Question 1

If inventories in a business using a standard cost system are insignificant, the firm would be justified (in a practical sense) by disposing of variances each year:
A) As an adjustment to the finished goods inventory only.
B) As an adjustment to cost of goods sold only.
C) As adjustments to both inventory accounts and the cost of goods sold for the period.
D) As a special item (gain or loss) on the income statement for the period.
E) As an adjustment to the work-in-process (WIP) inventory only.

Accepted Answer

Since inventories are insignificant, the variances should be disposed of in the period they occur rather than carrying them forward into future accounting periods. In such cases, it would be appropriate to adjust the cost of goods sold only for the period. This adjusts the cost to reflect the actual cost incurred rather than the standard cost applied. Adjusting the inventory accounts for insignificant variances would be unnecessary and could result in extra work for the accounting department without providing any meaningful benefit. Similarly, disclosing the variances as a special item on the income statement would provide little value to the users of financial statements. Therefore, option B is the best choice.

Question 2

In a standard cost system, an unfavorable production-volume variance would result if:
A) There is an unfavorable labor efficiency variance.
B) There is an unfavorable labor rate variance.
C) Actual production is less than the "denominator volume" (that is, the volume level used to establish the fixed overhead application rate).
D) There is an unfavorable fixed manufacturing overhead spending variance.
E) Actual fixed overhead costs are greater than budgeted fixed overhead costs.

Accepted Answer

Production-volume variance measures the difference between the overhead applied to work in process and the overhead that should have been applied based on the actual level of activity. This variance occurs when there is a difference in actual and budgeted production levels. If actual production is less than the denominator volume, the fixed overhead rate applied to products would be higher than the rate required to cover actual fixed overhead expenses. This results in unfavorable production-volume variance.

Question 3

Factors contributing to the fixed factory overhead spending variance can include all the following except:
A) Inaccurate budget estimates for these costs.
B) Inadequate control of fixed overhead costs.
C) Misclassification of cost items by the accounting system.
D) Operating inefficiency.
E) Unanticipated increases in costs such as factory insurance.

Accepted Answer

Operating inefficiency typically affects variable costs rather than fixed costs. Fixed factory overhead spending variance is more concerned with the budgeting, control, and classification of fixed costs, as well as unexpected changes in those costs.

Question 4

Many firms feel a strong obligation to establish and use a standard rate for fixed factory overhead because:
A) Generally accepted accounting principles in the U.S. require full costing of inventories for financial reporting purposes.
B) The resulting data are useful for performance-evaluation purposes.
C) Larger income tax deductions result when fixed overhead costs are treated as product costs rather than period costs.
D) This approach improves upon management's ability to more accurately forecast future overhead costs.
E) None of the above—fixed overhead costs are typically expensed as period costs.

Accepted Answer

Generally accepted accounting principles in the U.S. require full costing of inventories for financial reporting purposes, which includes the use of a standard rate for fixed factory overhead. This standard rate is used to allocate fixed overhead costs to products and is included in the cost of inventory.

Answer: B
 The resulting data from using a standard rate for fixed factory overhead are useful for performance-evaluation purposes. This data can be used to analyze the profitability of products, departments, and the overall business.

Answer: C
 Treating fixed overhead costs as product costs rather than period costs can result in larger income tax deductions, as these costs are deducted when the associated inventory is sold. This can help to lower the tax liability for the business.

Answer: D
 Using a standard rate for fixed factory overhead can improve management's ability to more accurately forecast future overhead costs. By analyzing past trends and adjusting the standard rate as necessary, managers can better estimate future overhead costs and make more informed decisions.

Answer: E
 This statement is not true. While fixed overhead costs can be expensed as period costs, many businesses choose to allocate these costs to products using a standard rate for full costing purposes.

Question 5

Cost behavior for variable overhead is more difficult to predict than the behavior of direct materials or direct labor cost for all the following reasons except:
A) Multiple cost drivers are usually involved with variable overhead.
B) Direct material and direct labor contain no semi-variable component.
C) The variable portion of overhead must first be separated from the fixed portion.
D) Variable overhead is a relatively small part of total overhead.

Accepted Answer

Variable overhead can indeed be a significant or small part of total overhead, but this does not inherently make its behavior more difficult to predict compared to direct materials or direct labor. The other options (A, B, C) directly relate to the complexities in predicting variable overhead costs.

Question 6

A standard costing system will produce the same income as an actual costing system when end-of-period standard cost variances are assigned:
A) Only to work-in-process (WIP) inventory.
B) Only to finished goods inventory.
C) To work-in-process and finished goods inventories.
D) Entirely to cost of goods sold.
E) To cost of goods sold and all inventory accounts.

Accepted Answer

Standard costing systems can produce the same income as actual costing systems when end-of-period standard cost variances are allocated across cost of goods sold and all inventory accounts (work-in-process, finished goods, and possibly raw materials). This ensures that the total costs reflected in the financial statements match those that would have been reported using actual costs, by appropriately adjusting the reported values of inventories and cost of goods sold for the variances.

Question 7

Because fixed factory overhead cost in total does not vary with changes in output:
A) The amount used in the control budget for a period is a "lump-sum" amount.
B) There is no way to assign fixed overhead cost to products for product-costing purposes.
C) Most companies treat such costs as period, rather than as product costs.
D) There is no justification for fixed overhead cost application.
E) Generally accepted accounting principles permit companies to use variable rather than absorption (full) costing for external reporting purposes.

Accepted Answer

Fixed factory overhead costs are constant in total regardless of the level of output, so they are budgeted as a lump-sum amount in the control budget. This allows for planning and control purposes without varying the budgeted amount with changes in production volume.

Question 8

Which of the following factors is not usually important when deciding whether to investigate a variance?
A) Magnitude of the variance.
B) Trend of the variance over time.
C) Whether the variance is favorable or unfavorable.
D) Cost of investigating the variance.
E) Likelihood that the variance will recur in the future.

Accepted Answer

Whether the variance is favorable or unfavorable is not a relevant factor in deciding whether to investigate a variance as both types of variances may indicate potential issues or errors. The other factors listed - magnitude, trend, cost, and likelihood of recurrence - are all important in determining if an investigation is necessary.

Question 9

The difference between actual overhead costs incurred during a period and the overhead in the flexible budget based on the output for the period is called the:
A) Total overhead spending variance.
B) Total overhead efficiency variance.
C) Production-volume variance.
D) Overhead flexible-budget variance.
E) Total overhead variance.

Accepted Answer

The overhead flexible-budget variance represents the difference between actual overhead costs and the overhead costs that were budgeted based on the flexible budget, which adjusts for changes in activity levels. This variance can be further analyzed into spending and efficiency variances, but the initial difference between actual and budgeted overhead costs is captured by the flexible-budget variance. The production-volume variance is a separate variance that measures the difference between the budgeted overhead costs at one level of activity and the budgeted overhead costs at a different level of activity. The total overhead variance is a general term that could refer to any variance related to overhead costs.

Question 10

The fixed factory overhead production-volume variance represents:
A) Money lost or gained because of achieved production levels.
B) A result of unitizing fixed overhead costs for product-costing purposes.
C) Information regarding the effectiveness of the organization in meeting sales targets.
D) Information that management can use for cost-control purposes.
E) Important information for companies pursuing a JIT production philosophy.

Accepted Answer

The fixed factory overhead production-volume variance arises because fixed overhead costs that are incurred during a period are unitized for product-costing purposes. The variance measures the difference between the budgeted fixed overhead (based on expected production volume) and the actual fixed overhead incurred (based on actual production volume). It does not reflect money lost or gained or provide information on sales targets or JIT production. However, management can use this variance for cost-control purposes.

Question 11

Proration of manufacturing cost variances among ending inventories and cost of goods sold has the effect of carrying the cost (savings) of inefficient (efficient) operations of a period to:
A) Only the balance sheet of the current period.
B) Only the income statement of the current period.
C) The balance sheets of future periods only.
D) The income statement of the current period and the balance sheet of the current period.

Accepted Answer

Proration of manufacturing cost variances would result in carrying the cost (savings) of inefficient (efficient) operations of a period to both the income statement and the balance sheet of the current period.

Question 12

In firms using activity-based costing (ABC), budgeted total factory overhead varies with changes in:
A) A single cost driver for applying overhead.
B) Several cost drivers.
C) The selected denominator activity level.
D) The quantity of input resources used in operations of the period.
E) Only batch-level cost drivers.

Accepted Answer

In activity-based costing, overhead costs are allocated based on multiple cost drivers that reflect the various activities causing overhead costs, rather than a single cost driver.

Question 13

An activity-based cost (ABC) driver applies factory overhead to products or services according to the:
A) Activity output as measured by the units produced.
B) Activity level of hours of direct labor.
C) Resource demands/resource consumption of the firm's outputs (goods or services produced).
D) Budgeted activity level for the period.
E) Standard machine hours allowed for good output produced during the period.

Accepted Answer

Activity-based costing is a cost allocation method that assigns costs to products or services based on the resources needed to produce them. Therefore, the ABC driver applies factory overhead to products or services according to the resource demands of the firm's outputs (goods or services produced), making choice C the best answer. Choices A, B, D, and E are incorrect because they do not consider the specific resources used in the production process.

Question 14

A manufacturing company that uses standard costs and flexible budgets can break the total variable overhead cost variance into:
A) Volume and efficiency components.
B) Spending and efficiency variances.
C) Spending and production volume variances.
D) Spending variances only.
E) A selling price variance and a sales volume variance.

Accepted Answer

The total variable overhead cost variance can be broken down into two components: spending variance and efficiency variance. The spending variance measures the difference between the actual variable overhead cost incurred and the budgeted amount at the actual level of activity. The efficiency variance measures the difference between the budgeted variable overhead cost at the actual level of activity and the actual cost adjusted for differences in efficiency. Volume variance is not a component of overhead variance in a flexible budgeting system. A selling price variance and sales volume variance are unrelated to variable overhead costs.

Question 15

Among characteristics that distinguish service and manufacturing firms are the:
A) Absence of output inventory in service firms.
B) Existence of labor-intensive products in manufacturing firms.
C) Rendering of identical services in a service firm.
D) Capital intensiveness of service firms.
E) Organizational structure of service firms.

Accepted Answer

One of the characteristics that distinguish service and manufacturing firms is the absence of output inventory in service firms. This is because services are intangible and cannot be stored like physical products.

Question 16

The production-volume variance should generally not be calculated and reported for control purposes because, unless interpreted properly, it can:
A) Distract top management by focusing on operational efficiencies/inefficiencies.
B) Give information that only top management should have.
C) Distort other variable-cost variances.
D) Encourage overproduction by managers to achieve a favorable volume variance.
E) Encourage underproduction by managers to avoid an unfavorable variance.

Accepted Answer

The production-volume variance can encourage overproduction by managers to achieve a favorable variance, which goes against the principles of lean manufacturing and cost efficiency. Therefore, it is not a reliable measure for control purposes.

Question 17

Finding a single cost driver that changes in the same proportion as variable factory overhead costs is:
A) Simplified by breaking out the fixed portion of overhead cost.
B) The first step in variable overhead cost assignment.
C) Difficult but manageable using advanced statistical techniques.
D) An important goal of effective cost system design.
E) Difficult, if not impossible, because of the underlying nature of variable overhead cost components.

Accepted Answer

Variable overhead costs consist of various components that may not change in proportion to a single cost driver, making it difficult to find one that aligns perfectly with changes in these costs.

Question 18

Manufacturing companies using a standard cost system often can achieve more effective control when factory overhead variance analysis is done with:
A) A two-variance approach.
B) A three-variance approach.
C) A four-variance approach.
D) A single cost driver.
E) Multiple cost drivers.

Accepted Answer

Using multiple cost drivers allows for a more detailed and accurate analysis of factory overhead variances, leading to more effective control and decision-making.

Question 19

Using an activity-based costing system (ABC) enables a firm to calculate overhead variances for:
A) Sales volume and production volume.
B) Spending and selling price.
C) Each activity-based cost driver.
D) Semi-variable overhead costs.
E) Semi-fixed overhead costs.

Accepted Answer

Activity-based costing system helps in identifying accurate cost drivers for each activity which leads to calculation of overhead variances for each activity-based cost driver. This helps in better cost control and decision-making.

Question 20

Intangible attributes often play dominant roles in determining the value of outputs from a service organization. These characteristics often lead service firms to rely on:
A) Input-related measures for measuring and monitoring operations.
B) Intuitive judgment in monitoring operations.
C) Quantitative measures of output.
D) Qualitative measures exclusively for measuring and monitoring operations.
E) Output-related measures for measuring and monitoring operations.

Accepted Answer

The answer of Intangible attributes often play dominant roles in...

Quiz 15: Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management

If inventories in a business using a standard cost system are insignificant, the firm would be justified (in a practical sense) by disposing of variances each year:

In a standard cost system, an unfavorable production-volume variance would result if:

Factors contributing to the fixed factory overhead spending variance can include all the following except:

Many firms feel a strong obligation to establish and use a standard rate for fixed factory overhead because:

Cost behavior for variable overhead is more difficult to predict than the behavior of direct materials or direct labor cost for all the following reasons except:

A standard costing system will produce the same income as an actual costing system when end-of-period standard cost variances are assigned:

Because fixed factory overhead cost in total does not vary with changes in output:

Which of the following factors is not usually important when deciding whether to investigate a variance?

The difference between actual overhead costs incurred during a period and the overhead in the flexible budget based on the output for the period is called the:

The fixed factory overhead production-volume variance represents:

Proration of manufacturing cost variances among ending inventories and cost of goods sold has the effect of carrying the cost (savings) of inefficient (efficient) operations of a period to:

In firms using activity-based costing (ABC) , budgeted total factory overhead varies with changes in:

An activity-based cost (ABC) driver applies factory overhead to products or services according to the:

A manufacturing company that uses standard costs and flexible budgets can break the total variable overhead cost variance into:

Among characteristics that distinguish service and manufacturing firms are the:

The production-volume variance should generally not be calculated and reported for control purposes because, unless interpreted properly, it can:

Finding a single cost driver that changes in the same proportion as variable factory overhead costs is:

Manufacturing companies using a standard cost system often can achieve more effective control when factory overhead variance analysis is done with:

Using an activity-based costing system (ABC) enables a firm to calculate overhead variances for:

Intangible attributes often play dominant roles in determining the value of outputs from a service organization. These characteristics often lead service firms to rely on: