Question 1

Which of these is true?

Accepted Answer

A)  Budgeted fixed factory overheads = Budgeted overheads per unit × actual volume
B)  Budgeted fixed factory overheads = Budgeted overheads per unit × standard volume
C)  Budgeted factory overheads = Budgeted fixed overheads per unit × budgeted volume + actual variable overheads
D)  Budgeted factory overheads = Budgeted fixed overheads per unit × standard volume + budgeted variable overheads
E)  None of the above E

Question 2

Wendy Wall (WW) makes wall units. For the year, the following details have been budgeted. Output, 10,000 units; factory overheads $1,250,000, of which 60% is variable. Each wall unit should take 2.5 hours of direct labor to produce. WW produced 9,500 units with 24,000 DLH used and $1,175,000 actual overhead was incurred. Overhead is allocated based on direct labor hours (DLH). What is Wendy's total overhead variance?

Accepted Answer

A)  $75,000 over absorbed
B)  $12,500 over absorbed
C)  $12,500 under absorbed
D)  $25,000 over absorbed
E)  None of the above B

Question 3

Developing Additional Variances for Performance Evaluation
Saidwell Company manufactures washers and dryers on a single assembly line in its main factory. The market has deteriorated over the last five years and competition has made cost control very important. Management has been concerned about the materials costs of both washers and dryers. There have been no model changes in the past two years, and economic conditions have allowed the company to negotiate price reductions for many key parts.
Saidwell uses a standard cost system in accounting for materials. Purchases are charged to inventory at a standard price, and purchase discounts are considered an administrative cost reduction. Production is charged at the standard price of the materials used. Thus, the price variance is isolated at time of purchase as the difference between gross contract price and standard price multiplied by the quantity purchased. When a substitute part is used in production, a price variance equal to the difference in the standard prices of the materials is recognized at the time of substitution. The quantity variance is the actual quantity used compared with the standard quantity allowed, with the difference multiplied by the standard price.
The materials variances for several of the parts Saidwell uses are unfavorable. Part #4121 is one item that has an unfavorable variance. Saidwell knows that some of these parts are defective and will fail. The failure is discovered during production. The normal defective rate is 5 percent of normal input. The original contract price of this part was $0.285 per unit; thus, Saidwell set the standard unit price at $0.285. The unit contract purchase price of Part #4121 was increased to $0.325 from the original $0.285 due to a parts specification change. Saidwell chose not to change the standard; it treated the increase in price as a price variance. In addition, the contract terms were changed from payment due in 30 days to a 4 percent discount if paid in 10 days or full payment due in 30 days. These new contractual terms were the consequence of negotiations resulting from changes in the economy.
Data regarding the use of Part #4121 during December are as follows. $\begin{array}{|l|}
\hline\text{- Purchas es of Part \$ 4121 }\\
\hline\text{- Unit price paid for purchases of Part  \# 4121 }\
\hline\text{- Requisitions of Part 44121 from stores for use in products}\\
\hline\text{- Substitution of Part  \# 5125  for Part  \# 4121  to use obsolete}\
\text{ stock (standard unit price of Part \# 5125  is \$ 0.35  )}\
\hline\text{- Units of Part  \$ 4121  and its substitute (Part  \# 5125)  identified as defective}\\
\hline\text{- Standard allowed usage 〈including normal defective units) }\
\text{of Part 44121 and its substitute based on output for the month}\
\hline
\end{array}$$\begin{array}{|r|}
\hline 150,000 \
\text { units } \
\hline \$ 0.325 \
\hline 134,000 \
\text { units } \
\hline 24,000 \
\text { units } \
\hline 9.665 \
\text { units } \
\hline 153.300 \
\text { units } \
\hline
\end{array}$ Saidwell's material variances related to Part #4121 for December were reported as follows: $$\begin{array} { | l | c | } 
\hline \text { Price variance } & \$ 7.560 .00 \cup \
\hline \text { Quantity variance } & \underline { 1.339 .50\cup} \
\hline \text { Total materials variances for Part } \# 4121 & \$ 8.899 .50 \cup\
\hline
\end{array}$$ Bob Speck, the purchasing director, claims the unfavorable price variance is misleading. Speck says that his department has worked hard to obtain price concessions and purchase discounts from suppliers. In addition, Speck says engineering changes in several parts have increased their prices, even though the part identification has not changed. These price increases are not his department's responsibility. Speck declares that price variances no longer measure purchasing's performance.
Jim Buddle, the manufacturing manager, thinks the responsibility for the quantity variance should be shared. Buddle states that manufacturing cannot control quality associated with less expensive parts, substitutions of material to use up otherwise obsolete stock, or engineering changes that increase the quantity of materials used.
The accounting manager, Mike Kohl, suggests that the computation of variances be changed to identify variations from standard with the causes and functional areas responsible for the variances. Kohl recommends the following system of materials variances and the method of computation for each:  Required:
a. Discuss the appropriateness of Saidwell Company's current method of variance analysis for materials and indicate whether the claims of Bob Speck and Jim Buddle are valid.
b. Compute the materials variances for Part #4121 for December using the system recommended by Mike Kohl.
c. Who would be responsible for each of the variances in Mike Kohl's system of variance analysis for materials?

Accepted Answer

This problem is a good example of some of the many causes of materials price and quantity variances and how responsibility for the causes can be assigned.
Note: $$\begin{array} { | l | l | r | r | } 
\hline \text { Price variance: } & & & \
\hline \text { Purchase of } 4121 & 150,000 \times ( .325 - .285 ) & \$ 6,000 & \
\hline \text { Substitution of } 5125 & 24,000 \times ( .35 - .285 ) & \underline{1,560} & \
\hline & & \$ 7,560 & \cup \
\hline
\end{array}$$ $\begin{array}{|c|r|r|r|}
\hline \text { Quantity variance: } & & & \
\hline \text { Standard usage } & & 153,300 & \
\hline \text { Actual usage } & & & \
\hline \text { required } & 134,000 & & \
\hline 5125 s & \underline{24,000} &  \underline{158,000} & \
\hline \text { Excess usage } & & 4.700 & \
\hline \text { Times standard price } & &  \underline{\times .285} & \
\hline & & \$ 1.339 .50 & \text { unfav } \
\hline
\end{array}$ a. Isolation of the materials price variance at the time of purchase is appropriate because it records the entire amount of the variance in the correct period. The claims of Bob Speck and Jim Buddle, however, are valid.
Speck is correct in stating that the price variance is misleading and does not measure his department's performance. Purchase discounts are price concessions obtained by the Purchasing Department for which the Purchasing Department should receive credit.
Buddle is correct in stating that the responsibility for the quantity variance should be shared. An analysis of increased quantities may indicate that there has been a purchase of inferior parts. This is the responsibility of the Purchasing Department. The substitution of materials to use up otherwise obsolete stock is the result of actions or decisions of Purchasing, Engineering, or both, and should be charged to the responsible department(s).
b.  $$\begin{array} { | l | c | } 
\hline & \text { Units } \
\hline \text { "Total spoilage } & 9.665 \
\hline \text { Normal spoilage } ( 153.300 \times 0.5 / 1.05 ) &  \underline{7,300} \
\hline \text { Abnormal spoilage } & 2,365 \
\hline
\end{array}$$ c. The following areas would be responsible for the variances in Mike Kohl's system of variance analysis.  While not specifically asked in the problem, one should question whether the additional complexity created by this new set of variances is justified. The proposed variances are confusing. Substantial training and retraining of the managers involved will be required. Moreover, these variances are a change in the performance evaluation system. What other parts of the organization structure are being changed? For example, is the performance reward system being changed to incorporate the new performance measures? Finally, Mr. Kohl's system fails the "KISS" test (Keep It Simple, Stupid).

Question 4

Overhead is applied on the basis of direct labor hours. Three direct labor hours are required for each product unit. Planned production for the period was set at 8,000 units. Manufacturing overhead for the period is budgeted at $204,000, of which 30 percent is fixed. The 26,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $220,500.
Required:
Calculate the following three overhead variances:
1. Overhead volume variance
2. Overhead efficiency variance
3. Overhead spending variance

Accepted Answer

The answer of Overhead is applied on the basis of...

Question 5

Derf Company applies overhead on the basis of direct labor hours. Two direct labor hours are required for each product unit. Planned production for the period was set at 9,000 units. Manufacturing overhead for the period is budgeted at $135,000, of which 20 percent is fixed. The 17,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $136,500.
Required:
Calculate the following three overhead variances:
1. Overhead volume variance.
2. Overhead efficiency variance.
3. Overhead spending variance.

Accepted Answer

The answer of Derf Company applies overhead on the basis...

Question 6

The following information is for the third quarter of this year: $\begin{array} { | l | r r|  rr| l | } 
\hline &  { \text { Planned } } &&{ \text { Actual } } \
\hline \text { Production } & 92,000 & \text { units } & 87,000 & \text { units } \
\hline \text { Direct labor hours } & 506,800 & \begin{array} { l } 
\text { DL } \
\text { hrs }
\end{array} & 380,000 & \begin{array} { l } 
\text { DL } \
\text { hrs }
\end{array} \
\hline \begin{array} { l } 
\text { Fixed manufacturing } \
\text { overhead }
\end{array} & \$ 205,000 & & \$ 182,400 & \
\hline \begin{array} { l } 
\text { Variable } \
\text { manufacturing } \
\text { overhead }
\end{array} & \$ 910,000 & & \$ 841,500 & \
\hline \begin{array} { l } 
\text { Standard direct labor } \
\text { hour per unit }
\end{array} & 5.5 & & & \
\hline
\end{array}$ Required:
Calculate the following three overhead variances:
1. Overhead volume variance
2. Overhead efficiency variance
3. Overhead spending variance

Accepted Answer

The answer of The following information is for the third...

Question 7

Karpoff Kremes (KK) planned to sell 40,000 Kings at $20 each and 20,000 Kweens at $15 each. Actual sales of the former were 45,000 and 25,000 of the latter, at $19 and $16 respectively. Which is true of KK's mix variance?

Accepted Answer

A)  $0
B)  $175,000 fav
C)  $28,333 fav
D)  $8,333 unfav
E)  Unable to determine

Question 8

Karpoff Kremes (KK) planned to sell 40,000 Kings at $20 each and 20,000 Kweens at $15 each. Actual sales of the former were 45,000 and 25,000 of the latter, at $19 and $16 respectively. Which is true of KK's sales variance?

Accepted Answer

A)  $183,333 fav
B)  $155,000 fav
C)  $163,333 fav
D)  $175,000 fav
E)  None of the above

Question 9

Which is true of BB's sales quantity variances?

Accepted Answer

A)  $12 million unfav
B)  $5.75 million fav
C)  $5.75 million unfav
D)  $6.25 million unfav
E)  None of the above

Question 10

Which of these is true?

Accepted Answer

A)  Budgeted volume = Actual output × units allowed
B)  Actual volume = Budgeted output × actual units allowed
C)  Expected volume = Standard volume
D)  Standard volume = Actual output × # cost driver units allowed
E)  None of the above

Question 11

Boris Bangles planned to sell 280,000 banjos at $400 each, but actually sold 250,000 at $425 each. Which is true of BB's sales price variances?

Accepted Answer

A)  $6.25 million unfav
B)  $12 million fav
C)  $6.25 million fav
D)  $5.75 million fav
E)  None of the above

Question 12

The overhead volume variance:

Accepted Answer

A)  captures the difference between planned overheads and actual overheads
B)  measures underutilized capacity
C)  measures the opportunity cost of actual capacity utilization differing from planned capacity utilization
D)  as a performance measure encourages overproduction
E)  all of the above

Question 13

Wendy Wall (WW) makes wall units. For the year, the following details have been budgeted. Output, 10,000 units; factory overheads $1,250,000, of which 60% is variable. Each wall unit should take 2.5 hours of direct labor to produce. WW produced 9,500 units with 24,000 DLH used and $1,175,000 actual overhead was incurred. Overhead is allocated based on direct labor hours (DLH). What is Wendy's total overhead absorbed?

Accepted Answer

A)  $1,175,000
B)  $1,200,000
C)  $1,187,500
D)  $1,250,000
E)  None of the above

Question 14

Karpoff Kremes (KK) planned to sell 40,000 Kings at $20 each and 20,000 Kweens at $15 each. Actual sales of the former were 45,000 and 25,000 of the latter, at $19 and $16 respectively. Which is true of KK?

Accepted Answer

A)  The price variance is $20,000 fav
B)  The quantity variance is $175,000 unfav
C)  The price variance is $20,000 unfav
D)  The quantity variance is $20,000 unfav
E)  None of the above

Question 15

Wendy Wall (WW) makes wall units. For the year, the following details have been budgeted. Output, 10,000 units; factory overheads $1,250,000, of which 60% is variable. Each wall unit should take 2.5 hours of direct labor to produce. WW produced 9,500 units with 24,000 DLH used and $1,175,000 actual overhead was incurred. Overhead is allocated based on direct labor hours (DLH). What is the correct overhead absorption rate (to nearest cent)?

Accepted Answer

A)  $52.63
B)  $50.00
C)  $49.47
D)  $47.00
E)  None of the above

Question 16

Wendy Wall (WW) makes wall units. For the year, the following details have been budgeted. Output, 10,000 units; factory overheads $1,250,000, of which 60% is variable. Each wall unit should take 2.5 hours of direct labor to produce. WW produced 9,500 units with 24,000 DLH used and $1,175,000 actual overhead was incurred. Overhead is allocated based on direct labor hours (DLH). What is true of Wendy's overhead variances?

Accepted Answer

A)  Overhead spending variance is $45,000 fav
B)  Overhead efficiency variance is $7,500 fav
C)  Overhead volume variance is $25,000 fav
D)  Overhead spending variance is $37,500 fav
E)  None of the above

Exam 13: Overhead and Marketing Variances

Which of these is true?

Karpoff Kremes (KK) planned to sell 40,000 Kings at $20 each and 20,000 Kweens at $15 each. Actual sales of the former were 45,000 and 25,000 of the latter, at $19 and $16 respectively. Which is true of KK's mix variance?

Karpoff Kremes (KK) planned to sell 40,000 Kings at $20 each and 20,000 Kweens at $15 each. Actual sales of the former were 45,000 and 25,000 of the latter, at $19 and $16 respectively. Which is true of KK's sales variance?

Which is true of BB's sales quantity variances?

Which of these is true?

Boris Bangles planned to sell 280,000 banjos at $400 each, but actually sold 250,000 at $425 each. Which is true of BB's sales price variances?

The overhead volume variance:

Karpoff Kremes (KK) planned to sell 40,000 Kings at $20 each and 20,000 Kweens at $15 each. Actual sales of the former were 45,000 and 25,000 of the latter, at $19 and $16 respectively. Which is true of KK?