Braun Ma4 SM 09

Chapter 6
Cost Behavior
Chapter 6
Cost Behavior
Quick Check
Answers:
QC-1. a
QC-2. b
QC-3. c
QC-4. d
QC-5. d
QC-6. b
QC-7. c
QC-8. c
QC-9. b
QC-10. c
Short Exercises
(5-10 min.) S6-1
Cost A is a mixed cost. Total costs are not constant and the per unit costs are not constant as
the volume increases.
Cost B is a fixed cost. Total costs stay the same and the per unit costs decrease as the volume
increases.
Cost C is a variable cost. Total costs increase and the per unit costs remain constant as the
volume increases.
(5-10 min.) S6-2

Total fixed cost
$18,000
Number of basketballs
produced
18,000
=
=
New fixed cost per

basketball
$1.00
(5-10 min.) S6-3

Total manufacturing costs $120,000 - $50,000 variable expenses = $70,000 fixed expenses
$50,000 / 15,000 packages = $3.33 per package (rounded)
Total variable costs
$83,250*
+
+
Total fixed costs

$70,000
=
=
Total production costs

$153,250
*$3.33 x 25,000 = $83,250
Copyright 2015 Pearson Education, Inc.
6-1
Managerial Accounting 4e Solutions Manual
(5-10 min.) S6-4

Req. 1
a.
Call for 30 minutes
$8.00 + (30 $0.20)
$8.00 + $6.00 = $14.00
b.
Call for 60 minutes

$8.00 + (60 $0.20)
$8.00 + $12.00 = $20.00
c.
Call for 120 minutes

$8.00 + (120 $0.20)
$8.00 + $24.00 = $32.00
Req. 2
(5-10 min.) S6-5

a.
b.
c.
d.
e.
f.
g.
6-2
Depreciation on equipment
Shoe laces
Patents
Rice husk filler
Recycled polyester fibers
Glue
Quality inspectors salary
Fixed
Variable
Fixed
Variable
Variable
Variable
Fixed
Chapter 6
Cost Behavior
(10-15 min.) S6-6

Req. 1
Req. 2
There appears to be a very strong relationship between the companys operating expenses and
the number of oil changes it performs. We can tell this because the scatterplot of the data
almost falls in a straight line (it is very linear). If there were no relationship, or if the relationship
was weak, the scatterplot of data points would appear almost random. Additionally, since all of
the data points fall in the same linear pattern, there do not appear to be any outliers.
Req. 3
The operating expenses appear to be mixed costs. If the operating expenses were purely fixed,
the data points would fall in a horizontal, rather than sloped line. If the operating expenses were
purely variable, the data points would fall in a sloped line as they do now, but the slope of the
data points would intersect the graphs origin.
Req. 4
Jones Oil and Lube could only perform 3,800 oil changes per month if it expanded its existing
facility. The companys operating expenses may change significantly as a result. Therefore, the
current relationship between monthly operating expenses and number of oil changes performed
each month should not be used to project total monthly operating expenses at a volume of
3,800 oil changes.
6-3
(5-10 min.) S6-7

First, identify the formula and calculate the variable cost component (slope).
Change in costs
Change in volume
$5,100*
1,000*
*Use May (high) and February (low)
Change in cost = $37,000 - $31,900
Change in volume = $3,600 $2,600
=
=
Variable cost per unit

$5.10
Next, identify the formula and compute the fixed cost component (the vertical intercept) using
the costs for the highest level of activity.
Total mixed
(operating) cost
$37,000
*$5.10 x 3,600 = $18,360
Total variable cost
Total fixed costs
$18,360*
$18,640
Complete the companys operating cost equation.

y = $5.10x + $18,640
The total monthly operating costs if the company performs 3,400 oil changes is $35,980
[$18,640 + ($5.10 x 3,400)].
(5-10 min.) S6-8

Change in costs
$2,100a
a
$25,600 - $27,700
Change in volume
100b
b
910 810
=
=

$21
Total mixed
(overhead) cost
$27,700
*$21 x 910
Total variable cost
Total fixed costs
$19,110*
$8,590
Complete Three Brothers Caterings operating cost equation.

y = $21x + $8,590
The total monthly operating costs if Three Brothers Catering works 835 labor hours is $26,125
[$8,590 + ($21 x 835)].
6-4
Chapter 6
Cost Behavior
(5-10 min.) S6-9

Change in costs
$9,500a
$46,500 - $37,000
Change in volume
475b
b
1,675 1,200
=
=

$20
Total mixed
Total variable cost
=
Total fixed costs
(overhead) cost
$46,500
$33,500*
=
$13,000
*$20 x 1,675
Complete Boston Care Health Groups operating cost equation: y = $20x + $13,000
The total monthly operating costs if the company works 1,225 nursing hours is $37,500
[$13,000 + ($20 x 1,225)].
(15 min.) S6-10

The process of identifying cost behaviors and building cost equation models that are useful for
predictions is more involved than the intern believes. Thats because cost equations are only as
good as the data and method used to build them. The intern has not considered any of the
following:
1. More than two months of historical data should be collected. Cost behavior patterns are
difficult to assess from simply two data points.
2. One or both of the most recent months may have been outliers. If so, they should not be
used in building the cost equation.
3. If the business is seasonal, using data from two adjoining months may not result in a cost
equation that is representative of the rest of the year.
4. The data should first be plotted to see if a relationship exists between the costs and activity
selected. Plotting the data will also help determine whether outliers are present.
5. The high-low method may not render the best cost equation, because the method only relies
on two data points. If possible, the intern should use regression analysis based on several
months (or years) worth of data. The R-square statistic will let the intern know how
representative the cost equation is of the data.
6. Before making predictions based on the equation, the intern should consider whether the
equation should be adjusted for inflation.
7. Predictions should only be made for volumes in the same relevant range. If the volume is
outside of the current relevant range, cost behavior patterns may be different.
Student answers may vary.
6-5
(5-10 min.) S6-11

Req. 1
There appears to be a fairly strong relationship between the number of room-nights rented per
month and the monthly utilities cost. We can tell this because most of the data points fall in a
tight, linear pattern, resembling something close to a straight line.
Req. 2
The highest and lowest volume data points appear to be somewhat off-line from the rest of the
data points. Whether these points are significant is a matter of judgment. These points are not
extremely different from the rest of the points. The two ends might suggest that the cost
behaves in a curvilinear fashion. Management may wish to check this data to make sure it is
accurate before proceeding with any further analysis.
Req. 3
Using the high-low method will result in a slightly skewed cost equation. The high-low method
results in a cost equation for the straight line connecting the highest and lowest volume data
points. The low volume data point is slightly high. The high-volume data point is slightly low.
The line connecting these data points will be flatter than a line representing the rest of the
data points. As a result, management may overestimate the fixed portion of the cost equation,
and underestimate the variable portion of the cost equation.
(5-10 min.) S6-12

1. Generally speaking, regression analysis results in more accurate cost equations than does
the high-low method. Regression analysis uses all of the data points to form the line and
cost equation that best fits all of the data points. The high-low method uses only the highest
and lowest volume data points to form the line and cost equation.
In the scatter plot, the low volume data point is slightly high, while the high-volume data
point is slightly low compared to the other data points. As a result, the high-low line will be
flatter than the regression line.
2. The R-square value will range from 0 to 1. An R-square value of 1 is the highest possible
value and occurs only if the data points fall in a perfectly straight line.
The lowest possible R-square value of 0 occurs when the data points are extremely random.
Therefore, an R-square of 0.939 is very high, and indicates that the regression line fits the
data very well.
3. With an R-square value of 0.939, a manager should be quite confident in using the
regression cost equation to predict utilities costs for other volumes within the same relevant
range.
(5-10 min.) S6-13

a) y = $0.22x + $1,784.73
b) This equation should be used with caution to predict costs. The R-square statistic can range
from a high of 1.00 to a low of 0. In this case, the R-square indicates that the cost equation
should be used with caution, indicating there may or may not be a relationship between the
potential cost driver and the firms operating costs.
6-6
Chapter 6
Cost Behavior
(10-15 min.) S6-14

Patricias Quilt Shoppe
Income Statement
Month Ended February 28
Sales revenue (100 $410)
Less: Cost of goods sold (100 $240)
Gross profit
Less: Operating expenses
Sales commissions (4% $41,000)
Payroll costs
Lease
Operating income
$41,000
(24,000)
17,000
$ (1,640)
(2,100)
(1,600)
Patricias Quilt Shoppe

Contribution Margin Income Statement
Month Ended February 28
Sales revenue (100 $410)
Less variable expenses:
Cost of goods sold (100 $240)
($24,000)
Sales commissions (4% $41,000)
($1,640)
Contribution margin
Less fixed expenses:
Payroll costs
(2,100)
Lease
(1,600)
Operating income
($5,340)
$ 11,660
$41,000
(25,640)
15,360
(3,700)
$ 11,660
(10-15 min.) S6-15

