Chapter 1: Managerial Accounting and Cost Concepts Learn Smart Questions:

1. The contribution approach to constructing income statements:

- Aids on decision making
- Distinguishes between fixed and variable costs

2. Sales revenue minus variable expenses equals:

- Contribution margin

3. Fantastic Furniture makes custom orders. The material used to make a couch is a(n)____ cost of the
customer placing the order.
- Direct

4. A manufacturing cost that cannot be easily traced to a specific cost object is a(n) ____.
- Indirect

5. Indirect materials include:

- Nails, glue, and thread

6. Indirect labor costs include:

- Assembly-line supervisor salary
- Factory security guard wages

7. Materials that become an important component of the finished product whose cost can be easily and
conveniently traced to the finished product are _____ materials.
- Direct

8. The cost of producing one more unit is the ____ cost.

- Marginal

9. Nonmanufacturing costs include:

- Sales commissions
- Company president’s salary

10. In an automobile manufacturing plant, the assembly-line workers are classified as _____ cost.
- Direct Labor

11. Within the relevant range of activity, ____ costs remain constant in total.
- Fixed

12. Opportunity Costs:

- Should be considered in decision making
- Are benefits that are given up when selecting one alternative over another
13. Differential Costs:
- The difference in cost between two alternatives
- Also known as incremental costs
14. A laptop computer manufacturer would consider the computer’s processor chip to be a(n)___cost.
- Direct Material (The computer chip can be easily and conveniently traced to the laptop)

15. Manufacturing costs can be divided into three categories: direct _____, _____ labor and
manufacturing______.
- Materials
- Direct
- Overhead

16. T/F: Labor costs that can be specifically traced to a product are indirect labor costs.
- False

17. Cost of goods sold for a merchandising company, direct materials and commission are all examples of
____ costs.
- Variable

18. Within the relevant range, _____ costs remain constant on a per unit basis.
- Variable

19. Product costs:

- Are also called inventoriable costs
- “Attach” to units of products as they are purchased for resale or produced.

20. Factory materials, such as cleaning supplies, that are not components of finished products are classified
as:
- Manufacturing overhead

21. Which of the following statements is true?

- A mixed cost has a minimum cost of having a service available and ready for use
- When mixed costs are represented by a straight-line, the steeper the slope, the higher the variable
cost per unit.

22. Cost assumptions are reasonable valid within the ____ ___ of activity.
- Relevant Range

23. Step- Variable costs:

- Can be adjusted quickly as conditions change
- May include total salaried employee expense

24. Which of the following statements are true?

- The relevant range of activity is approximated by a straight line.
- Within the relevant range of activity, fixed costs remain constant in total.

25. A cost that contains both variable and fixed cost elements is a(n) ____ cost.
- Mixed

26. Costs that have already been incurred and can not be changed by decisions made in the current period or
in future are called _____ costs.
- Sunk
27. Period costs are always expensed on the income statement in the period in which:
- They are incurred.

28. Any item for which cost data is desired is called a(n) _______ ________.
- Cost object

29. Manufacturing overhead costs include _______.

- Indirect materials, factory supervisors’ salaries, and factory depreciation.

30. The following information is for S&P Enterprises for the month of September:

Direct Materials $82,000

Direct Labor $51,000
Variable Manufacturing Overhead $32,000
Fixed Manufacturing Overhead $30,000
Variable Selling Expense $16,000
Fixed Selling Expense $15,000
Variable Administrative Expense $9,000
Fixed Administration Expense $18,000

Total Prime cost for the month of September was $_________.

- Prime cost = direct materials + direct labor

$82,000 + $51,000 = $133,000

31. The following information is for S&P Enterprise for the month of July:

Direct Materials $82,000

Direct Labor $51,000
Variable Manufacturing Overhead $32,000
Fixed Manufacturing Overhead $30,000
Variable Selling Expense $16,000
Fixed Selling Expense $15,000
Variable Administrative Expense $9,000
Fixed Administration Expense $18,000

Total conversion cost for the month of July was:

- Direct labor + manufacturing overhead = conversion cost
$40,000 + $25,000 + $30,000 = $95,000

32. A laptop computer manufacturer would consider the computer’s processor chip to be a(n) ____ cost.
- Direct material

33. Common activities bases include:

- Direct labor hours
- Machine Hours
- Units sold

34. Direct labor and manufacturing overhead costs are added to:
 - Work in process
35. Order-getting and order-filling are other names for ______ costs.
- Selling

36. A fixed cost remains fixed ____ within the relevant range of activity.
- In total

37. Which of the following statements are true?

- A regional sales manager’s salary would be a direct cost of the regional office in which the sales
manager works.
- A direct cost can be easily and conveniently traced to a specific cost object.

38. Fixed cost that usually arise from annual spending decisions by management are _____ fixed costs.
- Discretionary

39. The following information is for S&P Enterprises for the month of September:

Direct Materials $82,000

Direct Labor $51,000
Variable Manufacturing Overhead $32,000
Fixed Manufacturing Overhead $30,000
Variable Selling Expense $16,000
Fixed Selling Expense $15,000
Variable Administrative Expense $9,000
Fixed Administration Expense $18,000

Total product cost for the month of September was $________.

- Total product cost = direct materials + direct labor + manufacturing overhead
$82,000+$51,000+$32,000+$30,000 = $195,000

40. A type of indirect cost incurred to benefit more than one cost object is a(n) _____ cost.
- Common

41. The accrual concept that costs incurred to generate a revenue are expensed in the same period the
revenue is known as the ______ principle.
- Matching

42. Committed fixed cost include:

- Real estate taxes
- Top management salaries
43. The following information is for S&P Enterprise for the month of July:

Direct Materials $76,000

Direct Labor $40,000
Variable Manufacturing Overhead $25,000
Fixed Manufacturing Overhead $30,000
Variable Selling Expense $12,000
Fixed Selling Expense $15,000
Variable Administrative Expense $6,000
Fixed Administration Expense $18,000

Total variable manufacturing cost for the month of July was:

- Direct materials + direct labor + variable manufacturing overhead
$76,000 + $40,000 + $25,000 = $141,000

44. Cost behavior:

- Refers to how a cost will change as activity levels changes
- Categorizes cost as fixed, mixed, and variable

45. T/F: The finished product of one company can become raw materials for another company.
- True

46. Which of the following differences between the traditional and contribution format to income
statements?
- Traditional income statements focus on cost classifications. Contribution format statements focus on
cost behavior.
- Compared to traditional statements, contribution format statements provide management with a
tool to make decisions easier.

47. The following information is for S&P Enterprise for the month of July:

Direct Materials $76,000

Direct Labor $40,000
Variable Manufacturing Overhead $25,000
Fixed Manufacturing Overhead $30,000
Variable Selling Expense $12,000
Fixed Selling Expense $15,000
Variable Administrative Expense $6,000
Fixed Administration Expense $18,000

Total fixed cost for the month of July was:

- Total fixed cost = Fixed manufacturing overhead + fixed selling expense + fixed administration
expense
$30,000 + $15,000 + $18,000 = $63,000

48. Within the relevant range, fixed costs:

 - Remain constant in total regardless of changes in activity
- Generally, include rent and supervisor salaries
- Should not be expressed on a per unit basis when making decisions
49. A change in revenues between two alternatives is known as _____ revenue or incremental revenue.
- Differential

50. How individual costs react to change in activity level is referred to as cost _____.
- Behavior

51. Administrative costs include:

- Executive compensation and public relations costs

52. Other names for manufacturing overhead include:

- Factory burden
- Factory overhead
- Indirect manufacturing costs

53. Direct labor and overhead costs incurred to change raw materials into finished product are known as
___costs.
- Conversion

54. All costs associated with the general management of an organization are called _____.
- Administrative

55. The following information is for S&P Enterprises for the month of September:

Direct Materials $82,000

Direct Labor $51,000
Variable Manufacturing Overhead $32,000
Fixed Manufacturing Overhead $30,000
Variable Selling Expense $16,000
Fixed Selling Expense $15,000
Variable Administrative Expense $9,000
Fixed Administration Expense $18,000

Total period cost for the month of September was $ ______.

