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2.5: Summary

  • Page ID
    5189
  • Section Summaries

     

    2.1 Distinguish between Merchandising, Manufacturing, and Service Organizations

    • Merchandising, manufacturing, and service organizations differ in what they provide to consumers; however, all three types of firms must control costs in order to remain profitable. The type of costs they incur is primarily determined by the product/good, or service they provide.
    • As the type of organization differs, so does the way they account for costs. Some of these differences are reflected in the income statement.

    2.2 Identify and Apply Basic Cost Behavior Patterns

    • Costs can be broadly classified as either fixed or variable costs. However, in order for managers to manage effectively, these two cost classifications are often further expanded to include mixed, step, prime, and conversion costs.
    • For manufacturing firms, it is essential that they differentiate among direct materials, direct labor, and manufacturing overhead in order to identify and manage their total product costs.
    • For planning purposes, managers must be careful to consider the relevant range because it is only within this relevant range that total fixed costs remain constant.

    2.3 Estimate a Variable and Fixed Cost Equation and Predict Future Costs

    • In order to make business decisions, managers can utilize past cost data to predict future costs employing three methods: scatter graphs, the high-low method, and least-squares regression analysis.
    • Scatter graphs are used as a diagnostic tool to determine if the relationship between activity and cost is a linear relationship.
    • Both the high-low method and the least-squares regression method separate mixed costs into their fixed and variable components to allow managers to predict future costs from historical costs.

     

    Key Terms

     

    average fixed cost (AFC)
    total fixed costs divided by the total number of units produced, which results in a per-unit cost
    average variable cost (AVC)
    total variable costs divided by the total number of units produced, which results in a per-unit cost
    conversion costs
    total of labor and overhead for a product; the costs that “convert” the direct material into the finished product
    cost driver
    activity that is the reason for the increase or decrease of another cost; examples include labor hours incurred, labor costs paid, amounts of materials used in production, units produced, or any other activity that has a cause-and-effect relationship with incurred costs
    direct labor
    labor directly related to the manufacturing of the product or the production of a service
    direct materials
    materials used in the manufacturing process that can be traced directly to the product
    fixed cost
    unavoidable operating expense that does not change in total, regardless of the level of activity
    high-low method
    technique for separating the fixed and variable cost components of mixed costs
    indirect labor
    labor not directly involved in the active conversion of materials into finished products or the provision of services
    indirect materials
    materials used in production but not efficiently traceable to a specific unit of production
    intangible good
    good with financial value but no physical presence; examples include copyrights, patents, goodwill, and trademarks
    manufacturing organization
    business that uses parts, components, or raw materials to produce finished goods
    manufacturing overhead
    costs incurred in the production process that are not economically feasible to measure as direct material or direct labor costs; examples include indirect material, indirect labor, utilities, and depreciation
    merchandising firm
    business that purchases finished products and resells them to consumers
    mixed costs
    expenses that have a fixed component and a variable component
    period costs
    typically related to a particular time period instead of attached to the production of an asset; treated as an expense in the period incurred (examples include many sales and administrative expenses)
    prime costs
    direct material expenses and direct labor costs
    product costs
    all expenses required to manufacture the product: direct materials, direct labor, and manufacturing overhead
    relevant range
    quantitative range of units that can be produced based on the company’s current productive assets; for example, if a company has sufficient fixed assets to produce up to 10,000 units of product, the relevant range would be between 0 and 10,000 units
    scatter graph
    plot of pairs of numerical data that represents actual costs incurred for various levels of activity, with one variable on each axis, used to determine whether there is a relationship between them
    service organization
    business that earns revenue primarily by providing an intangible product
    stepped cost
    one that changes with the level of activity but will remain constant within a relevant range
    tangible good
    physical good that customers can handle and see
    total cost
    sum of all fixed and all variable costs
    total fixed costs
    sum of all fixed costs
    total variable costs
    sum of all variable costs
    variable cost
    one that varies in direct proportion to the level of activity within the business

     

    Multiple Choice

     

    1

    LO 2.1Which of the following is the primary source of revenue for a service business?

