### Sample Chapter

##### Managerial Accounting 15th Edition by Garrison – Solution Manual

CHAPTER 1

Managerial Accounting:An Overview

Exercises

For this chapter, LearnSmart and Interactive Presentations are available with

McGraw-Hill’s Connect ® Accounting.

EXERCISE 1–1 Planning and Control

Many companies use budgets for three purposes. First, they use them to plan how to deploy resources to

best serve customers. Second, they use them to establish challenging goals, or stretch targets, to motivate

employees to strive for exceptional results. Third, they use them to evaluate and reward employees.

Assume that you are a sales manager working with your boss to create a sales budget for next

year. Once the sales budget is established, it will influence how other departments within the company

plan to deploy their resources. For example, the manufacturing manager will plan to produce

enough units to meet budgeted unit sales. The sales budget will also be instrumental in determining

your pay raise, potential for promotion, and bonus. If actual sales exceed the sales budget, it bodes

well for your career. If actual sales are less than budgeted sales, it will diminish your financial

compensation and potential for promotion.

Required:

1. Do you think it would be appropriate for your boss to establish the sales budget without any

input from you? Why?

1. Do you think the company would be comfortable with allowing you to establish the sales

budget without any input from your boss? Why?

1. Assume the company uses its sales budget for only one purpose—planning to deploy resources

in a manner that best serves customers. What thoughts would influence your estimate of future

sales as well as your boss’s estimate of future sales?

1. Assume the company uses its sales budget for only one purpose—motivating employees to

strive for exceptional results. What thoughts would influence your estimate of future sales as

well as your boss’s estimate of future sales?

1. Assume the company uses its sales budget for only one purpose—to determine your pay raise,

potential for promotion, and bonus. What thoughts would influence your estimate of future

sales as well as your boss’s estimate of future sales?

1. Assume the sales budget is used for all three purposes described in questions 3–5. Describe any

conflicts or complications that might arise when using the sales budget for these three purposes.

EXERCISE 1–2 Controlling

on average, each airplane contains 100 pieces of luggage. Furthermore, your boss has stated that

you should be able to unload 100 pieces of luggage from an airplane in 10 minutes. Today an airplane

arrived with 150 pieces of luggage and you unloaded all of it in 13 minutes. After finishing

with the 150 pieces of luggage, your boss yelled at you for exceeding the 10 minute allowance for

Required:

How would you feel about being yelled at for taking 13 minutes to unload 150 pieces of luggage?

How does this scenario relate to the larger issue of how companies design control systems?

EXERCISE 1–3 Decision Making

Exhibit 1–2 (see page 4) includes 12 questions related to 12 types of decisions that companies

often face. In the chapter, these 12 decisions were discussed within the context of for-profit companies;

however, they are also readily applicable to nonprofit organizations. To illustrate this point,

assume that you are a senior leader, such as a president, provost, or dean, in a university setting.

Required:

For each of the 12 decisions in Exhibit 1–2 , provide an example of how that type of decision might

be applicable to a university setting.

EXERCISE 1–4 Ethics and the Manager

Richmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of

Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele.

Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant

controller, was asked to oversee the financial reporting for these test stores, and she and other

management personnel were offered bonuses based on the sales growth and profitability of these

stores. While completing the financial reports, Perlman discovered a sizable inventory of outdated

goods that should have been discounted for sale or returned to the manufacturer. She discussed the

situation with her management colleagues; the consensus was to ignore reporting this inventory as

obsolete because reporting it would diminish the financial results and their bonuses.

Required:

1. According to the IMA’s Statement of Ethical Professional Practice, would it be ethical for

Perlman not to report the inventory as obsolete?

1. Would it be easy for Perlman to take the ethical action in this situation?

EXERCISE 1–5 Strategy

The table below contains the names of six companies.

Required:

For each company, categorize its strategy as being focused on customer intimacy, operational

excellence, or product leadership. If you wish to improve your understanding of each company’s

customer value proposition before completing the exercise, review its most recent annual report.

To obtain electronic access to this information, perform an Internet search on each company’s

name followed by the words “annual report.”

EXERCISE 1–6 Enterprise Risk Management

The table below refers to seven industries.

Required:

For each industry, identify one important risk faced by the companies that compete within that industry.

Also, describe one control that companies could use to reduce the risk that you have identified

Consumers and attorney generals in more than 40 states accused a prominent nationwide chain of

auto repair shops of misleading customers and selling them unnecessary parts and services, from

brake jobs to front-end alignments. Lynn Sharpe Paine reported the situation as follows in “Managing

for Organizational Integrity,” Harvard Business Review, Volume 72 Issue 3:

In the face of declining revenues, shrinking market share, and an increasingly competitive

market . . . management attempted to spur performance of its auto centers. . . . The automotive

service advisers were given product-specific sales quotas—sell so many springs, shock

absorbers, alignments, or brake jobs per shift—and paid a commission based on sales. . . .

[F]ailure to meet quotas could lead to a transfer or a reduction in work hours. Some employees

spoke of the “pressure, pressure, pressure” to bring in sales.

This pressure-cooker atmosphere created conditions under which employees felt that the

only way to satisfy top management was by selling products and services to customers that

they didn’t really need.

Suppose all automotive repair businesses routinely followed the practice of attempting to sell

customers unnecessary parts and services.

Required:

1. How would this behavior affect customers? How might customers attempt to protect themselves

against this behavior?

1. How would this behavior probably affect profits and employment in the automotive service

industry?

EXERCISE 1–8 Cognitive Bias

In the 1970s, one million college-bound students were surveyed and asked to compare themselves

to their peers. Some of the key findings of the survey were as follows:

1. 70% of the students rated themselves as above average in leadership ability, while only 2%

rated themselves as below average in this regard.

1. With respect to athletic skills, 60% of the students rated their skills as above the median and

only 6% of students rated themselves as below the median.

1. 60% of the students rated themselves in the top 10% in terms of their ability to get along with

others, while 25% of the students felt that they were in the top 1% in terms of this interpersonal

skill.

Required:

What type of cognitive bias reveals itself in the data mentioned above? How might this cognitive

bias adversely influence a manager’s planning, controlling, and decision-making activities? What

steps could managers take to reduce the possibility that this cognitive bias would adversely influence

their actions?

EXERCISE 1–9 Ethics and Decision Making

Assume that you are the chairman of the Department of Accountancy at Mountain State University.

One of the accounting professors in your department, Dr. Candler, has been consistently and uniformly

regarded by students as an awful teacher for more than 10 years. Other accounting professors

within your department have observed Dr. Candler’s classroom teaching and they concur that

his teaching skills are very poor. However, Dr. Candler was granted tenure 12 years ago, thereby

ensuring him life-long job security at Mountain State University.

Much to your surprise, today you received a phone from an accounting professor at Oregon

Coastal University. During this phone call you are informed that Oregon Coastal University is on

the verge of making a job offer to Dr. Candler. However, before extending the job offer, the faculty

at Oregon Coastal wants your input regarding Dr. Candler’s teaching effectiveness while at Mountain

State University.

Required:

How would you respond to the professor from Oregon Coastal University? What would you say

Why?

EXERCISE 1–10 Corporate Social Responsbility

In his book Capitalism and Freedom, economist Milton Friedman wrote on page 133: “There is

one and only one social responsibility of business—to use its resources and engage in activities

designed to increase its profits so long as it . . . engages in open and free competition, without

deception or fraud.”

Required:

Explain why you agree or disagree with this quote.

EXERCISE 1–11 Intrinsic Motivation and Extrinsic Incentives

In a Harvard Business Review article titled “Why Incentive Plans Cannot Work,” (Volume 71, Issue 5)

author Alfie Kohn wrote: “Research suggests that, by and large, rewards succeed at securing one

thing only: temporary compliance. When it comes to producing lasting change in attitudes and

behavior, however, rewards, like punishment, are strikingly ineffective. Once the rewards run out,

people revert to their old behaviors. . . . Incentives, a version of what psychologists call extrinsic

motivators, do not alter the attitudes that underlie our behaviors. They do not create an enduring commitment

to any value or action. Rather, incentives merely—and temporarily—change what we do.”

