Lecture 03 Managerial Accounting ❸ Income statement

To be more specific, service companies are outside the scope of our coverage because they were covered in
the previous term, and there is no problem with them as long as there is no inventory in the company.

What is the purpose of the income statement?

Determine the result of the company's operations.
How?
By matching the revenues with related expenses which helped in achieving these revenues during the period.

Revenues XX sales = number of units sold x selling price

(-) Expenses (XX) This is the problem

Net Income XX

The problem is related to expenses (which are costs that have benefited in the current period), so:

Classification of costs according to their behavior (variable/fixed) is important to the manager to enable them to plan,
but this information cannot be disclosed to external users.

Therefore, the income statement can be prepared according to one of two approaches:

Managerial accounting approach

Based on functional classification Based on cost behavior

sales XX sales XX
(-) COGS (XX) (-) TVC (XX)
Gross margin XX TCM XX
(-) S & A costs (XX) (-) TFC (XX)
NOI XX NOI XX
COGS: Cost Of Goods Sold. TVC: Total Variable Cost
S & A costs: Selling & Administrative costs. TCM: Total Contribution Margin
NOI: Net Operating Income. TFC: Total Fixed Cost.

Also Also
called called

Traditional format Contribution margin format

 Lecture 03 Managerial Accounting ❸ Income statement

Traditional format

Net sales XX
(-) COGS (XX)
Gross margin XX
(-) S & A costs (XX)
NOI XX

The problem here is how to calculate COGS, it depends on inventory types in the company.

In general, any inventory has two balances (Beg. & End.), we will apply the following rule for any inventory:

We will apply this rule in:

Will be discussed in third year

Which has only one type of inventory: Which has 3 types of inventories:
Net purchases of goods XX Net purchases of material XX
+ Beg. Inv. XX + Beg. Material Inv. XX
(-) End. Inv. (XX) (-) End. Material Inv. (XX)
COGS XX Direct material used XX
Note that: + Direct labor XX
• Net purchases = Purchases + Fright in – purchases R & A – purchases discount. + MOH XX
• COGS here is a variable cost. TMC (Total Manufacturing Cost) XX
+ Beg. WIP XX
(-) End. WIP (XX)
COGM (Cost Of Goods Manufactured) XX
If you opened store to sell mobile phones, and you have 10 mobiles at the beginning
of current month. During this month you purchased 60 mobile. So, until now you + Beg. FG XX
have 70 mobiles available for sale. if the ending balance of mobiles were 20 (-) End. FG (XX)
mobiles. So, you have sold 50 mobiles (70 – 20).
COGS XX
You add Beg. To calculate the available goods for sale, then subtract End. to
calculate COGS. COGS here is a mixed cost (because of MOH).

Here we assume that all production cost either variable or fixed cost are allocated for the product, this assumption
will discuss in detail in cost accounting (third year).
 Lecture 03 Managerial Accounting ❸ Income statement

Contribution margin format

To help management in doing their activities, managerial accountant reprepare income statement according to cost behavior.

abbreviations Sales (# sold × SP) XX

Total Variable Cost. (-) TVC (# sold × VC) (XX) All variable costs either is manufacturing or not.
Total Contribution Margin TCM XX
Total Fixed Cost (-) TFC (XX) All fixed costs either is manufacturing or not.
Net Operating Income NOI XX NOI = TCM – TFC

Note that we will use the following abbreviations:

# SP VC CM
Number of units Selling Price per unit Variable Cost per unit Contribution Margin per unit

Notice: the cost here includes all kinds of costs, direct/indirect & manufacturing/nonmanufacturing,
provided that all these costs are classified into variable cost per unit & total fixed cost.

Example (1)
Mostafa manufacturing company reported the following financial data (numbers are in thousands):
Sales $
460
Variable production cost $
84 Fixed production cost $
100
Variable selling cost $
12 Fixed selling cost $
47
Variable administrative cost $
33 Fixed administrative cost $
132
Assuming that there isn’t any inventory, and all production was sold.
Required: Prepare an income statement in good form using the (a) traditional approach (b) contribution approach.

Preparing data: Preparing data:

1- COGS = all production cost (V + F) = 84 + 100 = 184 1- TVC = all variable cost (P, S, & A) = 84 + 12 + 33 = 129
2- S & A cost = all S & A (V + F) = 12 + 47 + 33 + 132 = 224 2- TFC = all fixed cost (P, S, & A) = 100 + 47 + 132 = 279
sales 460 sales 460
(-) COGS (184) (-) TVC (129)
Gross margin 276 The difference is here TCM 331
(-) S & A costs (224) (-) TFC (279)
NOI 52 NOI 52
Gross margin is inaccurate result, since it depends upon the TCM is more accurate, since it yields a better view of how much
fixed cost allocation methodology. money a business earns from its sales, which can then be used
to cover fixed costs and generate a profit.
 Lecture 03 Managerial Accounting ❸ Income statement

Example (2)
Mostafa Shop, Inc., is a large retailer of shoes. The company assembled the information shown below for the
quarter ended May 31 (numbers are in thousands):
Sales (2 units) $
800 Selling price per unit $
400
Variable selling cost per unit $
50 Total fixes selling cost $
150
Variable administrative cost per unit $
20 Total fixes administrative cost $
120
If you know that net purchases were $320, and inventory balances were as follows:
Beg. End.
Merchandise inventory $
80 $
100
Required: Prepare an income statement in good form using the (a) traditional approach (b) contribution approach.

Preparing data: Preparing data:

1- COGS = Purchases + Beg. – End. = 320 + 80 – 100 = 300 1- TVC = COGS + V (S & A) = 300 + (2 x 70) = 440
2- S & A cost = all S & A (V + F) = (2 x 70) + 150 + 120 = 410 2- TFC = all fixed cost (S, & A) = 150 + 120 = 270
Sales (2 x 400) 800 Sales (2 x 400) 800
(-) COGS (300) (-) TVC (440)
Gross margin 500 The difference is here TCM 360
(-) S & A costs (410) (-) TFC (270)
NOI 90 NOI 90

Example (3)
Mostafa Company has decided to use a contribution format income statement for internal planning purposes. The
company has analysed its costs and has developed the following cost formulas (numbers are in thousands):
Cost Cost formula
COGS $
20 per unit sold
Advertising cost $
170 per quarter
Sales commission 5% of sales
Administrative salaries $
80 per quarter
Shipping cost ?
Depreciation cost $
50 per quarter
Management has concluded that shipping cost is a mixed cost, containing both variable and fixed cost elements.
Units sold and the related shipping cost over the last eight quarters are given below:
Quarters for 1st year Units sold Shipping cost Quarters for 2nd year Units sold Shipping cost
First 16 units $
160 First 17 units $
170
Second 18 units $
175 Second 20 units $
185
Third 23 units $
217 Third 25 units $
232
Fourth 19 units $
180 Fourth 22 units $
208
Management would like a cost formula derived for shipping expense so that a budgeted contribution format
income statement can be prepared for the next quarter.
Required: 1. Using the high-low method, estimate a cost formula for shipping cost.
2. In the first quarter of 3rd Year, the company plans to sell 21 units at a selling price of $50 per unit. Prepare a
contribution format income statement for the quarter.

1- High-Low method
232 - 160 72 $
1- VC = = = 8/unit
25 - 16 9
$
2- TFC = 232 – (25 × 8) = 32
Total shipping cost = 32 + 8 X
 Lecture 03 Managerial Accounting ❸ Income statement

2- Contribution format income statement

Preparing data:
1- TVC = COGS + V shipping + sales commission = (21 units x 20) + (21 units x 8) + (21 units x 50 x 5%) = 420 + 168 + 52.5 = 640.5
2- TFC = all fixed cost = 170 (Advertising cost) + 80 (Administrative salaries) + 50 (Depreciation cost) + 32 (shipping fixed cost) = 332
Sales (21 x 50) 1,050
(-) TVC (640.5)
TCM 409.5
(-) TFC (332)
NOI 77.5

Example (4)
Mostafa Manufacturing produces metal picture frames. The company's income statements for the last two years
are given below (numbers are in thousands):
Last year This year
Number of units sold 50 units 70 units
Sales 800 1,120
(-) COGS (550) (710)
Gross margin 250 410
(-) S & A costs (150) (190)
NOI 100 220
Required: 1- Estimate the company's total variable cost per unit and its total fixed costs per year.
2- Compute the company's contribution margin for this year.

1- Estimate the company's total variable cost per unit and its total fixed costs per year.

We have two volumes 70 units is high, & 50 units is low. So, we should calculate total cost @ each volume to apply High-
Low method as follows:
• Total cost @ 70 units = COGS + S & A costs = 710 + 190 = 900
• Total cost @ 50 units = COGS + S & A costs = 550 + 150 = 700
900 - 700 200
1- VC = = = $10/unit
70 - 50 20
2- TFC = 900 – (70 × 10) = $200
Y = 200 + 10 X
2- Compute the company's contribution margin for this year.
This year we sold 70 units, so:
TVC = 10 x 70 = 700
Sales 1,120
(-) TVC (700)
TCM 420
 Lecture 03 Managerial Accounting ❸ Income statement

EXERCISE 2–1
Your Boat, Inc., assembles custom sailboats from components supplied by various manufacturers.
The company is very small and its assembly shop and retail sales store are housed in a Gig Harbor,
Washington, boathouse. Below are listed some of the costs that are incurred at the company.
Required:
For each cost, indicate whether it would most likely be classified as direct labor, direct materials,
manufacturing overhead, selling, or an administrative cost.

Solution
1. The wages of employees who build the sailboats. direct labour cost.
2. The cost of advertising in the local newspapers marketing and selling cost.
3. The cost of an aluminum mast installed in a sailboat. direct materials cost.
4. The wages of the assembly shop’s supervisor. manufacturing overhead cost.
5. Rent on the boathouse. a combination of manufacturing overhead,
administrative, and marketing and selling cost.
The rent would most likely be prorated on the
basis of the amount of space occupied by
manufacturing, administrative, and marketing
operations.
6. The wages of the company’s bookkeeper. administrative cost.
7. Sales commissions paid to the company’s salespeople. marketing and selling cost.
8. Depreciation on power tools. manufacturing overhead cost.
EXERCISE 2–3
Koffee Express operates a number of espresso coffee stands in busy suburban malls. The fixed
weekly expense of a coffee stand is $1,100 and the variable cost per cup of coffee served is $0.26.
Required:
1. Fill in the following table with your estimates of total costs and average cost per cup of coffee
at the indicated levels of activity for a coffee stand. Round off the cost of a cup of coffee to the
nearest tenth of a cent.
Cups of Coffee Served in a Week
1,800 1,900 2,000
Fixed cost ? ? ?
Variable cost ? ? ?
Total cost ? ? ?
Average cost per cup of coffee served ? ? ?
2. Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups
of coffee served in a week increases? Explain.

Solution
Cups of Coffee Served in a Week
1,800 1,900 2,000
Fixed cost $1,100 $1,100 $1,100 ÷
Variable cost (= number of cups × 0.26) 468 494 520
Total cost $1,568 $1,594 $1,620
Average cost per cup of coffee served $0.871 $0.839 $0.810
Note
FC still constant =1,100
Average cost per cup= Total cost ÷ cups of coffee served in a week
2. The average cost of a cup of coffee declines as the number of cups of coffee served increases
because the fixed cost is spread over more cups of coffee.
 Lecture 03 Managerial Accounting ❸ Income statement

EXERCISE 2–5
Redhawk, Inc., is a merchandiser that provided the following information:
Number of units sold 10,000 Total fixed administrative expenses $15,000
Selling price per unit $15 Merchandise inventory, beginning balance $12,000
Variable selling expense per unit $2 Merchandise inventory, ending balance $22,000
Variable administrative cost $1 Merchandise purchases $90,000
Variable administrative expense per unit $20,000
Total fixed selling expense
Required: Prepare an income statement in good form using the (a) traditional approach (b) contribution approach.

Traditional approach Contribution approach

Preparing data: Preparing data:
1- COGS = Purchases + Beg. – End. = 12 + 90 – 22 = 80,000 1- TVC = COGS + V (S & A) = 80,000 + (2 x 10,000) +
2- S cost = all S (V + F) = (2 x 10,000) + 150 + 20,000 = 40,000 (1 x 10,000) = 110,000
& A cost = all A (V + F) = (1 x 10,000) + 15,000 = 25,0000 2- TFC = all fixed cost (S, & A) = 20,000 + 15,000 = 35,000
Sales (15 x 10,00) 150,000
(-) COGS (80,000) The difference is here Sales (15 x 10,00) 150,000
(-) TVC (110,000)
Gross margin 70,000
(-) S A costs (40,000) TCM 40,000
(-) A costs (25,000) (-) TFC (35,000)
NOI 5,000 NOI 5,000
EXERCISE 2–13
The number of X-rays taken and X-ray costs over the last nine months in Beverly Hospital are
given below:
Month X-Rays Taken X-Ray Costs
$
January 6,250 28,000
February 7,000 $29,000
March 5,000 $23,000
April 4,250 $20,000
May 4,500 $22,000
June 3,000 $17,000
July 3,750 $18,000
August 5,500 $24,000
September 5,750 $26,000
Required:
1. Using the high-low method, estimate the cost formula for X-ray costs.
2. Using the cost formula you derived above, what X-ray costs would you expect to be incurred
during a month in which 4,600 X-rays are taken?

Solution
X-rays Taken X-ray Costs
High activity level (February) 7,000 $29,000
Low activity level (June) 3,000 17,000
Change 4,000 $12,000

29,000 - 17,000 12,000 $

1- VC = = = 3/ X-ray
7,000 - 3,000 4,000
2- TFC = 29,000 – (7,000 × 3) = $8,000
Y = 8,000 + 3 X
Expected X-ray costs when 4,600 X-rays are taken = 8,000 + (3 × 4,600) = 8,000 + 13,800 = 21,800
 Lecture 03 Managerial Accounting ❸ Income statement

PROBLEM 2–14
House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the
retail level. The organs sell, on the average, for $2,500 each. The average cost of an organ from the
manufacturer is $1,500. The costs that the company incurs in a typical month are presented below:
During November, the company sold and delivered 60 organs.
Costs Cost Formula
Selling:
Advertising $950 per month
Delivery of organs 60 per organ sold
Sales salaries and commissions $4,800 per month, plus 4% of sales
Utilities $650 per month
Depreciation of sales facilities $5,000 per month
Administrative:
Costs Cost Formula
Executive salaries $13,500 per month
Depreciation of office equipment $900 per month
Clerical 500 per month, plus $40 per organ sold
Insurance $700 per month
Required:
1. Prepare a traditional income statement for November.
2. Prepare a contribution format income statement for November. Show costs and revenues on
both a total and a per unit basis down through contribution margin.
3. Refer to the income statement you prepared in (2) above. Why might it be misleading to show the fixed costs
on a per unit basis?

Traditional approach Contribution approach

Preparing data: Preparing data:
1- COGS = # units x COGS /U. = 60 x 1,500 = 90,000 1- TVC = COGS + V (S & A) = 90,000 + (60 x 1,500)
2- S cost = all S (V + F) = 950 + (60 x 60) + (4,800 + 4% x + (60 x 60) + (4% x 150,000) +(60 x40) = 102,000
150,000 +650 +5,000 = 21,000 2- TFC = all fixed cost (S, & A) = 950+ 4,80+650+5,000+
& A cost = all A (V + F) = 13,500 +900 + (2,500 + 60 x 40) +700 13,500 +900 +2,500 +700 = 29,000
= 20,000
Sales (60 x 2,500 150,000 Sales (15 x 2500) 150,000
(-) COGS (90,000) (-) TVC (102,000)
Gross margin TCM
60,000 The difference is here 48,000
(-) S A costs (21,000) (-) TFC (29,000)
(-) A costs (20,000) NOI 19,000
NOI 19,000

3- Fixed costs remain constant in total but vary on a per unit basis with changes in the activity level. For example,
as the activity level increases, fixed costs decrease on a per unit basis. Showing fixed costs on a per unit basis on
the income statement make them appear to be variable costs. That is, management might be misled into thinking
that the per unit fixed costs would be the same regardless of how many organs were sold during the month. For
this reason, fixed costs should be shown only in totals on a contribution-type income statement.
 Lecture 03 Managerial Accounting ❸ Income statement

PROBLEM 2–21
Golden Company’s total overhead cost at various levels of activity are presented below:
Month Month Machine-Hours Total Overhead Cost
March 50,000 $194,000
April 40,000 $170,200
May 60,000 $217,800
June 70,000 $241,600
Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance.
The breakdown of these costs at the 40,000 machine-hour level of activity is as follows:
Utilities (variable) $ 52,000
Supervisory salaries (fixed) 60,000
Maintenance (mixed) 58,200
Total overhead cost $170,200
The company wants to break down the maintenance cost into its variable and fixed cost elements.
Required:
1. Estimate how much of the $241,600 of overhead cost in June was maintenance cost.
(Hint: To do this, it may be helpful to first determine how much of the $241,600 consisted of utilities. and supervisory salaries.
Think about the behaviour of variable and fixed costs within the relevant range.)
2. Using the high-low method, estimate a cost formula for maintenance.
3. Express the company’s total overhead cost in the form Y = a + bX.
4. What total overhead cost would you expect to be incurred at an activity level of 45,000
machine-hours?

