Question 1

Productivity Measure With A Single Input and Output
An tax accountant is examining his productivity. In 1996 he did 300 tax returns in 1400 hours. In 1997 he did 250 tax returns in 1200 hours.
What was his percentage increase in productivity from 1996 to 1997?

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Question 2

Overhead Variances
The following information is for the third quarter of this year:  Required:
Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.

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The following information is for the...

Question 3

Absorption Costing in a Bank
First Eastern Bank is a large, multibranch bank offering a wide variety of commercial and retail banking services. Eastern uses an absorption costing system to monitor the costs of various services and provide information for a variety of decisions.
One set of services is a retail loan operation providing residential mortgages, car loans, and student college loans. All loan applications are filed by the applicant at a branch bank, where the branch manager fills out the loan application. From there, the loan application is sent to the loan processing department, where the applicant's credit history is checked and a recommendation is made regarding loan approval based on the applicant's credit history and current financial situation. This recommendation is forwarded to the loan committee of senior lending officers, who review the file and make a final decision.
Thus, there are three stages to making a loan: application in a branch, the loan processing department, and the loan committee. Mr. and Mrs. Jones visit the West Street branch and file an application for a residential mortgage. The Jones's loan application is processed through the three stages.
• West Street Branch Bank. The branch manager spends one hour taking the application. The branch manager spends 1,000 hours per year of her total time taking loan applications and the remainder of her time providing other direct services to customers. Total overhead in the West Street Branch is budgeted to be $259,000, excluding the manager's salary, and is allocated to direct customer services using the branch manager's time spent providing direct customer services. The branch manager's annual salary is $42,600.
• Processing department. The processing department budgets its total overhead for the year to be $800,000, which is allocated to loans processed using direct labor hours. Budgeted direct labor hours for the year are 40,000 hours. Direct labor hours in the processing department cost $18 per hour. The Jones's loan requires five direct labor hours in the loan processing department.
• Loan committee. Ten senior bank executives are on the loan committee. The loan committee meets 52 times per year, every Wednesday, all day, to approve all loans. The average salary and benefits of each member of the loan committee are $104,000. The loan committee spends 15 minutes reviewing the Jones's loan application before approving it.
For costing purposes, all employees are assumed to work eight-hour days, five days per week, 52 weeks per year.
Required:
Calculate the total cost of taking the application, processing, and approving the Joneses' mortgage.

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First Eastern Bank...

Question 4

Expected, Standard, and Actual Labor Hours
The Pizza Company makes two types of frozen pizzas: pepperoni and cheese. The Pizza Company allocates overhead to these two products based on the number of direct labor hours. The direct labor hours per unit for making a pepperoni pizza is 5 minutes or 1/12 of an hour. The direct labor hours per unit for making a cheese pizza is 4 minutes or 1/15 of an hour. At the start of the year the Pizza Company expected to make 12,000 pepperoni pizzas and 6,000 cheese pizzas. During the year, the Pizza Company actually made 9,000 pepperoni pizzas and 7,500 cheese pizzas. The time cards indicate that direct laborers worked for 1,300 hours. What are the total expected direct labor hours, standard direct labor hours, and actual direct labor hours?

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The Pizza...

Question 5

ABC and Average Cost in a Service Industry
For many years the Honey Lake Summer Camp had used the number of campers per week to estimate weekly costs. The summer camp is open for ten weeks during the summer with a different number of campers each week. July is busiest with June and the end of August least busy. Costs from the last week of summer camp in 1998 are used to estimate costs for 1999 for pricing purposes. The following costs occurred during the last week of 1998 and the costs of each cost category are expected to be the same for 1999:  Cost per camper: $12,200/50 campers = $244/camper
The Honey Lake Summer Camp expects 75 campers during the second week of July.
Required:
a. What is the expected cost of that week using the average cost?
b. What is the expected cost of that week using ABC?

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Question 6

Overhead Variances
Overhead is applied on the basis of direct labor hours. Three direct labor hours are required for each product unit. Planned production for the period was set at 8,000 units. Manufacturing overhead for the period is budgeted at $204,000, of which 30 percent is fixed. The 26,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $220,500.
Required:
Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.

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The answer of Overhead Variances
Overhead is applied on the basis...

Question 7

Describe ABC
Required:
a. What is activity-based costing and how does it differ from traditional absorption costing?
b. Describe the advantages and disadvantages of activity-based costing systems.

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Required:
a. What is activity-based costing and...

Question 8

Plantwide vs. Department Overhead Rates
Rose Bach has recently been hired as controller of Empco Inc., a sheet-metal manufacturer. Empco has been in the sheet-metal business for many years and is currently investigating ways to modernize its manufacturing process. At the first staff meeting Bach attended, Bob Kelley, chief engineer, presented a proposal for automating the drilling department. Kelley recommended that Empco purchase two robots that could replace the eight direct labor workers in the department. The cost savings outlined in Kelley's proposal include two elements. First, direct labor cost in the drilling department is eliminated. Second, manufacturing overhead cost in the department is reduced to zero because Empco charges manufacturing overhead on the basis of direct labor dollars using a plantwide rate.
The president of Empco felt that Kelley's explanation of the cost savings made no sense. Bach agreed and explained that as firms become more automated, they should rethink their manufacturing overhead systems. The president asked Bach to look into the matter and prepare a report for the next staff meeting.
To refresh her knowledge, Bach reviewed articles on manufacturing overhead allocation for an automated factory and discussed the matter with some of her peers. She also gathered the historical data presented below on the manufacturing overhead rates experienced by Empco over the years. Bach also wanted to have some departmental data to present at the meeting. Using Empco's accounting records, she was able to estimate the annual averages presented below for each manufacturing department in the 1990s.   Required:
a. Disregarding the proposed use of robots in the drilling department, describe the shortcomings of Empco's current system for applying overhead.
b. Do you agree with Bob Kelley's statement that the manufacturing overhead cost in the drilling department will be reduced to zero if the automation proposal is implemented? Explain.
c. Recommend ways to improve Empco's method for applying overhead by describing how it should revise its overhead accounting system:
(i) in the cutting and grinding departments.
(ii) to accommodate the automation of the drilling department.
Source: CMA adapted.

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Rose Bach has...

Question 9

Basic Overhead Variances
Derf Company applies overhead on the basis of direct labor hours. Two direct labor hours are required for each product unit. Planned production for the period was set at 9,000 units. Manufacturing overhead for the period is budgeted at $135,000, of which 20 percent is fixed. The 17,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $136,500.
Required:
Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.

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Derf Company applies overhead on...

Question 10

Variable and Absorption Costing
Varilux manufactures a single product and sells it for $10 per unit. At the beginning of the year there were 1,000 units in inventory. Upon further investigation, you discover that units produced last year had $3.00 of fixed manufacturing cost and $2.00 of variable manufacturing cost. During the year Varilux produced 10,000 units of product. Each unit produced generated $3.00 of variable manufacturing cost. Total fixed manufacturing cost for the current year was $40,000. There were no inventories at the end of the year.
Required:
Prepare two income statements for the current year, one on a variable cost basis and the other on an absorption cost basis. Explain any difference between the two net income numbers and provide calculations supporting your explanation of the difference.

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Varilux manufactures a single...

Question 11

Developing Standards
ColdKing Company is a small producer of fruit-flavored frozen desserts. For many years, ColdKing's products have had strong regional sales on the basis of brand recognition; however, other companies have begun marketing similar products in the area, and price competition has become increasingly important. John Wakefield, the company's controller, is planning to implement a standard cost system for ColdKing and has gathered considerable information from his co-workers on production and materials requirements for ColdKing's products. Wakefield believes that the use of standard costing will allow ColdKing to improve cost control and make better pricing decisions.
ColdKing's most popular product is raspberry sherbet. The sherbet is produced in 10-gallon batches, and each batch requires six quarts of good raspberries. The fresh raspberries are sorted by hand before entering the production process. Because of imperfections in the raspberries and normal spoilage, one quart of berries is discarded for every four quarts of acceptable berries. Three minutes is the standard direct labor time for sorting to obtain one quart of acceptable raspberries. The acceptable raspberries are then blended with the other ingredients; blending requires 12 minutes of direct labor time per batch. After blending, the sherbet is packaged in quart containers. Wakefield has gathered the following pricing information:
• ColdKing purchases raspberries at a cost of $0.80 per quart. All other ingredients cost a total of $4.50 per 10-gallon batch.
• Direct labor is paid at the rate of $9.00 per hour.
• The total cost of material and labor required to package the sherbet is $0.38 per quart.
Required:
a. Develop the standard cost for the direct cost components of a 10-gallon batch of raspberry sherbet. For each direct cost component of a batch of raspberry sherbet, the standard cost should identify the
(i) standard quantity.
(ii) standard rate.
(iii) standard cost per batch.
b. As part of the implementation of a standard cost system at ColdKing, John Wakefield plans to train those responsible for maintaining the standards in the use of variance analysis. Wakefield is particularly concerned with the causes of unfavorable variances.
(i) Discuss the possible causes of unfavorable materials price variances and identify the individual(s) who should be held responsible for them.
(ii) Discuss the possible causes of unfavorable labor efficiency variances and identify the individual(s) who should be held responsible for them.

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The answer of Developing Standards
ColdKing Company is a small producer...

Question 12

Developing Additional Variances for Performance Evaluation
Maidwell Company manufactures washers and dryers on a single assembly line in its main factory. The market has deteriorated over the last five years and competition has made cost control very important. Management has been concerned about the materials costs of both washers and dryers. There have been no model changes in the past two years, and economic conditions have allowed the company to negotiate price reductions for many key parts.
Maidwell uses a standard cost system in accounting for materials. Purchases are charged to inventory at a standard price, and purchase discounts are considered an administrative cost reduction. Production is charged at the standard price of the materials used. Thus, the price variance is isolated at time of purchase as the difference between gross contract price and standard price multiplied by the quantity purchased. When a substitute part is used in production, a price variance equal to the difference in the standard prices of the materials is recognized at the time of substitution. The quantity variance is the actual quantity used compared with the standard quantity allowed, with the difference multiplied by the standard price.
The materials variances for several of the parts Maidwell uses are unfavorable. Part #4121 is one item that has an unfavorable variance. Maidwell knows that some of these parts are defective and will fail. The failure is discovered during production. The normal defective rate is 5 percent of normal input. The original contract price of this part was $0.285 per unit; thus, Maidwell set the standard unit price at $0.285. The unit contract purchase price of Part #4121 was increased to $0.325 from the original $0.285 due to a parts specification change. Maidwell chose not to change the standard; it treated the increase in price as a price variance. In addition, the contract terms were changed from payment due in 30 days to a 4 percent discount if paid in 10 days or full payment due in 30 days. These new contractual terms were the consequence of negotiations resulting from changes in the economy.
Data regarding the use of Part #4121 during December are as follows.  Maidwell's material variances related to Part #4121 for December were reported as follows:  Bob Speck, the purchasing director, claims the unfavorable price variance is misleading. Speck says that his department has worked hard to obtain price concessions and purchase discounts from suppliers. In addition, Speck says engineering changes in several parts have increased their prices, even though the part identification has not changed. These price increases are not his department's responsibility. Speck declares that price variances no longer measure purchasing's performance.
Jim Buddle, the manufacturing manager, thinks the responsibility for the quantity variance should be shared. Buddle states that manufacturing cannot control quality associated with less expensive parts, substitutions of material to use up otherwise obsolete stock, or engineering changes that increase the quantity of materials used.
The accounting manager, Mike Kohl, suggests that the computation of variances be changed to identify variations from standard with the causes and functional areas responsible for the variances. Kohl recommends the following system of materials variances and the method of computation for each:  Required:
a. Discuss the appropriateness of Maidwell Company's current method of variance analysis for materials and indicate whether the claims of Bob Speck and Jim Buddle are valid.
b. Compute the materials variances for Part #4121 for December using the system recommended by Mike Kohl.
c. Who would be responsible for each of the variances in Mike Kohl's system of variance analysis for materials?

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The answer of Developing Additional Variances for Performance Evaluation
Maidwell Company...

Question 13

Standard Labor Variances
A CPA firm estimates that an audit will require the following work:  The actual hours and costs were:  Required:
Calculate the direct labor, wage rate, and labor efficiency variances for each type of auditor and interpret.

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A CPA firm estimates that...

Question 14

Labor Variances
Hospital Software sells and installs computer software used by hospitals for patient admissions and billing. Every sale requires that Hospital Services modify its proprietary software for the specific demands of the client. Prior to each installation, Hospital Software estimates the number of hours of programming time each job will require and the cost of the programmers. Programmers record the amount of time they spend on each modification, and variance reports are prepared at the end of each installation.
For the Denver General Hospital account, Hospital Software estimates the following labor standards:  After the job was completed, the following costs were reported:  Required:
Calculate the labor efficiency and labor wage rate variances for the junior and senior programmers on the Denver General Hospital account.

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Hospital Software sells and installs computer...

Question 15

Incentives and Depreciation Methods
What conditions are likely to exist when operating managers are compensated based on accounting earnings and accelerated depreciation methods are used to compute overhead charges to operating departments?

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What conditions are likely...

Question 16

Different Overhead Allocation Bases
Set-Up Company produces blue things and gray things. Blue things are in much greater demand in the market and the firm sells 120,000 blue things a year. Set-Up Co. sells 6,000 gray things per year in small boutiques. Things have a short shelf life. They must be distributed, sold, and consumed within two months of manufacture.
Both things use the identical production process and production facilities. Direct labor is $0.50 per thing and direct material is $0.50 per thing. Things are produced in batches. Blue things are produced in batches of 600 units and gray things in batches of 30. Each batch of things goes through the thingamajig, which is the machine that converts raw inputs into things. Each batch requires engineers to reset the machine for the next batch, calibrate settings, and test the first 10 things for product quality and conformity to standards. Even if sequential batches of the same things are made, setups must be performed for each new batch. All the overhead costs are incurred in setups. Indirect labor, indirect materials, and supplies consumed during setup cost $360,000 per year. The only costs of producing things are direct labor, direct materials, and the overhead of setups. The company is currently allocating setup costs to things based on direct labor cost.
The firm has been selling blue things for $4 per unit and gray things for $6 per unit. But foreign competition for blue things is starting to put pressure on the $4 price. Some competitors are selling blue things for as low as $3 per unit. Management is considering putting more emphasis on selling gray things, whose margins are higher. On the other hand, management worries that the current system for allocating overhead costs is misrepresenting the costs of the two products because direct labor costs are not representative of the time spent by each product on the thingamajig. Management is considering allocating setup costs using machine hours on the thingamajig. A batch of gray things requires one hour of machine time and a batch of blue things requires 20 hours of machine time.
Required:
Analyze the present situation. Is there anything wrong with the costing system? If so, should management change to the proposed allocation base of machine hours?

Accepted Answer

The answer of Different Overhead Allocation Bases
Set-Up Company produces blue...

Question 17

Establishing a Standard Cost System
The Tippa Canoe Company makes fiberglass canoes. The fiberglass resin is initially molded to the shape of a canoe, then sanded and painted. Metal or wooden seats and frames are added for stability. The Tippa Canoe Company was started several years ago in the owner's garage. The owner, Jeff George, did a lot of the initial manual labor with the help of a few friends. The company has since expanded into a large warehouse and new employees have been hired. Because of the expansion, Jeff is no longer directly involved with production and is concerned about his ability to plan for and control the company. He is considering the implementation of a standard cost system.
Required:
a. Describe the procedures Jeff should use in setting standards for direct labor and direct materials.
b. Describe how Jeff could use standards for planning purposes,
c. Describe how Jeff could use standards for motivating employees and problems in using standards as performance measures.
d. Why are some of Jeff's friends who worked with from the beginning not very excited about a change to a standard cost system?

Accepted Answer

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The Tippa Canoe...

Question 18

Product Profitability and Mix - Calculating Variable Overhead
Sportway Inc. is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. About 60 percent of Sportway's products are purchased from other companies and the remainder are manufactured by Sportway. The company has a plastics department that is currently manufacturing molded fishing tackle boxes. Sportway is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available workstations. Presented below are the selling price and costs associated with Sportway's tackle boxes.  Because Sportway believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68 per box delivered to Sportway's facility.
Bart Johnson, Sportway's product manager, has suggested that the company could make better use of its plastics department by manufacturing skateboards. To support his position, Johnson has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Johnson believes that Sportway could expect to sell 17,500 skateboards annually at $45 per skateboard. Johnson's estimate of the costs to manufacture the skateboards follows.  In the plastics department, Sportway uses direct labor hours as the application base for manufacturing overhead. Included in manufacturing overhead for the current year is $50,000 of factorywide, fixed manufacturing overhead that has been allocated to the plastics department. For each product that Sportway sells, regardless of whether the product has been purchased or is manufactured by Sportway, a portion of the selling and administrative cost is fixed at $6 per unit. Total selling and administrative costs for the purchased tackle boxes would be $10 per unit.
Required:
Prepare an analysis based on the data presented that will show which product or products Sportway Inc. should manufacture and/or purchase to maximize the company's profitability. Show the associated financial impact. Support your answer with appropriate calculations.

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Question 19

Materials Quantity Variance: Solving for Actual Quantity
Todco planned to produce 3,000 units of its single product, Teragram, during November. The standard specifications for one unit of Teragram include six pounds of material at $0.30 per pound. Actual production in November was 3,100 units of Teragram. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120.
Required:
Based on these data, calculate how many pounds of material were used in the production of Teragram during November.

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The answer of Materials Quantity Variance: Solving for Actual Quantity
Todco...

Question 20

Basic Price and Quantity Variances for Labor and Materials
Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the direct costs of one unit of product.  During May, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for May were $42,000, 90 percent of which were for direct labor. Arrow manufactured 19,000 units of product during May using 142,500 pounds of direct material and 5,000 direct labor hours.
Required:
a. Calculate the direct materials price variance for May.
b. Calculate the direct materials quantity variance for May.
c. Calculate the direct labor wage rate variance for May.
d. Calculate the direct labor efficiency variance for May.

Accepted Answer

The answer of Basic Price and Quantity Variances for Labor...

Quiz 1: Accounting for Decision Making and Control

Productivity Measure With A Single Input and Output An tax accountant is examining his productivity. In 1996 he did 300 tax returns in 1400 hours. In 1997 he did 250 tax returns in 1200 hours. What was his percentage increase in productivity from 1996 to 1997?

Overhead Variances The following information is for the third quarter of this year: Required: Calculate the following three overhead variances: a. Overhead volume variance. b. Overhead efficiency variance. c. Overhead spending variance.

Describe ABC Required: a. What is activity-based costing and how does it differ from traditional absorption costing? b. Describe the advantages and disadvantages of activity-based costing systems.

Standard Labor Variances A CPA firm estimates that an audit will require the following work: The actual hours and costs were: Required: Calculate the direct labor, wage rate, and labor efficiency variances for each type of auditor and interpret.

Incentives and Depreciation Methods What conditions are likely to exist when operating managers are compensated based on accounting earnings and accelerated depreciation methods are used to compute overhead charges to operating departments?