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© McGraw-Hill Ryerson Ltd. 2015. All rights reserved.Solutions Manual, Chapter 2 1 Chapter 2 Cost Terms, Concepts, and Classifications

Solution to Discussion Case

Possible reasons for disagreeing with the statement:

 Distinguishing between product and period costs will still be important, even for small single-product companies. For companies in competitive markets knowing product costs will help them manage profitability more successfully. Knowing product costs is also important for companies that are able to set their own prices as it will provide an indication of the price needed to cover the costs of production. Understanding how costs behave (variable versus fixed) is still important even for small companies as it will help them predict how costs will change in response to changes in activity levels. This knowledge will be helpful when developing budgets (more on this in chapter 9). Understanding concepts such as opportunity costs and sunk costs is still important in smaller companies because they will still arise. For example a company that devotes its production equipment to producing one product is still incurring an opportunity cost that is equal to the benefits that would arise from using the invested capital in something else. Peri- odically owners of small companies should still evaluate whether the benefits of the status quo exceed the opportunity costs being incurred related to the next best alternative for using the company’s resources.Sunk costs also arise in small companies and should be ignored.

Possible reasons for agreeing with the statement:

 Students who agree will likely take the view that, as per the question wording, many of the concepts in Chapter 2 take on more importance as the complexity of operations increases. For example, understand- ing product versus period costs is arguably more important in a multi- product setting where managers have to allocate resources across multiple products in an effort to maximize profitability.

Managerial Accounting Canadian Canadian 10th Edition Garrison Solutions Manual Visit TestBankDeal.com to get complete for all chapters

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• Managerial Accounting, 10th Canadian Edition

Solutions to Questions 2-1 No. Only costs related to operating the production facilities are included as manufactur- ing overhead. Costs related to the administrative building would be an administrative expense.2-2

• Direct materials are an integral part of a

finished product and their costs can be conven- iently traced to it.

• 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. Indirect materials are ordinarily classified as manufacturing over- head.

• Direct labour includes those labour costs

that can be easily traced to individual units of products. Direct labour is also called “touch la- bour.”

• Indirect labour includes the labour costs

of janitors, supervisors, materials handlers, and other factory workers that cannot be conven- iently traced directly to particular products.These labour costs are incurred to support pro- duction, but the workers involved do not directly work on the product.

• Manufacturing overhead includes all

manufacturing costs except direct materials and direct labour.2-3 Not always. Product costs are expensed in the same period in which the related products are sold. For example, if product costs were in- curred in December but the products weren’t sold until January, the costs would not be ex- pensed as part of cost of goods sold until Janu- ary. In this example, the product costs would be included on the December balance sheet as fin- ished goods inventory.2-4 Marketing or selling costs are those costs incurred to secure customer orders and to deliver the finished product or service into the hands of the customer. They are always treated as period costs on the income statement. As a result, they are expensed in the period incurred.2-5 The schedule of cost of goods manufac- tured lists the manufacturing costs that have been incurred during the period. These costs are organized under the three major categories of direct materials, direct labour, and manufactur- ing overhead. The total costs incurred are ad- justed for any change in the Work in Process inventory to determine the cost of goods manu- factured (i.e. finished) during the period.The schedule of cost of goods manufac- tured ties into the income statement through the Cost of Goods Sold section. The cost of goods manufactured is added to the beginning Finished Goods inventory to determine the goods available for sale. In effect, the cost of goods manufactured takes the place of the “Pur- chases” account in a merchandising firm.2-6 Prime costs consist of direct materials and direct labour. Conversion costs consist of manufacturing overhead and direct labour.2-7 Total manufacturing costs are the total costs of direct materials, direct labour and man- ufacturing overhead incurred in the current peri- od for products that are both complete and par- tially complete at the end of the period. Cost of goods manufactured represents the direct mate- rials, direct labour and manufacturing overhead costs for goods completed during the period.Cost of goods manufactured = Total manufac- turing costs + beginning WIP – ending WIP.2-8 Yes, costs such as salaries and deprecia- tion can end up as assets on the balance sheet if these are manufacturing costs. Manufacturing costs are inventoried until the associated fin- ished goods are sold. Thus, if some units are still in inventory, such costs may be part of either Work in Process inventory or Finished Goods inventory at the end of a period.2-9 A mixed cost contains both variable and fixed cost elements.2-10 As activity levels increase, variable costs per unit do not change within the relevant range. However, as activity levels increase, fixed costs per unit decrease. This decrease happens because total fixed costs remain unchanged (the numerator in the calculation of fixed costs per unit) even though the activity levels are increas- ing (the denominator in the calculation of fixed costs per unit).

© McGraw-Hill Ryerson Ltd. 2015. All rights reserved.Solutions Manual, Chapter 2 3 2-11 The relevant range is the range of activ- ity within which assumptions about variable and fixed costs are valid. The relevant range is im- portant when predicting costs because cost be- haviour may change when activity levels are well below or well above the normal range of activi- ty. For example, if the relevant range of produc- tion activity is 10,000 to 20,000 units and next year, 30,000 units of production are expected, both variable and fixed costs may change. Fixed costs will likely increase as the result of needing to expand production capacity; depreciation, insurance, rent, taxes and so on will rise. Varia- ble costs per unit may also change as produc- tion volume increases to 30,000 units. Buying raw materials in larger quantities may drive down unit costs but hiring additional employees could result in higher hourly wages if there is a shortage of available labour. Thus, managers will have to estimate the effects of production exceeding the relevant range on both variable and fixed cost behaviour.2-12 Manufacturing overhead is an indirect cost since these costs cannot be easily and con- veniently traced to particular units of products.2-13 No. The original cost of the existing ma- chine is a sunk cost that is not relevant to the decision as to whether the new machine should be purchased. The original cost has already been incurred and cannot be undone at this point. Thus it is irrelevant for decision-making purposes.2-14 No; differential costs can be either vari- able or fixed. For example, the alternatives might consist of purchasing one machine rather than another to make a product. The difference in the fixed costs of purchasing the two ma- chines would be a differential cost.2-15 Direct labour cost (46 hours  $18 per hour) ............................$828 Manufacturing overhead cost (6 hours  $9 per hour) ................................

54 Total wages earned ........................................... $882

2-16 Direct labour cost (35 hours  $26 per hour) ............................$910 Manufacturing overhead cost (5 hours  $26 per hour) ..............................

130 Total wages earned ........................................... $1,040

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• Managerial Accounting, 10th Canadian Edition

Exercise 2-1 (15 minutes)

• Manufacturing overhead cost.

• Administrative and marketing and selling costs. The rent would be allo-

cated based on the amount of space in the building used by the admin- istrative (accounting, human resources) and marketing and selling activ- ities.

• Direct labour cost.

• Manufacturing overhead cost. Because the cost of glue would likely be

very low per speaker, it would be considered an indirect material and thus included with manufacturing overhead.

• Marketing and selling cost.

• Administrative cost.

• Manufacturing overhead.

• Direct material cost.

• Marketing and selling cost.

• Administrative cost.