Solution manual managerial accounting by garrison noreen 13th chap005

costs change in response to changes in a measure of activity such as sales range is the range of activity within which assumptions about variable and fixedAn activity base is a measure o

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costs change in response to changes in a measure of activity such as sales range is the range of activity within which assumptions about variable and fixed

An activity base is a measure of whatever causes produced, units sold, letters typed, beds in a hospital, meals served in a cafe,per unit basis, but increases or decreases in total in direct relation to

cost that is incurred in large chunks, and which increases or decreases only in

The linear assumption is reasonably valid providing that the cost formula is used only within the

A discretionary fixed cost has a fairly short planning spend on certain fixed cost items, such as advertising, research, and management

costs are adjusted upward and downward in large steps, rather than being

cost per cup of coffee served *

of coffee served in a week The average cost of a cup of coffee declines

as the number of cups of coffee served increases because the fixed cost is

The scattergraph appears below:#

(Students� answers will vary considerably

The

unit level of activity, which falls on the line:Total cost at an unit level of activity #$46,000##Less fixed costs

8,000-an 8,000-unit level of activity

Observe from the scattergraph that if the company used the high-low method to determine the slope of the regression line, the line

Variable cost = Change in

element Electrical costs may reflect seasonal factors

as the reception area must be lighted for longer periods during the winter than

Additionally, fixed costs will be affected by the number of are variable with respect to the number of days in the month, but are fixed with

Other, less systematic, factors may also affect electrical costs such as the frugality of

The company�s variable cost per unit is:#

In accordance with the behavior of variable and fixed costs, the completed schedule is:#Units produced and

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where X is the number of

The scattergraph would be:# Thecost of shipping units is likely to depend on the weight and volume of the units

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#�8,000#$�6,000## Variable cost element: # EMBED

Fixed cost element:Custodial supplies expense at high activity level

#���9,000##Total fixed cost

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The scattergraph appears below:#

(Note: Students� answers will vary considerably due to the inherent lack of precision and subjectivity of the

#$6,000##

where X is the The high-low method would not provide an accurate cost formula in this situation because a line drawn through the high and low points would have a slope that is too flat and would be placed too high, cutting

Difference in cost:Monthly operatin#g#

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##���98,000###Gross marginexpenses:#####Advertising

expenses:#####Executive salaries #400####Clerical equipment

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#Variable###Advertising expense #Fixed###Shipping expense

#Mixed###Salaries and commissions #Mixed###Insurance expense

#Fixed###Depreciation expense #Fixed## Analysis of the mixed expenses:#Units#Shipping Expense#Salaries and Commissions Expense##High level ofactivity

Fixed cost element:#Shipping Expense#Salaries and Commissions Expense##Cost at high level per unit

#�������������#���60,000##Fixed cost element

Shipping expense:

or Salaries and commissions expense:

or

expenses:#####Advertising expense

expense #6,000####Depreciation expense

Without

an understanding of the underlying cost behavior patterns, it would be

difficult, if not impossible, for a manager to properly analyze the firm�s cost might move in one direction as a result of a particular action, and another costclearly understood, the impact of a firm�s activities on its costs will not be

High-low method:#Number of Scans#Utilities

cost:#Total cost at high level of activity #$4,000###Less variable

Scattergraph (Note: Students� answers will vary due to the inherent imprecision of the quick-and-dirty

#���6,000,000#���6,000,000##Maintenance costHigh-low analysis of maintenance cost:#Direct Labor-

Total factory overhead cost at 70,000 direct

##��7,000,000##Rent ##6,000,000##Maintenance:####Variable cost element

Units###Direct materials cost @ $6 per unit

#60,000#90,000###Manufacturing overhead cost*Work in process, beginning

*Computed by working upwards through the

The cost of goods manufactured if 7,000

##70,000###Manufacturing overhead cost:#####Fixed portion

process, beginning

ending ##�����������0###Cost of goods manufactured

Maintenance cost at the 90,000 machine-hour level of activity can be isolated as follows:#Level of Activity###60,000

MHs#90,000 MHs##Total factory overhead cost

High-low analysis of maintenance cost:#Machine-Hours#Maintenance Cost##High activity level

Variable rate:

Total fixed cost:Total maintenance cost at the high activity level

Therefore, the cost

Cost###Utilities cost

hours:Fixed costs

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In order to estimate the contribution to profit of the charity event, it is first necessary to estimate the variable

the behavior of overhead costs:� The relation between overhead expense and

Soderstrom, �Are overhead costs strictly proportional to activity?� Journal of

The data points are

probably wouldn�t be much benefit to investigating other possible cost drivers

expenses such as rent, depreciation, and her own salary?The overhead expenses could be decomposed into fixed and variable elements using the high-low method, least-squares regression method, or even the quick-and-dirty method based on the

