ncome Statement Effects of Alternative Denominator Activity Levels; SpreadsheetApplication At a recent board meeting of the Grayson Manufacturing Company, several individuals in attendance expressed concern that they could not understand how the choice of an activity levelfor determining overhead application rates for the company could affect reported operating profits.The controller, Susanna Wu, told members of the board that, in fact, companies have some latitude inhow overhead application rates are set. For example, she told members of the board that companiescan spread budgeted fixed overhead for the period over budgeted (forecasted) activity, normal capacity, practical capacity, or even theoretical (maximum) capacity. All of this didn’t resonate well withmembers of the board, who basically saw the discussion as just another example of how accountingcan be used to manage income (i.e., “cook the books”). The chair of the finance committee of theboard asked Susanna to generate a concise report that would illustrate, in concrete terms, the issuesinvolved. In turn, you have been asked to prepare this report, which will be distributed to attendeesat the next meeting of the finance committee. These committee members are adept at using spreadsheets and therefore have requested that your report be distributed to them electronically.Based on your subsequent discussions with the controller, you have come up with the followinginformation that is pertinent to your task:a. Basis for applying factory overhead costs to units produced = Standard machine hours.b. Budgeted fixed overhead (total) = $350,000 per year.c. Standard number of machine hours per unit produced = 2.0.d. Sales data: Units sold = 11,500; unit selling price = $100.e. Standard variable manufacturing cost per unit produced = $60.25.f. Beginning inventory of finished goods = 0 units.g. Budgeted operating costs: Variable = $4.95 per unit sold; fixed = $65,000 per year.h. Actual number of units produced during the year = 12,250.i. Capacity levels (in machine hours): Theoretical capacity = 30,000 hours; practical capacity =27,000 hours; normal capacity = 25,000 hours; budgeted (forecasted) usage = 24,000 hours.Required1. Develop an Excel spreadsheet to calculate the amount of the fixed overhead production volume variance(rounded to the nearest whole dollar) under each of the following denominator activity levels that can beused to set the fixed overhead allocation rate: (a) theoretical capacity, (b) practical capacity, (c) normalcapacity, and (d) budgeted capacity usage. Indicate in each case whether the variance is favorable (F) orunfavorable (U)
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
ncome Statement Effects of Alternative Denominator Activity Levels; Spreadsheet
Application At a recent board meeting of the Grayson Manufacturing Company, several individuals in attendance expressed concern that they could not understand how the choice of an activity level
for determining
The controller, Susanna Wu, told members of the board that, in fact, companies have some latitude in
how overhead application rates are set. For example, she told members of the board that companies
can spread budgeted fixed overhead for the period over budgeted (
members of the board, who basically saw the discussion as just another example of how accounting
can be used to manage income (i.e., “cook the books”). The chair of the finance committee of the
board asked Susanna to generate a concise report that would illustrate, in concrete terms, the issues
involved. In turn, you have been asked to prepare this report, which will be distributed to attendees
at the next meeting of the finance committee. These committee members are adept at using spreadsheets and therefore have requested that your report be distributed to them electronically.
Based on your subsequent discussions with the controller, you have come up with the following
information that is pertinent to your task:
a. Basis for applying
b. Budgeted fixed overhead (total) = $350,000 per year.
c. Standard number of machine hours per unit produced = 2.0.
d. Sales data: Units sold = 11,500; unit selling price = $100.
e. Standard variable manufacturing cost per unit produced = $60.25.
f. Beginning inventory of finished goods = 0 units.
g. Budgeted operating costs: Variable = $4.95 per unit sold; fixed = $65,000 per year.
h. Actual number of units produced during the year = 12,250.
i. Capacity levels (in machine hours): Theoretical capacity = 30,000 hours; practical capacity =
27,000 hours; normal capacity = 25,000 hours; budgeted (forecasted) usage = 24,000 hours.
Required
1. Develop an Excel spreadsheet to calculate the amount of the fixed overhead production volume variance
(rounded to the nearest whole dollar) under each of the following denominator activity levels that can be
used to set the fixed overhead allocation rate: (a) theoretical capacity, (b) practical capacity, (c) normal
capacity, and (d) budgeted capacity usage. Indicate in each case whether the variance is favorable (F) or
unfavorable (U)
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