Exercise 1-1 Classifying Manufacturing Costs [LO1]

Required:

1 The wages of employees who build the sailboats. 2 The cost of advertising in the local newspapers.

Direct labor cost Direct labor cost

Direct materials cost Direct materials cost

Manufacturing overhead cost Manufacturing overhead cost

Marketing and selling cost Marketing and selling cost

Administrative cost Administrative cost

3 The cost of an aluminum mast installed in a sailboat. 4 The wages of the assembly shop’s supervisor.

Direct labor cost Direct labor cost

Direct materials cost Direct materials cost

Manufacturing overhead cost Manufacturing overhead cost

Marketing and selling cost Marketing and selling cost

Administrative cost Administrative cost

5 Rent on the boathouse. 6 The wages of the company’s bookkeeper.

Direct labor cost Direct labor cost

Direct materials cost Direct materials cost

Manufacturing overhead cost Manufacturing overhead cost

Marketing and selling cost Marketing and selling cost

Administrative cost Administrative cost

7 Sales commissions paid to the company’s salespeople. 8 Depreciation on power tools.

Direct labor cost Direct labor cost

Direct materials cost Direct materials cost

Manufacturing overhead cost Manufacturing overhead cost

Marketing and selling cost Marketing and selling cost

Administrative cost Administrative cost

Your Boat, Inc., assembles custom sailboats from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a Gig Harbor, Washington, boathouse. Below are listed some of the costs that are incurred at the company.

For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, selling, or an administrative cost. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

The cost of advertising in the local newspapers.

Direct labor cost

Direct materials cost

Manufacturing overhead cost

Marketing and selling cost

Administrative cost

The wages of the assembly shop’s supervisor.

Direct labor cost

Direct materials cost

Manufacturing overhead cost

Marketing and selling cost

Administrative cost

The wages of the company’s bookkeeper.

Direct labor cost

Direct materials cost

Manufacturing overhead cost

Marketing and selling cost

Administrative cost

Depreciation on power tools.

Direct labor cost

Direct materials cost

Manufacturing overhead cost

Marketing and selling cost

Administrative cost

Your Boat, Inc., assembles custom sailboats from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a Gig Harbor, Washington, boathouse. Below

For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, selling, (You may select more than one answer. Single click the box with the question mark to produce a

check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Exercise 1-2 Classification of Costs as Period or Product Costs [LO2]

Cost

Suppose that you have been given a summer job at Fairwings Avionics, a company that manufactures sophisticated radar sets for commercial aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its tremendous growth. The bank requires financial statements before approving such a loan.

Required:

Classify each cost listed below as either a product cost or a period cost for purposes of preparing the financial statements for the bank.

1.    The cost of the memory chips used in a radar set.2.    Factory heating costs.3.    Factory equipment maintenance costs.4.    Training costs for new administrative employees.5.    The cost of the solder that is used in assembling the radar sets.6.    The travel costs of the company’s salespersons.7.    Wages and salaries of factory security personnel.8.    The cost of air-conditioning executive offices.9.    Wages and salaries in the department that handles billing customers.

10.    Depreciation on the equipment in the fitness room used by factory workers.11.    Telephone expenses incurred by factory management.12.    The costs of shipping completed radar sets to customers.13.    The wages of the workers who assemble the radar sets.14.    The president’s salary.15.    Health insurance premiums for factory personnel.

Exercise 1-2 Classification of Costs as Period or Product Costs [LO2]

Product/PeriodProductProductProductPeriod

ProductPeriod

ProductPeriodPeriod

ProductProductPeriod

ProductPeriod

Product

Suppose that you have been given a summer job at Fairwings Avionics, a company that manufactures sophisticated radar sets for commercial aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its tremendous growth. The bank requires financial statements before

Classify each cost listed below as either a product cost or a period cost for purposes of preparing the

Required:

Cups of Coffee Served in a Week1,800 1,900 2,000

Fixed Cost $ 1,100 $ 1,100 $ 1,100 Variable cost $ 468 $ 494 $ 520

Total cost $ 1,568 $ 1,594 $ 1,620

Average cost per cup of coffee served $ 0.87 $ 0.84 $ 0.81

2

IncreasesDecreasesRemains the same

Explanation:

Average cost per cup of coffee served = Total cost ÷ Cups of coffee served in a week

2

Koffee Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,100 and the variable cost per cup of coffee served is $0.26.