Required:

1. Do you agree with this quote? Why?
2. As a manager, how would you seek to motivate your employees?
3. As a manager, would you use financial incentives to compensate your employees? If so, what

would be the keys to using them effectively? If not, then how would you compensate your

employees?

EXERCISE 1–12 Cognitive Bias and Decision Making

During World War II, the U.S. military was studying its combat-tested fighter planes to determine

the parts of the plane that were most vulnerable to enemy fire. The purpose of the study was to

identify the most vulnerable sections of each plane and then take steps to reinforce those sections

to improve pilot safety and airplane durability. The data gathered by the U.S. military showed that

certain sections of its combat-tested fighter planes were consistently hit more often with enemy

fire than other sections of the plane.

Required:

1. Would you recommend reinforcing the sections of the plane that were hit most often by enemy

fire, or would you reinforce the sections that were hit less frequently by enemy fire? Why?

1. Do you think cognitive bias had the potential to influence the U.S. military’s decision-making

process with respect to reinforcing its fighter planes?

EXERCISE 1–13 Ethics and Decision Making

Assume that you just completed a December weekend vacation to a casino within the United

States. During your trip you won \$10,000 gambling. When the casino exchanged your chips for

cash they did not record any personal information, such as your driver’s license number or social

security number. Four months later while preparing your tax returns for the prior year, you stop to

contemplate the fact that the Internal Revenue Service requires taxpayers to report all gambling

winnings on Form 1040.

Required:

Would you report your gambling winnings to the Internal Revenue Service so that you could pay

federal income taxes on those winnings? Do you believe that your actions are ethical? Why?

being run in their best interests rather than in the interests of top managers. Corporate

governance is the system by which a company is directed and controlled. If properly

implemented, the corporate governance system should provide incentives for the board

of directors and top management to pursue objectives that are in the interests of the company’s

owners and it should provide for effective monitoring of performance. 1

Unfortunately, history has repeatedly shown that unscrupulous top managers, if

unchecked, can exploit their power to defraud stockholders. This unpleasant reality

became all too clear in 2001 when the fall of Enron kicked off a wave of corporate

scandals. These scandals were characterized by financial reporting fraud and misuse of

corporate funds at the very highest levels—including CEOs and CFOs. While this was

disturbing in itself, it also indicated that the institutions intended to prevent such abuses

weren’t working, thus raising fundamental questions about the adequacy of the existing

corporate governance system. In an attempt to respond to these concerns, the U.S. Congress

passed the most important reform of corporate governance in many decades— The

Sarbanes-Oxley Act of 2002.

Questions

1A–1 Imagine that you are the head coach of a college sports team. One of your most important

objectives is to win as many games as possible. Describe some controls that you

would implement to help achieve the objective of winning as many games as possible.

1A–2 Perhaps your most important post-graduation objective is to get a job. Describe some

control activities that you would pursue to help achieve this objective.

1A–3 Describe some controls that parents use to keep their homes safe for themselves and

their children.

1A–4 Many retail companies experience customer and employee theft (or what is referred to as

shrinkage) that equals 1%–2% of their total sales. For a company such as Walmart, this

seemingly small percentage of total sales translates to billions of dollars. What types of

internal controls might Walmart use to reduce its shrinkage?

1A–5 If you were a restaurant owner, what internal controls would you implement to help

1A–6 As a form of internal control, what documents would you review prior to paying an

1A–7 What internal controls would you implement to help maintain control of your credit

sales and accounts receivable?

1A–8 Why do companies take a physical count of their inventory on hand at least once per year?

1A–9 Why do companies use sequential prenumbering for documents such as checks, sales

invoices, and purchase orders?

1A–10 How can an annual budget function as a form of internal control?

CHAPTER 2

MANAGERIAL ACCOUNTING AND COST CONCEPTS

SOLUTIONS TO QUESTIONS

2–1 What are the three major elements of product costs in a manufacturing company?

