Quiz 13: Overhead and Marketing Variances
Business
Q 1Q 1
Lancaster Chamber Orchestra
When the budget was prepared at the beginning of the year, Alan Voit, director of marketing, admitted that projected ticket sales for the two series were optimistic, but he believed that his innovative advertising campaign would help the orchestra meet its goal. Although pops sales came in almost exactly on target, a devastating ice storm caused the cancellation of one of the classical concerts. Unfortunately, rehearsals had already been held and the musicians had been paid for their services. Series sales figures for the three levels of ticket prices follow.
Required:
a. Calculate a flexible budget for the Lancaster Chamber Orchestra's 2016-2017 season.
b. After calculating the flexible budget, Randall Nobucs, director of finance, found a total unfavorable variance in net income of $53,158. Account for this unfavorable variance by calculating the following:
(1) Revenue variances
(2) Labor efficiency variances
(3) Overhead efficiency and overhead spending variances
c. Nobucs is concerned that if the orchestra faces similar problems in the next season, the accumulated deficit will cause bankruptcy. He argues with Alan Voit that a 15 percent increase in ticket prices would ensure a balanced budget for the 2016-2017 season. Discuss the feasibility of this strategy.
d. In examining the income statement, CEO Peter Morris is puzzled. He believes that all of his senior staff members are superb and is not sure where to lay the blame for the orchestra's dismal financial performance. Discuss the areas of specialized knowledge involved in the operation. Which person should be held accountable for each variance?
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Not Answered
There is no answer for this question
Q 2Q 2
You work in the Strategy Analysis department of On-Call, a worldwide paging firm offering satellite- based digital communications through sophisticated pagers. On-Call is analyzing the possibility of acquiring AtlantiCom, an East Coast paging firm in Maine.
AtlantiCom's latest quarterly report disclosed an unfavorable volume variance of $1.3 million. The engineering staff of On-Call, familiar with AtlantiCom's network, estimates that AtlantiCom has quarterly fixed overhead costs of $6.5 million that can deliver 800,000 message packets per quarter. A message packet is the industry standard of delivering a fixed amount of digital information within a given time period.
In valuing AtlantiCom, senior management at On-Call wants to know whether AtlantiCom has excess capacity, and, if so, how much.
Required :
As a percentage of AtlantiCom's current capacity of 800,000 message packets, estimate AtlantiCom's over- or undercapacity last quarter. Assume that the quarterly fixed overhead costs of $6.5 million approximate budgeted fixed overhead and that actual and standard volumes are the same.
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Volume Variance:
It is the difference between the quantity sold or consumed by the company in actual and the quantity sold or consumed by the company as budgeted multiplied by the standard price per unit of the product sold or consumed.In the present case, the amount of unfavorable volume variance is $1.3 million. The estimated value of sales volume and fixed costs of overheads is also provided. The formula used for calculation of excess capacity is as follows:
The equation used for calculation of volume variance is as follows:
Now, by rearranging the above two equations, compute the value of excess capacity level as follows:
Therefore the excess capacity level for the company comes out to be
Q 3Q 3
The purchasing department of Bradley Inc. is responsible for companywide purchasing. Its total costs are assigned to each division based on the number of purchase orders the purchasing department processes for each division. The purchasing department's fixed costs are $300,000 per year and it expects to process 15,000 purchase orders (POs) at a variable cost of $50 per purchase order. Purchasing costs do not include the cost of the items purchased.
Purchasing processed 16,000 POs during the year and incurred total costs (excluding the cost of the items purchased) of $1,180,000.
Required :
a. Design a performance evaluation report for the purchasing department.
b. Describe what each item in the report measures.
c. Evaluate the performance of the purchasing department.
d. What other performance measures would you want to collect and report for the purchasing department?
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Fixed Costs:
These costs remain fixed irrespective of the level of output. It is immaterial that the company produces any product or not or it generates any income or not, these costs have to be paid by the company due to their fixed obligation. Fixed costs are irrelevant in relevant costing.
Variable Costs:
These cost changes with the level of output. Variable costs are considered relevant under relevant costing.
a.In the present case, the information regarding the purchase departments fixed and the variable costs on the products is given. The amount of total costs incurred by the department are also provided.
Performance Report:
It is a detailed statement that includes the analysis of the results obtained from the working of an activity in a particular time period. It can be prepared for a department or for employees or for a single product as well.
