Question 1

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.

Accepted Answer

The answer of What are the four (4) steps in...

Question 2

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

Accepted Answer

A)  Random error. 
B)  Prediction error. 
C)  Implementation error. 
D)  Modeling error. 
E)  Accounting error.

Question 3

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

Accepted Answer

A)  $1,900 underapplied. 
B)  $1,900 overapplied. 
C)  $3,200 underapplied. 
D)  $3,200 overapplied. 
E)  $5,100 overapplied.

Question 4

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

Accepted Answer

A)  Inaccurate budget estimates for these costs. 
B)  Inadequate control of fixed overhead costs. 
C)  Misclassification of cost items by the accounting system. 
D)  Operating inefficiency. 
E)  Unanticipated increases in costs such as factory insurance.

Question 5

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:$\begin{array}{lrr}
\text { Actual total factory overhead cost incurred } & \$ 24,000 \
\text { Actual fixed overhead cost incurred } & \$ 10,000 \
\text { Budgeted fixed overhead cost } & \$ 11,000 \
\text { Actual machine hours } & 5,000 \
\text { Standard machine hours allowed for the units manufactured } & 4,800 \
\text { Denominator volume-machine hours } & 5,500 \
\text { Standard variable overhead rate per machine hour } & \$ 3.00
\end{array}$The variable factory overhead efficiency variance, to the nearest dollar, is:

Accepted Answer

A)  $600 unfavorable. 
B)  $1,000 favorable. 
C)  $1,400 unfavorable. 
D)  $1,500 favorable. 
E)  $2,100 favorable.

Question 6

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

Accepted Answer

A)  Only non-volume-related cost drivers are used in the cost-allocation process. 
B)  An ABC system would likely have a greater number of standard cost variances reported each period. 
C)  Fewer variances need to be reported, compared to the number of overhead variances calculated under a traditional cost system. 
D)  Flexible budgets are used for planning but not cost-control purposes. 
E)  The flexible-budget variance will be the same under both a traditional cost system and an ABC system.

Question 7

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?

Accepted Answer

A)  N/A—this variance does not exist in a three-variance analysis of the total overhead variance. 
B)  $300 favorable. 
C)  $380 unfavorable. 
D)  $480 unfavorable. 
E)  $1,160 unfavorable.

Question 8

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:$\begin{array}{lrr}
\text { Actual total factory overhead cost incurred } & \$ 24,000 \
\text { Actual fixed overhead cost incurred } & \$ 10,000 \
\text { Budgeted fixed overhead cost } & \$ 11,000 \
\text { Actual machine hours } & 5,000 \
\text { Standard machine hours allowed for the units manufactured } & 4,800 \
\text { Denominator volume-machine hours } & 5,500 \
\text { Standard variable overhead rate per machine hour } & \$  3.00
\end{array}$Under a two-variance breakdown (decomposition) of the total factory overhead variance, the factory overhead efficiency variance (to the nearest whole dollar) is:

Accepted Answer

A)  Undefined. 
B)  $400 favorable. 
C)  $600 unfavorable. 
D)  $1,400 favorable. 
E)  $1,400 unfavorable.

Question 9

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

Accepted Answer

A)  A favorable labor efficiency variance. 
B)  An unfavorable total spending variance. 
C)  A favorable production-volume variance. 
D)  A favorable sales-volume variance. 
E)  A favorable overhead budget variance.

Question 10

Oslund Company manufactures only one product and uses a standard cost system. During the past month, the following variances were observed:$\begin{array}{lc}
\text { Direct labor rate variance } & \$ 30,000 \text { favorable } \
\text { Direct labor efficiency variance } & 50,000 \text { unfavorable } \
\text { Variable overhead efficiency variance } & 20,000 \text { unfavorable } \
\text { Standard direct labor hours (DLH) per unit of output } & 5.00
\end{array}$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?

Accepted Answer

A)  1,000. 
B)  2,500. 
C)  4,000. 
D)  5,000. 
E)  6,000.

Question 11

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.

Accepted Answer

The answer of In terms of the variance-investigation decision under...

Question 12

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

Accepted Answer

A)  Sales volume and production volume. 
B)  Spending and selling price. 
C)  Each activity-based cost driver. 
D)  Semi-variable overhead costs. 
E)  Semi-fixed overhead costs.

Question 13

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.)

Accepted Answer

The answer of The Wentworth Company manufactures modular furniture for...

Question 14

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

Accepted Answer

A)  $800 overapplied. 
B)  $800 underapplied. 
C)  $2,600 underapplied. 
D)  $3,000 overapplied. 
E)  $3,000 underapplied.

Question 15

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.)

Accepted Answer

The answer of Bluetop Company uses a standard cost system....

Question 16

The following information is available from the Terry Company:$\begin{array}{lrr}
\text { Actual total factory overhead cost incurred } & \$ 25,000 \
\text { Actual fixed overhead cost incurred } & \$ 10,400 \
\text { Budgeted fixed overhead expenses } & \$ 11,000 \
\text { Actual direct labor hours (DLH) worked } & 4,400 \
\text { Standard DLHs for this period's production (output) } & 4,000 \
\text { Standard variable overhead rate per DLH } & \$  3.00 \
\text { Standard fixed overhead rate per DLH } & \$  2.50
\end{array}$What is the total overhead spending variance for Terry Company for the period, to the nearest whole dollar?

Accepted Answer

A)  $800 unfavorable. 
B)  $1,000 unfavorable. 
C)  $1,200 unfavorable. 
D)  $1,400 unfavorable. 
E)  $2,000 unfavorable.

Question 17

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

Accepted Answer

A)  Generally accepted accounting principles in the U.S. require full costing of inventories for financial reporting purposes. 
B)  The resulting data are useful for performance-evaluation purposes. 
C)  Larger income tax deductions result when fixed overhead costs are treated as product costs rather than period costs. 
D)  This approach improves upon management's ability to more accurately forecast future overhead costs. 
E)  None of the above—fixed overhead costs are typically expensed as period costs.

Question 18

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.

Accepted Answer

The answer of The Wentworth Company manufactures modular furniture for...

Question 19

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.

Accepted Answer

The answer of Redtop Co. uses a standard cost system...

Question 20

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

Accepted Answer

A)  A debit to Work-in-Process Inventory, at standard cost. 
B)  A debit to Work-in-Process Inventory, at actual cost. 
C)  A credit to Cost of Goods Sold, at standard cost. 
D)  A debit to Finished Goods Inventory, at standard cost. 
E)  A debit to Finished Goods Inventory, at actual cost.

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