Muhammad Naeem Sarwar

Managerial Accounting
Module 3
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Exercises:
1. C6-69, page 359: Analyze cost behaior using a ariety o! "ethods
Manu!acturing #erhead Costs:
$he "anu!acturing oerhead costs o! %raunhaus Microbre&ery are "i'ed costs. $he
costs per "onth are not the sa"e and there!ore the "anu!acturing oerhead costs
cannot be !i'ed. Also, the cost per case and per processing hour is not the sa"e and
there!ore it cannot be ariable (%raun, $ietz ) *arrison, +,1,, p.359-.
*ence the "anu!acturing oerhead costs o! %raunhaus Microbre&ery are "i'ed costs.
Manu!acturing oerhead costs .s /rocessing hours 0raph:
Manu!acturing oerhead costs .s Cases produced 0raph:
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/otential proble"s o! 1ata:
2n the M#* .s processing hours graph, there is no appreance o! abnor"al data or
potential outliers.
2n the M#* .s cases produced graph, there is an outlier in the "onth o! 3une as the
"anu!acturing oerhead cost is +9,45, !or 5,6,, cases as co"pared to the costs o!
si"ilar cases in other "onths. $he "anager "ust !irst deter"ine i! the data !or the
"onth o! 3une is correct.
Manu!acturing #erhead Cost 56uation using processing hours:
Month &ith the highest nu"ber o! processing hours 7 3une
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Month &ith the lo&est nu"ber o! processing hours 7 March
8lope 9 :ise 9 Change in Cost 9 y (high- 7 y (lo&-
:un Change in olu"e ' (high- 7 ' (lo&-
9 (;+9,45, < ;+=,5,,- 9 ; +5 per hour
(41, < 5,,-
.ertical intercept (!- !or 3une: y 9 ' > !
;+9,45, 9 (;+5 ' 41, hours- > !
! 9 ; 1+,,,,
Cost 56uation:
y 9 ;+5' > ;1+,,,,
&here,
' 9 processing hours
y 9 "onthly "anu!acturing oerhead cost

Manu!acturing #erhead Costs ?sing Cost 56uation:
y 9 (;+5 ' 55, processing hours- > ;1+,,,,
9 ;+5,45,
$here!ore, "anu!acturing oerhead costs &ill be ;+5,45, i! %raunhaus Microbre&ery
incurs 55, processing hours in 3uly.
:egression analysis using processing hours as cost drier:
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Regression Statistics
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Multiple :
,.@@9+3
: 86uare
,.49,43
AdAusted : 86uare
,.43@=1+
8tandard 5rror 9@5.19,6
#bserations 6
ANOVA
df SS MS F Significance F
:egression 1
1=6696@1 1=6696@1 15.11=,3 ,.,144+5
:esidual =
3@@+=,+ 94,6,,.5
$otal 5
1@55+,@3


Coefficients Standard Error t Stat P-value Lower 95%
Upper
95%
Lower
95.%
Upper
95.%
2ntercept
1=+65.@6 354@.9@4 3.9@6,,5 ,.,16319 =3+9 +=+,+.4= =3+9 +=+,+.4=
B .ariable 1
++.3+94 5.4=3413 3.@@4646 ,.,144+5 6.3@+56 3@.+46@ 6.3@+56 3@.+46@
$he : 86uare is at ,.49,43 &hich is close to 1 and hence the regression line !its the
data 6uite &ell.
$he cost e6uation is: y 9 ;++.33' > ;1=,+66
&here, y 9 "onthly "anu!acturing oerhead costs
' 9 nu"ber o! processing hours
$he "anu!acturing oerhead costs i! %raunhaus Microbre&ery incurs 55, processing
hours in 3uly: y 9 (;++.33 ' 55,- > ;1=,+66
y 9 ;+6,5=@
:egression analysis using nu"ber o! cases as cost drier:
Regression Statistics
Multiple :
,.=5=+19
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: 86uare
,.+,6315
AdAusted : 86uare
,.,,4@9=
8tandard 5rror
191@.6+4
#bserations
6

ANOVA
df SS MS F Significance F
:egression 1
3@+4569 3@+4569 1.,394@+ ,.3655+@
:esidual =
1=4+=51= 36@11+@
$otal 5
1@55+,@3

Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
Lower
95.%
Upper
95.% 95%
2ntercept
++5=1.3+ 5=99.+,5 =.,99,1= ,.,1=@65 4+43.,=5 34@,9.56 4+43.,=5 34@,9.56
B .ariable 1
,.@1=+3+ ,.49@5,= 1.,19694 ,.3655+@ -1.=,+4@ 3.,31+35 -1.=,+4@ 3.,31+35
$he : 86uare is at ,.+,6315 &hich is lo& and hence the regression line does not !it the
data 6uite &ell.
$he cost e6uation is: y 9 ;,.@1' > ;++,5=1
&here, y 9 "onthly "anu!acturing oerhead costs
' 9 nu"ber o! cases
$he "anu!acturing oerhead costs i! %raunhaus Microbre&ery produces 6,,,, cases:
y 9 (;,.@1 ' 6,,,,- > ;++,5=1
y 9 ;+4,=,1
$he cost e6uation using processing hours is better because the data is "ore correct
and !its 6uite &ell.
:egression analysis using nu"ber o! cases as cost drier re"oing potential outlier:
$he "onth o! 3une &as a potential outlier so a!ter re"oing the data o! 3une the
regression analysis is:
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Regression Statistics
Multiple :
,.91+161
: 86uare
,.@3+,3@
AdAusted :
86uare
,.446,5
8tandard 5rror
9+=.,4@+
#bserations
5

ANOVA
df SS MS F
Significance
F
:egression 1
1+69,+39 1+69,+39 1=.@6115 ,.,3,@36
:esidual 3
+561461 @539+,.=
$otal =
15+5+,,,

Coefficients Standard Error t Stat P-value Lower 95%
Upper
95%
Lower
95.%
Upper
95.%
2ntercept
151@,.+= 3+@9.+@= =.615,5@ ,.,191=3 =41+.+56 +56=@.+ =41+.+56 +56=@.+
B .ariable 1
1.4@1@36 ,.=6++1+ 3.@55,16 ,.,3,@36 ,.31,@4 3.+5+@,= ,.31,@4 3.+5+@,=
$he : 86uare is at ,.@3+,3@ &hich is higher &hen the potential outlier is re"oed.
$he cost e6uation is: y 9 ;1.4@' > ;15,1@,
&here, y 9 "onthly "anu!acturing oerhead costs
' 9 nu"ber o! cases
$he "anu!acturing oerhead costs i! %raunhaus Microbre&ery produces 6,,,, cases:
y 9 (;1.4@ ' 6,,,,- > ;15,1@,
y 9 ;+5,@6,
Con!idence in &hich cost e6uation:
2 hae the "ost con!idence in the cost e6uation using the nu"ber o! processing hours
because the : 86uare is at ,.49,43 &hich is close to 1 and hence the regression line
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!its the data 6uite &ell. $here are no potential outliers also &hen processing hours is
used as the cost drier.
$here!ore, 2 hae the "ost con!idence in the cost e6uation using the nu"ber o!
processing hours as the cost drier.
MA:CD8 2C5 C:5AM 8*#//5
2nco"e 8tate"ent
Month 5nded 3une 3,
8ales reenue EEEEEEEEEEEEEEEEEEEEEEEEEEE ; 36,=,,
Fess: Cost o! goods sold EEEEEEEEEEEEEEEEEEEEEE. (6,34,-
0ross pro!it EEEEEEEEEEEEEEEEEEEEEEEEEEEE 3,,,3,
Fess: #perating e'penses:
Fease e'pense EEEEEEEE.. ; +,,5,
1epreciation e'pense EEEEE... +1,
#ther operation e'penses EEEE +,,,,
$otal #perating e'penses EEEEEEEEEEEEEEEEEEEEEE ; (=,+6,-
#perating inco"e EEEEEEEEEEEEEEEEEEEEEEEEE.. ; +5,44,
+. /6-65%, page 354: /repare traditional and contribution "argin inco"e state"ents
$raditional inco"e state"ent:
MA:CD8 2C5 C:5AM 8*#//5
Contribution Margin 2nco"e 8tate"ent
Month 5nded 3une 3,
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8ales reenue EEEEEEEEEEEEEEEEEEEEEEEEEEE ; 36,=,,
Fess: .ariable e'penses:
Cost o! goods sold EEEEEEE. ; 6,34,
#ther ariable operating e'penses .. 5,,
$otal ariable e'pense EEEEEEEEEEEEEEEEEEEEEEE (6,@4,-
Contribution "argin EEEEE.EEEEEEEEEEEEEEEEEEE +9,53,
Fess: Gi'ed e'penses:
Fease e'pense EEEEEEEE.. ; +,,5,
1epreciation e'pense EEEEE... +1,
#ther !i'ed e'penses EEE.EEE 1,5,,
$otal Gi'ed e'penses EEEEEEEEEEEEEEEEEEEEEEEE ; (3,46,-
#perating inco"e EEEEEEEEEEEEEEEEEEEEEEEEE.. ; +5,44,
Contribution "argin inco"e state"ent:
3. 24-4+, page =11: 5thical dile""a &ith C./ analysis error
1:
$he breaHeen point in "y breaH een analysis &ill be ery lo& because 2 did not
include !i'ed "arHeting e'penses in "y co"putations. 2! the !i'ed "arHeting e'penses
are higher then "ore units should be sold to coer these e'penses. *ence, the
breaHeen sales alue &ill increase and the operating pro!it &ill be lo&er because the
operating inco"e beco"es high. $his could cause the president to reAect the sales
co""ission plan.
+:
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$here is huge di!!erence bet&een initially "aHing an error and then subse6uently !ailing
to in!or" the controller. $he initial error &as a "istaHe done by "e due to nerousness
or lacH o! e'perience.
%ut subse6uently !ailing to in!or" the controller is an intentional behaior to hide "y
"istaHe. $his behaior is against the ethical standards as a "anage"ent accountant
"ust display integrity in proiding correct in!or"ation to his superisors.
3.
2! 2 in!or" *e&itt about the error in the analysis, the conse6uences "ight not be as bad
as 2 thinH. *e&itt "ight accept "y e'cuse that the error controller &as "istaHe due to
nerousness. 8he "ight een be i"pressed by "y honesty.
2 thinH *e&itt should taHe so"e responsibility o! the error 2 "ade. 8he did not reie& "y
analysis e!!ectiely be!ore sub"itting it to the president o! the co"pany een though
she Hne& that 2 &as not as e'perienced as her.
*e&itt could hae checHed i! 2 hae collected all the data correctly be!ore 2 start the
analysis. Also, she could hae reie&ed it a!ter the analysis &as co"plete be!ore
sub"itting to the president.
=.
2 should in!or" *e&itt and should not si"ply Heep 6uiet because the conse6uences
"ight not be as bad as 2 thinH een though there is a possibility that 2 "ight not get a
per"anent Aob &hen 2 disclose the controller about the error &hich &ill also create a
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negatie i"age about "e in the "ind o! the president o! the co"pany. *o&eer, not
in!or"ing the controller is against the ethical standards as a "anage"ent accountant
"ust display integrity in proiding correct in!or"ation to his superisors. Also, i! 2 si"ply
Heep 6uiet about the error and the sales co""ission plan is i"ple"ented, it &ill not
generate the sa"e pro!its as 2 co"puted. $he controller "ight then reie& the analysis
and &ill !ind out about the error. $hat &ill be a greater loss co"pared to in!or"ing *e&itt
about the error be!ore the sales co""ission proposal is i"ple"ented.
$here!ore, considering all the !actors, 2 should in!or" *e&itt about the error in the
analysis.
Essay Questions:
1. I%reaHeen analysis isnDt ery use!ul to a co"pany because co"panies need to do
"ore than breaH een to surie in the long run.J 5'plain &hy you agree or disagree
&ith this state"ent. (p. =13-
%reaHeen analysis is a tool used by the "anage"ent o! an organization during
decision "aHing process &hich proides the" in!or"ation about the changes in pro!its
due to the changes in the olu"e o! the output. 2t helps the "anage"ent to decide
&hether the business can surie in the !uture &ithout any loses by !inding the
breaHeen point &hich is the sales leel at &hich operating inco"e is zero and the total
reenue is e6ual to the total e'penses (%raun, $ietz ) *arrison, +,1,, p.36@-.
2 agree that the breaHeen analysis is not ery use!ul to a co"pany because the
co"panies need to do "ore than breaH een to surie in the long run. ?sing the
breaHeen analysis, the "anage"ent can deter"ine the olu"e o! output that "ust be
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produced to coer all costs incurred during the production process o! a product or
serice. $he breaHeen analysis is generally use!ul !or a ne& co"pany &hich has an
obAectie to at least reach breaH een point during the introduction phase. $he co"pany
is able to decide ho& the pro!its are a!!ected by changes in the selling price and
olu"es o! the products or serices. *o&eer, !or looHing to surie in the long run, a
co"pany has to strie !or achieing gro&th in the pro!its and "ust not rely upon
breaHeen analysis as this &ould "ean that the business did not lose any "oney, but it
did not "aHe any pro!its either. 2! a co"pany only ai"s to breaH een, it &ill not last long
due to the sti!! co"petition in the "arHet and there is possibility that the co"pany "ight
!all belo& the breaHing point and that &ould probably result in banHruptcy.
$here!ore, the breaHeen analysis is not use!ul to a co"pany to surie in the long run
because the co"pany has to target and ai" to increase their pro!its and achiee "arHet
gro&th and not Aust plan to breaH een and Aust coer their costs in order to be
success!ul.
+. :ondell /har"acy is considering s&itching to the use o! robots to !ill prescriptions
that consist o! oral solids or "edications in pill !or". $he robots &ill assist the hu"an
phar"acists and &ill reduce the nu"ber o! hu"an phar"acy &orHers needed. $his
change is e'pected to reduce the nu"ber o! prescription !illing errors, reduce the
custo"erDs &ait ti"e, and reduce the total oerall costs. *o& does the use o! the
robots a!!ect :ondell /har"acyDs cost structureK 5'plain the i"pact o! this s&itch to
robotics on :ondell /har"acyDs operating risH. (p. =1=-
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$he use o! to !ill prescriptions &ill de!initely reduce the nu"ber o! phar"acy &orHers.
$here!ore, the ariable costs o! :ondell /har"acy &ill decrease because the hu"an
labor costs &ill be reduced. ?sing robots &ill also reduce the errors and &ait ti"e !or the
custo"ers. %ut as the robots are a "achine, they &ill re6uire periodical "aintenance as
co"pared to the hu"ans. $he "aintenance o! the robots is a !i'ed cost to :ondell
/har"acy. $here!ore, the !i'ed costs &ill increase.
1ue to the decrease in ariable costs and increase in !i'ed costs, the contribution
"argin &ill be a!!ected and it &ill be higher (%raun, $ietz ) *arrison, +,1,, p.34@-.
$here!ore, the breaHeen point &ill be higher and the operating inco"e &ill increase
due to increase in !i'ed costs. :ondell /har"acy &ill re6uire "ore sales olu"e to
reach breaH een point and to aoid operating loss according to the C./ graph (%raun,
$ietz ) *arrison, +,1,, p.34+-. $his &ill increase the operating risH o! "aintaining high
sales olu"es.
Although :ondell /har"acy &ill reduce the ariable costs in the !or" o! labor costs
currently, the phar"acy &ill !ind it di!!icult to surie in the long run due to increased
!i'ed costs and breaHeen point.
$here!ore, the i"pact o! s&itching !ro" hu"an labor to robots !or :ondell /har"acy
&ould result in increase in the operating risH.
:e!erences
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%raun, L.M., $ietz, M.M., ) *arrison, M.$. (+,1,-. Managerial Accounting. 2e. ?pper
8addel :ier, Ne& 3ersey: /earson /rentice *all.
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