Multiple Choice Questions
1. A static budget:
A. is based totally on prior year's costs.
B. is based on one anticipated activity level.
C. is based on a range of activity.
D. is preferred over a flexible budget in the
evaluation of performance.
E. presents a clear measure of performance when
planned activity differs from actual activity.
Answer:
B LO: 1 Type: RC
2. Flexible budgets reflect a company's
anticipated costs based on variations in:
A. activity levels.
B. inflation rates.
C. managers.
D. anticipated capital acquisitions.
E. standards.
Answer:
A LO: 1 Type: RC
3. A flexible budget:
A. parallels a static budget with respect to
format and advantages of use.
B. is preferred over a static budget in the evaluation
of performance.
C. gives management flexibility in terms of
meeting budget goals.
D. can be used to compare actual and budgeted
costs at various levels of activity.
E. is characterized by choices "B"
and "D" above.
Answer:
E LO: 1 Type: RC
4. Interstate Merchandising anticipated selling
29,000 units of a major product and paying sales commissions of $6 per
unit. Actual sales and sales commissions
totaled 31,500 units and $182,700, respectively. If the company used a static budget for
performance evaluations, Interstate would report a cost variance of:
A. $6,300U.
B. $6,300F.
C. $8,700U.
D. $8,700F.
E. some other amount not listed above.
Answer: C LO: 1
Type: A
5. Main Street Merchandising anticipated selling
24,000 units of a major product and paying sales commissions of $5 per
unit. Actual sales and sales commissions
totaled 23,600 units and $120,360, respectively. If the company used a flexible budget for
performance evaluations, Main Street would report a cost variance of:
A. $360U.
B. $360F.
C. $2,360U.
D. $2,360F.
E. some other amount not listed above.
Answer:
C LO: 1 Type: A
6. Badger Bakeries anticipated making 17,000
fancy cakes during a recent period, requiring 14,000 hours of process
time. Each hour of process time was
expected to cost the firm $11. Actual
activity for the period was higher than anticipated: 18,000 cakes and 15,200
hours. If each hour of process time
actually cost Badger $12, what process-time variance would be disclosed on a
performance report that incorporated static budgets and flexible budgets?
|
|
Static
|
|
Flexible
|
||
|
A.
|
$15,200U
|
$15,200U
|
|||
|
B.
|
$15,200U
|
$28,400U
|
|||
|
C.
|
$28,400U
|
$15,200U
|
|||
|
D.
|
$28,400U
|
$28,400U
|
|||
|
E.
|
None of the
above
|
||||
Answer: C LO: 1
Type: A
7. Lantern Corporation recently prepared a
manufacturing cost budget for an output of 50,000 units, as follows:
|
Direct
materials
|
$100,000
|
|
Direct labor
|
50,000
|
|
Variable
overhead
|
75,000
|
|
Fixed
overhead
|
100,000
|
Actual
units produced amounted to 60,000.
Actual costs incurred were: direct materials, $110,000; direct labor,
$60,000; variable overhead, $100,000; and fixed overhead, $97,000. If Lantern evaluated performance by the use
of a flexible budget, a performance report would reveal a total variance of:
A. $3,000 favorable.
B. $23,000 favorable.
C. $27,000 unfavorable.
D. $42,000 unfavorable.
E. none of the above amounts.
Answer: A LO: 1, 2
Type: A
8. Zin, Inc., is planning its cash needs for an
upcoming period when 85,000 machine hours are expected to be worked. Activity may drop as low as 78,000 hours if
some overdue equipment maintenance procedures are performed; on the other hand,
activity could jump to 94,000 hours if one of Zin's major competitors likely goes
bankrupt. A flexible cash budget to
determine cash needs would best be based on:
A. 78,000 hours.
B. 85,000 hours.
C. 94,000 hours.
D. 78,000 hours and 94,000 hours.
E. 78,000 hours, 85,000 hours, and 94,000
hours.
Answer:
E LO: 2 Type: N
9. Young Corporation has a high probability of
operating at 40,000 activity hours during the upcoming period, and lower
probabilities of operating at 30,000 hours and 50,000 hours. The company's flexible budget revealed the
following:
|
|
30,000 Hours
|
40,000 Hours
|
50,000 Hours
|
|||||
|
Variable costs
|
$135,000
|
|
$180,000
|
|
$225,000
|
|
||
|
Fixed costs
|
720,000
|
|
720,000
|
|
720,000
|
|
||
Young's
flexible-budget formula, where Y is defined as total cost and AH represents
activity hours, is:
A. Y = $4.50AH + $24AH.
B. Y = $4.50AH + $720,000.
C. Y
= $22.50AH.
D. Y
= $180,000 + $18AH.
E. Y = $945,000.
Answer: B LO: 2
Type: A
10. Gourmet Restaurants has the following
flexible-budget formula:
Y
= $13PH + $450,000 where PH is defined as process hours
Which
of the following statements is (are) true?
A. Gourmet has $450,000 of fixed costs.
B. Each additional hour of process time is
expected to cost Gourmet $13.
C. Y would equal the amount shown as "total
cost" in the firm's flexible budget.
D. Choices "A" and "B" are
true.
E. Choices "A," "B," and
"C" are true.
Answer:
E LO: 2 Type: N
11.
Delicious Treats
(DT) anticipated that 84,000 process hours would be worked during an upcoming
accounting period when, in fact, 92,000 hours were actually worked. One of the company’s cost functions is
expressed as follows:
Y =
$16PH + $640,000 where PH is defined as process hours
What
budgeted dollar amount would appear in DT’s static budget and flexible budget
for the preceding cost function?
|
|
Static
|
Flexible
|
||
|
A.
|
$1,984,000
|
|
$1,984,000
|
|
|
B.
|
$1,984,000
|
|
$2,112,000
|
|
|
C.
|
$2,112,000
|
|
$1,984,000
|
|
|
D.
|
$2,112,000
|
|
$2,112,000
|
|
|
E.
|
None
of the above.
|
|||
Answer:
B LO: 2 Type: A, N
12. Which of the following mathematical
expressions is found in a typical flexible-budget formula for overhead?
A. Total activity units + budgeted fixed
overhead cost per unit.
B. Budgeted variable overhead cost per unit +
budgeted fixed overhead cost.
C. (Budgeted variable overhead cost per unit x
total activity units) + budgeted fixed overhead costs.
D. (Budgeted fixed overhead cost per unit x
total activity units) + (budgeted variable overhead cost per unit x total
activity units).
E. None of the above.
Answer:
C LO: 2 Type: RC
13. A flexible budget for 15,000 hours revealed
variable manufacturing overhead of $90,000 and fixed manufacturing overhead of
$120,000. The budget for 25,000 hours
would reveal total overhead costs of:
A. $210,000.
B. $270,000.
C. $290,000.
D. $350,000.
E. some other amount.
Answer: B LO: 2
Type: A
14. A flexible budget is
appropriate for a(n):
|
|
Direct Labor Budget
|
Marketing Budget
|
Administrative Expense Budget
|
|
A.
|
No
|
No
|
No
|
|
B.
|
No
|
Yes
|
Yes
|
|
C.
|
Yes
|
No
|
Yes
|
|
D.
|
Yes
|
Yes
|
Yes
|
|
E.
|
No
|
No
|
Yes
|
Answer:
D LO: 2 Type: N
15.
A
flexible budget is appropriate for a:
|
|
Sales Commission
Budget
|
Direct Material Budget
|
Variable Overhead Budget
|
|
A.
|
Yes
|
No
|
Yes
|
|
B.
|
Yes
|
Yes
|
Yes
|
|
C.
|
No
|
Yes
|
No
|
|
D.
|
No
|
No
|
No
|
|
E.
|
No
|
Yes
|
Yes
|
Answer:
B LO: 2 Type: N
16. The manufacturing overhead applied to
Work-in-Process Inventory by a company that uses standard costing would be
computed as:
A. actual hours x a predetermined (standard)
overhead rate.
B. standard hours x a predetermined (standard)
overhead rate.
C. actual hours x an actual overhead rate.
D. standard hours x an actual overhead rate.
E. $0, as these firms do not apply overhead to
work in process.
Answer:
B LO: 3 Type: RC
17. With respect to overhead, what is the
difference between normal costing and standard costing?
A. Use of a predetermined overhead rate.
B. Use of standard hours versus actual hours.
C. Use of a standard rate versus an actual rate.
D. The choice of an activity measure.
E. There is no difference.
Answer:
B LO: 3 Type: RC
18. The activity measure selected for use in a
variable- and fixed-overhead flexible budget:
A. should be stated in sales dollars.
B. should be approved by the company's
president.
C. should vary in a similar behavior pattern to
the way that variable overhead varies.
D. should remain fixed.
E. should produce the most attractive results
for the individual who will use the budget in managerial applications.
Answer:
C LO: 4 Type: RC
19. Which of the following should have the
strongest cause and effect relationship with overhead costs?
A. Cost followers.
B. Non-value-added costs.
C. Cost drivers.
D. Value-added costs.
E. Units of output.
Answer:
C LO: 4 Type: RC
20. Which of the
following is not an overhead variance?
A. Variable-overhead spending variance.
B. Variable-overhead volume variance.
C. Variable-overhead efficiency variance.
D. Fixed-overhead budget variance.
E. Fixed-overhead volume variance.
Answer:
B LO: 5 Type: RC
21. Which of the following is not an
overhead variance?
A. Variable-overhead spending variance.
B. Variable-overhead efficiency variance.
C. Fixed-overhead efficiency variance.
D. Fixed-overhead budget variance.
E. Fixed-overhead volume variance.
Answer:
C LO: 5 Type: RC
22. Which of the following is used in the
computation of the variable-overhead spending variance?
|
|
Actual Variable Overhead Cost
|
Budgeted Variable Overhead Based on Actual Hours
|
Standard Variable Overhead Applied
|
|
A.
|
No
|
Yes
|
No
|
|
B.
|
No
|
No
|
No
|
|
C.
|
Yes
|
No
|
Yes
|
|
D.
|
Yes
|
Yes
|
No
|
|
E.
|
Yes
|
Yes
|
Yes
|
Answer:
D LO: 5 Type: RC
23. Which of the following elements are needed in
a straightforward calculation of the variable-overhead spending variance?
A. Variable overhead incurred during the period.
B. Budgeted variable overhead based on actual
hours worked.
C. Standard variable overhead applied to
production.
D. Elements "A" and "B"
above.
E. Elements "A" and "C"
above.
Answer:
D LO: 5 Type: RC
24. Assume that machine hours is the cost driver
for overhead. The difference between the
actual variable overhead incurred and the applied variable overhead is the:
A. volume variance.
B. net overhead variance.
C. efficiency variance.
D. sum of the spending and efficiency variances.
E. spending variance.
Answer:
D LO: 5 Type: RC
25. What will cause the variable-overhead
efficiency variance?
A. Efficient or inefficient use of a specific
component of variable overhead (e.g., electricity).
B. Full or partial utilization of major
equipment resources.
C. Production of units in excess of the number
of units sold.
D. Efficient or inefficient use of the cost
driver (e.g., machine hours) for variable overhead.
E. Changes in the salary cost of production
supervisors.
Answer:
D LO: 5 Type: N
26. Smithville uses labor hours to apply variable
overhead to production. If the company's
workers were very inefficient during the period, which of the following
statements would be true about the variable-overhead efficiency variance?
A. The variance would be favorable.
B. The variance would be unfavorable.
C. The nature of the variance (favorable or
unfavorable) would be unknown based on the facts presented.
D. The variance would be the same amount as the
labor efficiency variance.
E. None of the above.
Answer:
B LO: 5 Type: N
27. The difference between the total
actual factory overhead and the total factory overhead applied to
production is the:
A. sum of the spending, efficiency, budget, and
volume variances.
B. controllable variance.
C. efficiency variance.
D. spending variance.
E. volume variance.
Answer:
A LO: 5 Type: RC
28. Which of the following variances would be
useful to help control overhead spending?
|
|
Variable-Overhead Spending Variance
|
Fixed-Overhead Budget Variance
|
Fixed-Overhead Volume Variance
|
|
A.
|
Yes
|
Yes
|
Yes
|
|
B.
|
Yes
|
Yes
|
No
|
|
C.
|
Yes
|
No
|
No
|
|
D.
|
Yes
|
No
|
Yes
|
|
E.
|
No
|
Yes
|
No
|
Answer:
B LO: 5 Type: N
29. The budget variance arises from a comparison
of:
A. budgeted fixed overhead expenditures with
budgeted fixed overhead costs.
B. actual fixed overhead costs with budgeted
fixed overhead costs.
C. actual variable overhead expenditures with
budgeted variable overhead costs.
D. variable overhead costs with budgeted fixed
overhead costs.
E. static-budget amounts with flexible-budget
amounts.
Answer:
B LO: 5 Type: RC
30. Which of the following is used in the
computation of the fixed overhead budget variance?
|
|
Actual Fixed Overhead
|
Budgeted Fixed Overhead
|
Fixed Overhead Applied to Production
|
|
A.
|
Yes
|
Yes
|
Yes
|
|
B.
|
Yes
|
Yes
|
No
|
|
C.
|
Yes
|
No
|
Yes
|
|
D.
|
Yes
|
No
|
No
|
|
E.
|
No
|
Yes
|
Yes
|
Answer:
B LO: 5 Type: RC
31. The difference between budgeted fixed
manufacturing overhead and the fixed overhead applied to production is the:
A. sum of the spending and efficiency variances.
B. controllable variance.
C. efficiency variance.
D. spending variance.
E. volume variance.
Answer:
E LO: 5 Type: RC
32. A fixed-overhead volume variance would
normally arise when:
A. actual hours of activity coincide with actual
units of production.