Solution
1- when 40,000 machine-hour level of activity Utilities (variable) = 52,000 So
$52,000
The variable cost per unit = = $1.3 per hour
40,000 hour
40,000 MH 70,000 MH
$
V.C Utilities cost = ( # x1.30 per MH) 52,000 91,000
$
F.C Supervisory salaries 60,000 60,000
$
Mixed cost 20,000 90,000
$
Total cost 170,200 241,600
Maintenance
2- Machine-Hours Cost
High activity level
70,000 $90,600
Low activity level
40,000 58,200
Change 30,000 $32,400
90,600 - 58,200 32,400 $
1- VC = = = 1,08 MH
70,000 - 40,000 30,000
2- TFC = 90,000 – (7,000 × 1,08) = $15,000
So Maintenance Cost Y = 15,000 + 1,08 X
3-

a b
F V /MH
Maintenance cost $15,000 $1.08
Utilities cost 1.30
Supervisory salaries cost 60,000
Total $75,000 $2.38
Y = 75,000 + 2,38 X
TC at an activity level of 45,000 machine-hours = 75,000 + (2,08 x 45,000) = 182,100
 Lecture 03 Managerial Accounting ❸ Income statement

85. Mostafa Manufacturing Company gathered the following data for the month:
Cost of goods sold $
35,000
Sales $
89,000
Selling cost $
16,000
Administrative cost $
21,000
How much NOI will be reported for the period?
a. $54,000 b. $17,000 c. $52,000 d. Cannot be determined
86. In October, Mostafa Corporation had sales of 273,000, selling cost of $26,000, and administrative cost of
$

$
47,000. The cost of goods manufactured was $183,000. The beginning balance in the finished goods inventory
account was $45,000 and the ending balance was $34,000.
The Net Operating income is:
a. $
73,000 b. $
194,000 c. $
79,000 d. $
6,000

(92 – 93) Mostafa Corporation reported the following data for the month of September:
Purchases of direct material $
47,000
Direct labor wages $
36,000
Manufacturing overhead $
67,000
Selling cost $
13,000
Administrative cost $
37,000
92. The conversion cost for September was:
a. $150,000 b. $103,000 c. $117,000 d. $86,000
93. The prime cost for September was:
a. $50,000 b. $83,000 c. $86,000 d. $103,000
98. Mostafa Corporation has provided the following production and total cost data for two levels of
monthly production (The company produces a single product):
Volume 2,000 units 3,000 units
Direct materials $
146,200 $
219,300
Direct labor $
37,200 $
55,800
Manufacturing overhead $
146,600 $
158,100
The best estimate of the total cost to manufacture 2,300 units is closest to:
a) $332,120 b) $379,500 c) $355,810 d) $360,960
99. The following production and average cost data for a month's operations have been supplied by a
company that produces a single product.
Volume 1,000 units 2,000 units
Direct materials 4 per unit
$
4 per unit
$

Direct labor $
3.5 per unit $3.5 per unit
Manufacturing overhead $
10 per unit $
6.2 per unit
The total fixed manufacturing cost and variable manufacturing cost per unit are as follows:
a) $3,600; $7.5 b) $3,600; $9.9 c) $7,600; $7.5 d) $7,600; $9.9
100. A consulting company would like to develop a method of predicting its total costs in a period. The following
past costs have been recorded by the company in two periods:
Number of client-hours 420 hours 515 hours
Total cost $
82,200 $
90,275
The best estimate of the cost formula for the company (where X is the number of client-hours) is:
a) Y = $46,500 + $85 X b) Y = $42,000 + $95 X c) Y = $46,500 - $85 X d) Y = $51,500 - $95 X
101. Mostafa Co. is a wholesaler that sells a single product. Management has provided the following cost data for
two levels of monthly sales volume. The company sells the product for $131 per unit.
Sales volume 4,000 units 5,000 units
COGS $
262,800 $
328,500
S & A costs $
230,400 $
244,500
The best estimate of the total monthly fixed cost is:
a) $174,000 b) $533,100 c) $493,200 d) $573,000
 Lecture 03 Managerial Accounting ❸ Income statement

102. In the Mostafa Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs
were $223,000. Of this amount, utilities were $48,000 (all variable) and depreciation was $60,000 (all fixed). The
balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance
costs were $130,000. Assume that all of the activity levels mentioned in this problem are within the relevant range.
If 110,000 machine hours of activity are projected for next period, total expected overhead cost would be:
a) $256,000 b) $263,500 c) $306,625 d) $242,500
103. The following costs are budgeted for Mostafa Corporation for next year:
Total variable costs $
270,000
Total fixed costs $
630,000
Total costs $
900,000
The costs above are based on a level of activity of 20,000 units. Assuming that this activity is within the relevant
range, what would total cost per unit be for Mostafa if the level of activity was only 18,000 units?
a) $45 b) $46.5 c) $48.5 d) $50
104. Mostafa Manufacturing Company has developed the following overhead cost formulas:
Cost Formula
Depreciation $
500
Set-up $
400 + $0.2 per machine-hour
Lubrication $
50 + $0.25 per machine-hour
Utilities $
0.4 per machine-hour
The total overhead cost expected for the Company if 200 machine hours are worked is:
a) $620 b) $900 c) $170 d) $1,120
105. Mostafa Corporation reports that at an activity level of 9,900 units, its total variable cost is $919,116 and its
total fixed cost is $259,974. What would be the total cost, both fixed and variable, at an activity level of 10,100
units? Assume that this level of activity is within the relevant range.
a) $1,197,658 b) $1,191,000 c) $1,179,090 d) $1,202,910

(106 – 108) Mostafa Company is a merchandising firm. Next month the company expects to sell 800 units. The
following data describe the company's revenue and cost structure:
Selling price per unit $
40
Sales commission 5% of sales
Purchase price (cost) per unit $
18
Advertising cost $
4,000 per month
Administrative expense $
4,500 per month plus 15% of sales
106. The expected gross margin next month is:
a) $17,600 b) $11,200 c) $14,400 d) $16,000
107. The expected contribution margin next month is:
a) $17,600 b) $11,200 c) $14,400 d) $16,000
108. The expected net operating income next month is:
a) $7,500 b) $5,100 c) $1,700 d) $11,200
(109 – 110) At an activity level of 9,000 machine-hours in a month, Mostafa Corporation's total variable
maintenance cost is $390,240 and its total fixed maintenance cost is $368,280.
109. What would be the total variable maintenance cost at an activity level of 9,300 machine-hours in a month?
Assume that this level of activity is within the relevant range.
a) $758,520 b) $403,248 c) $390,240 d) $380,556
110. What would be the average fixed maintenance cost per unit at an activity level of 9,300 units in a month?
Assume that this level of activity is within the relevant range.
a) $40.92 b) $84.28 c) $39.60 d) $54.93

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

96 97 98 99 100 101 102 103 104 105 106 107 108 109 110
 Lecture 03 Managerial Accounting ❸ Income statement

85. NOI = Sales – COGS – S & A costs = 89,000 - 35,000 - 16,000 - 21,000 = 17,000
86. COGS = COGM + Beg. FG – End. FG = 183,000 + 45,000 – 34,000 = 194,000
NOI = Sales – COGS – S & A costs = 273,000 - 194,000 - 26,000 - 47,000 = 6,000
92. Conversion cost = DL + MOH = 36,000 + 67,000 = 103,000
93. Prime cost = DM + DL = 47,000 + 36,000 = 83,000
98. we should apply High-Low method for TMC @ the two levels as follows:
• TMC @ 3,000 units = DM + DL + MOH = 219,300 + 55,800 + 158,100 = 433,200
• TMC @ 2,000 units = DM + DL + MOH = 146,200 + 37,200 + 146,600 = 330,000
433,200 - 330,000 103,200
1- VC = = = $103.2/unit
3,000 - 2,000 1,000
2- TFC = 433,200 – (3,000 × 103.2) = $123,600
Y = 123,600 + 103.2 X So: TMC @ 2,300 units = 123,600 + (103.2 x 2,300) = 360,960
99. we should analyse MOH by High-Low method as follows:
• Total MOH @ 2,000 units = 2,000 x 6.2 = 12,400
• Total MOH @ 1,000 units = 1,000 x 10 = 10,000
12,400 - 10,000 2,400
1- VOH = = = $2.44/unit
2,000 - 1,000 1,000
2- FOH = 12,400 – (2,000 × 2.4) = $7,600
So:
TFC = 7,600 VC per unit = 4 DM + 3.5 DL + 2.4 VOH = 9.9
100. we should apply High-Low method as follows:
90,275 - 82,200 8,075 $
1- VC = = = 85/unit
515 - 420 95
2- TFC = 90,275 – (515 × 85) = $46,500
Y = 46,500 + 85 X
101. we should apply High-Low method for TC @ the two levels as follows:
• TC @ 5,000 units = COGS + S & A costs = 328,500 + 244,500 = 573,000
• TC @ 4,000 units = COGS + S & A costs = 262,800 + 230,400 = 493,200
573,000 - 493,200 79,800 $
1- VC = = = 79.8/unit
5,000 - 4,000 1,000
2- TFC = 573,000 – (5,000 × 79.8) = $174,000
102. we should analyse maintenance cost by High-Low method as follows:
• Maintenance cost @ 100,000 Machine hours = 130,000
• Maintenance cost @ 80,000 Machine hours = 223,000 – 48,000 – 60,000 = 115,000
130,000 - 115,000 15,000
1- VC = = = $0.75/machine hour
100,000 - 80,000 20,000
2- TFC = 130,000 – (100,000 × 0.75) = $55,000
Total VC per unit = from utilities (48,000 / 80,000) = 0.6 + 0.75 from maintenance = $1.35/U
TFC = 60,000 from Dep. + 55,000 from maintenance = 115,000
Y = 115,000 + 1.35 X So, Total MOH @ 110,000 machine hours = 115,000 + (110,000 x 1.35) = 263,500
103. To predict cost we should prepare total cost formula as follows:
270,000 $
1- VC = = 13.5/unit
20,000
2- TFC = 630,000 (given)
Y = 630,000 + 13.5 X
So, Total cost @ 18,000 units = 630,000 + (18,000 x 13.5) = 873,000 Cost per unit = 873,000 / 18,000 = 48.5
 Lecture 03 Managerial Accounting ❸ Income statement

104. To predict total cost we should prepare total cost formula as follows:
Y = TFC + VC X
Dep. = 500 + 0 X
Set-up = 400 + 0.2 X
Lub. = 50 + 0.25 X
Uti. = 0 + 0.4 X
Y = 950 + 0.85 X
So: Total cost @ 200 machine hours = 950 + (200 x 0.85) = 1,120
105. To predict cost we should prepare total cost formula as follows:
919,116
1- VC = = $92.84/unit
9,900
2- TFC = 259,974 (given)
Y = 259,974 + 92.84 X
So, Total cost @ 10,100 units = 259,974 + (10,100 x 92.84) = 1,197,658

106. Gross margin = Sales – COGS = (800 x 40) – (800 x 18) = 32,000 – 14,400 = 17,600
107. TCM = Sales – TVC
TVC = COGS + 5% of sales (Sales commission) + 15% of sales (variable administrative cost)
TVC = 14,400 + (32,000 x 20%) = 20,800
So: TCM = Sales – TVC = 32,000 – 20,800 = 11,200
108. NOI = TCM – TFC = 11,200 – (4,000 + 4,500) = 1,700
109. Variable maintenance cost per unit = 390,240 / 9,000 = $43.36 / machine hour
total variable maintenance cost @ 9,300 MH = 9,300 MH x $43.36 / machine hour = 403,240
110. the average fixed maintenance cost per unit @ 9,300 MH = 368,280 / 9,300 = $39.6 / machine hour

Preparing data: Preparing data:

1- COGS = all production cost (V + F) 1- TVC = all variable cost (P, S, & A)
2- S & A cost = all S & A (V + F) = 2- TFC = all fixed cost (P, S, & A)
sales XX sales XX
(-) COGS (XX) (-) TVC (XX)
Gross margin XX The difference is here TCM XX
(-) S & A costs (XX) (-) TFC (XX)
NOI XX NOI XX