Problem 2 29 Income Statement Schedule of Cost of Goods Manufactured by yke14463

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									Exercise 2-6 Identifying Direct and Indirect Costs

    The Empire Hotel is a four-star hotel located in downtown Seattle.

   For each of the following costs incurred at the Empire Hotel, indicate whether it would most likely
   be a direct cost or an indirect cost of the specified cost object by placing an x in the appropriate

      Direct cost -- A cost that can be easily and conveniently traced to a specified cost object.

      Indirect cost -- A cost that cannot be easily and conveniently traced to a specified cost object.

                                                                                                       Type of Cost
                        Cost Item                                     Cost Object                    Direct    Indirect

Ex.        Room service beverages                         A particular hotel quest                     X

 1         The salary of the head chef                    The hotel's restaurant                       X

 2         The salary of the head chef                    A particular restaurant customer                        X

 3         Room cleaning supplies                         A particular hotel guest                                X

 4         Flowers for the reception desk                 A particular hotel guest                                X

 5         The wages of the doorman                       A particular hotel guest                                X

 6         Room cleaning supplies                         The housecleaning department                 X

 7         Fire Insurance on the hotel building           The hotel's gym                                         X

 8         Towels used in the gym                         The hotel's gym                              X
Exercise 2-7: Identifying Differential, Opportunity, and Sunk

   The Sorrento Hotel is a four-star hotel located in downtown Seattle. The hotel's operations
   vice president would like to replace the hotel's antiquated computer terminals at the
   registration desk with attractive state-of-the-art flat-panel displays. The new displays
   would take less space, would consume less power than the old computer terminals, and
   would provide additional security since they can only be viewed from a restrictive angle.
   The new computer displays would not require any new wiring. The hotel's chef believes
   the funds would be better spent on a new bulk freezer for the kitchen.


   For each of the items below, indicate by placing an X in the appropriate column whether it
   should be considered a differential cost, an opportunity cost, or a sunk cost in the decision
   to replace the old computer terminals with new flat-panel displays. If none of the categories
   apply for a particular item, leave all columns blank.

   Differential cost -- a difference in cost between two alternatives.

   Opportunity cost -- The potential benefit that is given up when one alternative is selected
                       over another.

   Sunk cost -- A cost that has already been incurred and that cannot be changed by any
                decision made now or in the future.

                                                                                 Type of Cost
                              Cost Item                              Differential Opportunity      Sunk

   Ex. Cost of electricity to run the terminals                          X

    1 Cost of the new flat-panel displays                                X

    2 Cost of the old computer terminals                                                            X

    3 Rent on the space occupied by the registration desk                                           X

    4 Wages of the registration desk personnel

    5 Benefits from a new freezer                                                     X

    6 Costs of maintaining the old computer terminals                    X

    7 Cost of removing the old computer terminals                        X

    8 Cost of existing registration desk wiring                                                     X
Exercise 2-10 (Modified to Include Appendix 2A): High-Low Method; Scattergraph Analysis; Regression

Zerbel Company, a wholesaler of large, custom-built air conditioning units for commercial buildings,
has noticed considerable fluctuation in its shipping expense from month to month, as shown below:

                          Units         Shipping
         Month           Shipped        Expense                      Summary Assuming 6 units are expected to be shipped)
        January             4               $2,200               1   Average Cost:                         $2,600
        February            7               $3,100               2   High-Low                              $2,900
         March              5               $2,600               3   Scattergraph                          $2,920
          April             2               $1,500               4   Regression Values:                    $2,918
          May               3               $2,200                         Intercept:                 1010.714286
          June              6               $3,000                              Slope:                317.8571429
          July              8               $3,600                               RSQ:                 0.962220603

1. Using the high-low method, estimate the cost formula for shipping expense.

  Cost formula:       Y = a + bX
    where             Y = Total shipping costs
                      X = Units shipped
                      b = Variable cost per unit
                      a = Fixed portion of total shipping cost

      Estimate b:  b = Change in Y / Change in X
                         Y              X
      High X Value    $3,600            8
      Low X Value     $1,500            2
      Difference      $2,100            6

      b = $2,100 / 6 =                         $350 per unit

      Estimate a:     a = Y - TVC

                            Y              TVC             TFC
      High X Value       $3,600          $2,800              $800
      Low X Value        $1,500           $700               $800

      Cost formula: Y = $350X + $800

2. The president has no confidence in the high-low method and would like you to "check out' your
   results using the scattergraph method.
   a. Prepare a scattergraph using the data given above. Plot cost on the vertical axis and activity
      on the horizontal axis. Fit a straight line to your plots.

                                                                                                                      y = 317.86x +
                                                   Total Shipping Expense Scattergraph


        Total Shipping Expense   $3,000






                                          0   1   2           3            4          5               6           7
                                                                          Units Shipped

  b. Using your scattergraph, estimate the approximate variable cost per unit shipped and the approximate fixed cos
     per month with the quick-and-dirty method.

     Right click on trend line.
     Click on format. Select options.
     Forecast backwards two units,

     Estimate Y intercept as $1,000.

     Select plotted point (5, $2,600) which lies on the trend line.
     The variable cost can be quickly estimated by subtracting the estimated fixed cost ($1,000) from the total cost at the poin
     lying on the straight line.

     The total variable cost = $2,600 - $1,000 = $1,600
     Estimate variable cost per unit by taking TVC and dividing it by the number for the selected point (5).

     Estimated variable cost per unit = $1,600 / 5 = $320.                    320

     Estimated cost formula = $1,000 + $320X

3. What factors, other than the number of units shipped, are likely to affect the company's shipping expense?

  a. The weight and volume of the units shipped.
  b. The distance shipped.
  c. The speed of the shipping process -- delivery deadlines.

Appendix 2A: Least-Squares Regression

1. Using the least-squares regression method, estimate the cost formula for shipping expense.

     Estimated cost formula = $1,010.71 + $317.857X                (See regression output below.)

     Note: the R-squared is 0.96, which means that 96% of the variation in shipping costs is explained by
     knowing the number of units shipped. This is a very high R-squared and indicates a very good fit.

     SUMMARY OUTPUT                To find the regression function: Click on Data Tab, then click on icon in the Analysis sectio

         Regression Statistics
     Multiple R     0.980928439
     R Square       0.962220603
     Adjusted R Square
     Standard Error 149.0445763
     Observations              7

                          df           SS         MS            F     Significance F
     Regression                  1 2828928.571 2828928.571 127.3472669 9.54922E-05
     Residual                    5 111071.4286 22214.28571
     Total                       6     2940000

                      Coefficients Standard Error t Stat    P-value   Lower 95%   Upper 95%
     Intercept        1010.714286 151.6827382 6.663344147 0.001149119 620.8013943 1400.627177
     X Variable 1     317.8571429 28.16677736 11.28482463 9.54922E-05 245.4521366 390.2621491


      Observation     Predicted Y  Residuals
                 1    2282.142857 -82.1428571
                 2    3235.714286 -135.714286
                 3            2600           0
                 4    1646.428571 -146.428571
                 5    1964.285714 235.7142857
                 6    2917.857143 82.14285714
                 7    3553.571429 46.42857143

2. Prepare a simple table comparing the variable and fixed cost elements of shipping expense as computed under
   the quick-and-dirty scattergraph method, the high-low method, and the least-squares regression method.

                       Fixed Cost Variable Cost
        Method        Element (a)  per Unit (b)
       High-Low           $800        $350
      Quick & Dirty     $1,000        $320
      Regression      $1,010.714    $317.857

cted to be shipped)


                y = 317.86x + 1010.7
                     R² = 0.9622
               7             8   9

he approximate fixed cost

om the total cost at the point

hipping expense?
n icon in the Analysis section.

               Lower 95.0% Upper 95.0%
                620.8013943 1400.627177
                245.4521366 390.2621491

se as computed under
 ession method.
Problem 2-14: Contribution Format versus Traditional Income Statement
House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the
retail level. The organs sell, on the average, for $2,500 each. The average cost of an organ
from the manufacturer is $1,500.                     $2,500    $1,500

House of Organs, Inc., has always kept careful records of its costs. The costs that the company
incurs in a typical month are presented below in the form of a spreadsheet:

   Costs                                         Cost Formula
    Advertising                           $950   per month
    Delivery of Organs                     $60   per organ sold
    Sales Salaries and Commissions      $4,800   per month, plus 4% of sales              0.04    $100
    Utilities                             $650   per month
    Depreciation of Sales Facilities    $5,000   per month
    Executive Salaries                 $13,500   per month
    Depreciation of Office Equipment      $900   per month
    Clerical                            $2,500   per month, plus $40 per organ sold       $40
    Insurance                             $700   per month

During November, the company sold and delivered 60 organs.                                  60

1. Prepare an income statement for November using the traditional format with costs
   organized by function.

   House of Organs, Inc.
   Traditional Formated Income Statement
   For the Month of November

   Sales (60 organs X $2,500 per organ)                                               $150,000
   Cost of Goods Sold (60 organs X $1,500)                                              90,000
   Gross Margin                                                                        $60,000
   Selling and Administrative Expenses:
      Selling Expenses:
          Advertising                                                         $950
          Delivery of Organs (60 organs X $60 per organ)                     3,600
          Sales Salaries and Commissions         $4,800         $6,000      10,800
          Utilities                                                            650
          Depreciation of Sales Facilities                                   5,000
              Total Selling Expense                                        $21,000
      Administrative Expenses:
          Executive Salaries                                               $13,500
          Depreciation of Office Equipment                                     900
          Clerical                               $2,500         $2,400       4,900
          Insurance                                                            700
              Total Administrative Expense                                 $20,000
      Total Selling and Administrative Expenses                                         41,000
   Net Operating Income                                                                $19,000
2. Redo (1) above, this time using the contribution margin format with costs organized by
   behavior. Show costs and revenues on both a total and a per unit basis down through CM.

   House of Organs, Inc.
   CM Format Income Statement
   For the Month of November
                                                                         Total       Total     Per Unit
   Sales (60 organs X $2,500 per organ)                                            $150,000
   Variable Expenses:
      Cost of Goods Sold ($1,500 per Organ)                             $90,000                  $1,500
      Delivery of Organs ($60 per Organ)                                  3,600                      60
      Sales Commissions (4% of Sales)                                     6,000                     100
      Clerical ($40 per Organ)                                            2,400     102,000          40
   Contribution Margin                                                              $48,000
   Fixed Expenses:
      Advertising                                                          $950
      Sales Salaries                                                      4,800
      Utilities                                                             650
      Depreciation of Sales Facilities                                    5,000
      Executive Salaries                                                 13,500
      Depreciation of Office Equipment                                      900
      Clerical                                                            2,500
      Insurance                                                             700
      Total Fixed Expenses                                                           29,000
   Net Operating Income                                                             $19,000

3. Refer to the income statement you prepared in (2) above. Why might it be misleading to
   show the fixed costs on a per unit basis?

   Fixed costs remain constant in total but change on a per unit basis with changes in activity level.
   Showing fixed costs on a per unit basis on the income statement make them appear to be variable
   costs which might mislead managers.
Per Unit

Problem 2-18: Cost Behavior: High-Low Method; C/M Format Income Statement
Frankel Ltd., a British merchandising company, is the exclusive distributor of a product that
is gaining rapid market acceptance. The company's revenues and expenses (in British
pounds) for the last three months are given below.

Frankel Ltd.
Comparative Income Statements
For the Three Months Ended. June 30
                                                      April             May             June
Sales in units                                    3,000 Per Unit   3,750 Per Unit   4,500
Sales Revenue                                   £420,000    £140 £525,000    £140 £630,000
Cost of Goods Sold                               168,000      56 210,000       56 252,000
Gross Margin                                    £252,000     £84 £315,000     £84 £378,000
Selling and Administrative Expense
    Shipping Expense                             £44,000     £14.67 £50,000          £13.33 £56,000
    Advertising Expense                           70,000      23.33   70,000          18.67   70,000
    Salaries and Commissions                     107,000      35.67 125,000           33.33 143,000
    Insurance Expense                              9,000       3.00    9,000           2.40    9,000
    Depreciation Expense                          42,000      14.00   42,000          11.20   42,000
Total Selling and Administrative Expenses       £272,000     £90.67 £296,000         £78.93 £320,000
Net Operating Income (Loss)                     -£20,000     -£6.67 £19,000           £5.07 £58,000

1. Identify each of the company's expenses (including cost of goods sold) as either variable,
   fixed, or mixed.
    (See Above)

2. Using the High-Low Method, separate each mixed expense into variable and fixed elements.
   State the cost formula for each mixed expense.

   Shipping Expense                    High       Low    Diff.          Rate
       Mixed Cost                     £56,000 £44,000 £12,000
       Volume                           4,500      3,000 1,500            £8.00 per unit
       Fixed Cost                     £20,000 £20,000
       Cost formula                y = 20,000 + 8.00(X)

   Salaries and Commissions            High      Low     Diff.          Rate
       Mixed Cost                   £143,000 £107,000 £36,000
       Volume                           4,500     3,000  1,500           £24.00 per unit
       Fixed Cost                     £35,000 £35,000
       Cost formula                y = 35,000 + 24.00(X)

3. Redo the Company's income statement at the 4,500- unit level of activity using the C/M

Frankel Ltd.
Contribution Format Income Statements
For the Month Ended. June 30

Sales revenue (4,500 units X 140 per unit)                                                      £630,000
Variable expenses:
   Cost of goods sold (4,500 units X 56 per unit)                £252,000
   Shipping Expense (4,500 units X 8 per unit)                     36,000
   Salaries and Commission Expense (4,500 units X 24 per unit)    108,000    396,000
Contribution Margin (4,500 units X (140 - 88) per unit)                     £234,000
Fixed Expenses:
   Shipping Expense                                               £20,000
   Advertising Expense                                             70,000
   Salaries and Commissions                                        35,000
   Insurance Expense                                                9,000
   Depreciation Expense                                            42,000    176,000
Net Operating Income                                                         £58,000
   Per Unit
         56 V

     £12.44   M
      15.56   F
      31.78   M
       2.00   F
       9.33   F
     £71.11   M
Exercise 2-9: Classification of Quality Costs

   Below are listed a number of activities that are part of a company's quality control systems.

   1. Classify the costs associated with each of these activities into one of the following

       Prevention costs -- Costs that are incurred to keep defects from occurring.

       Appraisal costs -- Costs that are incurred to identify defective products before the
                          products are shipped to customers.

       Internal failure costs -- Costs that are incurred as a result of identifying defective
                                 products before they are shipped to customers.

       External failure costs -- Costs that are incurred when a product or service that is
                                 defective is delivered to a customer

                                                                                    Type of Quality Cost
                                                                          Prevention Appraisal Internal
                                   Cost Item                                 Cost       Cost      Failure

        a Repairs of goods still under warranty

        b Customer returns due to defects

        c Statistical process control                                          X

        d Disposal of spoiled goods                                                                 X

        e Maintaining testing equipment                                                       X

         f Inspecting finished goods                                                          X

        g Downtime caused by quality problems                                                       X

        h Debugging errors in software                                                              X

         i Recall of defective products

         j Training quality engineers                                          X

        k Re-entry data due to typing errors                                                        X

         l Inspecting materials received from suppliers                        X

        m Audits of the quality systems                                        X

        n Supervision of testing personnel                                                    X
    0 Rework labor                                                                          X

2. Which of the four types of quality costs listed in (1) above are incurred to keep poor
   quality of conformance from occurring? Which of the four types of costs are incurred
   because poor quality of conformance has occurred?

   Quality of conformance -- The degree to which a product or service meets or exceeds
                              its design specifications and is free of defects or other
                              problems that mar its appearance or degrade performance.

   Prevention costs & appraisal make up cost of conformance, while the costs associated
   with non-conformance are internal and external failure costs.
Quality Cost




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