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# ACCT 505 Solutions to Weekly Problems - Week 1

## Exercise 2-4 (20 minutes)

1.
High activity level (August) ..
Low activity level (October)..
Change ...............................

OccupancyDays
3,608
186
3,422

Electrical
Costs
\$8,111
1,712
\$6,399

## Variable cost = Change in cost Change in activity

= \$6,399 3,422 occupancy-days
= \$1.87 per occupancy-day

## Total cost (August) ....................................................

Variable cost element
(\$1.87 per occupancy-day 3,608 occupancy-days)
Fixed cost element ....................................................

\$8,111
6,747
\$1,364

2. 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 2-12 (20 minutes)

1.
High level of activity ............
Low level of activity .............
Change ...............................

Miles
Driven

Total
Annual
Cost*

120,000 \$13,920
80,000 10,880
40,000 \$ 3,040

## * 120,000 miles \$0.116 per mile = \$13,920

80,000 miles \$0.136 per mile = \$10,880
Variable cost per mile:

Change in cost
\$3,040
=
=\$0.076 per mile
Change in activity 40,000 miles
Fixed cost per year:
Total cost at 120,000 miles ..................................
Less variable cost element:
120,000 miles \$0.076 per mile .......................
Fixed cost per year ..............................................

\$13,920
9,120
\$ 4,800

2. Y = \$4,800 + \$0.076X
3. Fixed cost ...............................................................
Variable cost: 100,000 miles \$0.076 per mile .........
Total annual cost .....................................................

\$ 4,800
7,600
\$12,400

## Problem 2-22 (30 minutes)

Note to the Instructor: Some of the answers below are debatable.

Cost Item
1. Depreciation, executive jet ............................................
2. Costs of shipping finished goods to customers ................
3. Wood used in manufacturing furniture ...........................
4. Sales managers salary .................................................
5. Electricity used in manufacturing furniture ......................
6. Secretary to the company president ...............................
7. Aerosol attachment placed on a spray can produced by
the company .............................................................
8. Billing costs .................................................................
9. Packing supplies for shipping products overseas .............
10. Sand used in manufacturing concrete ............................
11. Supervisors salary, factory ...........................................
12. Executive life insurance ................................................
13. Sales commissions........................................................

Variable
or Fixed

Selling
Cost

F
V

(Product) Cost
trative
Cost
Direct Indirect
X

V
F

X
X

X*

F
V

X
X

## 14. Fringe benefits, assembly line workers ...........................

16. Property taxes on finished goods warehouses .................
17. Lubricants for production equipment ..............................

X**

## *Could be an administrative cost.

**Could be an indirect cost.
Problem 3-22 (30 minutes)

## 1. Cost of Goods Manufactured

Direct materials:
Raw materials inventory, beginning* ...........
Add: Purchases of raw materials* ...............
Total raw materials available ......................
Deduct: Raw materials inventory, ending*...
Raw materials used in production ...............
Direct labor ....................................................
Manufacturing overhead applied to work in
process inventory* .......................................
Total manufacturing costs* .............................
Add: Beginning work in process inventory........
Deduct: Ending work in process inventory*......
Cost of goods manufactured ...........................

\$ 50,000
260,000
310,000
40,000

270,000
65,000
340,000
675,000
48,000
723,000
33,000
\$690,000

## 2. Cost of Goods Sold

Finished goods inventory, beginning* ..............
Add: Cost of goods manufactured ...................
Cost of goods available for sale* .....................
Deduct: Finished goods inventory, ending........
Adjusted cost of goods sold ............................
3.

\$ 30,000
690,000
720,000
55,000
665,000
10,000
\$675,000

Valenko Company
Income Statement
Sales .........................................................
Cost of goods sold (\$665,000 + \$10,000) ....
Gross margin..............................................
Selling expenses* ....................................
Net operating income*................................

* Given
Managerial Accounting
Fourteenth Edition
Garrison, Noreen, and Brewer
2012 McGraw-Hill

\$1,085,000
675,000
410,000
\$215,000
160,000

375,000
\$ 35,000