Fill in the following table with your estimates of total costs and average cost per cup of coffee at the indicated levels of activity for a coffee stand. (Round the "Average cost per cup of coffee" to 3 decimal places.)

Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases?

1. 

The average cost of a cup of coffee served declines as the number of cups of coffee served increases because the fixed cost is spread over more cups of coffee.

Koffee Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand

4Exercise 1-4 High-Low Method [LO4]

MonthOccupancy- Electrical

Days Costs

Required:1

Fixed Cost $1,364 per monthVariable Cost $1.87 per occupancy-day

2

Seasonal factors like winter or summer.Systematic factors like guests, switching off fans and lights.Number of days present in a month.Fixed salary paid to hotel receptionist.Income taxes paid on hotel income.

The Edelweiss Hotel in Vail, Colorado, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer.

  January 2,604          $ 6,257        February 2,856          $ 6,550        March 3,534          $ 7,986        April 1,440          $ 4,022        May 540          $ 2,289        June 1,116          $ 3,591        July 3,162          $ 7,264        August 3,608          $ 8,111        September 1,260          $ 3,707        October 186          $ 1,712        November 1,080          $ 3,321        December  2,046          $ 5,196      

Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. (Round the "Variable cost per occupancy-day" to 2 decimal places and the "Fixed cost" to the nearest dollar amount.)

What other factors other than occupancy-days are likely to affect the variation in electrical costs from month to month? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Explanation:

Variable cost

2

The Edelweiss Hotel in Vail, Colorado, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly

1. 

  High activity level (August)

  Low activity level (October)

  Change

  Total cost (August)

  Variable cost element

     ($1.87 per occupancy-day × 3,608 occupancy-days)

  Fixed cost element

Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of (Round the "Variable cost per occupancy-day" to 2 decimal places

Electrical costs may reflect seasonal factors other than just the variation in occupancy days. For example, common areas such as the reception area must be lighted for longer periods during the winter. This will result in seasonal effects on the fixed electrical costs.

Additionally, fixed costs will be affected by how many days are in a month. In other words, costs like the costs of lighting common areas are variable with respect to the number of days in the month, but are fixed with respect to how many rooms are occupied during the month.

What other factors other than occupancy-days are likely to affect the variation in electrical costs from (You may select more than one answer. Single click the box with the question

mark to produce a check mark for a correct answer and double click the box with the question

Other, less systematic, factors may also affect electrical costs such as the frugality of individual guests. Some guests will turn off lights when they leave a room. Others will not.

Occupancy- Electrical

Days Costs

$ 3,608 $ 8,111

$ 186 $ 1,712

$ 3,422 $ 6,399

= Change in cost ÷ Change in activity= $6,399 ÷ 3,422 occupancy-days

= $1.87 per occupancy-day

$ 6,747

$ 1,364

$ 8,111   

Electrical costs may reflect seasonal factors other than just the variation in occupancy days. For example, common areas such as the reception area must be lighted for longer periods during the winter. This will result in seasonal effects on the fixed electrical costs.

Additionally, fixed costs will be affected by how many days are in a month. In other words, costs like the costs of lighting common areas are variable with respect to the number of days in the month, but are fixed with respect to how many rooms are occupied during the month.

Other, less systematic, factors may also affect electrical costs such as the frugality of individual guests. Some guests will turn off lights when they leave a room. Others will not.

Exercise 1-5 Traditional and Contribution Format Income Statements [LO5]Redhawk, Inc., is a merchandiser that provided the following information:

Number of units sold $ 10,000.00 Selling price per unit $ 15.00 Variable selling expense per unit $ 2.00 Variable administrative expense per unit $ 1.00 Total fixed selling expense $ 20,000.00 Total fixed administrative expense $ 15,000.00 Merchandise inventory, beginning balance $ 12,000.00 Merchandise inventory, ending balance $ 22,000.00 Merchandise purchases $ 90,000.00

Required:

1

Redhawk, Inc.Tradiotional Income Statement

Sale $ 150,000 Cost of goods sold $ (80,000)

Gross margin $ 70,000

Selling and administrative expenses:

Selling expense $ 40,000 Administrative expenses $ 25,000 $ (65,000)

Net operating income $ 5,000

2

Redhawk, Inc.Contribution Format Income Statement

Sales $ 150,000

Variable expenses:

cost of goods sold $ $ 80,000

selling expenses $ 20,000 administrative expenses $ 10,000 $ (110,000)

Prepare a traditional income statement. (Input all amounts as positive values except losses which should be indicated by a minus sign.)

Prepare a contribution format income statement. (Input all amounts as positive values except losses which should be indicated by a minus sign.)

contribution margin $ 40,000

Fixed Expenses:

selling expenses $ 20,000 administrative expenses $ 15,000 $ 35,000

Net operating income $ 5,000

Explanation:

1

Sales: ($15 per unit × 10,000 units) = $150,000

Cost of goods sold: ($12,000 + $90,000 – $22,000) = $80,000

Selling expenses: (($2 per unit × 10,000 units) + $20,000) = $40,000

Administrative expenses: (($1 per unit × 10,000 units) + $15,000) =$25,000

2

Cost of goods sold: ($12,000 + $90,000 – $22,000) = $80,000

Selling expenses: ($2 per unit × 10,000 units) = $20,000

Administrative expenses: ($1 per unit × 10,000 units) = $10,000

Exercise 1-6 Identifying Direct and Indirect Costs [LO6]The Empire Hotel is a four-star hotel located in downtown Seattle.

Required:

Cost Cost ObjectEx. A particular hotel guest1 The hotel’s restaurant2 A particular restaurant customer3 A particular hotel guest4 A particular hotel guest5 A particular hotel guest6 The housecleaning department7 The hotel's gym8 The hotel's gym

For each of the following costs incurred at the Empire Hotel, indicate whether it would most likely be a direct cost or an indirect cost of the specified cost object.

  Room service beverages  The salary of the head chef  The salary of the head chef  Room cleaning supplies  Flowers for the reception desk  The wages of the doorman  Room cleaning supplies  Fire insurance on the hotel building  Towels used in the gym

Indirect CostIndirect CostIndirect CostIndirect Cost

Indirect Cost

For each of the following costs incurred at the Empire Hotel, indicate whether it would most likely be a

Direct Cost / Indirect Cost

  Direct cost  Direct cost

  Direct cost

  Direct cost

Exercise 1-7 Differential, Opportunity, and Sunk Costs [LO7]

Required:

Item CostEx. Cost of electricity to run the terminals Differential Cost1 Cost of the new flat-panel displays Differential Cost2 Cost of the old computer terminals Sunk cost3 Rent on the space occupied by the registration desk None4 Wages of registration desk personnel None5 Benefits from a new freezer Opportunity Cost6 Costs of maintaining the old computer terminals Differential Cost7 Cost of removing the old computer terminals Differential Cost8 Cost of existing registration desk wiring Sunk cost

The Sorrento Hotel is a four-star hotel located in downtown Seattle. The hotel’s operations vice president would like to replace the hotel’s antiquated computer terminals at the registration desk with attractive state-of-the-art flat-panel displays. The new displays would take less space, would consume less power than the old computer terminals, and would provide additional security since they can only be viewed from a restrictive angle. The new computer displays would not require any new wiring. The hotel’s chef believes the funds would be better spent on a new bulk freezer for the kitchen.

Classify each item as a differential cost, an opportunity cost, or a sunk cost in the decision to replace the old computer terminals with new flat-panel displays. If none of the categories apply for a particular item, select "None".

The Sorrento Hotel is a four-star hotel located in downtown Seattle. The hotel’s operations vice president would like to replace the hotel’s antiquated computer terminals at the registration desk with attractive state-of-the-art flat-panel displays. The new displays would take less space, would consume less power than the old computer terminals, and would provide additional security since they can only be viewed from a restrictive angle. The new computer displays would not require any new wiring. The hotel’s chef believes the funds would be better spent on a new bulk freezer for the

Exercise 1-8 Cost Behavior; Contribution Format Income Statement [LO3, LO5]Parker Company manufactures and sells a single product.

Required:1

Units Produced and Sold

total cost:Variable costs $ 150,000 $ $Fixed costs $ 360,000

Total costs $ 510,000 $ $

Cost per unit:Variable cost $ $ $Fixed cost

Total cost per unit $ $ $

2

Parker CompanyContribution Format Income Statement

$

$

A partially completed schedule of the company's total and per unit costs over a relevant range of 60,000 to 100,000 units produced and sold each year is given below. Complete the schedule of the company's total and unit costs. (Round the "Cost per unit" to 2 decimal places.)

        60,000         80,000      100,000

Assume that the company produces and sells 90,000 units during the year at the selling price of $7.50 per unit. Prepare a contribution format income statement for the year. (Input all amounts as positive values except losses which should be indicated by a minus sign.)

   (Click to select)

(Click to select)

(Click to select)

(Click to select)

(Click to select)

Exercise 1-8 Cost Behavior; Contribution Format Income Statement [LO3, LO5]Parker Company manufactures and sells a single product.

A partially completed schedule of the company's total and per unit costs over a relevant range of 60,000 to 100,000 units produced and sold each year is given below. Complete the schedule of the company's total and unit

Assume that the company produces and sells 90,000 units during the year at the selling price of $7.50 per unit. (Input all amounts as positive values except losses

Exercise 1-9 Cost Classification [LO1, LO2, LO3, LO7]

Required:

Cost BehaviorName of the Cost1 None none2 Variable cost Direct materials 3 Fixed cost Manu. Overhead4 Variable cost Direct labor5 Fixed cost none6 Fixed cost Manu. Overhead7 Fixed cost Manu. Overhead8 Fixed cost none9 Variable cost none

10 Variable cost Manu. Overhead11 None none

Several years ago, Medex Company purchased a small building adjacent to its manufacturing plant in order to have room for expansion when needed. Since the company had no immediate need for the extra space, the building was rented out to another company for rental revenue of $40,000 per year. The renter’s lease will expire next month, and rather than renewing the lease, Medex Company has decided to use the building itself to manufacture a new product.

     Direct materials cost for the new product will total $40 per unit. It will be necessary to hire a supervisor to oversee production. Her salary will be $2,500 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $18 per unit. Manufacturing operations will occupy all of the building space, so it will be necessary to rent space in a warehouse nearby in order to store finished units of product. The rental cost will be $1,000 per month. In addition, the company will need to rent equipment for use in producing the new product; the rental cost will be $3,000 per month. The company will continue to depreciate the building on a straight-line basis, as in past years. Depreciation on the building is $10,000 per year.

     Advertising costs for the new product will total $50,000 per year. Costs of shipping the new product to customers will be $10 per unit. Electrical costs of operating machines will be $2 per unit.

     To have funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of $6,000 per year.

  

For each of the costs associated with the new product decision, indicate whether it would be variable or fixed. If it is a product cost, indicate whether it would be direct materials, direct labor or a manufacturing overhead cost. If applicable, indicate whether it is a period, opportunity or a sunk cost. Select "None" if none of the categories apply for a particular item. NOTE: Opportunity cost is a special category, and to avoid confusion, do not attempt to classify the cost in any other way except as an opportunity cost.

Product Cost Classification

  Rental revenue forgone, $40,000 per year

  Direct materials cost, $40 per unit

  Supervisor's salary, $2,500 per month

  Direct labor cost, $18 per unit

  Rental cost of warehouse, $1,000 per month

  Rental cost of equipment, $3,000 per month

  Depreciation of the building, $10,000 per year

  Advertising cost, $50,000 per year

  Shipping cost, $10 per unit

  Electrical costs, $2 per unit

  Return earned on investments, $6,000 per year

Exercise 1-9 Cost Classification [LO1, LO2, LO3, LO7]

Opportunity cost

None

None

None

Period cost

None

Sunk cost

Period cost

Period cost

None

Opportunity cost

Several years ago, Medex Company purchased a small building adjacent to its manufacturing plant in order to have room for expansion when needed. Since the company had no immediate need for the extra space, the building was rented out to another company for rental revenue of $40,000 per year. The renter’s lease will expire next month, and rather than renewing the lease, Medex Company has decided to use the building itself to manufacture a new product.

Direct materials cost for the new product will total $40 per unit. It will be necessary to hire a supervisor to oversee production. Her salary will be $2,500 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $18 per unit. Manufacturing operations will occupy all of the building space, so it will be necessary to rent space in a warehouse nearby in order to store finished units of product. The rental cost will be $1,000 per month. In addition, the company will need to rent equipment for use in producing the new product; the rental cost will be $3,000 per month. The company will continue to depreciate the building on a straight-line basis, as in

Advertising costs for the new product will total $50,000 per year. Costs of shipping the new product to customers will be $10 per

To have funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments.

