Exam D Practice

A _____________ is like a budgetary target, but alters the debits and credits the firm makes to track production costs.

A Standard is like a budgetary target, but alters the debits and credits the firm makes to track production costs.

Jordan Company produces basketballs and uses a standard costing system. Budgeted fixed overhead was $275,000. Rent increased during the year, causing actual fixed overhead to be $292,000. Jordan Company applies overhead on the basis of basketballs produced. They projected 1,100,000 basketballs would be produced during the year. They actually produced 1,200,000 basketballs. Which of the following pairs of variances is correct? FOH Budget Variance / FOH Volume Variance a. $8,000 Favorable / $17,000 b. $25,000 Unfavorable / $17,000 c. $17,000 Favorable / $8,000 d. $17,000 Unfavorable / $25,000 e. An amount other than those above.

Actual FOH was $292,000 and budgeted was $275,000. Since actual was greater than budgeted, the difference of $17,000 is the unfavorable FOH budget variance. Now let's compute the standard rate. That equals the budgeted amount ($275,000) divided by expected production of 1.1 million balls, or $0.25 per ball. Multiplying that by actual production of 1.2 million balls gives applied FOH of $300,000. The difference between the applied and budgeted amounts is $25,000 overapplied, since applied exceeds budgeted. When overhead is incurred, the journal entry is: Fixed manufacturing overhead 292,000 Cash 292,000 When overhead is applied, the journal entry is: WIP inventory 300,000 Fixed manufacturing overhead 300,000 Adjusting entries Fixed manufacturing overhead 8,000 COGS - FOH budget variance 17,000 COGS - FOH volume variance 25,000

Druid Company makes a single product and uses a standard costing system that applies overhead on the basis of direct labor hours. They recently used 2,000 labor hours to produce 400 units. According to their standards, each unit is anticipated to take 6 hours. The company anticipated making 600 units. Actual VOH totaled $40,000. The company budgeted $54,000 of VOH. Which of the following pairs of variances is correct? VOH Spending Variance / VOH Efficiency Variance a. $6,000 Favorable / $10,000 Unfavorable b. $10,000 Unfavorable / $6,000 Favorable c. $24,000 Favorable / $10,000 Unfavorable d. $18,000 Favorable / $4,000 Unfavorable e. $4,000 Unfavorable / $18,000 Favorable f. $14,000 Favorable / $0 g. $10,000 Unfavorable / $24,000 Favorable h. An amount other than those above.

First, let's compute the standard rate for applying variable overhead. The company budgeted $54,000 of VOH. It also anticipated making 600 units and needing 6 hours per unit. Thus, it expected to spend 600 units×6 hours/unit=3,600 hours. Thus, the standard rate is ($54,000)/(3,600 hours)=$15/hour. Actual VOH was $40,000 (given, no calculation required). AQ was 2,000 hours, and the standard rate is $15. Multiplying those gives SP×AQ=$15×2,000=$30,000. Since actual was greater than standard, we know the VOH spending variance was $10,000 unfavorable. Now let's compute SQ given production. They produced 400 units and were allowed 6 hours per unit. That means SQ=400×6=2,400. SP×SQ=$15×2,400=$36,000. Since the actual amount (SP×AQ) is less than the standard amount (SP×SQ), the difference of $6,000 is the favorable VOH efficiency variance. The journal entry would be: WIP inventory 36,000 VOH spending variance 10,000 VOH efficiency variance 6,000 Cash 40,000

NewTone, Inc makes MP3 players and uses standard costing. They recently used 20,000 labor hours to produce 8,000 units. According to their standards, each unit is anticipated to take 2.25 hours. The company's actual payroll cost amounted to $300,000. If the standard labor cost per hour is $16, which of the following pairs of variances is correct? Labor Rate Variance/Labor Efficiency Variance a. $20,000 Favorable / $32,000 Unfavorable b. $32,000 Unfavorable / $20,000 Favorable c. $18,000 Favorable / $30,000 Unfavorable d. $30,000 Unfavorable / $18,000 Favorable e. An amount other than those above.

First, let's compute the three quantities in the diagram. The actual amount of direct labor is $300,000; there is no need to compute it as this number is given in the problem. Thus, AP×AQ=$300,000. The standard rate (SP) is $16/hour (given), and the actual quantity (AQ) is 20,000 labor hours. Multiplying these gives SP×AQ=$16/hour×20,000 hours=$320,000. The difference between AP×AQ and SP×AQ is the DL rate variance. We can see that this is $20,000 ($320,000-$300,000). Since the actual is less than the standard, this variance is favorable. Finally, let's compute SQ. We must take into account production volume when we do this. We produced 8,000 units, and 2.25 hours were allowed per unit. That means that the standard quantity of labor hours for 8,000 units is 8,000 units×2.25 hours/unit=18,000 hours. Thus, SQ=18,000 units. Multiplying by the standard rate gives SP×SQ=$16/hour×18,000 hours=$288,000. The difference between this and SP×AQ is the DL efficiency variance. This is $32,000 (=$320,000 - 288,000). Since the actual amount is greater than the standard amount, this variance is unfavorable. The journal entry would be: WIP inventory 288,000 DL efficiency variance 32,000 DL Rate variance 20,000 Cash or wages payable 300,000

Solar Salt has determined that its total manufacturing cost of $700,000 is a mixture of unit-level costs, batch-level costs, and product line costs. Solar Salt has assembled the following information concerning the manufacturing costs and the driver used to allocate the costs in each activity pool (units, batches, and lines respectively). Total Manufacturing Agricultural Retail Costs Products Products Unit-level costs $210,000 7,500 units 13,500 units Batch-level costs 280,000 50 batches 90 batches Product line costs 210,000 10 lines 18 lines $700,000 Revenues for the Agricultural Products totaled $600,000. Revenue for Retail Products totaled $350,000. How much will gross profit in each of the divisions be if Solar Salt adopts an activity-based costing system? a. Agricultural, $50,000; Retail, $200,000 b. Agricultural, loss of $50,000; Retail, $300,000 c. Agricultural, $350,000; Retail, $100,000 d. Agricultural, $350,000; Retail, $300,000 e. Agricultural, $250,000; Retail, $450,000 f. Agricultural, loss of $50,000; Retail, loss of $100,000 g. Agricultural, $150,000; Retail, $100,000 h. Agricultural, $350,000; Retail, loss of $100,000

In this problem, note that everything is given in terms of driver units; that means we can treat all units the same, all batches the same, and all lines the same. First, let's compute the rates. Total unit costs were $210,000, and the total number of units produced was 21,000 (7,500 + 13,500). Dividing the two gives a unit cost of $10. Total batch costs were $280,000, and the total number of batches produced was 140 (50 + 90). Dividing the two gives a batch cost of $2,000. Doing the same computation for product lines gives a per line cost of $7,500. The total reported cost for agricultural products is then 7,500 units×$10/unit+50 batches×($2,000)/batch+10 lines×($75,000)/line=$250,000. Since revenue is $600,000, the difference is the reported gross profit of $350,000. Similar computations for retail yield unit, batch, and line costs of $135,000, $180,000, and $135,000, respectively, for a total cost of $450,000. Since revenues were $350,000, the reported loss will be ($100,000).

Linking budgeted numbers to compensation results in a tension between the __________________________ and _________________________ roles of the budgeting process.

Linking budgeted numbers to compensation results in a tension between the Decision-Influencing and Coordination-Facilitating roles of the budgeting process.

Managers overstate the cost and difficulty of achieving high performance; when successful, this " ________________" behavior results in ______________________ that makes gives managers more resources to work with, and lower targets to achieve.

Managers overstate the cost and difficulty of achieving high performance; when successful, this "Sandbagging" behavior results in Budgetary Slack that makes gives managers more resources to work with, and lower targets to achieve.

Producing additional output that remains unsold at the end of the period will increase income in an absorption costing system; in a standard costing system, this increase will be contained in the ____________ variance.

Producing additional output that remains unsold at the end of the period will increase income in an absorption costing system; in a standard costing system, this increase will be contained in the Volume variance.

The three elements of responsibility (for a variance) are ___________, ____________ and ___________.

The three elements of responsibility (for a variance) are Aware, Explain and Respond.

