Exam 15: Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management

Bluetop Company uses standard costs. For the month of April, the firm budgeted $160,000 for total factory overhead based on 40,000 machine hours. The standard calls for 4 machine hours for each finished units. During April the firm used 39,000 machine hours to manufacture 9,500 units and incurred $159,000 in total factory overhead. Required: 1. Determine the total amount of standard factory overhead cost charged to production in April. 2. Provide the correct journal entry to record the application of standard factory overhead costs to production. (Assume that the company uses a single overhead account, Manufacturing Overhead.)

The total budget for fixed factory overhead in 2013 for Bluecap Co. was:

The total overhead flexible-budget (FB) variance for Bonehead Co. this period is:

You are provided with the following summary of overhead-related costs for the most recent accounting period for a company that uses a single overhead account, Factory Overhead, into which it records both actual and standard overhead costs during the period: 1. Overhead standard cost variances for the period: a. Fixed overhead (FOH) spending variance = $1,600U b. Production volume variance = $200F c. Variable overhead (VOH) efficiency variance = $1,050U d. Variable overhead (VOH) spending variance = $150U 2. Actual fixed overhead cost incurred (depreciation) = $15,800; actual variable overhead cost incurred (paid in cash) = $4,800 3. Standard overhead cost applied to production (i.e., WIP inventory) during the period = $18,000 4. Standard overhead cost of units transferred to Finished Goods Inventory = $20,000 5. Before closing its accounts at the end of the period, the (standard cost) amounts affecting the inventory and CGS accounts is as follows: Required: Prepare the proper journal entry for each of the following events: 1. Incurrence of actual FOH costs for the period. 2. Incurrence of actual VOH costs for the period. 3. Application of standard overhead costs to production (i.e., WIP inventory). 4. Recording of standard overhead costs for units completed during the period. 5. Recording of the four standard cost variances for the period. 6. Closing the standard cost variances under the assumption that the company closes these variances entirely to Cost of Goods Sold (CGS). 7. Closing the standard cost variances under the assumption that the company prorates the variances to the CGS and inventory accounts.

The standard variable overhead application rate per direct labor hour in 2013 for Bluecap Co. was:

What is the budgeted denominator activity level for Megan, Inc., in direct labor hours (DLHs)?

In regard to the investigation of variances under uncertainty, which of the following is not a positive (i.e., desirable) combination of courses of action and states of nature?

Under the assumption that the total budgeted fixed overhead for 2014 is the same as it was for 2013, what is the standard fixed overhead application rate per direct labor hour for Bluecap Co. for 2014?

Which of the following items would be useful to management in deciding whether to investigate the cause of a reported standard cost variance?

Many firms feel a strong obligation to establish and use a standard rate for fixed factory overhead for all the following reasons except:

Factors contributing to the fixed factory overhead spending variance can include all except:

Cost behavior for variable overhead is more difficult to predict than for direct material or direct labor cost for all the following reasons except:

The variable factory overhead efficiency variance for Neptune, Inc. in April is:

The fixed overhead production volume variance for Bluecap Co. in 2013 is:

Bike Pedals manufactures bicycle seats. The company budgeted to manufacture 25,000 seats in April with 0.05 standard machine hours per seat. The total variable factory overhead was budgeted at $30,000 for the operation. During April the company manufactured 30,000 seats using 1,600 machine hours. It incurred $34,000 of variable factory overhead (VOH) costs. Required: Determine each of the following variances. Show calculations. 1. Variable overhead spending variance. 2. Variable overhead efficiency variance. 3. Variable overhead flexible-budget variance.

For internal reporting purposes, it is recommended that fixed overhead allocation rates in a standard costing system be based on:

The total overhead variance in 2013 for Bluecap Co. is:

The Wentworth Company manufactures modular furniture for the home and uses a monthly variance system to control costs of the manufacturing departments. Edward Collins is the supervisor of the Assembly Department and is reviewing the monthly variance analysis for November, which showed a significant cost overrun (i.e., negative cost variance). Collins has gathered the following information to assist him in deciding whether or not to investigate the unfavorable cost variance for the Assembly Department: Required: Collins is uncertain about the probability estimate of 90% for proper operation of the Assembly Department. Determine the probability estimate that would cause Collins to be indifferent between the two possible managerial actions: investigate or don't investigate the variance.

Erie Co. uses machine hours to apply standard overhead cost to production. The following data pertain to October: Required: Compute the following variances using machine hours as the activity variable used to assign standard overhead costs to production. Show calculations. 1. Variable overhead spending variance 2. Variable overhead efficiency variance 3. Fixed overhead spending variance 4. Fixed overhead production-volume variance

Management is currently deciding whether or not to investigate a cost variance that was identified by the accounting system. To help address this question, you have generated the following data: Possible States of Nature: 1. The underlying operation is in control (i.e., is operating normally). 2. The underlying operation is out of control (and therefore is in need of an intervention) Possible Decisions/Courses of Action: 1. Investigate the variance (to determine its underlying cause(s)). 2. Do not investigate the variance Estimated Costs and Probabilities: 1. Cost of investigating the variance = I = $5,000. 2. Cost of correcting an out-of-control process (if the process is found to be out of control) = C = $10,000. 3. Losses from not correcting an out-of-control process = L = $110,000. 4. Probability, p, of the process being out of control = 60% Required: 1. Recast the above information in the form of a payoff table. 2. What is the expected cost of the decision to investigate the variance? Show calculations. 3. What is the expected cost of the decision to not investigate the variance? Show calculations. 4. What is the break-even probability of the process being out of control, p, which would make management indifferent between investigating and not investigating the observed variance? Demonstrate that, in fact, this is the break-even probability by showing the expected value of each management action. Show calculations.