Cost Behavior Garrison

Chapter 5 Cost Behavior: Analysis and Use
True/False Questions
1. Within the relevant range, a change in activity results in a change in total variable cost
and the per unit fixed cost.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium
2. The reluctance of managers to lay off employees when activity declines in the short-
run leads to an increase in the ratio of variable to fixed costs.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Hard
3. A variable cost fluctuates in total as activity changes but remains constant on a per unit
basis over the relevant range.

AICPA FN: Reporting LO: 1 Level: Easy
4. A cost that is classified as variable with respect to one measure of activity could be
classified as fixed with respect to a different measure of activity.

5. Fixed costs remain constant in total, but vary inversely with changes in activity when
expressed on a per unit basis.

6. Committed fixed costs have a short-term planning horizon--usually one year.

7. The following costs are all examples of committed fixed costs: depreciation on
buildings, advertising, insurance, and management development and training.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-5

8. The time frame in which discretionary fixed costs are controllable is usually much
shorter than the time frame for committed fixed costs.

9. The high-low method is generally more accurate than the least-squares regression
method in analyzing cost behavior.

AICPA FN: Reporting LO: 3,5 Level: Easy
10. A major problem with the high-low method of cost estimation is that some data are
omitted from the analysis.

11. The high and low points used in the high-low method tend to be unusual and therefore
the cost formula may not accurately represent all of the data.

12. Contribution margin and gross margin mean the same thing.

AICPA FN: Reporting, Measurement LO: 4 Level: Medium
13. Contribution margin equals revenue minus all variable costs.

14. The traditional income statement organizes costs on the basis of cost behavior.

AICPA FN: Measurement LO: 4 Level: Easy
5-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

15. It is necessary to break mixed costs into their variable and fixed cost components in
order to construct an income statement using the contribution approach.

Multiple Choice Questions
16. A is a fixed cost; B is a variable cost. During the current year the level of activity has
decreased but is still within the relevant range. We would expect that:
A) The cost per unit of A has remained unchanged.
B) The cost per unit of B has decreased.
C) The cost per unit of A has decreased.
D) The cost per unit of B has remained unchanged.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking

17. Which costs will change with an increase in activity within the relevant range?
A) Unit fixed cost and total fixed cost
B) Unit variable cost and total variable cost
C) Unit fixed cost and total variable cost
D) Unit fixed cost and unit variable cost
Ans: C AACSB: Analytic AICPA BB: Critical Thinking

18. Salaries of accounts receivable clerks when one clerical worker is needed for every
750 accounts receivable is an example of a:
A) fixed cost
B) step-variable cost
C) mixed cost
D) curvilinear cost
Ans: B AACSB: Analytic AICPA BB: Critical Thinking


19. Limousine Conversion Company purchases ordinary Cadillacs, cuts them in half, and
then adds a middle section to the vehicles to create stretch limousines. With respect to
the number of cars converted, the cost of the Cadillacs purchased for conversion by
Limousine Conversion Company would best be described as a:
A) fixed cost
B) mixed cost
C) step-variable cost
D) variable cost

20. For an automobile manufacturer, the cost of a driver's side air bag purchased from a
supplier and installed in every automobile would best be described as a:
A) fixed cost.
B) mixed cost.
C) step-variable cost.
D) variable cost.

21. With respect to a fixed cost, an increase in the activity level within the relevant range
results in:
A) an increase in fixed cost per unit.
B) a proportionate increase in total fixed costs.
C) an unchanged fixed cost per unit.
D) a decrease in fixed cost per unit.

22. In the standard cost formula Y = a + bX, what does the “Y” represent?
A) total cost
B) total fixed cost
C) total variable cost
D) variable cost per unit
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking


23. In the standard cost formula Y = a + bX, what does the “a” represent?
A) total cost
B) total fixed cost
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking

24. In the standard cost formula Y = a + bX, what does the “b” represent?
A) total cost
B) total fixed cost
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

25. In the standard cost formula Y = a + bX, what does the “X” represent?
A) total cost
B) total fixed cost
C) units of activity
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

26. Which of the following would usually be considered a discretionary fixed cost for a
soft drink bottling company?
A) the cost of advertising its products
B) the cost of fire insurance on its factory building
C) depreciation on its manufacturing equipment
D) both a and b above


27. Which of the following is a weakness of the quick-and-dirty scattergraph method of

analyzing mixed cost?
A) It is impossible to determine variable cost per unit.
B) Only two data points are used and the rest are ignored in drawing the
scattergraph.
C) Different people will have different answers even though they are analyzing the
same set of data.
D) Both B and C above

28. Which of the following statements is true when referring to the high-low method of
cost analysis?
A) The high-low method has no major weaknesses.
B) The high-low method is very hard to apply.
C) In essence, the high-low method draws a straight line through two data points.
D) None of the above is true.

29. Contribution margin is computed as sales revenue minus:

A) fixed expenses
B) variable expenses
C) cost of goods sold
D) cost of goods manufactured

AICPA FN: Reporting, Measurement LO: 4 Level: Easy

30. Which of the following approaches to preparing an income statement calculates gross
margin?
Traditional Contribution
Approach Approach
A) Yes Yes
B) Yes No
C) No Yes
D) No No

AICPA FN: Measurement LO: 4 Level: Medium
31. The least-squares regression method:

A) fits a regression line by minimizing the sum of the squared errors from the
regression line.
B) is generally less accurate than the scattergraph method.
C) can be used only if the fixed cost element is larger than the variable cost
element.
D) is the only method acceptable under generally accepted accounting principles.

32. Multiple regression analysis is used when:

A) more than one cost category must be analyzed.
B) when more than one factor causes variation in a cost.
C) the high-low method cannot be used because there is only one observation.
D) all of the points on a scattergraph fall exactly on a regression line.


33. Iacono Corporation is a wholesaler that sells a single product. Management has
provided the following cost data for two levels of monthly sales volume. The company
sells the product for $127.20 per unit.
Sales volume (units)................................... 5,000 6,000

Cost of sales............................................... $419,000 $502,800
Selling and administrative costs................. $186,500 $202,200
The best estimate of the total contribution margin when 5,300 units are sold is:
A) $230,020
B) $51,410
C) $146,810
D) $32,330

AICPA FN: Reporting LO: 1,3,4 Level: Hard
Solution:
Variable component of cost of goods sold:

Variable cost = Change in costs/Change in units
Variable cost = ($502,800 − $419,000)/(6,000 − 5,000)
Variable cost = $83.80 per unit
Variable component of selling and administrative expenses:

Variable cost = ($202,200 − $186,500)/(6,000 − 5,000)
Sales revenue ($127.20 × 5,300)......................... $674,160

Variable expenses:
Variable cost of goods sold ($83.80 × 5,300)... $444,140
Variable selling and administrative expense 83,210 527,350
($15.70 × 5,300)...........................................
Contribution margin............................................ $ 146,810

34. Utility costs at Service, Inc. are a mixture of fixed and variable components. Records
indicate that utility costs are an average of $0.40 per hour at an activity level of 9,000
machine hours and $0.25 per hour at an activity level of 18,000 machine hours.
Assuming that this activity is within the relevant range, what is the expected total
utility cost if the company works 13,000 machine hours?
A) $4,225
B) $5,200
C) $4,000
D) $3,250

AICPA FN: Reporting LO: 1,3 Level: Hard
Solution:
Average Total Utility Cost
Machine- Cost per (machine-hours ×
Hours Hour average cost per hour)
High activity level...... 18,000 $0.25 $4,500
Low activity level...... 9,000 $0.40 $3,600
Variable cost = Change in cost ÷ Change in activity

= ($4,500 − $3,600) ÷ (18,000 – 9,000) = $0.10
Fixed cost element = Total cost − Variable cost element

= $4,500 − ($0.10 × 18,000) = $2,700
Therefore, the cost formula for total utility cost is $2,700 per period plus $0.10 per
machine-hour, or Y = $2,700 + $0.10X.
At an activity level of 13,000 machine-hours, total cost is estimated to be:

Y = $2,700 + ($0.10 × 13,000) = $4,000

35. Clerical costs in the billing department of Craig Company are a mixture of variable
and fixed components. Records indicate that average unit processing costs are $0.50
per account processed at an activity level of 32,000 accounts. When only 22,000
accounts are processed, the total cost of processing is $12,500. Assuming that this
activity is within the relevant range, at a budgeted level of 25,000 accounts:
A) processing costs are expected to total $8,750.
B) fixed processing costs are expected to be $10,400.
C) the variable processing costs are expected to be $0.35 per account processed.
D) processing costs are expected to total $14,975.

Solution:
Average Total Utility Cost
Cost per (accounts × average
Account cost per account
Accounts Processed processed)
Low activity level...... 22,000 $12,500*
*Given

= ($16,000 − $12,500) ÷ (32,000 – 22,000) = $0.35

= $16,000 − ($0.35 × 32,000) = $4,800
account processed, or Y = $4,800 + $0.35X.
At an activity level of 25,000 accounts, total cost is estimated to be:

Y = $4,800 + ($0.35 × 25,000) = $13,550

36. Shipping cost at Junk Food Imports is a mixed cost with variable and fixed
components. Past records indicate total shipping cost was $18,000 for 16,000 pounds
shipped and $22,500 for 22,000 pounds shipped. Assuming that this activity is within
the relevant range, if the company plans to ship 18,000 pounds next month, the
expected shipping cost is:
A) $18,500
B) $20,400
C) $19,500
D) $24,000

AICPA FN: Reporting LO: 1,3 Level: Medium
Solution:
Shipping
Pounds Shipped Cost
High activity level...... 22,000 $22,500
Low activity level...... 16,000 $18,000

= ($22,500 − $18,000) ÷ (22,000 − 16,000) = $0.75

= $22,500 − ($0.75 × 22,000) = $6,000
Therefore, the cost formula for total shipping cost is $6,000 per period plus $0.75 per
pound shipped, or Y = $6,000 + $0.75X.
At an activity level of 18,000 pounds shipped, total cost is estimated to be:

Y = $6,000 + ($0.75 × 18,000) = $19,500

37. Larson Brothers, Inc., used the high-low method to derive its cost formula for
electrical power cost. According to the cost formula, the variable cost per unit of
activity is $3 per machine-hour. Total electrical power cost at the high level of activity
was $7,600 and at the low level of activity was $7,300. If the high level of activity was
1,200 machine hours, then the low level of activity was:
A) 800 machine hours
B) 900 machine hours
C) 1,000 machine hours
D) 1,100 machine hours

Solution:

= ($7,600 − $7,300) ÷ (1,200 − X) = $3, where X = low level of activity
=> $300 ÷ (1,200 – X) = $3
=> $300 = $3 × (1,200 – X)
=> $100 = $1,200 – X
=> X = $1,100

38. The following production and average cost data for a month's operations have been
supplied by a company that produces a single product.
Production volume......................... 1,000 units 2,000 units

Direct materials.............................. $4.00 per unit $4.00 per unit
Direct labor.................................... $3.50 per unit $3.50 per unit
Manufacturing overhead................ $10.00 per unit $6.20 per unit
The total fixed manufacturing cost and variable manufacturing cost per unit are as
follows:
A) $3,600; $7.50
B) $3,600; $9.90
C) $7,600; $7.50
D) $7,600; $9.90

AICPA FN: Reporting LO: 1,3 Level: Hard Source: CIMA, adapted
Solution:
First, calculate the variable manufacturing cost per unit:
Total Manufacturing
Production Average Overhead Cost (units
Volume Cost per × average cost per
(Units) Unit unit)
Variable manufacturing overhead cost = Change in cost ÷ Change in activity

= ($12,400 − $10,000) ÷ (2,000 – 1,000) = $2.40
Fixed cost element of manufacturing overhead = Total cost − Variable cost element
= $12,400 − ($2.40 × 2,000) = $7,600
Total variable cost per unit = Direct material + Direct labor + Variable manufacturing
overhead = $4.00 + $3.50 + $2.40 = $9.90
There are no fixed direct materials or direct labor, so the total fixed costs would be
equal to the fixed cost portion of manufacturing overhead, or $7,600.

