Final review

Chapter 2

100

• How is predetermined overhead rate calculated?

• By adding together all estimated manufacturing overhead costs and dividing by the estimated amount of a specific cost driver.

200

• How is applied overhead calculated?

• Applied overhead is calculated by multiplying the PDOHR (calculating using estimates) by the actual amount of a specified cost driver.

300

• A company computes its plantwide PDOHR annually based on the rate of machine hours. At the beginning of the year, they estimate that 35,000 machine hours and 43,000 direct labor hours are required. Additionally, they estimate $78,000 of fixed MOH cost as well as $3.5 per machine hour. Their actual MOH cost for the year was $210,000, actual machine hours were 37,714, and actual DL hours were 45,000. Calculate the PDOHR.

• Estimated MOH = 78,000 + (3.5*35,000) = $200,500
• Estimated cost driver = 35,000
• PDOHR = $5.73

400

• Your company estimates $150,000 of total manufacturing overhead for an estimated activity level of 13,000 direct labor hours. The company actually incurred $115,000 of manufacturing overhead and 11,000 direct labor-hours during the period. Determine the amount of underapplied or overapplied manufacturing overhead for the period and how it affects the company's gross margin.

• Underapplied OH = $11,500
• PDOHR 150,000 / 13,000 = $11.5
• Applied OH = 11.5 * 11,000 = 126,500
• Underapplied OH = 126,500 – 115,000 = 11,500
• Underapplied overhead decreases the company’s gross margin, because COGS is less than it should be. The extra $11,500 is sitting in finished goods inventory.

500

A company has 2 departments, machining and assembly. The following costs are estimated at the beginning of the year, and the following information is given regarding Job A:

Estimated data

Machining

Assembly

Total

DL hours

16,000

38,000

54,000

Machine hours

65,000

5,000

70,000

MOH

$550,000

$150,00

$700,000

Job A

Machining

Assembly

Total

DL hours

7

15

22

Machine hours

13

4

17

Assume the company uses a plantwide PDOHR on the basis of DL hours. How much MOH cost is applied to job A?

• Plantwide PDOHR = total estimated MOH / total estimated DL hours = 700,000 / 54,000 = 12.96
• Applied OH = PDOHR * actual cost driver = 12.96 * 22 = $285

Chapter 5

100

• Describe the difference between job order and process costing, and when each would be used.

• In job order costing, manufacturing overhead costs for each product is accumulated and divided by the main cost driver. In process costing, equivalent units of products must be calculated. Job-order costing is used when most of the products that the company makes are unique (ex, film studio), and process costing is used when a company makes mass produced products (ex, chips company). Most companies use a mix of the two.

200

•  The beginning WIP on March 1 has 5,000 units. During March, 12,000 units are started. On March 31, 3,000 units remain in ending WIP. Calculate the number of units completed and transferred out during March.

• Beginning wip + started = ending wip + completed and transferred
• 5,000 + 12,000 = 3,000 + x; x = 14,000

300

During the month, 15,000 units were completed and transferred out. The following information about the ending WIP inventory has been given:

Direct Materials:           2,000 units 60% complete

Conversion:                       1,500 units 80% complete

Calculate the total amount of equivalent units.

• Total = 32,400
• Materials: (15,000 * 100%) + (2,000 * 60%) = 16,200
• Conversion: (15,000 * 100%) + (1,500 * 80%) = 16,200

400

The beginning WIP on April 1 has 4,000 units. During April, 14,500 units are started. The following information has been given about costs incurred:

                                                                                          Materials                              Conversion

Beginning WIP:                                                   $5,000                                     $4,000

Added during month:                                    $65,000                                 $36,000

Additionally, the ending WIP inventory has 2,000 units. The following information has been given:

Direct Materials:           70% complete

Conversion:                       75% complete

Calculate the total amount of equivalent units.

