2026
MANAGERIAL ACCOUNTING
WORKED EXAMPLES
KOEN HANEGREEFS
VUB
,Contents
Right-click the table below and choose "Update Field" to build the page list.
Contents ............................................................................................................................................................... 1
Chapter 1: Managerial Accounting, the Business Organisation and Ethics ...................................................... 2
Chapter 2: Cost Terms, Concepts and Classifications ....................................................................................... 3
Chapter 3: Cost Behaviour ................................................................................................................................ 5
Chapter 4: Cost Accounting and Cost Allocation .............................................................................................. 8
Chapter 5: Job-Order Costing ......................................................................................................................... 14
Chapter 6: Process Costing ............................................................................................................................. 16
Chapter 7: Activity-Based Costing (ABC) ......................................................................................................... 19
Chapter 8: Cost-Volume-Profit (CVP) Relationships ....................................................................................... 21
Chapter 9: Variable Costing and Absorption Costing...................................................................................... 24
Chapter 10: Relevant Costs for Decision Making ............................................................................................ 27
Chapter 11: Budgets and the Master Budget ................................................................................................. 31
Chapter 12: Flexible Budgets and Variance Analysis ...................................................................................... 35
Exam Part 2: Case-Study Walk-throughs ............................................................................................................ 37
Cost concepts (WPO 1-2) ................................................................................................................................ 38
Job-order costing (WPO 3: Custom Fabric Ventures) ..................................................................................... 39
Activity-based costing (WPO 4a: Targit Garden Furniture)............................................................................. 40
Process costing (WPO 4b: Talloor Industries) ................................................................................................. 41
CVP analysis (WPO 5a: Forrest Gump)............................................................................................................ 42
Absorption vs. variable costing (WPO 5b, Embroidery T-shirts) ..................................................................... 43
Relevant costs (WPO 6: GianAuto plant closure)............................................................................................ 44
Planning & control (WPO 7, cash budget; flexible budget & variances) ......................................................... 45
Managerial Accounting: Course Summary Page 1 of 45
,Chapter 1: Managerial Accounting, the Business Organisation and Ethics
The roles of accounting information
Worked example: budget vs. actual (Starbucks Mayfair store, 31 March 20X1)
Item (£) Budget Actual Variance F/U
Sales 50,000 50,000 0 0
Ingredients 22,000 24,500 2,500 U
Store labour 12,000 11,600 400 F
Other labour 6,000 6,050 50 U
Utilities etc. 4,500 4,500 0 0
Total expenses 44,500 46,650 2,150 U
Operating income 5,500 3,350 2,150 U
Product life cycle and the value chain
Value-chain stage Accounting's contribution
1. Research & development Estimated revenue and cost data for new ideas
2. Design Cost estimates that shape product and process design
3. Production Cost planning and control via budgets and performance
reports
4. Marketing Revenue-vs-cost trade-off analysis of marketing programmes
5. Distribution Cost data driving channel and logistics decisions
6. Customer service Cost data for warranty and support activities
Chapter 1 in practice: homework & pre-test
Worked example: performance report (Chapter 1 homework, Soothings Tea)
Item (£) Budget Actual Variance F/U
Revenues 291,200 286,200 5,000 U
Advertising cost 26,000 29,120 3,120 U
Net 265,200 257,080 8,120 U
Managerial Accounting: Course Summary Page 2 of 45
,Chapter 2: Cost Terms, Concepts and Classifications
Cost of goods sold for a manufacturer, the four steps
Worked example: full schedule (€)
Schedule Amount
Beginning raw materials 18,000
+ Purchases of raw materials 142,000
− Ending raw materials (22,000)
= Direct materials used (Step 1) 138,000
+ Direct labour 80,000
+ Manufacturing overhead 120,000
= Total manufacturing costs (Step 2) 338,000
+ Beginning work-in-process 30,000
− Ending work-in-process (26,000)
= Cost of goods manufactured (Step 3) 342,000
+ Beginning finished goods 40,000
− Ending finished goods (35,000)
= Cost of goods sold (Step 4) 347,000
Income statement Amount (€)
Sales 600,000
− Cost of goods sold (347,000)
= Gross profit 253,000
− Selling & administrative expenses (period) (150,000)
= Operating income 103,000
Homework practice: what MyLab drills (Ch 2)
Worked example: merchandiser vs. manufacturer reach the same gross profit
Naylor (merchandiser) Orinoco (manufacturer)
Balance-sheet inventory lines 1 (merchandise) 3 (RM, WIP, finished goods)
Route to cost of goods available Beg. inv + Purchases COGM schedule (DM + DL + indirect)
Cost of goods manufactured / 970,000 (purchases) 970,000 (COGM)
purchases
− Ending inventory (48,500) (48,500)
= Cost of goods sold 921,500 921,500
Gross profit (sales 1,596,000) 674,500 674,500
Cost Allocation, the Four-Step Method, and the Cost-Allocation Base
Worked micro-example (from textbook, Li Company). Li Company has $110,000 of indirect manufacturing
costs. Machine hours used: Cabinets 9,000; Tables 6,000; Chairs 7,000; total 22,000.
Allocation rate = $110,,000 = $5.00 per machine hour
Cabinets: $5.00 x 9,000 = $45,000
Tables: $5.00 x 6,000 = $30,000
Chairs: $5.00 x 7,000 = $35,000
Total: $110,000 (reconciles to pool, as it must)
Cabinets: $30,000 x (6,000/15,000) = $12,000
Tables: $30,000 x (4,000/15,000) = $8,000
Chairs: $30,000 x (5,000/15,000) = $10,000
Managerial Accounting: Course Summary Page 3 of 45
,Unallocated Costs
Cabinets Tables Chairs
Sales $280,000 $100,000 $90,000
- Direct materials 50,000 30,000 40,000 (traced)
- Indirect mfg 45,000 30,000 35,000 (allocated by machine hrs)
= Gross profit 185,000 40,000 15,000
- Sales salaries 28,000 10,000 9,000 (traced: commission)
- Distribution 12,000 8,000 10,000 (allocated by weight)
= Contribution to
corporate costs $145,000 $22,000 $(4,000)
Unallocated: Admin salaries $40,000
Other admin 60,000
Total unallocated 100,000
Operating income $63,000
Variable vs. Fixed Costs and the ABC/Outsourcing Distinction
Worked example. Suppose AT&T outsources 20,000 commercial accounts at $8.00/account (ABC cost =
$10.50/account). Expected saving: 20,000 x $2.50 = $50,000. But if verification labor ($68,425 in the billing
pool) is a fixed cost (salaried employees), those wages do not disappear unless management eliminates those
positions. The immediate cash saving is only the variable portion (paper, variable telecom, part-time labor).
Management must take explicit action to convert the ABC saving into a real cost reduction.
Managerial Accounting: Course Summary Page 4 of 45
,Chapter 3: Cost Behaviour
Estimating a mixed cost: Y = a + bX and five methods
Worked example: account analysis (facilities maintenance, 3,700 patient-days)
Account (€) Fixed Variable
Supervisor salary 3,800 0
Hourly wages 0 14,674
Equipment depreciation / rentals 5,873 0
Equipment repairs 0 5,604
Cleaning supplies 0 7,472
Totals 9,673 27,750
Worked example: high-low method (hospital maintenance)
Patient-days (X) Total cost (Y)
High month 8,000 £9,800
Low month 5,000 £7,400
Step 1: slope (variable per unit): b = (9,800 − 7,400) ÷ (8,000 − 5,000) = 2,400 ÷ 3,000 = £0.80/day.
Step 2: intercept (fixed): a = 9,800 − 0.80 × 8,000 = £3,400 (check at the low point: 7,400 − 0.80 × 5,000 =
3,400 ✓).
Cost function: Y = 3,400 + 0.80X. Predict 6,500 days → 3,400 + 0.80 × 6,500 = £8,600.
Traditional vs. contribution income statements
Contribution format (€) Total Per unit
Sales (2,400 units) 120,000 50
− Variable expenses (72,000) (30)
= Contribution margin 48,000 20
− Fixed costs (33,000)
= Operating profit 15,000
Homework practice: what MyLab drills (Ch 3)
Worked example: build the cost function from mixed components (DG Computers, 5 units)
Component Treatment
Telephone 60, advertising 110, insurance 75 (all fixed) fixed
Utilities 130: only 20% is business fixed 26
Labour 1,900 = 1,500 fixed + 400 variable fixed 1,500
Total fixed (a) 1,771
Materials 6,500 ÷ 5 + hourly help 400 ÷ 5 variable 1,380 / unit
Managerial Accounting: Course Summary Page 5 of 45
,MyLab Chapter 3 pre-test & post-test, worked examples
Beyond the homework, the MyLab Chapter 3 pre-test and post-test reinforce building and using cost
functions (Y = a + bX), the high-low method, regression, and cost-driver classification.
Cost function from two periods (E3-30). Operating expenses = Sales − Operating income (airline, INR m): 2020
= 149 − (−16) = 165; 2021 = 312 − 122 = 190. High-low gives the variable cost as a % of sales = (190 − 165) ÷
(312 − 149) = 25 ÷ 163 = 0.15, and fixed = 165 − 0.15×149 ≈ 143, so Y = INR 143m + 0.15 × sales. Because fixed
costs are unchanged, the entire extra contribution margin from higher 2021 sales dropped straight to
operating income, turning the 2020 loss into 2021 profit.
Cost-driver choice & behaviour (P3-42), for a 5-star hotel chain, pick a driver, then classify the cost relative to
it:
Cost Cost driver Behaviour
Maintenance contract fees (AMC), all Number of equipment Fixed
equipment
Advertising costs Difficult to identify Fixed
Payroll Number of employees Fixed
Food, beverages, cleaning supplies Room-days Variable
Laundry operations Room-days Variable
Guest supplies and amenities Room-days Variable
Electricity and water supply Room-days Mixed
Mixed cost split & break-even with a step cost (P3-51). Fixed/yr = Administrative 89,000 + Facilities 150,500 =
$239,500; variable/student-month = (Teaching 92,500 + Supplies 16,000) ÷ 3,100 = $35. Predicted profit at
2,860 student-months: revenue 356,000 − variable 100,100 = CM 255,900 − fixed 239,500 = $16,400. If the
school contract is dropped (private students only, CM $675/student = 9×($110 − $35)), the volume for an
$8,000 profit = (239,500 + 9,000 + 8,000) ÷ 675 = 380 students, the +$9,000 step-fixed facilities charge kicks in
above 3,200 student-months.
High-low vs. regression (P3-46). Receiving cost vs. purchase orders: high-low (high 656/$5,621, low
341/$3,204) → Y = AUD 587.51 + 7.6730X, predicting 587.51 + 7.6730×500 = AUD 4,424.01 at 500 orders;
regression Y = AUD 1,731 + 5.88X predicts AUD 4,671. Prefer regression, it uses all the data, whereas the two
points the high-low method relies on may not represent the general cost-volume relation.
Effect of time horizon and magnitude on cost classification
Textbook example (Transavia flights).
• Decision A: gate agent considers holding the plane 2 minutes for one more passenger. Time horizon:
seconds. Change: +1 passenger. Nearly all costs (crew, fuel, meals) are fixed for this decision; only a tiny
amount of extra fuel is variable.
• Decision B: Transavia decides whether to add several extra flights for the FIFA World Cup. Time horizon:
weeks. Change: many additional flights. Fuel, crew salaries, and meal costs now vary with the number of
flights; they are variable costs for this decision.
Activity analysis and choosing between cost drivers
Textbook worked example: Living Room Fitness (support costs).
Product Components Support (new driver) Support (old driver: 2 Difference
x labour)
Velo-Fit 2 70 60 10 higher under new
X-Fit 4 140 180 40 lower under new
Managerial Accounting: Course Summary Page 6 of 45
,Multi-cost-driver account analysis
Textbook example: Dependable Insurance claims processing.
Claim 607788 Claim 607991
Policyholder claim 4,500 23,600
Other party claim 0 3,400
Personal injury claim 12,400 0
Processing cost: single driver (0.5% of 84.50 135.00
total)
Processing cost: three-driver approach 108.20 67.60
Predicting and comparing cost functions against actual results
Textbook worked example: nD Labs PSC costs.