39. Anderst Corporation has provided the following production and average cost data for
two levels of monthly production volume. The company produces a single product.

The best estimate of the total monthly fixed manufacturing cost is:
A) $201,800
B) $233,200
C) $170,400
D) $392,400

Solution:
First, calculate the variable manufacturing cost per unit:
Total Manufacturing
(Units) Unit unit)

= ($233,200 − $201,800) ÷ (4,000 – 2,000) = $15.70
Fixed cost element of manufacturing overhead = Total cost − Variable cost element
= $233,200 − ($15.70 × 4,000) = $170,400

40. Bakeman Corporation has provided the following production and average cost data for

The best estimate of the total variable manufacturing cost per unit is:
A) $104.80
B) $36.10
C) $20.70
D) $84.10
Ans: A AACSB: Analytic AICPA BB: Critical Thinking

Solution:
To calculate the variable manufacturing cost per unit:
Total Manufacturing
Production Average Overhead Cost
Volume Cost per (units × average cost
(Units) Unit per unit)

= ($122,700 − $102,000) ÷ (3,000 – 2,000) = $20.70
Total variable manufacturing cost per unit

= Direct materials + Direct labor + Manufacturing overhead
= $36.10 + $48.00 + $20.70 = $104.80

41. Carcia Corporation has provided the following production and average cost data for

The best estimate of the total cost to manufacture 6,300 units is closest to:
A) $1,274,490
B) $1,287,090
C) $1,312,290
D) $1,236,690

Solution:
Total Manufacturing
(Units) Unit unit)
Variable manufacturing overhead cost

= Change in cost ÷ Change in activity
= ($669,900 − $646,200) ÷ (7,000 – 6,000) = $23.70
Fixed cost element of manufacturing overhead

= Total cost − Variable cost element
= $669,900 − ($23.70 × 7,000) = $504,000
Per Unit Number

Cost of Units Total Cost
Direct materials................................... $89.40 6,300 $ 563,220
Direct labor.......................................... $11.20 6,300 70,560
Variable manufacturing overhead........ $23.70 6,300 149,310
Fixed manufacturing overhead............ 504,000
Total cost to manufacture 6,300 units $1,287,090

42. Daar Corporation has provided the following production and total cost data for two
levels of monthly production volume. The company produces a single product.

Direct materials.............................. $188,400 $282,600
Direct labor.................................... $91,800 $137,700
Manufacturing overhead................ $110,400 $127,800
The best estimate of the total monthly fixed manufacturing cost is:
A) $75,600
B) $390,600
C) $469,350
D) $548,100

Solution:
Production
Volume Total Manufacturing
(Units) Overhead Cost

= ($127,800 − $110,400) ÷ (3,000 – 2,000) = $17.40

= $127,800 − ($17.40 × 3,000) = $75,600

43. Edde Corporation has provided the following production and total cost data for two

Direct labor.................................... $219,600 $274,500
The best estimate of the total variable manufacturing cost per unit is:
A) $127.70
B) $150.30
C) $22.60
D) $72.80

Solution:
Direct material cost per unit = $291,200 ÷ 4,000 = $72.80

(Alternatively, direct material cost per unit = $364,000 ÷ 5,000 = $72.80)
Direct labor cost per unit = $219,600 ÷ 4,000 = $54.90

(Alternatively, direct labor cost per unit = $274,500 ÷ 5,000 = $54.90)

= ($343,000 − $320,400) ÷ (5,000 – 4,000) = $22.60
Total variable manufacturing cost per unit = $72.80 + $54.90 + $22.60 = $150.30

44. Farah Corporation has provided the following production and total cost data for two

Direct labor.................................... $37,200 $55,800
The best estimate of the total cost to manufacture 2,300 units is closest to:
A) $332,120
B) $379,500
C) $355,810
D) $360,960

Solution:
Production
Volume Total Manufacturing
(Units) Overhead Cost

= ($158,100 − $146,600) ÷ (3,000 – 2,000) = $11.50

= $158,100 − ($11.50 × 3,000) = $123,600

Per Unit Number

Cost of Units Total Cost
Direct materials................................... $73.10* 2,300 $168,130
Direct labor.......................................... $18.60** 2,300 42,780
Variable manufacturing overhead........ $11.50 2,300 26,450
Fixed manufacturing overhead............ 123,600
Total cost to manufacture 2,300 units $360,960
*$219,300 ÷ 3,000 units = $73.10 per unit

**$55,800 ÷ 3,000 units = $18.60 per unit
45. Gamad Corporation is a wholesaler that sells a single product. Management has
Sales volume (units)............................. 4,000 5,000

Cost of sales......................................... $262,800 $328,500
Selling and administrative costs........... $230,400 $244,500
The best estimate of the total monthly fixed cost is:

A) $174,000
B) $533,100
C) $493,200
D) $573,000


Solution:

Variable cost = ($328,500 − $262,800)/(5,000 − 4,000)
Variable cost = $65.70
Fixed cost:
High volume: $328,500 − $65.70 × 5,000 = $0
Low volume: $262,800 − $65.70 × 4,000 = $0

Variable cost = ($244,500 − $230,400)/(5,000 − 4,000)
Fixed cost:
High volume: $244,500 − $14.10 × 5,000 = $174,000
Low volume: $230,400 − $14.10 × 4,000 = $174,000
Total variable cost per unit:

$65.70 + $14.10 = $79.80
Total fixed cost:

$0 + $174,000 = $174,000

46. Harada Corporation is a wholesaler that sells a single product. Management has
Sales volume (units)............................. 4,000 5,000

Cost of sales......................................... $273,600 $342,000
Selling and administrative costs........... $56,800 $68,000
The best estimate of the total variable cost per unit is:
A) $68.40
B) $79.60
C) $82.60
D) $82.00

Solution:

Variable cost = ($342,000 − $273,600)/(5,000 − 4,000)
Fixed cost:
High volume: $342,000 − $68.40 × 5,000 = $0
Low volume: $273,600 − $68.40 × 4,000 = $0

Variable cost = ($68,000 − $56,800)/(5,000 − 4,000)
Fixed cost:
High volume: $68,000 − $11.20 × 5,000 = $12,000
Low volume: $56,800 − $11.20 × 4,000 = $12,000

$68.40 + $11.20 = $79.60
Total fixed cost:

$0 + $12,000 = $12,000

47. A company produces a single product. The following volume and average cost data for
two accounting periods have been provided by management:
Number of units............................. 500 800

Direct materials.............................. $2.00 $2.00
Direct labor.................................... $1.50 $1.50
Manufacturing overhead................ $2.50 $1.75
Other overhead............................... $1.00 $0.625
The best estimate for the cost formula for the total cost of producing and selling the
product (where X is the number of units produced and sold in a period) is:
A) $1,000 + $1.125 X
B) $1,000 + $3.50 X
C) $1,500 + $3.50 X
D) $1,500 + $4.00 X

AICPA FN: Reporting LO: 1,3 Level: Hard Source: CIMA, adapted

Solution:
Variable component of manufacturing overhead:

Variable cost = ($1,400* − $1,250**)/(800 − 500)
*$1.75 × 800 = $1,400

**$2.50 × 500 = $1,250
Fixed cost:
High volume: $1,400 − $0.50 × 800 = $1,000
Low volume: $1,250 − $0.50 × 500 = $1,000
Variable component of other overhead:

Variable cost = ($500* − $500**)/(800 − 500)
Variable cost = $0
*$0.625 × 800 = $500

**$1.00 × 500 = $500
Fixed cost:
High volume: $500 − $0 × 800 = $500
Low volume: $500 − $0 × 500 = $500
Total variable cost per unit (includes direct material, direct labor, variable
manufacturing overhead, and variable other overhead):
$2.00 + $1.50 + $0.50 + $0 = $4.00
Total fixed cost:

$1,000 + $500 = $1,500

48. The employees at Mobile Sun Lotion Company roam the beaches with a tank of
premium suntan lotion strapped on their backs. For a $2 charge, the employees will
spray sunbathers with suntan lotion. Last year, Mobile sprayed 250,000 customers and
incurred the following costs:
Total variable costs............. $175,000

Total fixed costs................. 50,000
Total costs.......................... $225,000
Assuming that this activity is within the relevant range, what would Mobile's total
contribution margin have been last year if only 240,000 customers were sprayed?
A) $255,000
B) $262,000
C) $305,000
D) $312,000

Solution:
Variable cost per unit: $175,000 ÷ 250,000 customers = $0.70 per customer
Sales ($2 × 240,000)........................................... $480,000
Variable costs ($0.70 × 240,000)........................ 168,000
Contribution margin........................................... $312,000

49. The following costs are budgeted for Ghana Corporation for next year:

Total costs.......................... $590,000
The costs above are based on a level of activity of 10,000 units. Assuming that this
activity is within the relevant range, what would total costs be for Ghana if the level of
activity was 12,000 units?
A) $590,000
B) $638,000
C) $660,000
D) $708,000

Solution:
Variable cost per unit: $350,000 ÷ 10,000 units = $35 per unit
The cost function is:
Y = $240,000 + $35X
Y = $240,000 + $35(12,000)
Y = $660,000

50. The following costs are budgeted for Harlow Corporation for next year:

Total costs.......................... $900,000
The costs above are based on a level of activity of 20,000 units. Assuming that this
activity is within the relevant range, what would total cost per unit be for Harlow if the
level of activity was only 18,000 units?
A) $45.00
B) $46.50
C) $48.50
D) $50.00

Solution:
Variable cost per unit: $270,000 ÷ 20,000 units = $13.50 per unit
Y = $630,000 + $13.50X
Y = $630,000 + $13.50(18,000)
Y = $873,000
Total cost ÷ number of units = total cost per unit
$873,000 ÷ 18,000 = $48.50

51. At a volume of 20,000 direct labor hours, Tirso Company incurs $50,000 in factory
overhead costs, including $10,000 in fixed costs. Assuming that this activity is within
the relevant range, if volume increases to 25,000 direct labor hours, Tirso Company
would expect to incur total factory overhead costs of:
A) $50,000
B) $60,000
C) $62,500
D) $72,500

Solution:
Variable cost per direct labor hour: $40,000 ÷ 20,000 direct labor hours = $2.00 per
direct labor hour
Y = $10,000 + $2.00X
Y = $10,000 + $2.00(25,000)
Y = $60,000

52. The Frandsen Company has estimated the following cost formulas for overhead:
Cost Formula
Lubricants.............. $1,500 plus $0.50 per machine-hour
Utilities................... $2,000 plus $0.60 per machine-hour
Depreciation........... $1,000
Maintenance........... $200 plus $0.10 per machine-hour
Machine setup........ $0.30 per machine-hour
Based on these cost formulas, the total overhead cost expected at an activity level of
300 machine hours is:
A) $4,950
B) $5,000
C) $4,700
D) $5,150

Solution:
Fixed Variable
Cost Cost
Portion Portion Total Cost
Lubricants
(variable cost = $0.50 × 300)........ $1,500 $150 $1,650
Utilities
(variable cost = $0.60 × 300)........ $2,000 $180 2,180
Depreciation...................................... $1,000 1,000
Maintenance
(variable cost = $0.10 × 300)........ $200 $30 230
Machine setup
(variable cost = $0.30 × 300)........ $90 90
Total cost........................................... $5,150

53. Erg Manufacturing Company has developed the following overhead cost formulas:
Cost Formula
Depreciation........... $500
Set-up..................... $400 plus $0.20 per machine-hour
Lubrication............. $50 plus $0.25 per machine-hour
Utilities................... $0.40 per machine-hour
Based on these cost formulas, the total overhead cost expected for Erg Manufacturing
Company if 200 machine hours are worked is:
A) $620
B) $900
C) $170
D) $1,120

Solution:
Fixed Variable
Cost Cost Total
Portion Portion Cost
Lubricants (variable cost = $0.25 × 200). $50 $50 $ 100
Utilities (variable cost = $0.40 × 200)..... $80 80
Depreciation............................................. $500 500
Setup (variable cost = $0.20 × 200)......... $400 $40 440
Total cost.................................................. $1,120
54. Vicuna Wool Company manufactures and sells sweaters. Last year, Vicuna operated at
100% of capacity and had the following cost formula for total manufacturing costs:
Y = $50,000 + $400X
Assuming no change in cost structure, what would Vicuna's cost formula have been
last year if they only operated at 90% of production capacity?
A) Y = $45,000 + $360X
B) Y = $45,000 + $400X
C) Y = $50,000 + $360X
D) Y = $50,000 + $400X


55. Timchak Corporation reports that at an activity level of 9,900 units, its total variable
cost is $919,116 and its total fixed cost is $259,974. What would be the total cost, both
fixed and variable, at an activity level of 10,100 units? Assume that this level of
activity is within the relevant range.
A) $1,197,658
B) $1,191,000
C) $1,179,090
D) $1,202,910

Solution:
Variable cost per unit: $919,116 ÷ 9,900 units = $92.84 per unit
Y = $259,974 + $92.84X
Y = $259,974 + $92.84(10,100)
Y = $1,197,658
56. At an activity level of 8,400 machine-hours in a month, Braughton Corporation's total

variable maintenance and repair cost is $697,284 and its total fixed maintenance and
repair cost is $464,100. What would be the total maintenance and repair cost, both
fixed and variable, at an activity level of 8,500 units in a month? Assume that this
level of activity is within the relevant range.
A) $1,175,210
B) $1,169,685
C) $1,161,384
D) $1,168,297

Solution:
Variable cost per machine-hour: $697,284 ÷ 8,400 hours = $83.01 per unit
Y = $464,100 + $83.01X
Y = $464,100 + $83.01(8,500)
Y = $1,169,685

57. At an activity level of 7,200 machine-hours in a month, Falks Corporation's total

variable production engineering cost is $556,416 and its total fixed production
engineering cost is $226,008. What would be the total production engineering cost per
unit, both fixed and variable, at an activity level of 7,300 units in a month? Assume
that this level of activity is within the relevant range.
A) $107.93
B) $107.18
C) $108.67
D) $108.24

Solution:
Variable cost per machine-hour: $556,416 ÷ 7,200 hours = $77.28 per hour
Y = $226,008 + $77.28X
Y = $226,008 + $77.28(7,300)
Y = $790,152
58. You are applying the scattergraph method and find that the regression line you have
drawn passes through a data point with the following coordinates: 7,500 units and
$10,000. The regression line passes through the Y axis at the $4,000 point. Which of
the following is the cost formula that represents the slope of this line?
A) Y=$4,000+$1.25X
B) Y=$4,000+$0.80X
C) Y=$10,000+$1.33X
D) None of the above is true

Solution:

= ($10,000 – $4,000) ÷ (7,500 – 0) = $0.80
Since the regression line passes through the Y axis at the $4,000 point, the $4,000
represents the fixed costs.
Therefore, the cost formula would be Y=$4,000+$0.80X.

59. Wright Company has observed that at an activity level of 5,000 units the cost for
maintenance is $6,500, and at 10,000 units the cost for maintenance is $9,000. Using
the high-low method, the cost formula for maintenance is:
A) $4,000 plus $.50 per unit
B) $3,000 plus $.60 per unit
C) $.90 per unit
D) $1.30 per unit

Solution:

= ($9,000 – $6,500) ÷ (10,000 – 5,000) = $0.50
Fixed cost element = Total cost – Variable cost element

= $9,000 – ($0.50 × 10,000) = $4,000
Therefore, the cost formula for total maintenance cost is $4,000 per period plus $0.50
per unit, or Y = $4,000 + $0.50X.

60. Jackson, Inc., is preparing a budget for next year and requires a breakdown of the cost
of steam used in its factory into fixed and variable components. The following data on
the cost of steam used and direct labor hours worked are available for the last six
months:
Cost of Steam Direct Labor-Hours

July................... $ 15,850 3,000
August.............. 13,400 2,050
September........ 16,370 2,900
October............. 19,800 3,650
November......... 17,600 2,670
December......... 18,500 2,650
Total................. $101,520 16,920
If Jackson uses the high-low method of analysis, the estimated variable cost of steam
per direct labor hour would be:
A) $4.00
B) $5.42
C) $5.82
D) $6.00

AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted
Solution:

= ($19,800 – $13,400) ÷ (3,650 – 2,050) = $4.00

61. Shown below are units produced and total manufacturing costs for the past four
months at Minga Manufacturing Corporation:
Units Produced Total Cost

Jul............... 120 $446,000
Aug............. 150 $508,000
Sep.............. 180 $668,000
Oct.............. 160 $574,000
What is Minga's cost formula for total manufacturing cost under the high-low method?
A) Y = $2,000 + $3,700X
B) Y = $3,700 + $2,000X
C) Y = $14,000 + $3,600X
D) Y = $62,000 + $3,200X

Solution:

= ($668,000 – $446,000) ÷ (180 – 120) = $3,700

= $668,000 – ($3,700 × 180) = $2,000
Therefore, the cost formula for total cost is $2,000 per period plus $3,700 per unit, or
Y = $2,000 + $3,700X.

62. A consulting company would like to develop a method of predicting its total costs in a
period. The following past costs have been recorded by the company in two periods:
Number of client-hours.................. 420 515

Total cost........................................ $82,200 $90,275
The best estimate of the cost formula for the company (where X is the number of
client-hours) is:
A) Y = $46,500 + $85 X
B) Y = $42,000 + $95 X
C) Y = $46,500 – $85 X
D) Y = $51,500 – $95 X

AICPA FN: Reporting LO: 3 Level: Easy Source: CIMA, adapted
Solution:

= ($90,275 – $82,200) ÷ (515 – 420) = $85

= $90,275 – ($85 × 515) = $46,500
Therefore, the cost formula for total cost is $46,500 per period plus $85 per client-
hour, or Y = $46,500 + $85X.

63. Electrical costs at one of Finfrock Corporation's factories are listed below:
Machine-Hours Electrical Cost

March..................... 3,642 $40,537
April....................... 3,616 $40,319
May........................ 3,667 $40,706
June........................ 3,634 $40,462
July......................... 3,665 $40,703
August.................... 3,659 $40,680
September.............. 3,644 $40,547
October................... 3,612 $40,268
November............... 3,624 $40,364
Management believes that electrical cost is a mixed cost that depends on machine-
hours. Using the high-low method to estimate the variable and fixed components of
this cost, these estimates would be closest to:
A) $7.96 per machine-hour; $11,517 per month
B) $11.13 per machine-hour; $40,510 per month
C) $9.61 per machine-hour; $5,533 per month
D) $0.13 per machine-hour; $40,246 per month

Solution:

= ($40,706 − $40,268) ÷ (3,667 − 3,612) = $7.96

= $40,706 − ($7.96 × 3,667) = $11,517
Therefore, the cost formula for total electrical cost is $11,517 per period plus $7.96
per machine-hour, or Y = $11,517 + $7.96X

64. Maintenance costs at a Straiton Corporation factory are listed below:
Machine-Hours Maintenance Cost

March..................... 3,627 $54,384
April....................... 3,588 $53,980
May........................ 3,637 $54,453
June........................ 3,638 $54,491
July......................... 3,572 $53,843
August.................... 3,611 $54,196
September.............. 3,644 $54,550
October................... 3,609 $54,181
November............... 3,669 $54,767
Management believes that maintenance cost is a mixed cost that depends on machine-
hours. Using the high-low method to estimate the variable and fixed components of
this cost, these estimates would be closest to:
A) $0.10 per machine-hour; $54,382 per month
B) $15.00 per machine-hour; $54,316 per month
C) $9.12 per machine-hour; $21,309 per month
D) $9.53 per machine-hour; $19,801 per month