    1. the production of products from raw materials
    2. the purchase and resale of finished products
    3. providing intangible goods and services
    4. the sale of raw materials to manufacturing firms
    2

    LO 2.1Which of the following is the primary source of revenue for a merchandising business?

    1. the production of products from raw materials
    2. the purchase and resale of finished products
    3. the provision of intangible goods and services
    4. the sale of raw materials to manufacturing firms
    3

    LO 2.1Which of the following is the primary source of revenue for a manufacturing business?

    1. the production of products from raw materials
    2. the purchase and resale of finished products
    3. the provision of intangible goods and services
    4. both the provision of services and the sale of finished goods
    4

    LO 2.1Which of the following represents the components of the income statement for a service business?

    1. Sales Revenue – Cost of Goods Sold = gross profit
    2. Service Revenue – Operating Expenses = operating income
    3. Sales Revenue – Cost of Goods Manufactured = gross profit
    4. Service Revenue – Cost of Goods Purchased = gross profit
    5

    LO 2.1Which of the following represents the components of the income statement for a manufacturing business?

    1. Sales Revenue – Cost of Goods Sold = gross profit
    2. Service Revenue – Operating Expenses = gross profit
    3. Service Revenue – Cost of Goods Manufactured = gross profit
    4. Sales Revenue – Cost of Goods Manufactured = gross profit
    6

    LO 2.1Which of the following represents the components of the income statement for a merchandising business?

    1. Sales Revenue – Cost of Goods Sold = gross profit
    2. Service Revenue – Operating Expenses = gross profit
    3. Sales Revenue – Cost of Goods Manufactured = gross profit
    4. Service Revenue – Cost of Goods Purchased = gross profit
    7

    LO 2.2Conversion costs include all of the following except:

    1. wages of production workers
    2. depreciation on factory equipment
    3. factory utilities
    4. direct materials purchased
    8

    LO 2.2Which of the following is not considered a product cost?

    1. direct materials
    2. direct labor
    3. indirect materials
    4. selling expense
    9

    LO 2.2Fixed costs are expenses that ________.

    1. vary in response to changes in activity level
    2. remain constant on a per-unit basis
    3. increase on a per-unit basis as activity increases
    4. remain constant as activity changes
    10

    LO 2.2Variable costs are expenses that ________.

    1. remain constant on a per-unit basis but change in total based on activity level
    2. remain constant on a per-unit basis and remain constant in total regardless of activity level
    3. decrease on a per-unit basis as activity level increases
    4. remain constant in total regardless of activity level within a relevant range
    11

    LO 2.2Total costs for ABC Distributing are $250,000 when the activity level is 10,000 units. If variable costs are $5 per unit, what are their fixed costs?

    1. $240,000
    2. $200,000
    3. $260,000
    4. Their fixed costs cannot be determined from the information presented.
    12

    LO 2.2Which of the following would not be classified as manufacturing overhead?

    1. indirect materials
    2. indirect labor
    3. direct labor
    4. property taxes on factory
    13

    LO 2.2Which of the following are prime costs?

    1. indirect materials, indirect labor, and direct labor
    2. direct labor, indirect materials, and indirect labor
    3. direct labor and indirect labor
    4. direct labor and direct materials
    14

    LO 2.2Which of the following statements is true regarding average fixed costs?

    1. Average fixed costs per unit remain fixed regardless of level of activity.
    2. Average fixed costs per unit rise as the level of activity rises.
    3. Average fixed costs per unit fall as the level of activity rises.
    4. Average fixed costs per unit cannot be determined.
    15

    LO 2.3The high-low method and least-squares regression are used by managers to ________.

    1. decide whether to make or buy a component part
    2. minimize corporate tax liability
    3. maximize output
    4. estimate costs
    16

    LO 2.3Which of the following methods of cost estimation relies on only two data points?

    1. the high-low method
    2. account analysis
    3. least-squares regression
    4. SWOT analysis.
    17

    LO 2.3In the cost equation Y = a + bxY represents which of the following?

