C H A P TE R 3

P R E D E T E R M IN E D O V E R H E A D R A T E S , F L E X IB L E B U D G E T S ,
A N D A B S O R P T IO N /V A R IA B L E C O S T IN G

Q U E S T IO N S

1. A lth o u g h b o th v a ria b le and m ix e d c o sts change in to ta l w ith a c tiv ity m easu re

c h a n g e s, th e d iffe re n c e is th a t v a ria b le c o sts c h a n g e in d ire c t p ro p o rtio n to su c h a c -
tiv ity c h a n g e s a n d m ix e d c o sts d o n o t. S in c e a m ix e d c o st h a s b o th a fix e d a n d v a ri-
a b le c o m p o n e n t, th e c o st p e r u n it a t d iffe re n t a c tiv ity le v e ls is n o t c o n sta n t a s it is
w ith a v a ria b le c o st.

2. N o , th e se a re n o t a lw a y s th e b e st p o in ts o f o b se rv a tio n . F irst, th e p o in ts m u st b e
w ith in th e re le v a n t ra n g e o f a c tiv ity . S e c o n d , to b e u se fu l, th e p o in ts m u st b e re fle c -
tiv e o f th e e n tire d a ta se t o f o b se rv a tio n p o in ts. If th e h ig h a n d lo w p o in ts d o n o t
m e e t th e se tw o c o n d itio n s, a lte rn a tiv e p o in ts sh o u ld b e se le c te d .

3. T h e r e a r e s e v e r a l r e a s o n s f o r u s i n g p r e d e t e r m in e d o v e r h e a d r a t e s . F i r s t , t h e c o m p a n y
d o e s n o t n e e d to w a it to a ssig n o v e rh e a d c o sts to p ro d u c ts o r se rv ic e s u n til th e e n d o f
th e p e rio d w h e n a c tu a l c o sts a re k n o w n . S e c o n d , su c h ra te s e lim in a te o v e rh e a d c o st
flu c tu a tio n s th a t h a v e n o th in g to d o w ith v o lu m e le v e ls. T h ird , p re d e te rm in e d o v e r-
h e a d r a t e s p r o v i d e a m e a n s t o c o n t r o l d i s t o r ti o n s i n p r o d u c t c o s t s c a u s e d b y c h a n g e s i n
v o lu m e b e tw e e n o r a m o n g p e rio d s, a n d th e re su ltin g p ro d u c t/se rv ic e c o st c h a n g e s
c a u se d b y d iffe re n c e s in fix e d c o st p e r p e rio d .

4. D e p a rtm e n ta l o v e rh e a d ra te s a re su p e rio r to p la n tw id e o v e rh e a d ra te s in th a t o v e r-
h e a d a p p lic a tio n b a se s c a n b e id e n tifie d th a t m o re a c c u ra te ly re fle c t th e c a u se s o f
c o sts in e a c h d e p a rtm e n t. In e ffe c t, u se o f d e p a rtm e n ta l ra te s p e rm it m o re c o st d riv -
e rs to b e id e n tifie d a n d u se d a s a llo c a tio n b a se s.

S e p a ra tio n o f v a ria b le a n d fix e d c o sts a llo w s m a n a g e rs to m a k e d e c isio n s th a t re ly

o n k n o w le d g e o f c o st b e h a v io r. F o r e x a m p le , so m e d e c isio n s re q u ire th a t a m a n a g e r
id e n tify c o sts th a t w ill c h a n g e if a p a rtic u la r d e c isio n a lte rn a tiv e (su c h a s w h e th e r to
m a n u fa c tu re a n d se ll a d d itio n a l u n its) is im p le m e n te d . T o ta l v a ria b le c o st re sp o n d s
d iffe re n tly fro m to ta l fix e d c o st to m a n a g e ria l a c tio n s. U se o f a to ta l o v e rh e a d ra te
d o e s n o t e a sily a llo w m a n a g e rs to d e te rm in e th e im p a c t o f su c h d iffe re n c e s.

5. T h e tw o d iffe re n c e s b e tw e e n a b so rp tio n a n d v a ria b le c o stin g re la te to th e tre a tm e n t

of fix e d fa c to ry o v erh ead and th e p re se n ta tio n o f c o sts/e x p e n se s o n th e in c o m e
sta te m e n t. A b so rp tio n c o stin g tre a ts fix e d fa c to ry o v e rh e a d a s a p ro d u c t c o st a n d a l-
lo c a te s it to th e u n its p ro d u c e d d u rin g th e p e rio d ; v a ria b le c o stin g tre a ts fix e d o v e r-
h e a d a s a p e rio d e x p e n se a n d c h a rg e s th e fu ll a m o u n t in c u rre d to th e in c o m e o f th e
p e rio d . A b so rp tio n c o stin g p re se n ts c o sts o n th e in c o m e sta te m e n t in fu n c tio n a l c a t-
e g o rie s w ith o u t re g a rd to c o st b e h a v io r; v a ria b le c o stin g p re se n ts c o sts o n th e in -
c o m e sta te m e n t first a s p ro d u c t o r p e rio d , se c o n d ly b y c o st b e h a v io r (v a ria b le o r
fix e d ), a n d p o ssib ly b y fu n c tio n a l c a te g o rie s.

41

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
42 C h ap ter 3

T h e u n d e rly in g c a u se o f th e d iffe re n c e b e tw e e n a b so rp tio n a n d v a ria b le c o stin g is

fo u n d in th e d e fin itio n o f a n a sse t. A sse t c o st sh o u ld in c lu d e a ll c o sts n e c e ssa ry to
g e t a n ite m in to p la c e a n d re a d y fo r sa le o r u se . A b so rp tio n c o stin g c o n sid e rs fix e d
o v e rh e a d to b e in v e n to ria b le (p a rt o f a sse t c o st) b e c a u se p ro d u c ts c o u ld n o t b e m a d e
w ith o u t th e b a sic m a n u fa c tu rin g c a p a c ity re p re se n te d b y fix e d o v e rh e a d c o st. V a ria -
b le c o stin g p ro p o n e n ts, h o w e v e r, b e lie v e th a t fix e d o v e rh e a d is n o t in v e n to ria b le b e -
c a u se it is in c u rre d re g a rd le ss o f w h e th e r p ro d u c tio n o c c u rs o r n o t. T h e “ c o rre c t”
a n sw e r c a n n o t b e d e te rm in e d b e c a u se b o th p o sitio n s h a v e lo g ic a l a n d ra tio n a l a rg u -
m e n ts to su p p o rt th e m .

6. F u n c tio n a lly c la ssify in g a c o st re fe rs to c la ssific a tio n b a se d o n w h e re th e c o st w a s

in c u rre d (p ro d u c tio n , se llin g , o r a d m in istra tiv e a re a ) a n d fo r w h a t p u rp o se (w a g e s,
s a l a r i e s , u t i l i t i e s , e t c .) . B e h a v i o r a l l y c l a s s i f y i n g a c o s t r e f e r s t o c l a s s i f i c a t i o n b a s e d
o n th e re a c tio n th a t th e c o st h a s to a c h a n g e in u n d e rly in g a c tiv ity (su c h a s p ro d u c -
tio n o r sa le s v o lu m e ) a n d , th u s, a s v a ria b le o r fix e d . A c o m p a n y is c o n c e rn e d a b o u t
b e h a v io ra l c la ssific a tio n b e c a u se (a s lo n g a s th e c o m p a n y is o p e ra tin g in th e re le v a nt
ra n g e o f a c tiv ity ) v a ria b le c o sts w ill c h a n g e in a d ire c t re la tio n sh ip w ith c h a n g e s in
so m e u n d e rly in g a c tiv ity m e a su re , b u t fix e d c o sts w ill re m a in c o n sta n t. If v a ria b le
a n d fix e d c o sts a re c o m b in e d a n d sh o w n m e re ly a s fu n c tio n a l c a te g o rie s, m a n a g e -
m e n t w ill n o t b e a b le to se e h o w e a c h fu n c tio n a l c a te g o ry o f c o st w ill c h a n g e w ith
c h a n g e s in a c tiv ity .

7. A b so rp tio n c o stin g is re q u ire d fo r e x te rn a l re p o rtin g . T h e ra tio n a le is th a t fix e d

m a n u fa c tu rin g o v e rh e a d is tra d itio n a lly v ie w e d a s a p ro d u c t c o st, a n d th u s, it sh o u ld
b e a d d e d to v a ria b le p ro d u c tio n c o st a n d a ssig n e d to in v e n to ry . T h e to ta l c o st p e r
u n it w ill b e sh o w n a s a n e x p e n se o n ly in th e p e rio d in w h ic h th e re la te d p ro d u c ts a re
so ld .

8. U se o f m o n e ta ry , q u a n tita tiv e in fo rm a tio n v a rie s g re a tly b e tw e e n e x te rn a l a n d in te r-

n a l u se rs. E x te rn a l u se rs e m p h a siz e p ro fita b ility p o te n tia l; in te rn a l u se rs e m p h a siz e
in fo rm a tio n th a t h e lp s m a k e sa le s, p ro d u c tio n , a n d c a p ita l e x p e n d itu re d e c isio n s.

B o th a b so rp tio n a n d v a ria b le c o stin g h a v e a p la c e in d e c isio n m a k in g . A c c o u n ta n ts

a n d d e c isio n m a k e rs n e e d to u n d e rsta n d th e a p p lic a tio n s a n d lim ita tio n s o f th e tw o
te c h n iq u e s w ith in th e c o n te x t o f p a st, p re se n t, a n d fu tu re c o st in fo rm a tio n n e e d s. N o
m a tte r w h ic h ty p e o f c o stin g a firm u se s, th e firm ’s to ta l re v e n u e m u st c o v e r a ll
c o sts— b o th v a ria b le a n d fix e d — a n d a lso g e n e ra te a sa tisfa c to ry p ro fit if a firm is to
su rv iv e in th e lo n g ru n .

T h e m e t h o d s o f c o s t a c c u m u la ti o n a n d c o s t p r e s e n t a t i o n u s e d f o r r e p o r t i n g a r e d e t e r -
m i n e d b y w h a t i s a c c e p t a b le t o t h e p a r t i e s f o r w h o m t h e r e p o r t s a r e i n t e n d e d . E x t e r n a l
r e p o r t in g i s g u i d e d b y t h e c h a r a c te r is t ic s o f r e l ia b ility , u n i fo rm i t y , a n d c o n s i s t e n c y . I n -
t e r n a l r e p o r tin g i s g u i d e d b y f l e x ib il ity i n h e l p in g m a n a g e r s w i t h p l a n n i n g , c o n t r o l l i n g ,
d e c isio n m a k in g , a n d p e rfo rm a n c e e v a lu a tio n s.

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 43

9. W h e n p r o d u c t io n e x c e e d s s a l e s v o l u m e , a b s o rp ti o n c o s ti n g i n c o m e w i l l b e h i g h e r t h a n
v a r i a b le c o s tin g i n c o m e b e c a u s e s o m e o f t h e f i x e d f a c t o r y o v e r h e a d i n c u r re d d u r i n g t h e
p e r i o d w i l l b e d e f e rr e d i n t o i n v e n t o r y r a t h e r t h a n a p p e a r i n g o n t h e i n c o m e s t a t e m e n t .
S i n c e n o f i x e d o v e r h e a d i s i n v e n to rie d u n d e r v a r ia b le c o s t in g , t h e r e w i l l b e a l a r g e r e x -
p e n se o n th e in c o m e sta te m e n t u n d e r v a ria b le c o stin g th a n u n d e r a b so rp tio n c o stin g .

W h e n p ro d u c tio n is le ss th a n sa le s v o lu m e , so m e o f th e fix e d o v e rh e a d d e fe rre d in

p re v io u s p e rio d s w ill b e c h a rg e d a g a in st in c o m e a s p a rt o f c o st o f g o o d s so ld u n d e r
a b so rp tio n c o stin g in a d d itio n to a ll o f th e c u rre n t p e rio d fix e d o v e rh e a d . T h u s, th e re
w ill b e a h ig h e r in c o m e sta te m e n t c h a rg e u n d e r a b so rp tio n c o stin g th a n u n d e r v a ria -
b le c o stin g (w h ic h w ill o n ly e x p e n se th e c u rre n t p e rio d fix e d o v e rh e a d ). T h e re fo re ,
u n d e r th is c irc u m sta n c e , a b so rp tio n c o stin g in c o m e w ill b e le ss th a n v a ria b le c o stin g
in c o m e .

1 0 . T h e re g re ssio n m e th o d h a s th e m a jo r a d v a n ta g e o f u sin g a ll p o in ts in th e d a ta se t to
d e te rm in e th e fix e d a n d v a ria b le c o st e le m e n ts o f th e m ix e d c o sts. T h is is in c o n tra st
to th e h ig h – lo w m e th o d , w h ic h u se s o n ly tw o p o in ts in th e d a ta se t. It is p o ssib le th at
th e u se o f o n ly tw o p o in ts c o u ld in c lu d e o u tlie rs, if th e y a re n o t re c o g n iz e d a s su c h
b y th e u se r.

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
44 C h ap ter 3

E X E R C IS E S

1 1 . a . (1 ) A t a n y le v e l, th e v a ria b le c o st is $ 2 p e r m a c h in e h o u r. S in c e fo u r h o u rs a re
needed to m a k e o n e u n it, th e v a ria b le ra te is $ 8 p e r u n it. A t p ro d u c tio n o f
1 0 ,0 0 0 u n i t s , t h e f i x e d r a t e i s $ 3 2 5 ,0 0 0 ÷ 1 0 ,0 0 0 o r $ 3 2 .5 0 p e r u n i t .

(2 ) A t an y le v e l, th e v a ria b le c o st is $2 per m a c h in e h o u r. A t p ro d u c tio n of

1 0 ,0 0 0 u n i t s , t h e f i x e d r a t e p e r m a c h i n e h o u r = $ 3 2 .5 0 ÷ 4 = $ 8 .1 2 5 p e r m a -
c h in e h o u r.

b . ( 1 ) C o m b i n e d r a t e = $ 8 + $ 3 2 .5 0 = $ 4 0 .5 0 p e r u n i t

( 2 ) C o m b i n e d r a t e = $ 2 + $ 8 .1 2 5 = $ 1 0 .1 2 5 p e r u n i t

c . A t a c t u a l p r o d u c t i o n o f 1 1 ,0 0 0 u n i t s a n d a p p l y i n g O H o n u n i t s o f p r o d u c t i o n :

E x p e c te d = U n d e r/O v e r
A c tu a l A p p lie d A p p lie d
V O H ( 1 1 ,0 0 0 × $ 8 ) $ 8 8 ,0 0 0 ( 1 1 ,0 0 0  $ 8 ) = $ 8 8 ,0 0 0 $ 0

FO H 3 2 5 ,0 0 0 ( 1 1 ,0 0 0  $ 3 2 .5 0 ) = 3 5 7 ,5 0 0 3 2 ,5 0 0 o v e r a p p .

1 2 . a . A p p l i e d V O H = 9 0 0  $ 8 = $ 7 ,2 0 0

b . A p p l i e d F O H = 9 0 0  $ 3 2 .5 0 = $ 2 9 ,2 5 0

c . V O H : A c t u a l V O H – A p p l i e d V O H = $ 7 ,5 0 0 – $ 7 ,2 0 0 = $ 3 0 0 u n d e r a p p l i e d
F O H : A c t u a l F O H – A p p l i e d F O H = $ 2 6 ,5 0 0 – $ 2 9 ,2 5 0 = $ 2 ,7 5 0 o v e r a p p l i e d

1 3 . a . E x p e c t e d o v e r h e a d = ( $ 4 2 ,9 0 0  1 2 ) + ( $ 6  7 8 ,0 0 0 )
= $ 5 1 4 ,8 0 0 + $ 4 6 8 ,0 0 0
= $ 9 8 2 ,8 0 0

P r e d e t e r m i n e d o v e r h e a d r a t e = $ 9 8 2 ,8 0 0 ÷ 7 8 ,0 0 0 = $ 1 2 .6 0 p e r D L H

O v e r h e a d p e r u n i t = $ 1 2 .6 0  1 .5 h o u r s p e r u n i t = $ 1 8 .9 0

b . M a n u fa c tu rin g O v e rh e a d 1 2 8 ,5 5 0
V a rio u s a c c o u n ts 1 2 8 ,5 5 0

W o r k i n P r o c e s s I n v e n t o r y ( 6 ,3 9 0  $ 1 2 .6 0 ) 8 0 ,5 1 4
M a n u fa c tu rin g O v e rh e a d 8 0 ,5 1 4

c . 6 ,3 9 0 D L H s ÷ 1 .5 = 4 ,2 6 0 u n i t s s h o u l d h a v e b e e n p r o d u c e d

1 4 . a . J a n . $ 1 8 0 ,0 0 0  2 .5 0 = $ 4 5 0 ,0 0 0

F e b . $ 1 6 5 ,0 0 0  2 .5 0 = $ 4 1 2 ,5 0 0
M a r . $ 1 7 0 ,0 0 0  2 .5 0 = $ 4 2 5 ,0 0 0

b . J a n . A c t u a l – A p p l i e d = $ 4 4 0 ,0 0 0 – $ 4 5 0 ,0 0 0 = $ 1 0 ,0 0 0 o v e r a p p l i e d
F e b . A c t u a l – A p p l i e d = $ 4 2 0 ,4 0 0 – $ 4 1 2 ,5 0 0 = $ 7 ,9 0 0 u n d e r a p p l i e d
M a r . A c t u a l – A p p l i e d = $ 4 2 1 ,0 0 0 – $ 4 2 5 ,0 0 0 = $ 4 ,0 0 0 o v e r a p p l i e d
T o ta l fo r q u a rte r $ 6 ,1 0 0 o v e r a p p l i e d

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 45

1 5 . a . ( $ 6 0 0 ,4 0 0 + $ 1 9 9 ,6 0 0 ) ÷ ( 1 0 ,0 0 0 + 4 0 ,0 0 0 ) = $ 8 0 0 ,0 0 0 ÷ 5 0 ,0 0 0 = $ 1 6 .0 0 p e r D L H

b . ( $ 6 0 0 ,4 0 0 + $ 1 9 9 ,6 0 0 ) ÷ ( 7 6 ,0 0 0 + 4 ,0 0 0 ) = $ 8 0 0 ,0 0 0 ÷ 8 0 ,0 0 0 = $ 1 0 .0 0 p e r M H

c . A s s e m b l y : $ 6 0 0 ,4 0 0 ÷ 7 6 ,0 0 0 = $ 7 .9 0 p e r M H
F i n i s h i n g : $ 1 9 9 ,6 0 0 ÷ 4 0 ,0 0 0 = $ 4 .9 9 p e r D L H

d . O v e r h e a d a s s i g n e d u s i n g a n s w e r f r o m ( a ) : 1  $ 1 6 .0 0 = $ 1 6 .0 0
O v e r h e a d a s s i g n e d u s i n g a n s w e r f r o m ( b ) : 5  $ 1 0 .0 0 = $ 5 0 .0 0

O v e r h e a d a s s i g n e d u s i n g a n s w e r f r o m ( c ) : ( 5  $ 7 .9 0 ) + ( 1  $ 4 .9 9 )
= $ 3 9 .5 0 + $ 4 .9 9 = $ 4 4 .4 9

1 6 . a . M a n u fa c tu rin g O v e rh e a d 6 6 ,0 0 0
C o st o f G o o d s S o ld 6 6 ,0 0 0

b . M a n u fa c tu rin g O v e rh e a d 6 6 ,0 0 0
W o rk in P ro c e ss In v e n to ry 2 1 ,1 2 0
F in ish e d G o o d s In v e n to ry 5 ,2 8 0
C o st o f G o o d s S o ld 3 9 ,6 0 0

W IP $ 3 8 4 ,0 0 0 3 8 4 ,0 0 0 ÷ 1 ,2 0 0 ,0 0 0 = 3 2 % 0 .3 2  $ 6 6 ,0 0 0 = $ 2 1 ,1 2 0
FG 9 6 ,0 0 0 9 6 ,0 0 0 ÷ 1 ,2 0 0 ,0 0 0 = 8% 0 .0 8  $ 6 6 ,0 0 0 = 5 ,2 8 0

C G S 7 2 0 ,0 0 0 7 2 0 ,0 0 0 ÷ 1 ,2 0 0 ,0 0 0 = 6 0 % 0 .6 0  $ 6 6 ,0 0 0 = 3 9 ,6 0 0

T o ta l $ 1 ,2 0 0 ,0 0 0

c . T h e m e th o d in (b ) w o u ld b e m o re a p p ro p ria te in th is in sta n c e b e c a u se o f th e
a m o u n t . O v e r a p p l i e d o v e r h e a d i s 5 .5 p e r c e n t o f t h e t o t a l b a l a n c e s i n a l l o f t h e a c -
c o u n ts c o n ta in in g o v e rh e a d , so to c lo se it d ire c tly to c o st o f g o o d s so ld w o u ld
c a u se a d isto rtio n o f th e c o sts re m a in in g in in v e n to ry a n d c o st o f g o o d s so ld .

1 7 . a . P re d e te rm in e d o v e rh e a d ra te = A p p lie d o v e rh e a d ÷ A c tu a l D L H s
= $ 1 2 0 ,0 0 0 ÷ 5 ,0 0 0 = $ 2 4 .0 0 p e r D L H

b . O v e r h e a d i s u n d e r a p p l i e d b y ( $ 1 2 1 ,5 0 0 – $ 1 2 0 ,0 0 0 ) o r $ 1 ,5 0 0

c . B e c a u s e t h e a m o u n t o f u n d e r a p p l i e d o v e r h e a d i s o n l y a b o u t 0 .5 p e r c e n t o f t o t a l
p ro d u c tio n c o sts fo r th e m o n th , th e u n d e ra p p lie d b a la n c e c o u ld b e c lo se d o n ly to
C o st o f G o o d s S o ld w ith o u t d isto rtin g p ro d u c t c o sts. T h e jo u rn a l e n try w o u ld b e
a s fo llo w s:

C o st o f G o o d s S o ld 1 ,5 0 0
M a n u fa c tu rin g O v e rh e a d 1 ,5 0 0

1 8 . a . U sin g th e in fo rm a tio n in th e W IP In v e n to ry a c c o u n t, th e ra te is $ 2 0 ,0 0 0 ÷
$ 1 0 ,0 0 0 o r 2 0 0 p e r c e n t o f d i r e c t l a b o r c o s t .

b . T h e a m o u n t ( $ 4 0 ,0 0 0 ) s h o u l d b e p r o r a t e d b e c a u s e i t i s l a r g e r e l a t i v e t o t h e b a l -
ances in W o rk in P ro cess In v e n to ry , F in ish e d G oods In v e n to ry , a n d C ost of
G o o d s S o ld .

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
46 C h ap ter 3

c . W o rk in P ro c e ss In v e n to ry : $ 4 0 ,0 0 0  ( $ 5 0 ,0 0 0 ÷ $ 5 2 0 ,0 0 0 ) = $ 3 ,8 4 6

F in ish e d G o o d s In v e n to ry : $ 4 0 ,0 0 0  ( $ 2 0 0 ,0 0 0 ÷ $ 5 2 0 ,0 0 0 ) = 1 5 ,3 8 5

C o st o f G o o d s S o ld : $ 4 0 ,0 0 0  ( $ 2 7 0 ,0 0 0 ÷ $ 5 2 0 ,0 0 0 ) = 2 0 ,7 6 9
T o ta l $ 4 0 ,0 0 0

d . A d e b it b a la n c e in th e m a n u fa c tu rin g o v e rh e a d a c c o u n t c a n b e th e re su lt o f se v e r-
al causes in c lu d in g : (1 ) p a y in g h ig h e r p ric e s th a n b u d g e te d fo r th e re so u rc e s
c o m p risin g a c tu a l o v e rh e a d , (2 ) u sin g m o re o v e rh e a d re so u rc e s th a n a tta c h e d to
in v e n to ry fo r a c tu a l o u tp u t, (3 ) p ro d u c in g a t le ss c a p a c ity th a n th e p la n n e d le v e l
o f a c tiv ity u p o n w h ic h th e p re d e te rm in e d o v e rh e a d ra te w a s b a se d , o r (4 ) a c o m -
b in a tio n o f th e p rio r th re e c a u se s.

1 9 . a . T h e c h o ic e o f c a p a c ity m e a su re a ffe c ts th e a m o u n t o f u n d e r- o r o v e ra p p lie d o v e r-

h e a d o n ly fo r fix e d o v e rh e a d c o sts. B e c a u se th e to ta l a m o u n t o f o v e rh e a d th a t is
e x p e c te d to b e in c u rre d is u n a ffe c te d b y th e v o lu m e o f p ro d u c tio n (a s lo n g a s it is
w i t h i n t h e r e l e v a n t r a n g e ) , t h e p e r - u n it c o s t o f f i x e d o v e r h e a d v a r i e s i n v e r s e l y w i t h
t h e l e v e l o f a c t u a l p r o d u c tio n . I f t h e a c t u a l c a p a c it y d i f f e rs d r a m a tic a l ly f r o m t h e c a -
p a c i t y c h o s e n t o a l l o c a te o v e r h e a d , t h e r e s u l t i s l i k e l y t o b e l a r g e a m o u n t s o f u n d e r -
o r o v e r a p p lie d f i x e d o v e r h e a d . I f a c t u a l c a p a c i t y i s s i g n i f i c a n t l y b e l o w ( a b o v e ) t h e
c a p a c i ty u s e d t o d e v e l o p t h e f i x e d o v e r h e a d r a te , t h e r e s u lt i s l i k e ly t o b e a s i g n i f ic a n t
a m o u n t o f u n d e ra p p lie d (o v e ra p p lie d ) fix e d o v e rh e a d .

b . E x p e c te d c a p a c ity w o u ld lik e ly re su lt in th e le a st a m o u n t o f u n d e r- o r o v e ra p -
p lie d o v e rh e a d b e c a u se e x p e c te d c a p a c ity re fle c ts th e m o st lik e ly le v e l o f c a p a c i-
ty u tiliz a tio n fo r 2 0 1 3 .

c . If M illto w n is in a c y c lic a l in d u stry , it m ig h t c h o o se n o rm a l c a p a c ity to a llo c a te

o v e rh e a d c o sts. N o rm a l c a p a c ity is b a se d o n a c o n sid e ra tio n o f lo n g -te rm a c tiv ity
th a t c a n a c c o m m o d a te a n e n tire c y c le in a n in d u stry . T h e a n n u a l c a p a c ity re fle c ts
th e a v e ra g e o f th e lo n g -te rm a c tiv ity le v e l.

