Cost Accounting - Final Exam Material
The fixed factory overhead application rate (for product-costing purposes) is equal to:
Budgeted fixed factory overhead divided by denominator activity.
Because the full-cost method of transfer pricing includes fixed cost, it can:
Cause sub-optimal short-term decision making.
The primary limitation of using Economic Value Added (EVA®) to evaluate the financial performance of investment centers is:
Complexity of the calculation.
The most relevant factor in deciding how or which costs should be assigned to an SBU is the degree of:
Controllability.
In a not-for-profit organization, you are more likely to see
Cost centers.
Production or support SBUs within the firm that have the goal of providing the best quality product or service at the lowest cost are:
Cost centers.
The replacing of controllable costs with non-controllable costs by a department is:
Cost shifting.
Which one of the following determines the transfer price based on the seller's costs, plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?
Cost-plus method.
Which of the following specifications for calculating EVA® is correct?
EVA® = NOPAT − Imputed charge on EVA® capital, where NOPAT = net operating profit after (cash) taxes.
A division's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:
Economic value added (EVA®).
For production and support departments, a method of implementing cost centers that is output-oriented is the:
Engineered-cost method.
The balanced scorecard is particularly important in difficult economic times because:
Financial measures may be distorted.
Put simply, transfer pricing is a management tool for assigning a "price" to internally transferred goods (or services) in order to simulate the marketplace, thus encouraging managers to make decisions that are in the best interest of the:
Firm as a whole.
Which of the following is not a characteristic of the discretionary-cost approach?
Firms use an output-oriented evaluation focus.
All of the following are possible transfer pricing methods used in practice except:
Fixed cost.
The difference between budgeted fixed factory overhead for a period and the amount of fixed factory overhead applied to production during the period is the:
Fixed factory overhead production-volume variance.
The sales volume variance is:
Further divided into separate sales quantity and sales mix variances.
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 Under a two-variance breakdown (decomposition) of the total factory overhead variance, the factory overhead efficiency variance (to the nearest whole dollar) is:
Undefined. 1. In a two-variance decomposition, the total overhead variance for the period is broken down into a total flexible-budget variance + a fixed overhead production-volume variance. 2. Therefore, there is no factory overhead efficiency variance in a two-variance decomposition of the total overhead cost variance.
For product-costing purposes, which of the following statements is true?
Under the absorption or full-costing approach it is necessary to "unitize" fixed overhead costs.
A primary limitation of return on investment (ROI) as a performance evaluation metric for investment centers is that ROI:
Understates the level of investment for organizations operating in the so-called knowledge-based economy.
Order-filling costs:
Usually have a relatively clear relationship to sales volume.
Use of net book value (NBV) in valuing investment in operating plant assets for investment centers, in contrast to using an estimate of current value, will:
Usually overstate ROI.
Among the benefits of centralized management in a firm is(are):
Utilization of expertise of top management.
The main concept of the balanced scorecard is that, to evaluate the SBU's progress to strategic success, an organization must use all of the following except:
Value chain analysis.
Creepers, Inc., manufactures stuffed spiders and mummies. During September the following information was gathered: Spiders Mummies Units sold 6,900 3,100 Budgeted sales (units) 7,500 2,500 Contribution margin per unit: Actual$3.75 $5.75 Budgeted$2.75 $5.25 What is the sales quantity variance for Spiders?
$0 6,900 + 3,100 = 10,000 7,500 + 2,500 = 10,000 10,000 − 10,000 = 0
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 The variable overhead spending variance, to the nearest whole dollar, is:
$1,000 favorable. 1. Variable overhead spending variance = actual variable overhead cost incurred − flexible budget for variable overhead cost based on inputs (i.e., based on actual machine hours worked). 2. Actual variable overhead cost = $14,000 (Actual variable overhead cost incurred = Actual total overhead cost − actual fixed overhead cost incurred = $24,000 − $10,000 = $14,000). 3. Flexible budget for variable overhead cost based on inputs (i.e., based on actual machine hours worked) = 5,000 machine hours × $3.00/machine hour = $15,000. 4. Variable overhead spending variance = actual variable overhead cost − 3. Flexible budget for variable overhead cost based on inputs = $14,000 − $15,000 = $1,000F. (Note: the variance here is favorable (F) because the actual cost < budgeted cost.)
