Income Statement Showing Revenue & Cost of Services

Problem 2.58

Charlotte Electronics Corporation incurred the following costs during
20x1. The company sold all of its products manufactured during the year.

Direct
material................................................................
............... $3,000,000

Direct labor
........................................................................
............. 2,200,000

Manufacturing overhead:

Utilities (primarily electricity)
…...................................................... 140,000

Depreciation on plant and equipment
............................................... 230,000

Insurance
........................................................................
................... 160,000

Supervisory salaries
........................................................................
.. 300,000

Property
taxes...................................................................
.................. 210,000

Selling costs:

Advertising
........................................................................
................ 195,000

Sales commissions
........................................................................
....... 90,000

Administrative costs:

Salaries of top management and staff
................................................ 372,000

Office
supplies................................................................
...................... 40,000

Depreciation on building and
equipment.............................................. 80,000

During 20x1, the company operated at about half of its capacity due to a
slowdown in the economy. Prospects for 20x2 are slightly better. The
marketing manager forecasts a 20 percent growth in sales over the 20x1
level.

Required

Categorize each of the preceding costs as most likely variable or fixed.
Forecast the 20x2 amount for each cost item.

Problem 3.48

Cozy Cleaners has five employees and a president, Marty Stuart. Stuart
and one of the five employees manage all the marketing and
administrative duties. The remaining four employees work directly on
operations. Cozy Cleaners has four service departments: dry cleaning,
coin washing and drying, special cleaning, and repairs. A time report
is marked, and records are kept to monitor the time each employee spends
working in each department. When business is slow, there is idle time,
which is marked on the time record. (Some idle time is necessary because
Cozy Cleaners promises 60-minute service, and it must have reserve labor
available to accommodate fluctuating peak demand periods throughout the
day and the week.)

Some of the November operating data are as follows:

Coin

Dry Washing Special

Idle Time Cleaning and Drying Cleaning
Repairs

Sales revenue ........................................... $4,625
$5,250 $2,000 $625

Direct labor (in hours) .......... 25 320 80 125
90

Overhead traceable to departments:

Cleaning compounds ............................ 500 250
400 0

Supplies ................................................ 125
200 175 140

Electric usage........................................ 250
625 100 25

Rent ...................................................... 200
500 90 10

Additional Information

Each of the four employees working in the operating departments makes $8
per hour.

The fifth employee, who helps manage marketing and administrative
duties, earns $1,500 per month, and Stuart earns $2,000 per month.

Indirect overhead (i.e., overhead that is not traceable to departments)
amounted to $512 and is assigned to departments based on direct-labor
hours used. Because of the idle hours, some overhead will not be
assigned to a department.

In addition to salaries paid, marketing costs for such items as
advertising and special promotions totaled $400.

In addition to salaries, other administrative costs were $150.

All sales transactions are in cash; all other transactions are on
account.

Required

Management wants to know whether each department is contributing to the
company’s profit. Prepare an income statement for November that shows
the revenue and cost of services for each department. Write a short
report to management about departmental profitability. No inventories
were kept.

Problem 11.45

University Hospital has prepared a schedule of estimated overhead costs
for its blood test unit for the coming year on the assumption that
production will be 80,000 tests for the year. Costs have been classified
as fixed or variable, according to the controller’s judgment.

The following overhead items are classified as fixed or variable:

Item Cost

Supplies.................................................... $ 37,500
(all variable)

Indirect labor ............................................ 194,200
($171,000 fixed)

Building occupancy.................................. 236,420 (all fixed)

Utilities ...................................................... 27,210
(all variable)

Equipment depreciation ........................... 181,000 (all fixed)

Equipment maintenance ............................ 24,330 ($8,500 fixed)

Data processing.......................................... 25,320
($15,820 fixed)

Technical support....................................... 16,940 (all
fixed)

Total estimated overhead....................... $742,920

In the past, the overhead costs have been related to the number of
tests. Price instability has led management to suggest, however, that
explicit consideration be given to including an appropriate price index
that adjusts the historical data for inflation. Following management
instructions, data were gathered on past costs, past production levels,
and an appropriate price index for each period.

When these data were entered into a regression program using only the
production level as the independent variable, the following results were
obtained:

Overhead _ $626,547 _ ($1.504 _ Number of tests)

R2 _ .976

When both independent variables were entered in the regression program,
the following results were obtained:

Overhead _ $632,640 _ ($1.501 _ Number of tests) _ ($59.067 _ Index)

Adjusted R2 _ .972

Required

a. Prepare a cost-estimation equation using the account analysis
approach in which the only independent variable is the number of tests.

b. Prepare a cost estimate for 80,000 tests for the coming year using
the simple regression results.

c. Use the multiple regression results to estimate overhead costs for
80,000 tests and a price index of 113 for the coming period.

Exercise 2.45

California Catsup Company produces catsup, which it sells exclusively to
fast-food restaurants in five-gallon containers, which have the
following price and variable costs:

Sales price.................................... $15

Direct material ................................ 5

Direct labor...................................... 2

Variable overhead ......................... 3

Budgeted fixed overhead in 20x0 was $300,000. Actual production totaled
150,000 five-gallon containers, of which 125,000 were sold. No variances
were recorded in 20x0. The company incurred the following selling and
administrative expenses.

Fixed ............................. $50,000 for the year

Variable ......................... $1 per container sold

Required

a. Compute the standard product cost per container of catsup under (1)
absorption costing and (2) variable costing.

b. Prepare income statements for 20x0 using (1) absorption costing and
(2) variable costing.

c. Reconcile the income reported under the two methods by listing the
two key places where the income statements differ.

d. Reconcile the income reported under the two methods using the
shortcut method.