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The "FAR" factory produces one unique products for which it prepares a traditional gross
profit based income statement every month and every quarter. The factory keeps no
inventory and the following are the actual income statement of the first half of 2015 where
the factory produced and sold 3000 units in January, 5000 units in February, 4000 units in
March, 7000 units in April, 6000 units in May and 8000 units in June.
Jan.
Feb.
Mar.
Apr.
May
June
60000
Raw Materials
6000
10000
8000
14000
12000
16000
3000
5000
4000
7000
6000
8000
3000
5000
4000
14000
12000
16000
Quality Inspection
(Relevant range 5000 units)
3000
3000
3000
6000
6000
6000
13000
19000
16000
25000
22000
28000
28000
42000
35000
66000
58000
74000
Gross profit
32000
58000
45000
74000
62000
86000
600
1000
800
1400
1200
1600
14200
14200
14200
14200
14200
14200
30000
30000
30000
30000
30000
30000
44800
45200
45000
45600
18600
45800
(12800)
12800
28400
16600
40200
Sales Revenue
Less: cost of Goods sold:
Required:
1. Identify the behavior of each item of the actual costs of the first half of 2015 on
approximate graphs specifying the relevant cost driver.
2. The factory has plan to produce and sell 10000 units in July. Prepare income statement
for this month based on your data.
Solution
First: Determining the cast behavior for each cost item:
1) Raw material: is variable cost because the cost per unit (cost in each month / No. of
units in this month) is fixed number (2 pounds/ unit).
RW Cost
4000
2000
1000 2000
Units
2) Manufacturing Direct Wag: is variable cost because the cost per unit (cost in each
month / No. of units in this month) is fixed number (1 pound / unit).
RW Cost
2000
1000
1000 2000
Units
3) Incentives for Manufacturing workers: is Semi-variable cost because the cost per unit
(cost in each month / No. of units in this month) was fixed number (1 pound / unit) until
5000 units and changed to a new rate after producing more than 5000 units to (2 pound /
unit) .
IM Cost
2000
1000
Units
1000
2000
4) Quality Inspection: is Step cost because it is fixed until speciation level and jump to
another cost level every relevant range.
IM Cost
6000
3000
Units
5000
10000
5) Other manufacturing overhead: is mixed cost Step cost because it is not fixed cost
( Total is not fixed) and not variable cost ( cost per unit is not fixed number) .
OM Cost
4000
Units
5000
10000
SC Cost
1200
600
60000 120000
Sales prices
14200
Units
1000
2000
8) Other selling and administrative Expenses: is Fixed cost because it is fixed because it
is fixed cost for levels of productions.
OSA Cost
30000
Units
1000
2000
200000
20000
10000
20000
6000
34000
90000
110000
2000
14200
30000
44200
65800