Accounting

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Quiz 15 :

Cost Control

Quiz 15 :

Cost Control

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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: img
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According to the provided information, the actual raw materials are
img .
The actual direct labor is
img .
The actual variable overhead is
img .
Therefore, the raw materials variance is
img .
The direct labor variance is
img .
The variable overhead variance is
img .
The fixed overhead variance is
img The flexible budget and performance report for August is as below:
img

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Calculate variable cost variances-explain results The standards for one case of liquid weed killer are as follows: img 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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Variance is the difference between budgeted or standard cost and the actual amount spent/incurred. The same may be made for revenues.
There are various types of variances and are:
1. Variances of efficiency
2. Variances of price rates
3. Variances due to volume
a.
Price variance is the difference between the actual price paid for purchased materials and their standard cost.
The material price variance may also be calculated at the time of material withdrawal from stores. In this case, the stock accounts are maintained at actual cost, price variances being extracted at the time of material usage rather than of purchase. The latter method is not usually recommended because one of the advantages of a standard costing system is the valuation of all stock at standard costs.
img Compute price variance for raw material purchased:
img img b.
Raw material usage variance measures efficiency in the use of material, by comparing standard material usage for actual production with actual material used, the difference is valued at standard cost. The direct material usage variance may be divided into mix and yield variances if several materials are mixed in standard proportions
img Compute Raw material usage variance:
img img c.
Direct labor rate variance indicates the actual cost of any change from the standard labor rate of remuneration.
img Compute labor rate variance:
img img d.
Direct labor efficiency variance standard labor cost of any change from the standard level of labor efficiency.
img Compute direct labor efficiency variance:
img img e.
Variable overhead spending variance indicates the actual cost of any change from the standard rate per hour. Hours refer to either labor or machine hours depending on the recovery base chosen for variable production overhead.
img Compute variable overhead spending variance:
img f.
Variable overhead efficiency variance is that part of variable overhead variance which arises due to the difference between standard hours required for actual output and the actual hours worked. It can be computed by multiplying the difference of standard and actual hours by the standard variable overhead rate per hour. If standard hours exceed the actual hours worked, the variance will be favorable and vice versa.
img Compute variable overhead efficiency variance:
img

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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: img 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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(a) Evaluation of president's mark:
In the president's remark it can be identified that misleading of arbitrarily allocated fixed expenses are ignored.
(b) Calculate the company's net income if division B is closed down:
The company's net income if division B is closed down is calculated by deducting the lost contribution margin of closed division and adding the division B direct fixed expenses that would be eliminated to the current net income of the company as shown below:
img Hence, the company net income without Division B is $4,000.
(c) Policy statement:
The policy statement related to the allocated fixed expenses should include "Never arbitrarily allocate fixed expenses".

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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: img
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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: img
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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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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: img 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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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: img
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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: img 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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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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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: img 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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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: img 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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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: img
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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: img Required: Prepare an appropriate performance report for the manufacturing department.
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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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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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Segmented income statement Vogel Co. produces three models of heating and air conditioning thermostat components. The following table summarizes data about each model: img 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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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: img 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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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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Calculate variable cost variances-explain results The standards for one case of Springfever Tonic are as follows: img 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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