Before preparing the evaluation report for the department, first compute the Overhead rate per purchase order as follows:
Therefore the Overhead Rate per Purchase Order comes out to be $70 per order.
Now, prepare the Evaluation report as follows:
The result of the above calculation is as follows:
b.The cost of each purchase order in the purchasing department of the company $70 per order. So while taking this rate as a base, there was an amount of $60,000 which was left behind due to under charges of the said cost.
The amount of the said $60,000 can be adjusted against the amount of $80,000 which represents the spending variance and against the $20,000 of volume variances. The amount of $20,000 i.e. the volume variance is representing the over utilization of the capacity in the company.
c.
In the present case, the purchasing department of the company has done excess processing of the purchase orders than the expectation of the company. So the costs that were incurred by the department came out to be more than the expectation.
Therefore it is clear that the management of the company has not done a good task in the management of the costs.
d.The purchasing department of the company should keep the following issues in mind:
The price variances in the company for the items that were purchased shows that the purchase price is quiet low as per the expectation.
The variances regarding the usage of materials show that if the material has met the standards of quality as maintained by the company.
The delivery terms of the company should meet the criteria for issuing orders on time and delivering them to the customer on time as well.
Q 4Q 4
Spectra Inc. produces color monitors for personal computers. The firm makes 19-inch monitors with the following cost structure:
Direct materials $220
Direct labor $150
Because of the rapidly changing market for computer monitors, standard costs, overhead rates, and prices are revised quarterly. While the direct labor component of standard cost has been relatively constant over time, direct materials costs, especially the cost of the circuit boards, fluctuate widely. Therefore, for pricing purposes, management reviews costs each quarter and forecasts next quarter's costs using the current quarter's cost structure. It also uses this method for revising overhead costs each quarter. Overhead is absorbed to products using direct labor cost. Fixed overhead is incurred fairly uniformly over the year. The overhead rate next quarter is the actual overhead costs incurred this quarter divided by this quarter's direct labor cost. Actual operating data for the last six quarters and for next quarter are shown.
The president of the company, responding to the auditor's suggestion that Spectra set standard costs on an annual basis, replied, "Annual budgeting is fine for more static companies like automobiles. But the computer industry, especially peripherals, changes day by day. We have to be ahead of our competitors in terms of changing our product price in response to cost changes. If we waited eight months to react to cost changes, we'd be out of business."
Required :
Do you agree with the president or the auditor? Critically evaluate Spectra's costing system. What changes would you suggest, and how would you justify them to the president?
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Q 5Q 5
Logical Solutions reports the following overhead variances for 2016:
Spending variance $100,000 F
Efficiency variance $100,000 F
Volume variance $300,000 F
In addition, actual overhead incurred in 2016 was $1 million. Overhead is absorbed to products using standard direct labor hours. 2016 volume was budgeted to be 40,000 direct labor hours and fixed overhead was budgeted to be $600,000.
Required:
What were actual volume, standard volume, and budgeted variable overhead for 2016?
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Q 6Q 6
Oneida Metal manufactures stainless steel boxes to house sophisticated communications circuit boards for the defense industry. Oneida cuts the metal, bends it to form the chassis and top, punches holes, and drills and taps holes for screws. Oneida uses a standard cost system. Manufacturing overhead is assigned to jobs using standard direct labor hours. Before the year begins, Oneida uses a flexible manufacturing overhead budget and estimates the annual fixed manufacturing overhead and the budgeted variable overhead rate per direct labor hour. In the current year, Oneida started and completed four jobs. The following table summarizes these four jobs.
There were no beginning or ending work-in-process inventories. Budgeted variable overhead was estimated to be $8 per direct labor hour. The following table summarizes the operating results and standards for the year:
Actual direct labor wages paid $519,000
Annual budgeted direct labor hours 19,000
Standard direct labor wage rate per hour $31
Actual manufacturing overhead incurred $406,400
Manufacturing overhead rate per direct labor hour $20
Required:
Calculate the following:
a. Total direct labor efficiency variance (sum over the four jobs).
b. Total direct labor wage rate variance (aggregate over the four jobs).
c. Budgeted annual fixed manufacturing overhead.
d. Manufacturing overhead spending variance.
e. Manufacturing overhead efficiency variance.
f. Manufacturing overhead volume variance.
