ACC 222 Exam 4
What is target costing?
Target Cost = Target Price - Desired Profit
What is the KEY to flexible budgeting?
The key to flexible budgeting is knowledge of fixed and variable costs.
How do companies keep a stable fixed overhead rate throughout the period?
To keep a stable fixed overhead rate throughout the year, companies typically use practical capacity to determine the number of direct labor hours in the denominator of the fixed overhead.
What is the Total Fixed Overhead variance?
Total Fixed Overhead variance = Actual Fixed Overhead - Applied Fixed Overhead
What is the Total Variable overhead variance?
Total Variable overhead variance is simply the difference between actual variable overhead and applied variable overhead.
How to calc desired profit?
%profit x Target Price
What are the 2 types of flexible budgets?
1. Before-the-fact - the budget gives expected outcomes for a range of activity levels. This flexible budget allows managers to generate financial results for a number of potential scenarios. 2. After-the-fact - budget is based on the actual level of activity. This flexible budget is used to compute what costs should have been for the actual level of activity.
What are some advantages of decentralization?
1. Ease of gathering and using local information - Information about local factors are best understood and able to be addressed by those within the locality. Top executives typically don't have this local knowledge. Example; McDonalds tailors their menu to the customer they are serving. The menus in La Crosse are different than the menus in China. McDonalds in Hawaii sells Spam with their sandwiches and breakfast platters. 2. Focusing on central management - Top executives should really be focused on long-term strategy and less on day-to-day operations. Example; Management hires competent managers who can run operations. Executives at McDonalds need to focus on growth, capital decisions, and investor relations rather than deciding which products sell in each locality. 3. Training and motivating of segment managers - Organizations always need well-trained managers to step in when higher up managers leave the organization. If these mid-level/low-level managers are never asked to make decisions they won't have the decision making skills they need when they are promoted. 4. Enhanced competition, exposing segments to market forces - Segment reporting allows us to determine how each segment of our organization is doing rather than simply looking at an aggregate total of operations (all segments). Example; if we have a segment performing below our required rate of return, we need to determine what, if anything we can do. It is possible the segment in question is not something we can continue to keep in our product mix.
Disadvantages of Centralization?
1. Problem with coordination between segments - If segments are being ran completely independent of each other problems can arise with how the groups communicate with each other. Will each individual unit be looking out for themselves or for the organization as a whole? 2. Duplicating efforts - If segments are completing processes on their own we might not be streamlining processes. Example; If we have a pension plan for our employees and we have three segments do we have each segment book reserves for the pension plan or would it make more sense for one centralized team to do it? 3. Reliance on untested managers - Decision making by untested managers can have a negative impact on the organization. What if the managers don't have the skillset or experience they need to make these decisions? 4. Lack of uniformity - Each segment will have their own policies in procedures that need to be followed. What if the policy for one segment is different than the policy for another segment? Example; Accountants were allowed to wear jeans during quarter end but no one else in the company was allowed to wear jeans...does this cause a problem?
8. During August, 10,000 units were produced. The standard quantity of material allowed per unit was 10 pounds at a standard cost of $3 per pound. If there was an unfavorable usage variance of $18,750 for August, the actual quantity of materials used must be a. 106,250 pounds. b. 93,750 pounds. c. 31,875 pounds. d. 23,438 pounds.
ANSWER: a RATIONALE: 10,000 × 10 × $3 = $300,000 $300,000 + $18,750 = $318,750 $318,750 / $3 = 106,250 pounds
9. During January, 7,000 direct labor hours were worked at a standard cost of $20 per hour. If the direct labor rate variance for January was $17,500 favorable, the actual cost per direct labor hour must be a. $17.50. b. $20.00. c. $22.50. d. $25.00.
ANSWER: a RATIONALE: 7,000 × $20 = $140,000 $140,000 − $17,500 = $122,500 $122,500 / 7,000 = $17.50
92. Perfect Builders makes all sorts of moldings. Its standard quantity of material allowed is 1 foot of wood per 1 foot of molding at a standard price of $2.00 per foot. During August, it purchased 500,000 feet of wood at a cost of $1.90 per foot, which produced only 499,000 feet of molding. Calculate the materials price variance and the materials usage variance, respectively. a. $50,000 F and $2,000 U b. $49,900 U and $2,000 F c. $50,000 F and $1,900 U d. $49,900 F and $1,900 U
ANSWER: a RATIONALE: MPV = (AP − SP) × AQ = ($1.90 − $2.00) × 500,000 = $50,000 F MUV = (AQ − SQ) × SP = (499,000 − 500,000) × $2.00 = $2,000 U
10. Which of the following is not true regarding the use of labor variance information? a. The actual wage rate is almost always different from the standard rate. b. Unexpected overtime can cause variation in the labor rate. c. An average wage rate is chosen as the labor rate standard. d. The production manager controls the use of labor. e. The actual wage rate is used in determining the labor rate variance.
ANSWER: a RATIONALE: Typically, the actual wage rate is equal to the standard rate.
7. The Balanced Scorecard perspective that describes the internal processes needed to provide value for customers and owners is the ____ perspective. a. customer b. internal business process c. learning and growth d. financial e. None of these.
ANSWER: b
60. Standard cost systems are adopted a. to improve planning and control. b. to facilitate product costing. c. to improve planning and control, and to facilitate product costing. d. to enhance the operational control of firms that emphasize continuous improvement. e. for all of these reasons.
ANSWER: c
91. During June, Cisco Company produced 12,000 chainsaw blades. The standard quantity of material allowed per unit was 1.5 pounds of steel per blade at a standard cost of $8 per pound. The actual cost was $7 per pound. The actual pounds of steel that Cisco purchased were 19,500 pounds. All materials purchased were used. Calculate Cisco's materials usage variance. a. $10,500 U b. $12,000 F c. $12,000 U d. $10,500 F
ANSWER: c RATIONALE: 12,000 blades × 1.5 pounds = 18,000 pounds of steel MUV = (AQ − SQ) × SP = (19,500 − 18,000) × $8 = $12,000 U
Total Fixed Overhead Variance?
Actual Fixed OH - (SH x SFOR)
AFOH?
Actual Fixed Overhead = AFOH
Total Variable Overhead Variance?
Actual Variable OH - (SH x SVOR)
Whats the second way to calc. ROI?
Another way to calculate Return on Investment is to separate the formula into margin and turnover. Return on Investment (ROI) = Margin x Turnover
How to calc applied fixed over head?
Applied Fixed Overhead = SH x SFOR
BFOH?
Budgeted Fixed Overhead = BFOH
How to calc Fixed Overhead Spending variance?
Fixed Overhead Spending Variance = AFOH - BFOH
How to cal Fixed Overhead Volume Variance?
Fixed Overhead Volume Variance = BFOH - (SH x SFOR)
The ratio of operating income to sales
Margin
What is the practical capacity at standard?
Practical Capacity at Standard = SHp. Practical capacity is multiplying standard hours by units that can be produced under efficient operating conditions. If we need .12 hours of labor per unit and our efficiency output is 1,500 units we get 180 hours of practical capacity at Standard (.12 x 1,500 units).
The most common measure of performance for an investment center.
ROI
The dollar difference between operating income and minimum required return on a company's operating assets.
Residual income
Applied Fixed OH?
SH x SFOR
Applied Variable Overhead?
SH x SVOR
SH?
Standard Direct Labor Hours "Should have been worked" for actual units produced
How to calc Standard Fixed Overhead Rate?
Standard Fixed Overhead Rate (SFOR) = Budgeted Fixed Overhead Costs / Practical Capacity
There are two ways to make the comparison. What are they?
Static budget - 1. Compare actual costs with budgeted costs for the budgeted level of activity. If we budgeted 1,060 units and we produced 1,200 units we would still use the budgeted costs associated with 1,060 units for our analytics flexible budget - 2. Compare actual costs with the budgeted costs for the actual level of activity. If we budgeted 1,060 units and we produced 1,200 units we would base our budgeted costs on producing 1,200 units instead of 1,060 units
Irrelevant cost examples?
Sunk cost, a cost that cannot be affected by any future action and therefore is irrelevant to the decision making process. depreciation sometimes fixed depending on problem
The ratio of sales to average operating assets.
Turnover
What are the three important performance measurements for the investment center?
Typically, investment centers are evaluated on the basis of return on investment (ROI), residual income (RI) and/or economic value added (EVA).
How to calc contribution margin per hour of machine time?
Unit Contribution Margin / Required machine time per unit
How to calc Actual Variable Overhead Rate?
VOR = Actual Variable Overhead / Actual direct labor hours AVOR = $478,000 / 69,800 = $6.85
WHat is the formula for VOEV?
Variable Overhead Efficiency Variance = (AH - SH) x SVOR
What is the formula for VOSV?
Variable Overhead Spending Variance = Actual Variable Overhead - (AH x SVOR)
How is variable overhead applied?
Variable overhead (VOH) is applied using hours allowed in a standard cost system and can be divided into spending and efficiency variances. Applied Variable Overhead (SH X SVOR)
What could managers do to make themselves look good when using a static budget?
When using a static budget you run into the possibility that management will produce less units than budgeted so that it looks as if costs were managed well.
10. The Balanced Scorecard perspective that defines the capabilities than an organization needs to create long-term growth and improvement is the ____ perspective. a. learning and growth b. internal business process c. customer d. financial e. None of these.
a
68. Standard hours allowed are computed using the equation a. unit labor standard × actual output. b. unit labor standard × standard output. c. unit labor standard × actual input. d. unit labor standard × standard input. e. not shown here.
a
9. The Balanced Scorecard perspective that defines the customer and market segments in which the business unit will compete is the ____ perspective. a. customer b. internal business process c. learning and growth d. financial e. None of these.
a
Which of the following costs is not relevant to a decision to sell a product at split-off or process the product further and then sell the product? a. joint costs allocated to the product b. the selling price of the product at split-off c. the additional processing costs after split-off d. the selling price of the product after further processing
a
10. If actual fixed overhead was $98,400 and there was a $2,880 favorable spending variance and a $600 unfavorable volume variance, budgeted fixed overhead must have been a. $101,280. b. $100,680. c. $99,000. d. $97,800.
a. $101,280.
A(n) ___________ is a responsibility center in which a manager is responsible only for costs.
cost center
6. Which of the following is true regarding variances? a. Unfavorable variances occur whenever actual prices or actual usage of inputs are greater than standard prices or standard usage. b. Favorable variances occur whenever actual prices or actual usage of inputs are greater than standard prices or standard usage. c. Unfavorable variances are always credits. d. Favorable variances are always debits.
a. Unfavorable variances occur whenever actual prices or actual usage of inputs are greater than standard prices or standard usage.
3. Standard cost systems can enhance operational control through the use of a. efficiency variances which indicate the need for corrective action. b. price variances which indicate the need for better spending control. c. standard costs which indicate the desired cost of a unit of input. d. actual costs which indicate the price received for units sold. e. All of these.
a. efficiency variances which indicate the need for corrective action.
5. Return on investment (ROI) is calculated as a. operating income / average operating assets. b. average operating assets / operating income. c. (beginning operating assets + ending operating assets) / 2. d. sales / average operating assets. e. operating income / sales.
a. operating income / average operating assets.
5. Variances indicate a. that actual performance is not going according to plan. b. the cause of the variance. c. who is responsible for the variance. d. when the variance should be investigated. e. none of these.
a. that actual performance is not going according to plan.
7. A price charged for a component by the selling division to the buying division of the same company is called a(n) a. transfer price. b. economic value added. c. market price. d. cost-based price. e. None of these.
a. transfer price.
4. Which of the following is not true regarding normal costing systems? a. A normal costing system predetermines overhead costs. b. A normal costing system assigns direct materials and direct labor to products using a predetermined rate. c. In a normal costing system overhead is assigned using a budgeted rate and actual activity. d. A normal costing system has less capacity for control than a standard costing system. e. All of these statements are true.
b. A normal costing system assigns direct materials and direct labor to products using a predetermined rate.
6. Which of the following is a disadvantage of a focus on return on investment? a. It can encourage managers to focus on cost cutting efforts. b. It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm. c. It can encourage managers to cut inventories and reduce overall investment. d. It can encourage managers to focus on the long run at the expense of the short run. e. It can accomplish all of these disadvantages.
b. It can produce a narrow focus on divisional profitability at the expense of
1. The practice of delegating decision-making authority to the lower levels of management in a company is a. centralization. b. decentralization. c. performance evaluation. d. authorization. e. hierarchy flattening.
b. decentralization.
9. The manager of a division is displeased with the ROI of the division. One step that would increase ROI (holding everything else constant) is a. increasing investment. b. increasing sales. c. increasing costs. d. decreasing operating income. e. None of these.
b. increasing sales.
4. Responsibility for the variable overhead spending variance is usually assigned to a. the purchasing department. b. the production department. c. the engineering department. d. the personnel department.
b. the production department.
Future costs that differ across alternatives are a. opportunity costs. b. sunk costs. c. relevant costs. d. variable costs. e. product costs.
c
Limited resources and limited demand for a product are generally referred to as a. resources. b. problems. c. constraints. d. optima. e. contribution factors.
c
When managers are considering the optimal product mix, they are most concerned with a. maximizing revenue. b. minimizing cost. c. maximizing profit. d. minimizing selling and administrative expense. e. balancing productive capacity.
c
10. A responsibility center in which a manager is responsible for both revenues and costs is a(n) a. cost center. b. revenue center. c. profit center. d. investment center e. None of these.
c. profit center.
4. A segment of Mega Inc., manufactures and sells blankets. The various models of blankets are produced in a single factory using stable technology. They are sold by the sales department, also located in the factory. The segment is most probably accounted for as a(n) a. cost center. b. revenue center. c. profit center. d. investment center. e. None of these.
c. profit center.
5. In budgeting at the activity level, the cost behavior of each activity is defined with respect to a. direct labor hours. b. machine hours. c. the activity output measure. d. the activity's resource driver.
c. the activity output measure.
7. If variable manufacturing overhead is applied based on direct labor hours and there is an unfavorable direct labor efficiency variance a. the direct materials usage variance will be unfavorable. b. the direct labor rate variance will be favorable. c. the variable manufacturing overhead efficiency variance will be unfavorable. d. the variable manufacturing overhead spending variance will be unfavorable.
c. the variable manufacturing overhead efficiency variance will be unfavorable.
69. The standard quantity of materials allowed is computed by the equation a. unit quantity standard × standard output. b. unit quantity standard × actual input. c. unit quantity standard × standard input. d. unit quantity standard × actual output. e. not shown here.
d
8. The Balanced Scorecard perspective that describes the economic consequences of actions taken in the other three perspectives is the ____ perspective. a. customer b. internal business process c. learning and growth d. financial e. None of these.
d
A decision that focuses on whether a specially priced order should be accepted or rejected is what kind of decision? a. relevant b. make-or-buy c. sell-or-process-further d. special-order e. keep-or-drop
d
Qualitative factors that should be considered when evaluating a make-or-buy decision are a. the quality of the outside supplier's product. b. whether the outside supplier can provide the needed quantities. c. whether the outside supplier can provide the product when it is needed. d. All of these.
d
The act of choosing among alternatives with an immediate or limited end in view is termed a. assessing feasible alternative. b. strategic decision making. c. constructing a decision model. d. short-run decision making. e. None of these.
d
3. Inefficient usage of labor implies a(n) a. favorable variable overhead efficiency variance. b. unfavorable variable overhead spending variance. c. favorable variable overhead spending variance. d. unfavorable variable overhead efficiency variance.
d. unfavorable variable overhead efficiency variance.
2. In setting price standards for materials and labor, a. the purchasing department must consider discounts, freight, and quality. b. personnel must consider payroll taxes, fringe benefits, and qualifications. c. it is the joint responsibility of operations, purchasing, personnel, and accounting. d. All of these. e. None of these.
d. All of these.
2. To create a meaningful performance report, a. actual costs are compared with the expected costs found in the static budget. b. actual costs are calculated as a percentage of sales. c. actual costs are compared with the prior year's actual costs. d. actual costs are compared with the expected costs at the same level of activity.
d. actual costs are compared with the expected costs at the same level of activity.
3. A responsibility center in which a manager is responsible only for costs is a(n) a. investment center. b. revenue center. c. profit center. d. cost center. e. center not presented here.
d. cost center.
CH10 1. The sources of quantitative standards include a. historical experience. b. engineering studies. c. input from operating personnel. d. historical experience, engineering studies, and input from operating personnel. e. None of these.
d. historical experience, engineering studies, and input from operating personnel.
1. A static budget a. is considered a good choice for benchmarks in preparing a performance report. b. computes expected costs for a range of activity levels. c. compares actual costs with budgeted costs. d. is prepared for a particular level of activity.
d. is prepared for a particular level of activity.
8. Residual income is calculated as a. operating income − (ROI × average operating assets). b. operating income / (ROI × average operating assets). c. operating income / (minimum rate of return × average operating assets). d. operating income − (minimum rate of return × average operating assets). e. (minimum rate of return × average operating assets) / operating income.
d. operating income − (minimum rate of return × average operating assets).
6. In a standard cost system, variable overhead is applied a. using actual direct labor hours. b. using budgeted indirect labor hours. c. using direct labor hours at practical capacity. d. using standard direct labor hours.
d. using standard direct labor hours.
The practice of delegating decision-making authority to lower levels is __________.
decentralization
2. Which of the following is a reason for decentralization? a. Ease of gathering and using local information. b. Focusing of central management. c. Training and motivating segment managers. d. Exposing segments to market forces. e. All of these.
e
6. The strategic management system that translates an organization's mission and strategy into operational objectives and performance measures is a. activity-based management. b. responsibility accounting. c. strategic accounting. d. cost information management. e. Balanced Scorecard.
e
A decision in which a manager needs to determine whether a product line (or segment) should continue or be eliminated is what kind of decision? a. relevant b. make-or-buy c. sell-or-process-further d. special-order e. keep-or-drop
e
A decision involving a choice between internal and external production is what kind of decision? a. relevant b. keep-or-drop c. sell-or-process-further d. special-order e. make-or-buy
e
7. Which of the following is not true regarding the use of materials variance information? a. The purchasing agent has the responsibility for controlling the materials price variance. b. The production manager is generally responsible for materials usage. c. The production manager is concerned with minimizing scrap, waste, and rework. d. The purchasing department is responsible for acquiring quality materials. e. All of these are true.
e. All of these are true.
1. Which of the following is not a step in the decision-making model? a. define the problem b. identify alternatives c. consider qualitative factors d. total relevant costs and benefits for each alternative e. determine costs and benefits for both feasible and unfeasible alternatives
e. determine costs and benefits for both feasible and unfeasible alternatives
A(n) ___________ is a responsibility center in which a manager is responsible for revenues, costs, and investments
investment center
Relevant Costs include two characteristics:
o They are future costs o They differ among alternatives • Example would be the increase in labor for alternative four. This would be a future cost and the cost does differ among alternative five. • Another relevant cost is opportunity cost. Opportunity cost is the benefit sacrificed or foregone when one alternative is chosen over another. It is both a future cost and differs among alternatives making it relevant. However, it is not an accounting cost because accountants do not record the cost of what might happen in the future. • When international accounting firm Ernst & Young send thousands of accountants to a week-long training course, it includes the opportunity cost of the tens of millions of dollars in lost revenue that it foregoes by not billing customers.
The manager of a(n) ___________ is evaluated on the basis of income.
profit center
A(n) ___________ is a responsibility center in which a manager is responsible only for sales, or revenues.
revenue center
What is Activity Flexible Budgeting?
• Activity Flexible budgeting is the prediction of what activity costs will be as related output changes. • This allows us to build flexible budget formulas that include more than just one driver (i.e., direct labor hours).
What are 3 advantages of ROI?
• It encourages managers to focus on the relationship among sales, expenses, and investment, as should be the case for a manager of an investment center. Example; If we raise our advertising expense by $100,000 we can increase sales by $200,000. While an increase in sales is good, does the increase in sales actually increase or return on investment? What if an increase in sales means we have to purchase additional assets, does the increase in advertising costs and increase in operating assets actually reduce our return on investment? • Managers focus on cost efficiency. Example; If our Return on Investment is below our forecasted return on investment management can look at ways to cut costs to increase operating income. • It encourages managers to focus on operating asset efficiency. Example; when we have cut as many expenses as possible, we have to look at ways to reduce our operating asset usage to produce our operating income. Can we streamline processes? Can we go to a just-in-time system so we don't have to hold as much inventory?
Whats a problem with static budgets?
• One of the big problems with static budgets is comparing actual costs to budgeted costs when the units produced are different. In the example above, we budgeted production to be 1,060 units while actual production was 1,200 units. It would make sense that all our expenses are unfavorable because our budget was prepared expecting to produce 1,060 units not 1,200 units.
What are disadvantages of ROI?
• Overemphasis on ROI can produce myopic behavior . • Two negative aspects associated with ROI frequently are: o It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm. Example; If our current ROI is at 20% we would decline taking on a project that produced a ROI of 15% because it would lower our total ROI. Is this really best for the organization? If we have the capital getting 15% return is a solid return even if our division return is currently at 20%. o It encourages managers to focus on the short run at the expense of the long run. Example; We can easily cut costs for a year and receive a higher ROI at the expense of future profits. Management could decide to reduce advertising, use cheaper material and/or cut staff. What happens next year when our most talented people leave and customers realize our product doesn't have the same quality?