Chapter 2
Managerial Accounting and Cost Concepts
Solutions to Questions
2-1 The three major elements of product
2-2
a. Direct materials are an integral part of a
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
Direct labor is also called “touch labor.”
d. Indirect labor consists of the labor costs
These labor costs are incurred to support
production, but the workers involved do not
directly work on the product.
overhead includes indirect materials and indirect
labor as well as other manufacturing costs.
direct materials, direct labor, and manufacturing
overhead. A period cost is a cost that is taken
2-4
b. Fixed cost: The total fixed cost is constant
within the relevant range. The
average
fixed
cost per unit varies inversely with changes
2-5
a. Unit fixed costs decrease as volume
c. Total fixed costs remain constant as volume
increases.
2-6
a. Cost behavior: Cost behavior refers to the
way in which costs change in response to
b. Relevant range: The relevant range is the
range of activity within which assumptions
whatever causes the incurrence of a variable
cost. Examples of activity bases include units
valid providing that the cost formula is used only
within the relevant range.
2-9 A discretionary fixed cost has a fairly
items, such as advertising, research, and
management development. A committed fixed
cost has a long planning horizon—generally
incurred, they are “locked in” for many years.
costs are adjusted upward and downward in
large steps, rather than being absolutely fixed at
one level for all ranges of activity.
they represent extremes of activity.
variable cost per unit of activity.
2-13 The term “least–squares regression”
obtained from any other line that could be fitted
to the data.
contribution margin, and then deducting fixed
expenses to obtain net operating income. The
are intermingled.
2-15 The contribution margin is total sales
opportunity cost is the potential benefit that is
given up when one alternative is selected over
2-17 No, differential costs can be either
variable or fixed. For example, the alternatives
might consist of purchasing one machine rather
Exercise 2-3 (15 minutes)
1.
1,800
1,900
2,000
Fixed cost ……………………………………………………….
$1,100
$1,100
$1,100
Variable cost ……………………………………………………….
468
494
520
Total cost …………………………..…………………………..
$1,568
$1,594
$1,620
Average cost per cup served* …………………………..
$0.871
$0.839
$0.810
* Total cost ÷ cups of coffee served in a week
2. The average cost of a cup of coffee declines as the number of cups of
coffee served increases because the fixed cost is spread over more cups
of coffee.