2–2 Define the following: (a) direct materials, (b) indirect materials, (c) direct labor, (d) indirect

2–3 Explain the difference between a product cost and a period cost.

2–4 Distinguish between ( a ) a variable cost, ( b ) a fixed cost, and ( c ) a mixed cost.

2–5 What effect does an increase in volume have on—

1. Unit fixed costs?
2. Unit variable costs?
3. Total fixed costs?
4. Total variable costs?

2–6 Define the following terms: ( a ) cost behavior and ( b ) relevant range.

2–7 What is meant by an activity base when dealing with variable costs? Give several examples

of activity bases.

2–8 Managers often assume a strictly linear relationship between cost and volume. How can

this practice be defended in light of the fact that many costs are curvilinear?

2–9 Distinguish between discretionary fixed costs and committed fixed costs.

2–10 Does the concept of the relevant range apply to fixed costs? Explain.

2–11 What is the major disadvantage of the high-low method?

2–12 Give the general formula for a mixed cost. Which term represents the variable cost? The

fixed cost?

2–13 What is meant by the term least-squares regression?

2–14 What is the difference between a contribution format income statement and a traditional

format income statement?

2–15 What is the contribution margin?

2–16 Define the following terms: differential cost, opportunity cost, and sunk cost.

2–17 Only variable costs can be differential costs. Do you agree? Explain.

Multiple-choice questions are provided on the text website.

Applying Excel

Available with McGraw-Hill’s Connect® Accounting.

The Excel worksheet form that appears on the n ext page is to be used to recreate Exhibit 2–9 on

page 44. Download the workbook containing this form from the Online Learning Center at www.

mhhe.com/garrison15e . On the website you will also receive instructions about how to use this

worksheet form.

LO2–6

Required:

1. For financial accounting purposes, what is the total amount of product costs incurred to make

10,000 units?

1. For financial accounting purposes, what is the total amount of period costs incurred to sell

10,000 units?

1. If 8,000 units are sold, what is the variable cost per unit sold?
2. If 12,500 units are sold, what is the variable cost per unit sold?
3. If 8,000 units are sold, what is the total amount of variable costs related to the units sold?
4. If 12,500 units are sold, what is the total amount of variable costs related to the units sold?
5. If 8,000 units are produced, what is the average fixed manufacturing cost per unit

produced?

1. If 12,500 units are produced, what is the average fixed manufacturing cost per unit

produced?

1. If 8,000 units are produced, what is the total amount of fixed manufacturing cost incurred to

support this level of production?

1. If 12,500 units are produced, what is the total amount of fixed manufacturing cost incurred to

support this level of production?

1. If 8,000 units are produced, what is the total amount of manufacturing overhead cost

incurred to support this level of production? What is this total amount expressed on a per

unit basis?

1. If 12,500 units are produced, what is the total amount of manufacturing overhead cost

incurred to support this level of production? What is this total amount expressed on a per

unit basis?

1. If the selling price is \$22 per unit, what is the contribution margin per unit sold?
2. If 11,000 units are produced, what are the total amounts of direct and indirect manufacturing

costs incurred to support this level of production?

1. What total incremental cost will Martinez incur if it increases production from 10,000 to

All applicable exercises are available with McGraw-Hill’s Connect® Accounting.

EXERCISE 2–1 Identifying Direct and Indirect Costs [ LO2–1]

Northwest Hospital is a full-service hospital that provides everything from major surgery and

emergency room care to outpatient clinics.

Required:

For each cost incurred at Northwest Hospital, 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 column

Chapter 2

Cost Cost Object

Direct

Cost

Indirect

Cost

Ex. Catered food served to patients A particular patient X

1. The wages of pediatric nurses The pediatric department
2. Prescription drugs A particular patient
3. Heating the hospital The pediatric department
4. The salary of the head of pediatrics The pediatric department
5. The salary of the head of pediatrics A particular pediatric patient
6. Hospital chaplain’s salary A particular patient
7. Lab tests by outside contractor A particular patient
8. Lab tests by outside contractor A particular department

EXERCISE 2–2 Classifying Manufacturing Costs [LO2–2]

The PC Works assembles custom computers from components supplied by various manufacturers.

The company is very small and its assembly shop and retail sales store are housed in a single facility

in a Redmond, Washington, industrial park. Listed below are some of the costs that are incurred

at the company.

Required:

For each cost, indicate whether it would most likely be classified as direct labor, direct materials,

1. The cost of a hard drive installed in a computer.
2. The cost of advertising in the Puget Sound Computer User newspaper.
3. The wages of employees who assemble computers from components.
4. Sales commissions paid to the company’s salespeople.
5. The wages of the assembly shop’s supervisor.
6. The wages of the company’s accountant.
7. Depreciation on equipment used to test assembled computers before release to customers.
8. Rent on the facility in the industrial park.

EXERCISE  2–3 Classification of Costs as Product or Period Cost

Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures

sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The

company, which is privately owned, has approached a bank for a loan to help it finance its growth.

The bank requires financial statements before approving such a loan. You have been asked to help

prepare the financial statements and were given the following list of costs:

1. Depreciation on salespersons’ cars.
2. Rent on equipment used in the factory.
3. Lubricants used for machine maintenance.
4. Salaries of personnel who work in the finished goods warehouse.
5. Soap and paper towels used by factory workers at the end of a shift.
6. Factory supervisors’ salaries.
7. Heat, water, and power consumed in the factory.
8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.)
10. Workers’ compensation insurance for factory employees.
11. Depreciation on chairs and tables in the factory lunchroom.
12. The wages of the receptionist in the administrative offices.
13. Cost of leasing the corporate jet used by the company’s executives.
14. The cost of renting rooms at a Florida resort for the annual sales conference.
15. The cost of packaging the company’s product.

Required:

Classify the above costs as either product costs or period costs for the purpose of preparing the

financial statements for the bank.

EXERCISE 2–4 Fixed and Variable Cost Behavior

Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed

weekly expense of a coffee stand is \$1,200 and the variable cost per cup of coffee served is \$0.22

Managerial Accounting and Cost Concepts 55

Required:

1. Fill in the following table with your estimates of total costs and cost per cup of coffee at the

indicated levels of activity for a coffee stand. Round off the cost of a cup of coffee to the nearest

tenth of a cent.

Cups of Coffee Served in a Week

2,000 2,100 2,200

Fixed cost . . . . . . . . . . . . . . . . . . . . . . . . . . . ? ? ?

Variable cost . . . . . . . . . . . . . . . . . . . . . . . . . ? ? ?

Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? ? ?

Average cost per cup of coffee served . . . . . ? ? ?

1. Does the average cost per cup of coffee served increase, decrease, or remain the same as the

number of cups of coffee served in a week increases? Explain.

EXERCISE 2–5 High-Low Method

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs

of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a

room rented out for one day. The hotel’s business is highly seasonal, with peaks occurring during

the ski season and in the summer.

Month Occupancy-Days Electrical Costs

January . . . . . . . . 1,736 \$4,127

February . . . . . . . 1,904 \$4,207

March . . . . . . . . . 2,356 \$5,083

April . . . . . . . . . . 960 \$2,857

May . . . . . . . . . . . 360 \$1,871

June . . . . . . . . . . 744 \$2,696

July . . . . . . . . . . . 2,108 \$4,670

August . . . . . . . . 2,406 \$5,148

September . . . . . 840 \$2,691

October . . . . . . . 124 \$1,588

November . . . . . . 720 \$2,454

December . . . . . . 1,364 \$3,529

Required:

1. Using the high-low method, estimate the fixed cost of electricity per month and the variable

cost of electricity per occupancy-day. Round off the fixed cost to the nearest whole dollar and

the variable cost to the nearest whole cent.

1. What other factors other than occupancy-days are likely to affect the variation in electrical

costs from month to month?