Cost function Predicted cost Actual cost Variance (error)
Old: 2 x 12,000 24,000 31,460 7,460 underestimate
New: 10,000 + 11 x 2,000 32,000 31,460 540 overestimate
Quick-Reference Formula Block
Y = a + bX
Y = total cost (dependent variable)
a = total fixed cost (intercept; cost when X = 0)
b = variable cost per unit of driver (slope)
X = activity level of cost driver (independent variable)
High-low:
b = (Cost_high - Cost_low) / (Activity_high - Activity_low)
a = Cost_high - b x Activity_high
Verify: a = Cost_low - b x Activity_low (must match)
Account analysis variable rate:
b = Total variable costs / Units of cost-driver activity
R2 range: 0 (driver explains nothing) to 1 (perfect fit)
R2 > 0.8 = strong fit for cost functions
CM and profit:
Contribution margin = Sales - Variable costs
Operating profit = CM - Fixed costs
CM per unit = Selling price per unit - Variable cost per unit
CM ratio = CM / Sales
Managerial Accounting: Course Summary Page 7 of 45
,Chapter 4: Cost Accounting and Cost Allocation
Direct vs. indirect costs and the allocation procedure
Worked example: allocate €90,000 of overhead to three buildings by total direct cost
Bldg 1 Bldg 2 Bldg 3
Direct materials 140,000 70,000 90,000
Direct labour 210,000 130,000 60,000
Total direct cost (base) 350,000 200,000 150,000
Allocated overhead 45,000 25,000 20,000
Total cost 395,000 225,000 170,000
Allocating service-department costs
Department Type Cost (€) Employees Floor m²
Cafeteria Service 360,000 15 5,000
Custodial Service 90,000 10 2,000
Machining Producing 400,000 20 25,000
Assembly Producing 700,000 30 50,000
Machining (€) Assembly (€)
Own cost 400,000 700,000
Cafeteria over producing employees 144,000 216,000
20:30
Custodial over producing m² 30,000 60,000
25,000:50,000
Total 574,000 976,000
Machining (€) Assembly (€)
Own cost 400,000 700,000
Cafeteria over Custodial+Mach+Assy 120,000 180,000
employees 10:20:30 (Custodial gets
60,000)
Custodial (now 150,000) over 50,000 100,000
producing m² 25,000:50,000
Total 570,000 980,000
Joint products and by-products
Method Product X Product Y
Physical units (1,000,000 : 500,000) €66,667 €33,333
Relative sales value (90,000 : 30,000) €75,000 €25,000
Danger of Allocating Fixed Costs on Actual Usage
Textbook worked example: university computer department (p. 503-504).
Managerial Accounting: Course Summary Page 8 of 45
, Traditional 4-Step Approach to Allocating Producing-Department Costs to Products
Worked H.L. Display example (step-down results used as input, p. 509-510).
Cost element 200 Custom (total / unit) 1,200 Standard (total / unit)
Parts direct 200,,000.00 600,.00
Direct labor direct 50,.00 150,.00
Processing indirect (30.00 x parts) 312,,560.00 720,.00
Assembly indirect (323.125 x DL-hrs) 517,,585.00 1,551,,292.50
Total 1,079,,395.00 3,021,,517.50
ABC Approach to Allocating Costs to Products
Worked H.L. Display ABC example (p. 514-515).
Activity Cost pool Base Total base units Rate
Design 420,000 Distinct parts 60 custom + 20 5,250.00/distinct part
standard = 80
Processing 1,476,000 Machine hours 800 + 2,400 = 3,200 461.25/hr
hrs
Assembly 1,204,000 Direct-labor hours 1,600 + 4,800 = 6,400 188.125/hr
hrs
System Custom display (per unit) Standard display (per unit)
Traditional 5,395.00 2,517.50
ABC 6,175.00 2,387.50
Customer Profitability
Worked Cedar City Distributors example (p. 517-521).
H.L. Display customer example (M&S vs Asda, p. 822-823).
Central Corporate Costs
Budgeted vs actual sales as base (p. 525-526, H.L. Display example).
Finland Sweden
Forecast sales 500,000 500,000
Allocation on forecast 50,000 50,000
Actual sales 300,000 600,000
Allocation on actual 33,333 66,667
NRV Approximation for Relative-Sales-Value Method
Textbook example (p. 526, chemical Y).
Worked By-Product Example with Textbook Numbers
Principle. (The accounting rule is covered in current notes. What is missing is a clean worked example from
the textbook to practice with.)
Textbook sawdust example (p. 527).
A lumber company produces lumber (main product) and sawdust (by-product from the milling process).
Managerial Accounting: Course Summary Page 9 of 45
MANAGERIAL ACCOUNTING
WORKED EXAMPLES
KOEN HANEGREEFS
VUB
,Contents
Right-click the table below and choose "Update Field" to build the page list.
Contents ............................................................................................................................................................... 1
Chapter 1: Managerial Accounting, the Business Organisation and Ethics ...................................................... 2
Chapter 2: Cost Terms, Concepts and Classifications ....................................................................................... 3
Chapter 3: Cost Behaviour ................................................................................................................................ 5
Chapter 4: Cost Accounting and Cost Allocation .............................................................................................. 8
Chapter 5: Job-Order Costing ......................................................................................................................... 14
Chapter 6: Process Costing ............................................................................................................................. 16
Chapter 7: Activity-Based Costing (ABC) ......................................................................................................... 19
Chapter 8: Cost-Volume-Profit (CVP) Relationships ....................................................................................... 21
Chapter 9: Variable Costing and Absorption Costing...................................................................................... 24
Chapter 10: Relevant Costs for Decision Making ............................................................................................ 27
Chapter 11: Budgets and the Master Budget ................................................................................................. 31
Chapter 12: Flexible Budgets and Variance Analysis ...................................................................................... 35
Exam Part 2: Case-Study Walk-throughs ............................................................................................................ 37
Cost concepts (WPO 1-2) ................................................................................................................................ 38
Job-order costing (WPO 3: Custom Fabric Ventures) ..................................................................................... 39
Activity-based costing (WPO 4a: Targit Garden Furniture)............................................................................. 40
Process costing (WPO 4b: Talloor Industries) ................................................................................................. 41
CVP analysis (WPO 5a: Forrest Gump)............................................................................................................ 42
Absorption vs. variable costing (WPO 5b, Embroidery T-shirts) ..................................................................... 43
Relevant costs (WPO 6: GianAuto plant closure)............................................................................................ 44
Planning & control (WPO 7, cash budget; flexible budget & variances) ......................................................... 45
Managerial Accounting: Course Summary Page 1 of 45
,Chapter 1: Managerial Accounting, the Business Organisation and Ethics
The roles of accounting information
Worked example: budget vs. actual (Starbucks Mayfair store, 31 March 20X1)
Item (£) Budget Actual Variance F/U
Sales 50,000 50,000 0 0
Ingredients 22,000 24,500 2,500 U
Store labour 12,000 11,600 400 F
Other labour 6,000 6,050 50 U
Utilities etc. 4,500 4,500 0 0
Total expenses 44,500 46,650 2,150 U
Operating income 5,500 3,350 2,150 U
Product life cycle and the value chain
Value-chain stage Accounting's contribution
1. Research & development Estimated revenue and cost data for new ideas
2. Design Cost estimates that shape product and process design
3. Production Cost planning and control via budgets and performance
reports
4. Marketing Revenue-vs-cost trade-off analysis of marketing programmes
5. Distribution Cost data driving channel and logistics decisions
6. Customer service Cost data for warranty and support activities
Chapter 1 in practice: homework & pre-test
Worked example: performance report (Chapter 1 homework, Soothings Tea)
Item (£) Budget Actual Variance F/U
Revenues 291,200 286,200 5,000 U
Advertising cost 26,000 29,120 3,120 U
Net 265,200 257,080 8,120 U
Managerial Accounting: Course Summary Page 2 of 45
,Chapter 2: Cost Terms, Concepts and Classifications
Cost of goods sold for a manufacturer, the four steps
Worked example: full schedule (€)
Schedule Amount
Beginning raw materials 18,000
+ Purchases of raw materials 142,000
− Ending raw materials (22,000)
= Direct materials used (Step 1) 138,000
+ Direct labour 80,000
+ Manufacturing overhead 120,000
= Total manufacturing costs (Step 2) 338,000
+ Beginning work-in-process 30,000
− Ending work-in-process (26,000)
= Cost of goods manufactured (Step 3) 342,000
+ Beginning finished goods 40,000
− Ending finished goods (35,000)
= Cost of goods sold (Step 4) 347,000
Income statement Amount (€)
Sales 600,000
− Cost of goods sold (347,000)
= Gross profit 253,000
− Selling & administrative expenses (period) (150,000)
= Operating income 103,000
Homework practice: what MyLab drills (Ch 2)
Worked example: merchandiser vs. manufacturer reach the same gross profit
Naylor (merchandiser) Orinoco (manufacturer)
Balance-sheet inventory lines 1 (merchandise) 3 (RM, WIP, finished goods)
Route to cost of goods available Beg. inv + Purchases COGM schedule (DM + DL + indirect)
Cost of goods manufactured / 970,000 (purchases) 970,000 (COGM)
purchases
− Ending inventory (48,500) (48,500)
= Cost of goods sold 921,500 921,500
Gross profit (sales 1,596,000) 674,500 674,500
Cost Allocation, the Four-Step Method, and the Cost-Allocation Base
Worked micro-example (from textbook, Li Company). Li Company has $110,000 of indirect manufacturing
costs. Machine hours used: Cabinets 9,000; Tables 6,000; Chairs 7,000; total 22,000.