Which of the following are characteristics of companies involved in mass production, compared to those that produce goods customized to client specifications? a. A heightened focus on efficiency b. A heightened focus on overhead allocations c. Greater tendency to use standard costing d. Lower operational leverage e. Greater pricing power f. Greater product differentiation g. Less susceptibility to the "winners' curse" that results from underestimating production costs. h. Less likely to distinguish between direct labor and overhead costs in calculating product costs.

a. A heightened focus on efficiency Mass producers must focus on efficiency because they operate in more competitive markets, and therefore have much narrower margins. A slight decrease in efficiency could mean the difference between success and bankruptcy. c. Greater tendency to use standard costing Because mass producers do the same thing repeatedly, it is easier to develop standards (compared to a job shop). They also value the resulting variance analyses more than job-shops do, because they have a strong desire to be more efficient. g. Less susceptibility to the "winners' curse" that results from underestimating production costs. The winner's curse is more likely to affect job-shop producers for two reasons. First, job-shops have less information about their costs than mass producers, who make the same product over and over again, and can therefore better observe inputs. Second, mass producers are usually price takers, so they aren't really "winners" in an auction—everyone simply takes the uniform market price. h. Less likely to distinguish between direct labor and overhead costs in calculating product costs. Mass production is characterized by departments that do the same thing over and over again, making it easy to compute product costs—simply divide total cost incurred by total units produced. Because every unit is the same, they all get the same amount of cost. There is little need to allocate overhead separately from labor, because you can simply spread both over the units produced in the same way. Note that throughout Chapter 4 (Process costing), the book and my notes refer to "conversion costs" and "processing costs", synonyms for the sum of labor and OH. False b. A heightened focus on overhead allocations Overhead allocations are useful for pricing and product mix decisions. Mass producers have little pricing power because they have less product differentiation; they have few product mix decisions because they usually have less variety in their possible outputs. d. Lower operational leverage Mass producers are more likely to invest in automation, which implies higher fixed costs and operational leverage. e. Greater pricing power Mass producers tend to have less product differentiation, and be more likely to operate in competitive markets, which implies less pricing power. f. Greater product differentiation See answers to (a) and (e).

ABC Company uses a standard absorption costing system that allocates overhead on the basis of direct labor hours. Here is their Statement of Gross Margin: Statement of Gross Margin Standard revenue 1,000,000 Sales price variance (30,000) Sales volume variance 60,000 Net revenue 1,030,000 CGS @ Standard 700,000 Total direct labor variance 30,000 Direct materials price variance (50,000) Direct materials quantity variance 40,000 Fixed overhead budget variance 50,000 Fixed overhead volume variance (100,000) Variable overhead spending variance 20,000 Variable overhead efficiency variance (80,000) Adjusted Cost of Goods Sold 610,000 Gross Margin 420,000 Circle the true statements a. The firm has over-applied fixed overhead b. The firm produced more than projected in their static budget c. The sales variances could be explained by a decision to discount prices to drive higher volume d. The direct materials variance could be explained by the purchase of inferior materials e. Although the company did not decompose the direct labor variance, we can still determine that the direct labor efficiency variance must be favorable.

a. The firm has over-applied fixed overhead We know this because the sum of the two FOH variances is a reduction to cost of goods sold of $50,000. A reduction to cost of goods sold is a credit. The offsetting debit is to overhead, which means that too much overhead was applied. Another way to see this: if we apply too much overhead, we over-costed our products. To fix this, we must reduce product costs by reducing cost of goods sold. b. The firm produced more than projected in their static budget Remember, we are talking about production, not sales, so we cannot look at the sales variances. The big clue in the statement about where to look is in the term 'static budget'. That tells you to look at the FOH variances. In particular, look at the FOH volume variance. That one tells you whether more or less was produced than expected. Since that variance is a reduction to cost of goods sold (a credit), we immediately know that the firm produced more than expected. Had they produced exactly the expected amount, this "volume" variance would be zero. This variance was "over-applied" because production exceeded expectations. c. The sales variances could be explained by a decision to discount prices to drive higher volume The sales price variance was unfavorable, indicating that sales prices were lower than expected. However, the sales volume variance was favorable, indicating that more units were sold than expected. These two facts are consistent with a story that the firm discounted prices to drive higher volume. Think of it as evidence, not proof. d. The direct materials variance could be explained by the purchase of inferior materials The DM price variance was favorable, indicating that the purchase price for direct materials was lower than expected. However, the DM usage variance was unfavorable, indicating that the firm used more direct material than they should have, given production. These two facts are consistent with a story that the firm purchased cheap *@!* and had to scrap more of it than expected. e. Although the company did not decompose the direct labor variance, we can still determine that the direct labor efficiency variance must be favorable. We know that the sum of the labor rate and efficiency variances is unfavorable (since COGS was adjusted upward). We can infer something about the labor efficiency variance from the VOH efficiency variance, which was favorable. That means that AQ < SQ, and quantity refers to direct labor hours, which is the driver for VOH. Since AQ < SQ, we know that the direct labor efficiency variance must be favorable.