• Units completed = 16,500
• EU; Materials – (16,500 * 100%) + (2,000 * 70%) = 17,900. Conversion - (16,500 * 100%) + (2,000 * 75%) = 18,000
• Total = 25,900

500

The beginning WIP on September 1 has 7,000 units. During September, 33,500 units are started. On September 30, 5,800 units remain in ending WIP. The following information has been given about costs incurred:

                                                                                          Materials                              Conversion

Beginning WIP:                                                   $10,000                                 $7,500

Added during month:                                    $130,000                              $105,000

Additionally, the following information about the beginning and ending WIP inventories has been given:

Beginning:

Direct Materials:           70% complete

Conversion:                       75% complete

Ending:

Direct Materials:           65% complete

Conversion:                       55% complete

Calculate the equivalent units for direct materials and the equivalent units for conversion.

• 7000 + 33500 = x + 5800; x = 34,700
• EU; Materials: (34700 * 100%) + (5800 * 65%) = 38,470. Conversion: (34700 * 100%) + (5800 * 55%) = 37,890

Chapter 6

100

Sales are 200 and variable expenses are 100. Calculate the contribution margin ratio

• CMR = Contribution margin / sales
• CM = 200 – 100 = 100
• 100 / 200 = 0.5

200

If fixed expenses are 20,000, sales are $150,000, and variable expenses are $40,000, what is the net operating income?

• 150,000 – 40,000 – 20,000 = 90,000

300

A company sells products for $100 per product. Each product also incurs $40 of variable expenses and the company has $15,000 of fixed expenses in total. If the company wants to make a profit of $10,000, what is the amount of sales that they need?

• Target sales = fixed expense + target profit / CMR
• CMR = 100-40 = 60/100 = .6
• 25,000 / .6 = $41,667

400

A firm’s fixed expenses are $560,000 per year. The variable expense per product is $35. The selling price of each product is $85. The company sold 20,000 products last year. The sales manager believes that a reduction in the sales price to $75 per product will result in new sales of 3,000 products next year. What will be the break-even point in dollars if the price is changed?

• BE$ = FE / CMR
• CMR = contribution margin / sales = 40 / 75 = .53
• 560,000 / .53 = $1,060,000

500

The following information is provided:

Variable expense ratio: 40%

Sales: $200,000

Fixed expenses: $70,000

What is the operating leverage and how would a 15% increase in sales affect NOI?

• OL = CM/NOI
• CM = sales – var exp = 200,000 – 80,000 = $120,000
• Sales = 200,000
• VER = VE/sales
• .4 = VE/200,000
• VE = 80,000
• NOI = CM – fixed expenses = 120,000 – 70,000 = 50,000
• 120,000 / 50,000 = 2.4 OL
• A 15% increase in sales would increase NOI by 36%. (2.4 * 15%)

Chapter 8

100

Explain the sequence of sub-budgets within the master budget.

• The master budget always starts with the sales budget. From there it goes to the production budget, then the DL/DM/MOH budget, and finally ending in the cash budget. 

200

What is the idea of budgetary control, and what are some reasons why companies prepare budgets?

• Budgetary control is a form of planning that allows companies to track expenses, compare them to planned expenses, and decide whether corrective action should be taken place.

300

A company has the following inventory requirements: The finished goods inventory on hand at the end of each month must equal 5,000 units plus 15% of next month’s sales.

Calculate the FG inventory for June, July, and August based on the following projected sales:

June – 32,000

July – 35,000

August – 40,000

September – 38,000

• June: 5000 + (.15 * 35000) = 10,250
• July: 5000 + (.15 * 40000) = 11,000
• August: 5000 + (.15 * 38000) = 10,700

400

Your company asks you to prepare the following budgets given the following information:

• Sales budget for the third quarter, given the following budgeted unit sales. Each unit sells for $25 each.
• Direct labor and direct material budget for the month of August. Each unit of product requires 3.5 pounds of material and 2 hours of labor at $20 per hour.

• 100,000 * 25 = $2,500,000
• 125,000 * 25 = $3,125,000
• 135,000 * 25 = $3,375,000
• Direct labor:
• 126,000 * 0.5 = 63,00 hours * $25 = $1,575,500
• Direct material:
• 126,000 * 2 = 252,000 pounds * $1.5 = $378,000

500

500: Management has prepared the following summary of your company’s budgeted cash flows.

1st quarter

2nd quarter

3rd quarter

4th quarter

Total cash receipts

$180,000

$330,000

$210,000

$230,000

Total cash disbursements

$250,000

$230,000

$220,000

$240,000

The company’s beginning cash balance for the upcoming fiscal year is $20,000. The company requires a minimum cash balance of $10,000 and may borrow any amount needed from a local bank.

Prepare the cash budget for the fiscal year.

answer on sheet

Chapter 9

100

What is the difference between the flexible budget and the master budget?

• Flexible budgets are budgets that are adjusted to the actual level of activity, whereas the master budget is created once at the beginning of the year and is never changed after.

200

During the quarter ending June 30, a company manufactured 40,000 products using 22,500 pounds of raw materials. The materials cost $200,000. The company budgeted each helmet to require 0.5 pounds, at a cost of $8 per pound.

What is the standard quantity of materials required to make 40,000 products?

• 0.5 * 40,000 = 20,000

300

During the quarter ending June 30, a company manufactured 40,000 products using 22,500 pounds of raw materials. The materials cost $200,000. The company budgeted each helmet to require 0.5 pounds, at a cost of $8 per pound.

Calculate the materials price variance.

• MPV = AQ (SP - AP)
• AQ = 22,500
• SP = $8
• AP = 200,000 / 22,500 = $9
• 22,500 (8 – 9) = 22,500 Unfavorable

400

QuickFurniture assembles custom furniture. During the most recent month, the company assembled 1,800 units. The following data was collected:

1. Purchased 9,200 units of raw materials at $35 per unit, for a total of $322,000. The standard amount was 10,000 units at $30 per unit.
2. Used 8,900 units of raw materials in production.
3. Worked 3,200 direct labor hours at a total labor cost of $76,800.
4. The standard labor rate is $24 per hour, and the predetermined overhead rate is $28 per labor hour.

Questions:

1. What is the material price variance?
2. What is the labor rate variance?
3. What is the overhead spending variance?

Material price variance = (Actual price - Standard price) × Actual quantity purchased
Assume standard price = $34
Price variance = ($35 - $34) × 9,200 = $9,200 unfavorable

 Labor rate variance = (Actual rate - Standard rate) × Actual hours
Rate variance = ($24 - $24) × 3,200 = $0 (no variance)

Overhead spending variance = (Actual hours × Predetermined rate) - Actual overhead cost
Standard overhead = 3,200 hours × $28 = $89,600
Actual overhead = $76,800 (given as actual cost)
Spending variance = $89,600 - $76,800 = $12,800 favorable

500

ABC Coffee produces high-quality coffee. During the last month, they produced 8,000 50-pound sacks of coffee. The following transactions occurred during production:

1. Purchased 500,000 pounds of unroasted beans at $2.00 per pound, totaling $1,000,000.
2. Out of the materials purchased, 450,000 pounds were used.
3. The company worked 2,000 direct labor hours at a total cost of $30,000 (an average rate of $15 per hour).
4. The predetermined overhead rate is $50 per direct labor hour, based on 2,200 direct labor hours. The actual total amount spent on manufacturing overhead was $12,000.
5. Additionally, the master budget prepared at the start of the year budgeted for 500,000 pounds to be used at a total cost of $1,200,000.

Calculate all 6 variances.

Material price variance = (Actual price - Standard price) × Actual quantity
Price variance = ($2.00 - $1.95) × 500,000 = $25,000 unfavorable
(They paid more for materials than the standard rate.)

Labor efficiency variance = (Actual hours - Standard hours) × Standard rate
Standard hours for 8,000 sacks = 2,000 hours (if each sack requires 0.25 hours)
Labor efficiency variance = (2,000 - 2,000) × $15 = $0 (no variance)

Overhead efficiency variance = (Actual hours - Standard hours) × Overhead rate
Overhead efficiency variance = (2,000 - 2,200) × $50 = $10,000 favorable
(They worked fewer hours than expected, resulting in favorable variance.)