Ch 47 Homework Essay

Chapter 1 Questions:

1-1
What are the three major elements of product costs in a manufacturing company?
- direct materials
- direct labor
- manufacturing overhead
1-2
Define the following: (a) direct materials, (b) indirect materials, (c) direct labor, (d) indirect labor, and (e) manufacturing overhead.
- direct materials: those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product
- indirect materials: Materials such as solder and glue
- direct labor: labor costs that can be easily (i.e., physically and conveniently) traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made
- indirect labor: Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience
- manufacturing overhead: all manufacturing costs except direct materials and direct labor
1-3
Explain the difference between a product cost and a period cost.
- Product costs include all costs involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Product costs “attach” to units of product as the goods are purchased or manufactured, and they remain attached as the goods go into inventory awaiting sale. Period costs are all the costs that are not product costs. All selling and administrative expenses are treated as period costs. For example, sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices are all period costs. Product costs are costs for making a product while period costs are costs acquired in selling, promoting, or running a business.
1-4
Distinguish between (a) a variable cost, (b) a fixed cost, and (c) a mixed cost.
- A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit. A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity. A mixed cost is a cost that contains both variable and fixed cost elements.

1-5
What effect does an increase in volume have on—
1. Unit fixed costs? Unit becomes progressively smaller
2. Unit variable costs? Constant/ Stays the same
3. Total fixed costs? Remains constant
4. Total variable costs? Increases
1-6
Define the following terms: (a) cost behavior and (b) relevant range.
-cost behavior: The way in which a cost reacts to changes in the level of activity.
- relevant range: The range of activity within which assumptions about variable and fixed cost behavior are valid.
1-7
What is meant by an activity base when dealing with variable costs? Give several examples of activity bases.
- For a cost to be variable, it must be variable with respect to something. That “something” is its activity base. An activity base is a measure of whatever causes the incurrence of a variable cost. Some of the most common activity bases are direct labor-hours, machine-hours, units produced, and units sold. Other examples of activity bases (cost drivers) include the number of miles driven by salespersons, the number of pounds of laundry cleaned by a hotel, the number of calls handled by technical support staff at a software company, and the number of beds occupied in a hospital.
1-8
Managers often assume a strictly linear relationship between cost and volume. How can this practice be defended in light of the fact that many costs are curvilinear?
- Cost can be approximated within a narrow band of activity known as the relevant range by a straight line. Relevant range is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid. Outside of the

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