Chapter 3

# Above and below the line equal numbers of points

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 3-23 Analyze a mixed cost using the high-low method. 3-24 High-Low Method Step #2 Using the high and low points, calculate the variable rate. Cost at the high point – Cost at Variable rate = the low point High point output – Low point output 24 3-25 High-Low Method Step #3 Calculate the fixed cost using the variable rate and either the high point or the low point. Total cost at (Variable rate x Output Fixed Cost = high point at high point) Or Low Point 25 3-26 The High-Low Method – An Example Assume the following hours of maintenance work and the total maintenance costs for six months. 3-27 The High-Low Method – An Example The variable cost The per hour of per maintenance is equal to the change in cost divided by the change in hours. the \$2,400 = \$6.00/hour \$6.00/hour 400 3-28 The High-Low Method – An Example Total Fixed Cost = Total Cost – Total Variable Cost Total Fixed Cost = \$9,800 – (\$6/hour × 850 hours) Total 850 Total Fixed Cost = \$9,800 – \$5,100 Total Fixed Cost = \$4,700 Total \$4,700 3-29 The High-Low Method – An Example The Cost Equation for Maintenance Y = \$4,700 + \$6.00X 3-30 Quick Check Quick Sales salaries and commissions are \$10,000 when Sales salaries and commissions are \$10,000 when 80,000 units are sold, and \$14,000 when 120,000 80,000 units are sold, and \$14,000 when 120,000 units are sold. Using the high-low method, what is the units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? variable portion of sales salaries and commission? a. \$0.08 per unit a. \$0.08 per unit b.. \$0.10 per unit b \$0.10 per unit c.. \$0.12 per unit c \$0.12 per unit d. \$0.125 per unit d. \$0.125 per unit 3-31 \$14,000 - \$10,000 / 120,000 – 80,000 = \$.10 Per unit 3-32 Quick Check Quick Sales salaries and commissions are \$10,000 when Sales salaries and commissions are \$10,000 when 80,000 units are sold, and \$14,000 when 120,000 80,000 units are sold, and \$14,000 when 120,000 units are sold. Using the high-low method, what is units are sold. Using the high-low method, what is tthe ffixed portion of sales salaries and commissions? he ixed portion of sales salaries and commissions? a.. \$ 2,000 a \$ 2,000 b. \$ 4,000 b. \$ 4,000 c.. \$10,000 c \$10,000 d. \$12,000 d. \$12,000 3-33 \$14,000 = A + \$.10 (120,000) A = \$14,000 - \$12,000 A = \$2,000 3-34 Page 102, Exercise 3-3 Page 104, Exercise 3-8 3-35 Page 104, Exercise 3-8 3-36 Prepare an income statement using the contribution format. 3-37 The Contribution Format The Let’s put our knowledge of cost behavior to work by preparing a contribution format income statement. 3-38 The Contribution Format Sales Revenue Less: Variable costs Contribution margin Total \$ 100,000 60,000 \$ 40,000 Less: Fixed costs Net operating income Unit \$ 50 30 \$ 20 30,000 \$ 10,000 The contribution margin format emphasizes cost The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs behavior. Contribution margin covers fixed costs and provides for income. and provides for income. 3-39 Uses of the Contribution Format The contribution income statement format is used The contribution income statement format is used as an internal planning and decision-making tool. as an internal planning and decision-making tool. We will use this approach for: We will use this approach for: 1.Cost-volume-profit analysis. 1.Cost-volume-profit analysis. 2.Budgeting. 2.Budgeting. 3.Segmented reporting of profit data. 3.Segmented reporting of profit data. 4.Special decisions such as pricing and make-or4.Special decisions such as pricing and make-orbuy analysis. buy analysis. 3-40 The Contribution Format Comparison of the Contribution Income Statement w ith the Traditional Income Statement Traditional Approach (costs organized by function ) Contribution Approach (costs organized by behavior ) Sales \$ 100,000 Less cost of goods sold 70,000 Gross margin \$ 30,000 Less operating expenses 20,000 Net operating income \$ 10,000 Sales \$ 100,000 Less variable expenses 60,000 Contribution margin \$ 40,000 Less fixed expenses 30,000 Net operating income \$ 10,000 Used primarily for Used external reporting. Used primarily by management. 3-41 Page 102, Exercise 3-4...
View Full Document

Ask a homework question - tutors are online