Req. 1
ONeills Products
Income Statement (Variable Costing)
Variable cost per unit (given)
Sales revenue
($65 x 12,000)
Less Variable Expenses:
Variable Cost of Goods Sold
($35 x 12,000)
Variable Operating Expenses
($2 x 12,000)
Contribution Margin
Less Fixed Expenses:
Fixed MOH
Fixed Operating Expenses
Operating Income
$ 35
$780,000
$420,000
$ 24,000
$336,000
$132,000
$ 85,000
$ 119,000
6-7
(continued) S6-15
Req. 2
ONeills Products
Income Statement (Absorption Costing)
Cost per unit
Fixed MOH per unit ($132,000 / 12,000 units)
Total cost per unit
Sales revenue
Less: Cost of Goods Sold
($46 x 12,000)
Gross profit
[($2 x 12,000) + $85,000]
Operating income
$35
$11
$46
$780,000
($552,000)
$228,000
($109,000)
$ 119,000
(15 min.) S6-16

Req. 1
Allen Manufacturing
Sales revenue ($49 x 13,000)
Variable Cost of Goods Sold ($26 x 13,000)
Variable Operating Expenses ($3 x 13,000)
Contribution Margin
Fixed MOH
Operating income
$26
$637,000
($338,000)
($39,000)
$260,000
($187,000)
($ 47,000)
$ 26,000
Req. 2
Allen Manufacturing
Fixed MOH per unit ($187,000/17,000 units)
Total cost per unit
Sales revenue
Less: Cost of Goods Sold
Gross profit
Less Operating Expenses
Operating income
$26
$11
$37
$637,000
($481,000)
$156,000
($86,000)
$ 70,000
Req. 3
When inventory levels increase, operating income will be greater under absorption costing than
it is under variable costing. This situation is because under variable costing, fixed MOH is
expensed immediately as a period cost (operating expense). Under absorption costing, fixed
MOH becomes part of the inventoriable cost of the product, which isnt expensed (as Cost of
Goods Sold) until the inventory is sold, leaving a higher operating income due to less being
expensed.
6-8
Chapter 6
Cost Behavior
(15 min.) S6-17

(a)
Variable Expenses
Cost
$100
(thou- $ 80
sands) $ 60
$ 40
$ 20
0 2
10
$50
Cost
$40
(thou- $30
sands) $20
$10
(b)
Mixed Expenses
Cost $40
(thou- $30
sands) $20
$10
0
Volume
(thousands of
units)
10
(c)
Fixed Expenses
Volume
(thousands of
units)
0 2
8 10
Volume
(thousands of
units)
(5-10 min.) S6-18

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Graph
Graph
Graph
Graph
Graph
Graph
Graph
Graph
Graph
Graph
2
2
9
2
1
5
5
7
1
9
(15 min.) S6-19

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
Mixed cost(s)
Variable cost(s)
High-low method
Account analysis
Step cost(s)
Fixed cost(s)
Curvilinear cost(s)
R-square
Fixed cost(s)
Committed fixed cost(s)
Total cost(s), Variable cost(s), Fixed cost(s)
Average cost per unit
Regression analysis
6-9
(5 min.) S6-20
4.
The CEO of a small company visits a competitor's

dumpster and takes several trash bags containing
discarded papers and reports. The CEO directs Ivan to
go through the competitor's trash to find any
information about the competitor's costs for a
contract coming up for bid. Ivan goes through the
papers to find the information because he does not
want to lose his job.
Blue Heron Mobile operates in a highly competitive
environment. Cost information is highly confidential
since most jobs are obtained through a bidding
process based on variable costing, or in some cases
absorption costing. Steve Nunez is the manager of the
Accounting Department of Blue Heron Mobile. He
neglects to talk with his new hires about the
confidentiality of data, nor is there a formal policy in
place about non-disclosure.
Natasha is an accountant for Red Box Consulting. At a
party, she overhears a man about an upcoming
contract his company will be bidding on. She listens
closer and hears specific variable cost information
that the man shares. She returns to work the next
day and shares this competitor's cost information with
her friend who is working on preparing Red Box
Consulting's bid.
Curtis struggled through regression analysis in his
college courses. Now his manager has asked him to
run a regression analysis to create a model for
predicting overhead costs. He runs the regression
and creates the model. He gives his manager the cost
equation for overhead costs, even though he does not
really understand it or have any way of checking to
see if he did it correctly. He is hesitant to ask for help
because he just started this job and he wants to look
impressive.
5.
Alyssa does not disclose on the financial statements

that variable costing, rather than absorptions costing,
was used.
1.
2.
3.
6-10
Integrity - Abstain from

engaging in or supporting
any activity that might
discredit the profession.
Confidentiality - Inform all
relevant parties regarding
appropriate use of
confidential information.
Monitor subordinates'
activities to ensure
compliance.
Confidentiality - Refrain from

using confidential
information for unethical or
illegal advantage.
Competence - Recognize and

communicate professional
limitations or other
constraints that would
preclude responsible
judgment or successful
performance of an activity.
Credibility - Disclose all
relevant information that
could reasonably be
expected to influence an
intended user's
understanding of the reports,
analyses, or
recommendations.
Chapter 6
Cost Behavior
Exercises (Group A)
(15 min.) E6-21A
Req. 1

Total fixed costs
Total operating costs
Variable cost per garment
Fixed cost per garment
Average cost per garment
*given
2,000
Garments
$1,200
7,000
$8,200
3,500
Garments
$2,100*
7,000
$9,100
5,000
Garments
$ 3,000
7,000
$10,000
$0.60
3.50
$4.10
$0.60
2.00*
$2.60
$0.60
1.40
$2.00
Req. 2
The average cost per garment changes as volume changes, due to the fixed component of the
dry cleaners costs. The fixed cost per unit decreases as volume increases, while the variable
cost per unit remains constant.
Req. 3
He would underestimate his costs by $4,200*.
Cost from Req. 1 for 2,000 units:
$8,200
Estimated costs @2,000 using $2.00:
$4,000
Underestimation of costs
$4,200
(15 min.) E6-22A

Princeton Drycleaners
Projected Income Statement
Month Ended March 31
Dry cleaning revenue (4,300 $8)
Less: Operating expenses [$7,000 + (4,300 $0.60)]
Operating income (loss)
$34,400
(9,580)
$24,820
Princeton Drycleaners
Projected Contribution Margin Income Statement
Less: Variable expenses (4,300 $0.60)
Contribution margin
Less: Fixed expenses
Operating income (loss)
$34,400
(2,580)
31,820
(7,000)
$24,820
(15 min.) E6-23A

6-11

Req. 1
High June; Low March
Change in cost = $4,232 - $3,467 = $765
Change in volume = 1,460 1,010 = 450
Change in cost / Change in volume = Variable cost (slope)
$765 / 450 = $1.70
Using the high-low method, the variable utilities cost per machine hour is $1.70.
Req. 2
Total operating cost - Total variable cost = Fixed cost
Using the high activity level:
$4,232 ($1.70 x 1,460) = Fixed cost, or $1,750.
Using the high-low method, the fixed cost of utilities each month is $1,750.
Req. 3
Total cost = $1,750 + $1.70 (1,280) = $3,926.
The total cost when 1,280 machine hours are used is $3,926.
(15 min.) E6-24A

Req. 1

$20.43
$20,430
Req. 2
Total costs
Less: fixed costs
Total Variable cost
= Total cost number of units

= Total cost 1,000 units
= Total cost
$20,430
$10,430
$10,000
$10,000/1,000 units = $10.00 variable cost per unit.

Req. 3
Req. 4
$22,473
= $10.00x + $10,430
where x = number of mailboxes
= 1,100 x $20.43 average cost per mailbox
Req. 5
($10.00 x 1,100) + $10,430 = $21,430
Req. 6
The plant managers forecast would be $1,043 ($22,473 - $21,430) too high if he/she uses the
average cost per unit to predict costs. The average cost per unit is based on a mixed cost that
will change as volume changes. If the manager uses this method, he/she is erroneously
assuming that the average cost per unit does not change at different volumes. The manager
should use the cost equation to predict costs, since it correctly takes into account the variable
and fixed components of producing mailboxes.
(10-15 min.) E6-25A

Req. 1
6-12
Chapter 6
Variable cost:
High pt.
Low pt.
Difference
Cost
$800,000
$672,700
$127,300
Activity
740,000
550,000
190,000
Cost Behavior
Q3
Q1
Change in cost change in volume = variable cost

$127,300 190,000 = $0.67
Req. 2
Projected total number of bills
% of customers using paperless billing
660,000
X
20%
Calculated number of customers

Variable cost per bill saved
132,000
X
0.67
Total cost saved
$88,440
Less: cost of paperless system
$ 66,220
Net savings
$ 22,220
Req. 3
660,000
X
10%

66,000
X
0.67
Total cost saved
$44,220
Less: cost of paperless system

Net savings (cost)
$ 66,220
$ (22,000)
Should the company still offer the paperless billing system? The answer to this question is
dependent upon the students value system and is meant to be a discussion point.
6-13
(10-15 min.) E6-26A