    1. fixed costs
    2. variable costs
    3. total costs
    4. units of production
    18

    LO 2.3A scatter graph is used to test the assumption that the relationship between cost and activity level is ________.

    1. curvilinear
    2. cyclical
    3. unpredictable
    4. linear

     

    Questions

     

    1

    LO 2.1Identify the three primary classifications of businesses and explain the differences among the three.

    2

    LO 2.1Explain how the income statement of a manufacturing company differs from the income statement of a merchandising company.

    3

    LO 2.1Walsh & Coggins, a professional accounting firm, collects cost information about the services they provide to their clients. Describe the types of cost data they would collect and explain the importance of analyzing this cost data.

    4

    LO 2.1Lizzy’s is a retail clothing store, specializing in formal wear for weddings. They purchase their clothing for resale from specialty distributors and manufacturers. Recently the owners of Lizzy’s have noted an increased interest in costume jewelry and fashion accessories among their clientele. If the owners of Lizzy’s decide to expand their business to include these products, what cost data would they need to collect and analyze prior to expanding the business?

    5

    LO 2.2Identify and describe the three types of product costs in a manufacturing firm.

    6

    LO 2.2Explain the difference between a period cost and a product cost.

    7

    LO 2.2Explain the concept of relevant range and how it affects total fixed costs.

    8

    LO 2.2Explain the differences among fixed costs, variable costs, and mixed costs.

    9

    LO 2.2Explain the difference between prime costs and conversion costs.

    10

    LO 2.3Explain how a scatter graph is used to identify and measure cost behavior.

    11

    LO 2.3Explain the components of the total cost equation and describe how each of the components can be used by management for decision-making.

    12

    LO 2.3Explain how the high-low method is used for cost estimation. What, if any, are the limitations of this approach to cost estimation?

     

    Exercise Set A

     

    EA1

    LO 2.1Magio Company manufactures kitchen equipment used in hospitals. They distribute their products directly to the customer and, for the year ending 2019, they reported the following revenues and expenses. Use this information to construct an income statement for the year 2019.

    Sales Revenue $985,000, Cost of Goods Sold 489,000, Operating Expenses 245,000.
    EA2

    LO 2.1Park and West, LLC, provides consulting services to retail merchandisers in the Midwest. In 2019, they generated $720,000 in service revenue. Their total cost (fixed and variable) per client was $2,500 and they served 115 clients during the year. If operating expenses for the year were $302,000 what was their net income?

    EA3

    LO 2.1Canine Couture is a specialty dog clothing boutique that sells clothing and clothing accessories for dogs. In 2019, they had gross revenue from sales totaling $86,500. Their operating expenses for this same period were $27,500. If their Cost of Goods Sold (COGS) was 24% of gross revenue, what was their net operating income for the year?

    EA4

    LO 2.2Hicks Contracting collects and analyzes cost data in order to track the cost of installing decks on new home construction jobs. The following are some of the costs that they incur. Classify these costs as fixed or variable costs and as product or period costs.

    1. Lumber used to construct decks ($12.00 per square foot)
    2. Carpenter labor used to construct decks ($10 per hour)
    3. Construction supervisor salary ($45,000 per year)
    4. Depreciation on tools and equipment ($6,000 per year)
    5. Selling and administrative expenses ($35,000 per year)
    6. Rent on corporate office space ($34,000 per year)
    7. Nails, glue, and other materials required to construct deck (varies per job)
    EA5

    LO 2.2Rose Company has a relevant range of production between 10,000 and 25,000 units. The following cost data represents average cost per unit for 15,000 units of production.

    Average Cost per Unit: Direct materials $12, Direct labor 10, Indirect materials 2, Fixed manufacturing overhead 4, Variable manufacturing overhead 3, Fixed selling and administrative expenses 8.

