus $0.75 per unit

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D. $4,500 plus $0.75 per unit

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The best estimate of the total month 1 variable cost for cleaning and maintenance is: A. $300 B. $500 C. $800 D. $100

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C. $800

Cleaning and maintenance Variable cost per unit = Change in cost  Change in activity = ($1,100 - $900)  (2,500 units - 2,000 units) = $200  500 units = $0.40 per unit Total variable cost at 22,000 units = 2,000 units  $0.40 per unit = $800

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Assuming that these activity levels are within the relevant range, the mixed cost for July was: A. $10,000 B. $35,000 C. $15,000 D. $40,000

Review Questions M/C

C. $15,000 Variable cost per unit = $20,000  10,000 units = $2 per unit Total variable cost in July = $2 per unit  20,000 units = $40,000 per unit Fixed cost = $15,000 (given) Total cost = Variable cost + Fixed cost + Mixed cost $70,000 = $40,000 + $15,000 + Mixed cost Mixed cost = $70,000 - ($40,000 + $15,000) = $70,000 - $55,000 = $15,000

Review Questions M/C

50. At an activity level of 9,200 machine-hours in a month, Nooner Corporation's total variable production engineering cost is $761,300 and its total fixed production engineering cost is $154,008. What would be the total production engineering cost per unit, both fixed and variable, at an activity level of 9,300 machine-hours in a month? Assume that this level of activity is within the relevant range. A. $98.42 B. $99.49 C. $99.31 D. $98.96

Review Questions M/C

C. $99.31 Variable cost per unit = $761,300  9,200 units = $82.75 per unit Fixed cost per unit at 9,300 units = $154,008  9,300 units = $16.56 per unit Total cost = Variable cost + Fixed cost = $82.75 per unit + $16.56 per unit = $99.31 per unit

Review Questions M/C

51. At an activity level of 4,400 units in a month, Goldbach Corporation's total variable maintenance and repair cost is $313,632 and its total fixed maintenance and repair cost is $93,104. What would be the total maintenance and repair cost, both fixed and variable, at an activity level of 4,600 units in a month? Assume that this level of activity is within the relevant range. A. $420,992 B. $425,224 C. $415,980 D. $406,736

Review Questions M/C

A. $420,992 Variable cost per unit = $313,632  4,400 units = $71.28 unit Total cost = Total fixed cost + Total variable cost = $93,104 + $71.28 per unit  4,600 units = $93,104 + $327,888 = $420,992