Question 1

When there is a standard batch size for production activity:
A)A modification of the traditional approach to constructing the flexible budget for control purposes allows for a more detailed analysis of batch-related overhead costs.
B)It is not possible to construct a flexible budget for cost-control purposes.
C)Standard cost variances for only the variable portion of batch-related manufacturing overhead costs can be calculated.
D)The variable portion of the total flexible-budget variance for batch-related costs can be further decomposed into a spending and a volume variance,which leads to better cost control.

Accepted Answer

Systematic variance refers to variances that are persistent and likely to recur until corrected. Random variance, on the other hand, refers to variances that occur by chance and are unpredictable. Standard cost variance is a measure of the difference between actual and budgeted costs based on a predetermined standard cost. Non-controllable variance refers to variances that are beyond the control of the entity, while flexible-budget variance refers to the difference between actual and flexible budget amounts. None of these terms specifically refer to persistent variances.

Question 2

"In fact,a 'favorable' production-volume variance of a 'non-bottleneck' machine or operation is not favorable to the firm as a whole;rather,it increases work and costs for the firm." Why?

Accepted Answer

Feedback: A machine or operation that is "non-bottleneck" can easily enjoy a favorable fixed factory overhead production-volume variance by producing units above the maximum production level of the "bottleneck." Since the "bottleneck" equipment or division cannot handle more than its maximum capacity,at the bottleneck,the excess production by one or more "non-bottleneck" machines or operations creates excess inventories,which are costly to maintain and in fact counter to JIT and "lean manufacturing" strategies.The important point to stress here is that there are behavioral consequences associated with the choice of the denominator activity volume for purposes of determining a fixed overhead cost allocation rate.Such consequences can lead to goal-congruency problems for the organization.

Question 3

What are the steps in determining the standard fixed factory overhead application rate? Does the procedure differ for product-costing versus cost-control purposes?

Accepted Answer

Feedback: The four steps for determining the standard fixed factory overhead rate(s)for an operation are: (1)select one or more activity variables (or cost drivers)for the purpose of allocating standard FOH costs to outputs,(2)determine budgeted fixed factory overhead cost for each cost pool (which may only be one pool),(3)select a denominator activity level (volume)for each of the bases identified above in (2),(4)divide the amount in 2 by the amount in 3 to arrive at the standard fixed overhead application rate for each cost pool.Yes-as indicated in text Exhibit 15.3,for product-costing purposes we "unitize" FOH costs,as if they were variable;for cost-control purposes (i.e. ,the so-called "control budget")we treat short-term fixed costs as a "lump-sum" amount.Hence,the nature of the two cost functions,one for product-costing and the other for control,differ.

Question 4

"Firms need to use the capacity of the equipment or division that is the 'bottleneck' of the manufacturing process as the denominator volume in setting the fixed overhead allocation rate.In cases where there is more than one 'bottleneck,' the denominator should be the smallest capacity among the bottleneck production processes."
Required: (a)What type of variance is related to this "denominator?" Explain.
(b)Why should a firm choose the smallest capacity "bottleneck" as the denominator in a manufacturing process?

Accepted Answer

Feedback: (a)The "denominator" relates to production-volume variance.This denominator is the base activity measure to determine the rate for applying fixed manufacturing overhead cost to production.A variance between the total amount of applied fixed overhead (using the standard fixed overhead application rate,which is a function of the denominator volume selected)and budgeted fixed overhead is a (rough)measure of under- or over- capacity utilization.
(b)For short-term planning purposes.The smallest capacity,"bottleneck," represents the maximum flow of production (throughput)possible in a firm under existing physical conditions.This "bottleneck" measure represents the maximum capacity,and a rate determined at this level of activity is achievable.Any rate set above the "bottleneck" activity level will result in underapplied fixed overhead.The smallest capacity "bottleneck" activity level is the maximum currently attainable standard.

