Solutions to Review Questions

Chapter 02 - Cost Concepts and Behavior 2-1 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Chapter 02 Cost Concepts and Behavior Solutions to Review Questions 2-1.Cost is a more general term that refers to a sacrifice of resources and may be either an opportunity cost or an outlay cost. An expense is an outlay cost charged against sales revenue in a particular accounting period and usually pertains only to external financial reports.2-2.Product costs are those costs that are attributed to units of production, while period costs are all other costs and are attributed to time periods.2-3.Outlay costs are those costs that represent a past, current, or future cash outlay.Opportunity cost is the value of what is given up by choosing a particular alternative.2-4.Common examples include the value forgone because of lost sales by producing low quality products or substandard customer service. For another example, consider a firm operating at capacity. In this case, a sale to one customer precludes a sale to another customer.2-5.Yes. The costs associated with goods sold in a period are not expected to result in future benefits. They provided sales revenue for the period in which the goods were sold; therefore, they are expensed for financial accounting purposes.2-6.The costs associated with goods sold are a product cost for a manufacturing firm. They are the costs associated with the product and recorded in an inventory account until the product is sold.Fundamentals of Cost Accounting 4th Edition Lanen Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Chapter 02 - Cost Concepts and Behavior 2-2 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2-7.Both accounts represent the cost of the goods acquired from an outside supplier, which include all costs necessary to ready the goods for sale (in merchandising) or production (in manufacturing).The merchandiser expenses these costs as the product is sold, as no additional costs are incurred. The manufacturer transforms the purchased materials into finished goods and charges these costs, along with conversion costs to production (work in process inventory). These costs are expensed when the finished goods are sold.2-8.Direct materials: Materials in their raw or unconverted form, which become an integral part of the finished product are considered direct materials. In some cases, materials are so immaterial in amount that they are considered part of overhead.

Direct labor: Costs associated with labor engaged in manufacturing activities.

Sometimes this is considered as the labor that is actually responsible for converting the materials into finished product. Assembly workers, cutters, finishers and similar “hands on” personnel are classified as direct labor.Manufacturing

overhead:

All other costs directly related to product manufacture. These costs include the indirect labor and materials, costs related to the facilities and equipment required to carry out manufacturing operations, supervisory costs, and all other support activities.

2-9.Gross margin is the difference between revenue (sales) and cost of goods sold.Contribution margin is the difference between revenue (sales) and variable cost.

2-10.Contribution margin is likely to be more important, because it reflects better how profits will change with decisions.

2-11.Step costs change with volume in steps, such as when supervisors are added.Semivariable or mixed costs have elements of both fixed and variable costs. Utilities and maintenance are often mixed costs.

Chapter 02 - Cost Concepts and Behavior 2-3 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2-12.Total variable costs change in direct proportion to a change in volume (within the relevant range of activity). Total fixed costs do not change as volume changes (within the relevant range of activity).Solutions to Critical Analysis and Discussion Questions 2-13.The statement is not true. Materials can be direct or indirect. Indirect materials include items such as lubricating oil, gloves, paper supplies, and so on. Similarly, indirect labor includes plant supervision, maintenance workers, and others not directly associated with the production of the product.2-14.No. Statements such as this almost always refer to the full cost per unit, which includes fixed and variable costs. Therefore, multiplying the cost per seat-mile by the number of miles is unlikely to give a useful estimate of flying one passenger. We should multiply the variable cost per mile by 1,980 miles to estimate the costs of flying a passenger from Detroit to Los Angeles.2-15.Marketing and administrative costs are treated as period costs and expensed for financial accounting purposes in both manufacturing and merchandising organizations.However, for decision making or assessing product profitability, marketing and administrative costs that can be reasonably associated with the product (product- specific advertising, for example) are just as important as the manufacturing costs.2-16.There is no “correct” answer to this allocation problem. Common allocation procedures would include: (1) splitting the costs equally (25% each), (2) dividing the costs by the miles driven and charging based on the miles each person rides, (3) charging the incremental costs of the passengers (almost nothing), assuming you were going to drive to Texas anyway.2-17.The costs will not change. Your allocation in 2-16 was not “incorrect,” because the purpose of the allocation is not to determine incremental costs.2-18.Answers will vary. The major cost categories include servers (mostly fixed), personnel (mostly fixed), and licensing costs (mostly variable).

Chapter 02 - Cost Concepts and Behavior 2-4 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2-19.Direct material costs include the cost of supplies and medicine. One possible direct labor cost would be nursing staff assigned to the unit. Indirect costs include the costs of hospital administration, depreciation on the building, security costs, and so on.2-20.Answers will vary. Common suggestions are number of students in each program, usage (cafeteria: meals; library: study rooms reserved; or career placement: interviews, for example), assuming usage is measured, or revenue (tuition dollars).2-21.No, R&D costs are relevant for many decisions. For example, should a program of research be continued? Was a previous R&D project profitable? Should we change our process of approving R&D projects? R&D costs are expensed (currently) for financial reporting, but for managerial decision-making the accounting treatment is not relevant.

Solutions to Exercises 2-22. (15 min.) Basic Concepts.

• False. The statement refers to an expense. For example, R&D costs are incurred

in expectation of future benefits.

• True. Each unit of a product has the same amount of direct material (same cost

per unit), but producing more units requires more material (and more cost).

• False. Variable costs can be direct (direct materials) or indirect (lubricating oil for

machines that produce multiple products.)

2-23. (15 min.) Basic Concepts.

Cost Item Fixed (F) Variable (V) Period (P) Product (M)

• Depreciation on buildings for administrative staff offices ...... F P
• Bonuses of top executives in the company .......................... F P
• Overtime pay for assembly workers ..................................... V M