Beatrice, the manager at Maui Breeze Co. engaged in the following activities related to managerial accounting. I am asking you to identify the errors that she made. Be sure that you both identify the error (i.e., convey why the accounting is incorrect) and how the manager could make changes to perform the accounting correctly. There are three errors – one in each scenario (the error in the first scenario is worth 10 pts, and the error in the second and third scenarios are worth 4 pts each).

First (10 pts), the manager did some analysis of costs for the first sixth months of the year. The following table was relevant for her analysis (note – there are no errors in the table itself):

She used the high-low method to develop a model for costs. She concluded that the expected total cost for July (when 500 units are expected) is $20,000 (the average of the highest and lowest cost).

For this first scenario, if the error that you identify is with the manager's performance of the high-low method to determine the expected total cost in July, be sure to perform the high-low method properly (i.e., including calculating the variable and fixed portion) and then calculate the expected total cost in July.

Second (4 pts), the manager listed the costs during this month, and classified them into categories. Her list is as follows:

Third in preparation to answer executives’ questions regarding various costs, the manager needed to classify a list of (unrelated) future forecasted costs as fixed or variable. In instructing her new employee about how to do this task, she said that "factory-related costs are always variable, and non-factory costs are always fixed."

 
 

Month Costs Activity Level January February $16,500 $18,000 $10,000 400 units 450 units March 250 units April $30,000 800 units $18,000 $27,825 May 410 units June 825 units