    Using the cost data from Rose Company, answer the following questions:

    1. If 10,000 units are produced, what is the variable cost per unit?
    2. If 18,000 units are produced, what is the variable cost per unit?
    3. If 21,000 units are produced, what are the total variable costs?
    4. If 11,000 units are produced, what are the total variable costs?
    5. If 19,000 units are produced, what are the total manufacturing overhead costs incurred?
    6. If 23,000 units are produced, what are the total manufacturing overhead costs incurred?
    7. If 19,000 units are produced, what are the per unit manufacturing overhead costs incurred?
    8. If 25,000 units are produced, what are the per unit manufacturing overhead costs incurred?
    EA6

    LO 2.2Carr Company provides human resource consulting services to small- and medium-sized companies. Last year, Carr provided services to 700 clients. Total fixed costs were $159,000 with total variable costs of $87,500. Based on this information, complete this chart:

    Columns are: 500 clients, 800 clients, 900 clients. Rows are: Total costs: Fixed costs, Variable costs, Total costs. Cost per client: Fixed cost, Variable cost, Total cost per client.
    EA7

    LO 2.2Western Trucking operates a fleet of delivery trucks. The fixed expenses to operate the fleet are $79,900 in March and rose to $93,120 in April. It costs Western Trucking $0.15 per mile in variable costs. In March, the delivery trucks were driven a total of 85,000 miles, and in April, they were driven a total of 96,000 miles. Using this information, answer the following:

    1. What were the total costs to operate the fleet in March and April, respectively?
    2. What were the cost per mile to operate the fleet in March and April, respectively?
    EA8

    LO 2.2Suppose that a company has fixed costs of $18 per unit and variable costs $9 per unit when 15,000 units are produced. What are the fixed costs per unit when 12,000 units are produced?

    EA9

    LO 2.3The cost data for Evencoat Paint for the year 2019 is as follows:

    Month, Gallons of Paint Produced, Equipment Maintenance Expenses, respectively: January, 110,000, $70,000; February, 68,000, 66,800; March, 71,000, 67,000; April, 77,000, 68,100; May, 95,000, 69,200; June, 101,000, 70,300; July, 125,000, 70,400; August, 95,000, 68,900; September, 95,000, 69,500; October, 89,000, 68,600; November, 128,000, 72,800; December, 122,000, 71,450.
    1. Using the high-low method, express the company’s maintenance costs as an equation where x represents the gallons of paint produced. Then estimate the fixed and variable costs.
    2. Predict the maintenance costs if 90,000 gallons of paint are produced.
    3. Predict the maintenance costs if 81,000 gallons of paint are produced.
    4. Using Excel, create a scatter graph of the cost data and explain the relationship between gallons of paint produced and equipment maintenance expenses.
    EA10

    LO 2.3This cost data from Hickory Furniture is for the year 2017.

    Month, Number of Tables Produced, Factory Utility Expenses, respectively: January, 550, $2,063; February, 710, 2,663; March, 650, 2,438; April, 470, 1,823; May, 512, 1,920; June, 625, 2,344; July, 805, 3,019; August, 750, 2,813; September, 675, 2,531; October, 525, 1,969; November, 875, 3,281; December, 685, 2,569.
    1. Using the high-low method, express the company’s utility costs as an equation where X represents number of tables produced.
    2. Predict the utility costs if 800 tables are produced.
    3. Predict the utility costs if 600 tables are produced.
    4. Using Excel, create a scatter graph of the cost data and explain the relationship between number of tables produced and utility expenses.
    EA11

    LO 2.3Markson and Sons leases a copy machine with terms that include a fixed fee each month plus a charge for each copy made. Markson made 9,000 copies and paid a total of $480 in January. In April, they paid $320 for 5,000 copies. What is the variable cost per copy if Markson uses the high-low method to analyze costs?

    EA12

    LO 2.3Markson and Sons leases a copy machine with terms that include a fixed fee each month of $500 plus a charge for each copy made. The company uses the high-low method to analyze costs. If Markson paid $360 for 5,000 copies and $280 for 3,000 copies, how much would Markson pay if it made 7,500 copies?

     

    Exercise Set B

     

    EB1

    LO 2.1Winterfell Products manufactures electrical switches for the aerospace industry. For the year ending 2019, they reported these revenues and expenses. Use this information to construct an income statement for the year 2019.

    Sales Revenue $865,000, Cost of Goods Sold 354,000, Operating Expenses 315,000.
    EB2

    LO 2.1CPK & Associates is a mid-size legal firm, specializing in closings and real estate law in the south. In 2019, they generated $945,000 in sales revenue. Their expenses related to this year’s revenue are shown:

    Operating Expenses (including salaries) $312,000, Cost of Services: Total Cost per client 1,750, Clients served in 2019 225.

    Based on the information provided for the year, what was their net operating income?

    EB3

    LO 2.1Flip or Flop is a retail shop selling a wide variety of sandals and beach footwear. In 2019, they had gross revenue from sales totaling $93,200. Their operating expenses for this same period were $34,000. If their Cost of Goods Sold (COGS) was 21% of gross revenue, what was their net operating income for the year?

    EB4

    Roper Furniture manufactures office furniture and tracks cost data across their process. The following are some of the costs that they incur. Classify these costs as fixed or variable costs, and as product costs or period costs.

    1. Wood used to produce desks ($125.00 per desk)
    2. Production labor used to produce desks ($15 per hour)
    3. Production supervisor salary ($45,000 per year)
    4. Depreciation on factory equipment ($60,000 per year)
    5. Selling and administrative expenses ($45,000 per year)
    6. Rent on corporate office ($44,000 per year)
    7. Nails, glue, and other materials required to produce desks (varies per desk)
    8. Utilities expenses for production facility
    9. Sales staff commission (5% of gross sales)
    EB5

    LO 2.2Baxter Company has a relevant range of production between 15,000 and 30,000 units. The following cost data represents average variable costs per unit for 25,000 units of production.

    Average Cost per Unit: Direct materials $10, Direct labor 9, Indirect materials 3, Fixed manufacturing overhead 6, Variable manufacturing overhead 2, Fixed selling and administrative expenses 8.

    Using the costs data from Rose Company, answer the following questions:

    1. If 15,000 units are produced, what is the variable cost per unit?
    2. If 28,000 units are produced, what is the variable cost per unit?
    3. If 21,000 units are produced, what are the total variable costs?
    4. If 29,000 units are produced, what are the total variable costs?
    5. If 17,000 units are produced, what are the total manufacturing overhead costs incurred?
    6. If 23,000 units are produced, what are the total manufacturing overhead costs incurred?
    7. If 30,000 units are produced, what are the per unit manufacturing overhead costs incurred?
    8. If 15,000 units are produced, what are the per unit manufacturing overhead costs incurred?
    EB6

    LO 2.2Sanchez & Vukmin, LLP, is a full-service accounting firm located near Chicago, Illinois.

     

    Last year, Sanchez provided tax preparation services to 500 clients. Total fixed costs were $265,000 with total variable costs of $180,000. Based on this information, complete this chart.

    Columns are: 500 clients, 800 clients, 900 clients. Rows are: Total costs: Fixed costs, Variable costs, Total costs. Cost per client: Fixed cost, Variable cost, Total cost per client.
    EB7

    LO 2.2Case Airlines provides charter airline services. The fixed expenses to operate the company’s aircraft are $377,300 in January and $378,880 in February. It costs Case Airlines $0.45 per mile in variable costs. In January, Case aircraft flew a total of 385,000 miles, and in February, Case aircraft flew a total of 296,000 miles. Using this information, answer the following:

    1. What were the total costs to operate the aircraft in January and February, respectively?
    2. What were the total costs per mile to operate the fleet in January and February, respectively?
    EB8

    LO 2.2Suppose that a company has fixed costs of $11 per unit and variable costs $6 per unit when 11,000 units are produced. What are the fixed costs per unit when 20,000 units are produced?

    EB9

    LO 2.3The cost data for BC Billing Solutions for the year 2020 is as follows:

    Month, Invoices Processed, Overtime Wages, respectively: January, 10,000, $7,700; February, 8,000, 6,800; March, 1,000, 6,000; April, 7,000, 6,100; May, 5,000, 6,200; June, 10,000, 7,300; July, 12,000, 7,400; August, 9,000, 6,900; September, 5,000, 6,500; October, 9,000, 6,600; November, 8,000, 6,800; December, 12,000, 7,450.
    1. Using the high-low method, express the company’s overtime wages as an equation where x represents number of invoices processed. Assume BC has monthly fixed costs of $3,800.
    2. Predict the overtime wages if 9,000 invoices are processed.
    3. Predict the overtime wages if 6,500 invoices are processed.
    4. Using Excel, create a scatter graph of the cost data and explain the relationship between the number of invoices processed and overtime wage expense.
    EB10

    LO 2.3This cost data from Hickory Furniture is for the year 2017.

    Month, Number of Chairs Produced, Factory Utility Expenses, respectively: January, 425, $1,659; February, 510, 1,964; March, 625, 2,406; April, 725, 2,791; May, 685, 2,637; June, 575, 2,214; July, 510, 1,964; August, 810, 3,119; September, 700, 2,695; October, 650, 2,503; November, 875, 3,369; December, 680, 2,618.
    1. Using the high-low method, express the factory utility expenses as an equation where x represents number of chairs produced.
    2. Predict the utility costs if 900 chairs are produced.
    3. Predict the utility costs if 750 chairs are produced.
    4. Using Excel, create a scatter graph of the cost data and explain the relationship between number of chairs processed and utility expenses.
    EB11

    LO 2.3Able Transport operates a tour bus that they lease with terms that involve a fixed fee each month plus a charge for each mile driven. Able Transport drove the tour bus 4,000 miles and paid a total of $1,250 in March. In April, they paid $970 for 3,000 miles. What is the variable cost per mile if Able Transport uses the high-low method to analyze costs?

    EB12

    LO 2.3Able Transport operates a tour bus that they lease with terms that involve a fixed fee each month plus a charge for each mile driven. Able Transport drove the bus 7,000 miles and paid a total of $1,360 in June. In October, Able Transport paid $1,280 for the 5,000 miles driven. If Able Transport uses the high-low method to analyze costs, how much would Able Transport pay in December, if they drove 6,000 miles?

     

    Problem Set A

     

    PA1

    LO 2.1Ballentine Manufacturing produces and sells lawnmowers through a national dealership network. They purchase raw materials from a variety of suppliers, and all manufacturing and assembly work is performed at their plant outside of Kansas City, Missouri. They recorded these costs for the year ending December 31, 2017. Construct an income statement for Ballentine Manufacturing to reflect their net income for 2017.

    Administrative and selling expenses $425,000, Cost of Goods Sold 1,400,000, Rent on corporate headquarters 75,000, Marketing and advertising 400,000, Sales revenue 2,700,000, Straight-line depreciation on office equipment 100,000.
    PA2

    LO 2.1Tom West is a land surveyor who operates a small surveying company, performing surveys for both residential and commercial clients. He has a staff of surveyors and engineers who are employed by the firm. For the year ending December 31, 2017, he reported these income and expenses. Using this information, construct an income statement to reflect his net income for 2017.

    Service income $850,000, Surveyor salaries 124,000, Supplies and materials 32,000, Utilities 14,000, Office rent 24,000, Administrative expenses 115,000.
    PA3

    LO 2.1Just Beachy is a retail business located on the coast of Florida where it sells a variety of beach apparel, T-shirts, and beach-related souvenir items. They purchase all of their inventory from wholesalers and distributors. For the year ending December 31, 2017, they reported these revenues and expenses. Using this information, prepare an income statement for Just Beachy for 2017.

    Sales revenue $685,000, Building rent 48,000, Advertising 50,000, Sales staff salaries 85,000, Cost of Goods Sold 315,000, Utilities 23,000, Supplies 9,000.
    PA4

    LO 2.2Listed as follows are various costs found in businesses. Classify each cost as a fixed or variable cost, and as a product and/or period cost.

    1. Wages of administrative staff
    2. Shipping costs on merchandise sold
    3. Wages of workers assembling computers
    4. Cost of lease on factory equipment
    5. Insurance on factory
    6. Direct materials used in production of lamps
    7. Supervisor salary, factory
    8. Advertising costs
    9. Property taxes, factory
    10. Health insurance cost for company executives
    11. Rent on factory
    PA5

    LO 2.2Wachowski Company reported these cost data for the year 2017.

    Factory maintenance costs $90,000; Direct labor, wages 352,000; Direct labor, health insurance 32,000; Indirect labor, health insurance 15,000; Health insurance for production supervisor 6,500; Administrative costs 55,000; Rental of office space for administrative staff 17,500; Sales commissions 52,500; Direct material 1,230,000; Indirect materials 632,000; Advertising expense 39,000; Depreciation on factory building 62,000; Indirect labor, wages, 70,000; Production supervisor’s salary 32,000.

    Use the data to complete the following table.

    Total prime costs  
    Total manufacturing overhead costs  
    Total conversion costs  
    Total product costs  
    Total period costs  
    PA6

    LO 2.3Carolina Yachts builds custom yachts in its production factory in South Carolina. Once complete, these yachts must be shipped to the dealership. They have collected this shipping cost data:

    Month, Yachts Shipped, Shipping Cost, respectively: January, 6, $11,650; February, 4, 9,100; March, 3, 7,825; April, 8, 14,200; May, 2, 6,550; June, 7, 12,925; July, 5, 10,375.
    1. Prepare a scatter graph of the shipping data. Plot cost on the vertical axis and yachts shipped on the horizontal axis. Is the relationship between shipping costs and unit shipped approximately linear? Draw a straight line through the scatter graph.
    2. Using the high-low method, create the cost formula for Carolina Yachts’ shipping costs.
    3. The least-squares regression method was used and the analysis resulted in this cost equation: Y = 4,000 + 1,275x. Comment on the accuracy of your high-low method estimation.
    4. What would you estimate shipping costs to be if Carolina Yachts shipped 10 yachts in a single month? Use the cost formula you obtained in part B. Comment on how accurately this is reflected by the scatter graph you constructed.
    5. What factors other than number of yachts shipped do you think could affect Carolina Yachts’ shipping expense? Explain.

     

    Problem Set B

     

    PB1

    LO 2.1Hicks Products produces and sells patio furniture through a national dealership network. They purchase raw materials from a variety of suppliers and all manufacturing, and assembly work is performed at their plant outside of Cleveland, Ohio. They recorded these costs for the year ending December 31, 2017. Construct an income statement for Hicks Products, to reflect their net income for 2017.

    Sales revenue $3,100,000, Straight-line depreciation on office equipment 90,000, Advertising and marketing expense 625,000, Administrative salaries 136,000, Cost of goods sold 1,700,000, Rent on corporate headquarters 65,000.
    PB2

    LO 2.1Conner & Scheer, Attorneys at Law, provide a wide range of legal services for their clients. They employ several paralegal and administrative support staff in order to provide high-quality legal services at competitive prices. For the year ending December 31, 2017, the firm reported these income and expenses. Using this information, construct an income statement to reflect the firm’s net income for 2017.

    Service revenue $2,250,000, Paralegal salaries 215,000, Supplies and materials 42,000, Utilities 26,000, Office rent 58,000, Administrative expenses 195,000, Attorney salaries 925,000.
    PB3

    LO 2.1Puzzles, Pranks & Games is a retail business selling children’s toys and games as well as a wide selection of jigsaw puzzles and accessories. They purchase their inventory from local and national wholesale suppliers. For the year ending December 31, 2017, they reported these revenues and expenses. Using this information, prepare an income statement for Puzzles, Pranks & Games for 2017.