Question 5

Bike Pedals manufactures bicycle seats.The company budgeted to manufacture 25,000 seats in April with 0.05 standard machine hours per seat.The total variable factory overhead was budgeted at $30,000 for the operation.During April the company manufactured 30,000 seats using 1,600 machine hours.It incurred $34,000 of variable factory overhead (VOH)costs.
Required: Determine each of the following variances.Show calculations.
(a)Variable overhead spending variance.
(b)Variable overhead efficiency variance.
(c)Variable overhead flexible-budget variance.

Accepted Answer

Feedback: 11ea6e70_bd3e_4a50_8f54_0baa8de7da86_TB1699_00

Question 6

What are the steps in establishing the standard application rate for variable factory overhead cost? Does the procedure differ for product-costing versus cost control purposes?

Accepted Answer

Feedback: The four steps that are necessary in establishing the standard variable factory overhead cost for an operation are: (1)determining the behavioral pattern (or patterns)of variable factory overhead costs,(2)selecting one or more appropriate cost drivers-either volume-based or ABC-based-for applying variable factory overhead to cost objects,(3)for each cost driver (one or more),computing the standard variable factory overhead application rate.No,as indicated by the graph presented in Exhibit 15.1 of the text,the VOH cost function for product-costing purposes and cost control purposes is identical.

Question 7

A comprehensive management accounting and control system regarding manufacturing overhead costs:
A)Includes nonfinancial but not financial performance indicators.
B)Relies on direct managerial observation rather than a formal system for cost-control purposes.
C)Provides information for strategic but not operational control.
D)Provides financial-control information to operating personnel,while both financial and nonfinancial performance indicators to managers.
E)Includes both financial performance indicators as well as nonfinancial performance indicators.

Accepted Answer

A comprehensive management accounting and control system regarding manufacturing overhead costs should include both financial performance indicators (such as cost variances, absorption rates, and overhead allocation rates) as well as nonfinancial performance indicators (such as machine downtime, scrap rates, and employee productivity) to provide a more complete picture of the effectiveness of the manufacturing overhead cost-control efforts.

Question 8

Dillard,Inc. ,has developed the following standard cost data based on a denominator volume of 60,000 direct labor hours (DLHs),which is 75% of the firm's capacity.Budgeted fixed overhead is $360,000 and budgeted variable overhead is $180,000 at this level of activity.

Accepted Answer

During the last period,the company used 48,000 DLHs to produce 128,000 units.It incurred the following manufacturing costs: 11ea6e70_bd3e_e694_8f54_6dc893978a9b_TB1699_00 
Required:Determine all variances for direct materials,direct labor,and factory overhead.Use a 4-variance breakdown (decomposition)of the total overhead variance for the period.
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 Feedback: 11ea6e70_bd3e_e695_8f54_6781a3acc454_TB1699_00

Question 9

Ben Simon Corp.has the following information about its standards and production activity for the month of November:

Accepted Answer

Required:Calculate and show supporting calculations for each of the following variances:(a)Variable overhead flexible-budget variance.(b)Fixed overhead spending variance.(c)Fixed overhead production-volume variance.
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 Feedback: 11ea6e70_bd3e_9872_8f54_b73cc61e42f6_TB1699_00

Question 10

Harrison Corporation's direct labor rate variance for May was $200 favorable,and the direct labor efficiency variance was $150 unfavorable.The total direct labor payroll for the month was $10,050.
Required: (a)Prepare the summary journal entry (May 31)to accrue payroll costs,to charge Work in Process Inventory for the standard labor cost of the goods manufactured in May,and to record the direct labor variances for the month.
(b)Assuming that the direct labor variances are not material,prepare the journal entry that Harrison would make to close the variance accounts.

Accepted Answer

Feedback: 11ea6e70_bd3f_34b6_8f54_19edd5549b84_TB1699_00

Question 11

Which one of the following standard cost variances is not available when analyzing batch-related manufacturing overhead costs using an activity-based cost (ABC)system?
A)Production-volume variance.
B)Variable setup spending variance.
C)Fixed spending variance.
D)Fixed flexible-budget variance.
E)Sales volume variance.

Accepted Answer

The answer of Which one of the following standard cost...

Question 12

You are provided with the following summary of overhead-related costs for the most recent accounting period:

Accepted Answer

Required:Prepare the appropriate journal entries for each of the above events.Assume that the company uses a single account,Manufacturing Overhead.For entry (f),assume that any overhead variances are closed to Cost of Goods Sold (CGS).
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 Feedback: 11ea6e70_bd41_f3dd_8f54_9775360198d1_TB1699_00

Question 13

Bluetop Company uses standard costs.For the month of April,the firm budgeted $160,000 for total factory overhead based on 40,000 machine hours.The standard calls for 4 machine hours for each finished units.During April the firm used 39,000 machine hours to manufacture 9,500 units and incurred $159,000 in total factory overhead.
Required: (a)Determine the total amount of standard factory overhead cost charged to production in April.
(b)Provide the correct journal entry to record the application of standard factory overhead costs to production.(Assume that the company uses a single overhead account,Manufacturing Overhead. )

Accepted Answer

Feedback: 11ea6e70_bd3d_d51d_8f54_736ea519bdaa_TB1699_00 11ea6e70_bd3d_d51e_8f54_995e5a49eb61_TB1699_00

Question 14

ABN Corp.has the following information about its standards and production activity in May:

Accepted Answer

Required:Calculate and show calculations for each of the following variances:
(a)Variable overhead flexible-budget (FB)variance.
(b)Fixed overhead spending variance.
(c)Fixed overhead production-volume variance.
(d)Provide and interpretation of each of the above variances.
Please see Feedback for answers.
 Feedback: 11ea6e70_bd41_579b_8f54_47b26e633a87_TB1699_00 (d)The variable overhead flexible budget variance is a subdivision of the total overhead flexible-budget variance.It is calculated,as indicated above,as the difference between the actual overhead cost incurred and the FB for VOH cost,based on outputs (or equivalently,standard allowed resource inputs for the actual output of the period).The VOH flexible-budget variance can be further broken down into a VOH spending variance and a VOH efficiency variance,a procedure that is done in a four-variance breakdown of the total OVH variance for a period.The fixed overhead spending variance is simply the difference between the (lump-sum)budgeted FOH cost for the period and the actual FOH cost incurred.The total overhead spending variance is equal to the sum of the OVH spending variance plus the FOH spending variance.Both spending variances are calculated in a four-way analysis of the total overhead variance for the period.The factory overhead production-volume variance represents the difference between budgeted fixed overhead and the applied fixed overhead for actual units produced for the period.That is,for product-costing purposes,we "unitize" budgeted fixed overhead costs by choosing a particular volume (called the denominator volume)over which those budgeted fixed costs are spread.If actual volume of activity differs from the denominator volume,a production-volume variance will arise.Note that the production-volume variance is also called the capacity variance,the idle-capacity variance,and the denominator-level variance.This variance has little to do with short-term cost control,however it can be viewed as a (rough)measure of capacity utilization.Under a two- variance analysis,total overhead variance is separated into a production-volume variance and the total overhead flexible-budget (FB)variance.Under a three-variance analysis,the total overhead variance for a period is separated into a total overhead spending variance,a variable overhead efficiency variance,and a production-volume variance.

Question 15

Carl Jones Company's master budget for the year just completed was based on 100% capacity and included 50,000 machine hours and $300,000 total factory overhead.(That is,the denominator volume,for purposes of calculating the fixed overhead application rate,is defined as 100% capacity. )Budgeted fixed overhead at 70% factory capacity is $200,000 (and 35,000 machine hours).The company operated at 80% capacity for the year,and incurred $275,000 total factory overhead.
Required: (a)Determine the factory overhead flexible-budget variance for the year just completed.Show calculations.(b)Calculate the factory overhead production-volume variance for the year just completed.Show calculations.(c)Supply an interpretation of each of the two variances calculated above.

Accepted Answer

Feedback: 11ea6e70_bd40_bb59_8f54_25aa94c7df36_TB1699_00 (c)The total overhead flexible-budget (FB)variance measures the difference between actual total overhead cost for a period and the FB for overhead,based on outputs (or equivalently,standard allowed resource inputs for actual output of the period).This sum of this variance plus the production-volume variance = the total overhead variance for the period.Note that the total overhead FB variance can be (in a three-variance breakdown of the total overhead variance for a period)broken down into a total overhead spending variance and the overhead efficiency variance.The factory overhead production-volume variance represents the difference between budgeted fixed overhead for the period and the applied fixed overhead for the actual units produced.That is,for product-costing purposes,we "unitize" budgeted fixed overhead costs by choosing a particular volume (called the denominator volume)over which those budgeted fixed costs are spread.If actual volume of activity differs from the denominator volume,a production-volume variance will arise.Note that the production-volume variance is also called the capacity variance,the idle-capacity variance,and the denominator- level variance.This variance has little to do with short-term cost control,however it can be viewed as a (rough)measure of capacity utilization.As noted above,the production- volume variance plus the total overhead flexible-budget (FB)variance together explain the total overhead variance for the period.

Question 16

Redtop Co.uses a standard cost system and flexible budgets.The following flexible budget was prepared at the 80% operating level for the year:

Accepted Answer

However,for purposes of calculating the fixed overhead application rate,the company defined the denominator volume as the 90% capacity level.The standard calls for four DLHs per unit manufactured.During the year,Redtop worked 33,600 DLHs to manufacture 8,500 units.The actual factory overhead was $12,000 greater than the flexible-budget amount for the units produced,of which $5,000 was due to fixed factory overhead.
Required:Calculate (and provide supporting details for)each of the following variances:
(a)The standard variable overhead application rate.
(b)The variable overhead efficiency variance.
(c)The factory overhead spending variance.
(d)The factory overhead production-volume variance.
(e)The variable overhead spending variance.
(f)Provide an interpretation for each of the above variances you calculated.
Please see Feedback for answers.
 Feedback: 11ea6e70_bd3f_82d8_8f54_e9370d5e3d88_TB1699_00 (f)Interpretation of variances calculated above: 1.The variable overhead efficiency variance measures the impact on variable overhead costs of efficiency or inefficiency in the use of the activity variable (or cost driver)used to construct the flexible budget.Thus,for example,if the flexible budget is based on DLHs and DLHs are truly related to the incurrence of variable manufacturing overhead costs,then efficiencies or inefficiencies in the use of direct labor during a period have two effects: a labor efficiency variance and a variable overhead efficiency variance.This reinforces the need for exercising care in choosing the activity variable (or
variables)used to construct the control budget for variable overhead costs.2.The factory overhead spending variance is the difference between the actual overhead costs incurred during a period and the flexible budget for overhead,based on outputs (or,equivalently,based on standard resource inputs).As such,this variance consists of two components: a fixed overhead spending variance,and a variable overhead spending variance.The former is simply the difference between budgeted (i.e. ,lump-sum)fixed overhead and actual fixed overhead cost incurred.The latter is the difference between actual variable overhead cost incurred during the period and the variable overhead cost that should have been incurred given the actual level of the activity (e.g. ,DLHs,machine hours)during the period.3.The factory overhead production-volume variance represents the difference between budgeted fixed overhead for the period and the applied fixed overhead for actual units produced.That is,for product-costing purposes,we "unitize" budgeted fixed overhead costs by choosing a particular volume (called the denominator volume)over which those budgeted fixed costs are spread.If actual volume of activity differs from the denominator volume,a production-volume variance will arise.Note that the production-volume variance is also called the capacity variance,the idle-capacity variance,and the denominator-level variance.This variance has little to do with short-term cost control,however it can be viewed as a (rough)measure of capacity utilization.4.As noted above in 2,the variable overhead spending variance is a component of the total overhead spending variance.In formula form,it can be calculated as: AQ x (AP - SP),where AQ represents the actual quantity of the activity variable used to construct the flexible budget,AP = the actual VOH cost per unit of the activity variable,and SP = the standard VOH cost per unit of the activity variable.Because "spending" is a function of both price and quantity,the total VOH spending variance can conceptually be broken down further into price and quantity components for individual VOH costs.

Question 17

Which of the following is not a cost system proposed as an extension to ABC systems,with the overall goal of more accurately allocating manufacturing overhead costs to outputs?
A)Resource consumption accounting (RCA).
B)Flexible standard costing.
C)GPK (Grenzplankostenregnung).
D)Variable costing.

Accepted Answer

Variable costing is a method of inventory costing that is not directly related to overhead allocation. It focuses on separating fixed and variable costs and assigning only the variable costs to products. RCA, flexible standard costing, and GPK are all cost systems that aim to improve the accuracy of overhead allocation in ABC systems.

Question 18

McAllister Company's master budget for the year just completed was based on 100% capacity and included 40,000 machine hours and $240,000 total factory overhead.The budgeted fixed overhead at 75% of factory capacity would be $160,000 (and 30,000 machine hours).The company actually operated at 90% capacity for the year,and incurred $252,000 total factory overhead.
Required: (a)Determine the factory overhead flexible-budget variance for the year.Show calculations.(b)Calculate the factory overhead production-volume variance for the year.Show calculations.

Accepted Answer

Feedback: 11ea6e70_bd3d_fc2f_8f54_b17c32909e4d_TB1699_00

Question 19

Erie Co.uses machine hours to apply standard overhead cost to production.The following data pertain to October:

Accepted Answer

Required:Compute the following variances using machine hours as the activity variable used to assign standard overhead costs to production.Show calculations.
(a)Variable overhead spending variance
(b)Variable overhead efficiency variance
(c)Fixed overhead spending variance
(d)Fixed overhead production-volume variance
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 Feedback: 11ea6e70_bd3d_86fc_8f54_2367050a87b4_TB1699_00

Question 20

Eileen Bellows is controller at a new,rapidly growing company that produces replacement windows for existing houses or for initial installation in new houses.Competition is stiff in this industry,but the company for which Eileen works is aggressive in sales development,and just showed a modest profit for the first year since its founding four years ago.Howard Zeller is controller at Accents Incorporated,an established drapery and blinds manufacturer.Accent is an industry leader and has experienced sustained growth in both sales and profits for the past five years.Eileen: Our manufacturing support costs seem to be growing over time.For planning and control purposes we're using "currently attainable" standards in our standard cost system,including the costing of manufacturing overhead.But now that we're making profit,I've been thinking of a switch to tighter standards.Howard: We've always used ideal standards,although our enforcement of these goals hasn't been strict.It seems to work for us.
Required: What does this conversation say about each company's expectations regarding their standard cost system and anticipated variances from each of the two different systems?

Accepted Answer

Feedback: Both companies are using standards to control costs and motivate workers.Each has adjusted its enforcement of either "strict" or "attainable" standards to make the standards realistic and attainable,but still have goals that encourage continuing improvement.Perhaps Eileen believes that her company needs to set higher goals for workers now that the less strict goals seem to have been met,i.e. ,the company has finally posted a profit.One might question whether enforcement of increasing standards might not have to be initially relaxed in order to avoid worker resistance to this increase in expectations.However,a company that is new and marginal may need standards that will produce maximum cost control and efficiency.The ideal standard is an achievable standard,but "tight" enough that it probably will not be reached except occasionally.It becomes a goal to work towards,rather than a representation of expected short-term performance.As long as workers view the standard as realistic and achievable,a level of enforcement consistent with current period goals should be effective for cost control and worker motivation for continuous improvement.Again,the larger point here for students to understand is that choices made regarding the characteristics of a standard cost system have likely behavioral consequences,which can either help the organization achieve its goals or hinder it from doing so.

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

When there is a standard batch size for production activity: