Jay Company uses a standard cost system. During the past year, the variances from
standard were significant. Jay is considering whether to allocate the variances among the
appropriate inventory accounts and cost of goods sold or to allocate all of the variances
directly to cost of goods sold. Under which one of the following situations would reported net
income be largest?
Answer (A) is correct.
When favorable variances are written off directly to cost of goods sold,
cost of goods sold decreases, which in turn increases net income in full
by the entire variance amount.
Which one of the following is the least likely reason that variances are computed within a
performance monitoring system?
Answer (C) is correct.
Computing variances does not verify the accuracy of standards. The
standards may be in fact correct, while the actual number could include
unusual events that require further investigation.
Which one of the following statements about management by exception is least likely to be
Answer (D) is correct.
Positive variances still need to be investigated. If the cause of the
positive variance can be found, it can be applied to other areas to decrease the number of negative variances.
A standard cost system is often used in variance analysis because standard costs
Answer (B) is correct. Standard costs exclude past inefficiencies to focus on current performance and potential improvement, taking into account expected future changes.
Simson Company’s master budget shows straight-line depreciation on factory equipment of $258,000. The master budget was prepared at an annual production volume of 103,200 units of product. This production volume is expected to occur uniformly throughout the year. During September, Simson produced 8,170 units of product, and the accounts reflected actual depreciation on factory machinery of $20,500. Simson controls manufacturing costs with a flexible budget. The flexible budget amount for depreciation on factory machinery for September would be
Answer (D) is correct. Since depreciation is a fixed cost, that cost will be the same each month regardless of production. Therefore, the budget for September would show depreciation of $21,500 ($258,000 annual depreciation × 1/12).
Barnes Corporation expected to sell 150,000 board games during the month of November, and the company’s master budget contained the following data related to the sale and production of these games: Revenue $2,400,000 Cost of goods sold: Direct materials 675,000 Direct labor 300,000 Variable overhead 450,000 Contribution margin $ 975,000
Fixed overhead 250,000 Fixed selling and administration 500,000 Operating income $ 225,000 Actual sales during November were 180,000 games. Using a flexible budget, the company expects the operating income for the month of November to be
Answer (C) is correct. Revenue of $2,400,000 reflects a uni The contribution margin is $975,000, or $6.50 per game ($975,000 ÷ 150,000 games). Increasing sales will result in an increased contribution margin of $195,000 (30,000 games × $6.50). Since fixed costs are, by their nature, unchanging across the relevant range, net income will increase to $420,000 ($225,000 originally reported + $195,000).
A static budget
Answer (C) is correct. A static budget plans for only one level of activity and does not provide for changed levels of activity.
When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on the
Answer (C) is correct. If a report is to be used for performance evaluation, the planned cost column should be based on the actual level of activity for the period. The ability to adjust amounts for varying activity levels is the primary advantage of flexible budgeting.
Selo Imports uses flexible budgeting for the control of costs. The company’s annual master budget includes $324,000 for fixed production supervisory salaries at a volume of 180,000 units. Supervisory salaries are expected to be incurred uniformly throughout the year. During the month of September, 15,750 units were produced, and production supervisory salaries incurred were $28,000. A performance report for September would reflect a budget variance of
Answer (C) is correct. The budget (spending) variance for fixed O/H equals actual minus budgeted fixed O/H. The $324,000 cost of supervisory salaries is fixed and is incurred at $27,000 per month. Thus, the variance is the difference between actual costs of $28,000 and the bud of $27,000, or $1,000 unfavorable.
Red Rock Company uses flexible budgeting for cost control. Red Rock produced 10,800 units of product during October, incurring indirect materials costs of $13,000. Its master budget for the year reflected indirect materials costs of $180,000 at a production volume of 144,000 units. A flexible budget for October production would reflect indirect materials costs of
Answer (B) is correct. The cost of indirect materials for 144,000 units was expected to be $180,000. Consequently, the budgeted unit cost of indirect materials is $1.25 ($180,000 ÷ 144,000). Multiplying the $1.25 unit cost times the 10,800 units actually produced results in an expected total indirect materials cost of $13,500.