Exam 2 review

1
Exam 2 review

• This review does not cover every thing, use it
  with your books, notes, handouts, and quizzes.

2
Chapter 5

• You need to know
• The traditional costing system (single indirect
  cost pool system).
• OH Allocation rate ?/?.
• What causes over costing and under costing of
  products when using the traditional costing
  system.
• The main difference between ABC and the
  traditional costing system.

3
Chapter 5

• You need to know
• How ABC system refines a costing system.
• Cost Hierarchies.
• Examples on each level of the cost hierarchies.
• What the appropriate cost driver (allocation
  base) of the different activities are (e.g., for
  the machinery department OH cost, the appropriate
  cost driver is machine hours).

4
Chapter 5

• You need to know
• The advantages of ABC over the traditional
  costing system.
• What is activity cost management?
• When ABC and department costing system will be
  the same.
• What the benefits of implementing ABC are.
• What the limitation of ABC are.

5
Chapter 5

• King Corporation has two departments, Small and
  Large. Central costs could be allocated to the
  two departments in various ways.
• Small Department Large Department
• Square footage 6,000 18,000
• Number of employees 1,120 480
• Sales 400,000 2,000,000

6
Chapter 5

• If advertising expense of 300,000 is allocated
  on the basis of sales, the amount allocated to
  the Small Department would be?
• If total advertising expense of 300,000 is
  allocated on the basis of sales, the amount
  allocated to the Large Department would be?
• If total payroll processing costs of 96,000 are
  allocated on the basis of number of employees,
  the amount allocated to the Small Department
  would be?
• If total payroll processing costs of 60,000 are
  allocated on the basis of number of employees,
  the amount allocated to the Large Department
  would be?
• If total rent expense of 120,000 is allocated on
  the basis of square footage, the amount allocated
  to the Small Department would be?

7
Chapter 5

• Answers
• 50,000
• 250,000
• 67,200
• 18,000
• 30,000

8
Chapter 5

• Tiger Pride produces two product lines T-shirts
  and Sweatshirts. Product profitability is
  analyzed as follows
• T-SHIRTS SWEATSHIRTS
• Production and sales volume 60,000 units
  35,000 units
• Selling price 16.00 29.00
• Direct material 2.00 5.00
• Direct labor 4.50 7.20
• Manufacturing overhead 2.00 3.00
• Gross profit 7.50 13.80
• Selling and administrative 4.00 7.00
• Operating profit 3.50 6.80

9
Chapter 5

• Tiger Prides managers have decided to revise
  their current assignment of overhead costs to
  reflect the following ABC cost information
• Activity Activity cost Activity-cost driver
• Supervision 100,920 Direct labor hours (DLH)
• Inspection 124,000 Inspections

10
Chapter 5

• Activities demanded
• T-SHIRTS SWEATSHIRTS
• 0.75 DLH/unit 1.2 DLH/unit
• 45,000 DLHs 42,000 DLHs
• 60,000 inspections 17,500 inspections

11
Chapter 5

• Under the revised ABC system, the activity-cost
  driver rate for the supervision activity is

12
Chapter 5

• 100,920/87,000 1.16

13
Chapter 5

• Ernsting Printers has contracts to complete
  weekly supplements required by forty-six
  customers. For the year 20x5, manufacturing
  overhead cost estimates total 420,000 for an
  annual production capacity of 12 million pages.
• For 20x5 Ernsting Printers has decided to
  evaluate the use of additional cost pools. After
  analyzing manufacturing overhead costs, it was
  determined that number of design changes, setups,
  and inspections are the primary manufacturing
  overhead cost drivers. The following information
  was gathered during the analysis

14
Chapter 5

• Cost pool Manufacturing overhead costs Activity
  level
• Design changes 60,000 300 design changes
• Setups 320,000 5,000 setups
• Inspections 40,000 8,000 inspections
• Total manufacturing
• overhead costs 420,000

15
Chapter 5

• During 20x5, two customers, Wealth Managers and
  Health Systems, are expected to use the following
  printing services
• Activity Wealth Managers Health Systems
• Pages 60,000 76,000
• Design changes 10 0
• Setups 20 10
• Inspections 30 38
• What is the cost driver rate if manufacturing
  overhead costs are considered one large cost pool
  and are assigned based on 12 million pages of
  production capacity?
• 0.35
• Using the three cost pools to allocate overhead
  costs, what is the total manufacturing overhead
  cost estimate for Wealth Managers during 20x5?
• 3,430 (10 x 200 per change 2,000) (20 x
  64 per setup 1,280) (30 x 5 per inspection
  150)

16
Chapter 6

• You need to know
• Mater budget.
• Budgeting cycle.
• Operating budget and financial budget.
• Advantages of budgets.
• Rolling budgets.
• Budgeted income statement is part of -----
  budget, while budgeted balance sheet is part of
  ----- budget.

17
Chapter 6

• You need to know
• Kaizen.
• Kaizen budgeting.
• What is wrong with comparing a companys
  performance against actual results of last year.
• That budgeted financial statements are some times
  called Pro forma statements.

18
Chapter 6

• You need to know
• Operating budget includes --------
• Financial budget includes----------

19
Chapter 6

• DeArmond Corporation has budgeted sales of 18,000
  units, target ending finished goods inventory of
  3,000 units, and beginning finished goods
  inventory of 900 units. How many units should be
  produced next year?
• 18,000 3,000 - 900 20,100 units

20
Chapter 6

• What are the 20x4 budgeted costs for direct
  materials, direct manufacturing labor, and
  manufacturing overhead, respectively?
• 20,500 x 2.00 41,000 20,500 x 4.00
  82,000 20,500 x 0.80 16,400

21
Chapter 6

• The following information pertains to the January
  operating budget for Casey Corporation, a
  retailer
• Budgeted sales are 200,000 for January
• Collections of sales are 50 in the month of sale
  and 50 the next month
• Cost of goods sold averages 70 of sales
• Merchandise purchases total 150,000 in January
• Marketing costs are 3,000 each month
• Distribution costs are 5,000 each month
• Administrative costs are 10,000 each month

22
Chapter 6

• For January, budgeted gross margin is?
• For January, the amount budgeted for the
  nonmanufacturing costs budget is?
• For January, budgeted net income is ?

23
Chapter 6

• For January, budgeted gross margin is?
• 200,000 - 140,000 60,000
• For January, the amount budgeted for the
  nonmanufacturing costs budget is?
• 3,000 5,000 10,000 18,000
• For January, budgeted net income is ?
• 200,000 - 140,000 - 3,000 - 5,000 - 10,000
  42,000

24
Chapter 6

• Fiscal Company has the following sales budget for
  the last six months of 20x3
• July 100,000 October 90,000
• August 80,000 November 100,000
• September 110,000 December 94,000
• Historically, the cash collection of sales has
  been as follows
• 65 of sales collected in the month of sale,
• 25 of sales collected in the month following
  the sale,
• 8 of sales collected in the second month
  following the sale, and
• 2 of sales are uncollectible.

25
Chapter 6

• Cash collections for September are?
• What is the ending balance of accounts receivable
  for September, assuming uncollectible balances
  are written off during the second month following
  the sale?
• Cash collections for October are

26
Chapter 6

• Cash collections for September are?
• (110,000 x 0.65) (80,000 x 0.25) (100,000
  x 0.08) 99,500
• What is the ending balance of accounts receivable
  for September, assuming uncollectible balances
  are written off during the second month following
  the sale?
• (110,000 x 0.35) (80,000 x 0.10) 46,500
• Cash collections for October are
• (90,000 x 0.65) (110,000 x 0.25) (80,000 x
  0.08) 92,400

27
Chapter 7

• You need to know
• The static budget.
• The flexible budget.
• What happens at level 0, level 1, level 2
  variance analysis.

28
Chapter 7

• These equation will be provided to you with the
  exam
• Material price variance AQ ( AP SP)
• Material efficiency variance SP (AQ SQ)
• Labor price variance AQ ( AP SP)
• Labor efficiency variance SP (AQ SQ)

29
Chapter 7

• These equation will be provided to you with the
  exam
• Variable OH variances
• VOH Efficiency variance Budgeted cost per unit
  of cost driver X (actual cost driver Budgeted
  cost driver).
• VOH spending variances actual quantity of cost
  driver X (actual cost per cost driver Budgeted
  cost per cost driver)
• Fixed OH variances
• Fixed OH Spending variance Actual costs
  budgeted costs
• Production volume variance Budgeted fixed OH
  Applied OH

30
Chapter 7

• You need to know the following equations THEY ARE
  NOT PROVIDED ON THE EXAM
• Flexible budget variance actual results
  flexible budget
• Sales volume variance flexible budget- static
  budget
• Static budget variance static budget Actual
  results

31
Chapter 7

• You need to know
• Standards A standard is a predetermined cost,
  price or quantity, which serves as a benchmark
  against which to compare the actual numbers.

32
Chapter 7

• You need to know
• The journal entry to record materials used?
• Example
• Work in Process Control 650,000
• Direct-Materials Efficiency Variance 40,625
• Materials Control 690,625
• (unfavorable variance)

33
Chapter 7

• You need to know
• What is the journal entry to record materials
  used?
• Example
• Materials Control 690,625
• Direct-Materials Price Variance 12,750
• Accounts Payable Control 677,875
• (favorable variance)

34
Chapter 7

• You need to know
• Benchmarking

35
Chapter 7

• Regier Company had planned for operating income
  of 10 million in the master budget but actually
  achieved operating income of only 7 million.
• a. The static-budget variance for operating
  income is 3 million favorable.
• b. The static-budget variance for operating
  income is 3 million unfavorable.
• c. The flexible-budget variance for operating
  income is 3 million favorable.
• d. The flexible-budget variance for operating
  income is 3 million unfavorable.

36
Chapter 7

• Regier Company had planned for operating income
  of 10 million in the master budget but actually
  achieved operating income of only 7 million.
• a. The static-budget variance for operating
  income is 3 million favorable.
• b. The static-budget variance for operating
  income is 3 million unfavorable.
• c. The flexible-budget variance for operating
  income is 3 million favorable.
• d. The flexible-budget variance for operating
  income is 3 million unfavorable.
• Answer b

37
Chapter 7

• JJ White planned to use 82 of material per unit
  but actually used 80 of material per unit, and
  planned to make 1,200 units but actually made
  1,000 units.
• The flexible-budget amount is
• The flexible-budget variance is
• The sales-volume variance is

38
Chapter 7

• JJ White planned to use 82 of material per unit
  but actually used 80 of material per unit, and
  planned to make 1,200 units but actually made
  1,000 units.
• The flexible-budget amount is
• 1,000 units x 82 82,000
• The flexible-budget variance is
• (80 - 82) x 1,000 2,000 F
• The sales-volume variance is
• (1,000 1,200) x 82 16,400 U

39
Chapter 7

• Peters Company manufacturers tires. Some of the
  company's data was misplaced. Use the following
  information to replace the lost data

40
Chapter 7
41
Chapter 7

• What amounts are reported for revenues in the
  flexible-budget (A) and the static-budget (B),
  respectively?
• 82,160 84,960

42
Chapter 7

• What are the actual variable costs (C)
• 32,120

43
Chapter 7

• What is the total flexible-budget variance (D)
• 3,320 favorable

44
Chapter 7

• Madzingas Draperies manufactures curtains. A
  certain window requires the following
• Direct materials standard 10 square yards at 5
  per yard
• Direct manufacturing labor standard 5 hours at
  10
• During the second quarter, the company made 1,500
  curtains and used 14,000 square yards of fabric
  costing 68,600. Direct labor totaled 7,600
  hours for 79,800.
• Required
• a. Compute the direct materials price and
  efficiency variances for the quarter.
• b. Compute the direct manufacturing labor price
  and efficiency variances for the quarter.

45
Chapter 7

• a. Direct materials variances
• Actual unit cost 68,600/14,000 square
  yard
• 4.90 per square yard
• Price variance 14,000 x (5.00 -
  4.90)
• 1,400 favorable
• Efficiency variance 5.00 x (14,000 -
  (1,500 x 10))
• 5,000 favorable
• b. Direct manufacturing labor variances
• Actual labor rate 79,800/7,600
• 10.50 per hour
• Price variance 7,600 x (10.50 - 10.00)
• 3,800 unfavorable
• Efficiency variance 10.00 x (7,600 -
  7,500)
• 1,000 unfavorable

46
Chapter 8

• Variable OH variances
• VOH Efficiency variance Budgeted cost per unit
  of cost driver X (actual cost driver Budgeted
  cost driver).
• Variable OH spending variances actual quantity
  of cost driver X (actual cost per cost driver
  Budgeted cost per cost driver)
• Fixed OH variances
• Fixed OH Spending variance
• Actual costs budgeted costs
• Production volume variance Budgeted fixed OH
  Applied OH

47
Chapter 8

• You need to know
• OH Variances Interpretation
• Variable OH variances
• VOH Spending variance results from paying
  more or less for an OH item.
• VOH Efficiency variances a function of the
  selected cost driver, it does not reflect OH
  control.
• Fixed OH variances
• Fixed OH Spending variance results from paying
  more or less than expected for OH item.
• Production volume variance results from the
  inability to operate at the same level planned
  for the period. It has no significance for
  control purpose.

48
Chapter 8

• The variable overhead flexible-budget variance
• the actual variable overhead costs - the
  flexible
• Budget variable overhead costs.

49
Chapter 8

• White Corporation manufactures football jerseys
  and uses budgeted machine-hours to allocate
  variable manufacturing overhead. The following
  information pertains to the company's
  manufacturing overhead data.
• Budgeted output units 20,000 units
• Budgeted machine-hours 30,000 hours
• Budgeted variable manufacturing overhead
• costs for 20,000 units 360,000
• Actual output units produced 18,000 units
• Actual machine-hours used 28,000 hours
• Actual variable manufacturing overhead
  costs 342,000

50
Chapter 8

• What is the budgeted variable overhead cost rate
  per output unit?
• What is the flexible-budget amount for variable
  manufacturing overhead?
• What is the flexible-budget variance for variable
  manufacturing overhead?

51
Chapter 8

• What is the budgeted variable overhead cost rate
  per output unit?
• 360,000/20,000 18.00
• What is the flexible-budget amount for variable
  manufacturing overhead?
• 18,000 x (360,000/20,000) 324,000
• What is the flexible-budget variance for variable
  manufacturing overhead?
• 342,000 18,000 x (360,000/20,000) 18,000
  unfavorable

52
Chapter 8

• When machine-hours are used as an overhead
  cost-allocation base, the MOST likely cause of a
  favorable variable overhead spending variance is
• a. excessive machine breakdowns.
• b. the production scheduler efficiently
  scheduled jobs.
• c. a decline in the cost of energy.
• d. strengthened demand for the product.

53
Chapter 8

• When machine-hours are used as an overhead
  cost-allocation base, the MOST likely cause of a
  favorable variable overhead spending variance is
• a. excessive machine breakdowns.
• b. the production scheduler efficiently
  scheduled jobs.
• c. a decline in the cost of energy.
• d. strengthened demand for the product.
• c

54

• If you have questions, please email me.
• Keep up the good work.