    Sales revenue $415,000, Rent 24,000, Advertising 13,000, Sales staff salaries 45,000, Merchandise inventory 210,000, Utilities 11,000, Supplies 4,000.
    PB4

    LO 2.2Pocket Umbrella, Inc, is considering producing a new type of umbrella. This new pocket-sized umbrella would fit into a coat pocket or purse. Classify the following costs of this new product as direct materials, direct labor, manufacturing overhead, or selling and administrative.6

    1. Cost of advertising the product
    2. Fabric used to make the umbrellas
    3. Maintenance of cutting machines used to cut the umbrella fabric so it will fit the umbrella frame
    4. Wages of workers who assemble the product
    5. President’s salary
    6. The salary of the supervisor of the people who assemble the product
    7. Wages of the product tester who stands in a shower to make sure the umbrellas do not leak
    8. Cost of market research survey
    9. Salary of the company’s sales managers
    10. Depreciation of administrative office building
    PB5

    LO 2.2Using the costs listed in the previous problem, classify the costs as either product costs or period costs.

    PB6

    LO 2.3Gadell Farms produces venison sausage that is distributed to grocery stores throughout the Southeast. They have collected this shipping cost data:

    Month, Tons Produced, Packaging Cost, respectively: January, 6, $1,700; February, 4, 2,000; March, 3, 2,100; April, 8, 2,700; May, 2, 1,602; June, 7, 1,900; July, 5, 2,300.
    1. Prepare a scatter graph of the shipping data. Plot cost on the vertical axis and tons produced on the horizontal axis. Is the relationship between packaging costs and tons produced approximately linear? Draw a straight line through the scatter graph.
    2. Using the high-low method, estimate the cost formula for Gadell Farms’ packaging costs.
    3. The least-squares regression method was used and the analysis resulted in this cost equation: Y = 1650 + 78.57x. Comment on the accuracy of your high-low method estimation.
    4. What would you estimate packaging costs to be if Gadell Farms shipped 10 tons in a single month? Use the cost formula you obtained in part B. Comment on how accurately this is reflected by the scatter graph you constructed.
    5. What factors other than number of tons produced do you think could affect Gadell Farm’s packaging expense? Explain.

     

    Thought Provokers

     

    TP1

    LO 2.1In a team of two or three students, interview the manager/owner of a local business. In this interview, ask the manager/owner the following questions:

    1. Does the business collect and use cost information to make decisions?
    2. Does it have a specialist in cost estimation who works with this cost data? If not, who is responsible for the collection of cost information? Be as specific as possible.
    3. What type of cost information does the business collect and how is each type of information used?
    4. How important does the owner/manager believe cost information is to the success of the business?

    Then, write a report to the instructor summarizing the results of the interview.

     

    Content of the memo must include

    • date of the interview,
    • the name and title of the person interviewed,
    • name and location of the business,
    • type of business (service, merchandising, manufacturing) and brief description of the goods/services provided by the business, and
    • responses to questions A–D.
    TP2

    LO 2.2This list contains costs that various organizations incur; they fall into three categories: direct materials (DM), direct labor (DL), or overhead (OH).7

    1. Classify each of these items as direct materials, direct labor, or overhead.
      1. Glue used to attach labels to bottles containing a patented medicine.
      2. Compressed air used in operating paint sprayers for Student Painters, a company that paints houses and apartments.
      3. Insurance on a factory building and equipment.
      4. A production department supervisor’s salary.
      5. Rent on factory machinery.
      6. Iron ore in a steel mill.
      7. Oil, gasoline, and grease for forklift trucks in a manufacturing company’s warehouse.
      8. Services of painters in building construction.
      9. Cutting oils used in machining operations.
      10. Cost of paper towels in a factory employees’ washroom.
      11. Payroll taxes and fringe benefits related to direct labor.
      12. The plant electricians’ salaries.
      13. Crude oil to an oil refinery.
      14. Copy editor’s salary in a book publishing company.
    2. Assume your classifications could be challenged in a court case. Indicate to your attorneys which of your answers for part a might be successfully disputed by the opposing attorneys and why. In which answers are you completely confident?