Question 1

A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company's choice of the denominator level of activity has no effect on the fixed manufacturing overhead volume variance.

Accepted Answer

The choice of the denominator level of activity affects the fixed manufacturing overhead volume variance because it determines the standard hours allowed for actual production, impacting the variance calculation.

Question 2

A decrease in denominator level of activity will:
A) decrease the fixed portion of the predetermined overhead rate.
B) increase the fixed portion of the predetermined overhead rate.
C) decrease the variable portion of the predetermined overhead rate.
D) increase the variable portion of the predetermined overhead rate.

Accepted Answer

The predetermined overhead rate is calculated by dividing the estimated total overhead costs by an estimated level of activity, which is usually expressed in terms of direct labor hours, machine hours, or some other measure of production volume. The denominator level of activity represents the estimated level of production volume. If the denominator level of activity decreases, the fixed portion of the predetermined overhead rate will increase because the same amount of fixed overhead costs will be spread over a smaller estimated level of activity. This means that each unit of production will be charged with a higher amount of fixed overhead costs, leading to a higher predetermined overhead rate.

Question 3

The higher the denominator level of activity:
A) the higher the unit product cost.
B) the lower the unit product cost.
C) the less likely is the occurrence of a volume variance.
D) the more profitable operations likely will be.

Accepted Answer

The higher the denominator level of activity, which represents the level of production or sales volume, the lower the unit product cost. This is because fixed costs are spread over a larger number of units, resulting in a lower per unit cost.

Question 4

The fixed manufacturing overhead budget variance and the fixed manufacturing overhead volume variance taken together explain the difference between the actual fixed manufacturing overhead cost incurred and the fixed manufacturing overhead cost applied to production.

Accepted Answer

The fixed manufacturing overhead budget variance measures the difference between the actual fixed overhead costs and the budgeted fixed overhead costs, while the fixed manufacturing overhead volume variance measures the difference between the budgeted fixed overhead costs and the overhead costs that would have been incurred if production had been at the budgeted level. Together, these variances explain the difference between the actual fixed overhead costs incurred and the fixed overhead costs applied to production.

Question 5

A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. A fixed manufacturing overhead volume variance will NOT necessarily occur in a month in which actual direct labor-hours differ from standard hours allowed.

Accepted Answer

A fixed manufacturing overhead volume variance will only occur when the actual activity level differs from the budgeted activity level. Direct labor-hours are used to apply overhead costs, but they do not affect the budgeted fixed overhead costs.

Question 6

The fixed portion of the predetermined overhead rate is used for product costing purposes and has no significance in terms of cost control.

Accepted Answer

The fixed portion of the predetermined overhead rate is based on estimated overhead costs that cannot be easily influenced or controlled by management. Therefore, it is mainly used for allocating overhead costs to products and determining their total cost. However, the variable portion of the predetermined overhead rate is based on actual volume-based activity levels, which can be controlled and managed by management. Therefore, it is more relevant for cost control purposes, such as identifying cost drivers, reducing waste, and improving efficiency.

Question 7

The volume variance represents the difference between actual fixed manufacturing overhead costs and budgeted fixed manufacturing overhead costs.

Accepted Answer

The volume variance represents the difference between the budgeted fixed manufacturing overhead costs and the applied fixed manufacturing overhead costs based on actual production volume.

Question 8

The denominator activity represents the actual level of activity recorded for a period.

Accepted Answer

The denominator activity represents the estimated or budgeted level of activity used to allocate fixed costs, not the actual level of activity recorded.

Question 9

If the standard hours allowed for the actual output of the period is greater than the denominator level of activity (in hours), then the overhead budget variance will be unfavorable.

Accepted Answer

If the standard hours allowed for actual output is greater than the denominator level of activity, it means that overhead costs were spread over more hours than expected. This results in a favorable overhead budget variance. On the other hand, if the denominator level of activity is greater than the standard hours allowed, it means that overhead costs were spread over fewer hours than expected, resulting in an unfavorable overhead budget variance.

Question 10

Which of the following is not correct?
A) If the denominator level of activity and the standard hours allowed for the output of the period are the same, then there is no volume variance.
B) If the denominator level of activity is greater than the standard hours allowed for the output of the period, then the volume variance is unfavorable.
C) If the denominator level of activity is greater than the standard hours allowed for the output of the period, then the volume variance is favorable.
D) The volume variance is the most appropriate measure of the utilization of plant facilities.