Solution:

= ($54,767 − $53,843) ÷ (3,669 − 3,572) = $9.53

= $54,767 − ($9.53 × 3,669) = $19,801
per machine-hour, or Y = $19,801 + $9.53X

65. Supply costs at Coulthard Corporation's chain of gyms are listed below:
Client-Visits Supply Cost

March..................... 12,855 $23,598
April....................... 12,283 $23,278
May........................ 13,104 $23,742
June........................ 12,850 $23,607
July......................... 12,493 $23,415
August.................... 12,794 $23,562
September.............. 12,686 $23,496
October................... 12,765 $23,541
November............... 13,018 $23,687
Management believes that supply cost is a mixed cost that depends on client-visits.
Using the high-low method to estimate the variable and fixed components of this cost,
those estimates would be closest to:
A) $1.85 per client-visit; $23,547 per month
B) $1.77 per client-visit; $557 per month
C) $0.55 per client-visit; $16,579 per month
D) $0.57 per client-visit; $16,273 per month

Solution:

= ($23,742 − $23,278) ÷ (13,104 − 12,283) = $0.57

= $23,742 − ($0.57 × 13,104) = $16,273
per client visit, or Y = $16,273 + $0.57X

66. A jewelry manufacturer incurred the following costs: 15,000 units produced with costs
of $557,500, and 5,000 units produced with costs of $292,500. Which cost formula
would you estimate using the high-low method?
A) Y=$265,000+$37.17X
B) Y=$160,000+$17.67X
C) Y=$265,000+$58.50X
D) Y=$160,000+$26.50X

Solution:

= ($557,500 − $292,500) ÷ (15,000 − 5,000) = $26.50

= $557,500 − ($26.50 × 15,000) = $160,000
unit, or Y = $160,000 + $26.50X

67. Sales for a retail store were $250,000. Net operating income totaled $30,000 and cost
of goods sold was $110,000. If the contribution margin was $100,000, total variable
selling and administrative expenses must have been:
A) $40,000
B) $100,000
C) $70,000
D) $150,000

Solution:
Sales........................................................................... $250,000
Variable cost of goods sold........................................ $110,000
Variable selling and administrative expenses............. ? ?
Contribution margin................................................... $100,000
To solve this problem, it must be worked backwards. First, calculate what total
variable expenses must be by subtracting the contribution margin from sales
($250,000 − $100,000 = $150,000). Of the total variable expenses, $110,000 is given
in the problem as the variable cost of goods sold, so we would have:
Variable selling and administrative expenses = $150,000 − $110,000 = $40,000.

68. Glory Company's gross margin exceeded its contribution margin by $25,000. If sales
totaled $175,000 when net operating income equaled $20,000 and total selling and
administrative expenses equaled $55,000, then the contribution margin equaled:
A) $75,000
B) $80,000
C) $30,000
D) $50,000

Solution:
Partial traditional income statement:

Gross margin.............................................. $ ?
Less selling and administrative expenses. . 55,000
Net operating income................................. $20,000
Solving backwards, gross margin is $20,000 + $55,000 = $75,000.

Since the information given in the problem states that the gross margin exceeds the
contribution margin by $25,000, the contribution margin must be $75,000 − $25,000 =
$50,000.

69. Kramer Company is a retailer. At a sales level of $450,000, Kramer Company's gross
margin is $90,000 less than its contribution margin, its net operating income is
$30,000, and its selling and administrative expenses total $140,000. The company's
total fixed expenses are:
A) $360,000
B) $230,000
C) $190,000
D) $280,000

Solution:
Sales............................................................... $450,000
Cost of goods sold ($450,000 − $170,000).... 280,000
Gross margin ($140,000 + $30,000............... 170,000
Selling and administrative expenses.............. 140,000
Net operating income..................................... $ 30,000
Since the gross margin is $90,000 less than the contribution margin, the contribution
margin is $170,000 + $90,000, or $260,000.
Sales................................................................. $450,000
Variable expenses ($450,000 − $260,000)...... 190,000
Contribution margin........................................ 260,000
Fixed expenses ($260,000 − $30,000)............. 230,000
Net operating income...................................... $ 30,000

70. Gudwill Corporation, a manufacturing company, has provided the following financial
data for April:
Sales........................................................... $340,000
Variable production expense...................... $43,000
Variable selling expense............................. $21,000
Variable administrative expense................ $33,000
Fixed production expense.......................... $62,000
Fixed selling expense................................. $67,000
Fixed administrative expense..................... $88,000
The company had no beginning or ending inventories. The contribution margin for
April was:
A) $243,000
B) $235,000
C) $26,000
D) $123,000

Solution:
Sales........................................................... $340,000
Less variable expenses:
Variable production expense................... 43,000
Variable selling expense.......................... 21,000
Variable administrative expense............. 33,000
Contribution margin................................... $243,000

71. The management of Bushovisky Corporation, a manufacturing company, has provided

the following financial data for January:
Sales........................................................... $230,000
The contribution margin for January was:

A) $15,000
B) $152,000
C) $91,000
D) $154,000

Solution:
Sales........................................................... $230,000

72. The management of Gilmartin Corporation, a manufacturing company, has provided

the following data for February:
Sales........................................................... $550,000
The contribution margin for February was:

A) $366,000
B) $210,000
C) $26,000
D) $324,000

Solution:
Sales........................................................... $550,000

73. Stuart Company is a merchandising company. During the next month, the company
expects to sell 450 units. The company has the following revenue and cost structure:
Selling price per unit.......... $230

Cost per unit....................... $120
Sales commission............... 12% of sales
Advertising expense........... $18,000 per month
Administrative expense...... $32,500 per month
What is the expected contribution margin next month?

A) $66,420
B) $37,080
C) $50,500
D) $53,000

Solution:
Sales ($230 × 450)............................................... $103,500

Variable production expense ($120 × 450)....... 54,000
Sales commissions (12% × $103,500).............. 12,420
Contribution margin............................................. $ 37,080

74. Cranbrook Company has the following data for the month of March:
Sales........................................................... $30,000
Fixed manufacturing overhead.................. $5,500
Direct labor................................................ $7,250
Variable manufacturing overhead.............. $4,100
Direct materials.......................................... $5,150
Assume that direct labor is variable and all units are produced and sold in the same
month. What was the total contribution margin in March for Cranbrook Company?
A) $3,725
B) $8,875
C) $15,425
D) $16,125

Solution:
Sales........................................................... $30,000
Direct materials....................................... 5,150
Direct labor............................................. 7,250
Variable manufacturing overhead........... 4,100
Contribution margin................................... $ 3,725

75. The management of Dinky Tree Trimming believes that the number of trees trimmed
each month is an appropriate activity measure for total operating cost. Shown below
are the number of trees trimmed and operating costs in each of the last three months:
Trees Trimmed Operating Cost

March..................... 12 $2,600
April....................... 18 $2,990
May........................ 20 $3,250
What is Dinky's cost formula for monthly operating cost using the least-squares
regression method?
A) Y = $478.40 + $176.80X
B) Y = $1,625 + $81.25X
C) Y = $1,655 + $77.50X
D) Y = $8,840 + $176.80X

AICPA FN: Reporting Appendix: 5A LO: 5 Level: Hard
Solution:
The solution using Microsoft Excel functions is:

slope = $77.50 per tree
intercept = $1,655 per month

76. Your boss would like you to estimate the fixed and variable components of a particular
cost. Actual data for this cost over four recent periods appear below:
Activity Cost
Period 1...... 26 $269
Period 2...... 29 $285
Period 3...... 25 $256
Period 4...... 24 $254
Using the least-squares regression method, what is the cost formula for this cost?
A) Y = $0.00 + $10.23X
B) Y = $97.00 + $6.50X
C) Y = $91.40 + $6.72X
D) Y = $99.10 + $5.11X

Solution:

slope = $6.50 per activity unit
intercept = $97.00 per period

77. Seifer Inc.'s inspection costs are listed below:
Units Produced Inspection Costs

April....................... 119 $8,558
May........................ 117 $8,535
June........................ 113 $8,415
July......................... 125 $8,736
August.................... 152 $9,357
September.............. 108 $8,320
October................... 120 $8,603
November............... 192 $10,337
Management believes that inspection cost is a mixed cost that depends on the number
of units produced. Using the least-squares regression method, the estimates of the
variable and fixed components of inspection cost would be closest to:
A) $24.08 per unit plus $5,709 per month
B) $67.74 per unit plus $8,858 per month
C) $24.37 per unit plus $5,658 per month
D) $24.01 per unit plus $5,727 per month

Solution:

slope = $24.08 per unit

78. The management of Hamano Corporation would like for you to analyze their repair
costs, which are listed below:
Machine-Hours Repair Costs

April....................... 4,459 $98,523
May........................ 4,426 $98,296
June........................ 4,493 $98,781
July......................... 4,417 $98,207
August.................... 4,432 $98,349
September.............. 4,446 $98,420
October................... 4,489 $98,749
November............... 4,475 $98,654
Management believes that repair cost is a mixed cost that depends on the number of
machine-hours. Using the least-squares regression method, the estimates of the
variable and fixed components of repair cost would be closest to:
A) $22.11 per machine-hour plus $98,497 per month
B) $7.37 per machine-hour plus $65,670 per month
C) $8.19 per machine-hour plus $62,015 per month
D) $7.55 per machine-hour plus $64,859 per month

Solution:

slope = $7.37 per machine-hour
Use the following to answer questions 79-81:
Callaghan Corporation is a wholesaler that sells a single product. Management has provided
the following cost data for two levels of monthly sales volume. The company sells the product
for $138.20 per unit.
Sales volume (units)....................... 6,000 7,000

Cost of sales................................... $499,200 $582,400
Selling and administrative costs..... $285,600 $303,800

79. The best estimate of the total monthly fixed cost is:
A) $176,400
B) $835,500
C) $784,800
D) $886,200

Solution:

Variable cost = ($582,400 − $499,200)/(7,000 − 6,000)
Fixed cost:
High volume: $582,400 − $83.20 × 7,000 = $0
Low volume: $499,200 − $83.20 × 6,000 = $0

Variable cost = ($303,800 − $285,600)/(7,000 − 6,000)
Fixed cost:
High volume: $303,800 − $18.20 × 7,000 = $176,400
Low volume: $285,600 − $18.20 × 6,000 = $176,400

$83.20 + $18.20 = $101.40
Total fixed cost:

$0 + $176,400 = $176,400

80. The best estimate of the total variable cost per unit is:
A) $83.20
B) $126.60
C) $101.40
D) $130.80

Solution:

Variable cost = ($582,400 − $499,200)/(7,000 − 6,000)
Fixed cost:
High volume: $582,400 − $83.20 × 7,000 = $0
Low volume: $499,200 − $83.20 × 6,000 = $0

Variable cost = ($303,800 − $285,600)/(7,000 − 6,000)
Fixed cost:
High volume: $303,800 − $18.20 × 7,000 = $176,400
Low volume: $285,600 − $18.20 × 6,000 = $176,400

$83.20 + $18.20 = $101.40
Total fixed cost:

$0 + $176,400 = $176,400

81. The best estimate of the total contribution margin when 6,300 units are sold is:
A) $73,080
B) $231,840
C) $46,620
D) $346,500

AICPA FN: Reporting LO: 1,3,4 Level: Medium
Solution:

Variable cost = ($582,400 − $499,200)/(7,000 − 6,000)
Fixed cost:
High volume: $582,400 − $83.20 × 7,000 = $0
Low volume: $499,200 − $83.20 × 6,000 = $0

Variable cost = ($303,800 − $285,600)/(7,000 − 6,000)
Fixed cost:
High volume: $303,800 − $18.20 × 7,000 = $176,400
Low volume: $285,600 − $18.20 × 6,000 = $176,400

$83.20 + $18.20 = $101.40
Total fixed cost:

$0 + $176,400 = $176,400
Sales revenue ($138.20 × 6,300)......................... $870,660

Variable expenses:
Variable cost of goods sold ($83.20 × 6,300)... $524,160
Variable selling and administrative expense
($18.20 × 6,300)........................................... 114,660 638,820

Comparative income statements for Boggs Sports Equipment Company for the last two
months are presented below:
July August
Sales in units.................................................... 11,000 10,000
Sales................................................................. $165,000 $150,000
Cost of goods sold............................................ 72,600 66,000
Gross margin.................................................... 92,400 84,000
Selling and administrative expenses:
Rent............................................................... 12,000 12,000
Sales commissions........................................ 13,200 12,000
Maintenance expenses.................................. 13,500 13,000
Clerical expense............................................ 16,000 15,000
Total selling and administrative expenses........ 54,700 52,000
Net operating income....................................... $ 37,700 $ 32,000
All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed).
Assume that the relevant range includes all of the activity levels mentioned in this problem.
82. Which of the selling and administrative expenses of the company is variable?
A) Rent
B) Sales Commissions
C) Maintenance Expense
D) Clerical Expense

83. The total monthly fixed cost for Boggs Sporting Equipment Company is:
A) $12,000
B) $22,500
C) $25,000
D) $40,000


Solution:
Variable component of sales commissions:

Variable cost = ($13,200 − $12,000)/(11,000 − 10,000)
Fixed cost of sales commissions:

High volume: $13,200 − $1.20 × 11,000 = $0 (answer will be zero fixed costs, because
these sales commissions are variable, not mixed)
Low volume: $12,000 − $1.20 × 10,000 = $0
Variable component of maintenance expenses:

Variable cost = ($13,500 − $13,000)/(11,000 − 10,000)
Fixed cost of maintenance expenses:

High volume: $13,500 − $0.50 × 11,000 = $8,000
Low volume: $13,000 − $0.50 × 10,000 = $8,000
Variable component of clerical expense:

Variable cost = ($16,000 − $15,000)/(11,000 − 10,000)
Fixed cost of clerical expense:

High volume: $16,000 − $1.00 × 11,000 = $5,000
Low volume: $15,000 − $1.00 × 10,000 = $5,000

$1.20 + $0.50 + $1.00 = $2.70
Total fixed cost:

$0 + $8,000 + $5,000 + $12,000* = $25,000
*Rent

84. If sales are projected to be 8,000 units in September, total expected selling and
administrative expenses would be:
A) $49,300
B) $41,600
C) $44,750
D) $46,600

Solution:
Variable component of sales commissions:

Variable cost = ($13,200 − $12,000)/(11,000 − 10,000)
Fixed cost of sales commissions:

High volume: $13,200 − $1.20 × 11,000 = $0 (answer will be zero fixed costs, because
these sales commissions are variable, not mixed)
Low volume: $12,000 − $1.20 × 10,000 = $0
Variable component of maintenance expenses:

Variable cost = ($13,500 − $13,000)/(11,000 − 10,000)
Fixed cost of maintenance expenses:

High volume: $13,500 − $0.50 × 11,000 = $8,000
Low volume: $13,000 − $0.50 × 10,000 = $8,000
Variable component of clerical expense:

Variable cost = ($16,000 − $15,000)/(11,000 − 10,000)
Fixed cost of clerical expense:

High volume: $16,000 − $1.00 × 11,000 = $5,000
Low volume: $15,000 − $1.00 × 10,000 = $5,000


$1.20 + $0.50 + $1.00 = $2.70
Total fixed cost:

$0 + $8,000 + $5,000 + $12,000* = $25,000
*Rent
The following production and average cost data for two levels of monthly production volume
have been supplied by a company that produces a single product:


85. The best estimate of the total monthly fixed manufacturing cost is:
A) $227,200
B) $185,000
C) $435,400
D) $290,500

Solution:
Average Total Manufacturing

Production Cost per Overhead Cost
Volume Unit (units × average cost
(Units) per unit)

= ($290,500 − $227,200) ÷ (5,000 – 2,000) = $21.10

= $290,500 − ($21.10 × 5,000) = $185,000

86. The best estimate of the total variable manufacturing cost per unit is:
A) $21.10
B) $125.20
C) $104.10
D) $75.70

Solution:

(Units) per unit)

= ($290,500 − $227,200) ÷ (5,000 – 2,000) = $21.10

= $290,500 − ($21.20 × 5,000) = $185,000

= (Direct materials + Direct labor + Manufacturing overhead)
= $75.70 + $28.40 + $21.10 = $125.20

87. The best estimate of the total cost to manufacture 2,200 units is closest to:
A) $356,840
B) $460,440
C) $417,890
D) $478,940

Solution:

(Units) per unit)

= ($290,500 − $227,200) ÷ (5,000 – 2,000) = $21.10

= $290,500 − ($21.10 × 5,000) = $185,000

= (Direct materials + Direct labor + Manufacturing overhead)
= $75.70 + $28.40 + $21.10 = $125.20
Y = $185,000 + $125.20(2,200)
Y = $460,440

Gasson Company is a merchandising firm. Next month the company expects to sell 800 units.
The following data describe the company's revenue and cost structure:
Selling price per unit.................................. $40

Sales commission....................................... 5%
Purchase price (cost) per unit..................... $18
Advertising expense................................... $4,000 per month
Administrative expense.............................. $4,500 per month plus 15% of sales
Assume that all activity mentioned in this problem is within the relevant range.
88. The expected gross margin next month is:

A) $17,600
B) $11,200
C) $14,400
D) $16,000

Solution:
Sales........................................................... $32,000
Cost of goods sold...................................... 14,400
Gross margin.............................................. $17,600

89. The expected total administrative expense next month is:

A) $4,800
B) $13,300
C) $9,300
D) $14,900

AICPA FN: Reporting LO: 1,4 Level: Easy
Solution:
Fixed administrative expenses (given)........................... $4,500

Variable administrative expenses (15% × $32,000*)..... 4,800
Total administrative expenses......................................... $9,300
*$40 × 800 = $32,000
90. The expected contribution margin next month is:

A) $17,600
B) $11,200
C) $14,400
D) $16,000

Solution:
Sales ($40 × 800)....................................... $32,000

Variable expenses:
Cost of goods sold ($18 × 800)............... $14,400
Sales commissions (5% × $32,000)........ 1,600
Administrative (15% × $32,000)............ 4,800 20,800

91. The expected net operating income next month is:

A) $7,500
B) $5,100
C) $2,700
D) $11,200

Solution:
Sales ($40 × 800)....................................... $32,000

Variable expenses:
Cost of goods sold ($18 × 800)............... $14,400
Sales commissions (5% × $32,000)........ 1,600
Administrative (15% × $32,000)............ 4,800 20,800
Contribution margin................................... 11,200
Fixed expenses:
Advertising expense................................ 4,000
Administrative........................................ 4,500 8,500
Net operating income................................. $ 2,700
In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total
overhead costs were $223,000. Of this amount, utilities were $48,000 (all variable) and
depreciation was $60,000 (all fixed). The balance of the overhead cost consisted of
maintenance cost (mixed). At 100,000 machine hours, maintenance costs were $130,000.
Assume that all of the activity levels mentioned in this problem are within the relevant range.
92. The variable cost for maintenance per machine hour is:
A) $1.30
B) $1.44
C) $0.75
D) $1.35

Solution:
Variable maintenance cost = Change in cost ÷ Change in activity

= ($130,000 – $115,000) ÷ (100,000 – 80,000) = $0.75

93. The total fixed overhead cost for O'Donnell is:

A) $115,000
B) $130,000
C) $60,000
D) $55,000

Solution:

= ($130,000 − $115,000) ÷ (100,000 − 80,000) = $0.75
Fixed cost element of maintenance cost = Total cost − Variable cost element
= $115,000 − ($0.75 × 80,000) = $55,000
Total fixed overhead cost will be the total of the fixed maintenance cost and the fixed
depreciation cost, or $55,000 + $60,000 = $115,000

94. If 110,000 machine hours of activity are projected for next period, total expected
overhead cost would be:
A) $256,000
B) $263,500
C) $306,625
D) $242,500

Solution:

= ($130,000 − $115,000) ÷ (100,000 − 80,000) = $0.75
Fixed cost element of maintenance cost = Total cost − Variable cost element
= $115,000 − ($0.75 × 80,000) = $55,000
Total fixed overhead cost will be the total of the fixed maintenance cost and the fixed
depreciation cost, or $55,000 + $60,000 = $115,000
Variable utilities cost per machine hour = $48,000 ÷ 80,000 = $0.60
Total variable cost per machine hour is the total of the variable utilities cost per
machine hour and the variable maintenance cost per machine hour, or $0.60 + $0.75 =
$1.35
Y = $115,000 + $1.35 (110,000)

Y = $263,500
Oerther Corporation reports that at an activity level of 5,000 units, its total variable cost is
$131,750 and its total fixed cost is $31,200.

