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Cost Accounting Tauseef Ahmed Qureshi

Solutions
Assignment No 2 (Cost Behavior) - ALL

Problem No 1: (Patel Company’s)

1. Estimate the maintenance cost for June.

Total overhead cost at 80,000 machine hours $262,400

Less:
Utilities ($54,000÷50,000)×80,000 86,400
Supervisory salaries (Fixed) 62,000
Portion of overhead for June that represents maintenance $114,000

2. Use the high-low method to estimate the cost formula for maintenance cost.

Maintenance Cost Machine-Hour

High Point $114,000 80,000
Low point 78000 50,000
Change Observed $36,000 30,000

Variable Rate:
$36,000÷30,000MH = $1.20 per machine hour

Total Fixed Cost:

Total maintenance cost at the low point $78,000
Less: variable cost element (50,000×$1.20) 60,000
Fixed cost element $18,000

The Cost formula is Y = $18,000+41.20

Problem No 2: (Everglades Bus Tours)

1. Variable Maint cost per tour mile = ($12,500-$11,000) ÷ (20,000-8,000) = $0.125

$11,000 = FC + (0.125×8,000 miles) FC= $10,000

2. Develop a Formula to express the cost behavior exhibited by the company’s

maintenance cost. Cost Formula TC = 10,000 + 0.125× Tour miles travelled

3. Predict the level of maintenance cost that would be incurred during a month when
22,000 tour miles are driven.
TC = 10,000 + 0.125× Tour miles travelled

Problem No 3: (SRG Company)

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H $2,700 6,500
L 1,800 4,000

VC rate = (2,700 – 1,800) ÷ (6,500 – 4,000) = $0.36 per hour

FC = 2,700 – 0.36 × 6,500 = $360
Water Cost = $360 + 0.36 × machine hours

B. If 7,000 machine hours are used next month, what would be the expected water
costs for each of the methods used in A above

Linear programming = 505 + 0.315 × 7,000 = $2,710

High Low = 360 + 0.36 × 7,000 = $2,880

Problem No 4: (Hoi Chong Transport Company)

H 105,000 km $11,970
L 70,000 km $9,380

VC = $2590 ÷ 35,000 = $ 0.074 per km

9,380 = FC + 0.074×70,000 FC= $4,200

Y = 4,200 + 0.074 X

TC = 4,200 + 0.074 × 80,000 = $10,120

Problem No 5: (Franklin Ltd.,)

1. Identify each of the company’s expenses (including cost of goods sold) as either
variable, fixed, or mixed.

Cost of goods sold

Shipping expense
Advertising expense
Salaries and commissions
Insurance expense
Depreciation expense

2. Using the high-low method, separate each mixed expense into variable and fixed
elements. Sate the cost formula for each mixed cost.
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a) Mixed cost (shipping expense)

(56,000 – 44,000) ÷ (4,500 – 3,000) = $8 per unit

56,000 = FC + 4,500× $8 FC = $20,000

TC = 20,000 + $8 × number of units sold

b) Mixed cost (sales and commission expense)

(143,000 – 107,000) ÷ (4,500 – 3,000) = $24 per unit

143,000 = FC + 4,500× $24 FC = $35,000

TC = 35,000 + $24 × number of units sold

Problem No 6: (Coldwell Company)

A. CM = 500,000 – (80,000 + 100,000 + 50,000 + 95,000) = 175,000

NI = 175,000 – (100,000 + 60,000) =$15,000

B. CM = 500,000 – (88,000 + 112,000 + 52,500 + 95,000) = 152,500

NI = 152,500 – (100,000 + 60,000) = ($7,500)

Sales (500,000+150,000) $650,000

Variable Costs:
V.CGS 328,250
V. S&A 123,500 (451,750)
Contribution 198,250
Margin
Fixed Costs:
Manufacturing 100,000
S&A 84,000 (184,000)
Net Income $14,250

VC CGS rate 252,500÷500,000 = 0.505 650,000 × 0.505 = 328,250

VC S & A rate 95,000÷500,000 = 0.19 650,000 × 0.19 = 123,500

Fixed ( S & A) $60,000 + $24,000 = $84,000

Problem No 7: (Data Company)

Sales (4,000×$80) $320,000

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Variable Costs:
V.CGS 120,000
V. S&A 8,000 (128,000)
Contribution Margin 192,000
Fixed Costs:
(132,000+14,000+88,000) (134,000)
Net Income $58,000

B: New SP = 80×1.05 = $84 V. Selling exps = $4 VC = 4000×1.05 = 4,200

Sales (4,000×$84) $336,000

Variable Costs:
V.CGS 4,200×30 126,000
V. S&A 4,200×4 16,800 (142,800)
Contribution Margin 193,200
Fixed Costs:
(132,000+14,000+88,000) (134,000)
Net Income $59,200

C: Projected Sales = 4,000×1.15 = 4,600 units

Sales (4,600×$80) $368,000

Variable Costs:
V.CGS 4,600×30 138,000
V. S&A 4,600×2 9,200 (147,200)
Contribution Margin 220,800
Fixed Costs:
(132,000+14,000+88,000) (138,000)
Net Income $82,200

D: Projected Sales = 4,000×1.2 = 4,800 units

Sales (4,800×$80) $384,000

Variable Costs:
V.CGS 4,800×30 144,000
V. S&A 4,800×4 19,200 (163,200)
Contribution Margin 220,800
Fixed Costs:
(134,000+4,000) (138,000)
Net Income $82,200