Introduction to Managerial Accounting Chapter 3 Solutions Essay

707 Words Jan 28th, 2016 3 Pages
Problem 3-1 (LO2 CC10, 11) (30 minutes) 1. a) Change in cost: Monthly operating costs at 90% occupancy (high level of activity):
450 beds × 90% = 405 beds;
405 beds × 30 days × $29 per bed-day | $352,350 | Monthly operating costs at 60% occupancy (low level, given) | 326,700 | Change in cost | $ 25,650 |

Change in activity: | | 90% occupancy (450 beds × 90% × 30 days) | 12,150 | 60% occupancy (450 beds × 60% × 30 days) | 8,100 | Change in activity | 4,050 |

| b) | Monthly operating costs at 90% occupancy (above) | $352,350 | | | Less variable costs
405 beds × 30 days × $6.333 per bed-day | 76,950 | | | Fixed operating costs per month | $275,400 |

2. | 450 beds × 70% = 315 beds
…show more content…
| 9 | b. | 6 | d. | 1 | f. | 10 | h. | 7 | | |

2. Without knowledge of the underlying cost behaviour patterns, it would be difficult if not impossible for a manager to properly analyze the firm’s cost structure. The reason is that all costs don’t behave in the same way. One cost might move in one direction as a result of a particular action, and another cost might move in an opposite direction. Unless the behaviour pattern of each cost is clearly understood, the impact of a firm’s activities on its costs will not be known until after the activity has occurred.

Problem 3-9 (LO2 CC10, 11, 12, 13, 14) (90 minutes)

1. High-low estimate using production units:
Production Overhead
(Units) Costs
Highest (month 8) 105,000 $ 2,056,000
Lowest (month 6) 50,000 $ 1,825,000

Variable cost estimate =
Cost at highest activity - Cost at lowest activity
Highest activity - Lowest activity

= $2,056,000 - $1,825,000 105,000 units - 50,000 units

= $231,000 55,000 units
= $4.20 per unit

Fixed costs = Total costs – Variable costs
= $2,056,000 – ($4.20 × 105,000 units)
= $2,056,000 – $441,000
= $1,615,000
Or
= $1,825,000 – ($4.20 × 50,000 units)
= $1,825,000 – $210,000
= $1,615,000

The cost equation then is:

Overhead costs = $1,615,000 + $4.20X (where X is the number of units produced).

For 100,000 units:
Overhead costs = $1,615,000 + ($4.20 × 100,000 units)
= $1,615,000 + $420,000
= $2,035,000

Problem 3-9

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