Req. 1
Excel will render the following scatter plot if students do not force the axes back to the origin:
Req. 2
The data does not appear to contain any outliers. All data points fall in the same general
pattern.
Req. 3
There appears to be a very strong relationship between van operating costs and miles driven.
We can tell this because the data points fall in a fairly tight, linear pattern.
(10-15 min.) E6-27A

High point = February (17,500 miles, $5,700); Low point = July (14,500 miles, $4,920)
Determine the formula that is used to calculate the variable cost component.
Change in cost ($5,700 $4,920)
Change in volume (17,500

14,500)
Variable cost (slope)

($0.26/mile)
Now determine the formula that is used to calculate the fixed cost component. (Selecting high
point here.)
Total operating cost
$5,700
Total variable cost (17,500 x

$0.26)
Fixed cost $1,150
Use the high-low method to determine the companys operating cost equation.
y
$0.26x
$1,150
Use the operating cost equation you determined above to predict van operating costs at a
volume of 16,000 miles.
6-14
Chapter 6
Cost Behavior
The operating costs at a volume of 16,000 miles is $5,310, [($0.26 x 16,000) + $1,150].
(20-30 min.) E6-28A

Req. 1 and 2
y
$0.28x
$908.93
Req. 3
The R-square is 0.771973.
This model indicates that the cost equation explains 77.2% of the variability in the data. In other
words, it should be used with caution. The company may or may not feel confident using this
cost equation to predict total costs at other volumes within the same relevant range.
Req. 4
The van operating costs at 16,000 miles is $5,388.93, [($0.28 x 16,000) + $908.93].
(5-10 min.) E6-29A

Req. 1
Req. 2
$0.19x
$2,250.7
4
This indicates that the cost equation explains 36% of the variability in the data. In other words,
it does not fit the data at all. The company will not feel confident using this cost equation to
predict total costs at other volumes within the same relevant range.
Req. 3
The van operating costs at 15,500 miles is $5,195.74, [($0.19 x 15,500) + $2,250.74].
(10-15 min.) E6-30A

Req. 1
Req. 2
pattern.
6-15

Req. 3
There appears to be a very strong relationship between total laboratory overhead costs and the
number of tests performed. We can tell this because the data points generally fall within a fairly
tight linear pattern.
(10-15min.) E6-31A
Req. 1
Cost
High pt.
$31,100
Low pt.
$22,000
Difference
$9,100
Change in cost / change in volume = variable costs
$9,100 / 2,600 = $3.50
Variable cost:
Activity
4,600
2,000
2,600
April
June
Req. 2
Using high point
Total cost
= Variable cost component + fixed cost component
y
= vx + f
$31,100
= 4,600 ($3.50) + f
$31,100
= $16,100 + f
$15,000
= f
Total fixed costs = $15,000
Req. 3
Total costs = Variable costs + fixed costs
y = vx + f
y = 2,800 ($3.50) + $15,000
Total costs = $24,800
(5-10 min.) E6-32A

Req. 1
y = $4.94x + $10,637.34
Req. 2
This indicates that the cost equation explains 85.4% of the variability in the data. In other
words, it fits the data quite well. The company should feel confident using this cost equation to
Req. 3
$4.94(2,800) + $10,637.34 = $24,469.34
6-16
Chapter 6
Cost Behavior
(15-20 min.) E6-33A

Req. 1
Student prepares regression using Excel. Answers shown below under related requirements.
Req. 2
y = $6.57x + $1,626.72
Req. 3
words, it fits the data quite well. Management should feel confident using this cost equation to
Req. 4
y = $6.57x + $1,626.72
y = $6.57 (3,400) + $1,626.72
y = $23,964.72
(15 min.) E6-34A

High point: 90% x 900 units = 810 units, $224,650
Low point: 80% x 900 units = 720 units, $218,800
Determine the formula that is used to calculate the variable cost (slope).
Change in cost
Change in volume
($224,650 - $218,800) (810 720) = $65

Now determine the formula that is used to calculate the fixed cost component.
Total variable cost
Fixed cost
Choosing the high point here:

$224,650 = ($65 x 810) + FC
FC = $172,000
Use the high-low method to determine Seasides operating cost equation.
y
$65x
$172,000
The owner should expect his operating costs to be $212,950, if occupancy falls to 70% [($65 x
(630)) + $172,000]
(70% occupancy = 70% x 900 units = 630 units)
6-17
(10-20 min.) E6-35A

Two Lizards
For the Year Ended December 31
Sales revenue
Variable expenses:
Cost of goods sold
Variable selling and marketing expenses
Variable web site maintenance expenses
Other variable operating expenses
Total variable expenses
Contribution margin
Fixed expenses:
Fixed selling and marketing expenses
Fixed web site maintenances expenses
Other fixed operating expenses
Total fixed expenses
Operating income
$1,014,000
665,000
28,520
14,875
1,840
710,235
303,765
32,480
44,625
16,560
Calculations for selling and marketing expenses:

Total selling and marketing expenses
Variable freight-out
Remaining selling and marketing expenses
Variable:
$28,520
Fixed:
$40,600 20% = $8,120+ $20,400 (freight out) =

$40,600 80% = $32,480
Calculations for web site maintenance expenses:

Variable:
$59,500 25% = $14,875
Fixed:
$59,500 75% = $44,625
Calculations for other operating expenses:
Variable:
$18,400 10% = $1,840
Fixed:
$18,400 90% = $16,560
6-18
93,665
$210,100
$ 61,000
(20,400)
$ 40,600
Chapter 6
Cost Behavior
(15-20 min.) E6-36A

Req. 1
Hatcher Carriage Company
For the Month Ended May 31
Sales revenue (13,050 85% $21.00) +
(13,050 15% $13.00)
Variable expenses:
Fee paid to city (15% $258,390)
Complimentary postcards (13,050 $0.85)
Brokerage fee (13,050 60% $1.50)
Carriage driver wages (13,050 $3.80)
Contribution margin
Fixed expenses:
Leasing and boarding horses
Non-carriage driver payroll expense
Depreciation expense
Operating income
$258,390
$38,759
11,093
11,745
49,590
111,187
$147,203
$48,000
7,500
2,100
7,400
65,000
$82,203
Req. 2
If passenger volume increases by 10% in May, we would expect all variable expenses to
increase by 10%. This is because revenues and variable costs change in direct proportion to
changes in volume. As a result, the contribution margin would also increase by 10%.
Assuming that a 10% increase in volume is still in the same relevant range, we would expect all
fixed costs to remain at their present level.
(15-20 min.) E6-37A

Req. 1
Absorption Costing
Units sold
Year 1
12,000
Year 2
18,000
$31
$8
$3
$31
$8
$3
$9
Direct material
Direct labor
Variable MOH
Fixed MOH per unit ($135,000 15,000 units
produced)
Cost per unit
$9
$51
Year 1
Sales revenue
12,000 X $69
18,000 X $69
Less: Cost of Goods Sold (12,000 and 18,000 x
$51)
Gross profit
Less: Operating expenses [$83,000 + (12,000 x
$6)]; [$83,000 + (18,000 x $6)]
Operating income
$51
Year 2
$828,000
$612,000
$216,000
$1,242,000
$918,000
$324,000
$191,000
$155,000
$61,000
$133,000
6-19
(continued) E6-37A
Req. 2
Year 1
Fixed MOH cost per unit
Change in inventory (in units)
Difference in operating income
Year 2
$9
3,000
$9
(3,000)
27,000
(27,000)
Predicted operating income using variable costing

$34,000
$160,000b
a
b
$61,000+ $27,000 = $34,000
$133,000 + $27,000 = $160,000
a
Req. 3
Variable Costing
Year 1
Direct Material
Direct Labor
Variable MOH
Cost per unit
Year 2
$31
$8
$3
$42
Year 1
Sales revenue
12,000 X $69
18,000 X $69
Variable Cost of Goods Sold (12,000 and
18,000 x $42)
Variable Operating Expenses (12,000 and
18,000 x $6)
Contribution Margin
Fixed MOH
Operating Income
6-20
$31
$8
$3
$42
Year 2
$828,000
$1,242,000
$504,000
$756,000
108,000
72,000
$252,000
$378,000
$135,000
83,000
$135,000
83,000
$34,000
$160,000
Chapter 6
Cost Behavior
(15-20 min.) E6-38A

Req. 1
Wilsons operating income under variable costing will be lower than its operating income under
absorption costing. This situation is because under absorption costing, some of the fixed MOH
remains trapped on the balance sheet as part of the cost of inventory. Under variable costing,
all fixed MOH incurred during the period is expensed as a period cost.
Req. 2
Fixed MOH cost per unit $171,000 / 9,000
$19
1,000
$19,000
Req. 3
The figures below can be calculated using the
percentage of produced units sold without the
costs per unit, but you need to change the formula
for Variable Cost of Goods Sold since the costs per
unit are not provided in the problem.
Sales revenue (8,000 x $66)
($424,000 / 8,000 = $53 - $19 = $34
(8,000 x $34)
Variable Operating Expenses (8,000 x $1.625*)
Contribution Margin
Fixed MOH
Operating Income
$528,000
$272,000
$13,000
$243,000
$171,000
$56,000
$16,000
*Total operating expense

$69,000
Less fixed portion
$56,000
Variable operating expenses
$13,000
# of units
8,000
Variable operating expense per unit
$1.625
(15 min.) E6-39A
Req. 1
Flannery Water Optics
Conventional (Absorption Costing) Income Statement
Year Ended December 31
Sales revenue (225,000 $49)
Cost of goods sold* 225,000 x $30
Gross profit
Operating expenses [(225,000 $8) + $245,000]
Operating income
__________
*Variable manufacturing expense per unit of $20 plus $10 fixed
manufacturing expense per unit ($2,400,000 fixed
manufacturing overhead / 240,000 units produced.)
$11,025,000
(6,750,000)
4,275,000
(2,045,000)
$2,230,000
6-21
(continued) E6-39A
Flannery Water Optics
Contribution Margin (Variable Costing) Income Statement
Variable expenses:
Variable cost of goods sold
4,500,000
Sales commission expense (225,000 $8)
1,800,000
Contribution margin
Fixed expenses:
Manufacturing overhead
$2,400,000
Operating expenses
245,000
Operating income
$11,025,000
(6,300,000)
4,725,000
(2,645,000)
$ 2,080,000
Req. 2
Absorption costing operating income is higher than variable costing operating income. This
situation is because absorption costing defers $150,000 of fixed manufacturing overhead as an
asset in ending inventory. In contrast, variable costing expenses all of the fixed manufacturing
overhead during the year.
Variable costing expenses $150,000 more costs during the year, so variable costing operating
income is $150,000 less than absorption costing income.
Req. 3
Increase in contribution margin
Increase in fixed expenses
Increase in operating income
$315,000
(165,000)
$150,000
The company should go ahead with the promotion because the increase in contribution margin
exceeds the increase in fixed costs.
6-22
Chapter 6
Cost Behavior
Exercises (Group B)
(15 min.) E6-40B
Req. 1

Total fixed costs
Total operating costs
Variable cost per garment
Fixed cost per garment
Average cost per garment
*Given
6,000
garments
$ 5,100
18,000
$23,100
7,500
garments
$ 6,375*
18,000
$24,375
9,000
garments
$ 7,650
18,000
$25,650
$0.85
3.00
$3.85
$0.85
2.40*
$3.25
$0.85
2.00
$2.85
Req. 2
The average cost per garment changes as volume changes, due to the fixed component of the
dry cleaners costs. The fixed cost per unit decreases as volume increases, while the variable
cost per unit remains constant.
Req. 3
Cost from Requirement 1 for 6,000 garments:
$23,100
Estimated cost @ 6,000 garments using $2.85:

Underestimation total:
$17,100
$6,000
She would underestimate her costs by $6,000.
(15 min.) E6-41B

Peltier Dry Cleaners
Projected Absorption Costing Income Statement
Less: Operating expenses [$18,000 + (4,280 $0.85)]
Operating income
Peltier Dry Cleaners
Projected Contribution Margin Income Statement
Less: Variable expenses (4,280 $0.85)
Contribution margin
Less: Fixed expenses
Operating income
$25,680
(21,638)
$4,042
$25,680
(3,638)
22,042
(18,000)
$4,042
6-23
(15 min.) E6-42B

High point June; Low point March
Req. 1
Change in cost = $4,294 - $3,574 = $720
Change in volume = 1,430 1,030 = 400
Change in cost Change in volume = Variable cost (slope)
$720 400 = $1.80
Using the high-low method, the variable utilities cost per machine hour is $1.80.
Req. 2
Total operating cost - Total variable cost = Fixed cost
Using the high activity level:
$4,294 ($1.80 x 1,430) = Fixed cost, or $1,720
Using the high-low method, the fixed cost of utilities each month is $1,720.
Req. 3
Total cost = $1,720 + $1.80 (1,260) = $3,988.
6-24
Chapter 6
Cost Behavior
(15 min.) E6-43B

Req. 1
$23.43
$32,802
=
=
=
Total cost number of units

Total cost 1,400 units
Total cost
Req. 2
Total cost
y
$32,802
$12,600
$9.00
Variable cost component + fixed cost

component
vx + f
v (1,400) + $20,202
v (1,400)
v
The variable cost per unit is $9.00
=
=
=
=
=
Req. 3
y =
$9.00x + $20,202
where x = number of mailboxes
Req. 4
$37,488
1,600 $23.43 average cost per mailbox
Req. 5
y = ($9.00 x 1,600) + $20,202
y = $34,602
The total cost is $34,602
Req. 6
The plant managers forecast would be $2,886 too high ($37,488 - $34,602) if he/she uses the
average cost per unit to predict costs. The average cost per unit is based on a mixed cost that
will change as volume changes. If the manager uses this method, he/she is erroneously
assuming that the average cost per unit does not change at different volumes. The manager
should use the cost equation to predict costs, since it correctly takes into account the variable
and fixed components of producing mailboxes.
6-25
(10-15 min.) E6-44B

Req. 1
Variable cost:
High
Low
Difference
$810,000
$689,400
$120,600
750,000
616,000
134,000
Qtr 3
Qtr 1
$120,600/134,000 units = $0.90 variable cost per unit

Req. 2
Total cost saved
Less cost of paperless system
Net savings
640,000
40%
256,000
$0.90
$230,400.00
$187,800.00
$ 42,600.00
Req. 3
Total cost saved
Less cost of paperless system
Net savings (cost)
640,000
30%
192,000
$0.90
$172,800.00
$187,800.00
$ (15,000.00)
Should the company still offer the paperless billing system? The answer to this question is
dependent upon the students value system and is meant to be a discussion point.
6-26
Chapter 6
Cost Behavior
(10-15 min.) E6-45B

Req. 1
If students do not force the axes back to the origin, Excel will render the following scatter plot:
Req. 2
pattern.
Req. 3
There appears to be a very strong relationship between van operating costs and miles driven.
We can tell this because the data points fall in a fairly tight, linear pattern.
(10-15 min.) E6-46B

Use the high-low method to determine Posies Unlimiteds operating cost equation.
High point February; Low point - July
Change in cost
Change in volume
($5,350 - $4,590) (17,500 13,500) = $0.19

Determine the formula that is used to calculate the fixed cost component.
Total variable cost
Fixed cost
$5,350 - (17,500 x $0.19) = Fixed expenses = $2,025

y = $0.19x + $2,025
Use the operating cost equation you determined above to predict van operating costs at a
volume of 17,000 miles.
The operating costs at a volume of 17,000 miles is $5,255, [($0.19 x 17,000) + $2,025].
6-27
(20-30 min.) E6-47B

Req. 1
y = $0.20x + $1,964.29
Req. 2
The R-square indicates that the cost equation explains 75.2% of the variability in the data. In
other words, it fits the data quite well. The company may or may not feel confident using this
Req. 3
The van operating costs at 17,000 miles are estimated to be $5,364.29 [($0.20 x 17,000) +
$1,964.29].
(5-10 min.) E6-48B

Req. 1
y = $0.21x + $1,810.75
Req. 2
The R-square indicates that the cost equation explains 70% of the variability in the data. In
other words, it fits the data quite well. The company should feel confident using this cost
equation to predict total costs at other volumes within the same relevant range.
Req. 3
The van operating costs at 14,500 miles are estimated to be $4,855.75, [($0.21 x 14,500) +
$1,810.75].
6-28
Chapter 6
Cost Behavior
(10-15 min.) E6-49B

Req. 1
Req. 2
The data does not appear to contain outliers. All data points fall in the same general pattern.
Req. 3
There appears to be a very strong relationship between the number of laboratory overhead
costs and the number of lab tests performed. We can tell this because the data points fall in a
fairly tight, linear pattern.
(10-15 min.) E6-50B

Cost
High pt.
$26,500
Low pt.
$19,100
Difference
$7,400
Change in cost / change in volume = variable costs
$7,400 / 2,000 = $3.70
Variable cost:
Activity
4,100
2,100
2,000
May
June
Using high point

Total cost
y
= vx + f
$26,500
= 4,100 ($3.70) + f
$26,500
= $11,100 + f
$11,330
= f
Req. 3
y = vx + f
y = 3,000($3.70) + $11,330
6-29
(10-15 min.) E6-51B

Req. 1
y
$6.21x
$5,627.6
1
Req. 2
words, it should be used with caution. The company may or may not feel confident using this
Req. 3
y = $6.21x + $5,627.61
y = $6.21 (3,000) + $5,627.61
y = $24,257.61
(15-20 min.) E6-52B

Req. 1
Student prepares regression using Excel. Answers shown below under related requirements.
Req. 2
y
$4.16x
$10,604.
32
Req. 3
This indicates that the cost equation explains 92.4% of the variability in the data, which
indicates a strong relationship over the relevant range.
Req. 4
y = $4.16x + $10,604.32
y = $4.16 (3,000) + $10,604.32
y = $23,084.32 (rounded)
(15 min.) E6-53B

High point: 90% x 750 units = 675 units, $217,150
Low point: 80% x 750 units = 600 units, $212,800
Change in cost
Change in volume
($217,150 - $212,800) / (675 600) = $58

Now determine the formula that is used to calculate the fixed cost component.
Total variable cost
Fixed cost
Choosing the high point here:

$217,150 = ($58 x 675) + FC
FC = $178,000
Cost equation: y = $58x + $178,0000
The owner should expect his operating costs to be $208,450 if occupancy falls to 70% [($58 x
(70% x 750)) + $178,000].
6-30
Chapter 6
Cost Behavior
(10-20 min.) E6-54B

Fabulous Flamingos
For the Year Ended December 31
Sales revenue
Variable expenses:
Cost of goods sold
Variable selling and marketing expenses
Variable web site maintenance expenses
Contribution margin
Fixed expenses:
Fixed selling and marketing expenses
Fixed web site maintenance expenses
Other fixed operating
expenses
Operating income
$ 1,005,000
669,000
27,720
14,125
1,700
712,545
292,455
33,280
42,375
15,300
90,955
$ 201,500
Calculations for selling and marketing expenses:

Total selling and marketing expenses
Variable freight-out
Remaining selling and marketing expenses
Variable:
Fixed:
$ 61,000
(19,400)
$ 41,600
$41,600 20% = $8,320 + $19,400 (freight out) = $27,720

$41,600 80% = $33,280
Calculations for web site maintenance expenses:

Variable:
$56,500 25% = $14,125
Fixed:
$56,500 75% = $42,375
Calculations for other operating expenses:
Variable: $17,000 10% =
$1,700
Fixed:
$17,000 90% =
$15,300
6-31
(15-20 min.) E6-55B

Req. 1
Carter Carriage Company
For the Month Ended April 30
Sales revenue (13,040 85% $26.00) +
(13,040 15% $18.00)
Variable expenses:
Fee paid to city (15% $323,392)
Complimentary postcards (13,040 $0.85)
Brokerage fee (13,040 60% $1.00)
Carriage driver wages (13,040 $3.90)
Contribution margin
Fixed expenses:
Leasing and boarding horses
Non-carriage driver payroll expense
Operating income
$323,392
$48,509
11,084
7,824
50,856
118,273
$205,119
$53,000
7,500
2,100
7,300
69,900
$ 135,219
Req. 2
If passenger volume increases by 20% in May, we would expect all variable expenses to
increase by 20%. This situation is because revenues and variable costs change in direct
proportion to changes in volume. As a result, the contribution margin would also increase by
20%.
Assuming that a 20% increase in volume is still in the same relevant range, we would expect all
fixed costs to remain at their present level.
(15-20 min.) E6-56B

Req. 1
Absorption Costing
Year 1
Direct Material
Direct Labor
Variable MOH
Fixed MOH per unit ($286,000 22,000 units
produced)
Cost per unit
Year 2
$38
$16
$10
$13
$77
Year 1
Sales revenue
(15,000 and 27,000 x $93)
Less: Cost of Goods Sold (15,000 and 27,000 x
$77)
Gross profit
Operating income
6-32
$38
$16
$10
$13
$1,395,000
$1,155,000
$240,000
$141,000
$99,000
$77
Year 2
$2,511,000
$2,079,000
$432,000
$189,000
$243,000
Chapter 6
Cost Behavior
(continued) E6-56B
Req. 2
Fixed MOH cost per unit
Predicted operating income using variable costing
a
$99,000 - $91,000 = $8,000
Year 1
$13
7,000
Year 2
$13
5,000
91,000
65,000
$8,000a
$308,000b
$243,000 + $65,000 = $308,000
Req. 3
Variable Costing
Year 1
Direct Material
Direct Labor
Variable MOH
Cost per unit
Year 2
$38
$16
$10
$64
Year 1
Sales revenue
(15,000 and 27,000 x $93)
Variable Cost of Goods Sold (15,000 and 27,000
x $64)
Variable Operating Expenses (15,000 and
27,000 x $4)
Contribution Margin
Fixed MOH
Operating Income
$38
$16
$10
$64
Year 2
$1,395,000
$2,511,000
$960,000
$1,728,000
108,000
60,000
$375,000
$675,000
$286,000
81,000
$286,000
81,000
$8,000
$308,000
6-33
(15-20 min.) E6-57B

Req. 1
Wentworths operating income under variable costing will be lower than its operating income
under absorption costing. This situation is because under absorption costing, some of the fixed
MOH remains trapped on the balance sheet as part of the cost of inventory. Under variable
costing, all fixed MOH incurred during the period is expensed as period cost.
Req. 2
Reconciling between two methods
Fixed MOH cost per unit $161,000/7,000
(0+7,000
6,500)
Difference between methods
$23
500
11,500
Absorption income difference = Variable income

$32,500 11,500 = $21,000
Req. 3
The figures below can be calculated using the
percentage of produced units sold without the
costs per unit, but you need to change the formula
for Variable Cost of Goods Sold since the costs per
unit are not provided in the problem.
Sales revenue (6,500 x $76)
$396,500 / 6,500 = $61 - $23 = $38
6,500 x $38
Variable Operating Expenses (6,500 x $1.538
rounded)
Contribution Margin
Fixed MOH
Operating Income
$494,000
$247,000
$10,000
$237,000
$161,000
$55,000
$21,000
*Total operating expenses

$65,000
Less fixed portion
55,000
Variable
$10,000
# of units
6,500
Variable operating expense per unit$1.53846
6-34
Chapter 6
Cost Behavior
(15 min.) E6-58B

Req. 1
Goggle Water optics
Conventional (Absorption Costing) Income Statement
$9,000,000
Cost of goods sold (200,000 x $27*)
(5,400,000)
Gross profit
3,600,000
Operating expenses [(200,000 $14) + $235,000]
(3,035,000)
Operating income
$ 565,000
__________
*Variable manufacturing expense per unit of $18 plus $9 fixed manufacturing expense per unit
($1,980,000 fixed manufacturing overhead / 220,000 units produced.)
Goggle Water Optics
Contribution Margin (Variable Costing) Income Statement
Variable expenses:
Variable cost of goods sold (200,000 x $18)
3,600,000
Sales commission expense (200,000 $14)
2,800,000
Contribution margin
Fixed expenses:
Manufacturing overhead
$1,980,000
Operating expenses
235,000
Operating income
$9,000,000
(6,400,000)
2,600,000
(2,215,000)
$ 385,000
Req. 2
Absorption costing operating income is higher than variable costing operating income. This
situation is because absorption costing defers $180,000 of fixed manufacturing overhead as an
asset in ending inventory. In contrast, variable costing expenses all the fixed manufacturing
overhead during the year.
Variable costing expenses $180,000 more costs during the year, so variable costing operating
income is $180,000 less than absorption costing income during the year.
Req. 3
Increase in contribution margin (20,000 $13)*....
Increase in fixed expenses.......................
Increase in operating income..............................
$260,000
(140,000)
$ 120,000
The company should go ahead with the promotion.

*Contribution margin per unit:
Sales price..........................................
Variable manufacturing cost..................
Variable operating cost.......................
Contribution margin per unit..............
$45
$18
14
(32)
$ 13
6-35
Problems (Group A)
(45-60 min.) P6-59A
Req. 1
The hospitals overhead appears to be a mixed cost. If it were a fixed cost, it would remain
constant each month. If it were a variable cost, it would remain constant on a per-unit (of
activity) basis. Both of the hospitals overhead cost per nursing hour and overhead cost per
patient day vary with volume.
Req. 2
Req. 3
Req. 4
There does not appear to be any outlier in the graph depicting overhead costs vs. nursing hours.
In the graph of overhead costs vs. patient days, there does appear to be an outlier. The
September data point appears out of line with the other data points. If any of the data points are
out of line, management should check into this data before continuing with the analysis.
6-36
Chapter 6
Cost Behavior
Req. 5
Variable cost:
High pt.
Low pt.
Difference
Cost
$555,000
$424,000
$131,000
Activity
30,000
20,000
10,000
Nov
Sep
Change in cost / change in volume = variable cost

$131,000 / 10,000 = $13.10
Using high point
Total cost
=
Variable cost component + fixed cost component
y
= vx + f
$555,000
= 30,000 ($13.10) + f
$555,000
= $393,000 + f
$155,000
= f
y = vx + f
y = 25,000 ($13.10) + $162,000
Req. 6
y = $14.26x + $131,004.69
y = $14.26(25,000) + $131,004.69
y = $487,504.69
Req. 7
y = $47.15x + $280,775.96
y = $47.15(3,790) + $280,775.96
y = $459,474.46
Req. 8
We have the most confidence in the cost equation using nursing hours. The R-square value for
that equation was the highest.
6-37
(45-60 min.) P6-60A

