Solutions to Questions

Copyright © 2017 McGraw-Hill Education. All rights reserved.Solutions Manual, Chapter 2 1 Chapter 2 Cost Concepts Solutions to Questions 2-1 Cost behaviour refers to how a cost will react or respond to changes in the level of business activity.2-2 No. A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit of the activity level (e.g., number of beds occupied). A fixed cost is fixed in total, but will vary inversely on a per-unit basis with changes in the level of activity.2-3 When fixed costs are involved, the cost per unit of activity will depend on the activity volume (or level). For example, as production increases, the cost per unit will fall because the fixed cost is spread over more units. Conversely, as production declines, the cost per unit will rise since a constant fixed cost figure will be spread over fewer units.2-4 The cost of direct materials included in a product is a variable cost; similarly, sales commissions paid out on a per unit basis or as a percentage of sales dollars is a variable cost.On the other hand, costs such as building rent and the salary of a general manager are fixed costs.2-5 Fixed costs in total do not vary with volume within a relevant range. However, fixed costs per unit of volume decrease as volume increases and increases as volume decreases.Therefore, an inverse relationship exists between volume and fixed costs per unit of volume.2-6 Manufacturing overhead is an indirect cost since these costs cannot be easily and conveniently traced to individual products.2-7 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.2-8 No; differential costs can be either variable or fixed. For example, the alternatives might consist of purchasing one computer software program over another to simplify the accounts receivable process. The difference in the fixed costs of purchasing the two programs would be a differential cost.2-9 The three major elements of product costs in a manufacturing company are direct materials, direct labour, and manufacturing overhead.2-10

a. Direct materials: Direct materials are an

integral part of a finished product and can be conveniently traced into it.

b. Indirect materials: Indirect materials are

generally small items of material such as glue and nails. They may become an integral part of a finished product but are traceable into the product only at great cost or inconvenience.Indirect materials are ordinarily classified as part of manufacturing overhead.

c. Direct labour: Direct labour includes those

labour costs that can be easily traced to particular products. Direct labour is also called “touch labour.”

d. Indirect labour: Indirect labour includes

the labour costs of workers who do not directly work on products but provide a support function. Examples of such labour include janitors, supervisors, materials handlers, and other factory workers that cannot be Introduction to Managerial Accounting Canadian 5th Edition Brewer Solutions Manual Visit TestBankDeal.com to get complete for all chapters

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• Introduction to Managerial Accounting,Fifth Canadian Edition

conveniently traced directly to particular products.

e. Manufacturing overhead: Manufacturing

overhead includes all manufacturing costs except direct materials and direct labour.

2-11 PC = DM + DL

CC = DL + MOH

PC = DM + CC - MOH

2-12 A product cost is any cost incurred for the purchase or the manufacture of goods. In the case of manufactured goods, these costs consist of direct materials, direct labour, 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.Examples include selling (marketing) and administrative expenses.2-13 The income statement of a manufacturing firm differs from the income statement of a merchandising firm in the cost of goods sold section. The merchandising firm sells finished goods that it has purchased from a supplier. These goods are listed as “Purchases” in the cost of goods sold section. Since the manufacturing firm produces its goods rather than buying them from a supplier, it lists “Cost of Goods Manufactured” in place of “Purchases.” Also, the manufacturing firm identifies its inventory in this section as “Finished Goods Inventory,” rather than as “Merchandise Inventory.” 2-14 The schedule of cost of goods manufactured is used to list and organize the manufacturing costs that have been incurred.These costs are organized under the three major headingsof direct materials, direct labour, and manufacturing overhead. The total costs incurred are adjusted for any change in the Work in Process inventory to determine the cost of goods manufactured (i.e., finished) during the period.The schedule of cost of goods manufactured 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 “Purchases” account in a merchandising firm.2-15 A manufacturing firm has three

inventory accounts: Raw Materials, Work in

Process, and Finished Goods. The merchandising firm generally identifies its inventory account simply as Merchandise Inventory.2-16 Since product costs follow units of product into inventory, they are sometimes called inventoriable costs. The flow is from direct materials, direct labour, and manufacturing overhead into Work in Process.As goods are completed, their cost is removed from Work in Process and transferred into Finished Goods. As goods are sold, their cost is removed from Finished Goods and transferred into Cost of Goods Sold. Cost of Goods Sold is an expense on the income statement.2-17 Yes, costs such as salaries anddepreciationcan end up as assets on the balance sheet if these are manufacturing costs.Manufacturing costs are inventoried until the associated finished goods are sold. Thus, such costs may be part of either Work in Process inventory or Finished Goods inventory at the end of a period if there are unsold units.

Copyright © 2017 McGraw-Hill Education. All rights reserved.Solutions Manual, Chapter 2 3 Solutions to Foundational 15 The Foundational 15 (LO1 – CC1; LO2 – CC2; LO3 – CC3; LO4 – CC4,

5, 6, 7)

• Direct materials ................................................................$ 6.00

Direct labour ................................................................3.50 Variable manufacturing overhead ................................ 1.50 Variable manufacturing cost per unit ................................$11.00 Variable manufacturing cost per unit (a) ................................$11.00 Number of units produced (b) ............................................... 10,000 Total variable manufacturing cost (a) × (b)............................$110,000 Fixed manufacturing overhead per unit (c) .............................$4.00 Number of units produced (d) ............................................... 10,000 Total fixed manufacturing cost (c) × (d)................................ 40,000 Total product (manufacturing) cost................................$150,000

• Sales commissions ................................................................$1.00

Variable administrative expense ............................................. 0.50 Variable selling and administrative per unit .............................$1.50 Variable selling and admin. per unit (a) ................................$1.50 Number of units sold (b) ....................................................... 10,000 Total variable selling and admin. expense (a) × (b) ................................................................$15,000 Fixed selling and administrative expense per unit ($3 fixed selling + $2 fixed admin.) (c) ...............................$5.00 Number of units sold (d) ....................................................... 10,000 Total fixed selling and administrative expense (c) × (d) .................................................................................... 50,000 Total period (nonmanufacturing) cost................................$65,000

• Direct materials ................................................................$ 6.00

Direct labour ................................................................3.50 Variable manufacturing overhead ................................ 1.50 Sales commissions ................................................................1.00 Variable administrative expense ............................................. 0.50 Variable cost per unit sold .....................................................$12.50

Copyright © 2017 McGraw-Hill Education. All rights reserved.

• Introduction to Managerial Accounting,Fifth Canadian Edition

The Foundational 15 (continued)

• Direct materials ................................................................$ 6.00

Direct labour ................................................................3.50 Variable manufacturing overhead ................................ 1.50 Sales commissions ................................................................1.00 Variable administrative expense ................................ 0.50 Variable cost per unit sold .....................................................$12.50

• Variable cost per unit sold (a) ................................................$12.50

Number of units sold (b) .......................................................8,000 Total variable costs (a) × (b) ................................................. $100,000

• Variable cost per unit sold (a) ................................................$12.50

Number of units sold (b) .......................................................12,500 Total variable costs (a) × (b) ................................................. $156,250

• Total fixed manufacturing cost

(see requirement 1) (a)......................................................$40,000 Number of units produced (b) ................................8,000 Average fixed manufacturing cost per unit produced (a) ÷ (b) ............................................................$5.00

• Total fixed manufacturing cost

(see requirement 1) (a)......................................................$40,000 Number of units produced (b) ................................12,500 Average fixed manufacturing cost per unit produced (a) ÷ (b) ............................................................$3.20

• Total fixed manufacturing cost

(see requirement 1) ...........................................................$40,000 10.Total fixed manufacturing cost (see requirement 1) ...........................................................$40,000