Chapter 2A, Problem 2A.7P

1.

To determine

Introduction:

Variable costs and Fixed costs:

Variable costs are those that increase or decrease with the general volume of work. Some of the examples of variable costs are sales commissions, labor costs, raw material costs etc. Fixed costs are those costs that remain fixed irrespective of the volume of work. Some of the examples of fixed costs are office rent, administrative expenses, depreciation etc.

Mixed costs:

Mixed costs are those costs which consist of both variable and fixed portions in them. Some of the examples of mixed costs are salaries and commissions, shipping expenses, etc.

To classify: The expenses in the income statement of M& B Ltd as either variable fixed or mixed.

2.

To determine

Introduction:

Variable costs and Fixed costs:

Variable costs are those that increase or decrease with the general volume of work. Some of the examples of variable costs are sales commissions, labor costs, raw material costs etc. Fixed costs are those costs that remain fixed irrespective of the volume of work. Some of the examples of fixed costs are office rent, administrative expenses, depreciation etc.

Mixed costs:

Mixed costs are those costs which consist of both variable and fixed portions in them. Some of the examples of mixed costs are salaries and commissions, shipping expenses, etc.

High-low method:

In this method, the highest level of activity and the lowest level of activity is taken and compared to determine the total costs at each level. The high-low method can be expressed as Y = a + bx

Where Y is Total mixed cost

A is the total fixed cost

B is the variable cost

X is the activity level

To separate: Each mixed expense into a variable and fixed elements using the high-low method.

3.

To determine

Introduction:

Income Statement:

A company’s financial statements include income statement, balance sheet and cash flow statement. An income statement shows the revenues, expenses and profit / loss earned over a period of time.

To redo: The M& B Ltd income statement at the 5000 unit activity level using contribution format.