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 Under a two-variance breakdown (decomposition) of the total factory overhead variance, the total flexible-budget variance, to the nearest whole dollar, is:
$1,400 favorable. 1. Total flexible-budget overhead variance = total actual overhead − FB for overhead based on output (i.e., based on standard allowed machine hours for output of the period). 2. Total actual overhead = $24,000 (given). 3. FB for overhead based on output = Budgeted fixed overhead + budgeted variable overhead based on standard allowed machine hours for actual output this period = $11,000 + ($3.00/machine hour × 4,800 machine hours) = $25,400. 4. Therefore, total flexible-budget overhead variance = $24,000 − $25,400 = $1,400F (to nearest whole dollar). (Note: the variance here is favorable (F) because actual overhead < budgeted overhead for the output level achieved during the period).
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 The fixed factory overhead production-volume variance, to the nearest whole dollar, is:
$1,400 unfavorable. 1. Factory overhead production volume variance = Standard fixed overhead rate per machine hour × (denominator volume, in machine hours − standard hours allowed for this period's output) = SP × (denominator activity hours - SQ) 2. Standard hours allowed for this period's output = SQ = 4,800 (given) 3. Denominator volume (in machine hours) = 5,500 (given) (that is, 5,500 machine hours is the amount used to establish the predetermined fixed overhead application rate) 4. Standard fixed overhead application rate per machine hour = Budgeted fixed overhead ÷ denominator volume (in machine hours) = $11,000 (given) ÷ 5,500 machine hours (given) = $2.00 per machine hour. 5. Therefore, the fixed overhead production volume variance = $2.00 per machine hour × (5,500 − 4,800) machine hours = $1,400U (to nearest whole number). (Note: the variance here is unfavorable (U) because the standard allowed machine hours for the period (SQ) < machine hours used to establish the predetermined fixed overhead application rate.)
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 Under a three-variance breakdown (decomposition) of the total factory overhead variance, the fixed factory overhead production-volume variance (to the nearest whole dollar) is:
$1,400 unfavorable. 1. The production volume variance is the same for a two-variance breakdown, a three-variance breakdown, and a four-variance breakdown of the total overhead variance. 2. Factory overhead production volume variance = Standard fixed overhead rate per machine hour × (denominator volume, in machine hours − standard hours allowed for this period's output) = SP × (denominator activity hours - SQ). 3. Standard fixed overhead rate per machine hour = SP = $11,000 (given) / 5,500 machine hours (given) = $2.00 per machine hour. 4. Denominator activity volume (in machine hours) = 5,500 (given). 5. Standard machine hours allowed for this period's output = SQ = 4,800 (given). 6. Therefore, fixed overhead production volume variance = $2.00 per machine hour × (5,500 − 4,800) machine hours = $1,400U (to nearest whole dollar). (Note: the variance here is unfavorable (U) because the standard machine hours allowed for this period's output < the "denominator volume," i.e., the number of machine hours used to establish the standard fixed overhead application rate per machine hour).
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 Under a two-variance breakdown (decomposition) of the total factory overhead variance, the fixed overhead production volume variance, to the nearest whole dollar, is:
$1,400 unfavorable. 1. The production volume variance is the same in a two-variance decomposition, a three-variance decomposition, and a four-variance decomposition. 2. Production volume variance = Standard fixed overhead rate per machine hour × (denominator volume, in machine hours − standard machine hours allowed for this period's output) = SP × (Denominator activity hours - SQ). 3. Standard fixed overhead rate per machine hour = SP = $11,000 (given) ÷ 5,500 machine hours (given) = $2.00 per machine hour. 4. Denominator activity volume (in machine hours) = 5,500 (given). 5. Standard machine hours allowed for this period's output = SQ = 4,800 (given). 6. Production volume variance = $2.00 per machine hour × (5,500 − 4,800) machine hours = $1,400U (to nearest whole dollar). (Note: the variance here is unfavorable (U) since actual production this period < the output level assumed in establishing the fixed overhead application rate; as such, some budgeted fixed overhead was not "absorbed" into production. The amount of this unabsorbed budgeted fixed overhead = the fixed overhead production-volume variance.)