95. What would be the total variable cost at an activity level of 5,200 units? Assume that
this level of activity is within the relevant range.
A) $137,020
B) $131,750
C) $162,950
D) $32,448

Solution:
Variable cost per unit: $131,750 ÷ 5,000= $26.35

Total variable cost = 5,200 × $26.35 = $137,020
96. What would be the average fixed cost per unit at an activity level of 5,200 units?
Assume that this level of activity is within the relevant range.
A) $6.24
B) $6.00
C) $14.94
D) $32.59

Solution:
Average fixed cost per unit = Total fixed costs ÷ total units
Average fixed cost per unit = $31,200 ÷ 5,200 = $6.00
At an activity level of 9,000 machine-hours in a month, Moffatt Corporation's total variable

maintenance cost is $390,240 and its total fixed maintenance cost is $368,280.

97. What would be the total variable maintenance cost at an activity level of 9,300
machine-hours in a month? Assume that this level of activity is within the relevant
range.
A) $758,520
B) $403,248
C) $390,240
D) $380,556

Solution:
Variable cost per unit: $390,240 ÷ 9,000 hours = $43.36 per hour
Total variable cost = 9,300 × $43.36 = $403,248
98. What would be the average fixed maintenance cost per unit at an activity level of
9,300 units in a month? Assume that this level of activity is within the relevant range.
A) $40.92
B) $84.28
C) $39.60
D) $54.93

Solution:
Average fixed cost per unit = Total fixed costs ÷ total units
Average fixed cost per unit = $368,280 ÷ 9,300 = $39.60
Schuler Inc. reports that at an activity level of 2,100 machine-hours in a month, its total
variable inspection cost is $69,846 and its total fixed inspection cost is $9,072.

99. What would be the average fixed inspection cost per unit at an activity level of 2,400
units in a month? Assume that this level of activity is within the relevant range.
A) $37.58
B) $4.32
C) $15.23
D) $3.78

Solution:
Total fixed costs ÷ total units = Average fixed cost per unit
$9,072 ÷ 2,400 units = $3.78 per unit
100. What would be the total variable inspection cost at an activity level of 2,400 machine-
hours in a month? Assume that this level of activity is within the relevant range.
A) $78,918
B) $69,846
C) $79,824
D) $10,368

Solution:
First, calculate the variable inspection cost per hour by:

Total variable inspection costs ÷ total machine hours = variable inspection cost per
unit
$69,846 ÷ 2,100 machine-hours = $33.26 per machine-hour
Next, calculate the total variable inspection costs by:
Total variable inspection costs @ 2,400 machine-hours = $33.26 × 2,400 = $79,824

Johnson Company has provided the following data for the first five months of the year:
Machine Hours Lubrication Cost

January................... 120 $750
February................. 160 $800
March..................... 200 $870
April....................... 150 $790
May........................ 170 $840
101. Using the high-low method of analysis, the estimated variable lubrication cost per
machine hour is closest to:
A) $1.40
B) $1.25
C) $0.67
D) $1.50

Solution:

= ($870 – $750) ÷ (200 – 120) = $1.50

102. Using the high-low method of analysis, the estimated monthly fixed component of
lubrication cost is closest to:
A) $570
B) $560
C) $585
D) $565

Solution:

= ($870 − $750) ÷ (200 − 120) = $1.50

= $870 − ($1.50 × 200) = $570
103. Using the least-squares regression method of analysis, the estimated variable
lubrication cost per machine hour is closest to:
A) $0.80
B) $1.56
C) $1.40
D) $1.28

Solution:


104. Using the least-squares regression method of analysis, the estimated monthly fixed
component of lubrication cost is closest to:
A) $561
B) $580
C) $525
D) $572

Solution:

intercept = $561 per month
Wilson Company's activity for the first six of the current year is as follows:
Month Machine Hours Electrical Cost

January................... 2,000 $1,560
February................. 3,000 $2,200
March..................... 2,400 $1,750
April....................... 1,900 $1,520
May........................ 1,800 $1,480
June........................ 2,100 $1,600
105. Using the high-low method, the variable cost per machine hour would be:
A) $0.67
B) $0.64
C) $0.40
D) $0.60

Solution:

= ($2,200 – $1,480) ÷ (3,000 – 1,800) = $0.60

106. Using the high-low method, the fixed portion of the electrical cost each month would
be:
A) $400
B) $760
C) $280
D) $190

Solution:

= ($2,200 − $1,480) ÷ (3,000 − 1,800) = $0.60

= $2,200 − ($0.60 × 3,000) = $400
Electrical costs at one of Rome Corporation's factories are listed below:
Machine-Hours Electrical Cost

March..................... 458 $1,007
April....................... 423 $934
May........................ 440 $979
June........................ 409 $902
July......................... 426 $952
August.................... 372 $822
September.............. 414 $926
October................... 431 $949
November............... 468 $1,025
Management believes that electrical cost is a mixed cost that depends on machine-hours.

107. Using the high-low method, the estimate of the variable component of electrical cost
per machine-hour is closest to:
A) $2.11
B) $1.80
C) $2.21
D) $0.47

Solution:

= ($1,025 – $822) ÷ (468 – 372) = $2.11
108. Using the high-low method, the estimate of the fixed component of electrical cost per
month is closest to:
A) $822
B) $743
C) $38
D) $944

Solution:

= ($1,025 − $822) ÷ (468 − 372) = $2.11

= $1,025 − ($2.11 × 468) = $37.52 = $38 (rounded)

Inspection costs at one of Ratulowski Corporation's factories are listed below:
Units Produced Inspection Cost

April....................... 777 $10,176
May........................ 807 $10,404
June........................ 798 $10,355
July......................... 835 $10,665
August.................... 822 $10,542
September.............. 795 $10,313
October................... 805 $10,409
November............... 853 $10,795
December............... 796 $10,310
Management believes that inspection cost is a mixed cost that depends on units produced.
109. Using the high-low method, the estimate of the variable component of inspection cost
per unit produced is closest to:
A) $8.14
B) $7.05
C) $0.12
D) $12.89

Solution:

= ($10,795 – $10,176) ÷ (853 – 777) = $8.14

110. Using the high-low method, the estimate of the fixed component of inspection cost per
A) $10,344
B) $10,441
C) $3,852
D) $10,176

Solution:

= ($10,795 − $10,176) ÷ (853 − 777) = $8.14

= $10,795 − ($8.14 × 853) = $3,851.58 = $3,852 (rounded)
Wuensch Inc., an escrow agent, has provided the following data concerning its office
expenses:
Escrows Completed Office Expenses

April....................... 53 $7,427
May........................ 94 $9,201
June........................ 37 $6,769
July......................... 87 $8,902
August.................... 40 $6,875
September.............. 38 $6,797
October................... 82 $8,681
November............... 35 $6,678
December............... 62 $7,836
Management believes that office expense is a mixed cost that depends on the number of
escrows completed. Note: Real estate purchases usually involve the services of an escrow
agent that holds funds and prepares documents to complete the transaction.

111. Using the high-low method, the estimate of the variable component of office expense
per escrow completed is closest to:
A) $45.44
B) $42.76
C) $88.22
D) $131.00

Solution:

= ($9,201 – $6,678) ÷ (94 – 35) = $42.76
112. Using the high-low method, the estimate of the fixed component of office expense per
A) $7,685
B) $7,182
C) $6,678
D) $5,182

Solution:

= ($9,201 − $6,678) ÷ (94 − 35) = $42.76

= $9,201 − ($42.76 × 94) = $5,181.56 = $5,182 (rounded)

The following information has been provided by the Evans Retail Stores, Inc., for the first
quarter of the year:
Sales........................................................... $350,000
Fixed selling expenses............................... $25,000
Cost of goods sold...................................... $160,000
Fixed administrative expenses................... $55,000
Variable administrative expenses............... $15,000
113. The gross margin of Evans Retail Stores, Inc. for the first quarter is:
A) $210,000
B) $140,000
C) $220,000
D) $190,000

Solution:
Sales................................... $350,000
Cost of goods sold.............. 160,000
Gross margin...................... 190,000

114. The contribution margin of Evans Retail Stores, Inc. for the first quarter is:
A) $300,000
B) $140,000
C) $210,000
D) $190,000

Solution:
Sales................................... $350,000
Variable expenses:
Cost of goods sold........... $160,000
Selling expense............... 35,000
Administrative expense... 15,000 210,000
Contribution margin........... $140,000
An income statement for Crandall's Bookstore for the first quarter of the current year is
presented below:
Sales........................................................... $800,000
Gross margin.............................................. 240,000
Selling..................................................... $98,000
Administrative........................................ 98,000 196,000
On average, a book sells for $50. Variable selling expenses are $5.50 per book, with the
remaining selling expenses being fixed. The variable administrative expenses are 3% of sales,
with the remainder being fixed.

115. The contribution margin for Crandall's Bookstore for the first quarter is:
A) $688,000
B) $128,000
C) $152,000
D) $240,000

AICPA FN: Reporting, Measurement LO: 4 Level: Hard
Solution:
Sales........................................................... $800,000
Variable expenses:
Cost of goods sold................................... $560,000
Administrative (3% × $800,000)............ 24,000
Selling expense ($5.50 × 16,000*)......... 88,000 672,000
* $800,000 ÷ $50 average price per unit = 16,000 units sold
116. The net operating income using the contribution approach for the first quarter is:
A) $240,000
B) $152,000
C) $44,000
D) $128,000

AICPA FN: Reporting, Measurement LO: 4 Level: Medium
Solution:
Sales......................................................................... $800,000
Variable expenses:
Cost of goods sold................................................ $560,000
Administrative (3% × $800,000).......................... 24,000
Selling expense ($5.50 × 16,000*)....................... 88,000 672,000
Contribution margin................................................ 128,000
Fixed expenses:
Administrative expense ($98,000 − $24,000)...... 74,000
Selling expense ($98,000 − $88,000)................... 10,000 84,000
Net operating income.............................................. $ 44,000
* $800,000 ÷ $50 average price per unit = 16,000 units sold

117. The cost formula for selling and administrative expenses with “X” equal to the number
of books sold is:
A) Y = $84,000 + $35X
B) Y = $84,000 + $42X
C) Y = $98,000 + $35X
D) Y = $98,000 + $42X

Solution:
Sales...................................................................... $800,000
Variable expenses:
Cost of goods sold............................................. $560,000
Administrative (3% × $800,000)....................... 24,000
Selling expense ($5.50 × 16,000*).................... 88,000 672,000
Contribution margin............................................. 128,000
Fixed expenses:
Administrative expense ($98,000 − $24,000)... 74,000
Selling expense ($98,000 − $88,000)................ 10,000 84,000
Net operating income........................................... $ 44,000
* $800,000 ÷ $50 average sales price = 16,000 units sold
Total variable cost per unit = $672,000 ÷ 16,000 units = $42 per unit
Total fixed costs = $10,000 + $74,000 = $84,000
Y = $84,000 + $42X

In December, Barkes Corporation, a manufacturing company, reported the following financial

data:
Sales........................................................... $270,000
The company had no beginning or ending inventories.
118. The contribution margin for December was:

A) $201,000
B) $181,000
C) $32,000
D) $121,000

Solution:
Sales................................... $270,000
Variable expenses:
Production expense......... $27,000
Selling expense............... 28,000

119. The gross margin for December was:

A) $121,000
B) $32,000
C) $181,000
D) $201,000

Solution:
Sales........................................................... $270,000
Cost of goods sold ($27,000 + $42,000).... 69,000
Gross margin.............................................. $201,000
The management of Edrington Corporation, a manufacturing company, would like your help
in contrasting the traditional and contribution approaches to the income statement. The
company has provided the following financial data for April:
Sales........................................................... $280,000

120. The gross margin for April was:

A) $193,000
B) $11,000
C) $102,000
D) $189,000

Solution:
Sales........................................................... $280,000
Gross margin.............................................. $193,000
121. The contribution margin for April was:

A) $102,000
B) $189,000
C) $11,000
D) $193,000

Solution:
Sales................................... $280,000
Variable expenses:
Cost of goods sold .......... $30,000
Selling expense............... 27,000

Monsivais Corporation, a manufacturing company, has provided the following financial data
for February:
Sales........................................................... $470,000
122. The gross margin for February was:

A) $338,000
B) $303,000
C) $172,000
D) $40,000

Solution:
Sales........................................................... $470,000
Gross margin.............................................. $303,000

123. The contribution margin for February was:

A) $338,000
B) $303,000
C) $172,000
D) $40,000

Solution:
Sales........................................................... $470,000
Variable expenses:
Cost of goods sold................................... $81,000
Selling expense....................................... 11,000
Administrative expense........................... 40,000 132,000
(Appendix 5A) Lacourse Inc.'s inspection costs are listed below:
Units Produced Inspection Costs

January................... 647 $15,309
February................. 724 $15,965
March..................... 694 $15,715
April....................... 645 $15,271
May........................ 696 $15,745
June........................ 665 $15,442
July......................... 718 $15,933
August.................... 699 $15,739
Management believes that inspection cost is a mixed cost that depends on units produced.

124. Using the least-squares regression method, the estimate of the variable component of
inspection cost per unit produced is closest to:
A) $22.80
B) $8.82
C) $8.27
D) $8.78

Solution:

slope = $8.82 per unit produced
125. Using the least-squares regression method, the estimate of the fixed component of
inspection cost per month is closest to:
A) $9,608
B) $15,640
C) $9,587
D) $15,271

Solution:


(Appendix 5A) Recent maintenance costs of Divers Corporation are listed below:
Machine-Hours Maintenance Costs

February................. 527 $5,144
March..................... 499 $5,033
April....................... 542 $5,220
May........................ 541 $5,196
June........................ 489 $4,973
July......................... 543 $5,200
August.................... 558 $5,288
September.............. 513 $5,060
Management believes that maintenance cost is a mixed cost that depends on machine-hours.
maintenance cost per machine-hour is closest to:
A) $9.76
B) $6.00
C) $4.43
D) $4.57

Solution:


maintenance cost per month is closest to:
A) $5,139
B) $2,806
C) $4,973
D) $2,738

Solution:

(Appendix 5A) Gaumer Corporation's recent utility costs are listed below:
Machine-Hours Utility Costs

May........................ 1,708 $20,511
June........................ 1,770 $21,016
July......................... 1,703 $20,449
August.................... 1,734 $20,699
September.............. 1,787 $21,142
October................... 1,756 $20,912
November............... 1,731 $20,693
December............... 1,798 $21,252
Management believes that utility cost is a mixed cost that depends on machine-hours.

utility cost per machine-hour is closest to:
A) $8.45
B) $8.23
C) $11.92
D) $8.31

Solution:

utility cost per month is closest to:
A) $20,834
B) $20,449
C) $6,059
D) $6,314

Solution:


Essay Questions
130. ABC Company's total overhead costs at various levels of activity are presented below:
Machine Hours Total Overhead Costs

March......... 60,000 $216,800
April........... 50,000 $194,000
May............ 70,000 $239,600
June............ 80,000 $262,400
Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. At the 50,000 machine-hour level of activity these costs are:
Utilities (V).................................... $ 54,000

Supervisory salaries (F)................. 62,000
Maintenance (M)............................ 78,000
Total overhead cost........................ $194,000
V = Variable; F = Fixed; M = Mixed
The company wants to break down the maintenance cost into its basic variable and
fixed cost elements.
Required:
a. Estimate the maintenance cost for June.

b. Use the high-low method to estimate the cost formula for maintenance cost.
c. Estimate the total overhead cost at an activity level of 55,000 machine hours.

Ans:
a. Total overhead cost at 80,000 machine hours........................ $262,400

Less:
Utilities ($54,000/50,000) × 80,000................................... 86,400
Supervisory salaries (fixed)................................................ 62,000
Portion of overhead for June that represents maintenance.... $114,000
b. High-low analysis of maintenance cost:

Maintenance Cost Machine-Hours
High point.................... $114,000 80,000
Low point..................... 78,000 50,000
Change observed.......... $ 36,000 30,000
Variable cost:
Change in cost/Change in activity = $36,000/30,000 MHs = $1.20 per MHs
Total fixed cost:

Total maintenance cost at the low point................................... $78,000
Less variable cost element (50,000 MHs × $1.20 per MH)..... 60,000
Fixed cost element................................................................... $18,000
The cost formula is: Y = $18,000 + $1.20X
c. Total overhead at 55,000 machine hours:

Utilities ($54,000/50,000) × 55,000................. $ 59,400
Supervisory salaries......................................... 62,000
Maintenance cost:
Variable (55,000 MHs × $1.20 per MH)....... $66,000
Fixed............................................................. 18,000 84,000
Total overhead cost at 55,000 MH................... $205,400
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

LO: 1,3 Level: Hard

131. Hinrichs Corporation reports that at an activity level of 2,400 units, its total variable
cost is $174,504 and its total fixed cost is $55,080.
Required:
For the activity level of 2,700 units, compute: (a) the total variable cost; (b) the total
fixed cost; (c) the total cost; (d) the average variable cost per unit; (e) the average
fixed cost per unit; and (f) the average total cost per unit. Assume that this activity
level is within the relevant range.
Ans:
Variable cost = $174,504/2,400 units = $72.71 per unit

Activity level................................................................... 2,700
Total cost:
Variable cost (a) [2,700 units × $72.71 per unit].......... $196,317
Fixed cost (b)................................................................ 55,080
Total (c)......................................................................... $251,397
Cost per unit:
Variable cost (d)............................................................ $72.71
Fixed cost (e) [$55,080/2,700 units]............................. 20.40
Total (f)......................................................................... $93.11

LO: 1 Level: Easy

132. At an activity level of 6,800 units, Henkes Corporation's total variable cost is
$125,188 and its total fixed cost is $164,152.
Required:
For the activity level of 7,100 units, compute: (a) the total variable cost; (b) the total
fixed cost; (c) the total cost; (d) the average variable cost per unit; (e) the average
fixed cost per unit; and (f) the average total cost per unit. Assume that this activity
level is within the relevant range.
Ans:
Variable cost = $125,188/6,800 units = $18.41 per unit

Activity level................................................................... 7,100
Total cost:
Variable cost (a) [7,100 units × $18.41 per unit].......... $130,711
Fixed cost (b)................................................................ 164,152
Total (c)......................................................................... $294,863
Cost per unit:
Variable cost (d)............................................................ $18.41
Fixed cost (e) [$164,152/7,100 units]........................... 23.12
Total (f)......................................................................... $41.53

LO: 1 Level: Easy

133. The Pate Company reported the following:
Month 1 Month 2
Units sold...... 6,000 8,000
Cost A............ $35,000 $36,000
Cost B............ $16,000 $16,000
Cost C............ $1,500 $2,000
Cost D........... $12,000 $16,000
Cost E............ $6,000 $8,000
Cost F............ $2,000 $2,000
Cost G........... $4,200 $8,400
Cost H........... $37,300 $44,600
Cost I............. $13,000 $13,500
Cost J............. $10,000 $12,200
Required:
Indicate whether each of the costs above is probably a variable, mixed or fixed cost.
Cost A _______________
Cost B _______________
Cost C _______________
Cost D _______________
Cost E _______________
Cost F _______________
Cost G _______________
Cost H _______________
Cost I _______________
Cost J _______________
Ans:
Cost A: Mixed
Cost B: Fixed
Cost C: Variable
Cost D: Variable
Cost E: Variable
Cost F: Fixed
Cost G: Mixed
Cost H: Mixed
Cost I: Mixed
Cost J: Mixed

LO: 1 Level: Easy

134. Stuart Manufacturing produces metal picture frames. The company's income
statements for the last two years are given below:
Last year This year

Units sold................................................... 50,000 70,000
Sales........................................................... $800,000 $1,120,000
Cost of goods sold...................................... 550,000 710,000
Gross margin.............................................. 250,000 410,000
Selling and administrative expense............ 150,000 190,000
Net operating income................................. $100,000 $ 220,000
The company has no beginning or ending inventories.
Required:
a. Estimate the company's total variable cost per unit and its total fixed costs per
year. (Remember that this is a manufacturing firm.)
b. Compute the company's contribution margin for this year.

Ans:
a. Variable component of cost of goods sold:

Variable cost = ($710,000 − $550,000)/(70,000 − 50,000)
Fixed cost:
High volume: $710,000 − $8.00×70,000 = $150,000
Low volume: $550,000 − $8.00×50,000 = $150,000

Variable cost = ($190,000 − $150,000)/(70,000 − 50,000)
Fixed cost:
High volume: $190,000 − $2.00×70,000 = $50,000
Low volume: $150,000 − $2.00×50,000 = $50,000

$8.00 + $2.00 = $10.00
Total fixed cost:

$150,000 + $50,000 = $200,000
b. Sales revenue....................................................... $1,120,000

Variable expenses:
Variable cost of goods sold.............................. $560,000
Variable selling and administrative expense.... 140,000 700,000

LO: 3,4 Level: Medium

135. Selected data about Pitkin Company's manufacturing operations at two levels of
activity are given below:
Number of units produced............. 10,000 15,000

Total manufacturing costs.............. $157,000 $225,000
Direct material cost per unit........... $4 $4
Direct labor cost per unit................ $6 $6
Required:
Using the high-low method, estimate the cost formula for manufacturing overhead.
Assume that both direct material and direct labor are variable costs.
Ans:
Low High
Total manufacturing costs..............................................................................
$157,000 $225,000
Less:
Direct materials
($4 × 10,000 and $4 × 15,000, respectively)...........................................
40,000 60,000
Direct labor
($6 × 10,000 and $6 × 15,000, respectively)...........................................
60,000 90,000
Manufacturing overhead cost $ 57,000 $ 75,000
Cost Activity
High level of activity..................... $75,000 15,000 units
Low level of activity...................... 57,000 10,000 units
Change........................................... $18,000 5,000 units
$18,000 ÷ 5,000 units = $3.60 per unit
Total cost at the high level of activity.............................. $75,000

Less variable element ($3.60 per unit × 15,000 units)..... 54,000
Fixed cost element........................................................... $21,000
Therefore, the cost formula for manufacturing overhead is $21,000 per period plus
$3.60 per unit produced, or Y = $21,000 + $3.60X.