B. budgeted fixed overhead is overapplied to
production.
C. there is a fixed-overhead budget variance.
D. actual fixed overhead exceeds budgeted fixed
overhead.
E. there is a variable-overhead efficiency
variance.
Answer:
B LO: 5 Type: RC
33. Which variance is commonly associated with
measuring the cost of under- or over-utilization of plant capacity?
A. The variable-overhead spending variance.
B. The variable-overhead efficiency variance.
C. The fixed-overhead budget variance.
D. The fixed-overhead volume variance.
E. The total fixed-overhead variance.
Answer:
D LO: 5 Type: RC
34.
Rowe Corporation
reported the following variances for the period just ended:
Variable-overhead spending variance: $50,000U
Variable-overhead efficiency variance: $28,000U
Fixed-overhead budget variance: $70,000U
Fixed-overhead volume variance: $30,000U
If
Rowe desires to analyze variances that arose primarily from managers'
expenditures in excess of anticipated amounts, the company should focus on
variances that total:
A. $50,000U.
B. $70,000U.
C. $120,000U.
D. $178,000U.
E. some other amount.
Answer:
C LO: 5 Type: A, N
35. Delson Company, which applies overhead to production
on the basis of machine hours, reported the following data for the period just
ended:
Actual units produced: 10,000
Actual variable overhead incurred: $62,000
Actual machine hours worked: 16,000
Standard variable overhead cost per machine hour: $4
If
Delson estimates 1.7 hours to manufacture a completed unit, the company's
variable-overhead spending variance is:
A. $2,000 favorable.
B. $2,000 unfavorable.
C. $6,000 favorable.
D. $6,000 unfavorable.
E. some other amount not listed above.
Answer:
A LO: 5 Type: A
36. Martin Company, which applies overhead to
production on the basis of machine hours, reported the following data for the
period just ended:
Actual units produced: 9,000
Actual variable overhead incurred: $54,400
Actual machine hours worked: 16,000
Standard variable overhead cost per machine hour: $3.50
If
Martin estimates two hours to manufacture a completed unit, the company's
variable-overhead efficiency variance is:
A. $1,600 favorable.
B. $1,600 unfavorable.
C. $7,000 favorable.
D. $7,000 unfavorable.
E. some other amount not listed above.
Answer: C LO: 5
Type: A
Use the
following to answer questions 37-38:
Abbott has a
standard variable overhead rate of $4.50 per machine hour, and each unit
produced has a standard time allowed of three hours. The company's static budget was based on
46,000 units. Actual results for the
year follow.
Actual
units produced: 42,000
Actual
machine hours worked: 120,000
Actual
variable overhead incurred: $520,000
37. Abbott's variable-overhead spending variance
is:
A. $20,000 favorable.
B. $20,000 unfavorable.
C. $27,000 favorable.
D. $27,000 unfavorable.
E. not listed above.
Answer:
A LO: 5 Type: A
38. Abbott's variable-overhead efficiency
variance is:
A. $20,000 favorable.
B. $20,000 unfavorable.
C. $27,000 favorable.
D. $27,000 unfavorable.
E. not listed above.
Answer: C LO: 5
Type: A
39. Arling Company, which applies overhead to
production on the basis of machine hours, reported the following data for the
period just ended:
Actual units produced: 12,000
Actual fixed overhead incurred: $730,000
Actual machine hours worked: 60,000
Budgeted fixed overhead: $720,000
Planned level of machine-hour activity: 50,000
If
Arling estimates four hours to manufacture a completed unit, the company's
standard fixed overhead rate per machine hour would be:
A. $12.00.
B. $14.40.
C. $14.60.
D. $15.00.
E. some other amount.
Answer:
B LO: 5 Type: A
40. Herman Company, which applies overhead to
production on the basis of machine hours, reported the following data for the
period just ended:
Actual units produced: 13,000
Actual fixed overhead incurred: $742,000
Standard fixed overhead rate: $15 per hour
Budgeted fixed overhead: $720,000
Planned level of machine-hour activity: 48,000
If
Herman estimates four hours to manufacture a completed unit, the company's
fixed-overhead budget variance would be:
A. $22,000 favorable.
B. $22,000 unfavorable.
C. $60,000 favorable.
D. $60,000 unfavorable.
E. some other amount.
Answer: B LO: 5
Type: A
41. Enberg Company, which applies overhead to
production on the basis of machine hours, reported the following data for the
period just ended:
Actual units produced: 14,800
Actual fixed overhead incurred: $791,000
Standard fixed overhead rate: $13 per hour
Budgeted fixed overhead: $780,000
Planned level of machine-hour activity: 60,000
If
Enberg estimates four hours to manufacture a completed unit, the company's
fixed-overhead volume variance would be:
A. $10,400 favorable.
B. $10,400 unfavorable.
C. $11,000 favorable.
D. $11,000 unfavorable.
E. some other amount.
Answer: B LO: 5
Type: A
Use the
following to answer questions 42-43:
Benson Company,
which uses a standard cost system, budgeted $600,000 of fixed overhead when
40,000 machine hours were anticipated.
Other data for the period were:
Actual
units produced: 10,000
Standard
production time per unit: 3.9 machine hours
Fixed
overhead incurred: $620,000
Actual
machine hours worked: 42,000
42. Benson's fixed-overhead budget variance is:
A. $10,000 favorable.
B. $15,000 favorable.
C. $15,000 unfavorable.
D. $20,000 favorable.
E. $20,000 unfavorable.
Answer:
E LO: 5 Type: A
43. Benson's fixed-overhead volume variance is:
A. $10,000 favorable.
B. $15,000 favorable.
C. $15,000 unfavorable.
D. $20,000 favorable.
E. $20,000 unfavorable.
Answer: C LO: 5
Type: A
Use the
following to answer questions 44-46:
Sussex Company
uses a standard cost system and prepared the following budget for May when
24,000 machine hours of activity were anticipated: variable overhead, $48,000;
fixed overhead: $240,000. Actual data
for May were:
Standard
machine hours allowed for output attained: 25,000
Actual
machine hours worked: 24,000
Variable
overhead incurred: $50,000
Fixed
overhead incurred: $250,000
44. The standard variable overhead rate for May
is:
A. $2.00.
B. $2.08.
C. $3.00.
D. $5.00.
E. $5.21.
Answer:
A LO: 5 Type: A
45. The variable-overhead spending and efficiency
variances are:
|
|
Variable-Overhead
Spending Variance
|
Variable-Overhead Efficiency Variance
|
|
A.
|
$0
|
$0
|
|
B.
|
$0
|
$2,000
unfavorable
|
|
C.
|
$2,000
unfavorable
|
$0
|
|
D.
|
$2,000
favorable
|
$2,000
unfavorable
|
|
E.
|
$2,000
unfavorable
|
$2,000
favorable
|
Answer: E LO: 5
Type: A
46. The fixed-overhead budget and volume
variances are:
|
|
Fixed-Overhead
Budget Variance
|
|
Fixed-Overhead
Volume Variance
|
|
|
A.
|
$0
|
$10,000 favorable
|
||
|
B.
|
$10,000
favorable
|
$0
|
||
|
C.
|
$10,000
favorable
|
$10,000 unfavorable
|
||
|
D.
|
$10,000
unfavorable
|
$0
|
||
|
E.
|
$10,000
unfavorable
|
$10,000 favorable
|
||
Answer: E LO: 5
Type: A
Use the
following to answer questions 47-51:
Duncanville,
Inc., has the following overhead standards:
Variable
overhead: 4 hours at $8 per hour
Fixed
overhead: 4 hours at $10 per hour
The standards were based on
a planned activity of 20,000 machine hours when 5,000 units were scheduled for
production. Actual data follow.
Variable
overhead incurred: $167,750
Fixed
overhead incurred: $210,000
Machine
hours worked: 19,800
Actual
units produced: 5,100
47. Duncanville's fixed-overhead budget variance
is:
A. $6,000 unfavorable.
B. $7,000 unfavorable.
C. $10,000 unfavorable.
D. $12,000 unfavorable.
E. not listed above.
Answer:
C LO: 5 Type: A
48. Duncanville's fixed-overhead volume variance
is:
A. $4,000 favorable.
B. $4,000 unfavorable.
C. $10,000 favorable.
D. $10,000 unfavorable.
E. not listed above.
Answer: A LO: 5
Type: A
49. Duncanville's variable-overhead spending
variance is:
A. $550 favorable.
B. $4,550 unfavorable.
C. $4,800 favorable.
D. $9,350 unfavorable.
E. not listed above.
Answer: D LO: 5
Type: A
50. Duncanville's variable-overhead efficiency
variance is:
A. $550 favorable.
B. $550 unfavorable.
C. $4,800 favorable.
D. $4,800 unfavorable.
E. not listed above.
Answer: C LO: 5
Type: A
51. The amount of variable overhead that
Duncanville applied to production is:
A. $158,400.
B. $160,000.
C. $163,200.
D. $167,750.
E. not listed above.
Answer:
C LO: 5 Type: A
52. Luke, Inc., has a standard variable overhead
rate of $5 per machine hour, with each completed unit expected to take three
machine hours to produce. A review of
the company's accounting records found the following:
Actual production: 19,500 units
Variable-overhead efficiency variance: $9,000U
Variable-overhead spending variance: $21,000F
What
was Luke's actual variable overhead during the period?
A. $262,500.
B. $280,500.
C. $304,500.
D. $322,500.
E. Some other amount.
Answer:
B LO: 5 Type: A, N
53. Bushnell, Inc., has a standard variable
overhead rate of $4 per machine hour, with each completed unit expected to take
three machine hours to produce. A review
of the company's accounting records found the following:
Actual variable overhead: $210,000
Variable-overhead efficiency variance: $18,000U
Variable-overhead spending variance: $30,000F
How
many units did Bushnell actually produce during the period?
A. 13,500.
B. 16,500.
C. 18,500.
D. 21,500.
E. Some other amount.
Answer:
C LO: 5 Type: A, N
54. Atlanta Enterprises incurred $828,000 of
fixed overhead during the period. During
that same period, the company applied $845,000 of fixed overhead to production
and reported an unfavorable budget variance of $41,000. How much was Atlanta's budgeted fixed
overhead?
A. $787,000.
B. $804,000.
C. $869,000.
D. $886,000.
E. Not enough information to judge.
Answer:
A LO: 5 Type: A, N
Use the
following to answer questions 55-56:
SanBox Company
is choosing new cost drivers for its accounting system. One driver is labor hours; the other is a
combination of machine hours for unit variable costs and number of setups for a
pool of batch-level costs. Data for the
past year follow.
|
|
Budget
|
Actual
|
|
|
Labor hours
|
200,000
|
200,000
|
|
|
Machine hours
|
360,000
|
450,000
|
|
|
Number of
setups
|
3,000
|
3,300
|
|
|
Unit variable
cost pool
|
$1,600,000
|
$2,000,000
|
|
|
Batch-level
cost pool
|
$900,000
|
$990,000
|
|
55. Assume that both cost pools are combined into
a single pool, and labor hours is the driver.
The total flexible budget for the actual level of labor hours and the
total variance for the combined pool are:
|
|
Flexible Budget
|
Variance
|
|
A.
|
$1,600,000
|
$400,000U
|
|
B.
|
$2,500,000
|
$490,000U
|
|
C.
|
$2,590,000
|
$400,000U
|
|
D.
|
$2,900,000
|
$90,000U
|
|
E.
|
$2,990,000
|
$0
|
Answer:
B LO: 7 Type: A
56. Assume that the two separate pools are
used. The flexible budget amounts for
the actual level of machine hours and actual number of setups are:
|
|
Unit Variable Cost Pool
|
Batch-Level
Cost Pool
|
|
A.
|
$1,600,000
|
$900,000
|
|
B.
|
$1,600,000
|
$990,000
|
|
C.
|
$2,000,000
|
$900,000
|
|
D.
|
$2,000,000
|
$990,000
|
|
E.
|
$2,500,000
|
$0
|
Answer:
D LO: 7 Type: A
57. What is the most common treatment of the
fixed-overhead budget variance at the end of the accounting period?
A. Reported as a deferred charge or credit.
B. Allocated among Work-in-Process Inventory,
Finished-Goods Inventory, and Cost of Goods Sold.
C. Charged or credited to Cost of Goods Sold.
D. Allocated among Cost of Goods Manufactured,
Finished-Goods Inventory, and Cost of Goods Sold.
E. Charged or credited to Income Summary.
Answer:
C LO: 8
Type: RC
58. In an effort to reduce record-keeping
procedure, companies that sell perishable goods will often enter the standard
cost of direct material, direct labor, and manufacturing overhead directly into
what account?
A. Work-in-Process Inventory.
B. Finished-Goods Inventory.
C. Cost of Goods Sold.
D. Cost of Goods Manufactured.
E. Sales Revenue.
Answer:
C LO: 8 Type: RC
59. When actual variable cost per unit equals
standard variable cost per unit, the difference between actual and budgeted
contribution margin is explained by a combination of which two variances?
A. The sales-volume variance and the
fixed-overhead volume variance.
B. The sales-volume variance and the
fixed-overhead budget variance.
C. The sales-price variance and the
fixed-overhead volume variance.
D. The sales-price variance and sales-volume
variance.
E. The sales-price variance and fixed-overhead
budget variance.
Answer:
D LO: 9 Type: RC
60. The sales-volume variance equals:
A. (actual sales volume - budgeted sales volume)
x actual sales price.
B. (actual sales volume - budgeted sales volume)
x actual contribution margin.
C. (actual sales volume - budgeted sales volume)
x budgeted sales price.
D. (actual sales price - budgeted sales price) x
budgeted sales volume.
E. (actual sales price - budgeted sales price)
x fixed-overhead volume variance.
Answer:
C LO: 9 Type: RC
Use the
following to answer questions 61-62:
Master Products
has the following information for the year just ended:
|
|
Budget
|
|
Actual
|
|
Sales in
units
|
15,000
|
|
14,000
|
|
Sales
|
$150,000
|
|
$147,000
|
|
Less:
Variable expenses
|
90,000
|
|
82,600
|
|
Contribution
margin
|
$ 60,000
|
|
$ 64,400
|
|
Less: Fixed
expenses
|
35,000
|
|
40,000
|
|
Operating
income
|
$ 25,000
|
|
$ 24,400
|
61. The company's sales-volume variance is:
A. $3,000 unfavorable.
B. $4,000 unfavorable.
C. $4,400 favorable.
D. $10,000 unfavorable.
E. $10,000 favorable.
Answer: D LO: 9
Type: A
62. The company's sales-price variance is:
A. $3,000 unfavorable.
B. $7,000 unfavorable.
C. $7,000 favorable.
D. $7,500 unfavorable.
E. $7,500 favorable.
Answer: C LO: 9
Type: A
EXERCISES
Static Budget vs.
Flexible Budget
63. Bavaria's budget for variable overhead and
fixed overhead revealed the following information for an anticipated 40,000
hours of activity: variable overhead, $348,000; fixed overhead, $600,000.
The
company actually worked 43,000 hours, and actual overhead incurred was:
variable, $365,500; fixed, $608,000.
Required:
A.
Compute
the company's total cost variance for variable overhead and fixed overhead if
the firm uses a static budget to help assess performance.
B.
Repeat
part "A" assuming the use of a flexible budget.
C.
Which
of the two budgets (static or flexible) is preferred for performance
evaluations? Why?
LO: 1,
2 Type: A, N
Answer:
|
A.
|
Actual
($365,500 + $608,000)
|
$973,500
|
|||
|
|
Less: Static
budget ($348,000 + $600,000)
|
948,000
|
|||
|
|
Variance,
unfavorable
|
$ 25,500
|
|||
|
B.
|
Budgeted
variable overhead: $348,000 ÷ 40,000 hours = $8.70 per hour
|
||||
|
|
|
|
|||
|
|
Flexible
budget [(43,000 hours x $8.70) + $600,000]
|
$974,100
|
|||
|
|
Less:
Actual ($365,500 + $608,000)
|
973,500
|
|||
|
|
Variance,
favorable
|
$ 600
|
|||
|
C.
|
Flexible
budgets are preferred in performance evaluations. The use of flexible budgets eliminates
volume differences between actual and budgeted activity, allowing the analyst
to concentrate on differences between actual and budgeted costs "on the
same, level playing field." The
result is a clearer picture to study.
|
||||
Flexible Budgets
64. The Houston Chamber Orchestra presents a
series of concerts throughout the year.
Budgeted fixed costs total $300,000 for the concert season; variable
costs are expected to average $5 per patron.
The orchestra uses flexible budgeting.
Required:
A.
Prepare
a flexible budget that shows the expected costs of 8,000, 8,500, and 9,000
patrons.
B.
Construct
the orchestra's flexible budget formula.
C.
Assume
that 8,700 patrons attended concerts during the year just ended, and actual
costs were: variable, $42,000; fixed, $307,500.
Evaluate the orchestra's financial performance by computing variances
for variable costs and fixed costs.
LO: 1,
2 Type: A
Answer:
|
A.
|
Patrons
|
8,000
|
|
8,500
|
|
9,000
|
|||
|
|
Variable
cost at $5
|
$
40,000
|
|
$ 42,500
|
|
$ 45,000
|
|||
|
|
Fixed
cost
|
300,000
|
|
300,000
|
|
300,000
|
|||
|
|
Total
|
$340,000
|
|
$342,500
|
|
$345,000
|
|||
|
B.
|
Total
budgeted cost = (number of patrons x $5) + $300,000
|
||||||||
|
C.
|
|
Budget*
|
|
Actual
|
|
Variance
|
|||
|
|
Variable
cost
|
$
43,500
|
|
$ 42,000
|
|
$1,500F
|
|||
|
|
Fixed
cost
|
300,000
|
|
307,500
|
|
7,500U
|
|||
|
|
Total
|
$343,500
|
|
$349,500
|
|
$6,000U
|
|||
|
|
*Variable
budget: 8,700 patrons x $5
The
variances reveal that the orchestra exceeded its budget for 8,700 patrons by
$6,000. The overall performance was
not that bad, however, as the variances (individually and in total) are small
in both dollar- and percentage-terms.
|
||||||||
Budgets, Performance Evaluation
65. Calgary Insurance uses budgets to forecast
and monitor overhead throughout the organization. The following budget formula relates to the
processing of applications for automobile policies in any given month:
Total overhead = $6.60APH + $12,000
where APH
= application processing hours
The typical automobile insurance policy has an estimated
processing time of 1.5 hours.
During
June, management originally anticipated that 280 applications would be
processed. Activity was lower than
expected, with only 240 applications completed by month-end, and the following
costs were incurred: variable overhead, $2,780; fixed overhead, $11,900.
Required:
A.
What
volume level would have been used if Calgary had constructed a static budget?
B.
Construct
a flexible budget that shows the expected monthly variable and fixed overhead
costs of processing 200, 250, and 300 applications.
C.
From
a cost perspective, did the company perform better or worse than anticipated in
June? Show calculations to support your
answer.
LO: 1,
2 Type: A, N
Answer:
|
A.
|
The static budget would
have been based on the original forecast of 280 applications and 420
processing hours (280 x 1.5).
|
|
B.
|
Processing hours*
|
300
|
|
375
|
|
450
|
|
|
|
Variable cost at $6.60
|
$ 1,980
|
|
$ 2,475
|
|
$ 2,970
|
|
|
|
Fixed cost
|
12,000
|
|
12,000
|
|
12,000
|
|
|
|
Total
|
$13,980
|
|
$14,475
|
|
$14,970
|
|
|
|
*Number of applications
(200, 250, 300) x 1.5 hours
|
||||||
|
C.
|
The company did worse than
expected. Despite processing 40 fewer
applications (280 - 240) than anticipated, costs exceeded budgeted amounts by
$304:
|
||||||
|
|
Actual
($2,780 + $11,900)
|
$14,680
|
|||||
|
|
Flexible
budget [(240 x 1.5 x $6.60) + $12,000]
|
14,376
|
|||||
|
|
Variance,
unfavorable
|
$
304
|
|||||
Budgets, Performance Evaluation
66. The Marketing Club at Northern University recently
held an end-of-year dinner and swim party, which the treasurer noted was a
financial success. "Attendance was
an all-time high, 60 members, and the results were much better than expected." The treasurer presented the following
performance report at the executive board's June meeting:
|
Budget
|
|
Actual
|
|
Variance
|
||||||
|
Revenue
|
$1,575
|
|
$2,205
|
|
$630F
|
|||||
|
Food
|
$ 675
|
|
$ 870
|
|
$195U
|
|||||
|
Beverages
|
315
|
|
480
|
|
165U
|
|||||
|
Disc
jockey
|
150
|
|
175
|
|
25U
|
|||||
|
Facility
rental
|
200
|
|
200
|
|
----
|
|||||
|
Total costs
|
$1,340
|
|
$1,725
|
|
$385U
|
|||||
|
Profit
|
$ 235
|
|
$ 480
|
|
$245F
|
|||||
The budget was based on the assumptions that follow.
·
Forty-five members
would attend at a fixed ticket price of $35.
·
Food and beverage
costs were anticipated to be $15 and $7 per attendee, respectively.
·
A disc jockey was
hired via a written contract at $50 per hour.
Required:
A. Briefly evaluate the meaningfulness of the treasurer's
performance report.
B.
Prepare a
performance report by using flexible budgeting and determine whether the
end-of-year party was as successful as originally reported.
C.
Based on your
answer in requirement "B," present a possible explanation for the
variances in revenue, food costs, beverage costs, and the disc jockey.
LO: 1, 2 Type:
A, N
Answer:
A.
The performance
report is not very meaningful, as it was prepared based on the original
estimate that 45 tickets would be sold.
With 60 members in attendance, the resulting report compares anticipated
revenues, costs, and profit at one level of activity against actual amounts at
a totally different volume. In effect,
it's a comparison of apples vs. oranges.
B.
The end-of-year
party was successful as the treasurer claimed, as it netted the Marketing Club
$480. However, when actual results are
compared against what should have happened for the increased number of
attendees (60), the overall profitability was only $50 greater than expected.
|
Budget
|
|
Actual
|
|
Variance
|
|||||
|
Revenue*
|
$2,100
|
|
$2,205
|
|
$105F
|
||||
|
Food*
|
$ 900
|
|
$ 870
|
|
$ 30F
|
||||
|
Beverages*
|
420
|
|
480
|
|
60U
|
||||
|
Disc
jockey
|
150
|
|
175
|
|
25U
|
||||
|
Facility
rental
|
200
|
|
200
|
|
----
|
||||
|
Total costs
|
$1,670
|
|
$1,725
|
|
$ 55U
|
||||
|
Profit
|
$ 430
|
|
$ 480
|
|
$ 50F
|
||||
*Revenue, food, and beverage figures ($35, $15, and
$7, respectively) are all based on 60 attendees.
C. Revenue ($105F)—Three members who purchased tickets
didn't attend ($105 ÷ $35 = 3);
the
Club received a donation from the University or the faculty advisor to help
offset operating costs.
Food ($30F)—The actual food cost per person was less
than expected; attendees ate less than expected.
Beverages ($60U)—The actual beverage cost was more
than expected; attendees drank more than expected.
Disc jockey ($25U)—The disc jockey played music for
3.5 hours (3.5 x $50 = $175) rather than the 3 hours that were originally
budgeted.
Flexible Budgets and
Performance Evaluation
67. Hempstead Corporation plans to manufacture
8,000 units over the next month at the following costs: direct materials,
$480,000; direct labor, $60,000; variable manufacturing overhead, $150,000; and
fixed manufacturing overhead, $300,000.
The last amount, which includes $24,000 of straight-line depreciation,
resulted in a total budget of $990,000.
Shortly
after the conclusion of the month, Hempstead reported the following costs:
Direct
materials used
|
$490,500
|
|
Direct labor
|
69,600
|
|
Variable manufacturing
overhead
|
132,000
|
|
Depreciation
|
24,000
|
|
Other fixed manufacturing
overhead
|
272,000
|
|
Total
|
$988,100
|
Howard
Krueger and his crews turned out 7,200 units—a remarkable feat given that the
firm's manufacturing plant was closed for several days because of blizzards and
impassable roads. Krueger was especially
pleased with the fact that total actual costs were less than budget. He was thus very surprised when Hempstead's
general manager expressed unhappiness about the plant's financial performance.
Required:
A.
Prepare
a performance report that fairly compares budgeted and actual costs for the
period just ended—namely, the report that the general manager likely used when
assessing performance.
B.
Should
Krueger be praised for "having met the budget" or is the general
manager's unhappiness justified?
Explain, citing any apparent problems for the firm.
LO: 1,
2 Type: A, N
Answer:
|
A.
|
|
Budget:
7,200
Units
|
Actual:
7,200
Units
|
Variance
|
|||
|
|
Direct materials used
($60.00)
|
$432,000
|
$490,500
|
$58,500U
|
|||
|
|
Direct labor ($7.50)
|
54,000
|
69,600
|
15,600U
|
|||
|
|
Variable manufacturing
overhead ($18.75)
|
135,000
|
132,000
|
3,000F
|
|||
|
|
Depreciation
|
24,000
|
24,000
|
----
|
|||
|
|
Other fixed manufacturing
overhead
|
276,000
|
272,000
|
4,000F
|
|||
|
|
Total
|
$921,000
|
$988,100
|
$67,100U
|
|||
|
|
Budget calculations:
Direct
materials used: $480,000 ÷ 8,000 units = $60.00 per unit
Direct
labor: $60,000 ÷ 8,000 units = $7.50 per unit
Variable
manufacturing overhead: $150,000 ÷ 8,000 units = $18.75 per unit
Other
fixed manufacturing overhead: $300,000 - $24,000 = $276,000 per month
|
||||||
|
B.
|
The general manager's
unhappiness is appropriate because of the variances that have arisen. By comparing the original budget of
$990,000 vs. actual costs of $988,100, Krueger appears to have met the
budget. Bear in mind, though, that
volume was below the original monthly expectation of 8,000 units—presumably
because of the plant closure. A
reduced volume will likely lead to lower variable costs than anticipated (and
resulting favorable variances).
When the volume
differential is removed, variable cost variances turn unfavorable for direct
materials and direct labor. These two
amounts are, respectively, 13.5% and 28.9% greater than budget.
|
||||||
Understanding a Flexible
Budget; Cost Behavior
68. Midwestern University operates a motor pool
for the convenience of its faculty and staff.
The following budget was prepared for an upcoming period:
|
Gasoline and oil
|
$ 40,000
|
|
Minor repairs
|
6,000
|
|
Insurance
|
20,000
|
|
Office help
|
24,000
|
|
Depreciation
|
30,000
|
|
Total
|
$120,000
|
The
budget was based on the assumptions of 20 vehicles, with each vehicle being
driven 8,000 miles. Midwestern acquired
two additional vehicles early in the period under study. Actual miles driven during the period totaled
180,000.
Discussions
with the motor pool manager revealed that pool costs are variable and fixed in
nature. The manager believed that miles
driven was the most appropriate cost driver for studying gasoline and oil
expense. In contrast, the number of
vehicles in the pool was the best base to use when studying other selected
costs.
Required:
A.
Contrast
a static budget with a flexible budget.
B.
Suppose
that the university's budget officer desired to prepare a report that compared
budgeted and actual costs. Should the
report be based on a static budget or a flexible budget? Why?
C.
On
the basis of the information presented, determine the amounts for the five
preceding costs that would be used in a flexible budget.
LO: 1,
2 Type: A, N
Answer:
A.
A
static budget is based on a single expected activity level. In contrast, a flexible budget reflects data
for several activity levels.
B.
A
performance report that incorporates flexible budgets is preferred. The report compares budgeted and actual
performance at the same volume level, eliminating any variations in activity. In essence, everything is placed on a
"level playing field."
C.
Gasoline
and oil: $40,000 ÷ (8,000 x 20) = $0.25 per mile; 180,000 miles x $0.25
= $45,000
Minor
repairs: $6,000 ÷ 20 = $300 per vehicle; 22 vehicles x $300 = $6,600
Insurance:
$20,000 ÷ 20 = $1,000 per vehicle; 22 vehicles x $1,000 = $22,000
Office
help: $24,000 (fixed)
Depreciation:
$30,000 ÷ 20 = $1,500 per vehicle; 22 vehicles x $1,500 = $33,000
Flexible Budgets and
Variable Overhead Variances
69. Hot Stuff operates a delivery service for
local restaurants, delivering call-in, to-go meals for restaurant
customers. Variable overhead costs are
budgeted at $3 per hour, and the typical roundtrip takes a driver 45 minutes to
complete. Actual results for March
follow.
Number of roundtrips run: 1,560
Hours of delivery time: 1,250
Variable overhead cost incurred: $3,450
Hot
Stuff uses flexible budgets and variance analysis to monitor performance.
Required:
A.
Prepare
a flexible-budget performance report that shows (1) actual variable overhead,
(2) the amount of variable overhead that should have been incurred for the
number of roundtrips taken, and (3) the variance between these amounts.
B.
Compute
the company's variable-overhead spending and efficiency variances.
C.
Compare
the variances that you computed in requirements "A" and
"B," and comment on your findings.
LO: 1, 5,
6 Type: A, N
Answer:
|
A.
|
Budgeted variable overhead
(1,560 x 45/60 x $3)
|
$3,510
|
||
|
|
Less: Actual variable
overhead
|
3,450
|
||
|
|
Variance, favorable
|
$
60
|
||
|
B.
|
Spending variance: $3,450 -
(1,250 x $3) = $300F
Efficiency variance: (1,250
x $3) - (1,560 x 45/60 x $3) = $240U
|
|||
|
|
The spending and efficiency
variances comprise the "total" variance as shown in the
flexible-budget performance report ($300F + $240U = $60F). That is, variable overhead was $60 lower
than anticipated because of variations in both spending habits and driver
efficiency.
|
|||
Straightforward Variance Analysis
70. Hunt, Inc., uses a standard cost system when
accounting for its sole product. Planned
production is 60,000 process hours per month, which gives rise to the following
per-unit standards:
Variable overhead: 13 hours at $15 per hour
Fixed overhead: 13 hours at $7 per hour
During
September, 5,100 units were produced and the company incurred the following overhead
costs: variable, $942,500; fixed, $429,000.
Actual process hours totaled 65,000.
Required:
A.
Calculate
the spending and efficiency variances for variable overhead.
B.
Calculate
the budget and volume variances for fixed overhead.
LO: 5 Type: A
Answer:
A.
Spending
variance: $942,500 - (65,000 x $15) = $32,500F
Efficiency
variance: (65,000 x $15) - (5,100 x 13 x $15) = $19,500F
B.
Budget
variance: $429,000 - (60,000 x $7) = $9,000U
Volume
variance: (60,000 x $7) - (5,100 x 13 x $7) = $44,100F*
*Some accountants choose to label a negative volume
variance as "favorable," while others prefer to omit the
unfavorable/favorable label altogether.
Straightforward Variance Analysis
71. Jefferson Corporation uses a standard cost
system, applying manufacturing overhead on the basis of machine hours. The company's overhead standards per unit are
shown below.
Variable overhead: 4 hours at $9 per hour
Fixed overhead: 4 hours at $6* per hour
*Based on planned monthly activity of 120,000 machine hours
Actual
data for May were:
Number of units produced: 29,000
Number of machine hours worked: 125,000
Variable overhead costs incurred: $1,085,000
Fixed overhead costs incurred: $755,000
Required:
A.
Calculate
the spending and efficiency variances for variable overhead.
B.
Calculate
the budget and volume variances for fixed overhead.
LO: 5 Type: A
Answer:
A.
Spending
variance: $1,085,000 - (125,000 x $9) = $40,000F
Efficiency
variance: (125,000 x $9) - (29,000 x 4 x $9) = $81,000U
B.
Budget
variance: $755,000 - (120,000 x $6) = $35,000U
Volume
variance: (120,000 x $6) - (29,000 x 4 x $6) = $24,000U*
*Some accountants choose to label a positive volume
variance as "unfavorable," while others prefer to omit the
unfavorable/favorable label altogether.
Basic Variance
Analysis
72. The following information relates to Joplin
Company for the period just ended:
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Standard
variable overhead rate per hour
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$1
|
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Standard
fixed overhead rate per hour
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$2
|
|
Planned
monthly activity
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40,000
machine hours
|
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Actual
production completed
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82,000 units
|
|
Standard
machine processing time
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Two units per
hour
|
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Actual
variable overhead
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$37,000
|
|
Actual total
overhead
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$121,000
|
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Actual
machine hours worked
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40,500
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All
of the company's overhead is variable or fixed in nature.
Required:
A.
Calculate
the spending and efficiency variances for variable overhead.
B.
Calculate
the budget and volume variances for fixed overhead.
LO: 5 Type: A
Answer:
A.
Spending
variance: $37,000 - (40,500 x $1) = $3,500F
Efficiency
variance: (40,500 x $1) - (82,000 x 0.5* x $1) = $500F
*Two units
per hour = 0.5 hours per unit
B.
Budget
variance: ($121,000 - $37,000) - (40,000 x $2) = $4,000U
Volume
variance: (40,000 x $2) - (82,000 x 0.5* x $2) = $2,000F**
* Two units per hour = 0.5
hours per unit
**Some accountants choose to label a negative volume
variance as "favorable," while others prefer to omit the
unfavorable/favorable label altogether.
Variance
Interrelationships: Working Backward
73. The following selected information was
extracted from the accounting records of Austin, Inc.:
Planned manufacturing activity: 40,000 machine hours
Standard variable-overhead rate per machine hour: $16
Budgeted fixed overhead: $100,000
Variable-overhead spending variance: $92,000U
Variable-overhead efficiency variance: $102,000F
Fixed-overhead budget variance: $25,000U
Total actual overhead: $675,000
Required:
Determine
the following: actual fixed overhead, actual variable overhead, actual machine
hours worked, standard machine hours allowed for actual production, and the
fixed-overhead volume variance.
LO: 5 Type: A, N
Answer:
Actual
fixed overhead: $125,000
Actual
variable overhead: $550,000
Actual
machine hours worked: 28,625
Standard
machine hours allowed: 35,000
Fixed-overhead
volume variance: $12,500U*
*Some accountants choose to label a positive volume
variance as "unfavorable," while others prefer to omit the
unfavorable/favorable label altogether.
Variable overhead analysis:
|
|
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28,625 x $16
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35,000 x $16
|
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$550,000
|
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$458,000
|
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$560,000
|
 |
 $92,000U |
 |
 $102,000F |
|
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Fixed overhead analysis:
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|
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35,000 x $2.50*
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$125,000
|
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$100,000
|
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$87,500
|
 |
$25,000U
|
  |
 $12,500U |
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*$100,000 ÷ 40,000 hours
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Fixed Overhead Variances: Computation and Analysis
74.
Alexander
Corporation applies fixed manufacturing overhead to production on the basis of
machine hours worked. The following data
relate to the month just ended:
Actual fixed overhead incurred: $1,245,000
Budgeted fixed overhead: $1,200,000
Anticipated machine hours: 240,000
Standard machine hours per finished unit: 8
Actual finished units completed: 31,250
Required:
A. Compute Alexander’s standard fixed overhead rate per
machine hour.
B.
Determine
Alexander’s fixed overhead budget variance and fixed overhead volume variance.
C. Calculate the amount of fixed overhead applied to
production.
D.
Consider the two
events that follow and determine whether the event will affect the fixed
overhead budget variance, the fixed overhead volume variance, both variances,
or neither variance. Assume that
Alexander has not yet revised its standards to reflect these events if a
revision is warranted.
1. A raw material shortage halted production for two
days.
2.
An additional
assembly line supervisor was hired at the beginning of the month.
LO: 5 Type: A, N
Answer:
A.
Budgeted fixed
overhead ($1,200,000) ÷ anticipated machine hours (240,000) = $5
B.
Budget variance:
$1,245,000 - $1,200,000 = $45,000U
Volume variance: $1,200,000 - (31,250 x 8 x $5) =
$50,000F*
*Some accountants choose to label a
negative variance as “favorable,” while others prefer to omit the
unfavorable/favorable label altogether.
C.
31,250 x $8 x $5
= $1,250,000
D. 1. The volume variance would be affected because
of reduced output.
2. The budget variance would be affected because
actual fixed overhead will increase.
Overhead and Variances:
Focus on Interpretation
75. Hanks Company uses a standard cost system and
applies manufacturing overhead to products on the basis of machine hours. The following information is available for
the year just ended:
Standard variable overhead rate per machine hour: $2.50
Standard fixed overhead rate per machine hour: $5.00
Planned activity during the period: 30,000 machine hours
Actual production: 10,700 finished units
Production standard: Three machine hours per unit
Actual variable overhead: $86,200
Actual total overhead: $225,500
Actual machine hours worked: 35,100
Required:
A.
Calculate
the budgeted fixed overhead for the year.
B.
Did
Hanks spend more or less than anticipated for fixed overhead? How much?
C.
Was
variable overhead under- or overapplied during the year? By how much?
D.
Was
Hanks efficient in its use of machine hours?
Briefly explain.
E.
Would
the company's efficiency or inefficiency in the use of machine hours have any
effect on Hanks' overhead variances? If
"yes," which one(s)?
LO: 5 Type: A, N
Answer:
|
A.
|
Let X = budgeted fixed
overhead
X ÷ 30,000 machine hours
= $5.00 per hour
X = $150,000
|
|||
|
B.
|
Hanks spent less than
anticipated. Actual fixed overhead
amounted to $139,300 ($225,500 - $86,200) when the budget was set at $150,000
(part "A"). The
fixed-overhead budget variance is $10,700 favorable ($150,000 - $139,300).
|
|||
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C.
|
Variable overhead is
underapplied by $5,950:
|
|
||
|
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Actual
variable overhead
|
$86,200
|
||
|
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Applied
overhead: Standard hours allowed x standard rate
|
|
||
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(10,700 x 3 x $2.50)
|
80,250
|
||
|
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Underapplied variable overhead
|
$ 5,950
|
||
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||
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D.
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No. The company used 35,100 machine hours when
it should have used 32,100 hours (10,700 x 3).
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E.
|
Yes. The actual and standard machine hours are
used in the calculation of the variable-overhead efficiency variance.
|
|||
DISCUSSION
QUESTIONS
Overhead
Application: Normal Costing vs. Standard Costing
76. Briefly describe the procedures that are used
to apply manufacturing overhead to production for companies that use (1) normal
costing systems and (2) those that use standard costing systems.
LO: 3 Type: RC
Answer:
In a
normal costing system, overhead is applied to the Work-in-Process Inventory
account as follows (assuming hours as an application base): actual hours x
predetermined overhead rate. The actual
hours represent the actual time consumed in processing the actual number of
units produced (either completed or those in production). A similar procedure is followed in a standard
costing system except that the predetermined rate is multiplied by the standard
hours allowed (i.e., the actual production x the standard time per unit).
Understanding the
Variable-Overhead Efficiency Variance
77. A production manager was recently given a
performance report that showed a sizable unfavorable variable-overhead
efficiency variance. The manager was
puzzled as to how the department could be inefficient in the use/incurrence of
this cost.
Required:
Briefly
explain the nature of this variance to the manager. Does the variance really have much to do with
variable overhead efficiencies or inefficiencies? Discuss.
LO: 5 Type: RC
Answer:
The
variable-overhead efficiency variance can be somewhat misleading. It is computed as follows: (actual quantity x
standard price) - (standard quantity x standard price). The quantities consist of the actual and
standard amounts of the application base that is used to apply overhead to
production (such as labor hours or machine hours). The variance really has nothing to do with
the manager's efficiency or inefficiency in variable overhead consumption;
rather, it deals with the efficiency or inefficiency of the application base.
Understanding the
Fixed-Overhead Volume Variance
78. Briefly explain the nature of the
fixed-overhead volume variance. Be sure
to address the issue of capacity utilization in your response.
LO: 5 Type: RC
Answer:
The
fixed-overhead volume variance is the difference between a company's budgeted
amount of fixed overhead and that applied to production. The variance will arise if the standard hours
allowed for production differ from the hours of planned activity.
This hour
difference is what some accountants call an over-utilization or
under-utilization of capacity. The cost
of this under- or over-utilization is really more than the fixed overhead
amount just described, courtesy of the contribution margin lost on the units
not produced (when capacity is under-utilized).
Note that in the opposite case, the company "gains" from the
contribution margin associated with the excess units.
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