Creepers, Inc., manufactures stuffed spiders and mummies. During September the following information was gathered: SpidersMummies Units sold 6,900 3,100 Budgeted sales (units) 7,500 2,500 Contribution margin per unit: Actual$3.75 $5.75 Budgeted$2.75 $5.25 What is the sales volume variance for Spiders?
$1,650 unfavorable. = (6,900 − 7,500) × $2.75 = $1,650 unfavorable
Creepers, Inc., manufactures stuffed spiders and mummies. During September the following information was gathered: Spiders Mummies Units sold 6,900 3,100 Budgeted sales (units) 7,500 2,500 Contribution margin per unit: Actual$3.75 $5.75 Budgeted$2.75 $5.25 What is the sales mix variance for Spiders?
$1,650 unfavorable. 1. Mix percentage: 6900/(6900 + 3100) = 69%; 7500/(7500 + 2500) = 75% 2. (0.69 − 0.75) × 10,000 × $2.75 = $1,650 unfavorable
Bonehead Co. has the following factory overhead costs for the most recent period: Standard overhead cost applied to this period's production$72,000 Flexible budget for overhead based on output (i.e., units produced) 65,000 Total budgeted overhead in the master (static) budget 86,000 Actual total overhead cost incurred during the period 76,000 Under a two-variance analysis (breakdown) of the total overhead variance for the period, the total overhead flexible-budget (FB) variance, to the nearest whole dollar, is:
$11,000 unfavorable. 1. Total overhead FB variance = actual total overhead cost incurred − FB for total overhead based on output (i.e., based on units produced or, equivalently, standard allowed hours for units produced). 2. Actual overhead cost incurred = $76,000 (given). 3. FB for overhead, based on output = $65,000 (given). 4. Therefore, total overhead FB variance = $76,000 − $65,000 = $11,000U (to nearest whole dollar). (Note: the variance here is unfavorable (U) because actual overhead cost incurred during the period > budgeted overhead cost for the period (based on production achieved).
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 The total actual variable factory overhead cost incurred during the year, rounded to the nearest dollar, was:
$14,000. Actual variable overhead cost incurred = Actual total overhead cost − actual fixed overhead cost incurred = $24,000 − $10,000 = $14,000
Bradbo owned two adjoining restaurants, the Pork Palace and the Chicken Hut. Each restaurant was treated as a profit center for performance evaluation purposes. Although the restaurants had separate kitchens, they shared a central baking facility. The principal costs of the baking area included materials, supplies, labor, and depreciation and maintenance on the equipment. Bradbo allocated the monthly costs of the baking facility to the two restaurants based on the number of tables served in each restaurant during the month using dual allocation and equal sharing of fixed costs. In April, the costs were $30,000, of which $16,000 were fixed. The Pork Palace served 4,400 tables, while the Chicken Hut served 3,600 tables. The amount of the joint cost that should have been allocated to the Chicken Hut in April is calculated to be:
$14,300. 1. 3,600/(4,400 + 3,600) = 45% 2. ($16,000/2) + [45% × ($30,000 − $16,000)] = $14,300
Consider the following data from two divisions of a company, P and Q: DivisionalPQ Sales$1,500,000 $1,000,000 Operating Income$600,000 $450,000 Investment$4,000,000 $2,750,000 If the minimum rate of return is 11%, what is Division Q's residual income (RI)?
$147,500. Residual Income = Operating Income − Imputed Capital Charge = $450,000 − (0.11 × $2,750,000) = $450,000 − $302,500 = $147,500
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 Under a three-variance breakdown (decomposition) of the total factory overhead variance, the total factory overhead spending variance, to the nearest whole dollar, is:
$2,000 favorable. 1. Total overhead spending variance = Total actual overhead cost incurred − FB for overhead based on inputs (i.e., based on actual machine hours worked). 2. Total actual overhead cost incurred this period = $24,000 (given). 3. Flexible budget for variable overhead cost, based on inputs = $3.00/machine hour × 5,000 machine hours worked = $15,000. 4. Flexible budget for fixed overhead = $11,000 lump-sum amount (given). 5. Therefore, total overhead spending variance = $24,000 − ($15,000 + $11,000) = $24,000 − $26,000 = $2,000F (to nearest whole number) (Note: the variance here is favorable (F) because the actual overhead cost incurred this period < budgeted overhead cost for the actual number of machine hours used during the period.)
