Managerial Accounting 15th Edition by Garrison – Solution Manual
Managerial Accounting:An Overview
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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.
- Do you think it would be appropriate for your boss to establish the sales budget without any
input from you? Why?
- Do you think the company would be comfortable with allowing you to establish the sales
budget without any input from your boss? Why?
- 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?
- 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?
- 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?
- 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
Assume that you work for an airline unloading luggage from airplanes. Your boss has said that,
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
unloading luggage from an airplane.
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.
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.
- According to the IMA’s Statement of Ethical Professional Practice, would it be ethical for
Perlman not to report the inventory as obsolete?
- 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.
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.
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
EXERCISE 1–7 Ethics in Business
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.
- How would this behavior affect customers? How might customers attempt to protect themselves
against this behavior?
- How would this behavior probably affect profits and employment in the automotive service
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:
- 70% of the students rated themselves as above average in leadership ability, while only 2%
rated themselves as below average in this regard.
- 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.
- 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
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
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
How would you respond to the professor from Oregon Coastal University? What would you say
about Dr. Candler’s teaching ability? Would you describe your answer to this inquiry as being ethical?
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.”
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.”
- Do you agree with this quote? Why?
- As a manager, how would you seek to motivate your employees?
- 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
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.
- 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?
- 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.
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.
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
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
maintain control of your cash?
1A–6 As a form of internal control, what documents would you review prior to paying an
invoice received from a supplier?
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?
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
labor, and (e) manufacturing overhead.
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—
- Unit fixed costs?
- Unit variable costs?
- Total fixed costs?
- 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
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.
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
- For financial accounting purposes, what is the total amount of product costs incurred to make
- For financial accounting purposes, what is the total amount of period costs incurred to sell
- If 8,000 units are sold, what is the variable cost per unit sold?
- If 12,500 units are sold, what is the variable cost per unit sold?
- If 8,000 units are sold, what is the total amount of variable costs related to the units sold?
- If 12,500 units are sold, what is the total amount of variable costs related to the units sold?
- If 8,000 units are produced, what is the average fixed manufacturing cost per unit
- If 12,500 units are produced, what is the average fixed manufacturing cost per unit
- If 8,000 units are produced, what is the total amount of fixed manufacturing cost incurred to
support this level of production?
- If 12,500 units are produced, what is the total amount of fixed manufacturing cost incurred to
support this level of production?
- 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
- 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
- If the selling price is $22 per unit, what is the contribution margin per unit sold?
- If 11,000 units are produced, what are the total amounts of direct and indirect manufacturing
costs incurred to support this level of production?
- 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.
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
Cost Cost Object
Ex. Catered food served to patients A particular patient X
- The wages of pediatric nurses The pediatric department
- Prescription drugs A particular patient
- Heating the hospital The pediatric department
- The salary of the head of pediatrics The pediatric department
- The salary of the head of pediatrics A particular pediatric patient
- Hospital chaplain’s salary A particular patient
- Lab tests by outside contractor A particular patient
- 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.
For each cost, indicate whether it would most likely be classified as direct labor, direct materials,
manufacturing overhead, selling, or an administrative cost.
- The cost of a hard drive installed in a computer.
- The cost of advertising in the Puget Sound Computer User newspaper.
- The wages of employees who assemble computers from components.
- Sales commissions paid to the company’s salespeople.
- The wages of the assembly shop’s supervisor.
- The wages of the company’s accountant.
- Depreciation on equipment used to test assembled computers before release to customers.
- 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:
- Depreciation on salespersons’ cars.
- Rent on equipment used in the factory.
- Lubricants used for machine maintenance.
- Salaries of personnel who work in the finished goods warehouse.
- Soap and paper towels used by factory workers at the end of a shift.
- Factory supervisors’ salaries.
- Heat, water, and power consumed in the factory.
- Materials used for boxing products for shipment overseas. (Units are not normally boxed.)
- Advertising costs.
- Workers’ compensation insurance for factory employees.
- Depreciation on chairs and tables in the factory lunchroom.
- The wages of the receptionist in the administrative offices.
- Cost of leasing the corporate jet used by the company’s executives.
- The cost of renting rooms at a Florida resort for the annual sales conference.
- The cost of packaging the company’s product.
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
- 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 . . . . . ? ? ?
- 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
- 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.
- 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:
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
- Prepare a traditional income statement.
- 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.
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.
Ex. Cost of X-ray film used in the old machine X
- Cost of the old X-ray machine . . . . . . . . . . . . . . . . . . . . . .
- The salary of the head of the Radiology Department . . . .
- The salary of the head of the Pediatrics Department . . . .
- Cost of the new color laser printer . . . . . . . . . . . . . . . . . .
- Rent on the space occupied by Radiology . . . . . . . . . . .
- The cost of maintaining the old machine . . . . . . . . . . . . .
- Benefits from a new DNA analyzer . . . . . . . . . . . . . . . . . .
- 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.
- Using the high-low method, estimate the variable and fixed cost elements of the annual cost of
the truck operation.
- Express the variable and fixed costs in the form Y 5 a 1 bX.
- If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be
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
- What is the total amount of product costs?
- What is the total amount of period costs?
- What is the total amount of conversion costs?
- 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
Variable costs . . . . . $180,000 ? ?
Fixed costs . . . . . . . 300,000 ? ?
Total costs . . . . . . . . . . $480,000 ? ?
Cost per unit:
Variable cost . . . . . . ? ? ?
Fixed cost . . . . . . . . ? ? ?
Total cost per unit . . . . ? ? ?
- Complete the schedule of the company’s total and unit costs above.
- 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:
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
- 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?
- 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.
- 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?
- What factors, other than the number of units shipped, are likely to affect the company’s shipping
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
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.
Prepare an answer sheet with the following column headings:
Name (Selling and
of the Variable Fixed Direct Direct Manufacturing Administrative) Opportunity Sunk
Cost Cost Cost Materials Labor Overhead Cost Cost 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
column headings opposite the cost.)
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:
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
- Prepare a traditional income statement for the quarter ended March 31.
- Prepare a contribution format income statement for the quarter ended March 31.
- 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.)