Chapter 1
Managerial Accounting and Cost Concepts
Questions
1-1 The three major types of product costs directly to the income statement as an expense
in a manufacturing company are direct in the period in which it is incurred.
materials, direct labor, and manufacturing
overhead.
1-2
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.
1-3 A 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
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Solutions Manual, Chapter 1 1
,1-4 many years. Such costs relate to a company’s
a. Variable cost: The variable cost per unit is investment in facilities, equipment, and basic
constant, but total variable cost changes in organization. Once such costs have been
direct proportion to changes in volume. incurred, they are “locked in” for many years.
b. Fixed cost: The total fixed cost is constant
within the relevant range. The average fixed 1-10 Yes. As the anticipated level of activity
cost per unit varies inversely with changes changes, the level of fixed costs needed to
in volume. support operations may also change. Most fixed
c. Mixed cost: A mixed cost contains both costs are adjusted upward and downward in
variable and fixed cost elements. large steps, rather than being absolutely fixed at
one level for all ranges of activity.
1-5
a. Unit fixed costs decrease as the activity level
increases.
b. Unit variable costs remain constant as the
activity level increases.
c. Total fixed costs remain constant as the
activity level increases.
d. Total variable costs increase as the activity
level increases.
1-6
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.
1-7 An 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.
1-8 The linear assumption is reasonably
valid providing that the cost formula is used only
within the relevant range.
1-9 A 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
© The McGraw-Hill Companies, Inc., 2012. All rights reserved.
2 Managerial Accounting, 14th edition
, 1-11 The traditional approach
organizes costs by function, such
as production, selling, and
administration. Within a functional
area, fixed and variable costs are
intermingled. The contribution
approach income statement
organizes costs by behavior, first
deducting variable expenses to
obtain contribution margin, and
then deducting fixed expenses to
obtain net operating income.
1-12 The contribution margin is total sales
revenue less total variable expenses.
1-13 A differential cost is a cost that differs
between alternatives in a decision. An
opportunity cost is the potential benefit that is
given up when one alternative is selected over
another. A sunk cost is a cost that has already
been incurred and cannot be altered by any
decision taken now or in the future.
1-14 No, differential costs can be either
variable or fixed. For example, the alternatives
might consist of purchasing one machine rather
than another to make a product. The difference
between the fixed costs of purchasing the two
machines is a differential cost.
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Solutions Manual, Chapter 1 1
, Chapter 1: Applying Excel
The completed worksheet is shown below.
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4 Managerial Accounting, 17th edition
Managerial Accounting and Cost Concepts
Questions
1-1 The three major types of product costs directly to the income statement as an expense
in a manufacturing company are direct in the period in which it is incurred.
materials, direct labor, and manufacturing
overhead.
1-2
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.
1-3 A 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
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Solutions Manual, Chapter 1 1
,1-4 many years. Such costs relate to a company’s
a. Variable cost: The variable cost per unit is investment in facilities, equipment, and basic
constant, but total variable cost changes in organization. Once such costs have been
direct proportion to changes in volume. incurred, they are “locked in” for many years.
b. Fixed cost: The total fixed cost is constant
within the relevant range. The average fixed 1-10 Yes. As the anticipated level of activity
cost per unit varies inversely with changes changes, the level of fixed costs needed to
in volume. support operations may also change. Most fixed
c. Mixed cost: A mixed cost contains both costs are adjusted upward and downward in
variable and fixed cost elements. large steps, rather than being absolutely fixed at
one level for all ranges of activity.
1-5
a. Unit fixed costs decrease as the activity level
increases.
b. Unit variable costs remain constant as the
activity level increases.
c. Total fixed costs remain constant as the
activity level increases.
d. Total variable costs increase as the activity
level increases.
1-6
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.
1-7 An 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.
1-8 The linear assumption is reasonably
valid providing that the cost formula is used only
within the relevant range.
1-9 A 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
© The McGraw-Hill Companies, Inc., 2012. All rights reserved.
2 Managerial Accounting, 14th edition
, 1-11 The traditional approach
organizes costs by function, such
as production, selling, and
administration. Within a functional
area, fixed and variable costs are
intermingled. The contribution
approach income statement
organizes costs by behavior, first
deducting variable expenses to
obtain contribution margin, and
then deducting fixed expenses to
obtain net operating income.
1-12 The contribution margin is total sales
revenue less total variable expenses.
1-13 A differential cost is a cost that differs
between alternatives in a decision. An
opportunity cost is the potential benefit that is
given up when one alternative is selected over
another. A sunk cost is a cost that has already
been incurred and cannot be altered by any
decision taken now or in the future.
1-14 No, differential costs can be either
variable or fixed. For example, the alternatives
might consist of purchasing one machine rather
than another to make a product. The difference
between the fixed costs of purchasing the two
machines is a differential cost.
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Solutions Manual, Chapter 1 1
, Chapter 1: Applying Excel
The completed worksheet is shown below.
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4 Managerial Accounting, 17th edition