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 The standard fixed overhead application rate, to two (2) decimal places, is:
$2.00 per machine hour. 1. Standard fixed overhead application rate/machine hour = Budgeted fixed overhead/Denominator volume for cost-allocation base. 2. Budgeted fixed overhead = $11,000 (given). 3. Denominator volume, in machine hours = 5,500 (given). 4. Standard fixed overhead application rate = $11,000/5,500 machine hours = $2.00/machine hour
Division A, which is operating at capacity, produces a component that currently sells in a competitive market for $25 per unit. At the current level of production, the fixed cost of producing this component is $8 per unit and the variable cost is $10 per unit. Division B would like to purchase this component from Division A. The price that Division A should charge Division B for this component is:
$25 per unit. Generally speaking, when external market prices exist, their use results in an optimal transfer price from the standpoint of the organization as a whole, in terms of the transfer pricing objectives listed in Part Two of Chapter 19.
Organic Laboratories allocates research and development costs to its three research facilities based on each facility's total annual revenue from new product developments: Facility location Kentucky Arizona Illinois Total New product revenue$56,000,000 $100,000,000 $84,000,000 $240,000,000 Research & Development $60,000,000 Using revenue as an allocation base, the amount of costs allocated to the Arizona research facility is calculated to be:
$25,000,000. $25,000,000 = $60,000,000 × ($100,000,000/$240,000,000)
The following budget data pertain to the Machining Department of Yolkenverst Co.: Maximum capacity 60,000units Machine hours per unit 2.50 Variable factory overhead$3.60per machine hour Fixed factory overhead$433,500 The company prepared the budget at 85% of the maximum capacity level. The department uses machine hours as the basis for applying standard factory overhead costs to production (outputs). The standard fixed overhead application rate for the Machining Department (to two decimal places) is:
$3.40 per machine hour. 1. Budgeted fixed overhead = $433,500 (given). 2. Denominator volume level (in machine hours) = (60,000 units × 0.85) × 2.5 machine hours/unit = 127,500 machine hours. 3. Standard fixed overhead application rate = Budgeted fixed overhead/denominator activity level = $433,500/127,500 machine hrs. = $3.40/machine hour (to two decimal places).
Bonehead Co. has the following factory overhead costs for the most recent period: Standard overhead applied to this period's production$72,000 Flexible budget for overhead based on output (i.e., units produced) 65,000 Total budgeted overhead in the master (static) budget 86,000 Actual total overhead cost incurred during the period 76,000 The total underapplied or overapplied factory overhead for Bonehead Co. for the period, to the nearest whole number, is
$4,000 underapplied. 1. Total over/underapplied factory overhead = Total actual overhead cost incurred − Standard overhead cost applied to production (based on units produced during the period). 2. Therefore, total under/overapplied overhead = $76,000 (given) − $72,000 (given) = $4,000 underapplied overhead (to nearest whole dollar); the variance is unfavorable (or, overhead is underapplied) because actual cost > standard overhead cost applied to production this period.
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 The variable factory overhead efficiency variance, to the nearest dollar, is:
$600 unfavorable. 1.Variable overhead efficiency variance = FB for variable overhead cost based on inputs (i.e., based on actual machine hours worked) − FB for variable overhead cost based on outputs (i.e., based on standard allowed machine hours). 2. FB based on inputs = 5,000 actual machine hours × $3.00/machine hour = $15,000. 3. FB based on outputs = 4,800 allowed machine hours × $3.00/machine hour = $14,400. 4. Variable overhead efficiency variance = $15,000 − $14,400 = $600U (rounded to nearest whole number). (Note: the variance here is unfavorable (U) because the actual machine hours worked during the period > standard machine hours allowed for the actual output of the period.)
