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Chapter 1
Managerial Accounting and Cost Concepts
Solutions to Questions
1-1 The three major elements of product
costs in a manufacturing company are direct
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
1-3 A product cost is any cost involved in
purchasing or manufacturing goods. In the case
1-4
a. Variable cost: The variable cost per unit is
within the relevant range. The
average
fixed
cost per unit varies inversely with changes
in volume.
c. Mixed cost: A mixed cost contains both
variable and fixed cost elements.
valid.
1-8 The linear assumption is reasonably
1-9 A discretionary fixed cost has a fairly
short planning horizon—usually a year. Such
costs arise from annual decisions by
1-10 Yes. As the anticipated level of activity
changes, the level of fixed costs needed to
1-11 The high-low method uses only two
points to determine a cost formula. These two
1-12 The formula for a mixed cost is Y = a +
1-13 The term “least-squares regression”
means that the sum of the squares of the
deviations from the plotted points on a graph to
traditional approach organizes costs by function,
such as production, selling, and administration.
1-16 A differential cost is a cost that differs
another. A sunk cost is a cost that has already
1-17 No, differential costs can be either
variable or fixed. For example, the alternatives
© The McGraw-Hill Companies, Inc., 2016. All rights reserved.
Solutions Manual, Chapter 1 3
The Foundational 15
1.
Direct materials .......................................................
$ 6.00
Direct labor .............................................................
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
Average 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
2.
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
Average 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
Note: The average fixed selling and administrative expense per unit of
$5.00 is valid for only one level of activity—10,000 units sold.
The Foundational 15 (continued)
3.
Direct materials .......................................................
$ 6.00
Direct labor .............................................................
3.50
Variable manufacturing overhead .............................
1.50
Sales commissions ...................................................
1.00
Variable administrative expense ................................
0.50
Variable cost per unit sold ................................
$12.50
4.
Direct materials .......................................................
$ 6.00
Direct labor .............................................................
3.50
Variable manufacturing overhead .............................
1.50
Sales commissions ...................................................
1.00
Variable administrative expense ................................
0.50
Variable cost per unit sold ................................
$12.50
5.
Variable cost per unit sold (a)................................
$12.50
Number of units sold (b) ................................
8,000
Total variable costs (a) × (b) ................................
$100,000
6.
Variable cost per unit sold (a)................................
$12.50
Number of units sold (b) ................................
12,500
Total variable costs (a) × (b) ................................
$156,250
7.
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
8.
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
9.
Total fixed manufacturing cost
(see requirement 1) ..............................................
$40,000
The Foundational 15 (continued)
10.
Total fixed manufacturing cost
(see requirement 1) ..............................................
$40,000
11.
Variable overhead per unit (a) ................................
$1.50
Number of units produced (b) ................................
8,000
Total variable overhead cost (a) × (b) .......................
$12,000
Total fixed overhead (see requirement 1) ..................
40,000
Total manufacturing overhead cost ...........................
$52,000
Total manufacturing overhead cost (a) .................
$52,000
Number of units produced (b) .............................
8,000
Manufacturing overhead per unit (a) ÷ (b) ...........
$6.50
12.
Variable overhead per unit (a) ................................
$1.50
Number of units produced (b) ................................
12,500
Total variable overhead cost (a) × (b) .......................
$18,750
Total fixed overhead (see requirement 1) ..................
40,000
Total manufacturing overhead cost ...........................
$58,750
Total manufacturing overhead cost (a) .................
$58,750
Number of units produced (b) .............................
12,500
Manufacturing overhead per unit (a) ÷ (b) ...........
$4.70
13.
Selling price per unit ................................................
$22.00
Variable cost per unit sold
(see requirement 4) ..............................................
12.50
Contribution margin per unit ................................
$ 9.50
The Foundational 15 (continued)
14.
Direct materials per unit ................................
$6.00
Direct labor per unit ................................................
3.50
Direct manufacturing cost per unit (a) ......................
$9.50
Number of units produced (b) ................................
11,000
Total direct manufacturing cost (a) × (b) ..................
$104,500
Variable overhead per unit (a) .............................
$1.50
Number of units produced (b) .............................
11,000
Total variable overhead cost (a) × (b) ..................
$16,500
Total fixed overhead (see requirement 1) .............
40,000
Total indirect manufacturing cost .........................
$56,500
15.
Direct materials per unit ................................
$6.00
Direct labor per unit ................................................
3.50
Variable manufacturing overhead per unit .................
1.50
Incremental cost per unit produced ..........................
$11.00
Note: Variable selling and administrative expenses are variable with
respect to the number of units sold, not the number of units produced.
Exercise 1-1 (15 minutes)
Cost
Cost Object
Direct
Cost
Indirect
Cost
1.
The wages of pediatric
nurses
The pediatric
department
X
2.
Prescription drugs
A particular patient
X
3.
Heating the hospital
The pediatric
department
X
4.
The salary of the head
of pediatrics
The pediatric
department
X
5.
The salary of the head
of pediatrics
A particular pediatric
patient
X
6.
Hospital chaplain’s
salary
A particular patient
X
7.
Lab tests by outside
contractor
A particular patient
X
8.
Lab tests by outside
contractor
A particular department
X
Exercise 1-2 (10 minutes)
1. The cost of a hard drive installed in a computer: direct materials.
2. The cost of advertising in the
Puget Sound Computer User
newspaper:
selling.
Exercise 1-3 (15 minutes)
Product
Cost
Period
Cost
1.
Depreciation on salespersons’ cars ........................
X
2.
Rent on equipment used in the factory ..................
X
3.
Lubricants used for machine maintenance..............
X
4.
Salaries of personnel who work in the finished
goods warehouse ...............................................
X
5.
Soap and paper towels used by factory workers at
the end of a shift ...............................................
X
6.
Factory supervisors’ salaries ..................................
X
7.
Heat, water, and power consumed in the factory ...
X
8.
Materials used for boxing products for shipment
overseas (units are not normally boxed) ..............
X
9.
Advertising costs ..................................................
X
10.
Workers’ compensation insurance for factory
employees .........................................................
X
11.
Depreciation on chairs and tables in the factory
lunchroom .........................................................
X
12.
The wages of the receptionist in the administrative
offices ...............................................................
X
13.
Cost of leasing the corporate jet used by the
company's executives ........................................
X
14.
The cost of renting rooms at a Florida resort for the
annual sales conference .....................................
X
15.
The cost of packaging the company’s product ........
X
Exercise 1-4 (15 minutes)
1.
Cups of Coffee Served
in a Week
2,000
2,100
2,200
Fixed cost ................................
$1,200
$1,200
$1,200
Variable cost ............................
440
462
484
Total cost ................................
$1,640
$1,662
$1,684
Average cost per cup served * ..
$0.820
$0.791
$0.765
* 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
Exercise 1-5 (20 minutes)
1.
Occupancy-
Days
Electrical
Costs
High activity level (August) ..
2,406
$5,148
Low activity level (October) ..
124
1,588
Change ...............................
2,282
$3,560
Variable cost = Change in cost ÷ Change in activity
= $3,560 ÷ 2,282 occupancy-days
= $1.56 per occupancy-day
Total cost (August) ....................................................
$5,148
Variable cost element
($1.56 per occupancy-day × 2,406 occupancy-days)
3,753
Fixed cost element ....................................................
$1,395
2. Electrical costs may reflect seasonal factors other than just the variation
in occupancy days. For example, common areas such as the reception
area must be lighted for longer periods during the winter than in the
Exercise 1-6 (15 minutes)
1. Traditional income statement
Cherokee Inc.
Traditional Income Statement
Sales ($30 per unit × 20,000 units) ....................
$600,000
Cost of goods sold
($24,000 + $180,000 – $44,000) .....................
160,000
Gross margin .....................................................
440,000
Selling and administrative expenses:
Selling expenses
(($4 per unit × 20,000 units) + $40,000) ......
120,000
Administrative expenses
(($2 per unit × 20,000 units) + $30,000) ......
70,000
190,000
Net operating income ........................................
$250,000
2. Contribution format income statement
Cherokee Inc.
Contribution Format Income Statement
Sales ................................................................
$600,000
Variable expenses:
Cost of goods sold
($24,000 + $180,000 – $44,000) ..................
$160,000
Selling expenses ($4 per unit × 20,000 units) ...
80,000
Administrative expenses
($2 per unit × 20,000 units) .........................
40,000
280,000
Contribution margin ...........................................
320,000
Fixed expenses:
Selling expenses .............................................
40,000
Administrative expenses ..................................
30,000
70,000
Net operating income ........................................
$250,000
Exercise 1-7 (15 minutes)
Item
Differential
Cost
Opportunity
Cost
Sunk
Cost
1.
Cost of the old X-ray machine ....
X
2.
The salary of the head of the
Radiology Department ............
3.
The salary of the head of the
Pediatrics Department ............
4.
Cost of the new color laser
printer ...................................
X
5.
Rent on the space occupied by
Radiology ..............................
6.
The cost of maintaining the old
machine ................................
