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    Accounting: Costs and Income Statements

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    Problem 5-15 Contribution Format versus Traditional Income Statement [LO4]
    House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the retail level. The organs sell, on the average, for $2,500 each. The average cost of an organ from the manufacturer is $1,500.
    House of Organs, Inc., has always kept careful records of its costs. The costs that the company incurs in a typical month are presented below in the form of a spreadsheet:

    Costs Cost Formula
    Selling:
    Advertising $950 per month
    Delivery of organs $60 per organ sold
    Sales salaries and commissions $4,800 per month, plus 4% of sales
    Utilities $650 per month
    Depreciation of sales facilities $5,000 per month
    Administrative:
    Executive salaries $13,500 per month
    Depreciation of office equipment $900 per month
    Clerical $2,500 per month, plus $40 per organ sold
    Insurance $700 per month
    ________________________________________

    During November, the company sold and delivered 60 organs.

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

    House of Organs, Inc.
    Income Statement
    For the Month Ended November 30
    __________ $ ____________
    __________ ____________
    __________ ____________
    Selling and administrative expenses:
    Selling expenses:
    __________ $ ____________
    __________ ____________
    __________ ____________
    __________ ____________
    __________ ____________
    Total selling expenses ____________
    Administrative expenses:
    __________ ____________
    __________ ____________
    __________ ____________
    __________ ____________
    Total administrative expenses ____________
    Total selling and administrative expenses ____________
    __________ $ ____________
    ________________________________________
    Requirement 2:
    Redo requirement 1 above, this time using the contribution format with costs organized by behavior. Show costs and revenues on both a total and a per unit basis down through contribution margin.

    House of Organs, Inc.
    Income Statement
    For the Month Ended November 30

    Total Per Unit
    __________ $ ____________ $ ____________
    Variable expenses:
    __________ ____________ ____________
    __________ ____________ ____________
    __________ ____________ ____________
    __________ ____________ ____________
    Total variable expenses ____________ ____________
    Contribution margin ____________ $ ____________
    Fixed expenses:
    __________ ____________
    __________ ____________
    __________ ____________
    __________ ____________
    __________ ____________
    __________ ____________
    __________ ____________
    __________ ____________
    Total fixed expenses ____________
    __________ $ ____________
    ________________________________________

    ________________________________________

    Problem 5-23 High-Low Method; Predicting Cost [LO1, LO3]
    Echeverria SA is an Argentinian manufacturing company whose total factory overhead costs fluctuate somewhat from year to year according to the number of machine-hours worked in its production facility. These costs (in Argentinian pesos) at high and low levels of activity over recent years are given below:

    Level of Activity
    Low High
    Machine-hours 60,000 80,000
    Total factory overhead costs 274,000 pesos 312,000 pesos
    ________________________________________

    The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 60,000 machine-hours level of activity as follows:

    Indirect materials (variable) 90,000 pesos
    Rent (fixed) 130,000
    Maintenance (mixed) 54,000
    Total factory overhead costs 274,000 pesos
    ________________________________________

    For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.

    Requirement1:
    Estimate how much of the factory overhead cost of 312,000 pesos at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the 312,000 pesos cost consists of indirect materials and rent. Think about the behavior of variable and fixed costs.)

    Maintenance cost ____________ pesos

    Requirement2:
    Using the high-low method, estimate a cost formula for maintenance where X represents the per machine-hour. Round the variable portion of the formula to 2 decimal places.)

    Y = ____________ pesos + ____________ peso X

    Requirement3:
    What total overhead costs would you expect the company to incur at an operating level of 65,000 machine-hours?

    Total overhead cost ____________ pesos

    ________________________________________

    Problem 5-19 (Appendix 5A) Least-Squares Regression Method [LO5]
    Sebolt Wire Company heats copper ingots to very high temperatures by placing the ingots in a large heat coil. The heated ingots are then run through a shaping machine that shapes the soft ingot into wire. Due to the long heat-up time, the coil is never turned off. When an ingot is placed in the coil, the temperature is raised to an even higher level, and then the coil is allowed to drop to the "waiting" temperature between ingots. Management needs to know the variable cost of power involved in heating an ingot and the fixed cost of power during "waiting" periods. The following data on ingots processed and power costs are available:

    Month Ingots Power Cost
    January 110 $ 5,500
    February 90 $ 4,500
    March 80 $ 4,400
    April 100 $ 5,000
    May 130 $ 6,000
    June 120 $ 5,600
    July 70 $ 4,000
    August 60 $ 3,200
    September 50 $ 3,400
    October 40 $ 2,400
    ________________________________________

    Requirement 1:
    Using the least-squares regression method, estimate a cost formula for power cost, where "X" represents number of ingots processed. (Round the variable cost to the nearest cent and the fixed cost to the nearest dollar.

    Y = $ ____________ + $ ____________ X

    Requirement 2:
    Which of the following statements are correct: (Select all that apply.)

    (a) The quick-and-dirty scattergraph method is not imprecise.
    (b) The high-low method is accurate only in those situations where the variable cost is truly constant, or where the high and the low points happen to fall on the correct regression line.
    (c) The least squares regression method is generally considered to be the most accurate method of cost analysis.

    ________________________________________

    Exercise 5-1 Fixed and Variable Cost Behavior [LO1]
    Koffee Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,100 and the variable cost per cup of coffee served is $0.26.

    Requirement 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 cost of a cup of coffee to 3 decimal places.

    Cups of Coffee Served in a Week
    1,800 1,900 2,000
    Fixed cost $ ____________ $ ____________ $ ____________
    Variable cost ____________ ____________ ____________
    Total cost $ ____________ $ ____________ $ ____________
    Cost per cup of coffee served $ ____________ $ ____________ $ ____________
    ________________________________________
    Requirement 2:
    Does the cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases?

    (a) Increases
    (b) Decreases
    (c) Remains the same

    ________________________________________

    Exercise 5-5 (Appendix 5A) Least-Squares Regression [LO5]
    EZ Rental Car offers rental cars in an off-airport location near a major tourist destination in Florida. Management would like to better understand the behavior of the company's costs. One of those costs is the cost of washing cars. The company operates its own car wash facility in which each rental car that is returned is thoroughly cleaned before being released for rental to another customer. Management believes that the costs of operating the car wash should be related to the number of rental returns. Accordingly, the following data have been compiled:

    Month Rental Returns Car Wash Costs
    January 2,310 $ 10,113
    February 2,453 $ 12,691
    March 2,641 $ 10,905
    April 2,874 $ 12,949
    May 3,540 $ 15,334
    June 4,861 $ 21,455
    July 5,432 $ 21,270
    August 5,268 $ 19,930
    September 4,628 $ 21,860
    October 3,720 $ 18,383
    November 2,106 $ 9,830
    December 2,495 $ 11,081
    ________________________________________

    Required:
    Using least-squares regression, estimate the fixed cost and variable cost elements of monthly car wash costs. (Round your fixed cost to the nearest dollar amount and the variable cost element to the nearest cent.

    Fixed cost $ ____________
    Variable cost $ ____________

    ________________________________________

    Exercise 5-11 Scattergraph Analysis; High-Low Method [LO2, LO3]
    The number of X-rays taken and X-ray costs over the last nine months in Beverly Hospital are given below:

    Month X-Rays Taken X-Ray Costs
    January 6,250 $ 28,000
    February 7,000 $ 29,000
    March 5,000 $ 23,000
    April 4,250 $ 20,000
    May 4,500 $ 22,000
    June 3,000 $ 17,000
    July 3,750 $ 18,000
    August 5,500 $ 24,000
    September 5,750 $ 26,000
    ________________________________________

    Requirement 1:
    Using the high-low method, what X-ray costs would you expect to be incurred during a month in which 3,800 X-rays are taken?

    Total cost $ ____________

    Requirement 2:
    Using the high-low method, what X-ray costs would you expect to be incurred during a month in which 4,300 X-rays are taken?

    Total cost $ ____________

    ________________________________________

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    https://brainmass.com/business/finance/accounting-costs-and-income-statements-209891

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