Solution Manual of Chapter 2 -
Managerial Accounting 15th
Edition (Ray H. Garrison, Eric
W. Noreen and Peter C.)
, lOMoARcPSD|58847208
Chapter 2
Managerial Accounting and Cost Concepts
Solutions to Questions b. Fixed cost: The total fixed cost is constant
within the relevant range. The average fixed
cost per unit varies inversely with changes in
2-1 The three major elements of product volume.
costs in a manufacturing company are direct c. Mixed cost: A mixed cost contains both
materials, direct labor, and manufacturing variable and fixed cost elements.
overhead.
2-5
2-2 a. Unit fixed costs decrease as volume
a. Direct materials are an integral part of a increases.
finished product and their costs can be b. Unit variable costs remain constant as
conveniently traced to it. volume increases.
b. Indirect materials are generally small c. Total fixed costs remain constant as volume
items of material such as glue and nails. They increases.
may be an integral part of a finished product but d. Total variable costs increase as volume
their costs can be traced to the product only at increases.
great cost or inconvenience.
c. Direct labor consists of labor costs that 2-6
can be easily traced to particular products. a. Cost behavior: Cost behavior refers to the
Direct labor is also called “touch labor.” way in which costs change in response to
d. Indirect labor consists of the labor costs changes in a measure of activity such as
of janitors, supervisors, materials handlers, and sales volume, production volume, or orders
other factory workers that cannot be processed.
conveniently traced to particular products. b. Relevant range: The relevant range is the
These labor costs are incurred to support range of activity within which assumptions
production, but the workers involved do not about variable and fixed cost behavior are
directly work on the product. valid.
e. Manufacturing overhead includes all
manufacturing costs except direct materials and 2-7 An activity base is a measure of
direct labor. Consequently, manufacturing whatever causes the incurrence of a
overhead includes indirect materials and indirect variable cost. Examples of activity bases
labor as well as other manufacturing costs. include units produced, units sold,
letters typed, beds in a hospital, meals
2-3 A product cost is any cost involved in served in a cafe, service calls made, etc.
purchasing or manufacturing goods. In the case
of manufactured goods, these costs consist of 2-8 The linear assumption is
direct materials, direct labor, and manufacturing reasonably valid providing that the cost
overhead. A period cost is a cost that is taken formula is used only within the relevant
directly to the income statement as an expense range.
in the period in which it is incurred. 2-9 A discretionary fixed cost has a
2-4 fairly short planning horizon—usually a
a. Variable cost: The variable cost per unit is year. Such costs arise from annual
constant, but total variable cost changes in decisions by management to spend on
direct proportion to changes in volume. certain fixed cost items, such as
1
, lOMoARcPSD|58847208
advertising, research, and management 2-14 The contribution approach
development. A committed fixed cost income statement organizes costs by
has a long planning horizon—generally behavior, first deducting variable
many years. Such costs relate to a expenses to obtain contribution margin,
company’s investment in facilities, and then deducting fixed expenses to
equipment, and basic organization. obtain net operating income. The
Once such costs have been incurred, traditional approach organizes costs by
they are “locked in” for many years. function, such as production, selling,
and administration. Within a functional
2-10 Yes. As the anticipated level of area, fixed and variable costs are
activity changes, the level of fixed costs intermingled.
needed to support operations may also
change. Most fixed costs are adjusted 2-15 The contribution margin is total
upward and downward in large steps, sales revenue less total variable
rather than being absolutely fixed at one expenses.
level for all ranges of activity.
2-16 A differential cost is a cost that
2-11 The high-low method uses only differs between alternatives in a
two points to determine a cost formula. decision. An opportunity cost is the
These two points are likely to be less potential benefit that is given up when
than typical because they represent one alternative is selected over another.
extremes of activity. A sunk cost is a cost that has already
been incurred and cannot be altered by
2-12 The formula for a mixed cost is any decision taken now or in the future.
Y = a + bX. In cost analysis, the “a”
term represents the fixed cost and the 2-17 No, differential costs can be
“b” term represents the variable cost either variable or fixed. For example,
per unit of activity. the alternatives might consist of
2-13 The term “least-squares purchasing one machine rather than
regression” means that the sum of the another to make a product. The
squares of the deviations from the difference between the fixed costs of
plotted points on a graph to the purchasing the two machines is a
regression line is smaller than could be differential cost.
obtained from any other line that could
be fitted to the data.
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
, lOMoARcPSD|58847208
Average fixed manufacturing overhead per
unit $4.00
(c).......................................................
Number of units produced (d) ........................ 10,000
Total fixed manufacturing cost (c) × (d) ......... 40,000
Total product (manufacturing) cost ................. $150,000
Note: The average fixed manufacturing overhead cost per unit of $4.00
is valid for only one level of activity—10,000 units produced.
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.
3
Managerial Accounting 15th
Edition (Ray H. Garrison, Eric
W. Noreen and Peter C.)
, lOMoARcPSD|58847208
Chapter 2
Managerial Accounting and Cost Concepts
Solutions to Questions b. Fixed cost: The total fixed cost is constant
within the relevant range. The average fixed
cost per unit varies inversely with changes in
2-1 The three major elements of product volume.
costs in a manufacturing company are direct c. Mixed cost: A mixed cost contains both
materials, direct labor, and manufacturing variable and fixed cost elements.
overhead.
2-5
2-2 a. Unit fixed costs decrease as volume
a. Direct materials are an integral part of a increases.
finished product and their costs can be b. Unit variable costs remain constant as
conveniently traced to it. volume increases.
b. Indirect materials are generally small c. Total fixed costs remain constant as volume
items of material such as glue and nails. They increases.
may be an integral part of a finished product but d. Total variable costs increase as volume
their costs can be traced to the product only at increases.
great cost or inconvenience.
c. Direct labor consists of labor costs that 2-6
can be easily traced to particular products. a. Cost behavior: Cost behavior refers to the
Direct labor is also called “touch labor.” way in which costs change in response to
d. Indirect labor consists of the labor costs changes in a measure of activity such as
of janitors, supervisors, materials handlers, and sales volume, production volume, or orders
other factory workers that cannot be processed.
conveniently traced to particular products. b. Relevant range: The relevant range is the
These labor costs are incurred to support range of activity within which assumptions
production, but the workers involved do not about variable and fixed cost behavior are
directly work on the product. valid.
e. Manufacturing overhead includes all
manufacturing costs except direct materials and 2-7 An activity base is a measure of
direct labor. Consequently, manufacturing whatever causes the incurrence of a
overhead includes indirect materials and indirect variable cost. Examples of activity bases
labor as well as other manufacturing costs. include units produced, units sold,
letters typed, beds in a hospital, meals
2-3 A product cost is any cost involved in served in a cafe, service calls made, etc.
purchasing or manufacturing goods. In the case
of manufactured goods, these costs consist of 2-8 The linear assumption is
direct materials, direct labor, and manufacturing reasonably valid providing that the cost
overhead. A period cost is a cost that is taken formula is used only within the relevant
directly to the income statement as an expense range.
in the period in which it is incurred. 2-9 A discretionary fixed cost has a
2-4 fairly short planning horizon—usually a
a. Variable cost: The variable cost per unit is year. Such costs arise from annual
constant, but total variable cost changes in decisions by management to spend on
direct proportion to changes in volume. certain fixed cost items, such as
1
, lOMoARcPSD|58847208
advertising, research, and management 2-14 The contribution approach
development. A committed fixed cost income statement organizes costs by
has a long planning horizon—generally behavior, first deducting variable
many years. Such costs relate to a expenses to obtain contribution margin,
company’s investment in facilities, and then deducting fixed expenses to
equipment, and basic organization. obtain net operating income. The
Once such costs have been incurred, traditional approach organizes costs by
they are “locked in” for many years. function, such as production, selling,
and administration. Within a functional
2-10 Yes. As the anticipated level of area, fixed and variable costs are
activity changes, the level of fixed costs intermingled.
needed to support operations may also
change. Most fixed costs are adjusted 2-15 The contribution margin is total
upward and downward in large steps, sales revenue less total variable
rather than being absolutely fixed at one expenses.
level for all ranges of activity.
2-16 A differential cost is a cost that
2-11 The high-low method uses only differs between alternatives in a
two points to determine a cost formula. decision. An opportunity cost is the
These two points are likely to be less potential benefit that is given up when
than typical because they represent one alternative is selected over another.
extremes of activity. A sunk cost is a cost that has already
been incurred and cannot be altered by
2-12 The formula for a mixed cost is any decision taken now or in the future.
Y = a + bX. In cost analysis, the “a”
term represents the fixed cost and the 2-17 No, differential costs can be
“b” term represents the variable cost either variable or fixed. For example,
per unit of activity. the alternatives might consist of
2-13 The term “least-squares purchasing one machine rather than
regression” means that the sum of the another to make a product. The
squares of the deviations from the difference between the fixed costs of
plotted points on a graph to the purchasing the two machines is a
regression line is smaller than could be differential cost.
obtained from any other line that could
be fitted to the data.
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
, lOMoARcPSD|58847208
Average fixed manufacturing overhead per
unit $4.00
(c).......................................................
Number of units produced (d) ........................ 10,000
Total fixed manufacturing cost (c) × (d) ......... 40,000
Total product (manufacturing) cost ................. $150,000
Note: The average fixed manufacturing overhead cost per unit of $4.00
is valid for only one level of activity—10,000 units produced.
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.
3