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Q 7Q 7
The Ogden plant makes TY® Beanie Babies, small stuffed toys in a variety of animal shapes. The toys are so popular that they have become collectors' items. The plant uses a flexible budget and predetermined overhead rates to assign overhead costs to the different TY® Beanie Babies produced. Overhead costs are assigned using direct labor hours. Fixed overhead is budgeted at $2.3 million for the next year and variable overhead is predicted to be $3.50 per direct labor hour.
The plant was designed two years ago for 180 production employees (direct labor), each working 2,000 hours per year. With the high demand for TY® Beanie Babies, 240 production workers are projected for next year, each expected to work 2,200 hours per year. At the end of the year, based on the actual number of Beanie Babies produced, standard volume was 480,000 direct labor hours.
Required :
a. Calculate overhead rates using expected and normal volume. Round the overhead rates to two significant digits.
b. Calculate the volume variance for the year assuming expected volume is used in setting the overhead rate.
c. Calculate the volume variance for the year assuming normal volume is used in setting the overhead rate.
d. Write a short memo that nonaccounting senior managers can understand interpreting why the volume variance in part (b) differs from the volume variance in part (c). In other words, why do the numbers in parts (b) and (c) differ, and why is this difference relevant to the managers?
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Q 8Q 8
Printers, Inc., manufactures and sells a midvolume color printer (MC) and a high-volume color printer (HC). Each MC requires 100 direct labor hours to manufacture, and each HC requires 150 direct labor hours. At the beginning of the year, 700 MCs are scheduled for production, and 500 HCs are scheduled. At the end of the year, 720 MCs and 510 HCs were produced. Fourteen hundred hours too many were used in producing MCs, and 3,000 hours fewer than standard were used to manufacture HCs. The flexible overhead budget is $2.9 million of fixed costs and $10 per direct labor hour.
Required:
a. Calculate budgeted volume.
b. Calculate standard volume.
c. Calculate actual volume.
d. Calculate the overhead rate.
e. Calculate the overhead volume variance and discuss its meaning.
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Q 9Q 9
Galt Electric Motors (GEM) produces two types of motors, small and large. Standard machine time to make one small motor is 20 minutes; standard machine time to make one large motor is 30 minutes. GEM plans to make 30,000 small motors and 20,000 large motors during the year. Budgeted manufacturing overhead (fixed and variable) for GEM is $1,800,000. During the year, Galt used 21,600 machine hours to make 27,000 small motors and 24,000 large motors. Actual overhead incurred during the year was $1,900,000.
a. What is GEM's standard overhead rate per machine hour? How much overhead is reflected in the standard cost of each type of motor?
b. Use your answers in part (a) to verify that GEM's total overhead variance during the year was $10,000. Is this variance favorable or unfavorable?
c. The table below decomposes the $10,000 overhead variance into spending, efficiency, and volume variances assuming that (1) all overhead is variable and (2) all overhead is fixed. Verify the variances and determine which variances are favorable and which are unfavorable.
Explain the economic intuition behind these variances. In particular, explain why even though in each case the expenditures, inputs, and outputs are the same, (1) the spending variances are different, (2) there is no efficiency variance in the "fixed overhead" case, and (3) there is no volume variance in the "variable overhead" case.
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Q 10Q 10
Western Sugar processes sugar beets into granulated sugar that is sold to food companies. It uses a standard cost system to aid in cost control and performance evaluation. To compute the standards for next year, the actual expense incurred by expense category is divided by the bushels of sugar beets processed to arrive at a standard cost per bushel. These per-bushel standards are then increased by the expected amount of inflation forecast for that expense category. This year, Western Sugar processed 63 million bushels of beets. The accompanying table calculates next year's standard costs.
Required:
a. What do you think is the reason for the overhead variances?
b. Is it appropriate to base next year's standards on last year's costs?
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Q 11Q 11
The soldering department of Xtel Circuits solders integrated circuits onto circuit boards. The department is highly automated. The existing machinery is state of the art, having been installed only 15 months ago.
Overhead in the department is allocated based on machine hours. Normal volume is 2,000 machine hours per month. Fixed overhead averages $160,000 per month, and variable overhead is $110 per machine hour. Actual volume for the month of March (which just ended) was 2,400 machine hours, and standard volume was 2,200 machine hours.
The accompanying table summarizes the overhead efficiency and volume variances in the soldering department for the last 14 months since the new equipment was installed.
Required:
a. Calculate the overhead rate in the soldering department.
b. Calculate the overhead efficiency and volume variances in the soldering department for March of this year.
c. Comment on any apparent patterns in the overhead variances in the soldering department. What might be causing the patterns?
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Q 12Q 12
Commando Force is a new set of children's action toys consisting of three separately sold pieces: Matt, Kim, and the multi-terrain vehicle (MTV). The MTV can be used by itself or it can hold either Matt or Kim or both. With male and female action figures, Commando Force toys are targeted at both boys and girls aged 7 to 11. Commando Force is sold to wholesalers who sell to toy stores, chains, and discount stores. The first calendar quarter (January-March) tends to be very slow because it follows the holidays. Here are budgeted and actual sales data for the first quarter.
Required:
a. Calculate the price and quantity variances for each separately sold toy and all the toys.
b. Calculate the mix and sales variances for each separately sold toy and all the toys.
c. Write a short memo interpreting to management the variances in parts ( a ) and ( b ).
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Q 13Q 13
Wine Distributors is a wholesaler of wine, buying from wineries and selling to wine stores. Three different white wines are sold: Chablis, Chardonnay, and Riesling. Here are budgeted and actual sales data for the month of April.
Required:
Write a short memo to management analyzing the operating performance for April.
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Q 14Q 14
Auden Manufacturing produces a single product with the following standards:
Required:
a. Compute the overhead rate used to apply overhead to the product.
b. Calculate all variances.
c. Calculate net income under absorption costing. (All variances are taken to cost of goods sold.)
d. Calculate net income under variable costing. (All variances are taken to cost of goods sold.)
e. Reconcile the difference in income between variable costing and absorption costing.
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Q 15Q 15
Turow Trailers assembles horse trailers. Two models are manufactured: G7 and V8. While laborintensive, the production process is not very complicated. The single plant produces all the trailers with 48 work teams of two or three workers. Sixteen supervisors oversee the work teams. Materials handlers deliver all the parts needed for each trailer to the work team. Human resources, accounting, inspection, purchasing, and tools are the other major overhead departments. Some operating statistics for 2016 and 2017 follow.
Required:
a. Calculate all the overhead variances for both 2016 and 2017.
b. Discuss who in the plant should be held responsible for each overhead variance.
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Q 16Q 16
Betterton Corporation manufactures automobile headlight lenses and uses a standard cost system. At the beginning of the year, the following standards were established per 100 lenses (a single batch).
Required:
a. Calculate the following variances:
(1) Overhead spending variance
(2) Volume variance
(3) Over/underabsorbed overhead
(4) Direct materials price variance at purchase
(5) Direct labor efficiency variance
(6) Direct materials quantity variance
b. Discuss how the direct materials price variance computed at purchase differs from the direct materials price variance computed at use. What are the advantages and disadvantages of each?
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Q 17Q 17
Artco manufactures fiberglass home and office planters in a variety of decorator colors. These planters, in three sizes, are used to hold indoor plants. Overhead is allocated based on the standard pounds of fiberglass per planter. Here are standards for the three planters:
Required:
a. Calculate the total variance (over/underabsorbed) if standard pounds are used to assign overhead to products.
b. Calculate the total overhead variance (over/underabsorbed) if actual pounds are used to assign overhead to products.
c. Explain why the answers differ in parts ( a ) and ( b ).
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Q 18Q 18
Shady Tree produces two products: M1 and M2. There are no beginning inventories or ending workin- process inventories of either M1 or M2. A single plantwide overhead rate is used to allocate overhead to products using standard direct labor hours. This overhead rate is set at the beginning of the year based on the following flexible budget: Fixed factory overhead is forecast to be $3 million, and variable overhead is projected to be $20 per direct labor hour. Management expects plant volume to be 200,000 standard direct labor hours. Here are the standard direct labor hours for each product:
The efficiency and spending overhead variances for the year were zero. The following table summarizes operations for the year.
Required:
a. Calculate the plantwide overhead rate computed at the beginning of the year.
b. Calculate the volume variance for the year.
c. What is the dollar impact on accounting earnings if the volume variance is written off to cost of goods sold?
d. What is the dollar impact on accounting earnings of prorating the volume variance to inventories and cost of goods sold compared with writing it off to cost of sales?
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Q 19Q 19
Ultrasonic manufactures three ultrasound imaging systems: Avex, AvexII, and Mel. Overhead is allocated to each system based on standard direct material dollars in each system. The firm uses a flexible overhead budget to calculate the overhead rate for the coming year, where budgeted volume is based on expected (projected) direct material dollars. The following table summarizes operations for the year:
Fixed manufacturing overhead was budgeted at $7.5 million, and variable overhead was budgeted at $0.30 per direct material dollar. In other words, each dollar spent on direct materials is expected to generate $0.30 of variable manufacturing overhead. Actual overhead incurred during the year was $10.280 million.
Required:
a. Calculate the budgeted overhead rate Ultrasonic will use to absorb overhead to products. Round the overhead rate to two significant digits.
b. Calculate the total amount of over- or underabsorbed overhead Ultrasonic reports for the year.
c. Compute the overhead spending variance, the overhead volume variance, and the overhead efficiency variance.
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Q 20Q 20
The following data are available for the Megan Corp. finishing department for the current year. The department makes a single product that requires three hours of labor per unit of finished product. Budgeted volume for the year was 30,000 direct labor hours.
Required:
a. Calculate the following:
(1) Actual overhead incurred
(2) Overhead spending variance
(3) Actual number of direct labor hours
(4) Budgeted variable overhead rate per direct labor hour
(5) Overhead rate per direct labor hour
(6) Overhead volume variance
(7) Actual direct labor wage rate
b. Write a one-paragraph report summarizing the results of operations.
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Q 21Q 21
The MRI department at Community Hospital, a large urban health center, performs magnetic resonance imaging for heart disease, brain disorders, and total body scans for the various patient care units (neurology, cardiovascular, OB/GYN, oncology, and so forth). The fixed costs of the MRI department (MRI lease, space costs, personnel, overhead, and utilities) are budgeted to be $700,000 next year. The variable costs of the MRI department (supplies, fees, maintenance) are budgeted to be $300 per MRI hour. (An MRI hour is the total time needed to position the patient, set up the MRI for the scan, perform the scan, remove the patient, and prepare the MRI for the next patient.) The MRI is scheduled in 15-minute blocks. Some simple scans can be performed in 15 minutes, including the time to position the patient, set up the MRI, perform the scan, and prepare the machine for the next patient. Most scans take 30 minutes or 60 minutes. Each patient unit (neurology, cardiovascular, etc.) sending patients for an MRI is charged the expected, not the actual, time of the scan. If a patient requires a 30-minute scan but actually takes 35 minutes, the patient care unit is charged 30 minutes at the predetermined cost per minute. The predetermined cost per minute is calculated at the beginning of the year based on (1) the expected fixed costs, (2) the expected variable cost per minute, and (3) the expected number of minutes from the projected number of scans of various types.
The following table projects the number of various types of scans the MRI Department expects to perform next year.
At the end of the year, the MRI Department performed the following number of scans and the actual time spent on each scan:
The total cost of operating the MRI Department (fixed and variable costs) was $1,750,000.
Required:
a. Calculate the predetermined cost per minute of MRI scan time.
b. Based on the predetermined cost per minute calculated in part ( a ), what are the total MRI charges to the patient care units?
c. Prepare a report that analyzes the financial performance of the MRI Department.
d. Write a short report that succinctly summarizes the key findings of your performance analysis in part ( c ).
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Q 22Q 22
Anpax, Inc., manufactures two products: L7 and Q2. Overhead is allocated to products based on machine hours. Management uses a flexible budget to forecast overhead. For the current year, fixed factory overhead is projected to be $2.75 million, and variable factory overhead is budgeted at $20 per machine hour. At the beginning of the year, management developed the following standards for each product and made the following production forecasts for the year:
Required:
a. Calculate the overhead rate for the current year.
b. Calculate materials and labor variances. Report quantity (efficiency) variances and price variances.
c. Calculate the volume, spending, and efficiency overhead variances.
d. Your boss (a nonaccountant) asks you to explain in nontechnical terms the meaning of each overhead variance.
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Q 23Q 23
The Mopart Division produces a single product. Its standard cost system uses a flexible budget to assign indirect costs on the basis of standard direct labor hours. At the budgeted volume of 4,000 direct labor hours, the standard cost per unit is as follows:
Required:
a. Analyze the results of operations for March. Support your analysis.
b. Present two income statements in good format using absorption costing and variable costing net income.
c. Reconcile any difference in net income between the two statements.
d. What is the opportunity cost of the unused normal capacity?
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