No.

8 ID: 645740011-6
Maneejan Leebumrung

CM017812 Managerial Accounting Y23 Sec.01

Assignment 05

Questions
1. Distinguish between (a) a variable cost, (b) a fixed cost, and (c) a mixed cost.

(a.) Variable cost: Variable costs are any expenses incurred by an

organization that are related to the amount of goods or services produced. Variable
expenses fluctuate in relation to a company's output volume. Variable costs rise as
production volume increases. But, if the volume decreases, the variable expenses
decrease as well. However, variable cost remains constant on a per unit basis.
(b.) Fixed cost: Fixed costs stay constant regardless of whether or not
products or services are generated. As a result, a corporation cannot avoid fixed
costs. Unlike variable costs, a company's fixed expenses do not fluctuate with the
amount of output and are indirect, which means they do not typically apply to the
manufacturing process. Lease and rent payments, property taxes, certain wages,
insurance, depreciation, and interest payments are all examples of fixed costs. A
fixed cost remains constant in total amount, but changes, if expressed on a per unit
basis, inversely with changes in volume.
(c.) Mixed cost: Mixed costs or semi-variable costs have attributes of both
fixed and variable costs due to the presence of both variable and fixed elements in
them. Telephone expense is an example of a mixed cost since it often includes a
fixed component such as line rent and set subscription rates as well as a variable
cost invoiced per minute cost. Another example of a mixed cost is delivery cost,
which has a fixed component of vehicle depreciation and a variable component of
gasoline price.

2. What effect does an increase in volume have on–

a. Unit fixed costs? Unit fixed cost is inversely related to volume. As a

result, increasing volume leads to a decrease in unit fixed costs.
b. Unit variable costs? Unit Variable costs stay constant as manufacturing
volume increases.
c. Total fixed costs? Total fixed expenses will always remain constant. That
is why they are referred to as fixed costs. As a result, overall fixed costs will
remain constant.
d. Total variable costs? Total Variable cost is the component of production
costs that fluctuates in directly proportionate to variations in activity level. Unit
With an increase in manufacturing volume, variable costs stay constant.
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Maneejan Leebumrung

3. Define the following terms: (a) cost behavior and (b) relevant range.

(a.) Cost behavior: Cost behavior refers to the way in which costs change in
response to changes in a measure of activity such as sales volume, production
volume, or orders processed.
(b.) Relevant range: The relevant range indicates a certain degree of activity
that is defined by an upper and lower limits quantity. Certain income or spending
levels can be expected to take place within the stated parameters. Revenues and
costs will most likely differ from the projected amount if they fall outside of the
applicable range. The idea of the relevant range is especially important in two
types of analysis:
1. Budgeting. When a corporation creates a budget for a future period, it
makes assumptions about the relevant range of activities that the company is
expected to engage in. Budgeted revenues and costs are more likely to be right if
the actual activity volume falls somewhere within the relevant range and other
assumptions are true. In this situation, the applicable range is most likely to be
quite near to a business's present activity level, with slight adjustments.
2. Cost accounting. The anticipated cost of a product, service, or activity
is more likely to be valid within a relevant range and less likely to be valid outside
of that range. A "fixed" cost, in instance, is likely to stay fixed only within a
relevant spectrum of activity. Furthermore, supplier volume discounts are only
available for specified purchase volume numbers.

5. Distinguish between (a) a variable cost, (b) a mixed cost, and (c) a step-
variable cost. Plot the three costs on a graph, with activity plotted horizontally
and cost plotted vertically.
(a.) Variable cost: Variable costs are any expenses incurred by an
organization that are related to the amount of goods or services produced. Variable
expenses fluctuate in relation to a company's output volume. Variable costs rise as
production volume increases. But, if the volume decreases, the variable expenses
decrease as well. However, variable cost remains constant on a per unit basis.
(b.) Mixed cost: Mixed costs or semi-variable costs have attributes of both
fixed and variable costs due to the presence of both variable and fixed elements in
them. Telephone expense is an example of a mixed cost since it often includes a
fixed component such as line rent and set subscription rates as well as a variable
cost invoiced per minute cost. Another example of a mixed cost is delivery cost,
which has a fixed component of vehicle depreciation and a variable component of
gasoline price.
 No. 8 ID: 645740011-6
Maneejan Leebumrung

(c.) Step-variable cost: A step variable cost is one that, although typically
varying with the degree of activity, is incurred at defined points and involves
considerable changes in quantities when such a point is reached. A really variable
cost, on the other hand, will fluctuate continuously and immediately in tandem
with the degree of activity.

❖ Variable cost
❖ Mixed cost
❖ Step-variable cost

15. What is the contribution margin?

The contribution margin can be expressed in either gross or per-unit terms.
After subtracting the variable element of the firm's expenditures, it indicates the
extra money gained for each product/unit sold.
The contribution margin is calculated by subtracting the selling price per
unit from the variable cost per unit. The metric, also known as dollar contribution
per unit, reveals how a certain product adds to the total profit of the organization.
It displays the share of revenue that helps to pay the firm's fixed costs and gives
one approach to illustrate the profit potential of a certain product supplied by a
company. Profit is defined as any residual income after covering fixed costs.
 No. 8 ID: 645740011-6
Maneejan Leebumrung

Exercises
Exercise 5-3 High-Low Method
The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the
total electrical costs of the hotel and the number of occupancy-days over the last
year. An occupancy-day represents a room rented out for one day. The hotel's
business is highly seasonal, with peaks occurring during the ski season and in the
summer.

Occupancy- Electrical
Month
Days Costs
January……………………… 1,736 $4,127
February …………………… 1,904 $4,207
March .……………………… 2,356 $5,083
April ………………………... 960 $2,857
May...... …………………… 360 $1,871
June . ………………………. 744 $2,696
July.... ……………………... 2,108 $4,670
August. …………………… 2,406 $5,148
September ...……………… 840 $2,691
October. ......………………… 124 $1,588
November..... ……………… 720 $2,454
December ..………………… 1,364 $3,529

Required:
1. Using the high-low method, estimate the fixed cost of electricity per
month and the variable cost of electricity per occupancy-day. Round off the fixed
cost to the nearest whole dollar and the variable cost to the nearest whole cent.

Variable cost per unit = Highest activity cost – Lowest activity cost 0
Highest activity unit – Lowest activity units

Variable cost per unit = $5,148 – $1,588

2,406 – 124

Variable cost per unit = $3,560

2,282

Variable cost per unit = $1.56 per Occupancy-day

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Maneejan Leebumrung

Fixed cost = Highest activity cost – (Variable cost per unit x Highest activity units)
Fixed cost = $5,148 – ($1.56 x 2,406)
Fixed cost = $5,148 – $3,753
Fixed cost = $1,395

2. What other factors other than occupancy-days are likely to affect the
variation in electrical costs from month to month?

Electrical costs may represent seasonal factors other than the just the
variation in occupancy days. For example, in the winter, common places such as
the reception area must be lit for longer durations than in the summer. As a result,
the fixed electrical expenses will fluctuate seasonally. Furthermore, the amount of
days in a month will have an impact on the fixed expenses. In other words,
expenses such as lighting common spaces are variable in relation to the amount of
days in the month but fixed in relation to the number of rooms occupied
throughout the month. Other, less systematic, factors, such as individual visitors'
frugality, may also have an impact on power expenditures. When visitors leave,
some will turn off the lights. Others will not.
 No. 8 ID: 645740011-6
Maneejan Leebumrung

Exercise 5-4 Traditional and Contribution Format Income Statements

The Alpine House, Inc., is a large retailer of snow skis. The company assembled
the information shown below for the quarter ended March 31:

Amount
Total sales revenue ........................................................... $150,000
Selling price per pair of skis. ............................................. $750
Variable selling expense per pair of skis………………… $50
Variable administrative expense per pair of skis …........... $10
Total fixed selling expense .......... .................................... $20,000
Total fixed administrative expense.................................... $20,000
Beginning merchandise inventory .................................... $30,000
Ending merchandise inventory .......................................... $40,000
Merchandise purchases ..................................................... $100,000

Required:
1. Prepare a traditional income statement for the quarter ended March 31.

The Alpine House, Inc.

Income Statements
Sales $150,000
Cost of Goods Sold
Beginning merchandise inventory $30,000
Add Merchandise purchases 100,000
Total Cost of Goods Available for sale 130,000
Less Ending merchandise inventory 40,000 90,000
Gross margin 60,000
Expense
Selling expense 30,000
Administrative expense 22,000 52,000
Net Operating Income $8,000
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Maneejan Leebumrung

2. Prepare a contribution format income statement for the quarter ended

March 31.

The Alpine House, Inc.

Income Statements
Sales $150,000
Variable Expenses
Cost of Goods Sold $90,000
Selling Expense 10,000
Administrative Expense 2,000 102,000
Contribution margin 48,000
Fixed Expense
Selling expense 20,000
Administrative expense 20,000 40,000
Net Operating Income $8,000

3. What was the contribution toward fixed expenses and profits for each pair
of skis sold during the quarter? (State this figure in a single dollar amount per pair
of skis.)

Selling price per pair $ 750

Less Variable expenses
Cost per pair $ 450
Selling Expenses 50
Administrative Expenses 10 510
Contribution Margin per pair $ 240
 No. 8 ID: 645740011-6
Maneejan Leebumrung

Exercise 5-5 High-Low Method; Predicting Cost

The Lakeshore Hotels guest-days of occupancy and custodial supplies expense
over the last seven months were:

Guest-Days Custodial
Month
of Occupancy Supplies Expense
March .………………………… 4,000 $7,500
April …………...……………… 6,500 $8,250
May...... ……………………… 8,000 $10,500
June . …………………………… 10,500 $12,000
July.... …………………………… 12,000 $13,500
August. ……………………… 9,000 $10,750
September ...…………………… 7,500 $9,750

Guest-days is a measure of the overall activity at the hotel. For example, a

guest who stays at the hotel for three days is counted as three guest-days.
Required:
1. Using the high-low method, estimate a cost formula for custodial supplies
expense.

Variable cost per unit = Highest activity cost – Lowest activity cost 0
Highest activity unit – Lowest activity units
Variable cost per unit = $13,500 – $7,500
12,000 – 4,000
Variable cost per unit = $6,000
8000

Variable cost per unit = $0.75 per Guest-Days of Occupancy

Fixed cost = Highest activity cost – (Variable cost per unit x Highest activity units)
Fixed cost = $13,500 – ($0.75 x 12,000)
Fixed cost = $13,500 – $9,000
Fixed cost = $4,500

The cost formula is $4,500 per month plus $0.75 per guest-day or
Y = $4,500 + $0.75X
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Maneejan Leebumrung

2. Using the cost formula you derived above, what amount of custodial
supplies expense would you expect to be incurred at an occupancy level of 11,000
guest-days?
Variable cost (11,000 guest-day x &0.75) $ 8,250
Fixed Cost 4,500
Total cost $ 12,750

3. Prepare a scatter graph using the data given above. Plot custodial supplies
expense on the vertical axis and the number of guest-days occupied on the
horizontal axis. Draw a straight line through the two data points that correspond to
the high and low levels of activity. Make sure your line intersects the Y-axis.

14000

12000
Custodial Supplies Expense

10000

8000

6000

4000

2000

0
0 2000 4000 6000 8000 10000 12000 14000 16000

Guest-days Occupie
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4. Comment on the accuracy of your high-low estimates assuming a least-

squares regression analysis estimated the total fixed costs to be $3,973.10 per
month and the variable cost to be $0.77 per quest-day How would the straight line
that you drew in requirement 3 differ from a straight line that minimizes the sum
of the squared errors?

All of the activity’s points are inside the straight line.

5. Using the least-squares regression estimates given in requirement 4, what

custodial supplies expense would you expect to be incurred at an occupancy level
of 11,000 guest-days?

Variable cost (11,000 guest-day x &0.77) $ 8,470.00

Fixed Cost 3,973.10
Total cost $ 12,443.00