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

What are the four (4) steps in determining the standard fixed factory overhead application rate? Does the procedure differ for product-costing versus cost-control purposes? Explain.

A deviation from standard that occurs during operations because of operator errors is an example of a(n):

Neptune Inc. uses a standard cost system and has the following information for the most recent month, April: Actual direct labor hours (DLHs) worked 17,000 Standard DLHs allowed for good output produced this period 18,000 Actual total factory overhead costs incurred \ 45,400 Budgeted fixed factory overhead costs \ 10,800 Denominator activity level, in direct labor hours (DLHs) 15,000 Total factory overhead application rate per standard DLH \ 2.70 The total underapplied or overapplied factory overhead in April for Neptune, Inc., to the nearest whole dollar, was:

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

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:

Which of the following is a characteristic of calculating standard cost variances for manufacturing overhead costs under an activity-based cost (ABC) system?

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 worked 5,000 DLHs and incurred $16,500 of total factory overhead cost during May, including $6,800 for fixed factory overhead. Under a three-variance breakdown (decomposition) of the total overhead variance, what is the total factory overhead spending variance (to the nearest whole dollar) for May?

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:

In a standard cost system, when production (i.e., actual output) is greater than the denominator volume level, there will be:

Oslund Company manufactures only one product and uses a standard cost system. During the past month, the following variances were observed: Direct labor rate variance \ 30,000 favorable Direct labor efficiency variance 50,000 unfavorable Variable overhead efficiency variance 20,000 unfavorable Standard direct labor hours (DLH) per unit of output 5.00 Oslund applies variable overhead using a standard rate of $20.00 per standard DLH allowed. During the month, Oslund used 20% more DLHs than the total standard hours allowed for the units manufactured. What were the total standard DLHs (to the nearest whole number) for the units manufactured by Oslund Company during the past month?

In terms of the variance-investigation decision under uncertainty, which of the following items contains a cross-listing of costs associated with each of two states of nature (random vs. nonrandom variance) and each of two management actions (investigate the variance vs. do not investigate the variance)? A) Indifference probability chart. B) Statistical control chart. C) Run chart. D) Variance control chart. E) Payoff table.

Using an activity-based costing system (ABC) enables a firm to calculate overhead variances for:

The Wentworth Company manufactures modular furniture for the home, and uses a monthly variance-reporting 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 shows a significant cost overrun (i.e., unfavorable 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: Estimated cost (I) to investigate the variance $4,000 Estimated probability that the Assembly Department is operating properly, that is, the probability that the observed variance is a random event = (1 − p) = 90% If the Assembly Department is operating out of control (i.e., improperly): Estimated cost (C) to correct the process = $8,000 Estimated loss (L) if the observed variance is the result of a nonrandom cause but the company fails to investigate = $40,000 Required: Recommend whether Wentworth Company should investigate the observed unfavorable cost variance. Support your answer by: 1. Preparing a 2 × 2 payoff table for use in making the decision. Let the rows in your table represent possible managerial actions (Investigate vs. Don't Investigate) and the columns of your table represent possible states of nature (Random vs. Nonrandom). 2. Computing the expected value (to the nearest whole dollar) of the cost of each of the two actions that management can take: investigate the variance, or do not investigate the variance. (Let p = the probability that the process is out of control, that is, the probability of a nonrandom variance, and (1 − p) = the probability that the process is in control, that is, the probability that the observed variance is due to random causes.)

The following information is available from the Terry Company: Actual total factory overhead cost incurred \ 25,000 Actual fixed overhead cost incurred \ 10,400 Budgeted fixed overhead expenses \ 11,000 Actual direct labor hours (DLH) worked 4,400 Standard DLHs for this period's production (output) 4,000 Standard variable overhead rate per DLH \ 3.00 Standard fixed overhead rate per DLH \ 2.50 The total under or overapplied overhead for Terry Company for the period, to the nearest dollar, is:

Bluetop Company uses a standard cost system. For the month of April, the firm budgeted $160,000 for total factory overhead based on 40,000 machine hours. The standard calls for 4.0 machine hours for each finished unit. 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 (to the nearest whole dollar) 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 following information is available from the Terry Company: Actual total factory overhead cost incurred \ 25,000 Actual fixed overhead cost incurred \ 10,400 Budgeted fixed overhead expenses \ 11,000 Actual direct labor hours (DLH) worked 4,400 Standard DLHs for this period's production (output) 4,000 Standard variable overhead rate per DLH \ 3.00 Standard fixed overhead rate per DLH \ 2.50 What is the total overhead spending variance for Terry Company for the period, to the nearest whole dollar?

Many firms feel a strong obligation to establish and use a standard rate for fixed factory overhead because:

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: Estimated cost (I) to investigate the variance $4,000 Estimated probability that the Assembly Department is operating properly, that is, the probability that the observed variance is a random event = (1 − p) = 9% If the Assembly Department is operating out of control (i.e., improperly): Estimated cost (C) to correct the process = $8,000 Estimated loss (L) if the observed variance is the result of a nonrandom cause but the company fails to investigate = $40,000 Required: Collins is uncertain about the probability estimate of 90% for proper operation of the Assembly Department. Determine the probability estimate (to three (3) decimal places, for example, 0.04691 = 0.047) that would cause Collins to be indifferent between the two possible managerial actions: investigate or don't investigate the variance.

Redtop Co. uses a standard cost system and flexible budgets. The following flexible budget was prepared at the 80% operating level for the year:For purposes of calculating the standard fixed overhead application rate, the company defined the "denominator volume" as the 90% capacity level. As noted above, the standard calls for four DLHs per unit manufactured. During the year, Redtop worked 33,600 DLHs to manufacture 8,500 units. The actual factory overhead cost incurred was $12,000 greater than the flexible-budget amount for the units produced, of which $5,000 was due to fixed factory overhead. Required: Calculate (and provide supporting details for) each of the following variances: 1. The standard variable overhead application rate (to two (2) decimal places) per DLH. 2. The variable overhead efficiency variance, to the nearest dollar. 3. The total factory overhead spending variance, to the nearest dollar. 4. The fixed overhead production-volume variance. 5. The variable overhead spending variance. 6. Provide a short description (i.e., interpretation) of each of the variances you calculated in requirements 2 through 5.

Which one of the following journal entries in a standard cost system is needed to record the completion of production for the period?