EXERCISE 2–6 Traditional and Contribution Format Income Statements

Cherokee Inc. is a merchandiser that provided the following information:

Amount

Number of units sold . . . . . . . . . . . . . . . . . . . . . . . . 20,000

Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . \$30

Variable selling expense per unit . . . . . . . . . . . . . . . \$4

Variable administrative expense per unit . . . . . . . . . \$2

Total fixed selling expense . . . . . . . . . . . . . . . . . . . \$40,000

Total fixed administrative expense . . . . . . . . . . . . . \$30,000

Beginning merchandise inventory . . . . . . . . . . . . . . \$24,000

Ending merchandise inventory . . . . . . . . . . . . . . . . \$44,000

Merchandise purchases . . . . . . . . . . . . . . . . . . . . . \$180,000

Chapter 2

Required:

1. Prepare a traditional income statement.
2. Prepare a contribution format income statement.

EXERCISE 2–7 Differential, Opportunity, and Sunk Costs

Northwest Hospital is a full-service hospital that provides everything from major surgery and

emergency room care to outpatient clinics. The hospital’s Radiology Department is considering

replacing an old inefficient X-ray machine with a state-of-the-art digital X-ray machine. The

new machine would provide higher quality X-rays in less time and at a lower cost per X-ray. It

would also require less power and would use a color laser printer to produce easily readable X-ray

images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is

lobbying the hospital’s management to buy a new DNA analyzer.

Required:

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 X-ray machine with a new machine. If none of the categories apply for a particular item, leave

all columns blank.

Item

Differential

Cost

Opportunity

Cost

Sunk

Cost

Ex. Cost of X-ray film used in the old machine X

1. Cost of the old X-ray machine . . . . . . . . . . . . . . . . . . . . . .
2. The salary of the head of the Radiology Department . . . .
3. The salary of the head of the Pediatrics Department . . . .
4. Cost of the new color laser printer . . . . . . . . . . . . . . . . . .
5. Rent on the space occupied by Radiology . . . . . . . . . . .
6. The cost of maintaining the old machine . . . . . . . . . . . . .
7. Benefits from a new DNA analyzer . . . . . . . . . . . . . . . . . .
8. Cost of electricity to run the X-ray machines . . . . . . . . . .

EXERCISE 2–8 Cost Behavior; High-Low Method

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has

determined that if a truck is driven 105,000 kilometers during a year, the average operating cost

is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers during a year, the average

operating cost increases to 13.4 cents per kilometer.

Required:

1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of

the truck operation.

1. Express the variable and fixed costs in the form Y 5 a 1 bX.
2. If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be

incurred?

EXERCISE 2–9 Cost Terminology for Manufacturers

Arden Company reported the following costs and expenses for the most recent month:

Direct materials . . . . . . . . . . . . . . . . . . . . . . \$80,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . \$42,000

Manufacturing overhead . . . . . . . . . . . . . . . \$19,000

Selling expenses . . . . . . . . . . . . . . . . . . . . . \$22,000

Administrative expenses . . . . . . . . . . . . . . . \$35,000

Required:

1. What is the total amount of product costs?
2. What is the total amount of period costs?
3. What is the total amount of conversion costs?
4. What is the total amount of prime costs?

EXERCISE 2–10 Cost Behavior; Contribution Format Income Statement

Harris Company manufactures and sells a single product. A partially completed schedule of the

company’s total and per unit costs over the relevant range of 30,000 to 50,000 units produced and

sold annually is given below:

Managerial Accounting and Cost Concepts 57

Units Produced and Sold

30,000 40,000 50,000

Total costs:

Variable costs . . . . . \$180,000 ? ?

Fixed costs . . . . . . . 300,000 ? ?

Total costs . . . . . . . . . . \$480,000 ? ?

Cost per unit:

Variable cost . . . . . . ? ? ?

Fixed cost . . . . . . . . ? ? ?

Total cost per unit . . . . ? ? ?

Required:

1. Complete the schedule of the company’s total and unit costs above.
2. Assume that the company produces and sells 45,000 units during the year at a selling price of

\$16 per unit. Prepare a contribution format income statement for the year.

EXERCISE 2–11 High-Low Method; Scattergraph Analysis

The following data relating to units shipped and total shipping expense have been assembled by

Archer Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings:

Month

Units

Shipped

Total Shipping

Expense

January . . . . . . . . . 3 \$1,800

February . . . . . . . . 6 \$2,300

March . . . . . . . . . . 4 \$1,700

April . . . . . . . . . . . 5 \$2,000

May . . . . . . . . . . . . 7 \$2,300

June . . . . . . . . . . . . 8 \$2,700

July . . . . . . . . . . . . 2 \$1,200

Required:

1. Prepare a scattergraph using the data given above. Plot cost on the vertical axis and activity

on the horizontal axis. Is there an approximately linear relationship between shipping expense

and the number of units shipped?

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

line through the high and low data points shown in the scattergraph that you prepared in

requirement 1. Make sure your line intersects the Y axis.

1. Comment on the accuracy of your high-low estimates assuming a least-squares regression

analysis estimated the total fixed costs to be \$910.71 per month and the variable cost to be

\$217.86 per unit. How would the straight line that you drew in requirement 2 differ from a

straight line that minimizes the sum of the squared errors?

1. What factors, other than the number of units shipped, are likely to affect the company’s shipping

expense? Explain.

EXERCISE 2–12 Cost Classification

Wollogong Group Ltd. of New South Wales, Australia, acquired its factory building about 10 years

ago. For several years, the company has rented out a small annex attached to the rear of the building.

The company has received a rental income of \$30,000 per year on this space. The renter’s

lease will expire soon, and rather than renewing the lease, the company has decided to use the

space itself to manufacture a new product.

Direct materials cost for the new product will total \$80 per unit. To have a place to store

finished units of product, the company will rent a small warehouse nearby. The rental cost will

be \$500 per month. In addition, the company must rent equipment for use in producing the new

product; the rental cost will be \$4,000 per month. Workers will be hired to manufacture the new

product, with direct labor cost amounting to \$60 per unit. The space in the annex will continue to

be depreciated on a straight-line basis, as in prior years. This depreciation is \$8,000 per year.

Advertising costs for the new product will total \$50,000 per year. A supervisor will be hired to

oversee production; her salary will be \$1,500 per month. Electricity for operating machines will be

\$1.20 per unit. Costs of shipping the new product to customers will be \$9 per unit

Chapter 2

To provide funds to purchase materials, meet payrolls, and so forth, the company will have to

liquidate some temporary investments. These investments are presently yielding a return of about

\$3,000 per year.

Required:

Period

Name (Selling and

of the Variable Fixed Direct Direct Manufacturing Administrative) Opportunity Sunk

Cost Cost Cost Materials Labor Overhead Cost Cost Cost

Product Cost

List the different costs associated with the new product decision down the extreme left column

(under Name of the Cost). Then place an X under each heading that helps to describe the type

of cost involved. There may be X’ s under several column headings for a single cost. (For example,

a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these

EXERCISE 2–13 Traditional and Contribution Format Income Statements

The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information

shown below for the quarter ended March 31:

Amount

Total sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$150,000

Selling price per pair of skis . . . . . . . . . . . . . . . . . . . . . . . \$750

Variable selling expense per pair of skis . . . . . . . . . . . . . \$50

Variable administrative expense per pair of skis . . . . . . . \$10

Total fixed selling expense . . . . . . . . . . . . . . . . . . . . . . . . \$20,000

Total fixed administrative expense . . . . . . . . . . . . . . . . . . \$20,000

Beginning merchandise inventory . . . . . . . . . . . . . . . . . . \$30,000

Ending merchandise inventory . . . . . . . . . . . . . . . . . . . . . \$40,000

Merchandise purchases . . . . . . . . . . . . . . . . . . . . . . . . . . \$100,000

Required:

1. Prepare a traditional income statement for the quarter ended March 31.
2. Prepare a contribution format income statement for the quarter ended March 31.
3. What was the contribution toward fixed expenses and profits for each pair of skis sold during

the quarter? (State this figure in a single dollar amount per pair of skis.)