11 Flexible Budgets & OH Analysis PDF

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554 Garrison, Managerial Accounting 12th EditionTrue/False Questions Fixed costs should not be included in a flexible budget since such costs are not likely to be controllable by managers. Answer: False Level: Medium LO: 1 It is not important that the activity base and overhead costs be causally rel...

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Chapter 11 Flexible Budgets and Overhead Analysis True/False Questions 1. Fixed costs should not be included in a flexible budget since such costs are not likely to be controllable by managers. Answer: False Level: Medium LO: 1 2. It is not important that the activity base and overhead costs be causally related when developing a flexible budget. Answer: False Level: Easy LO: 1 3. The activity base for a flexible budget should usually be expressed in units of activity rather than in dollars. Answer: True Level: Easy LO: 1 4. The static budget should be used primarily to determine whether cost control is being maintained. Answer: False Level: Easy LO: 1 5. A company that wants to report both spending and efficiency variances for overhead must compute budget allowances for both the actual amount of activity that occurred and the standard level of activity allowed for the level of output achieved. Answer: True Level: Medium LO: 4 6. Responsibility for the overhead efficiency variance should be assigned to whoever is responsible for control of the activity base underlying the flexible budget. Answer: True Level: Easy LO: 4 7. A favorable variable overhead efficiency variance indicates that overhead has been used efficiently. Answer: False Level: Medium LO: 4

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Chapter 11 Flexible Budgets and Overhead Analysis 8. A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company's choice of the denominator level of activity has no effect on the fixed overhead budget variance. Answer: True Level: Medium LO: 5,6 9. In a standard cost system, overhead is applied on the basis of the actual level of activity rather than the standard level of activity allowed for the output of a period. Answer: False Level: Medium LO: 5 10. A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. The company's choice of the denominator level of activity has no effect on the fixed portion of the predetermined overhead rate. Answer: False Level: Easy LO: 5 11. The budget variance for fixed overhead represents the difference between actual fixed overhead costs incurred and the amount of fixed overhead applied to work in process. Answer: False Level: Medium LO: 6 12. There can be no volume variance for variable overhead. Answer: True Level: Medium LO: 6 13. An unfavorable volume variance means that a company operated at an activity level greater than that planned for the period. Answer: False Level: Medium LO: 6 14. The volume variance for fixed overhead is an activity-related variance based on the difference between the denominator level of activity and the standard level of activity allowed for the output of a period. Answer: True Level: Medium LO: 6

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Chapter 11 Flexible Budgets and Overhead Analysis 15. A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours. A fixed overhead volume variance will NOT necessarily occur in a month in which production volume differs from sales volume. Answer: True Level: Hard LO: 6

Multiple Choice Questions 16. When using a flexible budget, what will occur to fixed costs as the activity level increases within the relevant range? A) fixed costs per unit will decrease. B) fixed costs per unit will remain unchanged. C) fixed costs per unit will increase. D) fixed costs are not considered in flexible budgeting. Answer: A Level: Easy LO: 1 Source: CPA, adapted 17. A major disadvantage of static budgets is: A) the difficulty in developing such budgets due to the high cost of gathering the necessary information. B) the cost behavior pattern of manufacturing overhead, which is primarily fixed. C) that the variances between actual and budget on a static budget result from comparing actual costs at one level of activity to budgeted costs at a different level of activity. D) their length and complexity. Answer: C Level: Medium LO: 1 18. Comparing actual results to a budget based on actual activity for the period is possible with the use of a: A) monthly budget. B) master budget. C) flexible budget. D) rolling budget. Answer: C Level: Easy LO: 1

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Chapter 11 Flexible Budgets and Overhead Analysis 19. A static budget is: A) a budget for a single level of activity. B) a budget that ignores inflation. C) used only for fixed costs. D) used when the mix of products does not change. Answer: A Level: Easy LO: 1 20. Last year, a department's standard costing system reported an unfavorable variable overhead spending variance and an unfavorable volume variance. The denominator activity level selected for allocating overhead to the product was based on 80% of capacity. If 100% of capacity had been selected instead as the denominator level, how would the reported unfavorable spending and volume variances be affected?

A) B) C) D)

Spending variance Increased Increased Unchanged Unchanged

Volume variance Unchanged Increased Increased Unchanged

Answer: C Level: Hard LO: 3,5 Source: CPA, adapted 21. The overhead spending variance: A) measures the variance in amount spent for fixed overhead items. B) includes elements of waste or excessive usage as well as elements of price variance. C) is generally considered to be the least useful of all overhead variances. D) measures the difference between denominator activity and standard hours allowed. Answer: B Level: Easy LO: 3 22. If the price a company paid for overhead items, such as utilities, decreased during the year, the company would probably report a(n): A) favorable efficiency variance. B) favorable spending variance. C) unfavorable efficiency variance. D) unfavorable spending variance. Answer: B Level: Medium LO: 3

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Chapter 11 Flexible Budgets and Overhead Analysis 23. Variable overhead is applied on the basis of standard direct labor-hours. If the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be: A) favorable. B) unfavorable. C) zero. D) indeterminable since it is not related to the labor efficiency variance. Answer: B Level: Medium LO: 4 Source: CMA, adapted 24. Alex Company has a large underapplied overhead balance in the manufacturing overhead account. This could be explained by: A) an unfavorable volume variance, assuming all other variances are zero. B) a favorable volume variance, assuming all other variances are zero. C) standard hours allowed for the period's output being greater than denominator hours for the period. D) none of these. Answer: A Level: Hard LO: 5,6 25. In a standard cost system, overhead is applied to production on the basis of: A) the denominator hours chosen for the period. B) the actual hours required to complete the output of the period. C) the standard hours allowed to complete the output of the period. D) none of these. Answer: C Level: Medium LO: 5 26. The fixed overhead budget variance is measured by: A) the difference between budgeted fixed overhead cost and actual fixed overhead cost. B) the difference between actual fixed overhead cost and applied fixed overhead cost. C) the difference between budgeted fixed overhead cost and applied fixed overhead cost. D) none of these. Answer: A Level: Medium LO: 6

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Chapter 11 Flexible Budgets and Overhead Analysis 27. The Santos Company erred in selecting a denominator level of activity and chose a much lower level than was realistic. This error would most likely result in a large: A) favorable variable overhead efficiency variance. B) favorable fixed overhead budget variance. C) favorable fixed overhead volume variance. D) unfavorable fixed overhead budget variance. Answer: C Level: Medium LO: 6 28. A fixed overhead volume variance based on standard direct labor-hours measures: A) deviation from standard direct labor hour capacity. B) deviation from the denominator level of direct labor hours. C) fixed overhead efficiency. D) fixed overhead spending. Answer: B Level: Medium LO: 6 Source: CMA, adapted 29. Papenfuss Family Inn is a bed and breakfast establishment in a converted 100-year-old mansion. The Inn's guests appreciate its gourmet breakfasts and individually decorated rooms. The Inn's overhead budget for the most recent month appears below: Activity level ................................... 86 guests Variable overhead costs: Supplies ........................................ $ 86.00 Laundry ........................................ 507.40 Fixed overhead costs: Utilities ......................................... 340.00 Salaries and wages ....................... 4,790.00 Depreciation ................................. 2,620.00 Total overhead cost ......................... $8,343.40 The Inn's variable overhead costs are driven by the number of guests. What would be the total budgeted overhead cost for a month if the activity level is 76 guests? Assume that the activity levels of 86 guests and 76 guests are within the same relevant range. A) $52,848.40 B) $8,343.40 C) $8,274.40 D) $7,373.24 Answer: C Level: Easy LO: 1

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Chapter 11 Flexible Budgets and Overhead Analysis 30. Hatzenbuhler Manufacturing Corporation has prepared the following overhead budget for next month. Activity level ................................. Variable overhead costs: Supplies ...................................... Indirect labor .............................. Fixed overhead costs: Supervision ................................. Utilities ....................................... Depreciation ............................... Total overhead cost ....................

6,800 machine-hours $ 22,440 55,760 19,300 5,700 7,400 $110,600

The company's variable overhead costs are driven by machine-hours. What would be the total budgeted overhead cost for next month if the activity level is 6,600 machine-hours rather than 6,800 machine-hours? Assume that the activity levels of 6,800 machine-hours and 6,600 machine-hours are within the same relevant range. A) $107,824.00 B) $110,600.00 C) $108,300.00 D) $107,347.06 Answer: C Level: Easy LO: 1 31. Mcgahen Medical Clinic measures its activity in terms of patient-visits. Last month, the budgeted level of activity was 1,080 patient-visits and the actual level of activity was 990 patient-visits. The clinic's director budgets for variable overhead costs of $3.30 per patient-visit and fixed overhead costs of $10,600 per month. The actual variable overhead cost last month was $3,380 and the actual fixed overhead cost was $8,780. In the clinic's flexible budget performance report for last month, what would have been the variance for the total overhead cost? A) $113 U B) $297 F C) $1,707 F D) $2,004 F Answer: C Level: Medium LO: 2

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Chapter 11 Flexible Budgets and Overhead Analysis 32. Sesareo Tile Installation Corporation measures its activity in terms of square feet of tile installed. Last month, the budgeted level of activity was 1,130 square feet and the actual level of activity was 1,180 square feet. The company's owner budgets for supply costs, a variable overhead cost, at $2.60 per square foot. The actual supply cost last month was $2,130. In the company's flexible budget performance report for last month, what would have been the variance for supply costs? A) $808 F B) $938 F C) $90 U D) $130 U Answer: B Level: Easy LO: 2 33. Eng Natural Dying Corporation measures its activity in terms of skeins of yarn dyed. Last month, the budgeted level of activity was 16,800 skeins and the actual level of activity was 16,600 skeins. The company's owner budgets for dye costs, a variable overhead cost, at $0.44 per skein. The actual dye cost last month was $7,690. In the company's flexible budget performance report for last month, what would have been the variance for dye costs? A) $298 U B) $93 F C) $88 F D) $386 U Answer: D Level: Easy LO: 2 34. Mcneeley Footwear Corporation's flexible budget cost formula for supplies, a variable overhead cost, is $2.94 per unit of output. The company's flexible budget performance report for last month showed a $4,998 favorable variance for supplies. During that month, 11,900 units were produced. Budgeted activity for the month had been 12,300 units. The actual costs incurred for indirect materials must have been closest to: A) $2.94 B) $2.03 C) $2.10 D) $2.52 Answer: D Level: Hard LO: 2

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Chapter 11 Flexible Budgets and Overhead Analysis 35. Goy Corporation's flexible budget performance report for last month shows that actual indirect materials cost, a variable overhead cost, was $28,194 and that the variance for indirect materials cost was $1,887 unfavorable. During that month, the company worked 11,100 machine-hours. Budgeted activity for the month had been 11,200 machine-hours. The cost formula per machine-hour for indirect materials cost must have been closest to: A) $2.69 B) $2.71 C) $2.35 D) $2.37 Answer: D Level: Hard LO: 2 36. At Cady Company, maintenance is a variable cost that varies directly with machinehours. The performance report for June showed that actual maintenance costs totaled $9,600 and that the associated spending variance was $400 unfavorable. If 8,000 machine-hours were actually worked during June, the budgeted maintenance cost per machine-hour was: A) $1.30 B) $1.25 C) $1.20 D) $1.15 Answer: D Level: Hard LO: 3 37. Suski Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month: Budgeted level of activity...................................... Actual level of activity .......................................... Cost formula for variable overhead cost ............... Budgeted fixed overhead cost ............................... Actual total variable overhead............................... Actual total fixed overhead ...................................

7,400 MHs 7,500 MHs $5.90 per MH $60,000 $42,750 $61,000

What was the variable overhead spending variance for the month? A) $1,500 favorable B) $590 unfavorable C) $910 favorable D) $1,000 unfavorable Answer: A Level: Medium LO: 3

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Chapter 11 Flexible Budgets and Overhead Analysis 38. Masek Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month: Budgeted level of activity................................................ 2,000 MHs Actual level of activity .................................................... 2,400 MHs Cost formula for variable manufacturing overhead cost . $5.90 per MH Budgeted fixed manufacturing overhead cost ................. $50,000 Actual total variable manufacturing overhead ................ $14,880 Actual total fixed manufacturing overhead ..................... $49,000 What was the fixed overhead budget variance for the month? A) $2,360 unfavorable B) $1,000 unfavorable C) $2,360 favorable D) $1,000 favorable Answer: D Level: Medium LO: 3 39. Omary Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company has provided the following data for the most recent month: Budgeted level of activity................................................ Actual level of activity .................................................... Cost formula for variable manufacturing overhead cost . Budgeted fixed manufacturing overhead cost ................. Actual total variable manufacturing overhead ................ Actual total fixed manufacturing overhead .....................

3,900 MHs 4,100 MHs $7.60 per MH $50,000 $31,980 $54,000

What was the total of the variable overhead spending and fixed overhead budget variances for the month? A) $1,520 unfavorable B) $3,180 favorable C) $4,820 unfavorable D) $6,340 unfavorable Answer: C Level: Medium LO: 3

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Chapter 11 Flexible Budgets and Overhead Analysis 40. Coblentz Fabrication Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company's cost formula for variable manufacturing overhead is $6.20 per MH. The company had budgeted its fixed manufacturing overhead cost at $40,000 for the month. During the month, the actual total variable manufacturing overhead was $48,970 and the actual total fixed manufacturing overhead was $43,000. The actual level of activity for the period was 8,300 MHs. What was the total of the variable overhead spending and fixed overhead budget variances for the month? A) $2,490 favorable B) $510 favorable C) $510 unfavorable D) $2,490 unfavorable Answer: C Level: Easy LO: 3 41. Sholette Manufacturing Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company's cost formula for variable manufacturing overhead is $5.00 per MH. During the month, the actual total variable manufacturing overhead was $22,540 and the actual level of activity for the period was 4,600 MHs. What was the variable overhead spending variance for the month? A) $92 favorable B) $92 unfavorable C) $460 unfavorable D) $460 favorable Answer: D Level: Easy LO: 3 42. Tropiano Electronics Corporation has a standard cost system in which it applies manufacturing overhead to products on the basis of standard machine-hours (MHs). The company had budgeted its fixed manufacturing overhead cost at $62,100 for the month and its level of activity at 3,200 MHs. The actual total fixed manufacturing overhead was $61,600 for the month and the actual level of activity was 3,000 MHs. What was the fixed overhead budget variance for the month to the nearest dollar? A) $3,381 unfavorable B) $500 favorable C) $500 unfavorable D) $3,381 favorable Answer: B Level: Medium LO: 3

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Chapter 11 Flexible Budgets and Overhead Analysis 43. Merle Corporation applies manufacturing overhead to products on the basis of standard machine-hours. For the most recent month, the company based its budget on 4,000 machine-hours. Budgeted and actual overhead costs for the month appear below: Original Budget Based on 4,000 MachineActual Hours Costs Variable overhead costs: Supplies ................................... Indirect labor ........................... Fixed overhead costs: Supervision .............................. Utilities .................................... Factory depreciation ................ Total overhead cost ....................

$14,000 27,200

$13,150 24,390

19,900 4,700 8,800 $74,600

19,540 4,360 8,620 $70,060

The company actually worked 3,690 machine-hours during the month. The standard hours allowed for the actual output were 3,620 machine-hours for the month. What was the overall variable overhead efficiency variance for the month? A) $721 unfavorable B) $467 favorable C) $254 unfavorable D) $880 favorable Answer: A Level: Hard LO: 4

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Chapter 11 Flexible Budgets and Overhead Analysis 44. Schley Corporation applies manufacturing overhead to products on the basis of standard machine-hours. Budgeted and actual overhead costs for the most rece...