For each of the costs associated with the new product decision, indicate whether it would be variable or fixed. If it is a product cost, indicate whether it would be direct materials, direct labor or a manufacturing overhead cost. If applicable, indicate whether it is a period, opportunity or a sunk cost. Select "None" if none of the categories apply for a particular item. NOTE: Opportunity cost is a special category, and to avoid confusion, do not attempt to classify the cost in any other way except as an opportunity cost.

Other Cost  Classification

Exercise 1-10 High-Low Method; Scattergraph Analysis [LO4]

4752368

Required:2-a.

Y= 800 + 350 X

4

�� Distance traveled� Sales commissions��

Zerbel Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings, has noticed considerable fluctuation in its shipping expense from month to month, as shown below:

Units Shipped

Total Shipping Expense

  January $2,200      February $3,100      March $2,600      April $1,500      May $2,200      June $3,000      July $3,600    

Using the high-low method, estimate the cost formula for shipping expense where X is the number of units shipped.

What factors, other than the number of units shipped, are likely to affect the company's total shipping expense?' (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Weight of the units shipped

Trade discounts given to repeat Express shipping to meet a deadline

Exercise 1-11 Traditional and Contribution Format Income Statements [LO5]Haaki Shop, Inc., is a large retailer of surfboards. The company assembled the information shown below for the quarter ended May 31:

Amount $ 800,000 $ 400 $ 50 $ 20 $ 150,000 $ 120,000 $ 80,000 $ 100,000 $ 320,000

Required:1

Haaki Shop, InkTraditional Income statement

$

Selling and administrative expense:$

$

2

Redhawk, Inc.Contribution Format Income Statement

$

Variable expenses:

$

Fixed Expenses:

  Total sales revenue  Selling price per surfboard  Variable selling expense per surfboard  Variable administrative expense per surfboard  Total fixed selling expense  Total fixed administrative expense  Merchandise inventory, beginning balance  Merchandise inventory, ending balance  Merchandise purchases

Prepare a traditional income statement for the quarter ended May 31. (Input all amounts as positive values except losses which should be indicated by a minus sign.)

Prepare a contribution format income statement for the quarter ended May 31. (Input all amounts as positive values except losses which should be indicated by a minus sign.)

$

3 What was the contribution toward fixed expenses and profits for each surfboard sold during the quarter?

Contribution towards fixed expenses and profits $ per surfboard

Exercise 1-11 Traditional and Contribution Format Income Statements [LO5]Haaki Shop, Inc., is a large retailer of surfboards. The company assembled the information shown below for the quarter ended May 31:

(Input all amounts as positive values

(Input all amounts as positive values

What was the contribution toward fixed expenses and profits for each surfboard sold during the quarter?

Exercise 1-12 Cost Behavior; High-Low Method [LO3, LO4]

Required:1

Variable cost $ 0.076 per mile

Fixed cost $ 4,800 per year

2

Y= $ 4,800 + $ 0.076 X

3

Total annual cost $ 12,400

Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company’s cost analyst has determined that if a truck is driven 120,000 miles during a year, the average operating cost is 11.6 cents per mile. If a truck is driven only 80,000 miles during a year, the average operating cost increases to 13.6 cents per mile.

Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Round the "Variable cost per mile" to 3 decimal places and the "Fixed cost" to the nearest dollar amount.)

Express the variable and fixed costs in the form Y = a + bX. (Round the "Variable cost per mile" to 3 decimal places and the "Fixed cost" to the nearest dollar amount.)

If a truck were driven 100,000 miles during a year, what total cost would you expect to be incurred?(Round the "Variable cost per mile" to 3 decimal places. Round your intermediate and final answers to the nearest dollar amount.)

Exercise 1-12 Cost Behavior; High-Low Method [LO3, LO4]Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company’s cost analyst has determined that if a truck is driven 120,000 miles during a year, the average operating cost is 11.6 cents per mile. If a truck is driven only 80,000 miles during a year, the average operating cost increases to 13.6 cents per mile.

Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck (Round the "Variable cost per mile" to 3 decimal places and the "Fixed cost" to the nearest dollar

(Round the "Variable cost per mile" to 3 decimal places and the

If a truck were driven 100,000 miles during a year, what total cost would you expect to be incurred?(Round the "Variable cost per mile" to 3 decimal places. Round your intermediate and final answers to the nearest dollar

Problem 1-16A Variable and Fixed Costs; Subtleties of Direct and Indirect Costs [LO3, LO6]

Required:

Item Description

Ex. The cost of polio immunization tablets.a The salary of the head nurse in the Immunization Center.b Costs of incidental supplies consumed in the Immunization Center, such as paper towels.c The cost of lighting and heating the Immunization Center.d The cost of disposable syringes used in the Immunization Center.e The salary of the Central Area Well-Baby Clinic's Information Systems manager.f The costs of mailing letters soliciting donations to the Central Area Well-Baby Clinic.g The wages of nurses who work in the Immunization Center. (paid fixed amount every monh The cost of medical malpractice insurance for the Central Area Well-Baby Clinic.i Depreciation on the fixtures and equipment in the Immunization Center.

The Central Area Well-Baby Clinic provides a variety of health services to newborn babies and their parents. The clinic is organized into a number of departments, one of which is the Immunization Center.

  

A number of costs of the clinic and the Immunization Center are listed below. For each cost listed below, indicate whether it is a direct or indirect cost of the Immunization Center, whether it is a direct or indirect cost of immunizing particular patients, and whether it is variable or fixed with respect to the number of immunizations administered.

Direct Direct VariableDirect Indirect Fixed

Direct Indirect Variable

Direct Indirect Fixed

Direct Direct Variable

Indirect Indirect Fixed

Indirect Indirect Fixed

Direct Indirect Fixed

Indirect Indirect Fixed

Direct Indirect Fixed

A number of costs of the clinic and the Immunization Center are listed below. For each cost listed below, indicate whether it is a direct or indirect cost of the Immunization Center, whether it is a direct or indirect cost of immunizing particular patients, and whether it is variable or fixed with respect to the number of immunizations

Direct or Indirect Cost of the

Immunization Center

Direct or Indirect Cost of Particular

Patients

Respect to the # of Immunizations Administered

Problem 1-18A Cost Behavior; High-Low Method; Contribution Format Income Statement [LO3, LO4, LO5]

Frankel Ltd.Comparative Income Statements

For the Three Months Ended June 30April May June

Required:1 Identify each of the company’s expenses (including cost of goods sold) as either variable, fix

Expenses ClassificationCost of goods sold variableShipping Expense mixedAdvertising expense fixedSalaries and commissions mixedInsurance Expense fixedDepreciation expense fixed

2

Variable Cost Fixed Cost

Shipping expense £ 8 per unit £ 20,000

salaries and commissions £ 24 per unit £ 35,000

Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining rapid market acceptance. The company’s revenues and expenses (in British pounds) for the last three months are given below:

  Sales in units 3,000   3,750   4,500  

  Sales revenue £ 420, 000  

 £ 525,000  

  £ 630,000  

  Cost of goods sold 168,000   210,000   252,000  

  Gross margin 252,000   315,000   378,000  

  Selling and administrative expenses:       Shipping expense 44,000   50,000   56,000         Advertising expense 70,000   70,000   70,000         Salaries and commissions 107,000   125,000   143,000         Insurance expense 9,000   9,000   9,000         Depreciation expense 42,000   42,000   42,000    Total selling and administrative expenses

272,000   296,000   320,000  

  Net operating income (loss) £  (20,000)

£  19,000   £  58,000  

(Note: Frankel Ltd.’s income statement has been recast in the functional format common in the United States. The British currency is the pound, denoted by £.)

Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. (Enter mixed expenses in the order of company expenses provided under question.)

3

Frankel Ltd.Income Statement

For Month Ended June 30

sales revenue £ 630,000

Variable expenses:

cost of good sold £ 252,000

shipping expenses 36,000

sales commisions 108,000 396,000

Contribution Margin 234,000 Fixed Expenses:

shipping expenses 20,000

advertising expenses 70,000

sales salaries 35,000 insurance expenses 9,000 depreciation expenses 42,000 (176,000)

net operating income £ 58,000

Redo the company’s income statement at the 4,500-unit level of activity using the contribution format.(Input all amounts as positive values except losses which should be indicated by a minus sign.)

Problem 1-18A Cost Behavior; High-Low Method; Contribution Format Income Statement [LO3, LO4, LO5]Explanation:

Analysis of the mixed expenses:

Units

Shipping expense

Variable cost element:

Change in cost

Change in activity

Shipping expense: =£12,000

1,500 units

£36,001

Salaries and commissions: 1,500 units

Fixed cost element:

shipping expenscost at high level of activit £ 56,000 £ 143,000less variable cost element:

4,500 units x £8 per uni 36,0004,500 units x £24 per unit 108,000

Fixed cost element £ 20,000 £ 35,000

Identify each of the company’s expenses (including cost of goods sold) as either variable, fixThe cost formulas are:Shipping expense: £20,000 per month plus £8 per unit or

Salaries and Commissions: £35,000 per month plus £24 per unit or

3Cost of goods sold: (4,500 units × £56 per unit) = £252,000Shipping expense: (4,500 units × £8 per unit) = £36,000Sales commissions: (4,500 units × £24 per unit) = £108,000

Formula

Y= £ ### + £ 8 X

Y= £ ### + £ 24 X

Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that is gaining rapid market acceptance. The company’s revenues and expenses (in

2. 

  High level of activity 4,500     £ 56,000       

  Low level of activity 3,000     44,000       

  Change 1,500     £ 12,000       

Variable cost per unit  =  

 = £8 per unit

  = £24 per unit

salaries & commissions

(Note: Frankel Ltd.’s income statement has been recast in the functional format common in

  Y = £20,000 + £8X.

  Y = £35,000 + £24X.

Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. (Enter mixed expenses in

Redo the company’s income statement at the 4,500-unit level of activity using the contribution format.(Input all amounts as positive values except losses which should

Analysis of the mixed expenses:

Salaries and Commissions: £35,000 per month plus £24 per unit or

Cost of goods sold: (4,500 units × £56 per unit) = £252,000

Sales commissions: (4,500 units × £24 per unit) = £108,000

Salaries and Commissions

£ 143,000       

107,000       

£  36,000       

Problem 1-21A Cost Classification [LO2, LO3, LO6]

Cost Item

Ex. Direct labor Variable

Executive salaries Fixed

Factory rent Fixed

Depreciation, executive jet Fixed

Costs of shipping finished goods to customers Variable

Wood used in manufacturing furniture Variable

Sales manager’s salary Fixed

Electricity used in manufacturing furniture Variable

Secretary to the company president Fixed

Aerosol attachment placed on a spray can produced by the company Variable

Billing costs Variable

Packing supplies for shipping products overseas Variable

Sand used in manufacturing concrete Variable

Supervisor’s salary, factory Fixed

Executive life insurance Fixed

Sales commissions Variable

Fringe benefits, assembly-line workers Variable

Advertising costs Fixed

Property taxes on finished goods warehouses Fixed

Lubricants for production equipment Variable

Listed below are costs found in various organizations. For each cost item, indicate whether it would be variable or fixed with respect to the number of units produced and sold; and then whether it would be a selling cost, an administrative cost, or a manufacturing cost. If it is a manufacturing cost, indicate whether it would typically be treated as a direct cost or an indirect cost with respect to units of product. Three sample answers are provided for

                                               

Variable or Fixed

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

11. 

12. 

13. 

14. 

15. 

16. 

17. 

Direct Indirect

No No Yes No

No Yes No No

No No No Yes

No Yes No No

Yes No No No

No No Yes No

Yes No No No

No No No Yes

No Yes No No

No No Yes No

Yes Yes No No

Yes No No No

No No Yes No

No No No Yes

No Yes No No

Yes No No No

No No Yes Yes

Yes No No No

Yes No No No

No No No Yes

Listed below are costs found in various organizations. For each cost item, indicate whether it would be variable or fixed with respect to the number of units produced and sold; and then whether it would be a selling cost, an administrative cost, or a manufacturing cost. If it is a manufacturing cost, indicate whether it would typically be treated as a direct cost or an indirect cost with respect to units of product. Three sample answers are provided for

Manufacturing (Product) Cost

Selling Cost

Administrative Cost