Req. 1
McKnights manufacturing overhead appears to be a mixed cost. If it were a fixed cost, it would
remain constant each month. If it were a variable cost, it would remain constant on a per-unit
(of activity) basis. Both MOH per DL hour and MOH per unit produced vary with volume.
Req. 2
Req. 3
Req. 4
There does not appear to be any outlier in the graph depicting MOH costs vs. DL hours. In the
graph of MOH costs vs. units, there does appear to be an outlier. The September data point
appears out of line with the other data points. If any of the data points are out of line,
management should check into this data before continuing with the analysis.
6-38
Chapter 6
Cost Behavior
(continued) P6-60A
Req. 5
Variable cost:
High pt.
Low pt.
Difference
Cost
$579,000
$420,000
$159,000
Activity
32,000
20,000
12,000
Nov
Sep

$159,000 / 12,000 = $13.25 (rounded)
Using high point
Total cost
y
= vx + f
$579,000
= 32,000 ($13.25) + f
$579,000
= $424,000 + f
$155,000
= f
y = $13.25x + $155,000
Req. 6
Januarys estimated manufacturing overhead costs are $499,500.
y = vx + f
y = 26,000 ($13.25) + $155,000
Total costs = $499,500 (some rounding so answers may vary slightly)
6-39
(15-20 min.) P6-61A

Req. 1
The Fantastic Ice Cream Shoppe
Income Statement
For the Month Ended June 30
Sales revenue (8,800 $5.00)
Cost of goods sold (8,800 $0.65*)
Gross profit
Operating expenses:
Lease expense
$2,050
220
Other operating expenses
2,800
Total operating expenses
Operating income
$44,000
(5,720)
$38,280
(5,070)
$33,210
*$14 per tub 28 servings = $0.50 for ice cream + $0.15 per
ice cream cone = $0.65
Req. 2
The Fantastic Ice Cream Shoppe
Variable expenses:
Cost of goods sold (8,800 0.65*)
$5,720
700a
Contribution margin
Fixed expenses:
Lease expense
$2,050
220
2,100b
Operating income
a
b
$2,800 25% variable = $700

$2,800 75% fixed = $2,100
6-40
$44,000
(6,420)
$37,580
(4,370)
$33,210
Chapter 6
Cost Behavior
(30-45 min.) P6-62A

Req. 1
Gross Profit
Sales
($115.00 x 1,900)
Less: Cost of goods sold (1,900* violins $103**)
Gross profit
*2,700 800 = 1,900
** ($131,300 + $55,000 + $27,000 + $64,800)/2,700 = $103
$218,500
195,700
$ 22,800
Req. 2
Contribution Margin
Sales
Less: Variable costs
Contribution margin
*(131,300 + $55,000 + $27,000)/2,700 = $79
$12,000/1,900 = $6.31579
$79.00 + ($6.322x 1,900) = $162,100 (rounded)
$ 218,500
(162,100)
$ 56,400
Req. 3
Total Expenses Shown Below the Gross Profit Line
Variable selling and administrative expenses
+ Fixed selling and administrative expenses
Total expenses below the gross profit line
$12,000
12,900
$24,900
Req. 4
Total Expenses Shown Below the Contribution Margin Line
All fixed expenses:
Fixed manufacturing
Fixed selling and administrative
$64,800
12,900
$77,700
Req. 5
The dollar value of ending inventory under absorption costing is $82,400 ($103 x 800).
Req. 6
The dollar value of ending inventory under variable costing is $63,200 ($79 x 800).
The absorption (traditional) income statement will have a higher operating income by $19,200,
[($64,800/2,700) x 800].
Under absorption costing, more fixed manufacturing overhead costs are trapped on the balance
sheet when inventory increases. Under variable costing, these costs are expensed as part of
cost of goods sold in the current period.
(25-35 min.) P6-63A

Req. 1
Variable manufacturing expense per meal

Fixed MOH (Absorption only) ($800/2,000;
$800/1,600)
Total product cost....
January
Absorption
Variable
Costing
Costing
$5.00
$5.00
$0.40
$0.00
$5.40
$5.00
February
Absorption Variable
Costing
Costing
$5.00
$5.00
$0.50
$0.00
$5.50
$5.00
6-41
(continued) P6-63A
Req. 2a
Nickys Entrees
Months Ended
Jan. 31
Sales revenue
1,600 and 1,900 x $8
$12,800
Cost of goods sold
(1,600 x $5.40); (400 x $5.40) + (1,500
(8,640)
x $5.50)
Gross profit
4,160
Operating expenses [($2 x 1,600) +$600]; [($2 x 1,900) +
(3,800)
$600]
Operating income
$ 360
Feb. 28
$15,200
(10,410)
4,790
(4,400)
$ 390
Req. 2b
Nickys Entrees
Months Ended
January 31
$12,800
Sales revenue
Variable expenses:
Variable cost of goods sold (1,600 and
1,900 x $5)
Sales commission expense (1,600 x
$2; 1,900 x $2)
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed marketing and administrative
expenses
Operating income
8,000
3,200
February 28
$15,200
9,500
(11,200)
3,800
1,600
800
600
(13,300)
1,900
800
(1,400)
$200
600
(1,400)
$500
Req. 3
In January, absorption costing operating income exceeds variable costing income. This situation
is because units produced were greater than units sold.
Absorption costing defers some of Januarys fixed manufacturing overhead costs in the units of
ending inventory. These costs will not be expensed until those units are sold. Deferring these
fixed manufacturing overhead costs to the future increases Januarys absorption costing income.
In February, absorption costing operating income is less than variable costing operating income.
This is because units produced were less than units sold for the month.
As inventory declines, as was the case this February, Januarys fixed manufacturing overhead
costs that absorption costing assigned to that inventory are expensed in February. This
decreases Februarys absorption costing income.
Students should be able to provide responses similar to those above. The additional explanation
below is included for instructors who wish to provide a more detailed explanation of the source
of the difference between absorption and variable costing incomes.
No additional explanation provided.
6-42
Chapter 6
Cost Behavior
Problems (Group B)
(45-60 min.) P6-64B
Req. 1
The hospitals overhead appears to be a mixed cost. If it were a fixed cost, it would remain
constant each month. If it were a variable cost, it would remain constant on a per-unit (of
activity) basis. Both of the hospitals overhead cost per nursing hour and overhead cost per
patient day vary with volume.
Req. 2
Req. 3
Req. 4
There does not appear to be any outlier in the graph depicting overhead costs vs. nursing hours.
In the graph of overhead costs vs. patient days, there does appear to be an outlier. The
September data point appears out of line with the other data points. If any of the data points are
out of line, management should check into this data before continuing with the analysis.
6-43
(continued) P6-64B
Req. 5
Variable cost:
High pt.
Low pt.
Difference
Cost
$574,000
$412,000
$162,000
Activity
31,500
19,500
12,000
Nov
Sep

$162,000 / 12,000 = $13.50
Using high point
Total cost
=
Variable cost component + fixed cost component
y
= vx + f
$574,000
= 31,500 ($13.50) + f
$574,000
= $425,250 + f
$148,750
= f
y = vx + f
y = 24,500 ($13.50) + $148,750
Req. 6
y = $13.12x + $173,670.16
y = $13.12(24,500) + $173,670.16
y = $495,110.16
Req. 7
y = $51.37x + $270,606.28
y = $51.37(3,640) + $270,606.28
y = $457,593. 08
Req. 8
We have the most confidence in the cost equation using nursing hours. The R-square value for
that equation was the highest.
6-44
Chapter 6
Cost Behavior
(45-60 min.) P6-65B

Req. 1
Carmichaels manufacturing overhead appears to be a mixed cost. If it were a fixed cost, it
would remain constant each month. If it were a variable cost, it would remain constant on a per
unit (of activity) basis. Both MOH per DL hour and MOH per unit produced vary with volume. As
in this companys case, manufacturing overhead usually includes both fixed and variable
components.
Req. 2
Req. 3
Req. 4
There does not appear to be any outlier in the graph depicting MOH costs vs. DL hours. In the
graph of MOH costs vs. units, there does appear to be an outlier. The September data point
appears out of line with the other data points. If any of the data points are out of line,
management should check into this data before continuing with the analysis.
6-45

Req. 5
Variable cost:
High pt.
Low pt.
Difference
Cost
$527,000
$425,000
$102,000
Activity
27,000
19,000
8,000
Nov
Sep

$102,000 / 8,000 = $12.75
Using high point
Total cost
y
= vx + f
$527,000
= 27,000 ($12.75) + f
$527,000
= $344,250 + f
$182,750
= f
y = $12.75x + $182,750
Req. 6
Januarys estimated manufacturing overhead costs are $495,125.
y = vx + f
y = 24,500 ($12.75) + $182,750
y = $495,125
6-46
Chapter 6
Cost Behavior
(15-20 min.) P6-66B

Req. 1
Darlas Ice Cream Shoppe
Income Statement
$47,000
Cost of goods sold (9,400 $0.60*)
(5,640)
Gross profit
41,360
Operating expenses:
Lease expense
$ 2,000
240
Other operating expenses
2,600
Total operating expenses
(4,840)
Operating income
$ 36,520
*$14 per tub 35 servings = $0.40 for ice cream + $0.20 per ice cream cone = $0.60
Req. 2
Darlas Ice Cream Shoppe
Variable expenses:
Cost of goods sold (9,400 0.60*)
$5,640
650a
Contribution margin
Fixed expenses:
Lease expense
$2,000
240
1,950b
Operating income
a
$2,600 25% variable = $650
b
$2,600 75% fixed = $1,950
$47,000
(6,290)
$40,710
(4,190)
$ 36,520
6-47
(30-45 min.) P6-67B
1. Gross Profit
Sales
Less: Cost of goods sold (1,650* violins $103**)
$198,000
169,950
Gross profit
*2,300 650 = 1,650
** ($104,500 + $60,000 + $31,000 + $41,400)/2,300 = $103
$ 28,050
2. Contribution Margin
Sales
Less: Variable expenses *
Contribution margin
*($104,500 + $60,000 +$31,000)/2,300 = $85
$7,000/1,650 = $4.242
($85 + $4.242) x 1,650 = $147,250
$ 198,000
(147,250)
$ 50,750
3. Total Expenses Shown Below the Gross Profit Line

Variable selling and administrative expenses
Total expenses below the gross profit line
$7,000
13,100
$20,100
4. Total Expenses Shown Below the Contribution Margin Line

Total expenses below the contribution margin line
$41,400
13,100
$54,500
5. The dollar value of ending inventory under absorption costing is $66,950 ($103 x 650).
6. The dollar value of ending inventory under variable costing is $55,250 ($85 x 650).
The absorption (traditional) income statement will have a higher operating income by $11,700
($41,400/2,300) x 650.
Under absorption costing, more fixed manufacturing overhead costs are trapped on the balance
sheet when inventory increases. Under variable costing, these costs are expensed as part of
cost of goods sold in the current period.
(25-35 min.) P6-68B

Req. 1
Variable manufacturing expense per meal

Fixed MOH (Absorption only) $1,200/1,600;
$1,200/1,500
Total product cost....
6-48
January
Absorption
Variable
Costing
Costing
$3.00
$3.00
0.75
0.00
$3.75
$3.00
February
Absorption Variable
Costing
Costing
$3.00
$3.00
0.80
0.00
$3.80
$3.00
Chapter 6
Cost Behavior
(continued) P6-68B
Req. 2a
Martys Entrees
Month Ended January 31
Jan. 31
Sales revenue (1,300 and 1,700 $9)
$11,700
Cost of goods sold*
(4,875)
Gross profit
6,825
Operating expenses
(3,000)
Operating income
$ 3,825
Jan: 1,300 x $3.75 = $4,875
Feb: (300 x $3.75) + (1,400 x $3.80) = $6,445
Feb. 28
$15,300
(6,445)
8,855
(3,800)
$ 5,055
Req. 2b
Martys Entrees
Months Ended
January 31
$11,700
Sales revenue
Variable expenses:
Variable cost of goods sold
Sales commission expense
Contribution margin
Fixed expenses:
Fixed marketing and administrative
expenses
Operating income
3,900
2,600
(6,500)
5,200
1,200
400
February 28
$15,300
5,100
3,400
(8,500)
6,800
1,200
(1,600)
$3,600
400
(1,600)
$5,200
Req. 3
In January, absorption costing operating income exceeds variable costing income. This situation
is because the units produced were greater than the units sold.
Absorption costing defers some of Januarys fixed manufacturing overhead costs in the units of
ending inventory. These costs will not be expensed until those units are sold. Deferring some of
these fixed manufacturing overhead costs to the future increases Januarys absorption costing
income.
In February, absorption costing operating income is less than variable costing operating income.
This situation is because the units produced were less than the units sold for the month.
As inventory declines, as was the case in February, Januarys fixed manufacturing overhead
costs that absorption costing assigned to that inventory are expensed in February. This
decreases Februarys absorption costing income.
Students should be able to provide responses similar to those above. The additional explanation
below is included for instructors who wish to provide a more detailed explanation of the source
of the difference between absorption and variable costing incomes.
6-49
Discussion & Analysis

A6-69
1. Briefly describe an organization with which you are familiar. Describe a situation
when a manager in that organization could use cost behavior information and how
the manager could use the information.
The manager of Starbucks needs to understand how costs behave so that he/she can make
sound decisions, such as budgeting. For instance, the manager would need to know that the
depreciation of the coffee machines is a committed fixed cost and that it will remain
constant over a certain period of time. The manager needs to understand that the cost of
coffee behaves differently. The coffee used is a variable cost. The more drinks prepared,
the more coffee is used.
2. How are fixed costs similar to step fixed costs? How are fixed costs different from
step fixed costs? Give an example of a step fixed cost and describe why that cost
is not considered to be a fixed cost.
Fixed and step costs are similar in that they remain constant over a certain range of activity.
Step costs are fixed over a small range of activity and then jump to a different level with
moderate changes in volume. Rent is an example of a fixed cost where the total cost of rent
does not change no matter how much volume changes. The salary for an additional
professor who must be hired because a department is expanding past the range where
existing faculty can cover classes is an example of a step fixed cost.
3. Describe a specific situation when a scatter plot could be useful to a manager.
The manager of a printing firm could use a scatter plot to analyze the monthly telephone
expenses for a year to determine how much of the expense is fixed and how much is
variable. A scatter plot graphs cost and volume data so that managers can visualize the
relationship between the two. They are also useful because they allow managers to identify
outliers (abnormal data points).
4. What is a mixed cost? Give an example of a mixed cost. Sketch a graph of this
example.
A mixed cost contains both variable cost and fixed cost components. The expense for a cell
phone is often mixed because there is a fixed amount for a certain number of minutes and
an additional per minute charge if the minutes exceed the limit.
5. Compare discretionary fixed costs to committed fixed costs. Think of an

organization with which you are familiar. Give two examples of discretionary fixed
costs and two examples of committed fixed costs that organization may have.
6-50
Chapter 6
Cost Behavior
Explain why the costs you have chosen as examples fit within the definitions of
discretionary fixed costs and committed fixed costs.
Discretionary fixed costs are controllable in the short run where managers have little or no
control over committed fixed costs in the short run. Advertising and R&D are examples of
discretionary fixed costs because they can be increased or decreased in the short run by
managers. Rent and depreciation are examples of committed fixed costs because they can
only be changed in the long run.
6. Define the terms independent variable and dependent variable, as used in
regression analysis. Illustrate the concepts of independent variables and
dependent variables by selecting a cost a company would want to predict and
what activity it might use to predict that cost. Describe the independent variable
and the dependent variable in that situation.
The dependent variable is the amount you want to predict and is based on the amounts of
the independent variables. For example, a company would like to know the total cost of paid
compensation for their salespeople (dependent variable). The total cost would be based on
their base salary and their commission percentage of sales revenue (independent variables).
7. Define the term relevant range. Why is it important to managers?
The relevant range is the band of volume where total fixed costs and variable costs per unit
remain constant. It is important to managers in understanding that cost behavior may
change if they are making decisions that are outside the range.
8. Describe the term R-square. If a regression analysis for predicting
manufacturing overhead using direct labor hours as the dependent variable has
an R-square of .40, why might this be a problem? Given the low R-square value,
describe the options a manager has for predicting manufacturing overhead costs.
Which option do you think is the best option for the manager? Defend your
answer.
R-square is the goodness-of-fit statistic that tells how well the regression line fits the data
points. The higher the R-square, the stronger the relationship between cost and volume.
Generally an R-square over .80 indicates that the cost equation is very reliable for predicting
costs at other volumes within the relevant range. An R-square of .40 is low and indicates
that the manager should try using a different activity base for cost analysis because the
current measure of volume is only weakly related to the costs. The manager could also the
high-low method to plan for costs at different volumes. Of the two methods, regression
analysis usually gives better predictions because it uses more historical data where the highlow method only uses two data points.
9. Over the past year, a companys inventory has increased significantly. The
company uses absorption costing for financial statements, but internally, the
company uses variable costing for financial statements. Which set of financial
statements will show the highest operating income? What specifically causes the
difference between the two sets of financial statements?
The absorption costing financial statements will show higher operating income than the
variable costing statements. The difference between the two sets of statements is caused
by absorption costing deferring a portion of fixed manufacturing overhead to the balance
sheet in ending inventory. In variable costing statements, total fixed manufacturing
overhead is expensed as a period cost.
10.
A company has adopted a lean production philosophy and, as a result, has cut
its inventory levels significantly. Describe the impact on the companys external
financial statements as a result of this inventory reduction. Also describe the
impact of the inventory reduction on the companys internal financial statements,
which are prepared using variable costing.
The reduction in inventory will affect the balance sheet in that the three inventory accounts,
raw materials, work in process, and finished goods, will have little to no balances. The costs
6-51

of inventory will be expensed in the same period that they were incurred because the entire
inventory that was produced was sold. The difference in operating income between the
absorption and the variable costing statements will be zero or minimal.
11.
What costs might a business incur by not adopting e-billing (paperless)

services? Is e-billing only profitable to large businesses or is it applicable to small
business? Explain what might be involved in changing over to paperless billing.
A company that does not adopt e-billing will experience higher total variable costs for
processing, printing, and mailing statements as opposed to a company that does adopt ebilling. However, in place of these variable costs, the company must incur additional fixed
costs for banking and billing websites. This means that the company must be large enough
that the savings from a reduction in variable costs offsets the increase in fixed costs.
Changing over to a paperless billing system requires developing a secure banking website as
well as convincing customers to adopt the new system.
12.
How might the principles of sustainability (such as increased efficiency) affect

cost behavior overall? Think of an example of a sustainable change in process or
material that could impact the cost equation of that cost (i.e., the total fixed cost
versus the variable cost per unit). Describe this example in detail and what might
happen to total fixed costs and per unit variable costs.
The adoption of sustainable business practices can change either fixed or variable costs
depending upon the change implemented. Student responses may vary; please see the
previous questions for an example of a sustainable change (e-billing).
6-52
Chapter 6
Cost Behavior
Application & Analysis

A6-70
Cost Behavior in Real Companies
Basic Discussion Questions
1. Describe the company you selected and the products or services it provides.
Pearson Prentice Hall is a publisher of textbooks. It provides both printed and ebooks, online
resources for students and instructors, and customer service.
2. List ten costs that this company would incur. Include costs from a variety of
departments within the company, including human resources, sales, accounting,
production (if a manufacturer), service (if a service company), and others. Make
sure that you have at least one cost from each of the following categories: fixed,
variable, and mixed.
Development of new texts/editions
Training for customer service representatives
Sales commissions
Development of online resources such as narrated slides
Advertising
Handling textbook orders
Accounting salaries
Cost of paper/ink
Depreciation of binding machinery
Shipping costs
3. Classify each of the costs you listed as either fixed, variable, or mixed. Justify why
you classified each cost as you did.
Mixed includes salaried editors (fixed) and authors advances
Fixed scheduled training sessions
Variable per book amount
Mixed salaried employees and outside contractors
Fixed a discretionary amount not tied to activity levels
Variable dependent on the number of books ordered
Fixed salaried employees
Variable dependent on the number of books printed
Fixed committed cost of machinery
Variable dependent on the amount of books shipped
4. Describe a potential cost driver for each of the variable and mixed costs you
listed. Explain why each cost driver would be appropriate for its associated cost.
Revision/new book projects
Scheduled training sessions
Number of books sold
Online resource projects
Educational institutions targeted
Orders received
Accounting department employees
Orders received
Time
Orders received
5. Discuss how easy or difficult it was for you to decide whether each cost was fixed,
variable, or mixed. Describe techniques a company could use to determine
whether a cost is fixed, variable, or mixed.
6-53

Any cost that stays constant over a wide range of volumes is fixed. If a cost rises in direct
proportion to increases in volume, it can be recognized as a variable cost. For mixed costs,
a company can use scatter plots, the high-low method, and regression analysis to determine
the fixed and variable components.
A6-71
Ethics Mini-Case
1.
a. The ethical issues in this situation are:
i. Competence: Provide decision support information and recommendations that are
accurate, clear, concise, and timely. Penny is urging Richard to increase production,
which would end up with inaccurate and unclear information, since the records would
indicate a profit on a division that is actually operating at a loss.
ii. Integrity: Abstain from engaging in or supporting any activity that might discredit the
profession. Penny and Richard would both be engaging in an action that may discredit
the profession if Penny encourages the increase in production and Richard performs the
increase, for the primary reason of personal gain.
iii. Credibility: Communicate information fairly and objectively. By increasing the
production to gain a bonus, Richard would be reporting the information in a nonobjective way.
b. Pennys responsibilities as a management accountant include encouraging Richard to
report the information accurately and objectively, and to put accuracy and the profession
above personal gain.
c.Penny has violated portions of the IMA ethics standard, as stated above in 1.a.
2. By producing more units, more fixed overhead is trapped in ending inventory. The cost of
that fixed overhead is added to assets (as inventory) and does not lower operating income
until those units are sold. The fixed overhead that is sitting in ending inventory on the
balance sheet causes the shift from a loss to a profit (if more units are produced.)
3. The problems caused by building inventories at the end of the year are that it will impact the
profitability of the next fiscal year, as well as being a poor business practice if the units are
acquired just for increasing the current on-paper profitability.
4. KG Products could establish internal policies that require including existing inventory in any
evaluation of a divisions profitability. They could also make the individuals who are
responsible for the bookkeeping and control production, not have performance bonuses
linked to these things. That would remove an ethical conflict.
Student answers will vary.
A6-72
Real Life Mini-Case
1. Is the $179,750 cost per hour a fixed, variable, or mixed cost?
Since the $179,750 includes both fixed and variable costs of Air Force One, it would be a
mixed cost.
2. Exact details about the cost composition of the Air Force One travel are kept
secret to protect the president. Use your imagination, and the reading above, to
make a list of the costs that you think might be included in the $179,750 per hour
cost estimate.
Fuel costs, maintenance, engineering support, repairs, food and lodging, wages of the pilots,
security crew and serving crew for the aircraft, storage of the planes when not in use, and
similar costs.
6-54
Chapter 6
Cost Behavior
3. Categorized each cost in your list as fixed, variable, or mixed.

Fuel costs: Variable, Maintenance cost: Mixed, engineering support: variable, repairs: mixed,
food and lodging: mixed, wages of the pilots, security crew and serving crew: mixed,
storage: fixed.
4. The number of trips taken by the president in any given year fluctuates and is
dependent upon the political climate, crises, economics, and the like. How useful
to you think this cost per hour is?
The cost per hour may not be useful. Air Force One will have a lot of downtime. When Air
Force One is used, it can consume resources at vastly different rates given that it can
perform flights of a simple nature (just the president) or a very complex nature (many
people requiring much more security and other expenses).
Given that this number is highly dependent upon how much it is used, the per hour cost may
not be useful.
5. What purpose(s) can the $179,750 cost per hour be used for? Are there any
purposes for which that cost is not representative of the true cost?
This cost can be used as a political issue, if one party is looking to embarrass one president
and infuriate the public on this issue. This strategy would not necessarily be a good strategy,
but it would be one use for the per hour cost. If this cost is used to estimate the cost per
president on Air Force One, it will not accurately reflect what the cost would be for each
president because one president may use the plane more than another.
6. Can you think of a better way to represent/ communicate the cost of Air Force
One?
One could figure out all of the fixed costs associated with Air Force One, and separately state
these items. The variable costs could also be calculated. Then a cost equation could be
used to predict costs so that decision makers (like the president) can evaluate whether the
given trip is worth the cost of that trip.
7. Do you think the reimbursement policy is fair to the president? Why or why not?
Yes, I believe that the reimbursement policy is fair to the president, because he only has to
pay for what the normal transportation would be if he were an ordinary citizen. This seems
reasonable for him because he must use Air force One and has no other legal alternatives
available to him.
8. Do you think the reimbursement policy is fair to the taxpayers? Why or why not?
Yes, I believe that the reimbursement policy is fair to the taxpayers because the president is
required to take Air Force One on his flights. We are paying for the cost of his safety to
wherever he goes.
Student answers will vary.
6-55

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Chapter 6

(5-10 min.) S6-2

New fixed cost per

(5-10 min.) S6-3

Total fixed costs

Total production costs

*$3.33 x 25,000 = $83,250

Copyright 2015 Pearson Education, Inc.

Managerial Accounting 4e Solutions Manual

(5-10 min.) S6-4

Call for 60 minutes

Call for 120 minutes

(5-10 min.) S6-5

Copyright 2015 Pearson Education, Inc.

(10-15 min.) S6-6

Copyright 2015 Pearson Education, Inc.

Managerial Accounting 4e Solutions Manual

(5-10 min.) S6-7

Variable cost per unit

Total variable cost

Total fixed costs

Complete the companys operating cost equation.

(5-10 min.) S6-8

Variable cost per unit

Total variable cost

Total fixed costs

Complete Three Brothers Caterings operating cost equation.

Copyright 2015 Pearson Education, Inc.

(5-10 min.) S6-9

Variable cost per unit

(15 min.) S6-10

Copyright 2015 Pearson Education, Inc.

Managerial Accounting 4e Solutions Manual

(5-10 min.) S6-11

(5-10 min.) S6-12

(5-10 min.) S6-13

Copyright 2015 Pearson Education, Inc.

(10-15 min.) S6-14

Patricias Quilt Shoppe

(10-15 min.) S6-15

Copyright 2015 Pearson Education, Inc.

Managerial Accounting 4e Solutions Manual

(15 min.) S6-16

Copyright 2015 Pearson Education, Inc.

(15 min.) S6-17

(5-10 min.) S6-18

(15 min.) S6-19

Copyright 2015 Pearson Education, Inc.

Managerial Accounting 4e Solutions Manual

The CEO of a small company visits a competitor's

Alyssa does not disclose on the financial statements

Copyright 2015 Pearson Education, Inc.

Integrity - Abstain from

Confidentiality - Refrain from

Competence - Recognize and

Total variable costs

Estimated costs @2,000 using $2.00:

(15 min.) E6-22A

(15 min.) E6-23A

Managerial Accounting 4e Solutions Manual

(15 min.) E6-24A

Average cost per unit

= Total cost number of units