MANAGERIAL ACCOUNTING – CHAPTER # 7 - ANSWERS

Exercise 7-24 (Behavior of Fixed and Variable Costs; Television Station)

Cost per Broadcast Hour

July September
Cost Item (Rs.) (Rs.)
Production crew:
Rs. 4,875/390 hr 12.50 per hr.
Rs. 8,000/640 hr 12.50 per hr.
Supervisory employees:
Rs. 5,000/390 hr 12.82 per hr.*
Rs. 5,000/640 hr 7.81 per hr.*

* Rounded.

2. December cost predictions:

(Rs.)
Production crew (420 x Rs. 12.50 per hr.) 5,250
Supervisory employees 5,000
3.
Cost per Broad cast Hour in
Cost Item December
Production crew Rs. 12.50 per hr.
Supervisory employees (Rs. 5,000/420 hr.) Rs. 11.90 per hr.*

* Rounded.

Exercise 7-25 (Estimating Cost Behavior; High-Low Method)

1. Variable cost per pint of applesauce produced =

Rs. 24,100 – Rs. 22,100
Rs. 41,000 – Rs. 21,000 = Rs. 0.10

(Rs.)
Total cost at 41,000 pints 24,100
Variable cost at 41,000 pints
(41,000 x Rs. 0.10 per pint) 4,100
Fixed cost 20,000

Cost equation:

Total energy cost = Rs. 20,000 / Rs. 0.10X, where X denotes pints of applesauce produced.

2. Cost prediction when 26,000 pints of applesauce are produced.

Energy cost = Rs. 20,000 / (Rs. 0.10) (26,000) = Rs. 22,600

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 MANAGERIAL ACCOUNTING – CHAPTER # 7 - ANSWERS
Exercise 7-28 (Visual-Fit Method; Veterinary Laboratory)

1. Scatter diagram and visually-fitted line:

2. Note that the question asks for an estimate based on the visually-fit cost line. Therefore, answers
will vary on this requirement because of variation in the visually-fitted lines.

* Calculation of variable cost:

Total cost at 7,200 tests 104,000

Total cost at 0 tests 28,000
Difference: 7,200 tests 76,000

Variable cost per diagnostic test = Rs. 76,000

7,200

= Rs. 10.56*

* Rounded.

Exercise 7-29 (Estimating Cost Behavior; High-Low Method)

1. a. Fixed
b. Variable
c. Variable
d. Fixed
e. Semi-variable (or mixed)

2. Production cost per month = Rs. 33,000 + Rs. 2.00X*

*33,000 = Rs. 19,000 + Rs. 10,000 + Rs. 4,000
*Rs. 2.00 = Rs. 1.10 + Rs. Rs. 0.70 + Rs. 0.20

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 MANAGERIAL ACCOUNTING – CHAPTER # 7 - ANSWERS
Exercise 7-30 (High-Low Method; Tour Company)

1. Variable maintenance
Cost per tour mile = (12,500r – 11,000r) / (20,000 miles – 8,000 miles)
= 0.125r

r denotes the real, Brazil’s national currency.

Total maintenance cost at 8,000 miles 11,000r

Variable maintenance cost at 8,000 miles (0.125r x 8,000) 1,000r
Fixed maintenance cost per month 10,000r

2. Cost formula:

Total maintenance cost per month = 10,000r + 0.125rX, where X denotes tour miles traveled
during the month.

3. Cost prediction at the 22,000-mile activity level:

Maintenance cost = 10,000r + (0.125r)(22,000)

= 12,750r

Problem 7-36 (Cost Behavior and Analysis; High-Low Method)

1. Machine supplies: Rs. 102,000 + 34,000 direct labor hours = Rs. 3 per hour
January: 23,000 direct labor hours x Rs. 3 = Rs. 69,000

2. Plant maintenance cost:

March January
(34,000 hrs.) (23,000 hrs)
(Rs.) (Rs.)
Total cost* 586,000 454,000
Less: Machine supplies (102,000) (69,000)
Depreciation (15,000) (15,000)
Plant maintenance 469,000 370,000
* Excludes supervisory labor cost

Variable maintenance cost = difference in cost / difference in direct labor

Hours
= (Rs. 469,000 – Rs. 370,000) / (34,000 – 23,000)
= Rs. 99,000 / 11,000 hours
= Rs. 9 per hour

Fixed maintenance cost:

March January
(34,000 hrs.) (23,000 hrs)
(Rs.) (Rs.)
Total maintenance cost 469,000 370,000
Less: Variable cost at Rs. 9 per hour 306,000 207,000
Fixed maintenance cost 163,000 163,000

3. Manufacturing overhead at 29,500 labor hours

(Rs.)
Machine supplies at Rs. 3 per hour 88,500
Deprecation 15,000
Plant maintenance cost:
Variable at Rs. 9 per hour 265,500
Fixed 163,000
Supervisory labor 90,000
Total 622,000

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 MANAGERIAL ACCOUNTING – CHAPTER # 7 - ANSWERS
4. A fixed cost remains constant when a change occurs in the cost driver (or activity base). A step fixed cost, on
the other hand, remains constant within a range but will change (rise or fall) when activity falls outside that
range. A fixed cost is constant over a much larger range of activity than is a step fixed cost.

5. Ideally, the company should operate on the right most portion of a step, just prior to the jump in cost. In this
manner, a firm receives maximum benefit (i.e., the maximum amount of activity) for the rupees invested.

Problem 7-37 (Cost Behavior and Analysis; High-Low Method)

1. Straight-line deprecation – committed fixed

Charitable contributions – discretionary fixed
Mining labor/fringe benefits – variable
Royalties – semi-variable
Trucking and hauling – step-fixed

The per-ton mining labor/fringe benefit cost is constant at both volume levels presented, which is
characteristic of a variable cost.

Rs. 345,000 / 1,500 tons = Rs. 230 per ton

Rs. 598,000 / 2,600 tons = Rs. 230 per ton

Royalties have both a variable and a fixed component, making it semi-variable (mixed) cost.

Variable royalty cost = difference in cost / difference in tons

= (Rs. 201,000 – Rs. 135,000) / (2,600 – 1,500)
= Rs. 66,000 / 1,100 tons
= Rs. 60 per ton

Fixed royalty cost:

(Rs.) (Rs.)
Total royalty cost 201,000 135,000
Less: Variable cost at Rs. 60 per ton 156,000 90,000
Fixed royalty cost 45,000 45,000

2. Total cost for 1,6500 tons:

(Rs.)
Deprecation 25,000
Charitable contributions -
Mining labor/fringe benefits at Rs. 230 per ton 379,500
Royalties:
Variable at Rs. 60 per ton 99,000
Fixed 45,000
Trucking and hauling 275,000
Total 823,500

3. Hauling 1,500 tons is not very cost effective. Antioch will incur cost of Rs. 275,000 if it needs 1,500
tons hauled or, for that matter, 1,899 tons. The company would be better off if it had 1,499 tons hauled,
saving outlays of Rs. 25,000. in general, with this type of cost function, effectiveness is maximized if a
firm operates on the right-most portion of a step, just prior to a jump in cost.

4. A committed fixed cost results from an entity’s ownership or use of facilities and its basic
organizational structure. Examples of such costs include property taxes, deprecation, rent, and
management salaries. Discretionary fixed costs, on the other hand, arise from a decision to spend a
particular amount of money for a specific purpose. Outlays for research and development, advertising,
and charitable contributions fall in this category.

In times of severe economic difficulties, management should try to cut discretionary fixed costs. Such
costs are more easily altered in the short run and in some cases may not have significant long term
ramifications for a firm. The decision to close a manufacturing faculty, for example, could reduce

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 MANAGERIAL ACCOUNTING – CHAPTER # 7 - ANSWERS
property taxes, rent, and/or deprecation. However, that decision may result in a significant long run
change in operations that may be difficult to overturn when economic conditions rebound.

5. Antioch uses a calendar year for tax reporting purposes. At year end, it may have ample funds available
and decide to make donations to charitable causes. Such contributions are deductible in computing the
company’s tax obligation to the government. Tax deductions reduce taxable income and, therefore,
produce a tax savings for the firm.

Problem 7-38 (High-Low Method; Fitness Centers)

1. Variable maintenance cost per hour of service = Rs. 4,470 – Rs. 2,820
520 - 300

= Rs. 7.50
(Rs.)
Total maintenance cost at 300 hours of service 2,820
Variable maintenance cost at 300 hours of service (300 hr. x Rs. 7.50) 2,250
Fixed maintenance cost per month 570

Cost formula:

Monthly maintenance cost = Rs. 570 + Rs. 7.50X, Where X denotes

hours of maintenance service.

2. The variable component of the maintenance cost is Rs. 7.50 per hour of service.

3. Cost prediction at 590 hours of activity:

Maintenance cost = Rs. 570 + (Rs. 7.50)(590) = Rs. 4,995

4. Variable cost per hour [from requirement (2)] Rs. 7.50

Fixed cost per hour at 600 hours of activity (Rs. 570/600) Rs. 0.95

The fixed cost per hour is a misleading amount, because it will change as the number of hours changes.
For example, at 500 hours of maintenance service, the fixed cost per hour is Rs. 1.14 (Rs. 570/500
hours).

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