Share
Explore BrainMass

# Cost Flows and Cost Behavior, Cost Estimation

See the attached file.

Problem 1: Cost Terminology, Cost Flows and Cost Behavior

Part 1: The Miami Company suffered major losses in a fire on October 23, 2007. In addition to
destroying several buildings, the blaze destroyed the company's work in process inventory for an
entire product line. Fortunately, the company was insured. However, the company needs to
substantiate the amount of the claim. To this end, the company has gathered the following
information that pertains to the production and sales of the affected product line:

1. The company's sales for the first 23 days of October amounted to \$230,000. Normally,
this product line generates a gross profit equal to 30% of sales.

2. Finished goods inventory was \$29,000 on October 1 and \$42,500 on October 23.

3. On October 1, work in process inventory was \$48,000

4. During the first 23 days of October, the company incurred the following costs:
Direct materials used \$76,000
Direct labor 44,000

Required:

(1) Total Cost of Goods Manufactured for the first 23 days of October 2007

(2) The cost of Work in Process Inventory that was destroyed by the fire (i.e.,
the cost of Work in Process Inventory, 10/23/2007)

Part 2: The following inventory information is from the records of McMechen & Sons for 2006.
Inventories
Beginning Ending
Finished goods \$110,000 \$95,000
Work in Process 70,000 85,000
Direct materials 90,000 75,000

Other information:

Cost of direct materials used (variable) \$ ?
Cost of direct manufacturing labor (variable) 224,000
Marketing and distribution cost (variable) 80,000
Marketing and distribution cost (fixed) 50,000
Total Prime costs 417,000
Revenue 800,000

Required:

(1) Total Cost of Direct Materials Purchased during 2006

(2) Total Contribution Margin (in terms of dollars)

(3) Total Operating Income (in terms of dollars)

Problem 2 - Cost Estimation

Dave's "Golden Brown" Pancake Restaurant features sourdough pancakes made form a
strain of sourdough dating back to the Alaskan gold rush. To plan for the future, Dave needs to
figure out his cost behavior patterns. He has the following information about his operating costs
and the number of pancakes served:

Month Number of Pancakes Total Operating Costs
July 3,600 \$2,360
August 3,900 \$2,390
September 3,200 \$2,320
October 3,300 \$2,330
November 3,850 \$2,385
December 3,620 \$2,362

Required:

1. Use the high-low method to determine Dave's operating cost equation.

2. Predict the total monthly operating costs if Dave serves \$4,000 pancakes one
month.

#### Solution Preview

Problem 1: Cost Terminology, Cost Flows and Cost Behavior

Part 1: The Miami Company suffered major losses in a fire on October 23, 2007. In addition to
destroying several buildings, the blaze destroyed the company's work in process inventory for an
entire product line. Fortunately, the company was insured. However, the company needs to
substantiate the amount of the claim. To this end, the company has gathered the following
information that pertains to the production and sales of the affected product line:

1. The company's sales for the first 23 days of October amounted to \$230,000. Normally,
this product line generates a gross profit equal to 30% of sales.

2. Finished goods inventory was \$29,000 on October 1 and \$42,500 on October 23.

3. On October 1, work in process inventory was \$48,000

4. During the first 23 days of October, the company incurred the following costs:
Direct materials used \$76,000
Direct labor 44,000

Required:

(1) Total Cost of Goods Manufactured for the first 23 days of October 2007
First Lets find out COGS= Sales -Gross Profit
=230000-30%*230000
=\$1,61,000.00

COGM= COGS+ Closing stock of finished stock-Opening stock of finished stock
=161000+42500-29000
...

#### Solution Summary

The solution provides the cost flows and cost behavior, and cost estimation.

\$2.19