Quiz 15: Cost Control
Business
Q 1Q 1
Flexible budget Acme Company's production budget for August is 17,500 units and includes the following component unit costs: direct materials, $8; direct labor, $10; variable overhead, $6. Budgeted fixed overhead is $32,000. Actual production in August was 18,000 units.
Required:
Prepare a flexible budget that would be used to compare against actual production costs for August.
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Flexible budget
A flexible budget is a budget that changes with the change in the level of the output. The total variable overhead cost is that cost which is incurred for producing a product. In other words, it is the total cost that is incurred for the production of the product and is directly attributable to that product.
A flexible budget performance report used to differentiate between actual performance and budgeted performance on the bases of activity level or actual sales level. This report helps management to know the substantial changes from budgeted to actual in real figures.
Prepare a flexible budget as follows:
Working Notes (W. N.)Calculate the amount of direct materials for 17,500 units as follows:
Hence, the amount of direct materials for 17,500 units is $140,000.
Calculate the amount of direct materials for 18,000 units as follows:
Hence, the amount of direct materials for 18,000 units is $144,000.
Calculate the amount of direct labor for 17,500 units as follows:
Hence, the amount of direct labor for 17,500 units is $175,000.
Calculate the amount of direct labor for 18,000 units as follows:
Hence, the amount of direct labor for 18,000 units is $180,000.
Calculate the amount of variable overhead for 17,500 units as follows:
Hence, the amount of direct materials for 17,500 units is $105,000.
Calculate the amount of variable overhead for 18,000 units as follows:
Hence, the amount of direct materials for 18,000 units is $108,000.
Q 2Q 2
Flexible budget and performance reporting In addition to the information for Acme Company in Mini-Exercise 15.1, actual unit component costs incurred during August include direct materials, $8.25; direct labor, $9.45; variable overhead, $6.82. Actual fixed overhead was $33,500.
Required:
Prepare a performance report, including each cost component, using the following headings:
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According to the provided information, the actual raw materials are
.
The actual direct labor is
.
The actual variable overhead is
.
Therefore, the raw materials variance is
.
The direct labor variance is
.
The variable overhead variance is
.
The fixed overhead variance is
The flexible budget and performance report for August is as below:
Q 3Q 3
Direct material variances In addition to the information for Acme Company in Mini-Exercises 15.1 and 15.2, the standard direct material cost per unit consists of 10 pounds of raw material at $0.80 per pound. During August, 198,000 pounds of raw material were used that were purchased at $0.75 per pound.
Required:
Calculate the materials price variance and materials usage variance for August.
Reference Mini-Exercise 15.1:
Flexible budget Acme Company's production budget for August is 17,500 units and includes the following component unit costs: direct materials, $8; direct labor, $10; variable overhead, $6. Budgeted fixed overhead is $32,000. Actual production in August was 18,000 units.
Required:
Prepare a flexible budget that would be used to compare against actual production costs for August.
Reference Mini-Exercise 15.2:
Flexible budget and performance reporting In addition to the information for Acme Company in Mini-Exercise 15.1, actual unit component costs incurred during August include direct materials, $8.25; direct labor, $9.45; variable overhead, $6.82. Actual fixed overhead was $33,500.
Required:
Prepare a performance report, including each cost component, using the following headings:
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Materials Price Variance:
Material price variance is the variance calculated as difference between standard price of material with the actual price of material used in the production activity. If the standard price of material is more than the actual price then the variance calculated is said to be favorable. If the standard price of material is less than the actual price then the variance calculated is said to be unfavorable.
Calculate the materials price variance as shown below:
Thus, the materials price variance is
.
Materials Usage Variance:
Material usage variance is the variance calculated as difference between standard quantity of material to be used in the actual production activity with the actual quantity of material used in the production activity. If the standard quantity of material is more than the actual quantity used then the variance calculated is said to be favorable. If the standard quantity of material is less than the actual quantity used then the variance calculated is said to be unfavorable.
Calculate the materials usage variance as shown below:
Thus, the materials usage variance is
.
Q 4Q 4
Direct labor variances In addition to the information for Acme Company in Mini-Exercises 15.1 and 15.2, the standard direct labor cost per unit consists of 0.5 hour of labor time at $20 per hour. During August, $170,100 of actual labor cost was incurred for 8,100 direct labor hours.
Required:
Calculate the labor rate variance and labor efficiency variance for August.
Reference Mini-Exercise 15.1:
Flexible budget Acme Company's production budget for August is 17,500 units and includes the following component unit costs: direct materials, $8; direct labor, $10; variable overhead, $6. Budgeted fixed overhead is $32,000. Actual production in August was 18,000 units.
Required:
Prepare a flexible budget that would be used to compare against actual production costs for August.
Reference Mini-Exercise 15.2:
Flexible budget and performance reporting In addition to the information for Acme Company in Mini-Exercise 15.1, actual unit component costs incurred during August include direct materials, $8.25; direct labor, $9.45; variable overhead, $6.82. Actual fixed overhead was $33,500.
Required:
Prepare a performance report, including each cost component, using the following headings:
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Q 5Q 5
Variable overhead variances In addition to the information for Acme Company in Mini-Exercises 15.1 and 15.2, the standard variable overhead rate per unit consists of $6 per machine hour and each unit is allowed a standard of 1 hour of machine time. During August, $122,760 of actual variable overhead cost was incurred for 19,800 machine hours.
Required:
Calculate the variable overhead spending variance and the variable overhead efficiency variance.
Reference Mini-Exercise 15.1:
Flexible budget Acme Company's production budget for August is 17,500 units and includes the following component unit costs: direct materials, $8; direct labor, $10; variable overhead, $6. Budgeted fixed overhead is $32,000. Actual production in August was 18,000 units.
Required:
Prepare a flexible budget that would be used to compare against actual production costs for August.
Reference Mini-Exercise 15.2:
Flexible budget and performance reporting In addition to the information for Acme Company in Mini-Exercise 15.1, actual unit component costs incurred during August include direct materials, $8.25; direct labor, $9.45; variable overhead, $6.82. Actual fixed overhead was $33,500.
Required:
Prepare a performance report, including each cost component, using the following headings:
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Q 6Q 6
Fixed overhead variances In addition to the information for Acme Company in Mini-Exercises 15.1 and 15.2, the standard fixed overhead application rate per unit consists of $2 per machine hour and each unit is allowed a standard of 1 hour of machine time.
Required:
Calculate the fixed overhead budget variance and the fixed overhead volume variance.
Reference Mini-Exercise 15.1:
Flexible budget Acme Company's production budget for August is 17,500 units and includes the following component unit costs: direct materials, $8; direct labor, $10; variable overhead, $6. Budgeted fixed overhead is $32,000. Actual production in August was 18,000 units.
Required:
Prepare a flexible budget that would be used to compare against actual production costs for August.
Reference Mini-Exercise 15.2:
Flexible budget and performance reporting In addition to the information for Acme Company in Mini-Exercise 15.1, actual unit component costs incurred during August include direct materials, $8.25; direct labor, $9.45; variable overhead, $6.82. Actual fixed overhead was $33,500.
Required:
Prepare a performance report, including each cost component, using the following headings:
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Q 7Q 7
Flexible budgeting The cost formula for the maintenance department of Rainbow, Ltd., is $19,400 per month plus $7.70 per machine hour used by the production department.
Required:
a. Calculate the maintenance cost that would be budgeted for a month in which 6,700 machine hours are planned to be used.
b. Prepare an appropriate performance report for the maintenance department assuming that 7,060 machine hours were actually used in the month of May and that the total maintenance cost incurred was $68,940.
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Q 8Q 8
Flexible budgeting Western Manufacturing produces a single product. The original budget for April was based on expected production of 14,000 units; actual production for April was 13,300 units. The original budget and actual costs incurred for the manufacturing department follow:
Required:
Prepare an appropriate performance report for the manufacturing department.
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Q 9Q 9
Performance reporting and flexible budgeting Following is a partially completed performance report for a recent week for direct labor in the binding department of a book publisher:
The original budget is based on the expectation that 3,000 books would be bound; the standard is 20 books per hour at a pay rate of $12 per hour. During the week, 2,860 books were actually bound. Employees worked 160 hours at an actual total cost of $1,888.
Required:
a. Calculate the flexed budget amount against which actual performance should be evaluated and then calculate the budget variance.
b. Calculate the direct labor efficiency variance in terms of hours.
c. Calculate the direct labor rate variance.
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Q 10Q 10
Performance reporting and flexible budgeting For the stamping department of a manufacturing firm, the standard cost for direct labor is $12 per hour, and the production standard calls for 2,000 stampings per hour. During February, 121 hours were required for actual production of 230,000 stampings. Actual direct labor cost for the stamping department for June was $1,573.
Required:
a. Complete the following performance report for February:
b. Analyze the budget variance by calculating the direct labor efficiency and rate variances for February.
c. What alternatives to the preceding monthly report could improve control over the stamping department's direct labor?
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Q 11Q 11
Direct labor variances-solving for unknowns Ackerman's Garage uses standards to plan and control labor time and expense. The standard time for an engine tune-up is 3.5 hours, and the standard labor rate is $15 per hour. Last week, 24 tune-ups were completed. The labor efficiency variance was 6 hours unfavorable, and the labor rate variance totaled $81 favorable.
Required:
a. Calculate the actual direct labor hourly rate paid for tune-up work last week.
b. Calculate the dollar amount of the labor efficiency variance.
c. What is the most likely explanation for these two variances? Is this a good trade-off for the management of the garage to make? Explain your answer.
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Q 12Q 12
Direct labor variances-solving for unknowns Four Seasons Industries has established direct labor performance standards for its maintenance and repair shop. However, some of the labor records were destroyed during a recent fire. The actual hours worked during August were 2,500, and the total direct labor budget variance was $1,300 unfavorable. The standard labor rate was $16 per hour, but recent resignations allowed the firm to hire lower-paid replacement workers for some jobs, and this produced a favorable rate variance of $3,500 for August.
Required:
a. Calculate the actual direct labor rate paid per hour during August.
b. Calculate the dollar amount of the direct labor efficiency variance for August.
c. Calculate the standard direct labor hours allowed for the actual level of activity during August. (Hint: Use the formula for the quantity variance and solve for the missing information.)
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Q 13Q 13
Direct material variances-solving for unknowns Oakwood, Inc., manufactures end tables, armchairs, and other wood furniture products from high-quality materials. The company uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlling direct material price variances, and production managers are responsible for controlling usage variances.
During November, the following results were reported for the production of American Oak armchairs:
Required:
a. Calculate the actual price paid per board foot purchased.
b. Calculate the standard quantity of materials allowed (in board feet) for the number of units produced.
c. Calculate the direct materials usage variance.
d. What is the most likely explanation for the price and usage variances? Is this a good trade-off for management of Oakwood, Inc., to make? Explain your answer.
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Q 14Q 14
Direct material variances-solving for price and usage variances Fiberworks Company is a manufacturer of fiberglass toy boats. The company has recently implemented a standard cost system and has designed the system to isolate variances as soon as possible. During the month of May, the following results were reported for the production of 100,000 toy boats:
Required:
a. Calculate the actual cost per pound of fiberglass purchased during May.
b. Calculate the direct materials purchase price variance for May.
c. Calculate the direct materials usage variance for May.
d. Comment on calculating the material price variance based on pounds purchased rather than pounds issued into production.
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Q 15Q 15
Segmented income statement The president of Ravens, Inc., attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year's traditional model income statement be revised, and she received the following report:
The president was told that the fixed expenses of $30,000 included $21,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division B is a drag on the whole company. Close it down!"
Required:
a. Evaluate the president's remark.
b. Calculate what the company's net income would be if Division B were closed down.
c. Write a policy statement related to the allocation of fixed expenses.
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Q 16Q 16
Segmented income statement Vogel Co. produces three models of heating and air conditioning thermostat components. The following table summarizes data about each model:
Required:
a. Criticize the preceding presentation. On what basis does the $10,000 of company fixed expenses appear to be allocated?
b. Calculate the effect on total company net income if the MV12 model were discontinued.
c. Calculate the contribution margin ratio for each model.
d. If an advertising campaign focusing on a single model were to result in an increase of 5,000 units in the quantity of units sold, which model should be advertised? Explain your answer.
e. If an advertising campaign focusing on a single model were to result in an increase of $15,000 in revenues, which model should be advertised? Explain your answer.
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Q 17Q 17
Investment center analysis; ROI and residual income The Central Division of National, Inc., has operating income of $16,000 on sales revenue of $160,000. Divisional operating assets are $80,000, and management of National has determined that a minimum return of 12% should be expected from all investments.
Required:
a. Using the DuPont model, calculate The Central Division's margin, turnover, and ROI.
b. Calculate The Central Division's residual income.
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Q 18Q 18
Investment center analysis; ROI and residual income Romano Corporation has three operating divisions and requires a 12% return on all investments. Selected information is presented here:
Required:
a. Calculate the missing amounts for each division.
b. Comment on the relative performance of each division.
c. Provide an example to show how residual income improves decision making at the divisional level.
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Q 19Q 19
Calculate variable cost variances-explain results The standards for one case of Springfever Tonic are as follows:
During the week ended August 28, the following activity took place:
7,400 lb of raw materials were purchased for inventory at a cost of $4.95 per pound.
2,000 cases of finished product were produced.
8,300 lb of raw materials were used.
5,800 direct labor hours were worked at a total cost of $78,300.
$35,670 of actual variable overhead costs were incurred.
Required:
Calculate each of the following variances and provide plausible explanations for the results:
a. Price variance for raw materials purchased.
b. Raw materials usage variance.
c. Direct labor rate variance.
d. Direct labor efficiency variance.
e. Variable overhead spending variance.
f. Variable overhead efficiency variance.
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Not Answered
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Q 20Q 20
Calculate variable cost variances-explain results The standards for one case of liquid weed killer are as follows:
During the week ended May 6, the following activity took place:
2,910 machine hours were worked.
11,400 lb of raw material were purchased for inventory at a total cost of $80,940.
1,900 cases of finished product were produced.
9,260 lb of raw material were used.
4,420 labor hours were worked at an average rate of $14.35 per hour.
$12,513 actual variable overhead costs were incurred.
Required:
Calculate each of the following variances and provide plausible explanations for the results:
a. Price variance for raw materials purchased.
b. Raw materials usage variance.
c. Direct labor rate variance.
d. Direct labor efficiency variance.
e. Variable overhead spending variance.
f. Variable overhead efficiency variance.
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Q 21Q 21
Direct labor variances-insurance company application The Foster Insurance Company developed standard times for processing claims. When a claim was received at the processing center, it was first reviewed and classified as simple or complex. The standard time for processing was:
Employees were expected to be productive 7.5 hours per day. Compensation costs were $90 per day per employee. During April, which had 20 working days, the following number of claims were processed:
Required: a. Calculate the number of workers that should have been available to process April claims.
b. Assume that 27 workers were actually available throughout the month of April. Calculate a labor efficiency variance expressed as both a number of workers and a dollar amount for the month.
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Q 22Q 22
Direct labor variances-banking application Founders State Bank developed a standard for teller staffing that provided for one teller to handle 12 customers per hour. During June, the bank averaged 50 customers per hour and had five tellers on duty at all times. (Relief tellers filled in during lunch and rest breaks.) The teller compensation cost is $12 per hour. The bank is open eight hours a day, and there were 21 working days during June.
Required:
a. Calculate the teller efficiency variance during June expressed in terms of number of tellers and cost per hour.
b. Now assume that in June, during the 11 a.m. to 1 p.m. period every day, the bank served an average of 80 customers per hour. During the other six hours of the day, an average of 40 customers per hour were served.
1. Calculate a teller efficiency variance for the 11 to 1 period expressed in terms of number of tellers per hour and total cost for the month.
2. Calculate a teller efficiency variance for the other six hours of the day expressed in terms of number of tellers per hour and total cost for the month.
3. As teller supervisor, explain the significance of the variances calculated in 1 and 2, and explain how you might respond to the uneven work flow during each day.
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Q 23Q 23
Fixed overhead variances-various issues Silverstone's production budget for July called for making 40,000 units of a single product. The firm's production standards allow one-half of a machine hour per unit produced. The fixed overhead budget for July was $36,000. Silverstone uses an absorption costing system. Actual activity and costs for July were:
Required:
a. Calculate the predetermined fixed overhead application rate per machine hour that would be used in July.
b. Calculate the number of machine hours that would be allowed for actual July production.
c. Calculate the fixed overhead applied to work in process during July.
d. Calculate the over- or underapplied fixed overhead for July.
e. Calculate the fixed overhead budget and volume variances for July.
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Q 24Q 24
Variable and fixed overhead variances-various issues Presented here are the original overhead budget and the actual costs incurred during April for Piccolo, Inc. Piccolo's managers relate overhead to direct labor hours for planning, control, and product costing purposes. The original budget is based on budgeted production of 15,000 units in 5,000 standard direct labor hours. Actual production of 16,200 units required 5,600 actual direct labor hours.
Required:
a. Calculate the flexed budget allowances for variable and fixed overhead for April.
b. Calculate the direct labor efficiency variance for April expressed in terms of direct labor hours.
c. Calculate the predetermined overhead application rate for both variable and fixed overhead for April.
d. Calculate the fixed and variable overhead applied to production during April if overhead is applied on the basis of standard hours allowed for actual production achieved.
e. Calculate the fixed overhead budget and volume variances for April.
f. Calculate the over- or underapplied fixed overhead for April.
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Q 25Q 25
Performance reporting The chair of the Science Department of State University has a budget for laboratory supplies. Supplies have a variable cost behavior pattern that is a function of the number of students enrolled in laboratory courses. For planning purposes, when the budget was prepared in March 2016, it was estimated that 300 students would be enrolled in laboratory courses during the fall 2016 semester. Actual enrollment for the fall semester was 318 students.
Required:
a. Explain what action should be taken with respect to the supplies budget when the actual enrollment is known.
b. Would your answer to part a be any different if the actual enrollment turned out to be 273 students? Explain your answer.
c. Suppose the budget item in question was the salary for the lab assistant. How would your answer to part a and part b change, if at all? Explain your answer.
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Q 26Q 26
Flexible budgeting One of the significant costs for a nonpublic college or university is student aid in the form of gifts and grants awarded to students because of academic potential or performance, and/or financial need. Gifts and grants are only a part of a financial aid package, usually accounting for no more than 20% of the total package. Federal and state grants, other scholarships, loans, and income from work constitute the rest of financial aid, but these funds are not provided by the institution. Assume that for the 2016-2017 academic year, Wonder College had a gift and grant budget of $900,000 and that all of these funds had been committed to students by May 15, 2016. The college had capacity to enroll up to 200 additional students.
Required:
Explain why and how flexible budgeting should be applied by the management of Wonder College in administering its gift and grant awards budget.
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Q 27Q 27
Frequency of performance reporting If a company uses a standard cost system, should all variances be calculated with the same frequency (e.g., monthly) and should they always be expressed in dollar amounts? Explain your answer and include in it the reason for calculating variances.
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Q 28Q 28
Rank the importance of eight variances Assume that you are the production manager of a small branch plant of a large manufacturing firm. The central accounting control department sends you monthly performance reports showing the flexed budget amount, actual cost and variances for raw materials, direct labor, variable overhead (which is expressed on a direct labor hour basis), and fixed overhead. The variable cost budget variances are separated into quantity and cost per unit of input variances, and the fixed overhead budget and volume variances are shown. All variances are expressed in dollars.
Required:
a. Rank the eight variances in descending order of their usefulness to you for planning and controlling purposes. Explain your ranking.
b. Given the usefulness ranking in part a , explain how the frequency of reporting and the units in which each variance is reported might make the performance reports more useful.
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Q 29Q 29
Direct material variances-the price versus usage trade-off Williamson, Inc., manufactures quality replacement parts for the auto industry. The company uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlling the direct material price variances for hundreds of raw material items that are used in the company's various production processes. Recent experience indicates that, in the aggregate, direct material price variances have been favorable. However, several problems have occurred. Direct material usage variances have become consistently unfavorable for many items, and the company's total budget variance for direct materials has been unfavorable during each of the past six months. Direct laborers have complained about the quality of certain raw material items, and major customers have canceled purchase orders. In the meantime, the company's raw materials inventory has increased by nearly 240%.
Required:
a. Give a probable explanation of why these results have occurred. (Hint: What might the purchasing manager be doing that is dysfunctional for the company as a whole?)b. How could the performance reporting system be improved to encourage more appropriate behavior on the part of the purchasing manager?
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Q 30Q 30
Evaluate the effects of erroneous standards During the year ended May 31, 2015, Teller Register Co. reported favorable raw material usage and direct labor and variable overhead efficiency variances that totaled $285,800. Price and rate variances were negligible. Total standard cost of goods manufactured during the year was $1,905,340.
Required:
a. Comment about the effectiveness of the company's standards for controlling material and labor usage.
b. If standard costs are used for valuing finished goods inventory, will the ending inventory valuation be higher or lower than if actual costs are used? Explain your answer.
c. Assume that the ending inventory of finished goods valued at standard cost is $158,780. Calculate the adjustment to finished goods inventory that would be appropriate because of the erroneous standards.
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Q 31Q 31
Using standard costs to record inventory transactions York Co. uses a standard cost system. When raw materials are purchased, the standard cost of the raw materials purchased is recorded as an increase in the Raw Materials Inventory account. When raw materials are used, the standard cost of the materials allowed for the units produced is recorded as an increase in the Work in Process Inventory account. Likewise, the standard cost of direct labor and variable manufacturing overhead is recorded as an increase in Work in Process Inventory.
Required:
a. Explain where in the financial statements the difference between the actual and standard cost of raw materials purchased will be recorded.
b. In this system, under what circumstances will the increases and decreases in the Finished Goods Inventory account (due to production and sales, respectively) represent the actual cost of products made and sold?
c. How does the accounting for overapplied or underapplied overhead, originally discussed in Chapter 13, differ from York Co.'s cost accounting system?
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Q 32Q 32
The planning and control environment: Internet assignment The Consortium for Advanced Manufacturing-International (CAM-I) is an international consortium of companies, consultancies, and academics that have elected to work cooperatively in a precompetitive environment to solve problems common to the group. Its sole purpose is to support member companies in their quest for excellence in today's highly competitive global marketplace. This case requires you to use the CAM-I website at cam-i.org to complete the following requirements.
Assume that a start-up manufacturing company has recently hired you, and your first task is to develop a cost planning and control environment for the firm.
Required:
a. Review CAM-I's executive overview. Summarize the history of the organization and describe how CAM-I's participative model produces value for its members.
b. Read CAM-I's most recent quarterly report to members. Prepare a one-page summary emphasizing important accomplishments from your perspective.
c. Read CAM-I's value proposition, and review its membership options (corporate, smaller, and subscription based). Choose a membership option that you expect will be beneficial, and write a memo to your new supervisor describing your rationale to justify the cost of joining this organization.
d. Review CAM-I's body of knowledge publications. Identify two items from the list of publications that would help you with your new responsibility. Explain your choices.
e. Review CAM-I's wiki. Read the main-page overview of CAM-I's Cost Management Systems (CMS) interest group; explore the 10 planning and budgeting "we share your pain" issues presented in the survey results list, and write a brief summary of your findings.
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