- Period costs = selling expense + administrative expense

$16,000 + $15,000 + $9,000 + $18,000 = $58,000

56. T/F: Presenting fixed costs on an average per unit basis makes them look like they are variable costs.
- True

57. Prime costs are:

- Direct materials
- Direct labor

58. Prior to being recorded on the income statement, manufacturing’s’ product cost flow through:
- Raw materials
 - Finished goods
- Work in process

59. The relative proportion of each type of cost in an organization is known as the company’s
- Cost structure

60. The following information is for S&P Enterprises for the month of September:

Direct Materials $82,000

Direct Labor $51,000
Variable Manufacturing Overhead $32,000
Fixed Manufacturing Overhead $30,000
Variable Selling Expense $16,000
Fixed Selling Expense $15,000
Variable Administrative Expense $9,000
Fixed Administration Expense $18,000

Total fixed cost for the month of September was $ _____.

- Total fixed cost = Fixed manufacturing overhead + fixed selling expense + fixed administration
expense
$30,000 + $15,000 + $18,000 = $63,000

61. Differential costs, opportunity costs and sunk costs are all cost classifications used in:
- Decisions making

62. T/F: Removing expenses that do not differ between alternatives could alter a decision.
- False

63. Differential costs are also known as ____costs.

- Incremental

64. Based on the following information, calculate net income for Dana’s Dress Shop using the traditional
format.

Sales $360,000
Gross Margin $140,000
Contribution Margin $110,000
Total Selling & Administrative Exp. $60,000

- Gross margin of $140,000 – total selling & admin exp of $60,000 = $80,000

65. A serious limitation of using a traditional income statement for internal reporting purposes is that it does
not distinguish between _____ costs.
- Fixed and variable
 66. Based on the following information, compute the costs of goods sold for Spengler Merchandising
Corporation.

Sales $400,000
Purchases $300,000
Beginning Inventory $50,000
Ending Inventory $90,000
Selling Expenses $70,000
Administrative Expenses $30,000
Account Receivable $110,000

- Beginning Inventory ($50,000) + Purchases ($300,000) – Ending Inventory ($90,000) = Cost of Goods
Sold.
$50,000 + $300,000 - $90,000 = $260,000

67. We Shit It Ince. Is considering changing its shipping methods, which they believe will attract new
customers. The following information related to the present and proposed methods.

Present Proposed
Revenues $140,000 $190,000
Variable Costs $60,000 $70,000
Fixed Costs $20,000 $25,000

Calculated the differential net income or loss from the proposal.

- $35,000 differential new income ($50,000 - $10,000 - $5,000)
*A differential cost analysis considers the change in revenues ($50,000) and subtracts the change in
both variable ($10,000) and fixed ($5,000) costs.

Connect Chapter 1 Homework:

1. A direct cost is a cost that can be easily and conveniently traced to a cost object. An indirect cost is a cost
that cannot be easily or conveniently traced to a cost object. A common cost is a type of an indirect cost.
A particular cost can be direct or indirect, depending on the cost object.

Match the term and definition:

A. Adventure holiday sells thousands of tour packages each month through its various branches. A
branch manager’s salary would be a(n) indirect cost of selling a tour package.
B. A common cost is a cost that is incurred to support a number of cost objects but cannot be traced to
them individually.
C. Adventure Holiday sells thousands of tour packages each month through its various branches. A
branch managers salary would be a(n)direct cost of the branch.

2. The three basic categories of manufacturing costs: direct materials, direct labor, and manufacturing
overhead.
Manufacturing costs include all of the following categories except:
 - Administrative cost
- Direct labor
- Direct materials
- Manufacturing overhead

3. Materials that become an integral part of the finished product and whose cost can be conveniently traced
to the finished product are called: direct materials.

4. Direct labor is sometimes called “touch labor”.

5. Manufacturing overhead includes indirect materials, indirect labor, and maintenance repair.

Items such as indirect materials, indirect labor, maintenance and repairs on production equipment,
depreciation, and insurance on manufacturing facilities are included in manufacturing overhead costs.

6. Nonmanufacturing costs are also called selling costs, general costs and administrative costs. (SGA)
Nonmanufacturing cost are put into two categories (selling costs and administrative costs).
Examples of administrative costs include executive compensation, general accounting, secretarial work,
and public relations.
Examples of selling costs include advertising, shipping, commission, sales travel, sales salaries.

Property taxes associated with a company’s administrative facility are considered nonmanufacturing
costs.

7. Cost are classified as either product costs or period costs. Product costs include all costs involved in
acquiring/making a product.
For most company’s period cost include selling and administrative expenses.
Prime costs are the sum of direct materials costs and direct labor costs.
Conversion costs is the sum of direct labor costs and manufacturing overhead costs.

How should the wages of a sheet metal worker in a fabrication plant be classified?
- Product costs

The matching principle requires that the costs incurred to generate a particular revenue should be
recognized as expenses in the same period that the revenue is recognized.

8. Which of the following is common to both prime costs and conversion costs?
- Direct labor

9. Cost are often categorized as variable, fixed, or mixed. A variable cost varies, in total, in direct proportion
to change in the level of activity. A fixed cost is a cost that remains constant, in total, regardless of
changes in the level of activity. A mixed cost contains both variable and fixed costs elements.

If a firm increases its activity level, some costs will change, other costs will remain the same.

10. Cyber Devices, manufacturing PCTV products that enable people to watch television content on their
computers. It sells its product to retailers for $50. A tuner component that goes into each of these devices
costs $5 to acquire. The total variable cost at an activity level of 1,000 unit equals $5,000. (Total variable
cost = $5 * 1,000 units = $5,000)
11. A fixed cost is a cost which remains constant in total with changes in the level of activity.

12. In the equation, Y = a + bX, X represents, the level of activity.

Total fixed cost = a
Variable cost per unit of activity = b
The level of activity = X

13. Classifications used in decision making differential costs, sunk costs and opportunity costs. For purpose of
making decisions, the concepts of differential cost and revenue, sunk cost and opportunity costs are vitally
important. Differential costs and revenue are the future costs and revenues are the future costs and
revenues that differ between alternatives. Sunk cost is a cost that occurred in the past and cannot be
altered. Opportunity cost is the benefit forgone when one alternative is selected over another. Differential
costs and opportunity costs are always relevant and should be carefully considered in decisions. Sunk
costs are always irrelevant in decisions and should be ignored.
Differential costs are always relevant in making business decisions.

14. Which of the following is always an irrelevant cost? Sunk costs.

15. Which of the following statements about opportunity costs is not correct? An opportunity cost cannot be
changed by any decision made now or in the future.

16. Traditional income statement are prepared primarily for external reporting purposes. They organize cost
into two categories: cost of goods sold and selling and administrative expenses. The contribution
approach overcomes the limitations of traditional format and provides mangers with an income
statement that clearly distinguishes between fixed and variable costs and therefore aids in planning,
controlling, and decision making.

The traditional income statement uses which of the following cost categories? Cost of goods sold and
selling and administrative expenses.

Audio Corporation purchased $20,000 of DVD’s during the current year. The company had DVD inventory
of $15,000 at the beginning of the year. An end of the year audit revealed that the company had DVD
inventory of $10,000. The amount that would be reported as cost of goods sold in the income statement
for the current year is $25,000.

*Cost of goods sold = beginning merchandise inventory + purchases -ending merchandise inventory
($15,000 + $20,000 - $10,000 = $25,000)

17. Which of the following is true of the contribution approach? It separates costs into fixed and variable
categories.

Davidson Company has sales of $100,000, variable cost of goods sold of $40,000, variable selling expenses
of $15,000, variable administrative expenses of $5,000, fixed selling expenses of $7,000, and fixed
administrative expenses of $9,000, What is Davidson’s contribution margin? $40,000.

* Contribution margin = sales revenue – all variable expense ($100,000 – ($40,000 + $15,000 + $5,000)) =
$100,000 - $60,000 = $40,000).
18. Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly
expense of a coffee stand is $2,000 and the variable cost per cup of coffee served is $0.73.

Cups of coffee served in a week

900 1,000 1,100
Fixed cost $2,000 $2,000 $2,000
Variable cost ($0.73/cup) $657 (0.73*900) $730 (0.73*1,000) $803 (0.73*1,100)
Total cost (fixed + variable) $2,657 $2,730 $2,803
Average cost per cup of coffee $2.953 (2,657/900) $2.730 (2,730/1,000) $2.548 (2,803/1,100)
served (Total cost/cups served)

Dose the average cost per cut of coffee served increase, decrease, or remain the same as the number of
cups of coffee in a week increases? Decrease

19. Kubin Company’s relevant range of production is 30,000 to 35,000 units. When it produces and sells
32,500 units, its average costs per unit are as follows:
  
  Average Cost per Unit
Direct materials $ 9.00
Direct labor $ 6.00
Variable manufacturing
$ 3.50
overhead
Fixed manufacturing
$ 7.00
overhead
Fixed selling expense $ 5.50
Fixed administrative
$ 4.50
expense
Sales commissions $ 3.00
Variable administrative
$ 2.50
expense

1a Direct materials per unit $9.00

Direct labor per unit $6.00
Direct manufacturing cost per unit $15.00
Number of units sold 32,500
Total direct manufacturing cost $487,500

1b. Variable manufacturing overhead per unit $3.50

Fixed manufacturing over per unit $7.00
Indirect manufacturing cost per unit $10.50
Number of units sold 32,500
Total indirect manufacturing cost $341,250
 2a Direct materials per unit $9.00
Direct labor per unit $6.00
Variable manufacturing overhead per unit $3.50
Fixed manufacturing per unit $7.00
Total manufacturing cost per unit $25.50
Number of unit sold 32,500
Total direct costs $828,750

2b. Total indirect costs $0

Assume the cost object is the company’s various sales representatives. Furthermore, assume that the
company spent $146,250 of its total fixed selling expense on advertising and the remainder of the total
fixed selling expense comprised the fixed portion of the company's sales representatives’ compensation.

a. When the company sells 32,500 units, what is the total direct selling expense that can be readily traced
to individual sales representatives?

b. When the company sells 32,500 units, what is the total indirect selling expense that cannot be readily
traced to individual sales representatives?

3a Sales commission per unit $3.00

Number of units sold 32,500
Total sales commission $97,500
Fixed portion of sales representatives’ compensation 32,500
Total direct selling expense $130,000

3b. Total indirect selling expense $146,250 (32,500 *$4.50)

20. Kubin Company’s relevant range of production is 21,000 to 25,000 units. When it produces and sells 23,00
units, its average costs per unit are as follows:

Average Cost per Unit

Direct materials $ 8.10
Direct labor $ 5.10
Variable manufacturing overhead $ 2.60
Fixed manufacturing overhead $ 6.10
Fixed selling expense $ 4.60
Fixed administrative expense $ 3.60
Sales commissions $ 2.10
Variable administrative expense $ 1.60

1. For financial accounting purposes, what is the total amount of product costs incurred to make 23,000
units?
2. For financial accounting purposes, what is the total amount of period costs incurred to sell 23,000
units?
3. For financial accounting purposes, what is the total amount of product costs incurred to make 25,000
units?
 4. For financial accounting purposes, what is the total amount of period costs incurred to sell 21,000
units?
  1. Total amount of product costs $503,700
2. Total amount of period cost incurred $273,700
3. Total amount of product costs
4. Total amount of period costs

*Question #1, PRC = DM + DL+ MO and the multiplied it by the number of units.
$8.10+$5.10+$2.60+6.10 = $21.9 * 23,000 = $503,700.

Question #2, PE = SE+AE and then multiplied it by the number of units.

$4.60+$3.60+$1.60 +$2.10 = $273,700.

Question #3,
DM = $8.10 ($202,500)
DL = $5.10 ($127,500)
VMO = $2.60 ($65,000)
FMO = $5.61 ($140,300)
TAPC = $202,500 + $127,500 + $65,000 + $140,300 = $535,300
 Y = a - bX . $503,700 - ($6.10 * 23,000) = $363,400. $503,700 - $363,400 = $140,300.
$140,300/25,000 = 5.61.

Question #4,
FSE = $4.23 ($105,800)
FAE = $3.31 ($82,800)
SC = $1.76 ($44,100)
VAE = $1.34 ($33,600)
TAPC = $105,800 + $82,800 + $44,100 + $33,600 = $266,300
 Use same formula (Y=a-bX)
The total fixed cost is MFO + FSE + FAE.
$6.10+$4.60+$3.60 = $14.3

Chapter 1 Quiz:

1. The following costs were incurred in May:

   
Direct materials $ 46,800  
Direct labor $ 36,800  
Manufacturing overhead $ 29,200  
Selling expenses $ 25,000  
Administrative expenses $ 32,800  
Conversion costs during the month
totaled: $66,000.
Conversion cost = direct labor + manufacturing overhead
$36,800 + $29,200 = $66,000

2. The following costs were incurred in May:

 
    
41,00
Direct materials $  
0
25,20
Direct labor $  
0
17,20
Manufacturing overhead$  
0
18,30
Selling expenses $  
0
32,30
Administrative expenses $  
0

Prime costs during the month totaled: $66,200

Prime costs = direct materials + direct labor
$41,000 + $25,200 = $66,200

3. Tirri Corporation has provided the following information:

 
  Cost per Unit Cost per Period
Direct materials $ 7.20        
Direct labor $ 4.50        
Variable manufacturing overhead $ 1.25        
Fixed manufacturing overhead       $ 23,800  
Sales commissions $ 1.30        
Variable administrative expense $ 0.55        
Fixed selling and administrative expense       $ 8,200  
 
If the selling price is $27.50 per unit, the contribution margin per unit sold is closest to:
$12.70

First solve for variable cost (DM+DL+VMO+SC+VAE): $7.20+$4.50+$1.25+$1.30+$0.55 =$14.80.

Then deduct the selling price to the variable cost per unit to get the contribution margin $27.50 - $14.80 =
$12.70

4. Haack Inc. is a merchandising company. Last month the company's cost of goods sold was $67,500. The
company's beginning merchandise inventory was $11,000 and its ending merchandise inventory was
$26,200. What was the total amount of the company's merchandise purchases for the month? $82,700.

Cost of goods sold = beginning merchandise inventory + purchases -ending merchandise inventory
$67,500 = $11,000 + purchases - $26,200
Purchases = $67,500 - $11,000 + $26,200 = $82,700

5. Dake Corporation's relevant range of activity is 2,300 units to 5,500 units. When it produces and sells
3,900 units, its average costs per unit are as follows:
 
  Average Cost per
Unit
Direct materials $ 6.80
Direct labor $ 4.00
Variable manufacturing overhead $ 1.55
Fixed manufacturing overhead $ 2.50
Fixed selling expense $ 1.15
 Fixed administrative expense $ 0.85
Sales commissions $ 0.95
Variable administrative expense $ 0.85

 
For financial reporting purposes, the total amount of product costs incurred to make 3,900 units is closest
to: $57,915.

     
Direct materials $ 6.80
Direct labor   4.00
Variable manufacturing overhead   1.55
Variable manufacturing cost per unit $12.35

     
Total variable manufacturing cost
($12.35 per unit x 3,900 units produced) $ 48,165
Total fixed manufacturing overhead cost
 
($2.50 per unit x 3,900 units produced) 9,750
Total product (manufacturing) cost $ 57,915

6. Vignana Corporation manufactures and sells hand-painted clay figurines of popular sports heroes. Shown
below are some of the costs incurred by Vignana for last year:
 
     
Cost of clay used in production $65,000
Wages paid to the workers who paint the figurines $81,000
Wages paid to the sales manager's secretary $33,000
Cost of junk mail advertising $50,000

 
What is the total of the direct costs above? $146,000.

Direct costs = $65,000 + $81,000 = $146,000

7. Lagle Corporation has provided the following information:

 
  Cost per Unit   Cost per Period
Direct materials $ 4.90      
Direct labor $ 4.00      
Variable manufacturing overhead $ 1.60      
Fixed manufacturing overhead       $8,700
Sales commissions $ 2.00      
 Variable administrative expense $ 0.35      
Fixed selling and administrative expense       $5,700

 
For financial reporting purposes, the total amount of period costs incurred to sell 3,000 units is closest to:
$12,750.

     
Sales commissions $ 2.00
Variable administrative expense   0.35
Variable selling and administrative expense per unit $ 2.35

     
Total variable selling and administrative expense    
($2.35 per unit × 3,000 units sold) $ 7,050
Total fixed selling and administrative expense   5,700
Total period (nonmanufacturing) cost $ 12,750

8. Which of the following is correct concerning reactions to INCREASES in activity?

 
  Total Variable Cost Variable Cost Per Unit
A) Increases Decreases
B) Constant Decreases
C) Decreases Constant
D) Increases Constant

Answer: D

9. Fixed costs expressed on per unit basis: decrease with increases to activity.

10. A cost incurred in the past that is not relevant to any current decision is classified as a(n): Sunk cost.