X
7.
Benefits from a new DNA
analyzer .................................
X
8.
Cost of electricity to run the X-
ray machines .........................
X
Exercise 1-8 (20 minutes)
1.
Kilometers
Driven
Total Annual
Cost*
High level of activity .........................
105,000
$11,970
Low level of activity ..........................
70,000
9,380
Change ............................................
35,000
$ 2,590
*
105,000 kilometers × $0.114 per kilometer = $11,970
70,000 kilometers × $0.134 per kilometer = $9,380
Total cost at 105,000 kilometers .....................
$11,970
Less variable portion:
105,000 kilometers × $0.074 per kilometer ..
7,770
Fixed cost per year ........................................
$ 4,200
2. Y = $4,200 + $0.074X
3.
Fixed cost .........................................................
$ 4,200
Variable cost:
80,000 kilometers × $0.074 per kilometer ........
5,920
Total annual cost ...............................................
$10,120
Exercise 1-9 (10 minutes)
1. Product costs:
Direct materials ...........................
$ 80,000
Direct labor .................................
42,000
Manufacturing overhead ..............
19,000
Total product costs ......................
$141,000
2. Period costs:
Selling expenses ..........................
$22,000
Administrative expenses ...............
35,000
Total period costs ........................
$57,000
3. Conversion costs:
Direct labor .................................
$42,000
Manufacturing overhead ..............
19,000
Total conversion costs .................
$61,000
4. Prime costs:
Direct materials ...........................
$ 80,000
Direct labor .................................
42,000
Total prime costs .........................
$122,000
Exercise 1-10 (20 minutes)
1. The company’s variable cost per unit is:
$180,000 =$6 per unit.
30,000 units
In accordance with the behavior of variable and fixed costs, the
Units produced and sold
30,000
40,000
50,000
Total costs:
Variable costs ............
$180,000
$240,000
$300,000
Fixed costs ................
300,000
300,000
300,000
Total costs .................
$480,000
$540,000
$600,000
Cost per unit:
Variable cost ..............
$ 6.00
$ 6.00
$ 6.00
Fixed cost ..................
10.00
7.50
6.00
Total cost per unit ......
$16.00
$13.50
$12.00
2. The company’s income statement in the contribution format is:
Sales (45,000 units × $16 per unit) ........................
$720,000
Variable expenses (45,000 units × $6 per unit) .......
270,000
Contribution margin...............................................
450,000
Fixed expense .......................................................
300,000
Net operating income ............................................
$150,000
Exercise 1-11 (45 minutes)
1. The scattergraph appears below:
Yes, there is an approximately linear relationship between the number of
units shipped and the total shipping expense.
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
0 2 4 6 8 10
Shipping Expense
Units Shipped
Exercise 1-11 (continued)
2. The high-low estimates and cost formula are computed as follows:
Units Shipped
Shipping Expense
High activity level (June) ......
8
$2,700
Low activity level (July) ........
2
1,200
Change ...............................
6
$1,500
Shipping expense at high activity level .......................
$2,700
Less variable cost element ($250 per unit × 8 units)...
2,000
Total fixed cost .........................................................
$ 700
The cost formula is $700 per month plus $250 per unit shipped or
Y = $700 + $250X,
where X is the number of units shipped.
The scattergraph on the following page shows the straight line drawn
through the high and low data points.
Exercise 1-11 (continued)
3. The high-low estimate of fixed costs is $210.71 lower than the estimate
provided by least-squares regression. The high-low estimate of the
4. The cost of shipping units is likely to depend on the weight and volume
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
0 2 4 6 8 10
Shipping Expense
Units Shipped
Exercise 1-12 (30 minutes)
Product Cost
Period
(Selling
Name of the Cost
Variable
Cost
Fixed
Cost
Direct
Materials
Direct
Labor
Manu-
facturing
Overhead
and
Admin)
Cost
Oppor-
tunity
Cost
Sunk
Cost
Rental revenue forgone, $30,000
per year .....................................
X
Direct materials cost, $80 per unit .
X
X
Rental cost of warehouse, $500
per month..................................
X
X
Rental cost of equipment, $4,000
per month..................................
X
X
Direct labor cost, $60 per unit .......
X
X
Depreciation of the annex space,
$8,000 per year .........................
X
X
X
Advertising cost, $50,000 per year .
X
X
Supervisor's salary, $1,500 per
month .......................................
X
X
Electricity for machines, $1.20 per
unit ...........................................
X
X
Shipping cost, $9 per unit ..............
X
X
Return earned on investments,
$3,000 per year .........................
X
