Managerial Accounting and Cost Concepts
Solutions to Questions
1-1The three major elements of product costs in a manufacturing company are direct materials, direct labor, and manufacturing overhead.
a.Direct materials are an integral part of a finished product and their costs can be conveniently traced to it.
b.Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience.
c.Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is also called “touch labor.”
d.Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but the workers involved do not directly work on the product.
e.Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs.
1-3A product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred.
a. Variable cost: The variable cost per unit is constant, but total variable cost changes in direct proportion to changes in volume. b. Fixed cost: The total fixed cost is constant within the relevant range. The average fixed cost per unit varies inversely with changes in volume. c. Mixed cost: A mixed cost contains both variable and fixed cost elements.
a. Unit fixed costs decrease as volume increases.
b. Unit variable costs remain constant as volume increases.
c. Total fixed costs remain constant as volume increases.
d. Total variable costs increase as volume increases.
a. Cost behavior: Cost behavior refers to the way in which costs change in response to changes in a measure of activity such as sales volume, production volume, or orders processed. b. Relevant range: The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid.
1-7An activity base is a measure of whatever causes the incurrence of a variable cost. Examples of activity bases include units produced, units sold, letters typed, beds in a hospital, meals served in a cafe, service calls made, etc.
1-8The linear assumption is reasonably valid providing that the cost formula is used only within the relevant range.
1-9A discretionary fixed cost has a fairly short planning horizon—usually a year. Such costs arise from annual decisions by management to spend on certain fixed cost items, such as advertising, research, and management development. A committed fixed cost has a long planning horizon—generally many years. Such costs relate to a company’s investment in facilities, equipment, and basic organization. Once such costs have been incurred, they are “locked in” for many years.
1-10Yes. As the anticipated level of activity changes, the level of fixed costs needed to support operations may also change. Most fixed costs are adjusted upward and downward in large steps, rather than being absolutely fixed at one level for all ranges of activity.
1-11The high-low method uses only two points to determine a cost formula. These two points are likely to be less than typical because they represent extremes of activity.
1-12The formula for a mixed cost is Y = a + bX. In cost analysis, the “a” term represents the fixed cost and the “b” term represents the variable cost per unit of activity.
1-13The term “least-squares regression” means that the sum of...