Chapter 1 f
Managerial Accounting and Cost Concepts f f f f
Questions
1-1 The three major types of product costs f f f f f f 1-4
in a manufacturing company are direct
f f f f f f a. Variable cost: The variable cost per unit is f f f f f f f
fmaterials, direct labor, and manufacturing f f f f constant, but total variable cost changes in
f f f f f f f
foverhead. direct proportion to changes in volume.
f f f f f f
b. Fixed cost: The total fixed cost is constant
f f f f f f f
1-2 within the relevant range. The average fixed
f f f f f f f
a. Direct materials are an integral part of a f f f f f f f cost per unit varies inversely with changes
f f f f f f f
finished product and their costs can be
f f f f f f f in volume.
f f
fconveniently traced to it. f f f c. Mixed cost: A mixed cost contains both
f f f f f f
b. Indirect materials are generally small f f f f variable and fixed cost elements.
f f f f f
fitems of material such as glue and nails. They
f f f f f f f f
fmay be an integral part of a finished product but
f f f f f f f f f 1-5
their costs can be traced to the product only at
f f f f f f f f f f a. Unit fixed costs decrease as the activity level
f f f f f f f
fgreat cost or inconvenience.
f f f increases.
f
c. Direct labor consists of labor costs that f f f f f f b. Unit variable costs remain constant as the
f f f f f f
can be easily traced to particular products.
f f f f f f f activity level increases.
f f f
Direct labor is also called ―touch labor.‖
f f f f f f c. Total fixed costs remain constant as the
f f f f f f
d. Indirect labor consists of the labor costs f f f f f f activity level increases.
f f f
fof janitors, supervisors, materials handlers, and
f f f f f d. Total variable costs increase as the activity
f f f f f f
other factory workers that cannot be
f f f f f f level increases.
f f
fconveniently traced to particular products. f f f f
fThese labor costs are incurred to support
f f f f f f 1-6
fproduction, but the workers involved do not f f f f f f a. Cost behavior: Cost behavior refers to the
f f f f f f
fdirectly work on the product. f f f f way in which costs change in response to
f f f f f f f f
e. Manufacturing overhead includes all f f f changes in a measure of activity such as
f f f f f f f f
fmanufacturing costs except direct materials and f f f f f sales volume, production volume, or orders
f f f f f f
direct labor. Consequently, manufacturing
f f f f processed.
f
foverhead includes indirect materials and indirect
f f f f f b. Relevant range: The relevant range is the f f f f f f
labor as well as other manufacturing costs.
f f f f f f f range of activity within which assumptions
f f f f f f
about variable and fixed cost behavior are
f f f f f f f
1-3 A product cost is any cost involved in
f f f f f f f valid.
f
purchasing or manufacturing goods. In the case
f f f f f f f
of manufactured goods, these costs consist of
f f f f f f f 1-7 An activity base is a measure of
f f f f f f
direct materials, direct labor, and manufacturing
f f f f f f whatever causes the incurrence of a variable
f f f f f f f
overhead. A period cost is a cost that is taken
f f f f f f f f f f cost. Examples of activity bases include units
f f f f f f f
directly to the income statement as an expense
f f f f f f f f produced, units sold, letters typed, beds in a
f f f f f f f f
in the period in which it is incurred.
f f f f f f f f hospital, meals served in a cafe, service calls
f f f f f f f f
made, etc.
f f
1-8 The linear assumption is reasonably f f f f
valid providing that the cost formula is used only
f f f f f f f f f
within the relevant range.
f f f f
Solutions Manual, Chapter 1 1
,1-9 A discretionary fixed cost has a fairly
f f f f f f 1-11 The traditional approach organizes costs f f f f
fshort planning horizon—usually a year. Such
f f f f f by function, such as production, selling, and
f f f f f f f
fcosts arise from annual decisions by
f f f f f administration. Within a functional area, fixed
f f f f f f
fmanagement to spend on certain fixed cost f f f f f f and variable costs are intermingled. The
f f f f f f
fitems, such as advertising, research, and
f f f f f contribution approach income statement
f f f f
fmanagement development. A committed fixed f f f f organizes costs by behavior, first deducting
f f f f f f
cost has a long planning horizon—generally
f f f f f f variable expenses to obtain contribution margin,
f f f f f f
fmany years. Such costs relate to a company’s
f f f f f f f and then deducting fixed expenses to obtain net
f f f f f f f f
investment in facilities, equipment, and basic
f f f f f f operating income.
f f
forganization. Once such costs have been f f f f f
fincurred, they are ―locked in‖ for many years.
f f f f f f f 1-12 The contribution margin is total sales f f f f f
revenue less total variable expenses.
f f f f f
1-10 Yes. As the anticipated level of activity f f f f f f
changes, the level of fixed costs needed to
f f f f f f f f 1-13 A differential cost is a cost that differs
f f f f f f f
support operations may also change. Most fixed
f f f f f f f between alternatives in a decision. An
f f f f f f
costs are adjusted upward and downward in
f f f f f f f opportunity cost is the potential benefit that is
f f f f f f f f
large steps, rather than being absolutely fixed at
f f f f f f f f given up when one alternative is selected over
f f f f f f f f
one level for all ranges of activity.
f f f f f f f another. A sunk cost is a cost that has already
f f f f f f f f f f
been incurred and cannot be altered by any
f f f f f f f f
decision taken now or in the future.
f f f f f f f
1-14 No, differential costs can be either f f f f f
variable or fixed. For example, the alternatives
f f f f f f f
might consist of purchasing one machine rather
f f f f f f f
than another to make a product. The difference
f f f f f f f f
between the fixed costs of purchasing the two
f f f f f f f f
machines is a differential cost.
f f f f f
2 Managerial Accounting, 17th edition
,Chapter 1: Applying Excel
f f f
The completed worksheet is shown below.
f f f f f
Solutions Manual, Chapter 1 3
, Chapter 1: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
[Note: To display formulas in cells instead of their calculated amounts,consult
f f f f f f f f f f f
Excel Help.]
f f
4 Managerial Accounting, 17th edition
