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Soultions - Chapter 3
Soultions - Chapter 3
Fixed costs:
Factory utilities $ 3,000 $ 3,000 $ 3,000 $ 3,000
Factory maintenance 10,000 10,000 10,000 10,000
Material handling 8,000 8,000 8,000 8,000
Building rent 25,000 25,000 25,000 25,000
Supervisors’ salaries 72,000 72,000 72,000 72,000
Factory insurance 6,000 6,000 6,000 6,000
Total fixed costs $124,000 $124,000 $124,000 $124,000
c. Use of expected capacity would create costs that would be more closely
related to actual production costs. However, use of practical capacity
would help indicate to management the costs of unused capacity.
b. x y xy x2
1,400 $ 9,000 $ 12,600,000 1,960,000
1,900 10,719 20,366,100 3,610,000
2,000 10,900 21,800,000 4,000,000
2,500 13,000 32,500,000 6,250,000
2,200 11,578 25,471,600 4,840,000
2,700 13,154 35,532,000 7,290,000
1,700 9,525 16,192,500 2,890,000
2,300 11,670 26,841,000 5,290,000
16,700 $89,546 $191,303,200 36,130,000
x = 16,700 8 = 2,087.50
y = $89,546 8 = $11,193.25
b
xy n( x)( y ) $191,303,200 8(2,087.50)($11,193.25) $4,363,400 $3.44
x n( x )
2 2
36,130,000 8( 2,087.50)(2,087.50) 1,268,750
y = $4,012.25 + $3.44MH
d. Part (b) computations provide the better answer. The least squares
regression approach takes into consideration all of the available data
and employs a mathematical algorithm to minimize the variance around
the fitted regression line.
Supporting calculations
The direct labor rate is ($150,000 ÷ 25,000 hours) or $6.00 per hour.
The variable overhead rate is ($155,000 ÷ 25,000 hours) or $6.20 per hour.
1/1/09 12/31/09
Inventories Inventories Differences
Work in process 1,600 2,100 500
Finished goods 1,050 820 (230)
Total 2,650 2,920 270
The increase in hours (270) times the fixed overhead rate ($1 per hour)
equals the difference in operating incomes ($270).
c. The main advantage of variable costing is that it reveals the marginal
cost of production. That is, variable costing facilitates making decisions
about pricing, changes in volume and changes in cost structure. Variable
costing also facilitates identification of the break-even point. Further,
variable costing does not lend itself to managerial manipulation of
income. The major disadvantage is that variable costing treats fixed
overhead as a period cost and, therefore may violate the matching
principle if one believes fixed manufacturing overhead is a product cost.