Accepted Answer

If the denominator level of activity is greater than the standard hours allowed for the output of the period, then the volume variance is favorable. This is because the actual level of activity exceeded the standard level of activity, resulting in higher output than expected and therefore a favorable variance. Option A is correct if both levels are the same, there is no variance. Option B states an unfavorable variance when the denominator level is greater than the standard hours, which is incorrect. Option D is also incorrect as the volume variance is not directly related to plant facility utilization.

Question 11

A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The amount of overhead that the company would apply to finished production would ordinarily be the actual direct labor-hours times the predetermined overhead rate per direct labor-hour.

Accepted Answer

The answer of A company has a standard cost system...

Question 12

An unfavorable fixed manufacturing overhead volume variance would be caused by:
A) actual fixed manufacturing overhead costs being greater than budgeted fixed manufacturing overhead costs.
B) actual fixed manufacturing overhead costs being greater than applied fixed manufacturing overhead costs.
C) fixed manufacturing overhead cost being overapplied for the period.
D) the denominator hours exceeding the standard hours allowed for the output of a period.

Accepted Answer

The fixed manufacturing overhead volume variance occurs when fixed overhead is applied to a period based on standard hours allowed for the output, but the actual denominator hours exceed the standard hours allowed for the output. This variance is unfavorable because it means that fixed overhead costs were applied to a smaller amount of output than originally anticipated, resulting in a higher cost per unit. Choices A and B both describe unfavorable fixed overhead spending variances, while choice C describes a favorable fixed overhead spending variance.

Question 13

The fixed manufacturing overhead budget variance is more meaningful than the volume variance for cost control purposes.

Accepted Answer

The fixed manufacturing overhead budget variance indicates the difference between the actual fixed overhead cost and the budgeted fixed overhead cost, allowing managers to compare their actual spending to their planned spending. This variance can help identify where overspending or underspending may have occurred and allows for better cost control decisions. The volume variance, on the other hand, only measures the difference in fixed overhead costs due to changes in production levels and does not provide as useful information for cost control purposes.

Question 14

The volume variance provides a measure of the utilization of plant facilities.

Accepted Answer

The volume variance measures the difference between the actual number of units produced and the expected number of units produced based on the level of activity in the plant. It can provide insight into the efficiency and utilization of plant facilities.

Question 15

If the denominator activity used to compute the predetermined overhead rate is equal to the standard activity allowed for the actual output of the period, then there is no volume variance.

Accepted Answer

If the denominator activity used to compute the predetermined overhead rate is equal to the standard activity allowed for the actual output of the period, then there is no difference between the actual and expected overhead costs, and therefore no volume variance. This assumes that all other variances are zero or absorbed in the overhead rate calculation.

Question 16

The economic impact of the inability to reach a target denominator level of activity would best be measured by:
A) the amount of the volume variance.
B) the contribution margin lost by failing to meet the target denominator level of activity.
C) the amount of the fixed manufacturing overhead budget variance.
D) the amount of the variable overhead efficiency variance.

Accepted Answer

The contribution margin lost by failing to meet the target denominator level of activity reflects the lost revenue and profitability due to the inability to reach the desired level of production. The other options do not directly measure the economic impact on the company's profitability.

Question 17

If all four of Argo Corporation's overhead variances are favorable, Argo's overhead will be overapplied.

Accepted Answer

If all four overhead variances are favorable (i.e. actual overhead costs are less than budgeted/standard costs), it means that Argo Corporation has spent less on overhead than it had anticipated. As a result, its overhead will be overapplied (i.e. the amount of overhead allocated to products will be greater than the actual overhead costs).

Question 18

One cause of an unfavorable overhead volume variance would be increases in cost for fixed manufacturing overhead items.

Accepted Answer

An unfavorable overhead volume variance is typically caused by producing fewer units than expected, not by increases in fixed costs.

Question 19

Which of the following variances would be useful in calling attention to possible problems in the control of spending on overhead items? 
A) Choice A
B) Choice B
C) Choice C
D) Choice D

Accepted Answer

The answer of Which of the following variances would be...

Question 20

If the denominator activity (in hours) used to compute the predetermined overhead rate is equal to the actual activity (in hours) for the period, then there is no volume variance.

Accepted Answer

The answer of If the denominator activity (in hours) used...

Quiz 27: Predetermined Overhead Rates and Overhead Analysis

A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company's choice of the denominator level of activity has no effect on the fixed manufacturing overhead volume variance.

A decrease in denominator level of activity will:

The higher the denominator level of activity: