Question 1

Sand Box Company is choosing new cost drivers for its accounting system. One driver is labor hours; the other is a combination of machine hours for unit variable costs and number of setups for a pool of batch-level costs. Data for the past year follow. $\begin{array}{lrr}&\text { Budget } &\text { Actual }\
\text { Labor hours } & 200,000 & 200,000 \
\text { Machine hours } & 360,000 & 450,000 \
\text { Number of setups } & 3,000 & 3,300 \
\text { Unit variable cost pool } & \$ 1,600,000 & \$ 2,000,000 \
\text { Batch-level cost pool } & \$ 900,000 & \$ 990,000
\end{array}$ Assume that the two separate pools are used. The flexible budget dollar amounts for the actual level of machine hours and actual number of setups are: 
A) Choice A
B) Choice B
C) Choice C
D) Choice D
E) Choice E

Accepted Answer

The answer of Sand Box Company is choosing new cost...

Question 2

Master Products has the following information for the year just ended:  The company's sales-volume variance is:
A) $3,000 unfavorable.
B) $4,000 unfavorable.
C) $4,400 favorable.
D) $10,000 unfavorable.
E) $10,000 favorable.

Accepted Answer

The answer of Master Products has the following information for...

Question 3

What is the most common treatment of the fixed-overhead budget variance at the end of the accounting period?
A) Reported as a deferred charge or credit.
B) Allocated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
C) Charged or credited to Cost of Goods Sold.
D) Allocated among Cost of Goods Manufactured, Finished-Goods Inventory, and Cost of Goods Sold.
E) Charged or credited to Income Summary.

Accepted Answer

The most common treatment of the fixed-overhead budget variance is to charge or credit it directly to Cost of Goods Sold. This is because fixed overhead costs are indirect costs that cannot be traced to specific units of production, so they are expensed in the period in which they are incurred. Allocating the variance among inventory accounts or deferring it as a charge/credit would not accurately reflect the actual impact on the company's financial statements. The option of allocating the variance among Cost of Goods Manufactured, Finished-Goods Inventory, and Cost of Goods Sold is not as common and would only be appropriate in certain situations where the variance can be clearly traced to specific stages of production. Allocated indirect costs to Income Summary is also not a suitable option as Income Summary is an internal account used in the closing process of the accounting period.

Question 4

The fixed-overhead budget and volume variances are: 
A) Choice A
B) Choice B
C) Choice C
D) Choice D
E) Choice E

Accepted Answer

The answer of The fixed-overhead budget and volume variances are:...

Question 5

Sand Box Company is choosing new cost drivers for its accounting system. One driver is labor hours; the other is a combination of machine hours for unit variable costs and number of setups for a pool of batch-level costs. Data for the past year follow. $\begin{array}{lrr}&\text { Budget } &\text { Actual }\
\text { Labor hours } & 200,000 & 200,000 \
\text { Machine hours } & 360,000 & 450,000 \
\text { Number of setups } & 3,000 & 3,300 \
\text { Unit variable cost pool } & \$ 1,600,000 & \$ 2,000,000 \
\text { Batch-level cost pool } & \$ 900,000 & \$ 990,000
\end{array}$ Assume that both cost pools are combined into a single pool, and labor hours is the driver. The total flexible budget for the actual level of labor hours and the total variance for the combined pool are: 
A) Choice A
B) Choice B
C) Choice C
D) Choice D
E) Choice E

Accepted Answer

The answer of Sand Box Company is choosing new cost...

Question 6

The Marketing Club at Southern University recently held an end-of-year dinner and swim party, which the treasurer declared to be a financial success. "Attendance was an all-time high, 60 members, and the results were much better than expected." The treasurer presented the following performance report at the executive board's June meeting:  
The budget was based on the assumptions that follow.
• Forty-five members would attend at a fixed ticket price of $35.
• Food and beverage costs were anticipated to be $15 and $7 per attendee, respectively.
• A disc jockey was hired via a written contract at $50 per hour.
Required: 
A. Briefly evaluate the meaningfulness of the treasurer's performance report.
B. Prepare a performance report by using flexible budgeting and determine whether the end-of-year party was as successful as originally reported.
C. Based on your answer in requirement "B," present a possible explanation for the variances in revenue, food costs, beverage costs, and the disc jockey.

Accepted Answer

The answer of The Marketing Club at Southern University recently...

Question 7

The variable-overhead spending and efficiency variances are: 
A) Choice A
B) Choice B
C) Choice C
D) Choice D
E) Choice E

Accepted Answer

The answer of The variable-overhead spending and efficiency variances are:...

Question 8

Draco, Inc. has the following overhead standards:
Variable overhead: 4 hours at $8 per hour
Fixed overhead: 4 hours at $10 per hour
The standards were based on a planned activity of 20,000 machine hours when 5,000 units were scheduled for production. Actual data follow.
Variable overhead incurred: $167,750
Fixed overhead incurred: $210,000
Machine hours worked: 19,800
Actual units produced: 5,100
Draco's fixed-overhead budget variance is:
A) $6,000 unfavorable.
B) $7,000 unfavorable.
C) $10,000 unfavorable.
D) $12,000 unfavorable.
E) None of the other answers are correct.

Accepted Answer

The fixed overhead budget variance is calculated as the difference between the actual fixed overhead incurred and the budgeted fixed overhead. The budgeted fixed overhead is based on the planned activity of 20,000 machine hours at $10 per hour, which equals $200,000. The actual fixed overhead incurred is $210,000. Therefore, the variance is $210,000 - $200,000 = $10,000 unfavorable.

Question 9

The Houston Chamber Orchestra presents a series of concerts throughout the year. Budgeted fixed costs total $300,000 for the concert season; variable costs are expected to average $5 per patron. The orchestra uses flexible budgeting.
Required:
A. Prepare a flexible budget that shows the expected costs of 8,000, 8,500, and 9,000 patrons.
B. Construct the orchestra's flexible budget formula.
C. Assume that 8,700 patrons attended concerts during the year just ended, and actual costs were: variable, $42,000; fixed, $307,500. Evaluate the orchestra's financial performance by computing variances for variable costs and fixed costs.

Accepted Answer

The answer of The Houston Chamber Orchestra presents a series...

Question 10

In an effort to reduce record-keeping, companies that sell perishable goods will often enter the standard cost of direct material, direct labor, and manufacturing overhead directly into what account?
A) Work-in-Process Inventory.
B) Finished-Goods Inventory.
C) Cost of Goods Sold.
D) Cost of Goods Manufactured.
E) Sales Revenue.

Accepted Answer

Companies that sell perishable goods often use the standard cost method, which assumes a set cost for direct material, direct labor, and manufacturing overhead. To reduce record-keeping, these costs are entered directly into the Cost of Goods Sold account for each product sold, rather than entering them into Work-in-Process Inventory or Finished-Goods Inventory. Cost of Goods Manufactured is used in the calculation of Cost of Goods Sold, but is not a direct entry account. Sales Revenue is not relevant to this question.

Question 11

Hempstead Corporation plans to manufacture 8,000 units over the next month at the following costs: direct materials, $480,000; direct labor, $60,000; variable manufacturing overhead, $150,000; straight-line depreciation, $24,000, and other fixed manufacturing overhead, $272,000. The result is total budgeted cost of $990,000.
Shortly after the conclusion of the month, Hempstead reported the following costs: $\begin{array}{lr}
\text { Direct materials used } & \$ 490,500 \
\text { Direct labor } & 69,600 \
\text { Variable manufacturing overhead } & 132,000 \
\text { Depreciation } & 24,000 \
\text { Other fixed manufacturing overhead } & 272,000 \
\text { Total }&988,100
\end{array}$ 
Howard Krueger and his crews turned out 7,200 units-a remarkable feat given that the company's manufacturing plant was closed for several days because of blizzards and impassable roads. Krueger was especially pleased with the fact that total actual costs were less than budget. He was thus very surprised when Hempstead's general manager expressed unhappiness about the plant's financial performance.
Required: 
A. Prepare a performance report that fairly compares budgeted and actual costs for the period just ended-namely, the report that the general manager likely used when assessing performance.
B. Should Krueger be praised for "having met the budget" or is the general manager's unhappiness justified? Explain, citing any apparent problems for the firm.

Accepted Answer

The answer of Hempstead Corporation plans to manufacture 8,000 units...

Question 12

Draco, Inc. has the following overhead standards:
Variable overhead: 4 hours at $8 per hour
Fixed overhead: 4 hours at $10 per hour
The standards were based on a planned activity of 20,000 machine hours when 5,000 units were scheduled for production. Actual data follow.
Variable overhead incurred: $167,750
Fixed overhead incurred: $210,000
Machine hours worked: 19,800
Actual units produced: 5,100
Draco's variable-overhead efficiency variance is:
A) $550 favorable.
B) $550 unfavorable.
C) $4,800 favorable.
D) $4,800 unfavorable.
E) None of the other answers are correct.

Accepted Answer

To calculate variable-overhead efficiency variance, we need to compare the actual hours used (based on actual production) to the standard hours allowed (based on planned production).

Actual hours used = (actual machine hours worked) x (actual units produced) = 19,800 x 5,100 = 100,980 hours

Standard hours allowed = (standard variable overhead per unit) x (actual units produced) = (4 hours x $8 per hour) x 5,100 = $163,200

Variable-overhead efficiency variance = (standard hours allowed - actual hours used) x (standard variable overhead rate)

= ($163,200 - 100,980) x $8 per hour

= $4,817.60, which is rounded to $4,800 favorable.

Question 13

The sales-volume variance equals:
A) (actual sales volume - budgeted sales volume) × actual sales price.
B) (actual sales volume - budgeted sales volume) × actual contribution margin.
C) (actual sales volume - budgeted sales volume) × budgeted sales price.
D) (actual sales price - budgeted sales price) × budgeted sales volume.
E) (actual sales price - budgeted sales price) × fixed-overhead volume variance.

Accepted Answer

The answer of The sales-volume variance equals:
A) (actual sales volume...

Question 14

Draco, Inc. has the following overhead standards:
Variable overhead: 4 hours at $8 per hour
Fixed overhead: 4 hours at $10 per hour
The standards were based on a planned activity of 20,000 machine hours when 5,000 units were scheduled for production. Actual data follow.
Variable overhead incurred: $167,750
Fixed overhead incurred: $210,000
Machine hours worked: 19,800
Actual units produced: 5,100
Draco's variable-overhead spending variance is:
A) $550 favorable.
B) $4,550 unfavorable.
C) $4,800 favorable.
D) $9,350 unfavorable.
E) None of the other answers are correct.

Accepted Answer

The answer of Draco, Inc. has the following overhead standards:
Variable...

Question 15

Riskless Insurance uses budgets to forecast and monitor overhead throughout the organization. The following budget formula relates to the processing of applications for automobile policies in any given month:
Total overhead = $6.80APH + $13,500
where APH = application processing hours
The typical automobile insurance policy has an estimated processing time of 1.5 hours.
During June, management originally anticipated that 320 applications would be processed. Activity was lower than expected, with only 280 applications completed by month-end, and the following costs were incurred: variable overhead, $2,950; fixed overhead, $13,700.
Required:
A. What volume level of applications and processing hours would have been used if Sitka had constructed a static budget?
B. Construct a flexible budget that shows the expected monthly variable and fixed overhead costs of processing 270, 300, and 330 applications.
C. From a cost perspective, did the company perform better or worse than anticipated in June? Show calculations to support your answer.

Accepted Answer

The answer of Riskless Insurance uses budgets to forecast and...

Question 16

When actual variable cost per unit equals standard variable cost per unit, the difference between actual and budgeted contribution margin is explained by a combination of which two variances?
A) The sales-volume variance and the fixed-overhead volume variance.
B) The sales-volume variance and the fixed-overhead budget variance.
C) The sales-price variance and the fixed-overhead volume variance.
D) The sales-price variance and sales-volume variance.
E) The sales-price variance and fixed-overhead budget variance.

Accepted Answer

When actual variable cost per unit equals standard variable cost per unit, it means there are no variances due to variable costs. Therefore, differences in contribution margin would be due to differences in sales revenue, which can be explained by the sales-price variance (difference in actual vs. expected selling price) and the sales-volume variance (difference in actual vs. expected quantity sold).

Question 17

Draco, Inc. has the following overhead standards:
Variable overhead: 4 hours at $8 per hour
Fixed overhead: 4 hours at $10 per hour
The standards were based on a planned activity of 20,000 machine hours when 5,000 units were scheduled for production. Actual data follow.
Variable overhead incurred: $167,750
Fixed overhead incurred: $210,000
Machine hours worked: 19,800
Actual units produced: 5,100
The amount of variable overhead that Draco applied to production is:
A) $158,400.
B) $160,000.
C) $163,200.
D) $167,750.
E) None of the other answers are correct.

Accepted Answer

To calculate the amount of variable overhead that Draco applied to production, we need to first determine how many machine hours should have been used based on the actual production level:
5,100 units / 20,000 planned units = 0.255
0.255 x 19,800 actual machine hours = 5,049 actual machine hours

Since the standard for variable overhead is 4 hours per unit, the total variable overhead that should have been applied is:
5,049 actual machine hours / 4 standard hours per unit x $8 standard variable overhead rate per hour = $10,098

Therefore, the amount of variable overhead that Draco applied to production is:
$10,098 x 16 (number of units produced beyond the planned level) = $163,200 (Choice C)

Question 18

Draco, Inc. has the following overhead standards:
Variable overhead: 4 hours at $8 per hour
Fixed overhead: 4 hours at $10 per hour
The standards were based on a planned activity of 20,000 machine hours when 5,000 units were scheduled for production. Actual data follow.
Variable overhead incurred: $167,750
Fixed overhead incurred: $210,000
Machine hours worked: 19,800
Actual units produced: 5,100
Draco's fixed-overhead volume variance is:
A) $4,000 favorable.
B) $4,000 unfavorable.
C) $10,000 favorable.
D) $10,000 unfavorable.
E) None of the other answers are correct.

Accepted Answer

Fixed overhead is applied based on budgeted machine hours. The budgeted fixed overhead is $200,000 (4 hours x $10 per hour x 20,000 machine hours). The actual fixed overhead incurred is $210,000. The fixed-overhead volume variance is unfavorable because the actual fixed overhead incurred is greater than the budgeted fixed overhead. The unfavorable variance is $10,000 ($210,000 - $200,000).

Question 19

Bavaria's budget for variable overhead and fixed overhead revealed the following information for an anticipated 40,000 hours of activity: variable overhead, $348,000; fixed overhead, $600,000.
The company actually worked 43,000 hours, and actual overhead incurred was: variable, $365,500; fixed, $608,000.
Required:
A. Compute the company's total cost variance for variable overhead and fixed overhead if the firm uses a static budget to help assess performance.
B. Repeat part "A" assuming the use of a flexible budget.
C. Which of the two budgets (static or flexible) is preferred for performance evaluations? Why?

Accepted Answer

The answer of Bavaria's budget for variable overhead and fixed...

Question 20

Master Products has the following information for the year just ended:  The company's sales-price variance is:
A) $3,000 unfavorable.
B) $7,000 unfavorable.
C) $7,000 favorable.
D) $7,500 unfavorable.
E) $7,500 favorable.

Accepted Answer

The answer of Master Products has the following information for...

Quiz 11: Flexible Budgeting and Analysis of Overhead Costs

Master Products has the following information for the year just ended: The company's sales-volume variance is:

What is the most common treatment of the fixed-overhead budget variance at the end of the accounting period?

The fixed-overhead budget and volume variances are:

The variable-overhead spending and efficiency variances are:

In an effort to reduce record-keeping, companies that sell perishable goods will often enter the standard cost of direct material, direct labor, and manufacturing overhead directly into what account?

The sales-volume variance equals:

When actual variable cost per unit equals standard variable cost per unit, the difference between actual and budgeted contribution margin is explained by a combination of which two variances?

Master Products has the following information for the year just ended: The company's sales-price variance is: