Question 1

A product has a sales price of $20.Based on a 15,000-unit production level, the variable costs are $12 per unit and the fixed costs are $6 per unit.Using a flexible budget for an actual production and sales level of 18,000 units, what is the budgeted operating income?

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Question 2

Folsom Custom Skis, founded by Jordon Grano, sells skis at an average price of approximately $1,300 per pair.At this price the company is breaking even.Jordan hopes to double his company's sales in the near future.Could the company make a profit if the current cost structure and sales price per pair of skis remained the same while sales volume doubled?

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Question 3

Whistler Company determined that in the production of their products last period, they had a favorable price variance and an unfavorable quantity variance for direct materials.What might be the cause of this pattern of variances?

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Question 4

A company's budget for 60,000 units of production showed sales of $96,000, variable costs of $36,000, and fixed costs of $26,000.What operating income would be expected if the company produces and sells 70,000 units?

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Question 5

Perkins Company provides the following data developed for its master budget:
 $\begin{array}{ll}
\text { Sales price } & \$ 11 \text { per unit } \
\text { Costs: } \
\text { Direct materials } & \$ 3 \text { per unit } \
\text { Direct labor } & \$ 4.25 \text { per unit } \
\text { Variable overhead } & \$ 0.50 \text { per unit } \
\text { Factory depreciation } & \$ 12,000 \text { per month } \
\text { Supervision } & \$ 11,000 \text { per month } \
\text { Selling expense } & \$ 0.25 \text { per unit } \
\text { Administrative cost } & \$ 9,000 \text { per month }
\end{array}$ Prepare flexible budgets for sales of 20,000, 22,000, and 24,000 units.Use a contribution margin format.

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Question 6

Thomas Co.provides the following fixed budget data for the year:
 \(\begin{array}{l}
\text { Sales }(20,000 \text { units })&&\$600,000\
\text { Cost of sales: }\
\text { Direct materials } & \$ 200,000 \
\text { Direct labor } & 160,000 \
\text { Variable overhead } & 60,000 \
\text { Fixed overhead } & \underline{80,000}& \underline {   500,000  } \
\text {Gross profit  } &&\$100,000\
\text { Operating expenses: } \
\text { Fixed } & \$ 12,000 & \
\text { Variable } &\underline{40,000} &\underline {52,000} \
 \text { Income from operations } &&\underline {\$ 48,000}\
\
\text { The company's actual activity for the year follows: } \
\text {  Sales (21,000 units) } && \$ 651,000 \
\text { Cost of goods sold }\
\text { Direct materials } & \$ 231,000 \
\text { Direct labor } & 168,000 \
\text { Variable overhead } & 73,500 \
\text { Fixed overhead } & \underline { 77,500} & \underline {  550,000   }\
\text { Gross profit }&& \$ 101,000\
\text { Operating expenses: }\
 \text { Fixed } & 12,000 \
 \text { Variable } &\underline{39,500} &  \underline{51,500}\
 \text { Income from operations } &&\underline{\$ 49,500} \
\end{array}\) Prepare a flexible budget performance report for the year using the contribution margin format.

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The answer of Thomas Co.provides the following fixed budget data...

Question 7

Abrams, Inc.provides the following results of March's operations:
 $$\begin{array} { l r } 
\text { Direct materials price variance } & \$ 400 F \
\text { Direct materials quartity variance } & 2,000 \mathrm { U } \
\text { Direct labor rate variance } & 100 \mathrm { U } \
\text { Direct labor efficiency variance } & 1,200 \mathrm {F} \
\text { Variable overhead spendirg variance } & 400 \mathrm {U} \
\text { Variable overhead efficiency variance } & 800 \mathrm {F} \
\text { Fixed overhead spending variance } & 100 \mathrm {U} \
\text { Fixed overhead yolume yariance } & 600 \mathrm {F}
\end{array}$$ Required:
a.Determine the total overhead cost variance for March.
b.Applying the management by exception approach, which of the variances shown are of greatest concern? Why?
c.Assuming the variances are immaterial and we close them to Cost of Goods Sold, what will the effect be on that account of these variances?

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Question 8

In producing 700 units of Product CBA last period, Cobalt Company used 5,000 pounds of Material H, costing $34,250.The company has established the standard of using 7.2 pounds of Material H per unit of CBA, at a price of $7.50 per pound.
a.Calculate the materials price and quantity variances associated with producing the 700 units, and indicate whether they are favorable or unfavorable.
b.Record the entry for the material used and related variances for Cobalt.
c.Assume these variances are immaterial and prepare the entry to close them out at the end of the year.

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Question 9

What is the overhead volume variance? What would be the cause of a favorable volume variance?

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Question 10

How are unfavorable variances recorded?

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Question 11

Stanton Co.produces and sells two lines of t-shirts, Deluxe and Mega.Stanton provides the following data:
 $\begin{array}{lrr}
& \underline {  \text { Budget  }   } & \underline {    \text {Actual } } \
\text { Unit sales price-Deluxe } & \$ 15 & \$ 16 \
\text { Unit sales price-Mega } & \$ 20 & \$ 19 \
\text { Unit sales-Deluxe } & 2,400 & 2,500 \
\text { Unit sales-Mega } & 2,000 & 1,900
\end{array}$ Required:
Compute the sales price and the sales volume variances for each product.

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The answer of Stanton Co.produces and sells two lines of...

Question 12

Casco Co.planned to produce and sell 40,000 units.At that volume level, variable costs are determined to be $320,000 and fixed costs are $30,000.The planned selling price is $10 per unit.Casco actually produced and sold 42,000 units.
Required:
Using a contribution margin format:
a.Prepare a fixed budget income statement for the planned level of sales and production.
b.Prepare a flexible budget income statement for the actual level of sales and production.
c.Which budget should we use to compare to actual results and why?

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Question 13

Based on predicted production of 25,000 units, Best Co.anticipates $175,000 of fixed costs and $137,500 of variable costs.What are the flexible budget amounts of total costs for 20,000 and 30,000 units?

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Question 14

Big Bend Co.fixed budget for the year is shown below:
 $\begin{array}{lr}
\text { Sales (50,000units) }&&\$ 1,300,000\
\text { Cost of goods sold: }\
\text { Direct materials } & \$ 150,000 \
\text { Direct labor } & 450,000 \
\text { Overhead (includes } \$ 2 \text { per unit } & \underline { 240,000}& \underline { 840,000}\
 \text { variable overhead) } \
 \text { Gross profit } &&\$ 460,000\
\
\
\text { Selling expenses: }\
\text { Selling expenses: }\
\text { Sales commissions(all variable) } & 60,000 \
\text { Rent (all fixed) } & 40,000 \
\text { Insurance (all fixed) } & 35,000 \
\text { eneral and administrative expenses: } & \
\text { Salaries (all fixed) } & 72,000 \
\text { Rent (all fixed) } & 54,000 \
\text { Depreciation (all fixed) } & \underline {31,000}& \underline {  292,000   }\
\text { Net income from operations }&&\underline { \$ 168,000}\

\end{array}$ Prepare a flexible budget for Big Bend Co.that shows a detailed budget for its actual sales volume of 42,000 units.Use the contribution margin format.

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The answer of Big Bend Co.fixed budget for the year...

Question 15

DT Co.produces picture frames.It takes 3 hours of direct labor to produce a frame.DT's standard labor cost is $11 per hour.During March, DT produced 4,000 frames and used 12,400 hours at a total cost of $133,920.
a.What is DT's labor rate variance for March?
b.What is DT's direct labor efficiency variance for March?
c.Record the labor costs and the variances for DT.

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The answer of DT Co.produces picture frames.It takes 3 hours...

Question 16

Job #305 was budgeted to require 3.5 hours of labor at $11 per hour.However, it was completed in 3 hours by a person who worked for $14 per hour.
a.What is the total labor cost variance for Job #305?
b.Calculate the direct labor rate and efficiency variance for this job.

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Question 17

Flexible budgets may be prepared before or after an actual period of activity.Why would management prepare such budgets at differing time frames?

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Question 18

Elroy Co.has prepared the following fixed budget for the year, assuming production and sales of 30,000 units.This level of production represents 80% of capacity.
 $\begin{array}{c}
\text { ELROY CO. }\
\text { Fixed Budget }\
\text { For Year Ending December 31 }\
\hline \begin{array}{lr}
\text { Sales }&&\$ 1,500,000\
\text { Cost of goods sold: }\
\text { Direct materials } & \$ 540,000 \
\text { Direct labor } & 300,000 \
\text { Indirect materials (variable) } & 15,000 \
\text { Indirect labor (variable) } & 21,000 \
\text { Depreciation } & 180,000 \
\text { Salaries } & 90,000 \
\text { Utilities ( } 80 \% \text { fixed) } & 54,000 \
\text { Maintenance ( } 40 \% \text { variable) } & \underline { 33,000}& \underline {1,233,000}\
\text { Gross profit }&&\$ 267,000\
\text { Operating expenses: }\
\text { Commissions } & \$ 45,000 \
\text { Advertising (fixed) } & 60,000 \
\text { Wages (variable) } & 15,000 \
\text { Rent } & \underline { 30,000 }\
\text {  Total operating expenses }&& \underline{150,000}\
\text { Income from operations }&& \underline{\$ 117,000}\
\end{array}
\end{array}$ Calculate the following flexible budget amounts at the indicated levels of capacity:
 $ \begin{array}{ll}
&\text { Operations at } & \text { Operations at } \ 
&\underline {60 \% \text { of Capacity } }& \underline{75 \% \text { of Capacity }}\
 \text { Sales } &\underline {    \quad\quad\quad\quad\quad\quad\quad } &\underline {    \quad\quad\quad\quad\quad\quad\quad } \
 \text {Total variable costs } &\underline {    \quad\quad\quad\quad\quad\quad\quad } &\underline {    \quad\quad\quad\quad\quad\quad\quad } \
 \text { Total fixed costs } &\underline {    \quad\quad\quad\quad\quad\quad\quad } &\underline {    \quad\quad\quad\quad\quad\quad\quad } \
 \text {  Income from operations } &\underline {    \quad\quad\quad\quad\quad\quad\quad } &\underline {    \quad\quad\quad\quad\quad\quad\quad } \
\end{array} $

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The answer of Elroy Co.has prepared the following fixed budget...

Question 19

Use the following cost information to calculate the direct labor rate and efficiency variances and indicate whether they are favorable or unfavorable.
 $\begin{array}{lc}
 \text {  Actual costs and quartities: } \
\text { Direct labor cost incurred } & \$ 360,000 \
\text { Direct labor hours used } & 20,000 \text { hours } \
\text { Units produced } & 45,000 \text { units } \
\text { tandard costs and quantities: } & \
\text { Direct labor rate per hour } & \$ 16.50 \
\text { Hours to produce one unit } & 0.5 \text { hours }
\end{array}$

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Question 20

Provide at least one cause of direct labor rate and efficiency variances and provide an example of how this might occur.

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Quiz 8: Flexible Budgets and Standard Costing