
Mixed cost: Mixed cost is a cost that includes both the fixed cost and the variable cost. It represents the total cost of the activity or production.
Variable Cost: Variable cost is a cost that changes when the volume of production changes, in the same direction and in the same proportion.
Fixed Cost: Fixed cost is a cost that remains constant irrespective of the changes in the production volume.
High-low method: High-low method is a method of calculating the variable cost and the fixed cost of a product or service. The calculation of this method is based on the total production/activity cost and the lowest production/activity cost of the product during any period.
Income Statement: Income statement is a financial statement that shows the net income or loss for a particular period. It is the summary of expenses and income of a particular period.
- Each of the company's expenses (including cost of goods sold) as variable, fixed, or mixed.
- Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.
- The company's income statement at the 5,000-unit level of activity using the contribution format.

Answer to Problem 16P
Solution:
- Cost classification of the company’s expenses is done.
- Each mixed expense is separated into variable and fixed elements and the cost formula for each mixed expense is prepared.
- Income statement at the 5,000-unit level of activity using the contribution format is prepared.
Explanation of Solution
- Cost classification is as under
- a. Shipping expenses per unit is $4 & fixed shipping expense is $18,000 and the cost formula for each shipping expense is:
- b. Salaries and commissions per unit is $4 & fixed shipping expense is $18,000 and the cost formula for each shipping expense is:
- Income statement at the 5,000-unit level of activity using the contribution format is as below.
Expenses | Classification |
Cost of goods sold | Variable |
Advertising expense | Fixed |
Shipping expense | Mixed |
Salaries and commissions | Mixed |
Insurance expense | Fixed |
Fixed |
Explanations of the cost classification
Expenses | Classification | |
Cost of goods sold | Variable | Per unit cost is same in all month. |
Advertising expense | Fixed | Constant irrespective of changes in the number of units sold |
Shipping expense | Mixed | Per unit cost is not same in all month. |
Salaries and commissions | Mixed | Per unit cost is not same in all month. |
Insurance expense | Fixed | Constant irrespective of changes in the number of units sold |
Depreciation expense | Fixed | Constant irrespective of changes in the number of units sold |
Morrisey & Brown, Ltd. | ||
Income Statement | ||
For the month ended September 30 | ||
Sales in units | 5,000.00 | |
Sales ( 5000 unit sold) | $500,000.00 | |
Less : Variable expenses | ||
Cost of goods sold | $300,000.00 | |
Shipping expenses | $20,000.00 | |
Salaries and commissions | $60,000.00 | -$380,000.00 |
Contribution margin | $120,000.00 | |
Less : Variable expenses | ||
Advertising expenses | $21,000.00 | |
Insurance expense | $6,000.00 | |
Shipping expenses | $18,000.00 | |
Salaries and commissions | $30,000.00 | |
Depreciation expenses | $15,000.00 | $90,000.00 |
Net Operating Income | $30,000.00 |
Calculations:
a.) Cost formula for shipping expenses
Step 1: Identify high and low activities level.
Particulars | Cost/Unit | Month |
(X1) : Total cost of highest activity | $38,000 | September |
(X2) : Highest activity unit | 5,000 | September |
(Y1) : Total cost of lowest activity | $34,000 | July |
(Y2) : Lowest activity unit | 4,000 | July |
Step 2: Calculate the variable cost per day
Step 3: Calculate the fixed cost
=
Step 4: Cost formula for shipping expense.
Where X is the number of units sold per month and Y is total shipping expense.
b.) Cost formula for Salaries and commissions
Step 1: Identify high and low activities level.
Particulars | Cost/Unit | Month |
(X1) : Total cost of highest activity | $90,000 | September |
(X2) : Highest activity unit | 5,000 | September |
(Y1) : Total cost of lowest activity | $78,000 | July |
(Y2) : Lowest activity unit | 4,000 | July |
Step 2: Calculate the variable cost per day
Step 3: Calculate the fixed cost
Step 4: Cost formula for shipping expense.
Where X is the number of units sold per month and Y is total Salaries and commission.
Thus, for Morrisey & Brown, Ltd., cost classification is done, the cost formula & the income statement are determined and the calculations are explained.
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Chapter 2 Solutions
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