2 0 . a . V O H r a t e ( c a n b e c a l c u l a t e d a t e i t h e r l e v e l ) : $ 1 ,2 5 0 ,0 0 0 ÷ 1 0 0 ,0 0 0 M H s = $ 1 2 .5 0
p e r M H o r $ 1 ,8 7 5 ,0 0 0 ÷ 1 5 0 ,0 0 0 M H s = $ 1 2 .5 0 p e r M H

b . F O H r a t e : $ 1 ,4 4 0 ,0 0 0 ÷ 1 8 0 ,0 0 0 = $ 8 .0 0 p e r M H

c . E x p e c t e d c a p a c i t y = 2 / 3  1 8 0 ,0 0 0 = 1 2 0 ,0 0 0 M H s
F O H r a t e : $ 1 ,4 4 0 ,0 0 0 ÷ 1 2 0 ,0 0 0 = $ 1 2 .0 0 p e r M H

d . A t 1 1 0 ,0 0 0 M H s :

T o t a l V O H a p p l i e d = 1 1 0 ,0 0 0  $ 1 2 .5 0 = $ 1 ,3 7 5 ,0 0 0

T o t a l F O H a p p l i e d ( p r a c t i c a l c a p a c i t y r a t e ) : 1 1 0 ,0 0 0  $ 8 .0 0 = $ 8 8 0 ,0 0 0

T o t a l F O H a p p l i e d ( e x p e c t e d c a p a c i t y r a t e ) : 1 1 0 ,0 0 0  $ 1 2 .0 0 = $ 1 ,3 2 0 ,0 0 0

T o t a l O H a p p l i e d ( p r a c t i c a l ) ( $ 1 ,3 7 5 ,0 0 0 + $ 8 8 0 ,0 0 0 ) $ 2 ,2 5 5 ,0 0 0
A c tu a l O H ( 2 ,7 1 0 ,0 0 0 )
U n d e ra p p lie d O H $ ( 4 5 5 ,0 0 0 )

T o t a l O H a p p l i e d ( e x p e c t e d ) ( $ 1 ,3 7 5 ,0 0 0 + $ 1 ,3 2 0 ,0 0 0 ) $ 2 ,6 9 5 ,0 0 0
A c tu a l O H ( 2 ,7 1 0 ,0 0 0 )
U n d e ra p p lie d O H $ ( 1 5 ,0 0 0 )

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 47

21. a. M H s T o ta l C o st = V a ria b le C o st + F ix e d C o st

H ig h a c tiv ity 3 4 ,0 0 0 $ 1 2 ,2 0 0 $ 5 ,4 4 0 $ 6 ,7 6 0
L o w a c tiv ity 3 1 ,0 0 0 1 1 ,7 2 0 4 ,9 6 0 6 ,7 6 0
D iffe re n c e s 3 ,0 0 0 $ 480

V a r i a b l e r a t e = $ 4 8 0 ÷ 3 ,0 0 0 M H s = $ 0 .1 6 p e r M H

H i g h a c t i v i t y v a r i a b l e c o s t = 3 4 ,0 0 0  $ 0 .1 6 = $ 5 ,4 4 0

L o w a c t i v i t y v a r i a b l e c o s t = 3 1 ,0 0 0  $ 0 .1 6 = $ 4 ,9 6 0
F i x e d c o s t a t h i g h a c t i v i t y = $ 1 2 ,2 0 0  $ 5 ,4 4 0 = $ 6 ,7 6 0

F i x e d c o s t a t l o w a c t i v i t y = $ 1 1 ,7 2 0  $ 4 ,9 6 0 = $ 6 ,7 6 0
B u d g e t fo rm u la : T C = F C + V C (X )
T C = $ 6 ,7 6 0 + $ 0 .1 6 M H

b . T C = $ 6 ,7 6 0 + $ 0 .1 6 ( 3 1 ,2 5 0 ) = $ 6 ,7 6 0 + $ 5 ,0 0 0 = $ 1 1 ,7 6 0

22. a. S h ip m e n ts R e c e iv e d C o st o f R e p o rts
H ig h a c tiv ity 60 $202
L o w a c tiv ity 35 142
D iffe re n c e s 25 $ 60

V a r i a b l e c o s t = $ 6 0 ÷ 2 5 = $ 2 .4 0
F i x e d c o s t ( h i g h p o i n t ) = $ 2 0 2 – ( 6 0  $ 2 .4 0 ) = $ 5 8
y = $ 5 8 + $ 2 .4 0 X

b . y = $ 5 8 + ( $ 2 .4 0  7 2 )
y = $ 2 3 0 .8 0

c . T h e m o st sig n ific a n t p ro b le m is th a t 7 2 sh ip m e n ts is fa r la rg e r th a n th e la rg e st
n u m b e r o f sh ip m e n ts in th e d a ta u se d to d e v e lo p th e e q u a tio n . T h u s, 7 2 m a y b e
o u tsid e o f th e re le v a n t ra n g e fo r th e e q u a tio n . O th e r c o n c e rn s a re th o se a sso c ia te d
w ith u se o f th e h ig h – lo w m e th o d in c lu d in g o n ly tw o o f th e se v e n d a ta p o in ts
w e re u se d to d e v e lo p th e e q u a tio n .

23. a. M H s T o ta l C o st = V a ria b le C o st + F ix e d C o st
H ig h a c tiv ity 9 ,0 0 0 $ 880 $ ( 1 ,6 2 0 ) $ 2 ,5 0 0
L o w a c tiv ity 3 ,0 0 0 1 ,9 6 0 (5 4 0 ) 2 ,5 0 0
D iffe re n c e s 6 ,0 0 0 $ ( 1 ,0 8 0 )

V a r i a b l e r a t e = $ ( 1 ,0 8 0 ) ÷ 6 ,0 0 0 M H s = $ ( 0 .1 8 ) p e r M H

H i g h a c t i v i t y v a r i a b l e c o s t = 9 ,0 0 0  $ ( 0 .1 8 ) = $ ( 1 ,6 2 0 )

L o w a c t i v i t y v a r i a b l e c o s t = 3 ,0 0 0  $ ( 0 .1 8 ) = $ ( 5 4 0 )
F i x e d c o s t a t l o w a c t i v i t y = $ 1 ,9 6 0 – $ ( 5 4 0 ) = $ 2 ,5 0 0
T o t a l m a i n t e n a n c e c o s t = $ 2 ,5 0 0 – $ 0 .1 8 M H

b . T h e v a ria b le c o st c o m p o n e n t is n e g a tiv e , w h ic h im p lie s th a t, a s th e n u m b e r o f

m a c h in e h o u rs in c re a se s, th e a m o u n t o f m a in te n a n c e c o sts d e c lin e s. S u c h a re la -
tio n sh ip is im p la u sib le . O n e e x p la n a tio n th a t w o u ld a c c o u n t fo r th e p e rc e iv e d in -
v e rse re la tio n sh ip w o u ld b e th a t th e c o m p a n y p e rfo rm s th e m a in te n a n c e c h o re s
w h e n th e re is id le tim e a v a ila b le . A s b u sin e ss a c tiv ity in c re a se s, le ss a n d le ss tim e
is a v a ila b le to p e rfo rm m a in te n a n c e a c tiv itie s.

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
48 C h ap ter 3

c . F o r a c o st p re d ic tio n fo rm u la to w o rk e ffe c tiv e ly , a p o sitiv e re la tio n sh ip b e tw e e n

th e a c tiv ity m e a su re a n d th e c o st p o o l is n o t re q u ire d . T h u s, th e fo rm u la d e v e l-
o p e d in (a ) m ig h t fu n c tio n e ffe c tiv e ly . H o w e v e r, o n e c a n n o t in te rp re t th e p a ra m e -
t e r s o f t h e m o d e l ( – $ 0 .1 8 , $ 2 ,5 0 0 ) a s v a r i a b l e a n d f i x e d c o s t s , r e s p e c t i v e l y .

24. a. T o ta l V a ria b le F ix e d
M H s C ost = C ost + C ost
H ig h a c tiv ity 1 ,9 0 0 $ 1 ,1 6 0 $760 $400
L o w a c tiv ity 1 ,2 5 0 900 500 400
D iffe re n c e s 650 $ 260

V a r i a b l e r a t e = $ 2 6 0 ÷ 6 5 0 M H s = $ 0 .4 0 p e r M H
C o s t f o r m u l a : y = $ 4 0 0 + $ 0 .4 0 M H

b. 1 ,3 2 5 1 ,5 0 0 1 ,6 7 5
V a r i a b l e u t i l i t y c o s t @ $ 0 .4 0 p e r M H $ 530 $ 600 $ 670
F ix e d u tility c o st 400 400 400
E x p e c te d to ta l u tility c o st $ 930 $ 1 ,0 0 0 $ 1 ,0 7 0

2 5 . a . If th e p u rp o se is to c o n tro l c o sts, th e c o m p a riso n is in a p p ro p ria te . A c tu a l c o st

sh o u ld b e c o m p a re d w ith fle x ib le b u d g e t c o st a t th e sa m e le v e l o f o u tp u t a s th a t
o f t h e a c t u a l c o s t — i n t h i s c a s e 1 7 ,6 0 0 u n i t s ( n o t 1 6 ,0 0 0 u n i t s ) . A f l e x i b l e b u d g e t
fo rm u la a llo w s th e d e te rm in a tio n o f c o sts a t a n y le v e l o f a c tiv ity .

b . V a r i a b l e r a t e ( b ) ( a t a n y p o i n t ) = $ 4 ( f o r e x a m p l e , $ 8 0 ,0 0 0 ÷ 2 0 ,0 0 0 u n i t s )
F i x e d a m o u n t ( a ) ( g i v e n ) = $ 3 2 ,0 0 0

T h e f l e x i b l e b u d g e t f o r 1 7 ,6 0 0 u n i t s i s :
V a r i a b l e ( 1 7 ,6 0 0  $ 4 ) $ 7 0 ,4 0 0

F ix e d 3 2 ,0 0 0
T o ta l $ 1 0 2 ,4 0 0

A c o m p a riso n w ith th e b u d g e t fo llo w s:

B udget A c tu a l V a ria n c e s
V a ria b le $ 7 0 ,4 0 0 $ 6 9 ,0 0 0 $ 1 ,4 0 0 F
F ix e d 3 2 ,0 0 0 3 2 ,8 0 0 800 U
T o ta l $ 1 0 2 ,4 0 0 $ 1 0 1 ,8 0 0 $ 600 F

T h e c o m p a n y d id w e ll c o n tro llin g v a ria b le c o sts, b u t fix e d c o sts w e re $ 8 0 0 o v e r

th e b u d g e te d a m o u n t.

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 49

26. a. 250 300 350 400

V a ria b le c o sts:
S u p p lie s @ $ 4 .0 0 p e r D L H $ 1 ,0 0 0 $ 1 ,2 0 0 $ 1 ,4 0 0 $ 1 ,6 0 0
D i r e c t l a b o r @ $ 7 .0 0 p e r D L H 1 ,7 5 0 2 ,1 0 0 2 ,4 5 0 2 ,8 0 0
U tilitie s @ $ 5 .4 0 p e r D L H 1 ,3 5 0 1 ,6 2 0 1 ,8 9 0 2 ,1 6 0

F ix e d c o sts:
D ire c t la b o r 500 500 500 500
U tilitie s 350 350 350 350
R ent 450 450 450 450
A d v e rtisin g 75 75 75 75
T o ta l c o st $ 5 ,4 7 5 $ 6 ,2 9 5 $ 7 ,1 1 5 $ 7 ,9 3 5

b. C ost per D L H $ 2 1 .9 0 $ 2 0 .9 8 $ 2 0 .3 3 $ 1 9 .8 4

c . $ 2 0 .3 3  1 .4 = $ 2 8 .4 6 h o u r l y c h a r g e
$ 2 8 .4 6  1 .2 5 h o u r s p e r r e p a i r = $ 3 5 .5 8 o r $ 3 6 p e r c u s t o m e r r e p a i r

2 7 . a . ( 1 8 ,0 0 0 – 1 6 ,5 6 0 )  $ 2 2 .0 0 = 1 ,4 4 0  $ 2 2 .0 0 = $ 3 1 ,6 8 0

b . ( 1 8 ,0 0 0 – 1 6 ,5 6 0 )  ( $ 2 2 .0 0 – $ 4 .0 0 ) = 1 ,4 4 0  $ 1 8 .0 0 = $ 2 5 ,9 2 0

c . A b so rp tio n c o stin g w o u ld h a v e p ro d u c e d th e h ig h e r n e t in c o m e b e c a u se it w o u ld
h a v e r e q u i r e d $ 5 ,7 6 0 ( 1 ,4 4 0  $ 4 .0 0 ) o f f i x e d m a n u f a c t u r i n g o v e r h e a d t o b e i n -
v e n to rie d ra th e r th a n to b e c h a rg e d a g a in st in c o m e .

2 8 . T h e v a ria n c e b e tw e e n v a ria b le a n d a b so rp tio n n e t in c o m e is c a u se d b y th e d iffe re n ce

in tre a tm e n t o f fix e d m a n u fa c tu rin g o v e rh e a d .

F ix e d o v e rh e a d e x p e n se d :
V a ria b le c o stin g $ 5 0 0 ,0 0 0

A b s o r p t i o n c o s t i n g [ $ 5 0 0 ,0 0 0  ( 2 1 ,0 0 0 ÷ 2 5 ,0 0 0 ) ] ( 4 2 0 ,0 0 0 )

N e t in c o m e d iffe re n c e $ 8 0 ,0 0 0

T h e c o m p a n y ’s n e t in c o m e w o u ld have been $ 8 0 ,0 0 0 h i g h e r u n d e r a b s o r p t i o n
c o stin g .

2 9 . a . In g re d ie n ts $ 2 2 8 ,8 0 0
Labor 1 0 4 ,0 0 0
V a ria b le o v e rh e a d 1 9 7 ,6 0 0
T o ta l v a ria b le c o st $ 5 3 0 ,4 0 0
D iv id e d b y u n its ÷ 1 0 4 ,0 0 0
V a ria b le c o st p e r u n it $ 5 .1 0

T o ta l v a ria b le c o st $ 5 3 0 ,4 0 0
F ix e d o v e rh e a d 9 8 ,8 0 0
T o ta l c o st $ 6 2 9 ,2 0 0
D iv id e d b y u n its ÷ 1 0 4 ,0 0 0
A b so rp tio n c o st p e r u n it $ 6 .0 5

b . V a r i a b l e c o s t o f g o o d s s o l d = 1 0 0 ,0 0 0  $ 5 .1 0 = $ 5 1 0 ,0 0 0

c . A b s o r p t i o n c o s t o f g o o d s s o l d = 1 0 0 ,0 0 0  $ 6 .0 5 = $ 6 0 5 ,0 0 0

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
50 C h ap ter 3

d. E n d i n g i n v e n t o r y ( v a r i a b l e c o s t i n g ) = 4 ,0 0 0  $ 5 .1 0 = $ 2 0 ,4 0 0

E n d i n g i n v e n t o r y ( a b s o r p t i o n c o s t i n g ) = 4 ,0 0 0  $ 6 .0 5 = $ 2 4 ,2 0 0

e. F i x e d o v e r h e a d c h a r g e d t o e x p e n s e ( v a r i a b l e c o s t i n g ) = $ 9 8 ,8 0 0
F i x e d o v e r h e a d c h a r g e d t o e x p e n s e ( a b s o r p t i o n c o s t i n g ) = $ 9 5 ,0 0 0

30. a. In c o m e – V a ria b le c o stin g $ 1 8 8 ,0 0 0

D e d u c t i n c r e a s e i n C G S [ F O H o u t o f i n v e n t o r y ( $ 8  9 ,6 0 0 ) ] ( 7 6 ,8 0 0 )
In c o m e – A b so rp tio n c o stin g $ 1 1 1 ,2 0 0

b. In c o m e – V a ria b le c o stin g $ 1 8 8 ,0 0 0
A d d d e c r e a s e i n C G S [ F O H i n v e n t o r i e d ( $ 8 × 3 ,0 0 0 ) ] 2 4 ,0 0 0
In c o m e – A b so rp tio n c o stin g $ 2 1 2 ,0 0 0

3 1 . a. (1 ) F a b io ’s F a sh io n s
In c o m e S ta te m e n t (A b so rp tio n C o stin g B a sis)
F o r th e M o n th E n d e d A p ril 3 0 , 2 0 1 3

S a l e s ( $ 1 4 ,4 0 0 ,0 0 0 ÷ $ 1 4 4 = 1 0 0 ,0 0 0 u n i t s s o l d ) $ 1 4 ,4 0 0 ,0 0 0
C o s t o f g o o d s s o l d ( $ 1 0 2  1 0 0 ,0 0 0 ) ( 1 0 ,2 0 0 ,0 0 0 )
*
P r o d u c t i o n v o l u m e v a r i a n c e ( $ 3 0  4 2 ,5 0 0 ) ( 1 ,2 7 5 ,0 0 0 )

G ro ss m a rg in $ 2 ,9 2 5 ,0 0 0
F ix e d se llin g & a d m in istra tiv e e x p e n se s ( 2 ,4 0 0 ,0 0 0 )
In c o m e b e fo re ta x e s $ 5 2 5 ,0 0 0

*
T o t a l p r o d u c t i o n ( 1 0 0 ,0 0 0 u n i t s s o l d + 7 ,5 0 0
u n its in v e n to rie d ) 1 0 7 ,5 0 0
E x p e c te d p ro d u c tio n ( 1 5 0 ,0 0 0 )
U n its c re a tin g v o lu m e v a ria n c e 4 2 ,5 0 0

( 2 ) D i f f e r e n c e s i n i n c o m e s = $ 3 0 0 ,0 0 0 – $ 5 2 5 ,0 0 0 = $ ( 2 2 5 ,0 0 0 )

T h i s a m o u n t i s e q u a l t o t h e i n c r e a s e i n i n v e n t o r y o f 7 ,5 0 0 u n i t s  $ 3 0 p e r u n i t
fix e d o v e rh e a d d e fe rre d in e n d in g in v e n to ry u n d e r a b so rp tio n c o stin g .

b . C a ffre y sh o u ld fin d th e v a ria b le c o stin g a p p ro a c h to in c o m e d e te rm in a tio n d e sir-

a b le fo r m a n y re a so n s, in c lu d in g th e fo llo w in g :

 V a ria b le c o stin g in c o m e v a rie s w ith u n its so ld , n o t u n its p ro d u c e d .

 F ix e d m a n u fa c tu rin g o v e rh e a d c o sts a re c h a rg e d a g a in st re v e n u e in th e p e rio d
in w h ic h th e y a re in c u rre d ; c o n se q u e n tly , m a n u fa c tu rin g c o st p e r u n it d o e s
n o t c h a n g e w ith a c h a n g e in p ro d u c tio n le v e l.

 T h e c o n trib u tio n m a rg in o ffe rs a u se fu l to o l fo r m a rk e tin g d e c isio n s th a t c o n -

sid e r c h a n g e s in re la tio n sh ip s a m o n g c o sts, v o lu m e le v e ls, a n d p ro fit fig u re s.
(C M A a d a p te d )

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 51

3 2 . a . B u d g e t e d f i x e d o v e r h e a d = $ 0 .4 0  1 0 0 ,0 0 0 = $ 4 0 ,0 0 0

b . A c tu a l (a n d b u d g e te d ) fix e d o v e rh e a d $ 4 0 ,0 0 0

A p p l i e d f i x e d o v e r h e a d ( 4 5 ,0 0 0  $ 0 .4 0 ) 1 8 ,0 0 0
U n d e ra p p lie d fix e d o v e rh e a d (a b so rp tio n ) $ 2 2 ,0 0 0

T h e re is n o u n d e ra p p lie d o r o v e ra p p lie d fix e d o v e rh e a d u n d e r v a ria b le c o stin g

b e c a u se fix e d o v e rh e a d is n o t a p p lie d to u n its o f p ro d u c t.

c . D ire c t m a te ria l $ 3 .6 0
D ire c t la b o r 1 .0 0
V a ria b le o v e rh e a d 0 .6 0
C o st p e r u n it (v a ria b le ) $ 5 .2 0
F ix e d o v e rh e a d 0 .4 0
C o st p e r u n it (a b so rp tio n ) $ 5 .6 0

d . A b s o r p t i o n c o s t o f g o o d s s o l d ( 4 8 ,7 5 0  $ 5 .6 0 ) $ 2 7 3 ,0 0 0

P l u s u n d e r a p p l i e d o v e r h e a d ( 5 5 ,0 0 0  $ 0 .4 0 ) 2 2 ,0 0 0

A d ju ste d c o st o f g o o d s so ld $ 2 9 5 ,0 0 0
S e l l i n g a n d a d m i n i s t r a ti v e c o s t s :

V a r i a b l e ( 4 8 ,7 5 0  $ 0 .4 0 ) $ 1 9 ,5 0 0

F ix e d 1 5 0 ,0 0 0 1 6 9 ,5 0 0
T o ta l e x p e n se (a b so rp tio n ) $ 4 6 4 ,5 0 0

V a r i a b l e c o s t o f g o o d s s o l d ( 4 8 ,7 5 0  $ 5 .2 0 ) $ 2 5 3 ,5 0 0

V a r i a b l e s e l l i n g e x p e n s e s ( 4 8 ,7 5 0  $ 0 .4 0 ) 1 9 ,5 0 0

F ix e d o v e rh e a d 4 0 ,0 0 0
F i x e d s e l l i n g a n d a d m i n i s t r a t iv e e x p e n s e s 1 5 0 ,0 0 0
T o ta l e x p e n se (v a ria b le ) $ 4 6 3 ,0 0 0

e . In c o m e is h ig h e r u n d e r v a ria b le c o stin g b e c a u se th e sa le s le v e l is g re a te r th a n th e
p r o d u c t i o n l e v e l . I n c o m e w i l l b e h i g h e r b y t h e f i x e d o v e r h e a d p e r u n i t ( $ 0 .4 0 )
t i m e s t h e c h a n g e i n i n v e n t o r y ( 3 ,7 5 0 u n i t d e c l i n e ) o r $ 1 ,5 0 0 .

3 3 . E a c h stu d e n t w ill h a v e a d iffe re n t a n sw e r, b u t th e fo llo w in g p o in ts sh o u ld b e a d -

d re sse d . T h e d e b a te su rro u n d in g th e u se o f v a ria b le c o stin g v e rsu s a b so rp tio n c o st-
in g fo r v a lu in g in v e n to ry h in g e s o n w h e th e r th e in c u rre n c e o f fix e d o v e rh e a d c re a te s
a n a sse t. A c o st in c u rre d to c re a te a n a sse t, a s o p p o se d to a c o st th a t is a n e x p e n se o f
th e p e rio d , m u st b e c a p ita liz e d and sh o u ld n o t b e ch arg ed a g a in st re v e n u e s (e x -
p e n se d ) u n til its re la te d b e n e fit is re c o g n iz e d in in c o m e . S in c e in v e n to ry is a n a sse t,
a n y c o sts th a t a re in c u rre d to c re a te th a t a sse t, in c lu d in g fix e d o v e rh e a d , sh o u ld b e
c o n sid e re d fo r c a p ita liz a tio n . T h is is th e a rg u m e n t fo r u se o f a b so rp tio n c o stin g .

H o w e v e r, p ro p o n e n ts o f v a ria b le c o stin g a rg u e th a t th e in c u rre n c e o f fix e d o v e rh e a d

re la te s m o re to th e c a p a c ity to p ro d u c e th a n to p ro d u c tio n . A c c o rd in g ly , th e se p e o -
p le a rg u e th a t fix e d o v e rh e a d is n o t d ire c tly re la te d to p ro d u c tio n su ffic ie n tly to b e
c o n sid e re d a n in v e n to ria b le c o st.

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
52 C h ap ter 3

2
34. a. x y xy x
50 $ 175 $ 8 ,7 5 0 2 ,5 0 0
44 162 7 ,1 2 8 1 ,9 3 6
40 154 6 ,1 6 0 1 ,6 0 0
35 142 4 ,9 7 0 1 ,2 2 5
53 185 9 ,8 0 5 2 ,8 0 9
58 200 1 1 ,6 0 0 3 ,3 6 4
60 202 1 2 ,1 2 0 3 ,6 0 0
340 $ 1 ,2 2 0 $ 6 0 ,5 3 3 1 7 ,0 3 4

y $ 5 5 .2 9 + $ 2 .4 5 ( # o f s h i p m e n t s )

b . y = $ 5 5 .2 9 + $ 2 .4 5 ( 1 6 5 ) = $ 4 5 9 .5 4
N o te th a t o n e w o u ld b e c a u tio u s to u se th is p re d ic tio n b e c a u se 1 6 5 m a y b e su b -
sta n tia lly g re a te r th a n th e re le v a n t ra n g e o f a c tiv ity .

2
35. x y xy x
200 $ 300 $ 6 0 ,0 0 0 4 0 ,0 0 0
325 440 1 4 3 ,0 0 0 1 0 5 ,6 2 5
400 480 1 9 2 ,0 0 0 1 6 0 ,0 0 0
410 490 2 0 0 ,9 0 0 1 6 8 ,1 0 0
525 620 3 2 5 ,5 0 0 2 7 5 ,6 2 5
680 790 5 3 7 ,2 0 0 4 6 2 ,4 0 0
820 840 6 8 8 ,8 0 0 6 7 2 ,4 0 0
900 900 8 1 0 ,0 0 0 8 1 0 ,0 0 0
4 ,2 6 0 $ 4 ,8 6 0 $ 2 ,9 5 7 ,4 0 0 2 ,6 9 4 ,1 5 0

y $ 1 4 4 .2 3 + $ 0 .8 7 M H

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 53

P R O B LE M S

3 6 . a . O H ra te = A llo c a te d o v e rh e a d ÷ A c tu a l h o u rs
= ( $ 8 0 ,0 0 0 + $ 1 6 ,0 0 0 + $ 4 ,0 0 0 ) ÷ ( 8 ,0 0 0 + 1 ,6 0 0 + 4 0 0 )
= $ 1 0 .0 0 p e r D L H

b . O H r a t e = $ 1 0 0 ,0 0 0 ÷ ( 8 0 0 + 2 ,4 0 0 + 1 2 ,8 0 0 ) = $ 6 .2 5 p e r M H

c . G W 1 : 8 0 0  $ 6 .2 5 = $ 5 ,0 0 0
G W 4 : 2 ,4 0 0  $ 6 .2 5 = $ 1 5 ,0 0 0

G W 7 : 1 2 ,8 0 0  $ 6 .2 5 = $ 8 0 ,0 0 0

d . T h e o v erh ead a llo c a tio n s d iffe r d ra m a tic a lly b e c a u se m o st o f th e d ire c t la b o r

h o u rs a re e x p e n d e d o n th e p ro d u c tio n o f G W 1 a n d m o st o f th e m a c h in e h o u rs a re
e x p e n d e d o n G W 7 . G W 4 is a llo c a te d sim ila r a m o u n ts o f o v e rh e a d u n d e r th e tw o
sc h e m e s o n ly b e c a u se its p ro d u c tio n re q u ire s a b a la n c e o f m a c h in e a n d la b o r
tim e .

T h e b e tte r a llo c a tio n c a n n o t b e d e te rm in e d b a se d o n th e a v a ila b le in fo rm a tio n .

H o w e v e r, id e n tify in g th e b e tte r a llo c a tio n re q u ire s th a t th e c o sts c o m p risin g
o v erh ead b e e x a m in e d to d e te rm in e w h e th e r th e y a re m o re c lo se ly a sso c ia te d
w ith la b o r tim e o r m a c h in e tim e . A lte rn a tiv e ly , a n o v e rh e a d a llo c a tio n sc h e m e
c o u ld b e d e v ise d th a t w o u ld u se tw o o v e rh e a d ra te s: o n e u sin g d ire c t la b o r to a l-
lo c a te th e la b o r-d riv e n o v e rh e a d c o sts a n d th e o th e r u se s m a c h in e h o u rs to a llo -
c a te th e m a c h in e -d riv e n p o rtio n o f o v e rh e a d .

37. a. F ix e d C o sts V a ria b le C o sts

In d ire c t m a te ria l $ 2 .0 0
In d ire c t la b o r $ 1 4 4 ,0 0 0 2 .5 0
U tilitie s 6 ,0 0 0 0 .0 4
R e p a irs & m a in te n a n c e 2 0 ,0 0 0 0 .3 4

M a te ria l h a n d lin g 1 6 ,0 0 0 0 .1 2
D e p re c ia tio n 2 1 0 ,0 0 0
R e n t o n p la n t b u ild in g 5 0 ,0 0 0
In su ra n c e o n p la n t b u ild in g 1 2 ,0 0 0
T o ta ls $ 4 5 8 ,0 0 0 $ 5 .0 0

y = $ 4 5 8 ,0 0 0 + $ 5 X

b . C a p a c itie s c o m p u te d :
T h e o r e t i c a l = 5 0 ,0 0 0 u n i t s
P r a c t i c a l = 5 0 ,0 0 0  0 .8 0 = 4 0 ,0 0 0 u n i t s

N o r m a l = 5 0 ,0 0 0  0 .8 0  0 .8 0 = 3 2 ,0 0 0 u n i t s
E x p e c t e d c a p a c i t y = 3 0 ,0 0 0 u n i t s

O v e rh e a d a p p lic a tio n ra te s (p e r u n it):

T h e o r e t i c a l : ( $ 4 5 8 ,0 0 0 ÷ 5 0 ,0 0 0 ) + $ 5 = $ 1 4 .1 6
P r a c t i c a l : ( $ 4 5 8 ,0 0 0 ÷ 4 0 ,0 0 0 ) + $ 5 = $ 1 6 .4 5
N o r m a l : ( $ 4 5 8 ,0 0 0 ÷ 3 2 ,0 0 0 ) + $ 5 = $ 1 9 .3 1 ( r o u n d e d )
E x p e c t e d : ( $ 4 5 8 ,0 0 0 ÷ 3 0 ,0 0 0 ) + $ 5 = $ 2 0 .2 7 ( r o u n d e d )

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
54 C h ap ter 3

c . A c t u a l c o s t = $ 4 5 8 ,0 0 0 + ( $ 5  3 5 ,0 0 0 ) = $ 6 3 3 ,0 0 0

A p p lie d o v e rh e a d :