The high-low method throws away most of the data and bases the

the high-low method were used, the estimates would be computed as follows:

#Labor#Overhead###Hours#Expense##High level of activity

Fixed cost element = Total cost � Variable cost element =

$44,000� In this situation, the quick-and-dirty method based on the scattergraph is probably better than the high-low method andshould give acceptable estimates of the fixed and variable components of

Using statistical software, the least-squares regression

The totalvariable cost per guest is computed as follows:Food and beverages

And

Fixed costs are not included in the above computation because there is no indication that there would be any additional fixed costs incurred as a

incurred, they should be subtracted from revenues as well to determine the

a result of catering the charity event, any price greater than the variable cost

contribution to profit, catering the event would show off the company�s

and the lower price could be justified to future clients because this is a

compete based on price or service is a delicate issue that Maria will have to

The scattergraph of direct labor cost versus the number of units produced is presented below:#

number of paid days is presented below:##

number of paid days than between direct labor costs and number of units

number of paid days in the month and have little to do with the number of units

direct labor workers are treated as full-time employees who are paid even if the company is likely to be able to predict the number of paid days in the month

Blue Nile succeeds first and foremost

eliminates traditional layers of diamond wholesalers and brokers, which allows

us to generally purchase most of our product offerings at lower prices by

result, we are able to minimize the costs associated with carrying diamond

Blue Nile also emphasizes jewelry customization and customer service, but these

Blue Nile

are four risks faced by Blue Nile with suggested control activities:Risk:

Customer may not purchase an expensive item such as a diamond over the Internet because of concerns about product quality (given that customers cannot see the

web site that enables customers to easily learn more about the specific productspurchases because of fears that security breaches will enable criminals to have

products that are often purchased on a discretionary basis, sales may decline significantly in an economic downturn as people have access to less disposable

examples include:If Blue Nile is required by law to charge sales tax on

purchases it will reduce Blue Nile�s price advantage over bricks-and-mortar

as Blue Nile, while leveraging their stronger brand recognition to attract Blue

Blue Nile is a

Own� feature, the company essentially buys jewelry directly from suppliers and

relationships allow us to display suppliers� diamond inventories on the Blue Nile web site for sale to consumers without holding the diamonds in our

There is no need to calculate

jewelry products sold to customers, inbound and outbound shipping costs,

insurance on shipments and the costs incurred to set diamonds into ring, earring

that set diamonds into ring, earring, and pendant settings are not paid on a costs are likely to be committed fixed in nature; however, the overwhelming

Similarly, there is no need

to calculate any numbers to ascertain that selling, general and administrative administrative expenses consist primarily of payroll and related benefit costs for our employees, marketing costs, credit card fees and costs associated with fulfillment, customer service, technology and depreciation expenses, as well as

recognizes that selling, general and administrative expense includes a large

Examples of the various costs include:Variable

The data needed to complete the

The contribution format income

##6,944##Fixed selling, general and administrative

associated with physical retail stores, including the costs of maintaining margins are lower than those typically maintained by traditional diamond and fine jewelry retailers, we are able to realize relatively higher operating

least-squares regression estimates of fixed and variable costs can be computed using any of a variety of statistical and mathematical software packages or even

indicates a strong linear relationship between car wash costs and rental

Statistical software or a spreadsheet application such as Excel can

be used to compute the slope and intercept of the least-squares regression line

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Statistical software or a spreadsheet application such as Excel can

be used to compute the slope and intercept of the least-squares regression line

Therefore, the cost

Y =

Note that the high-low method gives estimates that are quite different

last year

A spreadsheet application such as Excel or a statisticalsoftware package can be used to compute the slope and intercept of the least-

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derive total cost is that an activity level of 8 sections may lie outside the relevant range�the range of activity within which the fixed cost is

Statistical software or a spreadsheet application such as Excel can be used to compute the slope and intercept of the least-squares regression line for

Therefore the cost formula for shipping expense is

Note that

##����600,000###Contribution margin ##600,000###Fixed

expenses:#####Advertising expense

#9,000####Depreciation expense #��76,000####Total fixed expenses

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Statistical software or a spreadsheet application such as Excel or can be used to compute the slope and intercept of the least-squares regression line for

Therefore, the Note that the

points in this case fall in such a way they are not representative of all points

the high-low method; although it is simple to apply, the manager must be careful

Direct labor-hour allocation base:#Electrical

Electrical cost for the shipyard job

Electrical cost for the shipyard job under

Scattergraph for electrical costs and hours:#

machine-In general, the allocation base should actually cause the cost being

Looking at the above scattergraph, electrical costs do not appear to be

scattergraph for machine-hours, there is some tendency for electrical costs to hours and direct labor-hours as an

allocation base, machine-hours seems to be the

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