Volokh sells caricatures of famous people, reproduced on high-quality paper using a sophisticated lithograph printer. A single caricature can be reproduced up to 1,000 times without losing quality and market value, though demand is usually much lower. Volokh spends considerable time studying a particular celebrity to determine exactly how to capture their most notable characteristics (e.g., Barack Obama's ears), which allows him to make a series of caricatures that capture the subject in different events and settings (e.g., the inauguration, giving a speech, playing basketball). Among many other items, Volokh sells 5,000 reproductions of Albert Einstein and 5,000 reproductions of Justin Bieber. However, the Einstein reproductions are all of a single caricature (Einstein riding a bicycle), while the Bieber reproductions include many different caricatures (laughing, dancing, looking soulful). a. The most appropriate cost hierarchy would place the cost of studying a celebrity above the cost of drawing a caricature, which in turn would be above the cost of reproducing a caricature on paper. b. The most appropriate cost hierarchy would place the cost of studying a celebrity above the cost of reproducing a caricature on paper, which in turn would be above the cost of drawing a caricature. c. An activity-based costing system would record a lower overhead cost for the 5000 Einstein reproductions than for the 5000 Bieber reproductions. d. Studying a celebrity to capture notable characteristics is a non-value-added activity.

a. The most appropriate cost hierarchy would place the cost of studying a celebrity above the cost of drawing a caricature, which in turn would be above the cost of reproducing a caricature on paper. Think of studying a celeb as a product level cost. Developing each different caricature is like a batch cost, and the actual reproductions are unit level costs. c. An activity-based costing system would record a lower overhead cost for the 5000 Einstein reproductions than for the 5000 Bieber reproductions. This is because there is only one "batch" for Einstein, and many batch-level costs for Bieber. The product- and unit-level cost amounts should be the same. If people are willing to pay for the caricatures, and Volokh is profitable, then surplus is created by all of the activities. Thus, (D) is false.

Alex Company manufactures boats in bottles (to sell to rich people who don't have the time to make them themselves). For their standard costing system they allow 5 hours of direct labor per bottle at a wage of $11 per hour. The last batch only took 4.5 hours per bottle. However, they ended up paying employees $12. What is the standard cost per bottle? a. $54.00. b. $55.00. c. $60.00. d. $49.50. e. An amount other than those above.

b. $55.00. The standard cost per bottle is equal to the standard price per unit of driver times the standard number of driver units. In this case, the driver is direct labor hours. The standard quantity is 5 hours, and the standard price is $11/hour. This gives a standard cost of $11/hr×5 hr=$55.

A firm calculates the standard labor cost for 100,000 widgets to be $250,000, and calculates DL rate and Efficiency variances at $20,000F and $25,000U. What are the entries to record the production? a. Inventory $250,000 Labor Rate Variance $20,000 Labor Efficiency Variance $25,000 Wages Payable $245,000 b. Inventory $250,000 Labor Efficiency Variance $25,000 Labor Rate Variance $20,000 Wages Payable $255,000 c. Inventory $255,000 Labor Rate Variance $20,000 Labor Efficiency Variance $25,000 Wages Payable $250,000 d. Inventory $245,000 Labor Efficiency Variance $25,000 Labor Rate Variance $20,000 Wages Payable $250,000

b. Inventory $250,000 Labor Efficiency Variance $25,000 Labor Rate Variance $20,000 Wages Payable $255,000 In a standard costing system, the standard cost will go into inventory. Thus, there will be a debit to inventory of $250,000. A favorable variance means that we spent less than we applied to inventory; since we applied too much to inventory, we debited too much and must offset that by a credit. That means that the favorable DL rate variance must be a credit, and that the unfavorable DL efficiency variance must be a debit. By this reasoning, the answer is (b).

A firm with a standard costing system applies $30,000 of fixed overhead (FOH) and $25,000 of variable overhead (VOH), and records the following overhead variances: FOH Budget Variance $3,000 Favorable FOH Volume Variance $0 VOH Spending Variance $1,000 Favorable VOH Efficiency Variance $2,000 Unfavorable Which of the following entries would be made to record variances at the end of the period, assuming that overhead is applied at standard costs over the course of the period? a. Work-in-Process Inventory $55,000 MOH $55,000 b. Work-in-Process Inventory $55,000 VOH Efficiency Variance $2,000 VOH Spending Variance $1,000 FOH Budget Variance $3,000 MOH $53,000 c. Work-in-Process Inventory $53,000 VOH Spending Variance $1,000 FOH Budget Variance $3,000 VOH Efficiency Variance $2,000 MOH $55,000 d. Work-in-Process Inventory $55,000 VOH Efficiency Variance $2,000 COGS $2,000 VOH Spending Variance $1,000 FOH Budget Variance $3,000 MOH $55,000 e. Work-in-Process Inventory $55,000 VOH Spending Variance $1,000 FOH Budget Variance $3,000 VOH Efficiency Variance $2,000 COGS $2,000 MOH $55,000

b. Work-in-Process Inventory $55,000 VOH Efficiency Variance $2,000 VOH Spending Variance $1,000 FOH Budget Variance $3,000 MOH $53,000 The problem tells us that $30,000 of FOH and $25,000 of VOH are applied. That means we must have a debit to inventory of $55,000. That narrows the answers down to (a), (b), and (d). By the reasoning in the answer to question 6, favorable variances are credits, and unfavorable variances are debits. A favorable variance means we applied too many dollars; we acted as if we spent more than we actually did. To correct this, we will must have an offsetting credit. The problem tells us that the FOH budget and VOH spending variances are favorable, so they must be credits. This narrows it down to (b) and (d). Answer (d) should look wrong to you. In standard costing, overhead is removed from the MOH account and applied to inventory at standard rates. When actual amounts differ from standard amounts, variances result. These variances are eventually closed to cost of goods sold, but the difference between applied overhead and actual must be the variances.

Cogito Company makes large volumes of dietary supplements pills that are said to aid cognitive function and energy. Production is divided into several departments: preparation, mixing and packaging. During their budgeting process they determine how much labor and materials should go into each batch of production, and hold their production managers responsible for any deviations from the budget. When the mixing department consumes labor and materials, the credits to wages payable and raw materials are balanced by a debit to work-in-process inventory. A large portion of overhead is driven by the activities required to add a new product to the product line, and to calibrate lines before production runs. All overhead is allocated on the basis of direct material dollars used in production, multiplied by a predetermined overhead rate drawn from the budget. Indicate the accurate (partial) descriptions of the accounting system: a. A variable costing system b. A standard costing system c. A C-V-P System d. A simple overhead allocation system e. A two-stage overhead allocation system f. A job-order costing system g. An absorption costing system h. A activity-based costing system i. A normal costing system

d. A simple overhead allocation system There is a single overhead pool with a single driver. Thus, we have a simple system. a. A variable costing system No, because fixed overhead is allocated to products, not expensed as a period cost. g. An absorption costing system Yes, fixed overhead goes into inventory. i. A normal costing system Yes, direct material, direct labor, and overhead are applied to inventory via a predetermined rate times the actual driver amounts used. (In a standard costing system, a predetermined rate would be multiplied by the standard driver amounts that should have been used for the actual level of production). False b. A standard costing system No, because "the credits to wages payable and raw materials are balanced by a debit to work-in-process inventory." That means that actual DL and DM go into inventory, so it can't be a standard costing. However, the description suggests that they do use targets for performance evaluation. Remember, the difference between targets and standards is that only the latter affect debits and credits. c. A C-V-P System There is no such thing. e. A two-stage overhead allocation system There is a single overhead pool with a single driver. Thus, we do not have a 2-stage system. f. A job-order costing system No, costing is done by department, not by job. h. A activity-based costing system The statement of the problem makes clear that the true production process involves a cost hierarchy (as most do). However, that hierarchy is not incorporated into the costing system, which bases OH allocations on unit-level costs.

A company can set the same machine to produce either right-handed or left-handed widgets, depending on how the machine is calibrated. The cost of the machine [ does | does not] reflect a joint production cost.

does not You can't choose your product mix in a joint production process (by definition).

Budgetary slack in production standards will [ increase | decrease ] unadjusted cost of goods sold.

increase More costs are applied to inventory, but if actual costs are low you will see favorable variances.

A convex (upward curving) compensation scheme will tend to [ increase | reduce ] managers' risk avoidance and smoothing behavior

reduce When the pay-performance line curves upward, you gain more from unexpectedly good performance than you lose from unexpectedly bad performance.