T h e o r e t i c a l r a t e : $ 1 4 .1 6  3 5 ,0 0 0 = $ 4 9 5 ,6 0 0
P r a c t i c a l r a t e : $ 1 6 .4 5  3 5 ,0 0 0 = $ 5 7 5 ,7 5 0

N o r m a l r a t e : $ 1 9 .3 1  3 5 ,0 0 0 = $ 6 7 5 ,8 5 0

E x p e c t e d r a t e : $ 2 0 .2 7  3 5 ,0 0 0 = $ 7 0 9 ,4 5 0

U n d e r/O v e ra p p lie d a m o u n ts:

A p p lie d A c tu a l (U n d e r-) O v e ra p p lie d A m o u n t

T h e o re tic a l: $ 4 9 5 ,6 0 0 $ 6 3 3 ,0 0 0 $ ( 1 3 7 ,4 0 0 )
P ra c tic a l: 5 7 5 ,7 5 0 6 3 3 ,0 0 0 ( 5 7 ,2 5 0 )
N o rm a l: 6 7 5 ,8 5 0 6 3 3 ,0 0 0 4 2 ,8 5 0
E x p e c te d : 7 0 9 ,4 5 0 6 3 3 ,0 0 0 7 6 ,4 5 0

38. a. E x p e c te d N o rm al P ra c tic a l T h e o re tic a l

7 2 ,0 0 0 7 6 ,0 0 0 8 0 ,0 0 0 1 0 0 ,0 0 0
V a ria b le c o sts:
In d ire c t m a te ria l $ 1 8 0 ,0 0 0 $ 1 9 0 ,0 0 0 $ 2 0 0 ,0 0 0 $ 2 5 0 ,0 0 0
In d ire c t la b o r 2 1 6 ,0 0 0 2 2 8 ,0 0 0 2 4 0 ,0 0 0 3 0 0 ,0 0 0
F a c to ry u tilitie s 1 ,4 4 0 1 ,5 2 0 1 ,6 0 0 2 ,0 0 0
M a c h in e m a in te n a n c e 3 6 ,0 0 0 3 8 ,0 0 0 4 0 ,0 0 0 5 0 ,0 0 0
M a te ria l h a n d lin g 8 ,6 4 0 9 ,1 2 0 9 ,6 0 0 1 2 ,0 0 0
M a c h in e d e p re c ia tio n 2 ,1 6 0 2 ,2 8 0 2 ,4 0 0 3 ,0 0 0
T o ta l v a ria b le c o sts $ 4 4 4 ,2 4 0 $ 4 6 8 ,9 2 0 $ 4 9 3 ,6 0 0 $ 6 1 7 ,0 0 0
F ix e d c o sts:
F a c to ry u tilitie s $ 3 ,0 0 0 $ 3 ,0 0 0 $ 3 ,0 0 0 $ 3 ,0 0 0
M a c h in e m a in te n a n c e 1 0 ,0 0 0 1 0 ,0 0 0 1 0 ,0 0 0 1 0 ,0 0 0
M a te ria l h a n d lin g 8 ,0 0 0 8 ,0 0 0 8 ,0 0 0 8 ,0 0 0
B u ild in g re n t 1 2 ,0 0 0 1 2 ,0 0 0 1 2 ,0 0 0 1 2 ,0 0 0
S u p e rv iso rs’ sa la rie s 7 2 ,0 0 0 7 2 ,0 0 0 7 2 ,0 0 0 7 2 ,0 0 0
F a c to ry in su ra n c e 6 ,0 0 0 6 ,0 0 0 6 ,0 0 0 6 ,0 0 0
T o ta l fix e d c o sts $ 1 1 1 ,0 0 0 $ 1 1 1 ,0 0 0 $ 1 1 1 ,0 0 0 $ 1 1 1 ,0 0 0

b . V a ria b le O H ra te p e r u n it $ 6 .1 7 $ 6 .1 7 $ 6 .1 7 $ 6 .1 7
F ix e d O H ra te p e r u n it $ 1 .5 4 $ 1 .4 6 $ 1 .3 9 $ 1 .1 1

c. (1 ) V a ria b le M a n u fa c tu rin g O v e rh e a d 1 7 5 ,0 0 0
R a w M a te ria l (S u p p lie s) In v e n to ry 1 7 5 ,0 0 0
T o r e c o r d i n d i r e c t m a t e r i a l a t $ 2 .5 0 p e r u n i t
produced

V a ria b le M a n u fa c tu rin g O v e rh e a d 2 1 0 ,0 0 0
W a g e s P a y a b le (o r C a sh ) 2 1 0 ,0 0 0
T o r e c o r d i n d i r e c t l a b o r a t $ 3 .0 0 p e r u n i t p r o d u c e d

V a ria b le M a n u fa c tu rin g O v e rh e a d 1 ,4 0 0
F ix e d M a n u fa c tu rin g O v e rh e a d 3 ,0 0 0
U tilitie s P a y a b le (o r C a sh ) 4 ,4 0 0
T o re c o rd fa c to ry u tilitie s

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 55

V a ria b le M a n u fa c tu rin g O v e rh e a d 3 5 ,0 0 0
F ix e d M a n u fa c tu rin g O v e rh e a d 1 0 ,0 0 0
C a sh (o r S u p p lie s) 4 5 ,0 0 0
T o re c o rd fa c to ry m a in te n a n c e

V a ria b le M a n u fa c tu rin g O v e rh e a d 8 ,4 0 0
F ix e d M a n u fa c tu rin g O v e rh e a d 8 ,0 0 0
C ash 1 6 ,4 0 0
T o re c o rd m a te ria l h a n d lin g c h a rg e s

V a ria b le M a n u fa c tu rin g O v e rh e a d 2 ,1 0 0
A c c u m u la te d D e p re c ia tio n 2 ,1 0 0
T o r e c o r d d e p r e c i a t i o n a t $ 0 .0 3 p e r u n i t p r o d u c e d

F ix e d M a n u fa c tu rin g O v e rh e a d 1 2 ,0 0 0
C ash 1 2 ,0 0 0
T o re c o rd b u ild in g re n t

F ix e d M a n u fa c tu rin g O v e rh e a d 7 2 ,0 0 0
S a la rie s P a y a b le (o r C a sh ) 7 2 ,0 0 0
T o re c o rd su p e rv iso rs’ sa la rie s

F ix e d M a n u fa c tu rin g O v e rh e a d 6 ,0 0 0
C a sh (o r P re p a id In s. o r In s. P a y a b le ) 6 ,0 0 0
T o re c o rd fa c to ry in su ra n c e

W o rk in P ro c e ss In v e n to ry 5 3 9 ,7 0 0
V a ria b le M a n u fa c tu rin g O v e rh e a d 4 3 1 ,9 0 0
F ix e d M a n u fa c tu rin g O v e rh e a d 1 0 7 ,8 0 0
T o a p p ly v a ria b le a n d fix e d m a n u fa c tu rin g o v e r-
h e a d to W IP

(2 ) A c tu a l fix e d o v e rh e a d $ 1 1 1 ,0 0 0

A p p l i e d f i x e d o v e r h e a d ( 7 0 ,0 0 0  $ 1 .5 4 ) 1 0 7 ,8 0 0

U n d e ra p p lie d fix e d o v e rh e a d $ 3 ,2 0 0

d . U se o f e x p e c te d c a p a c ity w o u ld c re a te c o sts th a t w o u ld m o re c lo se ly m a tc h a c tu -
a l p ro d u c tio n c o sts. H o w e v e r, u se o f p ra c tic a l c a p a c ity w o u ld h e lp in d ic a te to
m a n a g e m e n t th e c o sts o f u n u se d c a p a c ity .

3 9 . a . T o t a l o v e r h e a d = $ 6 3 5 ,3 4 0 + $ 3 2 4 ,0 0 0 = $ 9 5 9 ,3 4 0
T o t a l M H s = 7 2 ,0 0 0 + 9 ,3 0 0 = 8 1 ,3 0 0
O H r a t e p e r M H = $ 9 5 9 ,3 4 0 ÷ 8 1 ,3 0 0 M H = $ 1 1 .8 0 p e r M H
A p p l i e d o v e r h e a d = $ 1 1 .8 0  1 0 .3 0 = $ 1 2 1 .5 4

b . F a b r i c a t i o n : $ 6 3 5 ,3 4 0 ÷ 7 2 ,0 0 0 M H s = $ 8 .8 2 p e r M H  1 0 $ 8 8 .2 0

F i n i s h i n g : $ 3 2 4 ,0 0 0 ÷ 4 8 ,0 0 0 D L H s = $ 6 .7 5 p e r D L H  2 1 3 .5 0
T o ta l O H a p p lie d p e r u n it u sin g d e p a rtm e n ta l ra te s $ 1 0 1 .7 0

c. B ecause each d e p a rtm e n t is so d iffe re n t in th e ty p e o f w o rk b e in g p e rfo rm e d

(m a c h in e in te n siv e v s. la b o r in te n siv e ), p la n tw id e ra te s w ill n o t a c c u ra te ly a tta c h
o v e rh e a d c o sts.

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
56 C h ap ter 3

4 0 . a . ( 1 ) T o t a l D L H s = 2 7 ,0 0 0 + 3 ,0 0 0 = 3 0 ,0 0 0
O H r a t e p e r D L H = $ 9 9 3 ,0 0 0 ÷ 3 0 ,0 0 0 D L H s = $ 3 3 .1 0 p e r D L H

( 2 ) T o t a l M H s = 2 ,1 0 0 + 6 5 ,8 0 0 = 6 7 ,9 0 0
O H r a t e p e r M H = $ 9 9 3 ,0 0 0 ÷ 6 7 ,9 0 0 M H s = $ 1 4 .6 2 p e r M H

b . C u t t i n g : $ 3 8 5 ,5 0 0 ÷ 2 7 ,0 0 0 D L H s = $ 1 4 .2 8 p e r D L H
A s s e m b l y : $ 6 0 7 ,5 0 0 ÷ 6 5 ,8 0 0 M H s = $ 9 .2 3 p e r M H

c. R W 22SK I SD 45R O W

D ire c t m a te ria l $ 3 4 .8 5 $ 1 9 .5 7

D i r e c t l a b o r — C u t t i n g ( 6  $ 2 0 .0 0 ; 4 .8  $ 2 0 .0 0 ) 1 2 0 .0 0 9 6 .0 0

D i r e c t l a b o r — A s s e m b l y ( 0 .0 3  $ 8 .0 0 ; 0 .0 5  $ 8 .0 0 ) 0 .2 4 0 .4 0

T o ta l c o st o th e r th a n o v e rh e a d $ 1 5 5 .0 9 $ 1 1 5 .9 7

(1 ) O v e rh e a d (p la n tw id e ra te u sin g D L H s)
( 6 .0 3  $ 3 3 .1 0 ; 4 .8 5  $ 3 3 .1 0 ) 1 9 9 .5 9 1 6 0 .5 4

T o ta l c o st $ 3 5 4 .6 8 $ 2 7 6 .5 1

(2 ) T o ta l c o st o th e r th a n o v e rh e a d $ 1 5 5 .0 9 $ 1 1 5 .9 7
O v e rh e a d (p la n tw id e ra te u sin g M H s)

( 5 .9 6  $ 1 4 .6 2 ; 9 .4 5  $ 1 4 .6 2 ) 8 7 .1 4 1 3 8 .1 6
T o ta l c o st $ 2 4 2 .2 3 $ 2 5 4 .1 3

(3 ) T o ta l c o st o th e r th a n o v e rh e a d $ 1 5 5 .0 9 $ 1 1 5 .9 7
C u ttin g D e p a rtm e n t o v e rh e a d

( 6  $ 1 4 .2 8 ; 4 .8  $ 1 4 .2 8 ) 8 5 .6 8 6 8 .5 4

A sse m b ly D e p a rtm e n t o v e rh e a d
( 5 .9  $ 9 .2 3 ; 9 .3  $ 9 .2 3 ) 5 4 .4 6 8 5 .8 4

T o ta l c o st $ 2 9 5 .2 3 $ 2 7 0 .3 5

c . G iv e n th a t a c o m p e tito r se lls th e sim ila r p ro d u c t fo r $ 3 1 0 , m a n a g e m e n t w o u ld

p ro b a b ly c o n c lu d e th a t p ro d u c tio n o f R W 2 2 S K I w a s n o t fe a sib le if th e c o st d e -
te rm in e d fro m a p la n tw id e o v e rh e a d ra te b a se d o n D L H s w a s u se d ; c o m p e tin g o n
p ric e w o u ld c re a te a “ lo ss” p e r u n it. U sin g th e c o st d e te rm in e d fro m a p la n tw id e
ra te b a se d o n M H s m ig h t c a u se m a n a g e m e n t to u n d e rc u t th e c o m p e tito r’s p ric e
su b sta n tia lly , b e lie v in g th a t a sig n ific a n t p ro fit m a rg in c o u ld b e m a d e . U sin g th e
c o st d e te rm in e d fro m d e p a rtm e n ta l ra te s (w h ic h is th e m o st a c c u ra te o f th e th re e
c o sts) w o u ld a llo w m a n a g e m e n t to m e e t th e c o m p e titio n ’s p ric e b u t w o u ld p ro -
v i d e a s m a l l 5 p e r c e n t p r o f i t m a r g i n ( $ 3 1 0 – $ 2 9 5 .2 3 = $ 1 4 .7 7 ; $ 1 4 .7 7 ÷ $ 3 1 0 =
0 .0 5 ) . P o s s i b l y m a n a g e m e n t n e e d s t o d e t e r m i n e i f t h e p r o d u c t c o u l d b e p r o d u c e d
m o re e ffic ie n tly .

4 1 . a . V a ria b le in d ire c t la b o r $ 1 0 0 ,0 0 0
V a ria b le in d ire c t m a te ria l 2 0 ,0 0 0
V a ria b le u tilitie s 8 0 ,0 0 0
V a ria b le p o rtio n o f o th e r m ix e d c o sts 1 2 0 ,0 0 0
T o ta l v a ria b le O H c o sts $ 3 2 0 ,0 0 0

T o ta l v a ria b le O H c o sts ÷ N u m b e r o f M H s = V a ria b le O H ra te p e r M H

$ 3 2 0 ,0 0 0 ÷ 5 0 ,0 0 0 M H s = $ 6 .4 0 p e r M H

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 57

F ix e d m a c h in e ry d e p re c ia tio n $ 6 2 ,0 0 0
F ix e d m a c h in e ry le a se p a y m e n ts 1 3 ,0 0 0
F ix e d m a c h in e ry in su ra n c e 1 6 ,0 0 0
F ix e d sa la rie s 7 5 ,0 0 0
F ix e d u tilitie s 1 2 ,0 0 0
T o ta l fix e d o v e rh e a d O H c o sts $ 1 7 8 ,0 0 0

T o ta l fix e d O H c o sts ÷ N u m b e r o f M H s = F ix e d O H ra te p e r M H
$ 1 7 8 ,0 0 0 ÷ 5 0 ,0 0 0 M H s = $ 3 .5 6 p e r M H

b. V a ria b le M a n u fa c tu rin g O v e rh e a d 2 7 3 ,6 0 0
V a rio u s a c c o u n ts 2 7 3 ,6 0 0
T o re c o rd a c tu a l V O H c o sts

F ix e d M a n u fa c tu rin g O v e rh e a d 1 8 5 ,6 8 0
V a rio u s a c c o u n ts 1 8 5 ,6 8 0
T o re c o rd a c tu a l F O H c o sts

W o r k i n P r o c e s s I n v e n t o r y ( 5 3 ,0 0 0 M H s × $ 6 .4 0 ) 3 3 9 ,2 0 0
V a ria b le M a n u fa c tu rin g O v e rh e a d 3 3 9 ,2 0 0
T o a p p ly V O H to p ro d u c tio n

W o r k i n P r o c e s s I n v e n t o r y ( 5 3 ,0 0 0 M H s  $ 3 .5 6 ) 1 8 8 ,6 8 0
F ix e d M a n u fa c tu rin g O v e rh e a d 1 8 8 ,6 8 0
T o a p p ly F O H to p ro d u c tio n

c. A c tu a l V O H $ 2 7 3 ,6 0 0 A c tu a l F O H $ 1 8 5 ,6 8 0
A p p lie d V O H 3 3 9 ,2 0 0 A p p lie d F O H 1 8 8 ,6 8 0
O v e ra p p lie d V O H $ 6 5 ,6 0 0 O v e ra p p lie d F O H $ 3 ,0 0 0

d. F ix e d M a n u fa c tu rin g O v e rh e a d 3 ,0 0 0
C o st o f G o o d s S o ld 3 ,0 0 0
T o c lo se F O H a t y e a r -e n d

e. B a la n c e P ro p o rtio n % O v erap p . O H A d j.

W IP $ 2 3 4 ,0 0 0 $ 2 3 4 ,0 0 0 ÷ $ 1 ,5 6 0 ,0 0 0 15 $ 6 5 ,6 0 0 $ 9 ,8 4 0
FG 3 9 0 ,0 0 0 3 9 0 ,0 0 0 ÷ $ 1 ,5 6 0 ,0 0 0 25 $ 6 5 ,6 0 0 1 6 ,4 0 0
C G S 9 3 6 ,0 0 0 9 3 6 ,0 0 0 ÷ $ 1 ,5 6 0 ,0 0 0 60 $ 6 5 ,6 0 0 3 9 ,3 6 0
T o ta l $ 1 ,5 6 0 ,0 0 0 100 $ 6 5 ,6 0 0

V a ria b le M a n u fa c tu rin g O v e rh e a d 6 5 ,6 0 0
W o rk in P ro c e ss In v e n to ry 9 ,8 4 0
F in ish e d G o o d s In v e n to ry 1 6 ,4 0 0
C o st o f G o o d s S o ld 3 9 ,3 6 0

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
58 C h ap ter 3

4 2 . a . I n d i r e c t m a t e r i a l : v a r i a b l e ; a t e i t h e r l e v e l , $ 6 .4 0 p e r a n i m a l d a y

I n d i r e c t l a b o r : m i x e d ; $ 8 ,0 0 0 + $ 1 2 .0 0 p e r a n i m a l d a y
at 6 ,0 0 0 days $ 8 0 ,0 0 0
at ( 4 ,0 0 0 ) d a y s ( 5 6 ,0 0 0 )
2 ,0 0 0 $ 2 4 ,0 0 0

$ 2 4 ,0 0 0 ÷ 2 ,0 0 0 = $ 1 2 p e r a n i m a l d a y

T o ta l c o st $ 8 0 ,0 0 0

V a r i a b l e ( $ 1 2  6 ,0 0 0 a n i m a l d a y s ) 7 2 ,0 0 0

F ix e d $ 8 ,0 0 0

M a i n t e n a n c e : m i x e d ; $ 4 ,0 0 0 + $ 1 .6 0 p e r a n i m a l d a y
at 6 ,0 0 0 days $ 1 3 ,6 0 0
at ( 4 ,0 0 0 ) d a y s ( 1 0 ,4 0 0 )
2 ,0 0 0 $ 3 ,2 0 0

$ 3 ,2 0 0 ÷ 2 ,0 0 0 = $ 1 .6 0 p e r a n i m a l d a y

T o ta l c o st $ 1 3 ,6 0 0

V a r i a b l e ( $ 1 .6 0  6 ,0 0 0 a n i m a l d a y s ) ( 9 ,6 0 0 )

F ix e d $ 4 ,0 0 0

U t i l i t i e s : v a r i a b l e ; a t e i t h e r l e v e l , $ 2 .0 0 p e r a n i m a l d a y
A l l o t h e r : m i x e d ; $ 2 ,4 0 0 + $ 3 .2 0 p e r a n i m a l d a y
at 6 ,0 0 0 days $ 2 1 ,6 0 0
at ( 4 ,0 0 0 ) d a y s ( 1 5 ,2 0 0 )
2 ,0 0 0 $ 6 ,4 0 0

$ 6 ,4 0 0 ÷ 2 ,0 0 0 = $ 3 .2 0 p e r a n i m a l d a y

T o ta l c o st $ 2 1 ,6 0 0

V a r i a b l e ( $ 3 .2 0  6 ,0 0 0 a n i m a l d a y s ) ( 1 9 ,2 0 0 )

F ix e d $ 2 ,4 0 0

T o t a l f i x e d c o s t = $ 8 ,0 0 0 + $ 4 ,0 0 0 + $ 2 ,4 0 0 = $ 1 4 ,4 0 0
T o t a l v a r i a b l e c o s t = $ 6 .4 0 + $ 1 2 .0 0 + $ 1 .6 0 + $ 2 .0 0 + $ 3 .2 0 = $ 2 5 .2 0
T o t a l O H c o s t f o r m u l a : $ 1 4 ,4 0 0 + $ 2 5 .2 0 p e r a n i m a l d a y

b . $ 1 4 ,4 0 0 ÷ ( $ 2 6 .8 0  $ 2 5 .2 0 ) = 9 ,0 0 0 a n i m a l d a y s

c . $ 2 6 .8 0  9 ,0 0 0 = $ 2 4 1 ,2 0 0

d . V O H ra te re m a in s c o n sta n t a t $ 2 5 .2 0
F O H r a t e ( $ 1 4 ,4 0 0 ÷ 1 2 ,0 0 0 ) 1 .2 0
*
T o t a l O H r a t e a t 1 2 ,0 0 0 a n i m a l d a y s $ 2 6 .4 0

*
T h i s r a t e a s s u m e s t h a t 1 2 ,0 0 0 d a y s i s s t i l l w i t h i n t h e r e l e v a n t r a n g e o f a c t i v i t y
a n d , th e re fo re , n o v a ria b le c o sts w ill c h a n g e p e r u n it a n d no fix e d c o sts w ill
c h a n g e in to ta l.

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
 C h ap ter 3 59

43. a. M H s T o ta l C o st = V a ria b le C o st + F ix e d C o st
H ig h a c tiv ity 2 ,7 0 0 $ 1 3 ,1 6 0 $ 8 ,6 4 0 $ 4 ,5 2 0
L o w a c tiv ity ( 1 ,4 0 0 ) ( 9 ,0 0 0 ) 4 ,4 8 0 4 ,5 2 0
D iffe re n c e s 1 ,3 0 0 $ 4 ,1 6 0

V a r i a b l e r a t e = $ 4 ,1 6 0 ÷ 1 ,3 0 0 M H s = $ 3 .2 0 p e r M H

H i g h a c t i v i t y v a r i a b l e c o s t = 2 ,7 0 0  $ 3 .2 0 = $ 8 ,6 4 0

L o w a c t i v i t y v a r i a b l e c o s t = 1 ,4 0 0  $ 3 .2 0 = $ 4 ,4 8 0
F i x e d c o s t a t l o w a c t i v i t y = $ 9 ,0 0 0 – $ 4 ,4 8 0 = $ 4 ,5 2 0
T o ta l R & M c o s t = $ 4 ,5 2 0 + $ 3 .2 0 M H

2
b. x y xy x
1 ,4 0 0 $ 9 ,0 0 0 $ 1 2 ,6 0 0 ,0 0 0 1 ,9 6 0 ,0 0 0
1 ,9 0 0 1 0 ,7 1 9 2 0 ,3 6 6 ,1 0 0 3 ,6 1 0 ,0 0 0
2 ,0 0 0 1 0 ,9 0 0 2 1 ,8 0 0 ,0 0 0 4 ,0 0 0 ,0 0 0
2 ,5 0 0 1 3 ,0 0 0 3 2 ,5 0 0 ,0 0 0 6 ,2 5 0 ,0 0 0
2 ,2 0 0 1 1 ,5 7 8 2 5 ,4 7 1 ,6 0 0 4 ,8 4 0 ,0 0 0
2 ,7 0 0 1 3 ,1 6 0 3 5 ,5 3 2 ,0 0 0 7 ,2 9 0 ,0 0 0
1 ,7 0 0 9 ,5 2 5 1 6 ,1 9 2 ,5 0 0 2 ,8 9 0 ,0 0 0
2 ,3 0 0 1 1 ,6 7 0 2 6 ,8 4 1 ,0 0 0 5 ,2 9 0 ,0 0 0
1 6 ,7 0 0 $ 8 9 ,5 5 2 $ 1 9 1 ,3 0 3 ,2 0 0 3 6 ,1 3 0 ,0 0 0

y $ 4 ,0 1 2 .2 5 + $ 3 .4 4 M H

c . P a rt (b ) c o m p u ta tio n s p ro v id e th e b e tte r a n sw e r. T h e le a st sq u a re s re g re ssio n a p -

p ro a c h ta k e s in to c o n sid e ra tio n a ll o f th e a v a ila b le d a ta a n d e m p lo y s a m a th e m a ti-
c a l a lg o rith m to m in im iz e th e v a ria n c e a ro u n d th e fitte d re g re ssio n lin e .

44. a. D IR E C T L A B O R H O U R S
550 600 650 700
V a ria b le c o sts:
S u p p lie s $ 2 ,2 0 0 $ 2 ,4 0 0 $ 2 ,6 0 0 $ 2 ,8 0 0
D ire c t la b o r 6 ,6 0 0 7 ,2 0 0 7 ,8 0 0 8 ,4 0 0
O v erh ead 550 600 650 700
T o ta l v a ria b le c o sts $ 9 ,3 5 0 $ 1 0 ,2 0 0 $ 1 1 ,0 5 0 $ 1 1 ,9 0 0
V a ria b le c o st p e r D L H $ 1 7 .0 0 $ 1 7 .0 0 $ 1 7 .0 0 $ 1 7 .0 0
F ix e d c o sts:
O v erh ead $ 8 ,0 0 0 $ 8 ,0 0 0 $ 8 ,0 0 0 $ 8 ,0 0 0
F ix e d c o sts p e r D L H $ 1 4 .5 5 $ 1 3 .3 3 $ 1 2 .3 1 $ 1 1 .4 3
T o ta l c o st $ 1 7 ,3 5 0 $ 1 8 ,2 0 0 $ 1 9 ,0 5 0 $ 1 9 ,9 0 0

b . T o ta l c o st p e r D L H $ 3 1 .5 5 $ 3 0 .3 3 $ 2 9 .3 1 $ 2 8 .4 3

c . P r i c e = ( 1 .4 5 × $ 2 9 .3 1 ) + [ 0 .4 × ( 1 .4 5 × $ 2 9 .3 1 ) ] = $ 5 9 .5 0 ( r o u n d e d )

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
60 C h ap ter 3

45. a. A C T IV IT Y IN M H s
Low H ig h
2 ,5 0 0 3 ,0 0 0 3 ,5 0 0
P ro d u c tio n o v e rh e a d c o sts:
V a ria b le $ 1 0 ,1 2 5 $ 1 2 ,1 5 0 $ 1 4 ,1 7 5
F ix e d 9 5 ,4 0 0 9 5 ,4 0 0 9 5 ,4 0 0
T o ta l $ 1 0 5 ,5 2 5 $ 1 0 7 ,5 5 0 $ 1 0 9 ,5 7 5

A C T IV IT Y IN D L H s
6 ,0 0 0 7 ,0 0 0 8 ,0 0 0
In sta lla tio n o v e rh e a d c o sts:
V a ria b le $ 8 5 ,5 0 0 $ 9 9 ,7 5 0 $ 1 1 4 ,0 0 0
F ix e d 7 3 ,8 0 0 7 3 ,8 0 0 7 3 ,8 0 0
T o ta l $ 1 5 9 ,3 0 0 $ 1 7 3 ,5 5 0 $ 1 8 7 ,8 0 0

b . N u m b e r o f p o o ls: 8
P ro d u c tio n (2 5 M H s p e r p o o l):
V a r i a b l e ( 8  2 5  $ 4 .0 5 ) $ 810

F ix e d (m o n th ly a m o u n t) 7 ,9 5 0
T o ta l p ro d u c tio n o v e rh e a d $ 8 ,7 6 0
In sta lla tio n (6 0 D L H s p e r p o o l):
V a r i a b l e ( 8  6 0  $ 1 4 .2 5 ) $ 6 ,8 4 0

F ix e d (m o n th ly a m o u n t) 6 ,1 5 0
T o ta l in sta lla tio n 1 2 ,9 9 0
T o ta l $ 2 1 ,7 5 0

c. N u m b e r o f p o o ls: 1 2 0
P ro d u c tio n (2 5 M H s p e r p o o l):
V a r i a b l e ( 1 2 0  2 5  $ 4 .0 5 ) $ 1 2 ,1 5 0

F ix e d 9 5 ,4 0 0 $ 1 0 7 ,5 5 0
In sta lla tio n (6 0 D L H s p e r p o o l):

V a r i a b l e ( 1 2 0  6 0  $ 1 4 .2 5 ) $ 1 0 2 ,6 0 0
F ix e d 7 3 ,8 0 0 1 7 6 ,4 0 0
T o ta l o v e rh e a d $ 2 8 3 ,9 5 0
B u d g e te d c a p a c ity ÷ 120
O v erh ead co st p er p o o l $ 2 ,3 6 6 .2 5

4 6 . Y o u w o u ld lik e ly te ll S n id e r th a t h e sh o u ld p ro v id e to h is su p e rio r th e e q u a tio n fo r

e a c h c o st th a t p ro v id e s th e m o st a c c u ra te p re d ic tio n o f th e c o st. T o m a k e th is d e te r-
m in a tio n , y o u c o u ld a d v ise S n id e r to u se e a c h o f th e tw o e q u a tio n s to p re d ic t c o sts
in p a st p e rio d s. T h e e q u a tio n th a t p ro d u c e s th e le a st e rro r in th e p re d ic tio n w o u ld b e
th e b e st e q u a tio n to u se in th e b u d g e tin g p ro c e ss. S in c e S n id e r u se d th e h ig h -lo w
m e th o d to d e v e lo p h is e q u a tio n s, h e u se d o n ly tw o m o n th s o f d a ta in th e e stim a tio n
p ro c e ss. O th e r m o n th ly d a ta c o u ld b e u se d to a sse ss th e a c c u ra c y o f e a c h e q u a tio n .
Y o u r in itia l b ia s w o u ld fa v o r th e m o d e l b a se d o n m a c h in e h o u rs b e c a u se th a t m o d e l
p ro d u c e s a m u c h lo w e r fix e d c o st (c o st u n e x p la in e d b y th e x v a ria b le in th e m o d e l).

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 61

47. a. G e o rg ia S h a c k s
In c o m e S ta te m e n t (A b so rp tio n )
F o r th e Y e a r E n d e d D e c e m b e r 3 1 , 2 0 1 3

S a le s $ 3 ,7 5 0 ,0 0 0
C o st o f g o o d s so ld — v a ria b le $ 1 ,9 5 0 ,0 0 0
F i x e d o v e r h e a d [ ( $ 1 ,5 0 0 ,0 0 0 ÷ 2 ,0 0 0 )  1 ,5 0 0 ] 1 ,1 2 5 ,0 0 0 ( 3 ,0 7 5 ,0 0 0 )

G ro ss p ro fit $ 6 7 5 ,0 0 0
V a r i a b l e s e l l i n g & a d m i n i s t r a t iv e $ 2 7 0 ,0 0 0
F ix e d se llin g & a d m in istra tiv e 1 9 0 ,0 0 0 ( 4 6 0 ,0 0 0 )
N e t in c o m e $ 2 1 5 ,0 0 0

b . T h e d i f f e r e n c e i n t h e a m o u n t s i s e q u a l t o t h e f i x e d o v e r h e a d o f ( $ 1 ,5 0 0 ,0 0 0 ÷
2 ,0 0 0 u n i t s ) o r $ 7 5 0 p e r u n i t t i m e s t h e 5 0 0 u n i t s p r o d u c e d b u t n o t s o l d d u r i n g t h e
y e a r . T h i s $ 3 7 5 ,0 0 0 i s c o n t a i n e d i n e n d i n g i n v e n t o r y u n d e r a b s o r p t i o n c o s t i n g ,
w h e re a s it a p p e a rs a s p a rt o f to ta l fix e d o v e rh e a d e x p e n se o n th e v a ria b le c o stin g
in c o m e sta te m e n t.

c . It is n o t o n ly e th ic a l, b u t it is a lso re q u ire d fo r th e sta te m e n ts to b e in c o n fo rm ity

w ith g e n e ra lly a c c e p te d a c c o u n tin g p rin c ip le s.

d . (1 ) G e o rg ia S h a c k s
In c o m e S ta te m e n t (V a ria b le )
F o r th e Y e a r E n d e d D e c e m b e r 3 1 , 2 0 1 4

S a l e s ( 2 ,2 0 0  $ 2 ,5 0 0 ) $ 5 ,5 0 0 ,0 0 0

V a r i a b l e c o s t o f g o o d s s o l d ( 2 ,2 0 0  $ 1 ,3 0 0 ) ( 2 ,8 6 0 ,0 0 0 )

P ro d u c t c o n trib u tio n m a rg in $ 2 ,6 4 0 ,0 0 0

V a r i a b l e s e l l i n g & a d m i n i s t r a t iv e ( $ 1 8 0  2 ,2 0 0 ) ( 3 9 6 ,0 0 0 )
C o n trib u tio n m a rg in $ 2 ,2 4 4 ,0 0 0
F ix e d o v e rh e a d $ 1 ,5 0 0 ,0 0 0
F ix e d se llin g & a d m in istra tiv e 1 9 0 ,0 0 0 ( 1 ,6 9 0 ,0 0 0 )
N e t in c o m e $ 5 5 4 ,0 0 0

(2 ) G e o rg ia S h a c k s
In c o m e S ta te m e n t (A b so rp tio n )
F o r th e Y e a r E n d e d D e c e m b e r 3 1 , 2 0 1 4

S a le s $ 5 ,5 0 0 ,0 0 0
C o st o f g o o d s so ld — v a ria b le $ 2 ,8 6 0 ,0 0 0

F i x e d o v e r h e a d [ ( $ 1 ,5 0 0 ,0 0 0 ÷ 2 ,0 0 0 )  1 ,6 5 0 ,0 0 0 ( 4 ,5 1 0 ,0 0 0 )

2 ,2 0 0 ]
G ro ss p ro fit $ 9 9 0 ,0 0 0
V a r i a b l e s e l l i n g & a d m i n i s t r a t iv e $ 3 9 6 ,0 0 0
F ix e d se llin g & a d m in istra tiv e 1 9 0 ,0 0 0 ( 5 8 6 ,0 0 0 )
N e t in c o m e $ 4 0 4 ,0 0 0

(3 ) N e t in c o m e u n d e r v a ria b le c o stin g $ 5 5 4 ,0 0 0
N e t in c o m e u n d e r a b so rp tio n c o stin g ( 4 0 4 ,0 0 0 )
D iffe re n c e in n e t in c o m e s $ 1 5 0 ,0 0 0

T h e d iffe re n c e in th e n e t in c o m e s is e q u a l to th e in c re m e n ta l d e c re a se in th e
e n d in g b a la n c e s o f th e in v e n to ry a c c o u n ts w h e n c o m p a re d to th e b e g in n in g
b a la n c e s. A n o th e r w a y to lo o k a t th is m o re e a sily is to m u ltip ly th e 2 0 0 u n its

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
62 C h ap ter 3

s o l d i n e x c e s s o f t h e 2 ,2 0 0 u n i t s p r o d u c e d b y t h e f i x e d o v e r h e a d a p p l i c a t i o n

r a t e o f $ 7 5 0 p e r u n i t ( 2 0 0  $ 7 5 0 = $ 1 5 0 ,0 0 0 ) .

T h e d e c re a se in in c o m e in a b so rp tio n c o stin g is d u e to p re v io u sly in v e n to -

rie d c o sts n o w h ittin g th e in c o m e sta te m e n t. T h is h a p p e n s b e c a u se th e n u m -
b e r o f u n its so ld e x c e e d s th e n u m b e r o f u n its p ro d u c e d .

48. B ird ’s E y e V ie w
In c o m e S ta te m e n ts (A b so rp tio n )
F o r th e Y e a rs E n d e d D e c e m b e r 3 1 , 2 0 1 3 a n d 2 0 1 4

2 0 1 3 ( 1 0 ,0 0 0 u n i t s ) 2 0 1 4 ( 1 2 ,0 0 0 u n i t s )
S a le s (u n its × $ 5 0 0 ) $ 5 ,0 0 0 ,0 0 0 $ 6 ,0 0 0 ,0 0 0
C G S (u n its × $ 2 7 0 ) $ 2 ,7 0 0 ,0 0 0 $ 3 ,2 4 0 ,0 0 0
U n d e ra p p lie d F O H 0 ( 2 ,7 0 0 ,0 0 0 ) 9 0 ,0 0 0 ( 3 ,3 3 0 ,0 0 0 )
G ro ss p ro fit $ 2 ,3 0 0 ,0 0 0 $ 2 ,6 7 0 ,0 0 0
S& A :
V a ria b le (u n its × $ 5 0 ) $ 5 0 0 ,0 0 0 $ 6 0 0 ,0 0 0
F ix e d 1 8 0 ,0 0 0 ( 6 8 0 ,0 0 0 ) 1 8 0 ,0 0 0 ( 7 8 0 ,0 0 0 )
In c o m e b e fo re ta x e s $ 1 ,6 2 0 ,0 0 0 $ 1 ,8 9 0 ,0 0 0

B ird ’s E y e V ie w
In c o m e S ta te m e n ts (V a ria b le )
F o r th e Y e a rs E n d e d D e c e m b e r 3 1 , 2 0 1 3 a n d 2 0 1 4

2 0 1 3 ( 1 0 ,0 0 0 u n i t s ) 2 0 1 4 ( 1 2 ,0 0 0 u n i t s )

S a le s (u n its  $ 5 0 0 ) $ 5 ,0 0 0 ,0 0 0 $ 6 ,0 0 0 ,0 0 0

C G S (u n its  $ 2 1 0 ) ( 2 ,1 0 0 ,0 0 0 ) ( 2 ,5 2 0 ,0 0 0 )
P ro d u ct C M $ 2 ,9 0 0 ,0 0 0 $ 3 ,4 8 0 ,0 0 0

V a ria b le S & A (u n its  $ 5 0 ) ( 5 0 0 ,0 0 0 ) ( 6 0 0 ,0 0 0 )

T o ta l C M $ 2 ,4 0 0 ,0 0 0 $ 2 ,8 8 0 ,0 0 0
F ix e d c o sts :
F a c to ry $ 7 5 0 ,0 0 0 $ 7 5 0 ,0 0 0
S& A 1 8 0 ,0 0 0 ( 9 3 0 ,0 0 0 ) 1 8 0 ,0 0 0 ( 9 3 0 ,0 0 0 )
In c o m e b e fo re ta x e s $ 1 ,4 7 0 ,0 0 0 $ 1 ,9 5 0 ,0 0 0

2013 2014
N e t in c o m e (a b so rp tio n ) $ 1 ,6 2 0 ,0 0 0 $ 1 ,8 9 0 ,0 0 0
N e t in c o m e (v a ria b le ) 1 ,4 7 0 ,0 0 0 1 ,9 5 0 ,0 0 0
D iffe re n c e in in c o m e $ 1 5 0 ,0 0 0 $ ( 6 0 ,0 0 0 )

D iffe re n c e e q u a ls in v e n to ry c h a n g e + 2 ,5 0 0  1 ,0 0 0
T im e s F O H a p p lic a tio n ra te  $60  $60
D iffe re n c e in in c o m e $ 1 5 0 ,0 0 0 $ ( 6 0 ,0 0 0 )

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 63

49. a. A k ro n A v ia tio n
In c o m e S ta te m e n t (V a ria b le )
F o r th e Y e a r E n d e d D e c e m b e r 3 1 , 2 0 1 4

S a le s $ 1 ,0 1 5 ,0 0 0
V a ria b le c o st o f g o o d s so ld :
W o rk in p ro c e ss 1 /1 /1 4 $ 4 6 ,4 0 0
F in ish e d g o o d s 1 /1 /1 4 1 6 ,9 5 0
M a n u fa c tu rin g c o sts in c u rre d 6 5 0 ,6 0 0
T o ta l c o sts a v a ila b le $ 7 1 3 ,9 5 0
W o rk in p ro c e ss 1 2 /3 1 /1 4 ( 6 1 ,9 0 0 )
F in ish e d g o o d s 1 2 /3 1 /1 4 ( 1 3 ,1 8 0 ) ( 6 3 8 ,8 7 0 )
P ro d u c t c o n trib u tio n m a rg in $ 3 7 6 ,1 3 0
V a ria b le se llin g e x p e n se s ( 5 0 ,7 5 0 )
C o n trib u tio n m a rg in $ 3 2 5 ,3 8 0
F ix e d e x p e n se s :
F a c to ry o v e rh e a d $ 4 2 ,3 0 0
S e llin g 4 4 ,2 5 0
A d m in istra tiv e 7 5 ,0 0 0 ( 1 6 1 ,5 5 0 )
O p e ra tin g In c o m e $ 1 6 3 ,8 3 0

S u p p o rtin g c a lc u la tio n s

V a ria b le fin ish e d g o o d s in v e n to ry a t 1 /1 /1 4 :

A b so rp tio n fin ish e d g o o d s in v e n to ry $ 1 8 ,0 0 0

L e s s f i x e d o v e r h e a d ( 1 ,0 5 0 h o u r s  $ 1 p e r h o u r ) ( 1 ,0 5 0 )
V a ria b le fin ish e d g o o d s in v e n to ry $ 1 6 ,9 5 0

V a ria b le w o rk in p ro c e ss in v e n to ry a t 1 /1 /1 4 :
A b so rp tio n w o rk in p ro c e ss in v e n to ry $ 4 8 ,0 0 0

L e s s f i x e d o v e r h e a d ( 1 ,6 0 0 h o u r s  $ 1 p e r h o u r ) ( 1 ,6 0 0 )

V a ria b le w o rk in p ro c e ss $ 4 6 ,4 0 0

V a ria b le m a n u fa c tu rin g c o sts in c u rre d d u rin g 2 0 1 4 :

D ire c t m a te ria l $ 3 7 0 ,0 0 0
D i r e c t l a b o r ( 2 3 ,0 0 0 h o u r s  $ 6 p e r h o u r ) 1 3 8 ,0 0 0

V a r i a b l e o v e r h e a d ( 2 3 ,0 0 0 h o u r s  $ 6 .2 0 p e r h o u r ) 1 4 2 ,6 0 0

V a ria b le m a n u fa c tu rin g c o sts $ 6 5 0 ,6 0 0

T h e d i r e c t l a b o r r a t e i s ( $ 1 5 0 ,0 0 0 ÷ 2 5 ,0 0 0 h o u r s ) o r $ 6 .0 0 p e r h o u r . T h e v a r i a b l e
o v e r h e a d r a t e i s ( $ 1 5 5 ,0 0 0 ÷ 2 5 ,0 0 0 h o u r s ) o r $ 6 .2 0 p e r h o u r .

V a ria b le w o rk in p ro c e ss in v e n to ry a t 1 2 /3 1 /1 4 :
A b so rp tio n w o rk in p ro c e ss in v e n to ry $ 6 4 ,0 0 0

L e s s f i x e d o v e r h e a d ( 2 ,1 0 0 h o u r s  $ 1 ) ( 2 ,1 0 0 )

V a ria b le w o rk in p ro c e ss in v e n to ry $ 6 1 ,9 0 0

V a ria b le fin ish e d g o o d s in v e n to ry a t 1 2 /3 1 /1 4 :

A b so rp tio n fin ish e d g o o d s in v e n to ry $ 1 4 ,0 0 0
L e ss fix e d o v e rh e a d (8 2 0 h o u rs  $ 1 ) (8 2 0 )

V a ria b le fin ish e d g o o d s in v e n to ry $ 1 3 ,1 8 0

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
64 C h ap ter 3

V a ria b le se llin g e x p e n se s = S a le s × 5 % = $ 1 ,0 1 5 ,0 0 0 × 5 % = $ 5 0 ,7 5 0

F ix e d se llin g e x p e n se s:
T o ta l se llin g e x p e n se s $ 9 5 ,0 0 0
L e ss v a ria b le se llin g e x p e n se s ( 5 0 ,7 5 0 )
F ix e d se llin g e x p e n se s $ 4 4 ,2 5 0

b . T h e m a in a d v a n ta g e o f v a ria b le c o stin g is th a t it re v e a ls th e m a rg in a l c o st o f p ro -
d u c tio n . That is, v a ria b le c o stin g fa c ilita te s m a k in g d e c isio n s a b o u t p ric in g ,
c h a n g e s in v o lu m e , a n d c h a n g e s in c o st stru c tu re . V a ria b le c o stin g a lso fa c ilita te s
id e n tific a tio n o f th e b re a k -e v e n p o in t. F u rth e r, v a ria b le c o stin g d o e s n o t le n d it-
se lf to m a n a g e ria l m a n ip u la tio n o f in c o m e . T h e m a jo r d isa d v a n ta g e is th a t v a ria -
b le c o stin g tre a ts fix e d o v e rh e a d a s a p e rio d c o st a n d , th e re fo re , m a y v io la te th e
m a tc h in g p rin c ip le if o n e b e lie v e s fix e d m a n u fa c tu rin g o v erh ead is a p ro d u c t
c o st.

5 0 . a . In c re a sin g p ro d u c tio n , re la tiv e to sa le s o r re la tiv e to p rio r p la n s, h a s th e e ffe c t o f

m o v in g fix e d m a n u fa c tu rin g o v e rh e a d fro m th e in c o m e sta te m e n t to th e b a la n c e
sh e e t. B y p ro d u c in g su b sta n tia lly m o re u n its th a n a re re q u ire d to m e e t sa le s d e -
m a n d , a sig n ific a n t p o rtio n o f th e fix e d m a n u fa c tu rin g o v e rh e a d c o st in c u rre d c a n
b e p u t in to in v e n to ry a n d th e re su lt is a lo w e r C o st o f G o o d s S o ld th a n w o u ld
o th e rw ise b e re p o rte d .

b . B e c a u se th e in c re a se in p ro d u c tio n is n o t m a tc h e d b y a n in c re a se in sa le s, fin -
ish e d g o o d s, a n d p e rh a p s in p ro c e ss, in v e n to rie s w o u ld in c re a se . A lso , th e c o sts
o f m a n u fa c tu rin g w o u ld rise a s p ro d u c tio n in c re a se s. T h e risin g c o sts c o u ld b e
re a liz e d in th e fo rm o f h ig h e r a c c o u n ts p a y a b le b a la n c e s, lo w e r c a sh b a la n c e s, o r
h ig h e r lo a n b a la n c e s. A ssu m in g th e firm o p e ra te s w ith in its re le v a n t ra n g e , o n ly
th e to ta l v a ria b le c o sts o f p ro d u c tio n w o u ld in c re a se w ith in c re a se s in p ro d u c tio n .
T h e to ta l a m o u n t o f fix e d m a n u fa c tu rin g o v e rh e a d in c u rre d w o u ld n o t b e a ffe c te d
b y th e d e c isio n to in c re a se p ro d u c tio n .

c . T h e C F O ’ s p l a n i s n o t e t h i c a l . T h e i n t e n t o f t h e i n c r e a s e i n p r o d u c t i o n i s t o d i s t o rt
th e re p o rte d p ro fit e a rn e d by th e firm . B y re p o rtin g a h ig h e r p ro fit, th e C F O
w o u ld lik e ly p e rso n a lly b e n e fit th ro u g h b o n u s c o m p e n sa tio n a n d , p e rh a p s, sto c k
o p tio n s.

d . T h e e ffe c ts o f th e C F O ’s p la n sh o u ld b e d e te c tib le b y a n a ly z in g th e fin a n c ia l

sta te m e n ts. T h e e ffe c ts to id e n tify a re d e sc rib e d in th e a n sw e r to (b ). O f a ll th e e f-
fe c ts o f th e p la n , th e rise in in v e n to ry le v e ls is lik e ly th e m o st p ro m in e n t fla g .

51. a. T o m m ’s T ’s
In c o m e S ta te m e n t (V a ria b le )
F o r th e Y e a r E n d e d D e c e m b e r 3 1 , 2 0 1 3

S a l e s ( 4 0 ,0 0 0  $ 2 2 ) $ 8 8 0 ,0 0 0

V a r i a b l e c o s t o f g o o d s s o l d ( 4 0 ,0 0 0  $ 8 .2 5 ) ( 3 3 0 ,0 0 0 )

C o n trib u tio n m a rg in $ 5 5 0 ,0 0 0
F ix e d c o sts:
P ro d u c tio n $ 1 2 0 ,0 0 0
S e llin g & a d m in istra tiv e 1 3 0 ,0 0 0 ( 2 5 0 ,0 0 0 )
In c o m e b e fo re ta x e s $ 3 0 0 ,0 0 0

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
C h ap ter 3 65

b. T o m m ’s T ’s
In c o m e S ta te m e n t (A b so rp tio n )
F o r th e Y e a r E n d e d D e c e m b e r 3 1 , 2 0 1 3

S a l e s ( 4 0 ,0 0 0  $ 2 2 ) $ 8 8 0 ,0 0 0

C o s t o f g o o d s s o l d ( 4 0 ,0 0 0  $ 1 0 .2 5 ) $ 4 1 0 ,0 0 0
U n d e ra p p lie d fix e d o v e rh e a d * 2 4 ,0 0 0 ( 4 3 4 ,0 0 0 )
G ro ss m a rg in $ 4 4 6 ,0 0 0
L e s s s e l l i n g a n d a d m i n i s t r a t iv e c o s t s ( 1 3 0 ,0 0 0 )
In c o m e b e fo re ta x e s $ 3 1 6 ,0 0 0

N u m b e r o f u n i t s i n e n d i n g F G i n v e n t o r y = 4 ,0 0 0 + 4 8 ,0 0 0 – 4 0 ,0 0 0 = 1 2 ,0 0 0
F O H : $ 1 2 0 ,0 0 0 ÷ 6 0 ,0 0 0 = $ 2 .0 0 p e r u n i t

U n d e r a p p l i e d F O H = $ 2 .0 0  ( 6 0 ,0 0 0 – 4 8 ,0 0 0 ) = $ 2 .0 0  1 2 ,0 0 0 = $ 2 4 ,0 0 0

c . I n v e n t o r y i n c r e a s e d f r o m 4 ,0 0 0 t o 1 2 ,0 0 0 u n i t s o r b y 8 ,0 0 0 u n i t s . E a c h a d d e d u n i t
a b s o r b s $ 2 .0 0 i n a l l o c a t e d f i x e d o v e r h e a d o r a t o t a l o f $ 1 6 ,0 0 0 . T h e p r e s u m p t i o n
in th e p ro b le m is th a t th e b o o k s a re m a in ta in e d o n a v a ria b le c o stin g b a sis. A s-
su m in g o n ly th e c u rre n t y e a r n e e d s to b e a d ju ste d (th e b e g in n in g in v e n to ry o f
2 0 1 3 w a s c h a rg e d w ith th e a p p ro p ria te fix e d o v e rh e a d ), th e n th e e n try w o u ld b e :

I n v e n t o r y ( 8 ,0 0 0 × $ 2 .0 0 ) 1 6 ,0 0 0
C o s t o f G o o d s S o l d ( 4 0 ,0 0 0 × $ 2 .0 0 ) 8 0 ,0 0 0
U n d e ra p p lie d O v e rh e a d 2 4 ,0 0 0
F ix e d F a c to ry O v e rh e a d 1 2 0 ,0 0 0

d . A d v a n ta g e s:

 T h e fix e d c o sts a re re p o rte d a t in c u rre d v a lu e s (a n d n o t a p p lie d ), th u s in -

c re a sin g th e lik e lih o o d o f b e tte r c o n tro l o f th o se c o sts.

 P ro fits a re d ire c tly in flu e n c e d b y c h a n g e s in sa le s v o lu m e (a n d n o t in flu -

e n c e d b y b u ild in g in v e n to ry ).
 T h e im p a c t o f fix e d c o sts o n p ro fits is e m p h a siz e d .

 P r o d u c t l i n e , t e r r i t o r y , e t c ., m a r g i n a l c o n t r i b u t i o n i s e m p h a s i z e d a n d m o r e
re a d ily a sc e rta in a b le .

D isa d v a n ta g e s:

 T o ta l c o sts m a y b e o v e rlo o k e d w h e n c o n sid e rin g p ro b le m s.

 D istin c tio n b e tw e e n fix e d a n d v a ria b le c o st is a rb itra ry fo r m a n y c o sts.

 E m p h a sis o n v a ria b le c o st m a y c a u se m a n a g e rs to ig n o re fix e d c o sts.

e . A d v a n ta g e s:

 S ta te m e n ts w o u ld re a d ily re fle c t th e d ire c t im p a c t o f sa le s v o lu m e o n p ro fits.

 T h e c o n se q u e n c e s o f fix e d c o sts w o u ld b e m o re o b v io u s.

 In v e n to ry sw in g s w o u ld n o t in flu e n c e p ro fits.

D isa d v a n ta g e s:

 C o sts a re n o t m a tc h e d w ith re v e n u e s.
 T h e d iffic u lty in se p a ra tin g fix e d a n d v a ria b le c o sts m ig h t c a u se sta te m e n ts
to b e m isle a d in g .

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .
66 C h ap ter 3

 S ta te m e n ts w o u ld c o n fu se in v e sto rs u se d to a b so rp tio n c o stin g sta te m e n ts.

 C o n fid e n tia l in fo rm a tio n (o n th e n a tu re o f c o sts) c o u ld b e d isc lo se d to c o m -
p e tito rs.
(C M A a d a p te d )

2
52. a. x y xy x
10 $ 8 ,0 0 0 $ 8 0 ,0 0 0 100

14 9 ,2 0 0 1 2 8 ,8 0 0 196
22 1 2 ,0 0 0 2 6 4 ,0 0 0 484
28 1 4 ,2 0 0 3 9 7 ,6 0 0 784
40 1 8 ,5 0 0 7 4 0 ,0 0 0 1 ,6 0 0
62 2 8 ,0 0 0 1 ,7 3 6 ,0 0 0 3 ,8 4 4
100 3 4 ,0 0 0 3 ,4 0 0 ,0 0 0 1 0 ,0 0 0
90 3 0 ,0 0 0 2 ,7 0 0 ,0 0 0 8 ,1 0 0
80 2 4 ,0 0 0 1 ,9 2 0 ,0 0 0 6 ,4 0 0

446 $ 1 7 7 ,9 0 0 $ 1 1 ,3 6 6 ,4 0 0 3 1 ,5 0 8

y $ 6 ,3 2 7 + $ 2 7 1 .1 8 (# o f c h a rte rs )

2
b. x y xy x
$ 1 2 ,0 0 0 $ 8 ,0 0 0 $ 9 6 ,0 0 0 ,0 0 0 1 4 4 ,0 0 0 ,0 0 0
1 8 ,0 0 0 9 ,2 0 0 1 6 5 ,6 0 0 ,0 0 0 3 2 4 ,0 0 0 ,0 0 0
2 6 ,0 0 0 1 2 ,0 0 0 3 1 2 ,0 0 0 ,0 0 0 6 7 6 ,0 0 0 ,0 0 0
3 6 ,0 0 0 1 4 ,2 0 0 5 1 1 ,2 0 0 ,0 0 0 1 ,2 9 6 ,0 0 0 ,0 0 0
6 0 ,0 0 0 1 8 ,5 0 0 1 ,1 1 0 ,0 0 0 ,0 0 0 3 ,6 0 0 ,0 0 0 ,0 0 0
8 2 ,0 0 0 2 8 ,0 0 0 2 ,2 9 6 ,0 0 0 ,0 0 0 6 ,7 2 4 ,0 0 0 ,0 0 0
1 2 0 ,0 0 0 3 4 ,0 0 0 4 ,0 8 0 ,0 0 0 ,0 0 0 1 4 ,4 0 0 ,0 0 0 ,0 0 0
1 0 0 ,0 0 0 3 0 ,0 0 0 3 ,0 0 0 ,0 0 0 ,0 0 0 1 0 ,0 0 0 ,0 0 0 ,0 0 0
9 6 ,0 0 0 2 4 ,0 0 0 2 ,3 0 4 ,0 0 0 ,0 0 0 9 ,2 1 6 ,0 0 0 ,0 0 0
$ 5 5 0 ,0 0 0 $ 1 7 7 ,9 0 0 $ 1 3 ,8 7 4 ,8 0 0 ,0 0 0 4 6 ,3 8 0 ,0 0 0 ,0 0 0

y $ 5 ,4 0 5 .5 6 + $ 0 .2 3 5 (g ro s s re c e ip ts )

© 2 0 1 3 C e n g a g e L e a rn i n g . A l l R i g h t s R e s e rv e d . M a y n o t b e s c a n n e d , c o p i e d , d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y

a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a rt .