The "FAR" factory case:

The "FAR" factory produces one unique products for which it prepares a traditional gross
profit based income statement every month and every quarter. The factory keeps no
inventory and the following are the actual income statement of the first half of 2015 where
the factory produced and sold 3000 units in January, 5000 units in February, 4000 units in
March, 7000 units in April, 6000 units in May and 8000 units in June.
Jan.

Feb.

Mar.

Apr.

May

June

60000

100000 80000 140000 120000 160000

Raw Materials

6000

10000

8000

14000

12000

16000

Manufacturing Direct Wages

3000

5000

4000

7000

6000

8000

Incentives for Manufacturing workers

3000

5000

4000

14000

12000

16000

Quality Inspection
(Relevant range 5000 units)

3000

3000

3000

6000

6000

6000

Other manufacturing overhead

13000

19000

16000

25000

22000

28000

Total cost of goods sold

28000

42000

35000

66000

58000

74000

Gross profit

32000

58000

45000

74000

62000

86000

Sales Commission (1% of sales prices)

600

1000

800

1400

1200

1600

Showrooms and administrative rent

14200

14200

14200

14200

14200

14200

Other selling and administrative Exp.

30000

30000

30000

30000

30000

30000

Total selling and administrative Exp.

44800

45200

45000

45600

18600

45800

Net profit ( or loss)

(12800)

12800

28400

16600

40200

Sales Revenue
Less: cost of Goods sold:

Less: selling and administrative Exp.

Required:
1. Identify the behavior of each item of the actual costs of the first half of 2015 on
approximate graphs specifying the relevant cost driver.
2. The factory has plan to produce and sell 10000 units in July. Prepare income statement
for this month based on your data.
Solution
First: Determining the cast behavior for each cost item:
1) Raw material: is variable cost because the cost per unit (cost in each month / No. of
units in this month) is fixed number (2 pounds/ unit).
RW Cost
4000
2000
1000 2000

Units

2) Manufacturing Direct Wag: is variable cost because the cost per unit (cost in each
month / No. of units in this month) is fixed number (1 pound / unit).
RW Cost
2000
1000
1000 2000

Units

3) Incentives for Manufacturing workers: is Semi-variable cost because the cost per unit
(cost in each month / No. of units in this month) was fixed number (1 pound / unit) until
5000 units and changed to a new rate after producing more than 5000 units to (2 pound /
unit) .
IM Cost

2000
1000

Units
1000

2000

4) Quality Inspection: is Step cost because it is fixed until speciation level and jump to
another cost level every relevant range.
IM Cost

6000
3000

Units
5000

10000

5) Other manufacturing overhead: is mixed cost Step cost because it is not fixed cost
( Total is not fixed) and not variable cost ( cost per unit is not fixed number) .
OM Cost

4000

Units
5000

10000

Its equation will be: Y (cost) = 4000 + ( 3.X(units))

6) Selling commission: is variable cost because the cost per unit (cost in each month / No.
of units in this month) is fixed number (0.5 pounds/ unit).

SC Cost
1200
600
60000 120000

Sales prices

7) Showrooms and administrative rent: is Fixed cost because it is fixed because it is

fixed cost for levels of productions.
SA Cost

14200
Units
1000

2000

8) Other selling and administrative Expenses: is Fixed cost because it is fixed because it
is fixed cost for levels of productions.
OSA Cost

30000
Units
1000

2000

Second: Estimated income statement for July 2015:

Income statement
Sales Revenue (10000 units 20 pound)
Less: cost of Goods sold:
Raw Materials (10000 units 2 pound)
Manufacturing Direct Wages (10000 units 1 pound
Incentives for Manufacturing workers (10000 units 2 pound)
Quality Inspection
Other manufacturing overhead (4000+(3 10000))
Total cost of goods sold
Gross profit
Less: selling and administrative Exp.
Sales Commission (1% of sales prices)

Showrooms and administrative rent

Other selling and administrative Exp.

Total selling and administrative Exp.

Net profit ( or loss)

200000
20000
10000
20000
6000
34000
90000
110000
2000
14200
30000
44200
65800