ACC510 Week 5
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Industrial Engineering
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Feb 20, 2024
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Quantity standards determine the amount of input that should be used per unit of output. True
Price standards determine the amount that should be paid per unit of the input to be used. True
The total materials variance is equal to actual costs minus planned costs. True All total direct labor variance are due to differences between actual and planned wage rates. False Which of the following is true of currently attainable standards? It can be achieved under efficient operating conditions. Which of the following is an advantage of standard product costing? It provides readily available unit cost
information that can be used for pricing decisions at any time throughout a period. Which of the following is true of standard quantity of materials allowed? It is the product of unit quantity standard and actual output. Diamond Motors Corp. manufactures heavy motor vehicles. During a month, it manufactured 15,000 vehicles. Each vehicle used an average of 8 direct labor hours and 2.5 sheets of aluminum. It normally manufactures 7,000 vehicles in a month. Materials and labor standards for making the vehicles are:
Direct Materials (1 sheet of aluminum @ $10.00) $10.00
Direct Materials (other accessories @ $7.25) 7.25
Direct Labor (6 hours @ $7.00) 42.00
Compute the standard hours allowed for a volume of 15,000 vehicles. 90,000 hours Which of the following variances is the difference between the actual cost of the input and its planned cost? Total budget variance Which of the following conditions leads to an unfavorable price variance? It occurs when the actual price
is greater than the standard price. Platinum Energy Corporation’s standard cost is $700,000. The allowable deviation is ±10%. Its actual costs for three months are:
January $630,000
February 750,000
March 725,000
The upper and lower control limits respectively are: $770,000 and $630,000. Hexagon Corp. manufactures jute bags. Each bag requires 5 Kgs of raw material, R+. During the month of
November it produced 3,000 bags. It consumed 12,000 Kgs of R+ during the period. The standard price per kg of R+ is $8. At the end of November, Hexagon Corp. found that it had a favorable materials price variance of $24,000. What was Hexagon Corp.’s actual cost per unit of R+? $6 Which of the following measures the difference between the direct materials actually used and the direct materials that should have been used for the actual output? Materials usage variance Galaxy Technologies Corp. manufactures cell phones. During the year, 150,000 phones were manufactured. Materials and labor standards for producing the phones are as follows:
Direct materials (2 pieces of plastic material @ $3.25) $6.50
Direct labor (2 hours @ $10) 20.00
Galaxy Technologies Corp. purchased and used 500,000 pieces of plastic material at $2.50 each, and its actual labor hours were 340,000 hours at a wage rate of $10.50. What is the materials price variance? $375,000 F
The responsibility for controlling the materials price variance usually belongs to the _____. purchasing agent Which of the following is the correct equation for computing the total labor variance? Total labor variance = (Actual hourly wage rate × Actual direct labor hours used) – (Standard hourly wage rate × Standard hours allowed) Which of the following is true of a production manager’s responsibility? Production manager is generally responsible for labor rate variance.
Which of the following is the difference between target costing and kaizen costing? Target costing is a long-term approach to cost reduction, whereas kaizen costing is a continuous, short-term approach to cost reduction. Garnet Developers Inc., a manufacturing company, provides the following data:
Standard variable overhead rate (SVOR) $4 per direct labor hour
Actual variable overhead costs (AH) $900
Standard hours allowed per unit 0.20 hours
Actual direct labor hours worked (AH) 120 hours
Actual production 1,200 units
What is the total variable overhead variance? $60 (favorable) What is the equation to calculate variable overhead spending variance? Variable Overhead Spending Variance = Actual Variable Overhead - (Actual Direct Labor Hours x Standard Variable Overhead Rate) Which of the following might result in a variable overhead spending variance? The use of the items that comprise variable overhead. Responsibility for the variable overhead efficiency variance is most likely to be assigned to a/an _____. production manager What is the formula to calculate the standard fixed overhead rate? Budgeted Fixed Overhead Costs ÷ Practical Capacity Krypton Chemicals Corp., a manufacturing company, provides the following data for the second quarter of the current year:
Standard fixed overhead rate (SFOR) $8.00 per direct labor hour
Actual fixed overhead costs $2,000
Standard hours allowed per unit 0.15 hour
Actual production 1,500 units
What is the total fixed overhead variance? $200 (unfavorable) What is the formula to calculate fixed overhead spending variance? Fixed Overhead Spending Variance= Actual Fixed Overhead - Budgeted Fixed Overhead During the previous month, a small retail company called Green Inc. purchased 800 bundles of a certain type of product at a price of $40 per bundle, which was $7 more than the standard price. The standard quantity for this type of product is 840 bundles. What is the journal entry to record the purchase of materials? Debit Materials for $26,400; Debit Materials Price Variance for $5,600 U; Credit Accounts Payable for $32,000. During March, Black Diamond Corp., a tire manufacturing company, purchased 650 bundles of a certain type of raw material at a price of $45 per bundle, which was $6 less than the standard price. Its standard quantity of this type of raw material is 500 bundles. What is the journal entry to record the purchase of materials? Debit Materials for $33,150; Credit Materials Price Variance for $3,900 F; Credit Accounts Payable for $29,250. Price variance is the difference between the actual and standard unit price of an input multiplied by the number of inputs used. True The quantity variance is the difference between the actual and standard quantity of inputs multiplied by the standard unit price of the input. True The responsibility for controlling the materials price variance usually belongs to the production agent, while the purchasing manager is generally responsible for materials usage. False Once set, production standards are static. False All inventories are carried at standard cost. True In recording variances, unfavorable variances are always credits, and favorable variances are always debits. False
The Two Cost Systems
Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two biggest nursing service lines—the Emergency Room (ER) and the Operating Room (OR). SHH's current cost system assigns total nursing costs to the ER and OR based on the number of patients serviced by each line. Total hospital annual nursing costs for these two lines are expected to equal $300,000. The table below shows expected patient volume for both lines.