At the denominator activity level, Norland Company's total overhead budget for 25,000 units of production shows variable overhead costs of $36,000 and fixed overhead costs of $32,000. During the most recent period, the company incurred total overhead costs of $61,400 to manufacture 20,000 units. The total overhead flexible-budget variance for Norland Co. for the most recent period, to the nearest whole dollar, was:
$600 unfavorable. 1. Total overhead flexible-budget (FB) variance = Total actual OH cost incurred − FB for overhead based on output. 2. Standard variable OH rate/unit produced = Budgeted variable overhead/budgeted output (in units) = $36,000 (given)/25,000 denominator activity level, in units (given) = $1.44/unit. 3. FB for variable overhead based on output = standard variable OH rate/unit × actual units produced = $1.44/unit × 20,000 units = $28,800. 4. FB for total OH based on output = budgeted fixed overhead + budgeted variable overhead based on output = $32,000 (given) + $28,800 = $60,800. 5. Actual total overhead cost = $61,400 (given). 6. Therefore, total overhead FB variance = Total actual OH − Flexible budget for overhead based on output = $61,400 − $60,800 = $600U (to nearest whole dollar). Note: the variance here is unfavorable (U) because actual overhead cost incurred during the period > budgeted overhead cost (based on actual output achieved during the period).
The following information for the past year is available from Thinnews Co., a company that uses machine hours to apply standard factory overhead cost to outputs: Actual total factory overhead cost incurred$24,000 Actual fixed overhead cost incurred$10,000 Budgeted fixed overhead cost$11,000 Actual machine hours 5,000 Standard machine hours allowed for the units manufactured 4,800 Denominator volume—machine hours 5,500 Standard variable overhead rate per machine hour$3.00 Under a three-variance breakdown (decomposition) of the total factory overhead variance, the factory overhead efficiency variance (to nearest whole dollar) is:
$600 unfavorable. 1.Factory overhead efficiency variance = variable overhead efficiency variance (because there is no fixed overhead efficiency variance) = $600 unfavorable, as follows: 2. Variable overhead efficiency variance = FB for variable overhead based on inputs (i.e., based on actual machine hours worked during the period) − FB for variable overhead based on outputs (i.e., based on standard allowed machine hours for the output achieved). 3. FB based on inputs = 5,000 actual machine hours × $3.00/machine hour = $15,000. 4. FB based on outputs = 4,800 allowed machine hours × $3.00/machine hour = $14,400. 5. Variable overhead efficiency variance = $15,000 − $14,400 = $600U (to nearest whole dollar). (Note: the variance here is unfavorable (U) because actual machine hours (5,000) > standard allowed machine hours (4,800) based on the actual units produced during the period.)
Bonehead Co. has the following factory overhead costs for the most recent period: Standard overhead applied to this period's production$72,000 Flexible budget for overhead based on output (i.e., units produced) 65,000 Total budgeted overhead in the master (static) budget 86,000 Actual total overhead cost incurred during the period 76,000 The fixed overhead production volume variance for Bonehead Co. this period, to the nearest whole dollar, is:
$7,000 favorable. 1. One version of the formula to calculate the Fixed Overhead Production-Volume Variance is as follows: Production volume variance = FB for total overhead, based on output (i.e., based on standard allowed hours for units produced during the period) − Standard overhead cost applied to output of the period. 2. FB for total overhead based on output = $65,000 (given). 3. Standard overhead cost applied to production = $72,000 (given). 4. Therefore, fixed overhead production volume variance = $65,000 − $72,000 = $7,000F (favorable) (to nearest whole dollar).
At the denominator activity level, Norland Company's total overhead budget for 25,000 units of production shows variable overhead costs of $36,000 and fixed overhead costs of $32,000. During the most recent period, the company incurred total overhead costs of $61,400 to manufacture 20,000 units. The total factory overhead variance for Norland Co. for the most recent period, to the nearest whole dollar, was:
$7,000 unfavorable. 1. Total overhead variance = Total actual OH cost incurred during the period − Standard OH cost applied to (i.e., assigned to) production. 2. Total actual OH cost incurred = $61,400 (given). 3. Standard OH applied cost to production = Standard OH application rate/unit × # units produced = [($36,000 + $32,000)/25,000 units (given)] × 20,000 units (given) = $2.72/unit × 20,000 units = $54,400. 4. Therefore, total overhead variance = $61,400 (see (2) above) − $54,400 (see (3) above) = $7,000U (to the nearest dollar). Note: the variance here is unfavorable (U) because actual overhead cost incurred during the period > standard overhead cost assigned to production during the period.
