Chapter 2

Managerial Accounting and Cost Concepts

Exercise 2-1
1. direct labor cost.
2. marketing and selling cost.
3. direct materials cost.
4. manufacturing overhead cost.
5. a combination of manufacturing overhead, administrative, and marketing and
selling cost.
6. administrative cost.
7. marketing and selling cost.
8. manufacturing overhead cost.

Exercise 2-2
1. Product Cost
2. Product Cost
3. Product Cost
4. Period Cost
5. Product Cost
6. Period Cost
7. Product Cost
8. Period Cost
9. Period Cost
10. Product Cost
11. Product Cost
12. Period Cost
13. Product Cost
14. Period Cost
15. Product Cost

Exercise 2-3
1. Cups of Coffee Served
in a Week
1,800 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 0.871 0.839 0.810

Exercise 2-4
1. Occupancy-Days Electrical Costs
High 3,608 8,111
 Low 186 1,712
Change 3,422 6,399
Variable cost = 6,399/ 3,422
= 1.87
Total cost 8,111
Variable cost element
(1.87 × 3,608) 6,747
Fixed cost element 1,364

Exercise 2-5
1. Traditional format income statement
Sales (15 × 10,000) 150,000
COGS
(12,000 + 90,000 – 22,000) 80,000
Gross margin 70,000
Selling and administrative expenses:
Selling expenses
(2 × 10,000 + 20,000) 40,000
Administrative expenses
(1× 10,000 + 15,000) 25,000 65,000
Net operating income 5,000

2. Contribution format income statement

Sales 150,000
Variable expenses:
COGS
(12,000 + 90,000 – 22,000) 80,000
Selling expenses (2 × 10,000) 20,000
Administrative expenses
(1 × 10,000) 10,000 110,000
Contribution margin 40,000
Fixed expenses:
Selling expenses 20,000
Administrative expenses 15,000 35,000
Net operating income 5,000

Exercise 2-6
1. Direct cost
2. Indirect cost
3. Indirect cost
4. Indirect cost
5. Indirect cost
6. Direct cost
7. Indirect cost
8. Direct cost

Exercise 2-7
1. Differential cost
2. Sunk cost
3. N.A.
4. N.A.
5. Opportunity cost
6. Differential cost
7. Differential cost
8. Sunk cost

Exercise 2-8
1. The company’s variable cost:
Units produced and sold
60,000 80,000 100,000
Total costs:
Variable costs 150,000 200,000 250,000
Fixed costs 360,000 360,000 360,000
Total costs 510,000 560,000 610,000
Cost per unit:
Variable cost 2.50 2.50 2.50
Fixed cost 6.00 4.50 3.60
Total cost per unit 8.50 7.00 6.10

2. The company’s contribution format income statement:

Sales (90,000 × 7.50) 675,000
Variable expenses (90,000 × 2.50) 225,000
Contribution margin 450,000
Fixed expenses 360,000
Net operating income 90,000

Exercise 2-9
Product Cost Period
Variable Fixed Direct Direct Mfg. (Selling and Opportunity Sunk
Name of the Cost Cost Cost Materials Labor Overhead Admin.) Cost Cost Cost

Rental revenue forgone, 40,000 per year X

Direct materials cost, 40 per unit X X

Supervisor’s salary, 2,500 per month X X

Direct labor cost, 18 per unit X X

Rental cost of warehouse, 1,000 per

month X X
 Product Cost Period
Variable Fixed Direct Direct Mfg. (Selling and Opportunity Sunk
Name of the Cost Cost Cost Materials Labor Overhead Admin.) Cost Cost Cost

Rental cost of equipment, 3,000 per

month X X

Depreciation of the building, 10,000 per

year X X X

Advertising cost, 50,000 per year X X

Shipping cost, 10 per unit X X

Electrical costs, 2 per unit X X

Return earned on investments, 6,000 per

year X

Exercise 2-10
1. Yes, there is an approximately linear relationship
2.
. Units Shipped Shipping Expense
High 8 3,600
Low 2 1,500
Change 6 2,100
Variable cost = 2,100/6 350
Fixed cost element:
Shipping expense at the high 3,600
Less variable cost element (350 × 8) 2,800
Total fixed cost 800
The cost formula: Y = 800 + 350X

Exercise 2-11
1. Traditional income statement
Sales 800,000
COGS
(80,000 + 320,000 – 100,000) 300,000
Gross margin 500,000
Selling and administrative expenses:
Selling expenses (50 × 2,000 + 150,000) 250,000
Administrative expenses (20 × 2,000 + 120,000) 160,000 410,000
Net operating income 90,000

2. Contribution format income statement

Sales 800,000
Variable expenses:
 COGS
(80,000 + 320,000 – 100,000) 300,000
Selling expenses
(50 × 2,000) 100,000
Administrative expenses
(20 × 2,000) 40,000 440,000
Contribution margin 360,000
Fixed expenses:
Selling expenses 150,000
Administrative expenses 120,000 270,000
Net operating income 90,000

3. 180

Exercise 2-12
1. Total Annual
Miles Driven Cost*
High 120,000 13,920
Low 80,000 10,880
Change 40,000 3,040

Variable cost per mile = 3,040/40,000 = 0.076

Fixed cost per year:

Total cost 13,920

Less variable cost element:
120,000 × 0.076 9,120
Fixed cost 4,800

2. Y = 4,800 + 0.076X

3. Fixed cost 4,800

Variable cost: 100,000 × 0.076 X 7,600
Total annual cost 12,400

Exercise 2-13
1. X-rays Taken X-ray Costs
High 7,000 29,000
Low 3,000 17,000
Change 4,000 12,000

Variable cost per X-ray = 12,000/4,000 = 3

Fixed cost per month:
X-ray cost at high 29,000
Less variable cost element:
7,000 X × 3 21,000
Total fixed cost 8,000

The cost formula: Y = 8,000 + 3.00X

2. Expected X-ray costs when 4,600 X-rays are taken:

Variable cost: 4,600 × 3 13,800
Fixed cost 8,000
Total cost 21,800

3. Expected X-ray costs when 4,600 X-rays are taken:

Variable cost: 4,600 × 3.29 15,134
Fixed cost 6,529
Total cost 21,663

Problem 2-14
1. Traditional Income Statement
Sales (60 × 2,500) 150,000
COGS
(60 × 1,500) 90,000
Gross margin 60,000
Selling and administrative expenses:
Selling expenses:
Advertising 950
Delivery of organs
(60 × 60) 3,600
Sales salaries and commissions
(4,800 + 4% × 150,000) 10,800
Utilities 650
Depreciation of sales facilities 5,000
Total selling expenses 21,000
Administrative expenses:
Executive salaries 13,500
Depreciation of office equipment 900
Clerical
(2,500 + 60 × 40) 4,900
Insurance 700
Total administrative expenses 20,000
Total selling and administrative expenses 41,000
Net operating income 19,000
2. Contribution Format Income Statement
Total Per Unit
Sales (60 × 2,500) 150,000 2,500
Variable expenses:
COGS
(60 × 1,500) 90,000 1,500
Delivery of organs
(60 × 60) 3,600 60
Sales commissions (4% of 150,000) 6,000 100
Clerical (60 × 40) 2,400 40
Total variable expenses 102,000 1,700
Contribution margin 48,000 800
Fixed expenses:
Advertising 950
Sales salaries 4,800
Utilities 650
Depreciation of sales facilities 5,000
Executive salaries 13,500
Depreciation of office equipment 900
Clerical 2,500
Insurance 700
Total fixed expenses 29,000
Net operating income 19,000

Problem 2-15
1. a. 6
b. 11
c. 1
d. 4
e. 2
f. 10
g. 3
h. 7
i. 9

Problem 2-16
Variable or Fixed with
Respect to the Number of
Direct or Indirect Cost of Direct or Indirect Cost Immunizations
the Immunization Center of Particular Patients Administered
Item Direct Indirect Direct Indirect Variable Fixed
a. X X X
b. X X X
c. X X X
d. X X X
 e. X X X
f. X X X
g. X X X
h. X X X
i. X X X

Problem 2-17
1. Maintenance cost:
Level of Activity
60,000 MH 80,000 MH
Total factory overhead cost 274,000 312,000
Deduct:
Indirect materials @ 1.5 90,000 120,000
Rent 130,000 130,000
Maintenance cost 54,000 62,000

2. High-low analysis of maintenance cost:

Machine-Hours Maintenance Cost
High 80,000 62,000
Low 60,000 54,000
Change 20,000 8,000

Variable cost = 8,000/ 20,000 = 0.4

Fixed cost element:

Total cost 54,000
Less variable cost element
(60,000 × 0.40) 24,000
Fixed cost element 30,000

Cost formula: Y = 30,000 + 0.40 X.

3. Total factory overhead cost:

Indirect materials (65,000 × 1.50) 97,500

Rent 130,000
Maintenance:
Variable cost element (65,000 × 0.40) 26,000
Fixed cost element 30,000 56,000
Total factory overhead cost 283,500

Problem 2-18
1. Cost of goods sold Variable
Shipping expense Mixed
Advertising expense Fixed
Salaries and commissions Mixed
Insurance expense Fixed
Depreciation expense Fixed

2. Analysis of the mixed expenses:

Shipping Salaries and Comm.
Units Expense Expense
High 4,500 56,000 143,000
Low 3,000 44,000 107,000
Change 1,500 12,000 36,000

Variable cost element:

Shipping = 12,000/1,500 = 8
Salaries and others = 36,000/1,500 = 24
Fixed cost element:
Shipping Salaries and Comm.
Expense Expense
Cost at high level of activity 56,000 143,000
Less variable cost element:
4,500 × 8 36,000
4,500 × 24 108,000
Fixed cost element 20,000 35,000
The cost formulas are:
Shipping expense: Y = 20,000 + 8X
Salaries and Comm. expense: Y = 35,000 + 24X

Income Statement
Sales revenue 630,000
Variable expenses:
COGS
(4,500 × 56) 252,000
Shipping expense
(4,500 × 8) 36,000
Salaries and commissions expense
(4,500 × 24) 108,000 396,000
Contribution margin 234,000
Fixed expenses:
Shipping expense 20,000
Advertising 70,000
 Salaries and commissions 35,000
Insurance 9,000
Depreciation 42,000 176,000
Net operating income 58,000

Problem 2-21
1. Maintenance cost at the 70,000
Level of Activity
40,000 MH 70,000 MH
Total factory overhead cost 170,200 241,600
Deduct:
Utilities cost 52,000 91,000
Supervisory salaries 60,000 60,000
Maintenance cost 58,200 90,600

2. High-low analysis of maintenance cost:

Machine-Hours Maintenance Cost
High 70,000 90,600
Low 40,000 58,200
Change 30,000 32,400

Variable cost per unit of activity = 32,400/ 30,000 = 1.08

Total fixed cost:

Total maintenance cost at the low activity level 58,200

Less the variable cost element
40,000 × 1.08 43,200
Fixed cost 15,000

cost formula: Y = 15,000 + 1.08X

3. Variable Rate Fixed Cost

Maintenance cost 1.08 15,000
Utilities cost 1.30
Supervisory salaries cost 60,000
Totals 2.38 75,000

cost formula: Y = 75,000 + 2.38X.

4. Total overhead cost at 45,000 machine-hours:

Fixed costs 75,000
Variable costs: 2.38 × 45,000 107,100
Total overhead costs 182,100
Problem 2-22
Manufacturing (Product)
Adminis-trative Cost
Variable or Fixed Selling Cost Cost Direct Indirect
1. F X
2. V X
3. V X
4. F X
5. V X
6. F X
7. V X
8. V X
9. V X
10. V X
11. F X
12. F X
13. V X
14. V X
15. F X
16. F X
17. V X

Problem 2-23
1. High-low method:
Units Sold Shipping Expense
High 25,000 232,000
Low 16,000 160,000
Change 9,000 72,000

Variable cost = 72,000/ 9,000 = 8

Fixed cost element:
Total shipping expense at high activity level 232,000
Less variable element:
25,000 × 8 200,000
Fixed cost element 32,000

cost formula: Y = 32,000 + 8X.

2.
Budgeted Income Statement
Sales (21,000 × 50) 1,050,000
Variable expenses:
 COGS
(21,000 × 20) 420,000
Shipping expense
(21,000 × 8.00) 168,000
Sales commission (1,050,000 × 0.05) 52,500
Total variable expenses 640,500
Contribution margin 409,500
Fixed expenses:
Shipping expenses 32,000
Advertising expense 170,000
Administrative salaries 80,000
Depreciation expense 50,000
Total fixed expenses 332,000
Net operating income 77,500

Problem 2-24
1.
Selling or
Cost Behavior Administrative Product Cost
Cost Item Variable Fixed Cost Direct Indirect
Direct materials used (wood, glass) 430,000 430,000
Administrative office salaries 110,000 110,000
Factory supervision 70,000 70,000
Sales commissions 60,000 60,000
Depreciation, factory building 105,000 105,000
Depreciation, admin. office equipment 2,000 2,000
Indirect materials, factory 18,000 18,000
Factory labor (cutting and assembly) 90,000 90,000
Advertising 100,000 100,000
Insurance, factory 6,000 6,000
Administrative office supplies 4,000 4,000
Property taxes, factory 20,000 20,000
Utilities, factory 45,000 45,000
Total costs 647,000 413,000 276,000 520,000 264,000

2. The average product cost per bookcase:

Direct 520,000
Indirect 264,000
Total 784,000
784,000 ÷ 4,000 = 196
3. The average product cost is inversely proportional to production.
4. a. Yes
b. Opportunity cost.