Measure ER OR Total
Number of patients (ER visits or OR surgeries) 1,000 1,000 2,000 Number of vital signs checks 2,000 4,000 6,000 Number of nursing hours 10,000 5,000 15,000 Required:
1. Using the current cost system, calculate the hospital-wide rate based on number of patients. $ 50
2. Calculate the amount of nursing costs that the current cost system assigns to the ER and to the OR.
The nursing cost, assigned to the ER: $150,000
The nursing cost, assigned to the OR: $150,000
3. Using the results from Requirement 2, calculate the cost per OR nursing hour under the current cost system. $30 per OR hour
After discussion with several experienced nurses, Jack Bauer (SHH’s accountant) decided that assigning nursing costs to the two service lines based on the number of times that nurses must check patients’ vital signs might more closely match the underlying use of costly hospital resources. Therefore, for comparative purposes, Jack decided to develop a second cost system that assigns total nursing costs to the ER and OR based on the number of times nurses check patients’ vital signs. This system is referred to as the “vital-signs costing system.” The earlier table also shows data for vital signs checks for lines.
4. Using the vital-signs costing system, calculate the hospital-wide rate based on the number of vital signs checks. $50 per vital signs check
5. Calculate the amount of nursing costs that the vital-signs costing system assigns to the ER and to the OR.
The vital-signs cost, assigned to the ER: $100,000
The vital-signs cost, assigned to the OR: $200,000
6. Using the results from Requirement 5, calculate the cost per OR nursing hour under the vital-signs costing system. $40 per OR hour
Budgeting and Variance Analysis
In an effort to better plan for and control OR costs, SHH management asked Jack to calculate the flexible budget variance (i.e., flexible budget costs - actual costs) for OR nursing costs, including the price variance and efficiency variance. Given that Jack is interested in comparing the reported costs of both systems, he decided to prepare the requested OR variance analysis for both the current cost system and the vital-signs costing system. In addition, Jack chose to use each cost system’s estimate of the cost per
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OR nursing hour as the standard cost per OR nursing hour. Jack collected the following additional information for use in preparing the flexible budget variance for both systems:
Actual number of surgeries performed = 950
Standard number of nursing hours allowed for each OR surgery = 5
Actual number of OR nursing hours used = 5,000
Actual OR nursing costs = $190,000
(Enter a favorable variance as a negative amount, and an unfavorable variance as a positive amount. If there is no variance, enter "0" and select "No variance" from the dropdown.)
7. For the OR service line, use the information above and the cost per OR nursing hour under the current cost system to calculate the:
a. flexible budget variance. (Hint: Use your answer to Requirement 3 as the standard cost per OR
nursing hour for the current cost system.): $ 47,5000 (is it Favorable, Unfavorable
, or No Variance)
b. price variance. $40,000 (is it Favorable, Unfavorable
, or No Variance)
c. efficiency variance. $7,500 (is it Favorable, Unfavorable
, or No Variance)
8. For the OR service line, use the information above and the cost per OR nursing hour under the vital-
signs costing system to calculate the: a. flexible budget variance. (Hint: Use your answer to Requirement 6 as the standard cost per OR
nursing hour for the vital signs cost system.) $0 (is it Favorable, Unfavorable, or No Variance
)
b. price variance. $10,000 (is it Favorable
, Unfavorable, or No Variance)
c. efficiency variance. $10,000 (is it Favorable, Unfavorable
, or No Variance)
Discussion of Reported Costs and Variances from the Two Systems
9. Consider SHH’s need to control its skyrocketing costs, Jack’s discussion with experienced nurses regarding their use of hospital resources, and the reported costs that you calculated from each cost system. Based on these considerations, which cost system (current or vitalsigns) should Jack choose? Briefly explain the reasoning behind your choice.
a.
(
Vital Signs
or Current) costing system should more accurately allocate costs to service lines because its cost allocation base.
b.
(
Both
, Current or Vital Signs) uses only one cost driver and (
both are equally
, vital signs are more, current system is more) cost effective.
c.
The more accurate (
Vital signs
, or current) system should generate a more accurate estimate of the cost per nursing hour, which affects the budgeting process, because the portion of costs allocated to each service line, ER.
10. What does each of the calculated variances suggest to Jack regarding actions that he should or should not take with respect to investigating and improving each variance? Also, briefly explain why the variances differ between the two cost systems.
a. The overall current system’s OR flexible budget variance ($47,500) is very (
large and unfavorable
, large and favorable, small and favorable, or Zero), suggesting that the subvariances (price variance and efficiency variance) should be calculated.
b. The current system’s OR price variance ($40,000) is very large and unfavorable, suggesting that the nursing hiring manager negotiated a (
bad
or good) price and that nursing hour pay cuts might be necessary.
c. The current system’s OR efficiency variance ($7,500) is (
moderate and unfavorable
, large and favorable, large and unfavorable, or Zero), suggesting that the operating room manager used too many OR nursing hours for the actual number of surgeries performed.
d. The overall vital signs’ OR flexible budget variance is (moderate and unfavorable, large and favorable, large and unfavorable, or Zero
), and suggests that nothing needs to be investigated further.
e. The vital signs’ OR price variance ($10,000) is (
large and unfavorable
, large and favorable, small and favorable) large and favorable, suggesting that the nursing hiring manager negotiated a good price.
f. The vital signs’ OR efficiency variance ($10,000) is (large and unfavorable, large and favorable, small and favorable, and zero), suggesting that the operating room manager used too many OR nursing hours for the actual number of surgeries performed. In addition, it would be unwise had Jack decided to end the variance analysis after seeing that the flexible budget variance was zero. Only after continuing on with the analysis to calculate the price and efficiency variances would Jack realize that the zero flexible budget variance was the result of two large offsetting variances, both of which likely require further investigation and attention.
g. Overall, the two cost systems produce (
different
or the same) reported costs of the two service lines, ER and OR. The current system assigns nursing costs equally because the ER and OR have the same number of patients. Alternately, the vital-signs system assigns (
Twice
or thrice) as much of the nursing costs to the OR because the OR requires (
Twice
or thrice) as many vital signs checks of its patients as the ER does of its patients. In addition, the two systems produce (
different
or the same) estimates of the cost incurred by the hospital per OR nursing hour. When used as the standard costs in the budgeting process, these (
different
or the same) reported costs, lead to very different flexible budget variances and
price and efficiency variances for the OR service line. Therefore, the managerial accountant should be very careful when constructing a cost system and be sure that the chosen allocation bases are as accurate as possible to match the underlying resource consumption patterns of the business environment. Choosing different cost allocation bases usually will result in differences in reported service
line costliness and various variances, which can have ramifications for numerous managers (e.g., purchasing managers responsible for price variances, production managers responsible for efficiency variances, other managers responsible for making service line mix decisions, etc.)
The underlying details for the standard cost per unit are provided in: The standard cost sheet (This document provides the standard input prices and the standard input allowed per unit of output. It also gives the standard cost per unit.)
The standard quantity of materials allowed is computed as: Unit Quantity Standard × Actual Output. (Think about how you would calculate the materials that should be used for the units the company has produced.)
Investigating variances from standard is: done if the variance is outside the control limits (Random deviations from variances are not investigated.) The materials price variance is usually computed: when materials are purchased. (Think about the importance of timeliness of information for control purposes.) Krumple Inc. produces aluminum cans. Production of 12-ounce cans has a standard unit quantity of 4.7 ounces of aluminum per can. During the month of April, 450,000 cans were produced using 1,875,000 ounces of aluminum. The actual cost of aluminum was $0.10 per ounce and the standard price was $0.08 per ounce. There are no beginning or ending inventories of aluminum.
Calculate the materials price and usage variances using the columnar and formula approaches. Enter amounts as positive numbers and select Favorable or Unfavorable.
Material Price Variance: $37,500 (Favorable or Unfavorable
)
Material Usage Variance: $19,200 (
Favorable
or Unfavorable)
1.
Determine the material price variance = (actual cost per unit - standard cost per unit) x actual quantity
2.
Compare the actual to the standard cost and determine if the result from above is favorable or unfavorable
3.
Determine the material usage variance = (actual quantity - standard quantity) x standard cost per unit
4.
Compare the actual to the standard quantities and determine if the result from above is favorable or unfavorable
Branch Company provided the following information:
Standard fixed overhead rate (SFOR) per direct labor hour $5.00 Actual fixed overhead $305,000 BFOH $300,000 Actual production in units 16,000
Standard hours allowed for actual units produced (SH) 64,000
1.
Using the columnar approach, calculate the fixed overhead spending and volume variances.
1.
For the columnar approach, select the formula in the first row and then enter the calculations based on the formula in the second row. The third row compares the first and second columns and the second and third columns to determine the spending and volume variances.
2.
The formula approach for the fixed overhead spending variance is: Actual FOH – BFOH
3.
The formula approach for the fixed overhead volume variance is: BFOH – (SH × SFOR)
4.
The formula approach for the total fixed overhead variance is the sum of the two variances or:
Total FOH Variance = Actual FOH – (SFOR × SH)
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