The following budget data pertain to the Machining Department of Yolkenverst Co.: Maximum capacity 60,000units Machine hours per unit 2.50 Variable factory overhead$3.60per machine hour Fixed factory overhead$433,500 The company prepared the budget at 85% of the maximum capacity level. The department uses machine hours as the basis for applying standard factory overhead costs to production. During the year the Machining Department produced 50,000 units, consuming 127,500 machine hours and incurring $433,500 of fixed overhead. For the current year the department has a fixed overhead production volume variance, rounded to the nearest whole dollar, of:
$8,500 unfavorable. 1. Denominator volume level (in units) = 60,000 units × 0.85 = 51,000 units. 2. Standard fixed overhead rate/unit = $433,500 (given)/51,000 units (see (1) above) = $8.50/unit. 3. Fixed overhead production volume variance = standard fixed overhead rate/unit × (actual volume − denominator volume) = $8.50/unit × (50,000 − 51,000) units = $8,500U (the variance is unfavorable (U) because actual volume < volume used to establish the fixed overhead application rate)
The following budget data pertain to the Machining Department of Yolkenverst Co.: Maximum capacity 60,000units Machine hours per unit 2.50 Variable factory overhead$3.60per machine hour Fixed factory overhead$433,500 The company prepared the budget at 85% of the maximum capacity level. The department uses machine hours as the basis for applying standard factory overhead costs to production. The budgeted total factory overhead for the Machining Department, rounded to the nearest dollar, is:
$892,500. 1. Budgeted total overhead = Budgeted fixed overhead + Budgeted variable overhead. 2. Budgeted fixed overhead = $433,500 (given). 3. Denominator volume level = 60,000 units × 2.5 machine hours/unit × 0.85 = 127,500 machine hours. 4. Budgeted variable overhead = $3.60/machine hour (given) ×127,500 machine hours = $459,000. 5. Therefore, budgeted total overhead = Budgeted fixed overhead + Budgeted variable overhead = $433,500 + $459,000 = $892,500 (to nearest whole dollar).
Consider the following data for three divisions of a company, X, Y, and Z: Divisional:XYZ Sales$1,800,000 $900,000 $4,800,000 Operating Income 252,000 108,000 240,000 Investment in assets 630,000 540,000 3,000,000 The asset turnover (AT) for Division Y is calculated to be (rounded):
1.67. Asset Turnover (AT) = Sales/Investment = $900,000/$540,000 = 1.67
Consider the following data for three divisions of a company, X, Y, and Z: Divisional:XYZ Sales$1,800,000 $900,000 $4,800,000 Operating Income 252,000 108,000 240,000 Investment in assets 630,000 540,000 3,000,000 The return on sales (ROS) for Division Y is:
12.0%. ROS = Operating income/Sales = $108,000/$900,000 = 12.0%
Consider the following data for three divisions of a company, X, Y, and Z: Divisional:XYZ Sales$1,800,000 $900,000 $4,800,000 Operating Income 252,000 108,000 240,000 Investment in assets 630,000 540,000 3,000,000 The return on investment (ROI) for Division Y is:
20.0%. ROI = Operating income/Investment = $108,000/$540,000 = 20.0%
Return on investment (ROI) encourages business units—such as investment centers— to invest only in projects that earn:
A rate of return higher than the unit's current ROI.
The fixed factory overhead production-volume variance represents:
A result of unitizing fixed overhead costs for product-costing purposes.
The difference between the historical cost and the net book value (NBV) of a plant asset is the:
Accumulated depreciation expense on the asset.
All the following choices exist for defining the denominator volume (denominator activity level) for assigning fixed overhead costs in a standard cost system, except:
Actual capacity utilization.
Which of the following is not a part of the sales mix variance equation?
Actual contribution margin per unit of the product.
In a standard cost system, an unfavorable production-volume variance would result if:
Actual production is less than the "denominator volume" (that is, the volume level used to establish the fixed overhead application rate).
An unfavorable sales mix variance arises for a product when the:
Actual sales mix percentage is less than the budgeted sales mix percentage.
Which of the following is not an element of a product's sales quantity variance?
Actual sales mix ratio.
The use of gross book value (GBV) for measuring the level of investment in depreciable assets (for purposes of calculating return on investment, ROI) is preferred by those who value the objectivity of:
An historical cost number.
A measure of the manager's ability to produce increased sales from a given level of investment is:
Asset turnover (AT).
A segment of an organization is referred to as an investment center if it has:
Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply and significant control over the amount of invested capital.
The use of replacement cost of assets for purposes of calculating return on investment (ROI) has the advantage of:
Being a relevant measure of the level of investment in a continuing business.
A significant problem in comparing profitability measures among companies is the:
Differences in the accounting methods used by the companies.
Many firms feel a strong obligation to establish and use a standard rate for fixed factory overhead because:
Generally accepted accounting principles in the U.S. require full costing of inventories for financial reporting purposes.
The major criticism of using return on investment (ROI) for evaluating the financial performance of business units considered investment centers is that ROI:
Gives managers of profitable business units an incentive to reject some projects that would benefit the organization as a whole.
Managerial performance can be measured in various ways, including return on investment (ROI) and residual income (RI). A good reason for using RI rather than ROI is:
Goal congruence is more likely to be promoted by using RI.
Which one of the following is not an order-filling cost?
Inspection.
A fully-owned subsidiary of a multinational company reports its return on investment (ROI) periodically during the year. This unit of the company, for performance evaluation purposes, is likely considered a(n):
Investment center.
Decentralized firms can delegate authority and yet retain control and monitor managers' performances by structuring the organization into so-called "responsibility centers." Which one of the following business segments/responsibility centers is most like an independent business?
Investment center.
SBUs that include the assets they employ as well as profits in the performance evaluation are:
Investment centers.
Which of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income (RI) or the return on investment (ROI) approach for performance measurement and evaluation?
Land being held by the division as a site for a new plant in the future.
The estimated price that could be received for the sale of divisional assets is referred to as:
Liquidation value.
Firms with high operating leverage tend to have:
Low asset turnover and high return on sales.
As a strategic issue, "budget slack" could represent a:
Lower overall level of expected performance than is achievable.
Expropriation occurs when the government in which a foreign company's investment assets are located:
Takes ownership and control of those assets.
Transfer prices based on actual costs of the selling division as opposed to standard costs incurred by that division:
May fail to provide the selling division with an incentive to control costs.
Which one of the following is a drawback of decentralization?
May hinder coordination among independent SBUs.
A selling price variance is:
Not further divided.
Economic value added (EVA®):
Of $10,000 indicates that the division's actual earnings (adjusted for bias effects of accounting conservatism) exceed the division's imputed capital charge by $10,000.
Compared to return on investment (ROI), residual income (RI) may be a better measure of the financial performance of an investment center because:
Of the fact that desirable investment opportunities will not be neglected by divisions currently earning high rates of return.
Residual income (RI) is:
Operating income of an investment center, less the imputed interest on the capital used by the center.
Factors contributing to the fixed factory overhead spending variance can include all the following except:
Operating inefficiency.
Parkside Inc. has three divisions (Entertainment, Plastics, and Video Card), each of which is considered an investment center for performance evaluation purposes. The Entertainment Division manufactures video arcade equipment using products produced by the other two divisions, as follows: 1. The Entertainment Division purchases plastic components from the Plastics Division that are considered unique (i.e., they are made exclusively for the Entertainment Division). In addition, the Plastics Division makes less-complex plastic components that it sells externally, to other producers. 2. The Entertainment Division purchases, for each unit it produces, a video card from Parkside's Video Card Division, which also sells this video card externally (to other producers). The per-unit manufacturing costs associated with each of the above two items, as incurred by the Plastic Components Division and the Video Card Division, respectively, are: Plastic Components Video Cards Direct material$1.25 $2.40 Direct labor 2.35 3.00 Variable overhead 1.00 1.50 Fixed overhead 0.40 2.25 Total cost$5.00 $9.15 Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70/unit. The Video Cards Division, having excess capacity, agrees to lower its transfer price to $8.70/unit. This action would likely:
Optimize the overall profit goals of Parkside Inc.
An investment center's return on investment (ROI) is affected by a change in:
Option A Asset Turnover - yes Return on Sales - yes
Expenditures made in revenue centers usually include:
Order-getting costs.
Quick Technology Company is a supplier of high-end research equipment for the pharmaceutical industry. Quick currently has a variety of different firms producing computer chips for increased memory and improved processing speeds which are installed in Quick's equipment. In this case, having another firm provide supplies for Quick's equipment is an example of:
Outsourcing.
For internal reporting purposes, it is recommended that fixed overhead allocation rates in a standard costing system be based on which of the following denominator volume choices?
Practical capacity.
Which of the following is not a revenue driver factor which affects sales volume for a manufacturing firm?
Productivity.
SBUs that generate revenues and incur the major portion of the cost for producing those revenues are:
Profit centers.
Under the notion of controllability, it is most appropriate for top management to evaluate the profitability of an investment center in terms of:
Profits generated in relation to the amount of capital invested in the unit.
Which of the following is not an objective when choosing a cost allocation method?
Provide an opportunity for managers to make decisions consistent with the manager's goals.
A manufacturing company that uses standard costs and flexible budgets can break the total variable overhead cost variance into:
Spending and efficiency variances.
Parkside Inc. has three divisions (Entertainment, Plastics, and Video Card), each of which is considered an investment center for performance evaluation purposes. The Entertainment Division manufactures video arcade equipment using products produced by the other two divisions, as follows: 1. The Entertainment Division purchases plastic components from the Plastics Division that are considered unique (i.e., they are made exclusively for the Entertainment Division). In addition, the Plastics Division makes less-complex plastic components that it sells externally, to other producers. 2. The Entertainment Division purchases, for each unit it produces, a video card from Parkside's Video Card Division, which also sells this video card externally (to other producers). The per-unit manufacturing costs associated with each of the above two items, as incurred by the Plastic Components Division and the Video Card Division, respectively, are: Plastic Components Video Cards Direct material$1.25 $2.40 Direct labor 2.35 3.00 Variable overhead 1.00 1.50 Fixed overhead 0.40 2.25 Total cost$5.00 $9.15 The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25/unit on the open market. The market price of the video card used by the Entertainment Division is $10.98/unit. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15, would: Multiple Choice
Provide no profit incentive for the Video Cards Division to control or reduce costs.
"Outsourcing" a cost center is often done to:
Reduce cost and obtain improve focus.
The estimated cost to replicate assets of an investment center at the current level of service and functionality of these assets is defined as:
Replacement cost.
In terms of allocating fixed overhead cost to products, generally accepted accounting principles in the U.S.:
Require that such allocations be based on normal capacity.
Return on investment (ROI) is the result of multiplying:
Return on sales (ROS) by asset turnover (AT).
A measure of the manager's ability to control expenses and increase revenues to improve profitability is:
Return on sales (ROS).
The two major contributing factors to a sales volume variance are deviations in:
Sales mix and sales quantity.
Which one of the following is a result of the difference between the actual sales mix and the budgeted sales mix?
Sales mix variance.
(Units sold − budgeted sales units) × (Budgeted contribution margin per unit) equals:
Sales volume variance.
Which one of the following is the result of the [(units sold) × (actual selling price per unit)] − [(units sold) × (budgeted selling price per unit)]:
Selling price variance.
Determining the standard fixed factory overhead cost applied to production for a period involves all the following essential elements except:
The actual amount of fixed overhead cost incurred during the period.
A key standard in international transfer pricing is:
The arm's-length standard.
In the context of transfer pricing, dual pricing is:
The simultaneous use of two or more transfer pricing methods.
The choice of valuation method for inventories would normally not affect which item(s) used in calculating Return on Investment (ROI)?
The valuation of fixed assets (e.g., Plant, Property, and Equipment) used by an investment center.
Which one of the following is not a limitation shared by residual income (RI) and return on investment (ROI) divisional performance measures?
They both relate, in percentage terms, earnings to the level of investment in each division.
All of the following are true of market-based transfer prices except:
They can be determined for all goods and services transferred internally.
As a general rule, leased assets should be included as part of the calculation of "investment" (for calculating ROI and residual income) since they represent assets used:
To generate operating income.
The sales quantity variance of a firm arises when the:
Total units of all products sold differ from the budgeted total units to be sold.
The difference between the standard variable overhead cost for the actual quantity of the cost driver used for applying variable overhead and the standard variable overhead cost allowed for the units manufactured during a given period is the:
Variable overhead efficiency variance.
The difference in each period between total variable overhead cost incurred and the standard variable overhead cost for the period based on the actual quantity of the cost driver used to apply variable overhead cost is the:
Variable overhead spending variance.