LO: 3 Level: Medium

136. Utility costs at one of Hannemann Corporation's factories are listed below:
Machine-Hours Utility Cost

March..................... 5,021 $52,824
April....................... 5,076 $53,287
May........................ 5,074 $53,263
June........................ 5,040 $52,991
July......................... 5,087 $53,371
August.................... 5,073 $53,251
September.............. 5,075 $53,252
October................... 5,034 $52,916
November............... 5,062 $53,137
Management believes that utility cost is a mixed cost that depends on machine-hours.
Required:
Estimate the variable cost per machine-hour and the fixed cost per month using the
high-low method. Show your work!
Ans:
Machine-Hours Utility Cost


= ($53,371 − $52,824) ÷ (5,087 − 5,021) = $8.29

= $52,824 − ($8.29 × 5,021) = $11,200

LO: 3 Level: Easy

137. Swofford Inc. has provided the following data concerning its maintenance costs:

March..................... 4,440 $50,950
April....................... 4,431 $50,877
May........................ 4,412 $50,696
June........................ 4,460 $51,113
July......................... 4,414 $50,711
August.................... 4,433 $50,900
September.............. 4,443 $50,976
October................... 4,415 $50,730
November............... 4,391 $50,530
Management believes that maintenance cost is a mixed cost that depends on machine-
hours.
Required:
Estimate the variable cost per machine-hour and the fixed cost per month using the
Ans:

High activity level.............. 4,460 $51,113
Low activity level.............. 4,391 $50,530

= ($51,113 − $50,530) ÷ (4,460 − 4,391) = $8.45

= $50,530 − ($8.45 × 4,391) = $13,426

LO: 3 Level: Easy

138. The management of Dethlefsen Corporation would like to have a better understanding
of the behavior of its inspection costs. The company has provided the following data:
Direct Labor-Hours Inspection Cost

January................... 5,089 $33,122
February................. 5,042 $32,929
March..................... 5,026 $32,870
April....................... 5,073 $33,065
May........................ 5,029 $32,906
June........................ 5,040 $32,913
July......................... 5,070 $33,050
August.................... 5,027 $32,875
September.............. 4,995 $32,746
Management believes that inspection cost is a mixed cost that depends on direct labor-
hours.
Required:
Estimate the variable cost per direct labor-hour and the fixed cost per month using the
Ans:
Direct Labor-Hours Inspection Cost

High activity level.............. 5,089 $33,122
Low activity level.............. 4,995 $32,746

= ($33,122 − $32,746) ÷ (5,089 − 4,995) = $4.00

= $32,746 − ($4.00 × 4,995) = $12,766

LO: 3 Level: Easy

139. The accounting department of Archer Company, a merchandising company, has

prepared the following analysis:
Cost Formula
Cost of goods sold.......................... $56 per unit
Sales commissions......................... 12% of sales
Advertising expense....................... $300,000 per month
Administrative salaries................... $160,000 per month
Billing expense............................... ?
Depreciation expense..................... $62,000 per month
The accounting department feels that billing expense is a mixed cost, containing both
fixed and variable cost elements. The billing expenses and sales in units over the last
several months follow:
Units Sold Billing

(000) Expense
January................... 9 $30,000
February................. 11 $33,000
March..................... 14 $36,000
April....................... 17 $42,000
May........................ 15 $39,000
June........................ 12 $35,000
The accounting department now plans to develop a cost formula for billing expense so
that a contribution format income statement can be prepared for management's use.
Required:
a. Using the least-squares method, estimate the cost formula for billing expense.
b. Assume that the company plans to sell 30,000 units during July at a selling price of
$100 per unit. Prepare a budgeted income statement for the month, using the
contribution format.

Ans:
a. Using least-squares regression, the cost formula is Y = $16,952 + $1,452X, where

X is a thousand units
b
Sales ($100 × 30,000)................................ $3,000,000
Variable expenses:
Cost of goods sold ($56 × 30,000).......... $1,680,000
Commissions (0.12 × $3,000,000).......... 360,000
Billing expense ($1,452 × 30)................. 43,560 2,083,560
Fixed expenses:
Advertising expense................................ 300,000
Administrative salaries........................... 160,000
Billing expense....................................... 16,952
Depreciation expense.............................. 62,000 538,952

Appendix: 5A LO: 4,5 Level: Hard
140. In January, Verba Corporation, a manufacturing company, reported the following

financial data:
Sales........................................................... $460,000
Required:
a. Prepare an income statement in good form for January using the traditional
approach.
b. Prepare an income statement in good form for January using the contribution
approach.

Ans:
a. Traditional approach
Sales........................................................... $460,000
Gross margin.............................................. 276,000
Selling..................................................... $ 59,000
Administrative........................................ 165,000 224,000
b. Contribution approach
Sales........................................................... $460,000
Variable expenses:
Variable production expense................... $84,000
Variable administrative expense............. 33,000 129,000
Fixed expenses:
Fixed production expense....................... 100,000
Fixed selling expense.............................. 47,000
Fixed administrative expense.................. 132,000 279,000
AACSB: Analytic AICPA BB: Critical Thinking


141. Novakovich Inc., a manufacturing company, has provided the following financial data
for January:
Sales........................................................... $430,000
Required:
a. Prepare an income statement in good form for January using the traditional
approach.
b. Prepare an income statement in good form for January using the contribution
approach.

Ans:
a. Traditional approach
Sales........................................................... $430,000
Gross margin.............................................. 244,000
Selling..................................................... $ 60,000
Administrative........................................ 149,000 209,000
b. Contribution approach
Sales........................................................... $430,000
Variable expenses:
Fixed expenses:


142. In July, Haertel Corporation, a manufacturing company, reported the following

financial data:
Sales........................................................... $390,000
Required:
Prepare an income statement in good form for July using the contribution approach.
Ans:
Sales........................................................... $390,000
Variable expenses:
Fixed expenses:


143. Crabbe Inc., a manufacturing company, has provided the following data for October:
Sales........................................................... $270,000
Required:
Prepare an income statement in good form for October using the contribution
approach.
Ans:
Sales........................................................... $270,000
Variable expenses:
Fixed expenses:


144. Below are cost and activity data for a particular cost over the last four periods. Your
boss has asked you to analyze this cost so that management will have a better
understanding of how this cost changes in response to changes in activity.
Activity Cost
Period 1...... 40 $637
Period 2...... 47 $693
Period 3...... 45 $675
Period 4...... 41 $646
Required:
Using the least-squares regression method, estimate the cost formula for this cost.
Ans: Using least-squares regression, the cost formula is Y = $324 + $7.82X.

Appendix: 5A LO: 5 Level: Hard
145. Grawburg Inc. maintains a call center to take orders, answer questions, and handle
complaints. The costs of the call center for a number of recent months are listed
below:
Calls Taken Call Center Cost

April....................... 9,030 $112,323
May........................ 9,017 $112,278
June........................ 9,035 $112,341
July......................... 9,065 $112,458
August.................... 9,015 $112,290
September.............. 9,061 $112,419
October................... 9,070 $112,463
November............... 9,067 $112,439
Management believes that the cost of the call center is a mixed cost that depends on
the number of calls taken.
Required:
Estimate the variable cost per call and fixed cost per month using the least-squares
regression method.

Ans:
slope = $3.27 per call

146. The management of Rutledge Corporation would like to better understand the
behavior of the company's warranty costs. Those costs are listed below for a number
of recent months:
Product Returns Warranty Cost

March..................... 30 $3,648
April....................... 37 $4,074
May........................ 43 $4,460
June........................ 41 $4,330
July......................... 32 $3,756
August.................... 48 $4,782
September.............. 35 $3,932
October................... 33 $3,823
Management believes that warranty cost is a mixed cost that depends on the number of
product returns.
Required:
Estimate the variable cost per product return and the fixed cost per month using the
least-squares regression method.
Ans:
slope = $63.59 per product return


147. Furlan Printing Corp., a book printer, has provided the following data:
Titles Printed Press Setup Cost

May........................ 40 $6,649
June........................ 38 $6,438
July......................... 25 $5,307
August.................... 28 $5,564
September.............. 33 $6,030
October................... 27 $5,505
November............... 39 $6,551
December............... 36 $6,275
Management believes that the press setup cost is a mixed cost that depends on the
number of titles printed. (A specific book that is to be printed is called a “title”.
Typically, thousands of copies will be printed of each title. Specific steps must be
taken to setup the presses for printing each title-for example, changing the printing
plates. The costs of these steps are the press setup costs.)
Required:
Estimate the variable cost per title printed and the fixed cost per month using the least-
squares regression method.
Ans:
slope = $88.21 per title printed


Cost Behavior Garrison

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Cost Behavior Garrison

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Chapter 5 Cost Behavior: Analysis and Use

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

6. Committed fixed costs have a short-term planning horizon--usually one year.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-5

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

13. Contribution margin equals revenue minus all variable costs.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking

5-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking

Multiple Choice Questions

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-7

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking

5-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-9

27. Which of the following is a weakness of the quick-and-dirty scattergraph method of

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking

29. Contribution margin is computed as sales revenue minus:

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking

5-10 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking

31. The least-squares regression method:

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking

32. Multiple regression analysis is used when:

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-11

Sales volume (units)................................... 5,000 6,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Variable component of cost of goods sold:

Variable component of selling and administrative expenses:

Sales revenue ($127.20 × 5,300)......................... $674,160

5-12 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Variable cost = Change in cost ÷ Change in activity

Fixed cost element = Total cost − Variable cost element

At an activity level of 13,000 machine-hours, total cost is estimated to be:

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 5-13

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

Variable cost = Change in cost ÷ Change in activity

Fixed cost element = Total cost − Variable cost element

At an activity level of 25,000 accounts, total cost is estimated to be:

5-14 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition