Test bank managerial accounting by kieso weygandt 5e ch11

CHAPTER 11 STANDARD COSTS AND BALANCED SCORECARD SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item SO BT Item SO BT 1 1 3 K K C K C C K C 10 11 12 13 14 15 16 3 3 3 3 C K C K K C K K 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 1 1 1 1 2 2 2 3 3 3 3 3 3 3 K K C C C K K K K K K C C C C C K K K C K C C K C C K C K K 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 3 3 3 3 3 4 4 4 4 4 4 4 4 4 Item SO BT Item SO BT 9 10 10 10 C C C K K C K K 4 4 4 4 5 6 6 7 7 7 8 8 9 K AP K K AP AP AP AP C K AP AP C AP K K C C K K K AP AP K K K K K AP C Item SO BT 33 34 35 36 37 a 38 10 K K C K K K True-False Statements 17 18 19 20 21 22 23 24 4 4 C K C K C C K C a 25 26 a 27 a 28 a 29 a 30 31 32 a Multiple Choice Questions K K K AP AP AP AP K K K AP K AP AP AP AP AP AP K K AP AP AP AP C C C C C C 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C C K AP AP C AP AP AP K K C K 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 a 157 a 158 a 159 160 a 161 a 162 a 163 a 164 a 165 a 166 a 167 a 168 a 169 a 170 a 171 a 172 a 173 a 174 a 175 a 176 a 177 a 178 a 179 a 180 181 182 183 184 185 186 187 a 188 a 9 9 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 3 4 K AP AP AP AP C K AP AP AP AP C C K K K K C C AP AP K K K K K K C K K Test Bank for ISV Managerial Accounting, Fourth Edition 11 - SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY (cont.) Brief Exercises 189 190 AP AP 191 192 4 AP AP 193 a 194 AP AP a 195 a 196 10 a AP AP 197 198 10 10 AP AP 219 220 a 221 9,10 10 10 AP AP AP 230 231 10 K K a Exercises 199 200 201 202 203 4 4 AP AP AP AP AP 222 223 K K 204 AP 205 AP 206 4,5 AN a 207 4,5,10 AN a 208 4,5,10 AP a 209 4,5,10 210 4,6,9 211 4,9 212 4,9 213 4,9 AP AP AP AP AP a 214 5,10 215 5,10 216 5,10 217 a 218 AP AP AP AP AP a Completion Statements sg st a 224 225 4 K K 226 227 K K 228 229 5 K K a This question also appears in the Study Guide This question also appears in a self-test at the student companion website This question covers a topic in an Appendix to the chapter SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item TF TF TF 31 39 TF TF MC 40 41 42 32 TF TF 48 49 MC MC 50 51 10 11 12 TF TF TF TF TF TF TF 13 14 15 16 17 33 55 TF TF TF TF TF TF MC 56 57 58 59 60 61 62 18 19 20 21 22 34 35 88 89 90 91 92 TF TF TF TF TF TF TF MC MC MC MC MC 93 94 95 96 97 98 99 100 101 102 103 104 MC MC MC MC MC MC MC MC MC MC MC MC 105 106 107 108 109 110 111 112 113 114 115 116 Type Item Type Item Study Objective TF 43 MC 46 MC 44 MC 47 MC 45 MC 189 Study Objective MC 52 MC 54 MC 53 MC 181 Study Objective MC 63 MC 70 MC 64 MC 71 MC 65 MC 72 MC 66 MC 73 MC 67 MC 74 MC 68 MC 75 MC 69 MC 76 Study Objective MC 117 MC 129 MC 118 MC 130 MC 119 MC 131 MC 120 MC 132 MC 121 MC 133 MC 122 MC 134 MC 123 MC 135 MC 124 MC 136 MC 125 MC 137 MC 126 MC 184 MC 127 MC 185 MC 128 MC 186 Type Item Type Item Type MC MC BE 222 C MC MC MC MC MC MC MC 77 78 79 182 183 190 199 MC MC MC MC MC BE Ex 223 C MC MC MC MC MC MC MC MC MC MC MC MC 191 192 200 201 202 203 204 205 206 207 208 209 BE BE Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex 210 211 212 213 224 225 226 Ex Ex Ex Ex C C C MC MC Standard Costs and Balanced Scorecard 23 138 139 TF MC MC 140 193 206 MC BE Ex 207 208 209 24 36 TF TF 141 142 MC MC 143 144 37 146 TF MC 147 148 MC MC 149 150 152 MC 153 MC 154 25 26 27 TF TF TF 157 158 159 MC MC MC 160 161 162 28 29 30 38 164 TF TF TF TF MC 165 166 167 168 169 MC MC MC MC MC 170 171 172 173 174 Note: TF = True-False MC = Multiple Choice Study Objective 214 Ex 227 215 Ex 228 216 Ex 229 Study Objective MC 145 MC 210 MC 187 MC 230 Study Objective MC 151 MC MC 217 Ex Study Objective MC 155 MC 156 a Study Objective MC 163 MC 195 MC 188 MC 210 MC 194 BE 211 Study Objective a10 MC 175 MC 180 MC 176 MC 196 MC 177 MC 197 MC 178 MC 198 MC 179 MC 207 Ex Ex Ex 11 - C C C Ex C MC BE Ex Ex 212 213 218 Ex Ex Ex 219 Ex MC BE BE BE Ex 208 209 214 215 216 Ex Ex Ex Ex Ex 219 220 221 231 Ex Ex Ex C BE = Brief Exercise Ex = Exercise C = Completion The chapter also contains one set of ten Matching questions and four Short-Answer Essay questions CHAPTER STUDY OBJECTIVES Distinguish between a standard and a budget Both standards and budgets are predetermined costs The primary difference is that a standard is a unit amount, whereas a budget is a total amount A standard may be regarded as the budgeted cost per unit of product Identify the advantages of standard costs Standard costs offer a number of advantages They (a) facilitate management planning, (b) promote greater economy, (c) are useful in setting selling prices, (d) contribute to management control, (e) permit "management by exception," and (f) simplify the costing of inventories and reduce clerical costs Describe how companies set standards The direct materials price standard should be based on the delivered cost of raw materials plus an allowance for receiving and handling The direct materials quantity standard should establish the required quantity plus an allowance for waste and spoilage The direct labor price standard should be based on current wage rates and anticipated adjustments such as COLAs It also generally includes payroll taxes and fringe benefits Direct labor quantity standards should be based on required production time plus an allowance for rest periods, cleanup, machine setup, and machine downtime 11 - Test Bank for ISV Managerial Accounting, Fourth Edition For manufacturing overhead, a standard predetermined overhead rate is used It is based on an expected standard activity index such as standard direct labor hours or standard machine hours State the formulas for determining direct materials and direct labor variances The formulas for the direct materials variances are: (Actual quantity × Actual price) – (Standard quantity × Standard price) = Total materials variance (Actual quantity × Actual price) – (Actual quantity × Standard price) = Materials price variance (Actual quantity × Standard price) – (Standard quantity × Standard price) = Materials quantity variance The formulas for the direct labor variances are: (Actual hours × Actual rate) – (Standard hours × Standard rate) = Total labor variance (Actual hours × Actual rate) – (Actual hours × Standard rate) = Labor price variance (Actual hours × Standard rate) – (Standard hours × Standard rate) = Labor quantity variance State the formula for determining the total manufacturing overhead variance The formula for the total manufacturing overhead variance is: Actual overhead – Overhead applied = Total overhead variance Discuss the reporting of variances Variances are reported to management in variance reports The reports facilitate management by exception by highlighting significant differences Prepare an income statement for management under a standard costing system Under a standard costing system, an income statement prepared for management will report cost of goods sold at standard cost and then disclose each variance separately, Describe the balanced scorecard approach to performance evaluation The balanced scorecard incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company’s strategic goals It employs four perspectives: financial, customer, internal processes, and learning and growth Objectives are set within each of these perspectives that link to objectives within the other perspectives a Identify the features of a standard cost accounting system In a standard cost accounting system, companies journalize and post standard costs, and they maintain separate variance accounts in the ledger a 10 Compute overhead controllable and volume variance The total overhead variance is generally analyzed through a price variance and a quantity variance The name usually given to the price variance is the overhead controllable variance The quantity variance is referred to as the overhead volume variance Standard Costs and Balanced Scorecard 11 - TRUE-FALSE STATEMENTS Inventories cannot be valued at standard cost in financial statements Standard cost is the industry average cost for a particular item A standard is a unit amount, whereas a budget is a total amount Standard costs may be incorporated into the accounts in the general ledger An advantage of standard costs is that they simplify costing of inventories and reduce clerical costs Setting standard costs is relatively simple because it is done entirely by accountants Normal standards should be rigorous but attainable Actual costs that vary from standard costs always indicate inefficiencies Ideal standards will generally result in favorable variances for the company 10 Normal standards incorporate normal contingencies of production into the standards 11 Once set, normal standards should not be changed during the year 12 In developing a standard cost for direct materials, a price factor and a quantity factor must be considered 13 A direct labor price standard is frequently called the direct labor efficiency standard 14 The standard predetermined overhead rate must be based on direct labor hours as the standard activity index 15 Standard cost cards are the subsidiary ledger for the Work in Process account in a standard cost system 16 A variance is the difference between actual costs and standard costs 17 If actual costs are less than standard costs, the variance is favorable 18 A materials quantity variance is calculated as the difference between the standard direct materials price and the actual direct materials price multiplied by the actual quantity of direct materials used 19 An unfavorable labor quantity variance indicates that the actual number of direct labor hours worked was greater than the number of direct labor hours that should have been worked for the output attained 20 Standard cost + price variance + quantity variance = Budgeted cost 21 There could be instances where the production department is responsible for a direct materials price variance 11 - Test Bank for ISV Managerial Accounting, Fourth Edition 22 The starting point for determining the causes of an unfavorable materials price variance is the purchasing department 23 An overhead variance consists of a controllable variance and a volume variance 24 Variance analysis facilitates the principle of "management by exception." a 25 A credit to a Materials Quantity Variance account indicates that the actual quantity of direct materials used was greater than the standard quantity of direct materials allowed a 26 A standard cost system may be used with a job order cost system but not with a process cost system a 27 Companies assign overhead to jobs by debiting Work in Process Inventory for actual hours multiplied by the standard overhead rate a 28 The overhead controllable variance relates primarily to fixed overhead costs a 29 The overhead volume variance relates only to fixed overhead costs a 30 If production exceeds normal capacity, the overhead volume variance will be favorable Additional True-False Questions a 31 In concept, standards and budgets are essentially the same 32 Standards may be useful in setting selling prices for finished goods 33 The materials price standard is based on the purchasing department's best estimate of the cost of raw materials 34 The materials price variance is normally caused by the production department 35 The use of an inexperienced worker instead of an experienced employee can result in a favorable labor price variance but probably an unfavorable quantity variance 36 In using variance reports, top management normally looks carefully at every variance 37 The use of standard costs in inventory costing is prohibited in financial statements 38 The overhead controllable variance is the difference between the actual overhead costs incurred and the budgeted costs for the standard hours allowed Standard Costs and Balanced Scorecard 11 - Answers to True-False Statements Item Ans F F T T T F Item 10 11 12 Ans T F F T F T Item 13 14 15 16 17 18 Ans F F F T T F Item 19 20 21 22 23 24 Ans T F T T T T Item a 25 26 a 27 a 28 a 29 a 30 a Ans F F F F T T Item 31 32 33 34 35 36 Ans T T T F T F Item 37 38 a Ans F T MULTIPLE CHOICE QUESTIONS 39 What is a standard cost? a The total number of units times the budgeted amount expected b Any amount that appears on a budget c The total amount that appears on the budget for product costs d The amount management thinks should be incurred to produce a good or service 40 A standard cost is a a cost which is paid for a group of similar products b the average cost in an industry c a predetermined cost d the historical cost of producing a product last year 41 The difference between a budget and a standard is that a a budget expresses what costs were, while a standard expresses what costs should be b a budget expresses management's plans, while a standard reflects what actually happened c a budget expresses a total amount, while a standard expresses a unit amount d standards are excluded from the cost accounting system, whereas budgets are generally incorporated into the cost accounting system 42 Standard costs may be used by a universities b governmental agencies c charitable organizations d all of these 43 Which of the following statements is false? a A standard cost is more accurate than a budgeted cost b A standard is a unit amount c In concept, standards and budgets are essentially the same d The standard cost of a product is equivalent to the budgeted cost per unit of product 44 Budget data are not journalized in cost accounting systems with the exception of a the application of manufacturing overhead b direct labor budgets c direct materials budgets d cash budget data 11 - Test Bank for ISV Managerial Accounting, Fourth Edition 45 It is possible that a company's financial statements may report inventories at a budgeted costs b standard costs c both budgeted and standard costs d none of these 46 A standard differs from a budget because a standard a is a predetermined cost b contributes to management planning and control c is a unit amount d none of the above; a standard does not differ from a budget 47 Donkey Company expects direct materials cost of $6 per unit for 100,000 units (a total of $600,000 of direct materials costs) Donkey’s standard direct materials cost and budgeted direct materials cost is a b c d Standard $6 per unit $6 per unit $600,000 per year $600,000 per year Budgeted $600,000 per year $6 per unit $6 per unit $600,000 per year 48 Using standard costs a makes employees less “cost-conscious.” b provides a basis for evaluating cost control c makes management by exception more difficult d increases clerical costs 49 Using standard costs a can make management planning more difficult b promotes greater economy c does not help in setting prices d weakens management control 50 If standard costs are incorporated into the accounting system, a it may simplify the costing of inventories and reduce clerical costs b it can eliminate the need for the budgeting process c the accounting system will produce information that is less relevant than the historical cost accounting system d approval of the stockholders is required 51 Standard costs a may show past cost experience b help establish expected future costs c are the budgeted cost per unit in the present d all of these 52 Which of the following statements about standard costs is false? a Properly set standards should promote efficiency b Standard costs facilitate management planning c Standards should not be used in "management by exception." d Standard costs can simplify the costing of inventories Standard Costs and Balanced Scorecard 11 - 53 Which of the following is not considered an advantage of using standard costs? a Standard costs can reduce clerical costs b Standard costs can be useful in setting prices for finished goods c Standard costs can be used as a means of finding fault with performance d Standard costs can make employees "cost-conscious." 54 If a company is concerned with the potential negative effects of establishing standards, it should a set loose standards that are easy to fulfill b offer wage incentives to those meeting standards c not employ any standards d set tight standards in order to motivate people 55 The two levels that standards may be set at are a normal and fully efficient b normal and ideal c ideal and less efficient d fully efficient and fully effective 56 The most rigorous of all standards is the a normal standard b realistic standard c ideal standard d conceivable standard 57 Most companies that use standards set them at a the normal level b a conceivable level c the ideal level d last year's level 58 A managerial accountant does not participate in the standard setting process provides knowledge of cost behaviors in the standard setting process provides input of historical costs to the standard setting process a b c d and 59 The cost of freight-in a is to be included in the standard cost of direct materials b is considered a selling expense c should have a separate standard apart from direct materials d should not be included in a standard cost system 60 The direct materials quantity standard would not be expressed in a pounds b barrels c dollars d board feet 11 - 10 Test Bank for ISV Managerial Accounting, Fourth Edition 61 The direct materials quantity standard should a exclude unavoidable waste b exclude quality considerations c allow for normal spoilage d always be expressed as an ideal standard 62 The direct labor quantity standard is sometimes called the direct labor a volume standard b effectiveness standard c efficiency standard d quality standard 63 A manufacturing company would include setup and downtime in their direct a materials price standard b materials quantity standard c labor price standard d labor quantity standard 64 Allowance for spoilage is part of the direct a materials price standard b materials quantity standard c labor price standard d labor quantity standard 65 The total standard cost to produce one unit of product is shown a at the bottom of the income statement b at the bottom of the balance sheet c on the standard cost card d in the Work in Process Inventory account 66 An unfavorable materials quantity variance would occur if a more materials were purchased than were used b actual pounds of materials used were less than the standard pounds allowed c actual labor hours used were greater than the standard labor hours allowed d actual pounds of materials used were greater than the standard pounds allowed 67 A standard which represents an efficient level of performance that is attainable under expected operating conditions is called a(n) a ideal standard b loose standard c tight standard d normal standard 68 Ideal standards a are rigorous but attainable b are the standards generally used in a master budget c reflect optimal performance under perfect operating conditions d will always motivate employees to achieve the maximum output 11 - 44 Test Bank for ISV Managerial Accounting, Fourth Edition Solution 210 a (cont.) (b) Raw Materials Inventory Materials Price Variance Accounts Payable (To record purchase of materials) 656,000 32,800 Work in Process Inventory Materials Quantity Variance Raw Materials Inventory (To record issuance of direct materials) 608,000 Factory Labor Labor Price Variance Wages Payable (To record direct labor costs) 391,000 Work in Process Inventory Labor Quantity Variance Factory Labor (To assign factory labor to jobs) 380,000 11,000 Manufacturing Overhead Accounts Payable/Cash etc (To record overhead incurred) 235,000 Work in Process Inventory Manufacturing Overhead (To assign overhead to jobs) 228,000 688,800 28,000 580,000 11,730 379,270 391,000 235,000 Finished Goods Inventory (76,000 × $16.00) 1,216,000 Work in Process Inventory (To record transfer of completed work to finished goods) 228,000 1,216,000 Ex 211 The standard cost of Product 245 manufactured by Starr Company includes pounds of direct materials at $5.00 per pound During September, 40,000 pounds of direct materials are purchased at a cost of $4.80 per pound, and all of the direct materials are used to produce 19,000 units of Product 245 Instructions (a) Compute the materials price and quantity variances a (b) Journalize the purchase of the materials and the issuance of the materials, assuming a standard cost system is used Standard Costs and Balanced Scorecard Solution 211 11 - 45 (15–20 min.) (a) Materials Price Variance: $192,000 – $200,000 = (40,000 × $4.80) (40,000 × $5.00) Materials Quantity Variance: $200,000 – $190,000 = (40,000 × $5.00) *(38,000 × $5.00) $8,000 F $10,000 U *19,000 × pounds = 38,000 a (b) Raw Materials Inventory Materials Price Variance Accounts Payable 200,000 Work in Process Inventory Materials Quantity Variance Raw Materials Inventory 190,000 10,000 8,000 192,000 200,000 Ex 212 Lankford Company's standard labor cost of producing one unit of product is hours at the rate of $14.00 per hour During February, 39,000 hours of labor are incurred at a cost of $13.80 per hour to produce 19,000 units of product Instructions (a) Compute the labor price and labor quantity variances a (b) Journalize the incurrence of the labor costs and the assignment of direct labor to production, assuming a standard cost system is used Solution 212 (15–20 min.) (a) Labor Price Variance: $538,200 – $546,000 = $7,800 F (39,000 × $13.80) (39,000 × $14.00) Labor Quantity Variance: $546,000 – $532,000 = $14,000 U (39,000 × $14.00) (38,000 × $14.00) a (b) Factory Labor Labor Price Variance Wages Payable 546,000 Work in Process Inventory Labor Quantity Variance Factory Labor 532,000 14,000 7,800 538,200 546,000 Test Bank for ISV Managerial Accounting, Fourth Edition 11 - 46 Ex 213 The following direct labor data pertain to the operations of Foster Manufacturing Company for the month of November: Standard labor rate Actual hours incurred and used $10.00 per hr 4,500 The standard cost card shows that 2.5 hours are required to complete one unit of product The actual labor rate incurred exceeded the standard rate by 10% Two thousand units were manufactured in November Instructions (a) Calculate the price, quantity, and total labor variances a (b) Journalize the entries to record the labor variances Solution 213 (15–20 min.) Actual Hours × Actual Rate 4,500 × $11.00 = $49,500 Actual Hours × Standard Rate 4,500 × $10.00 = $45,000 Standard Hours × Standard Rate 5,000 × $10.00 = $50,000 Price Variance Quantity Variance $4,500 U $5,000 F Total Labor Variance $500 F a (b) Factory Labor Labor Price Variance Wages Payable 45,000 4,500 Work in Process Inventory Labor Quantity Variance Factory Labor 50,000 49,500 5,000 45,000 Standard Costs and Balanced Scorecard a 11 - 47 Ex 214 Edmiston Industries provided the following information about its standard costing system for 2009: Standard Data Actual Data Labor hrs @ $21 per hr Produced 8,000 units Budgeted fixed overhead $100,000 Labor worked 15,000 hrs costing $300,000 Budgeted variable overhead $30 per unit Actual overhead $355,000 Budgeted production 10,000 units Edmiston applies fixed overhead at $10 per unit produced Instructions Determine the amounts of the overhead variances a Solution 214 (8 min.) Overhead controllable variance = Actual overhead - Overhead budgeted = $355,000 – [($100,000 + (8,000 × $30)] = $15,000 Unfavorable Overhead volume variance = (Normal hours – Standard hours) × Fixed overhead rate = [(10,000 × 2) – (8,000 × 2)] × $5/hr = $20,000 Unfavorable Total overhead variance = Actual overhead – Overhead applied = $15,000 U + $20,000 U = $35,000 Unfavorable Ex 215 Reagan Company planned to produce 20,000 units of product and work 100,000 direct labor hours in 2009 Manufacturing overhead at the 100,000 direct labor hours level of activity was estimated to be: Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing overhead $ 700,000 300,000 $1,000,000 At the end of 2009, 21,000 units of product were actually produced and 108,000 actual direct labor hours were worked Total actual overhead costs for 2009 were $1,025,000 Instructions (a) Compute the total overhead variance a (b) Compute the overhead controllable variance a (c) Compute the overhead volume variance Test Bank for ISV Managerial Accounting, Fourth Edition 11 - 48 Solution 215 (11–16 min.) (a) Actual overhead – $1,025,000 – Overhead applied $1,050,000 = Total overhead variance = $25,000 favorable Overhead applied = 21,000 units × hrs = 105,000 standard hours allowed 105,000 × $10 = $1,050,000 a (b) Actual overhead – Overhead budgeted = Overhead controllable variance $1,025,000 – $1,035,000 = $10,000 favorable Overhead budgeted at 105,000 actual direct labor hours allowed Variable overhead (105,000 × $7) $ 735,000 Fixed overhead 300,000 $1,035,000 a (c) (Normal hours – Standard hours) × Fixed overhead rate = Overhead volume variance (100,000 – 105,000) × $3/hour = $15,000 favorable Ex 216 The following information was taken from the annual manufacturing overhead cost budget of Olson Company: Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in direct labor hours Normal production level in units $124,000 $62,000 31,000 15,500 During the year, 15,000 units were produced, 32,000 hours were worked, and the actual manufacturing overhead costs were $190,000 The actual fixed manufacturing overhead costs did not deviate from the budgeted fixed manufacturing overhead costs Overhead is applied on the basis of direct labor hours Instructions (a) Compute the total, fixed, and variable predetermined manufacturing overhead rates a (b) Compute the total, controllable, and volume overhead variances Solution 216 (13–18 min.) (a) Item Variable Overhead Fixed Overhead Total Overhead Amount $124,000 62,000 $186,000 Hours 31,000 31,000 31,000 (b) Total overhead variance: Overhead incurred – Overhead applied ($190,000) (30,000 hours × $6.00) Rate $4.00 2.00 $6.00 = $10,000 U Overhead controllable variance: Overhead incurred – Overhead budgeted = $8,000 U ($190,000) [(30,000 × 4.00) + $62,000] Standard Costs and Balanced Scorecard Solution 216 11 - 49 (cont.) Overhead volume variance: (Normal hours – Standard hours) × Fixed overhead rate (31,000 – 30,000) × $2.00/hr = $2,000 U Ex 217 Zena Company uses a standard cost accounting system During March, 2009, the company reported the following manufacturing variances: Materials price variance Materials quantity variance Labor price variance Labor quantity variance Overhead controllable Overhead volume $1,600 2,400 600 2,200 500 3,000 F U U U F U In addition, 15,000 units of product were sold at $18 per unit Each unit sold had a standard cost of $12 Selling and administrative expenses for the month were $10,000 Instructions Prepare an income statement for management for the month ending March 31, 2009 Solution 217 (15–20 min.) ZENA COMPANY Income Statement For the Month Ended March 31, 2009 Sales (15,000 × $18) Cost of goods sold (15,000 × $12) Gross profit (at standard) Variances: Materials price Materials quantity Labor price Labor quantity Overhead controllable Overhead volume Total variances (unfavorable) Gross profit (actual) Selling and administrative expenses Net income $270,000 180,000 90,000 $(1,600) 2,400 600 2,200 (500) 3,000 6,100 83,900 10,000 $ 73,900 11 - 50 a Test Bank for ISV Managerial Accounting, Fourth Edition Ex 218 Snyder Company developed the following standards for 2009: SNYDER COMPANY Standard Cost Card Cost Elements Direct materials Direct labor Manufacturing overhead Standard Quantity pounds hour hour × Standard Price $ $18 $10 = Standard Cost $25 18 10 $53 The company planned to produce 90,000 units of product and work at the 90,000 direct labor level of activity in 2009 The company uses a standard cost accounting system which records standard costs in the accounts and recognizes variances in the accounts at the earliest opportunity During 2009, 87,000 actual units of product were produced Instructions Prepare the journal entries to record the following transactions for Snyder Company during 2009 (a) Purchased 441,000 pounds of raw materials for $4.90 per pound on account (b) Actual direct labor payroll amounted to $1,581,000 for 85,500 actual direct labor hours worked Factory labor cost is to be recorded and distributed to production (c) Direct materials issued for production amounted to 441,000 pounds which actually cost $4.90 per pound (d) Actual manufacturing overhead costs incurred were $864,000 in 2009 (e) Manufacturing overhead was applied when the 87,000 units were completed (f) Transferred the 87,000 completed units to finished goods a Solution 218 (20–25 min.) (a) Raw Materials Inventory 2,205,000 Materials Price Variance Accounts Payable (To record purchase of materials) (b) Factory Labor 1,539,000 Labor Price Variance 42,000 Wages Payable (To record direct labor costs) Work in Process Inventory 1,566,000 Labor Quantity Variance Factory Labor (To assign factory labor to jobs) (c) Work In Process Inventory 2,175,000 Materials Quantity Variance 30,000 Raw Materials Inventory (To record issuance of raw materials) 44,100 2,160,900 1,581,000 27,000 1,539,000 2,205,000 Standard Costs and Balanced Scorecard a Solution 218 (cont.) (d) Manufacturing Overhead Accounts Payable/Cash/Acc Depreciation (To record overhead incurred) 864,000 (e) Work In Process Inventory Manufacturing Overhead (To assign overhead to jobs) 870,000 (f) a 11 - 51 864,000 870,000 Finished Goods Inventory 4,611,000 Work In Process Inventory (To record transfer of completed units to finished goods) 4,611,000 Ex 219 Presented below is a flexible manufacturing budget for Waner Company, which manufactures fine timepieces: Activity Index: Standard direct labor hours Variable costs Indirect materials Indirect labor Utilities Total variable Fixed costs Supervisory salaries Rent Total fixed Total costs 2,000 3,200 3,600 4,000 $ 4,000 2,300 5,200 11,500 $ 6,400 3,680 8,320 18,400 $ 7,200 4,140 9,360 20,700 $ 8,000 4,600 10,400 23,000 1,000 3,000 4,000 $15,500 1,000 3,000 4,000 $22,400 1,000 3,000 4,000 $24,700 1,000 3,000 4,000 $27,000 The company applies the overhead on the basis of direct labor hours at $7.00 per direct labor hour and the standard hours per timepiece is 1/2 hour each The company's actual production was 5,800 timepieces with 2,900 actual hours of direct labor Actual overhead was $21,200 Instructions (a) Compute the controllable and volume overhead variances a (b) Prepare the entries for manufacturing overhead during the period and the entry to recognize the overhead variances at the end of the period a Solution 219 (16–21 min.) (a) Computation of variances: Actual overhead – Budgeted overhead $21,200 – [(5,800 × 1/2 × $5.75) + $4,000] Overhead volume variance: (Normal hours – Standard hours) × Fixed overhead rate (3,200 – 2,900) × ($4,000  3,200) = $375 Unfavorable = = Controllable overhead variance $525 Unfavorable 11 - 52 a Test Bank for ISV Managerial Accounting, Fourth Edition Solution 219 (cont.) (b) Manufacturing Overhead Accounts Payable, Cash, Etc (To record overhead incurred) 21,200 Work in Process Inventory Manufacturing Overhead (To assign overhead to production) 20,300 Overhead Controllable Variance Overhead Volume Variance Manufacturing Overhead (To recognize overhead variances) 525 375 a 21,200 20,300 900 Ex 220 Stone Company planned to produce 20,000 units of product and work at the 60,000 direct labor hours level of activity for 2009 Manufacturing overhead at this level of activity and the predetermined overhead rate are as follows: Predetermined Overhead Rate per Direct Labor Hour Variable manufacturing overhead $300,000 $5.00 Fixed manufacturing overhead 180,000 3.00 Total manufacturing overhead $480,000 $8.00 At the end of 2009, 21,000 units were actually produced and 61,500 direct labor hours were actually worked Total actual manufacturing overhead costs were $488,000 Instructions Using a two-variance analysis of manufacturing overhead, calculate the following variances and indicate whether they are favorable or unfavorable: (a) Overhead controllable variance (b) Overhead volume variance a Solution 220 (12–17 min.) (a) Overhead controllable variance = $7,000 unfavorable Overhead budgeted for standard hours allowed Variable overhead (63,000 × $5) Fixed overhead Actual overhead incurred Overhead controllable variance = = $315,000 180,000 495,000 488,000 $ 7,000 favorable (b) Overhead volume variance = $9,000 favorable Overhead volume variance: (Normal hours – Standard hours) × Fixed overhead rate (60,000 – 63,000) × $3/hr = $9,000 favorable Standard Costs and Balanced Scorecard a 11 - 53 Ex 221 Lapins Company has a standard costing system The following data are available for July: a b c d e Actual manufacturing overhead cost incurred: $22,000 Actual machine hours worked: 1,600 Overhead volume variance: $3,600 Unfavorable Total overhead variance: $1,000 Unfavorable Overhead is assigned to production on the basis of machine hours Instructions Determine the amount of (1) the controllable overhead variance and (2) the overhead applied a Solution 221 (6 min.) (1) Volume variance plus controllable variance = total overhead variance $3,600 U + X = $1,000 U; so controllable variance = $2,600 F (2) Overhead applied = $21,000 ($22,000 – $1,000) 11 - 54 Test Bank for ISV Managerial Accounting, Fourth Edition COMPLETION STATEMENTS 222 A is expressed as a unit amount, whereas a _ is expressed as a total amount 223 Standards which represent optimum performance under perfect operating conditions are called _ standards, but most companies use _ standards which are rigorous but attainable 224 In developing a standard cost for direct materials used in making a product, consideration should be given to two factors: (1) per unit of direct materials and (2) the of direct materials to produce one unit of product 225 The difference between actual hours times the actual pay rate and actual hours times the standard pay rate is the labor _ variance 226 The standard number of hours allowed times the predetermined overhead rate is the amount of to the products produced 227 The difference between actual quantity of materials times the standard price and standard quantity times the standard price is the materials variance 228 If the actual direct labor hours worked are greater than the standard hours, the labor quantity variance will be _, and the labor rate variance will be if the standard rate of pay is greater than the actual rate of pay 229 The overhead variance is generally analyzed through the calculation of the overhead _ variance and the overhead variance 230 In using variance reports, top management normally looks for _ variances a 231 The overhead variance is the difference between normal capacity hours and standard hours allowed times the fixed overhead rate Answers to Completion Statements 222 223 224 225 226 227 228 229 230 a 231 standard, budget ideal, normal price, quantity price overhead applied quantity unfavorable, favorable controllable, volume significant volume Standard Costs and Balanced Scorecard 11 - 55 MATCHING 232 Match the items in the two columns below by entering the appropriate code letter in the space provided A B a C D E Variances Standard costs Standard cost accounting system Normal standards Ideal standards F G a H a I J Materials price variance Labor quantity variance Overhead controllable variance Overhead volume variance Standard hours allowed The difference between actual overhead incurred and overhead budgeted for the standard hours allowed The hours that should have been worked for the units produced The difference between the actual quantity times the actual price and the actual quantity times the standard price The difference between total actual costs and total standard costs The difference between actual hours times the standard rate and standard hours times the standard rate Predetermined unit costs that are measures of performance The difference between normal capacity hours and standard hours allowed times the fixed overhead rate Standards based on an efficient level of performance that are attainable under expected operating conditions Standards based on the optimum level of performance under perfect operating conditions 10 A double-entry system of accounting in which standard costs are used in making entries and variances are recognized in the accounts Answers to Matching a H J F A G a 10 a B I D E C 11 - 56 Test Bank for ISV Managerial Accounting, Fourth Edition SHORT-ANSWER ESSAY QUESTIONS S-A E 233 Penn Company computes variances as a basis for evaluating the performance of managers responsible for controlling costs For several months, the labor quantity variance has been unfavorable Briefly explain what could be causing the unfavorable labor quantity variance and indicate what type of corrective action, if any, might be taken Solution 233 Since labor quantity variances relate to the efficiency of labor, the cause of an unfavorable variance could be poor training, poor maintenance of machinery, fatigue, carelessness, or similar problems that affect efficiency The management of Penn Company would need to identify the likely causes of the variance and correct the situation with additional training, improved maintenance, better scheduling or similar appropriate actions S-A E 234 In reviewing the activities of the Mixing Department for the month of June, the manager of the department notices that there was an unfavorable materials price variance for the month and there was an unfavorable materials quantity variance Under what circumstances, if any, can the responsibility for each variance be placed on (a) the purchasing department and (b) the production department? Solution 234 (a) Purchasing department The investigation of a materials price variance usually begins with this department If the price standard has been properly set, purchasing is responsible However, it should be recognized that in a period of inflation, prices may rise faster than expected Also, there may be extenuating circumstances such as oil cartel price increases The purchasing department may be responsible for an unfavorable quantity variance if it purchased raw materials of inferior quality (b) Production department Ordinarily, responsibility for an unfavorable quantity variance rests with this department For example, production is responsible if the variance is caused by inexperienced workers, faulty machinery, or carelessness The production department may be responsible for an unfavorable price variance when the materials must be ordered on a rush basis at a higher price than planned Standard Costs and Balanced Scorecard 11 - 57 S-A E 235 (Ethics) Tinikits, Inc is the manufacturer of miniature models, especially of automobiles with historical interest The company is developing new standard costs Trent Roswell suggests that the new standards for materials should not include any waste for liquid plastics that spill out of the molds "After all," he says, "we're trying to be a world class company When we build in waste, we tell the workers it's okay to waste some." Betty Farrell, another manager, disagrees "If we don't allow for some normal human error," she says, "we'll have a mighty unhappy work force Also, I think that these kinds of perfection standards exploit the workers I certainly wouldn't want to be held up to perfection every day—what could I but fail?" The argument continued Finally, the standards were prepared All standards were prepared according to normal expected performance, except that for materials, an ideal standard was used Betty, still maintaining the unfairness of the system, refused to hold her workers accountable for materials quantity variances Required: Are ideal standards unethical? Explain briefly Is it unethical for Betty to refuse to support the standards? Explain Solution 235 Ideal standards are not necessarily unethical They may be used unethically, such as in the case in which employees are denied bonuses or other rewards because of not meeting a standard which was out of their reach If they are used as a guide to maximum attainable performance, however, and not tied directly to the reward system, they may be ethical It is unethical for Betty simply to refuse to accept a particular standard However, if the company intends to use the standard unethically, she may refuse to hold her workers accountable while she pursues a permanent disposition of the matter If she simply refuses to accept it, she may be indirectly sabotaging the company by hindering it from accomplishing its legitimate objectives This would be unethical S-A E 236 (Communication) Bret Kiner has come to the accounting department for help in interpreting his variance report He says that he understands that last month was not a very good one for output, but he really thought everyone put forth good effort, so he is confused about the existence of an unfavorable labor quantity variance He cites as an example the workers' willingness to work extra hours to get full output, even when a whole week's worth of production had to be scrapped He knew that his materials costs would be higher, and that overtime would make his rate variance unfavorable, but he certainly didn't think his workers had been inefficient Required: Write a short note to Bret explaining the probable cause of the unfavorable labor efficiency variance 11 - 58 Test Bank for ISV Managerial Accounting, Fourth Edition Solution 236 Bret, Last month was a tough one for all of us, wasn't it? Your workers certainly did go the extra mile, no doubt about it You asked about your efficiency variance When we calculate it, we count the number of hours it took to get good output Since we had such high spoilage, we got fewer units, but used more hours That is why your efficiency variance was negative It does not imply that you didn't your best It just means that we investigate to see what happened Good luck, and I hope this month is a better one for all of us (signed) .. .Test Bank for ISV Managerial Accounting, Fourth Edition 11 - SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY (cont.) Brief... cost accounting systems with the exception of a the application of manufacturing overhead b direct labor budgets c direct materials budgets d cash budget data 11 - Test Bank for ISV Managerial Accounting, ... rate c times the predetermined fixed overhead rate d divided by actual number of hours worked 11 - 28 Test Bank for ISV Managerial Accounting, Fourth Edition Additional Multiple Choice Questions