Allocation rate = $110,,000 = $5.00 per machine hour
Cabinets: $5.00 x 9,000 = $45,000
Tables: $5.00 x 6,000 = $30,000
Chairs: $5.00 x 7,000 = $35,000
Total: $110,000 (reconciles to pool, as it must)
Cabinets: $30,000 x (6,000/15,000) = $12,000
Tables: $30,000 x (4,000/15,000) = $8,000
Chairs: $30,000 x (5,000/15,000) = $10,000
Managerial Accounting: Course Summary Page 3 of 45
,Unallocated Costs
Cabinets Tables Chairs
Sales $280,000 $100,000 $90,000
- Direct materials 50,000 30,000 40,000 (traced)
- Indirect mfg 45,000 30,000 35,000 (allocated by machine hrs)
= Gross profit 185,000 40,000 15,000
- Sales salaries 28,000 10,000 9,000 (traced: commission)
- Distribution 12,000 8,000 10,000 (allocated by weight)
= Contribution to
corporate costs $145,000 $22,000 $(4,000)
Unallocated: Admin salaries $40,000
Other admin 60,000
Total unallocated 100,000
Operating income $63,000
Variable vs. Fixed Costs and the ABC/Outsourcing Distinction
Worked example. Suppose AT&T outsources 20,000 commercial accounts at $8.00/account (ABC cost =
$10.50/account). Expected saving: 20,000 x $2.50 = $50,000. But if verification labor ($68,425 in the billing
pool) is a fixed cost (salaried employees), those wages do not disappear unless management eliminates those
positions. The immediate cash saving is only the variable portion (paper, variable telecom, part-time labor).
Management must take explicit action to convert the ABC saving into a real cost reduction.
Managerial Accounting: Course Summary Page 4 of 45
,Chapter 3: Cost Behaviour
Estimating a mixed cost: Y = a + bX and five methods
Worked example: account analysis (facilities maintenance, 3,700 patient-days)
Account (€) Fixed Variable
Supervisor salary 3,800 0
Hourly wages 0 14,674
Equipment depreciation / rentals 5,873 0
Equipment repairs 0 5,604
Cleaning supplies 0 7,472
Totals 9,673 27,750
Worked example: high-low method (hospital maintenance)
Patient-days (X) Total cost (Y)
High month 8,000 £9,800
Low month 5,000 £7,400
Step 1: slope (variable per unit): b = (9,800 − 7,400) ÷ (8,000 − 5,000) = 2,400 ÷ 3,000 = £0.80/day.
Step 2: intercept (fixed): a = 9,800 − 0.80 × 8,000 = £3,400 (check at the low point: 7,400 − 0.80 × 5,000 =
3,400 ✓).
Cost function: Y = 3,400 + 0.80X. Predict 6,500 days → 3,400 + 0.80 × 6,500 = £8,600.
Traditional vs. contribution income statements
Contribution format (€) Total Per unit
Sales (2,400 units) 120,000 50
− Variable expenses (72,000) (30)
= Contribution margin 48,000 20
− Fixed costs (33,000)
= Operating profit 15,000
Homework practice: what MyLab drills (Ch 3)
Worked example: build the cost function from mixed components (DG Computers, 5 units)
Component Treatment
Telephone 60, advertising 110, insurance 75 (all fixed) fixed
Utilities 130: only 20% is business fixed 26
Labour 1,900 = 1,500 fixed + 400 variable fixed 1,500
Total fixed (a) 1,771
Materials 6,500 ÷ 5 + hourly help 400 ÷ 5 variable 1,380 / unit
Managerial Accounting: Course Summary Page 5 of 45
,MyLab Chapter 3 pre-test & post-test, worked examples
Beyond the homework, the MyLab Chapter 3 pre-test and post-test reinforce building and using cost
functions (Y = a + bX), the high-low method, regression, and cost-driver classification.
Cost function from two periods (E3-30). Operating expenses = Sales − Operating income (airline, INR m): 2020
= 149 − (−16) = 165; 2021 = 312 − 122 = 190. High-low gives the variable cost as a % of sales = (190 − 165) ÷
(312 − 149) = 25 ÷ 163 = 0.15, and fixed = 165 − 0.15×149 ≈ 143, so Y = INR 143m + 0.15 × sales. Because fixed
costs are unchanged, the entire extra contribution margin from higher 2021 sales dropped straight to
operating income, turning the 2020 loss into 2021 profit.
Cost-driver choice & behaviour (P3-42), for a 5-star hotel chain, pick a driver, then classify the cost relative to
it:
Cost Cost driver Behaviour
Maintenance contract fees (AMC), all Number of equipment Fixed
equipment
Advertising costs Difficult to identify Fixed
Payroll Number of employees Fixed
Food, beverages, cleaning supplies Room-days Variable
Laundry operations Room-days Variable
Guest supplies and amenities Room-days Variable
Electricity and water supply Room-days Mixed
Mixed cost split & break-even with a step cost (P3-51). Fixed/yr = Administrative 89,000 + Facilities 150,500 =
$239,500; variable/student-month = (Teaching 92,500 + Supplies 16,000) ÷ 3,100 = $35. Predicted profit at
2,860 student-months: revenue 356,000 − variable 100,100 = CM 255,900 − fixed 239,500 = $16,400. If the
school contract is dropped (private students only, CM $675/student = 9×($110 − $35)), the volume for an
$8,000 profit = (239,500 + 9,000 + 8,000) ÷ 675 = 380 students, the +$9,000 step-fixed facilities charge kicks in
above 3,200 student-months.
High-low vs. regression (P3-46). Receiving cost vs. purchase orders: high-low (high 656/$5,621, low
341/$3,204) → Y = AUD 587.51 + 7.6730X, predicting 587.51 + 7.6730×500 = AUD 4,424.01 at 500 orders;
regression Y = AUD 1,731 + 5.88X predicts AUD 4,671. Prefer regression, it uses all the data, whereas the two
points the high-low method relies on may not represent the general cost-volume relation.
Effect of time horizon and magnitude on cost classification
Textbook example (Transavia flights).
• Decision A: gate agent considers holding the plane 2 minutes for one more passenger. Time horizon:
seconds. Change: +1 passenger. Nearly all costs (crew, fuel, meals) are fixed for this decision; only a tiny
amount of extra fuel is variable.
• Decision B: Transavia decides whether to add several extra flights for the FIFA World Cup. Time horizon:
weeks. Change: many additional flights. Fuel, crew salaries, and meal costs now vary with the number of
flights; they are variable costs for this decision.
Activity analysis and choosing between cost drivers
Textbook worked example: Living Room Fitness (support costs).
Product Components Support (new driver) Support (old driver: 2 Difference
x labour)
Velo-Fit 2 70 60 10 higher under new
X-Fit 4 140 180 40 lower under new
Managerial Accounting: Course Summary Page 6 of 45
,Multi-cost-driver account analysis
Textbook example: Dependable Insurance claims processing.
Claim 607788 Claim 607991
Policyholder claim 4,500 23,600
Other party claim 0 3,400
Personal injury claim 12,400 0
Processing cost: single driver (0.5% of 84.50 135.00
total)
Processing cost: three-driver approach 108.20 67.60
Predicting and comparing cost functions against actual results
Textbook worked example: nD Labs PSC costs.
Cost function Predicted cost Actual cost Variance (error)
Old: 2 x 12,000 24,000 31,460 7,460 underestimate
New: 10,000 + 11 x 2,000 32,000 31,460 540 overestimate
Quick-Reference Formula Block
Y = a + bX
Y = total cost (dependent variable)
a = total fixed cost (intercept; cost when X = 0)
b = variable cost per unit of driver (slope)
X = activity level of cost driver (independent variable)
High-low:
b = (Cost_high - Cost_low) / (Activity_high - Activity_low)
a = Cost_high - b x Activity_high
Verify: a = Cost_low - b x Activity_low (must match)
Account analysis variable rate:
b = Total variable costs / Units of cost-driver activity
R2 range: 0 (driver explains nothing) to 1 (perfect fit)
R2 > 0.8 = strong fit for cost functions
CM and profit:
Contribution margin = Sales - Variable costs
Operating profit = CM - Fixed costs
CM per unit = Selling price per unit - Variable cost per unit
CM ratio = CM / Sales
Managerial Accounting: Course Summary Page 7 of 45
,Chapter 4: Cost Accounting and Cost Allocation
Direct vs. indirect costs and the allocation procedure
Worked example: allocate €90,000 of overhead to three buildings by total direct cost
Bldg 1 Bldg 2 Bldg 3
Direct materials 140,000 70,000 90,000
Direct labour 210,000 130,000 60,000
Total direct cost (base) 350,000 200,000 150,000
Allocated overhead 45,000 25,000 20,000
Total cost 395,000 225,000 170,000
Allocating service-department costs
Department Type Cost (€) Employees Floor m²
Cafeteria Service 360,000 15 5,000
Custodial Service 90,000 10 2,000
Machining Producing 400,000 20 25,000
Assembly Producing 700,000 30 50,000
Machining (€) Assembly (€)
Own cost 400,000 700,000
Cafeteria over producing employees 144,000 216,000
20:30
Custodial over producing m² 30,000 60,000
25,000:50,000
Total 574,000 976,000
Machining (€) Assembly (€)
Own cost 400,000 700,000
Cafeteria over Custodial+Mach+Assy 120,000 180,000
employees 10:20:30 (Custodial gets
60,000)
Custodial (now 150,000) over 50,000 100,000
producing m² 25,000:50,000
Total 570,000 980,000
Joint products and by-products
Method Product X Product Y
Physical units (1,000,000 : 500,000) €66,667 €33,333
Relative sales value (90,000 : 30,000) €75,000 €25,000
Danger of Allocating Fixed Costs on Actual Usage
Textbook worked example: university computer department (p. 503-504).
Managerial Accounting: Course Summary Page 8 of 45
, Traditional 4-Step Approach to Allocating Producing-Department Costs to Products
Worked H.L. Display example (step-down results used as input, p. 509-510).
Cost element 200 Custom (total / unit) 1,200 Standard (total / unit)
Parts direct 200,,000.00 600,.00
Direct labor direct 50,.00 150,.00
Processing indirect (30.00 x parts) 312,,560.00 720,.00
Assembly indirect (323.125 x DL-hrs) 517,,585.00 1,551,,292.50
Total 1,079,,395.00 3,021,,517.50
ABC Approach to Allocating Costs to Products
Worked H.L. Display ABC example (p. 514-515).
Activity Cost pool Base Total base units Rate
Design 420,000 Distinct parts 60 custom + 20 5,250.00/distinct part
standard = 80
Processing 1,476,000 Machine hours 800 + 2,400 = 3,200 461.25/hr
hrs
Assembly 1,204,000 Direct-labor hours 1,600 + 4,800 = 6,400 188.125/hr
hrs
System Custom display (per unit) Standard display (per unit)
Traditional 5,395.00 2,517.50
ABC 6,175.00 2,387.50
Customer Profitability
Worked Cedar City Distributors example (p. 517-521).
H.L. Display customer example (M&S vs Asda, p. 822-823).
Central Corporate Costs
Budgeted vs actual sales as base (p. 525-526, H.L. Display example).
Finland Sweden
Forecast sales 500,000 500,000
Allocation on forecast 50,000 50,000
Actual sales 300,000 600,000
Allocation on actual 33,333 66,667
NRV Approximation for Relative-Sales-Value Method
Textbook example (p. 526, chemical Y).
Worked By-Product Example with Textbook Numbers
Principle. (The accounting rule is covered in current notes. What is missing is a clean worked example from
the textbook to practice with.)
Textbook sawdust example (p. 527).
A lumber company produces lumber (main product) and sawdust (by-product from the milling process).
Managerial Accounting: Course Summary Page 9 of 45
