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

Based on experience, you observe the following probabilities regarding the underlying cause of an observed cost or revenue variance: the probability, p, of a nonrandom variance equals 0.10, and the probability, 1 − p, of a random variance equals 0.90. If management chooses to investigate, the total cost is $1,000 if it is concluded that the reported variance is a random fluctuation, while the total cost is $6,000 if it is concluded that the variance is the result of a nonrandom (i.e., a systematic) cause (i.e., the incremental cost to correct the variance is $5,000). On the other hand, if an observed variance is not investigated, management expects the following costs: if it is concluded that the variance is due to random causes, the cost would be $0; if it is concluded that the observed variance is due to a nonrandom (i.e., a systematic) cause, the cost would be $30,000. Given this information, what is the indifference probability, p (i.e., the probability of a nonrandom variance that would make management indifferent between investigating and not investigating the variance)? (Round your answer to one (1) decimal place, for example, 12.3458% = 12.3%.) A) 3.3% B) 4.0% C) 4.2% D) 10.0% E) 16.7%

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:

Which of the following statements is correct?

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:

Which one of the following reflects both price (rate) as well as efficiency (quantity) effects regarding individual variable overhead items?

What are the three steps in establishing the standard application rate for variable factory overhead cost? Does this procedure differ for product-costing versus cost control purposes? Explain.

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:

Management is currently deciding whether 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., it is operating normally). 2. The underlying operation is out of control (and therefore needs 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 (to the nearest dollar) of the decision to investigate the variance? Show calculations. 3. What is the expected cost (to the nearest dollar) 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.

Gerhan Company's flexible budget for the units manufactured in May shows $15,640 of total factory overhead; this output level represents 70% of available capacity. During May, the company applied overhead to production at the rate of $3.00 per direct labor hour (DLH), based on a denominator volume level of 6,120 DLHs, which represents 90% of available capacity. The company used 5,000 DLHs and incurred $16,500 of total factory overhead cost during May, including $6,800 for fixed factory overhead. What is the fixed factory overhead spending variance (to the nearest whole dollar) in December for Gerhan Company?

Zero Company's standard factory overhead rate is $3.75 per direct labor hour (DLH), calculated at 90% capacity = 900 standard DLHs. In December, the company operated at 80% of capacity, or 800 standard DLHs. Budgeted factory overhead at 80% of capacity is $3,150, of which $1,350 is fixed overhead. For December, the actual factory overhead cost was $3,800 for 840 actual DLHs, of which $1,300 was for fixed factory overhead. Assuming the use of a four-way breakdown (decomposition) of the total overhead variance, what is the variable factory overhead efficiency variance for Zero Company in December (to the nearest whole dollar)?

Zero Company's standard factory overhead rate is $3.75 per direct labor hour (DLH), calculated at 90% capacity = 900 standard DLHs. In December, the company operated at 80% of capacity, or 800 standard DLHs. Budgeted factory overhead at 80% of capacity is $3,150, of which $1,350 is fixed overhead. For December, the actual factory overhead cost was $3,800 for 840 actual DLHs, of which $1,300 was for fixed factory overhead. Under a four-way breakdown (decomposition) of the total overhead variance, what is the variable factory overhead spending variance for Zero Company for December (to the nearest whole dollar)?

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:

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:

Zero Company's standard factory overhead rate is $3.75 per direct labor hour (DLH), calculated at 90% capacity = 900 standard DLHs. In December, the company operated at 80% of capacity, or 800 standard DLHs. Budgeted factory overhead at 80% of capacity is $3,150, of which $1,350 is fixed overhead. For December, the actual factory overhead cost incurred was $3,800 for 840 actual DLHs, of which $1,300 was fixed factory overhead. What is the fixed overhead production volume variance, to the nearest whole dollar, for Zero Company in December?

Systematic variances, as this term is used in the text, are persistent and most likely:

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:

The variances discussed in Chapter 15 (for manufacturing overhead) are all components of a short-term financial control system. These variances are calculated using standard manufacturing costs and flexible budgets. As was argued in the text (both in Chapter 15 and elsewhere) a financial control system is but part of a more comprehensive management accounting and control system. Required: 1. What are the primary limitations of short-run financial control measures? 2. How can a short-run financial control system be expanded to become a more comprehensive management accounting and control system? Discuss, in at least some detail, how and why you would expand the system to provide management with more useful information.

In terms of allocating fixed overhead cost to products, generally accepted accounting principles in the U.S.:

If there is a 90 percent chance that an observed variance is random, the cost of conducting an investigation is $1,000, the cost to correct a variance if the investigation reveals a nonrandom cause, and the amount of loss a company expects to incur if it does not investigate a variance that had a nonrandom cause is $30,000, what is the expected cost (to the nearest whole dollar) of not investigating the variance? A) $30,000. B) $1,500. C) $0. D) $3,900. E) $3,000.

Megan, Inc. uses the following standard costs per unit for one of its products: Direct labor (2.0 hrs. @ $5.00/hr.) = $10.00; overhead (2.0 hrs. @ $2.50/hr.) = $5.00. The flexible budget for overhead is $120,000 plus $1.00 per direct labor hour (DLH). Actual data for the past month show total overhead costs of $225,000, total fixed overhead of $123,000, 85,000 hours worked, and 40,000 units produced. The variable overhead spending variance for the past month for Megan, Inc., to the nearest whole dollar, was: