STUDY UNIT TWENTY COSTING SYSTEMS AND VARIANCE ANALYSIS Flashcards Preview

My BEC > STUDY UNIT TWENTY COSTING SYSTEMS AND VARIANCE ANALYSIS > Flashcards

Flashcards in STUDY UNIT TWENTY COSTING SYSTEMS AND VARIANCE ANALYSIS Deck (35):
1

Weighted-average and first-in, first-out (FIFO) equivalent units would be the same in a period when which of the following occurs?

A. No beginning inventory exists.
B. Both a beginning and an ending inventory exist but are not necessarily equal.
C. Beginning inventory units equal ending inventory units.
D. No ending inventory exists.

A. No beginning inventory exists.
Answer (A) is correct.
Equivalent units of production (EUP) is the number of complete goods that could have been produced using the inputs consumed during the period. Two methods of calculating EUP are in common use: weighted-average and FIFO. Under the weighted-average method, units in beginning inventory are treated as if they were started and completed during the current period. Beginning inventory is therefore not included in the EUP calculation. Under the FIFO method, units in beginning inventory are part of the EUP calculation. If no beginning inventory exists, then weighted-average and FIFO EUP would be the same.
(20.1.2)

2

In an income statement prepared as an internal report using the variable costing method, fixed selling and administrative expenses are

A. Not used.
B. Used in the computation of operating income but not in the computation of the contribution margin.
C. Used in the computation of the contribution margin.
D. Treated the same as variable selling and administrative expenses.

B. Used in the computation of operating income but not in the computation of the contribution margin.
Answer (B) is correct.
In a variable costing income statement, all variable costs are deducted from sales revenue to arrive at the contribution margin. Total fixed costs are then deducted from the contribution margin to determine operating income. Thus, fixed selling and administrative expenses would be used in the computation of operating income but not in the computation of the contribution margin.
(19.1.10)

3

In computing the current period’s manufacturing cost per equivalent unit of production (EUP), the FIFO method of process costing considers current period costs

A. Plus cost of beginning work-in-process (BWIP) inventory.
B. Less cost of beginning work-in-process (BWIP) inventory.
C. Only.
D. Plus cost of ending work-in-process (EWIP) inventory.

C. Only.
Answer (C) is correct.
An equivalent unit of production is a set of inputs required to manufacture one physical unit. Calculating equivalent units for each factor of production facilitates measurement of output and cost allocation when work-in-process exists. Under the FIFO assumption, only current-period costs are allocated between cost of goods manufactured and ending work in process because FIFO maintains beginning inventory costs completely separable from current-period costs. The cost per EUP considers only current-period costs.
(20.1.7)

4

As goods are completed, their cost is credited to WIP and debited to cost of goods sold.
True.
False.

False.
Your answer is correct.
As goods are completed, their cost is credited to WIP and debited to finished goods. As the finished goods are sold, their cost is debited to cost of goods sold.

5

Under the LIFO assumption, only the costs incurred in the current period are allocated between finished goods and EWIP.
True.
False


False.
Your answer is correct.
Under the FIFO assumption, only the costs incurred in the current period are allocated between finished goods and EWIP. Beginning inventory costs are maintained separately from current period costs.

6

Under the FIFO method of EUP, units in beginning work-in-process are treated the same as units started and completed during the current period.
True.
False.

False.
Your answer is correct.
Under the weighted-average method of EUP, units in beginning work-in-process are treated the same as units started and completed during the current period. This method averages the costs of beginning work-in-process with the costs of current-period production.

7

Units started and completed during the current period are equal to units started minus beginning work-in-process.
True.
False.

False.
Your answer is correct.
Units started and completed during the current period are equal to units started minus ending work-in-process.

8

Cost pools are a set of work actions undertaken within the entity, and an activity is established for each cost pool.
True.
False.

False.
Your answer is correct.
An activity is a set of work actions undertaken within the entity, and a cost pool is established for each activity.

9

Direct labor and direct materials are not traced to products or service units when using a traditional costing system.
True.
False.

False.
Your answer is correct.
Direct labor and direct materials are traced to products or service units when using a traditional costing system.

10

An unfavorable variance occurs when the actual costs are greater than standard.
True.
False.

True.
Your answer is correct.
When actual costs and standard costs differ, the difference is a variance. A favorable variance arises when actual costs are less than standard costs. An unfavorable variance occurs when the actual costs are greater than standard.

11


A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct labor efficiency variance?
A $30,000 unfavorable.
B $25,000 unfavorable.
C $25,000 favorable.
D $30,000 favorable.

D $30,000 favorable.
This answer is correct.
The labor usage (efficiency) variance is the difference between the standard hours and the actual hours worked, times the standard wage rate. Standard hours to produce 10,000 widgets are 5,000 hours (10,000 × 0.5 hour)

Labor efficiency variance

=

(SQ – AQ) × SP

=

(5,000 hours – 3,000 hours) × $15

=

2,000 hours × 15

=

$30,000 favorable

12

Which of the following is a disadvantage of using a process costing system versus job-order costing?
A It is difficult to determine cost of goods sold when partial shipments are made before completion.
B It involves the calculation of stage of completion of goods-in-process and the use of equivalent units.
C It is difficult to ensure that materials and labor are accurately charged to each specific job.
D It is expensive to use as a good deal of clerical work is required.

B It involves the calculation of stage of completion of goods-in-process and the use of equivalent units.
This answer is correct.
Process costing is used to assign costs to similar products that are mass produced on a continuous basis. Costs are accumulated for a cost object consisting of a large number of similar units of goods or services, work-in-process is stated in terms of equivalent units, and unit costs are established based on the average cost of all units. Process costing, therefore, involves the calculation of the stage of completion of goods-in-process, a necessary step in determining the number of equivalent units.

13

Which of the following statements about activity-based costing (ABC) is false?
A Activity-based costing differs from traditional costing systems in that products are not cross-subsidized.
B Activity-based costing is useful for allocating manufacturing overhead costs.
C Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
D In activity-based costing, cost drivers are what cause costs to be incurred.

C Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products.
This answer is correct.
ABC determines the activities that will serve as cost objects and then accumulates a cost pool for each activity using the appropriate activity base (cost driver). It is a system that may be employed with job order or process costing methods. Thus, when there is only one product, the allocation of costs to the product is trivial. All of the cost is assigned to the one product; the particular method used to allocate the costs does not matter.

14


For the current-period production levels, XL Molding Co. budgeted 8,500 board feet of production and used 9,000 board feet for actual production. Material cost was budgeted at $2 per foot. The actual cost for the period was $3 per foot. What was XL’s material efficiency variance for the period?
A $1,500 favorable.
B $1,000 unfavorable.
C $1,500 unfavorable.
D $1,000 favorable.

B $1,000 unfavorable.
This answer is correct.
The materials efficiency variance equals the standard cost times the difference between the actual quantity used and the standard quantity. Consequently, the materials efficiency variance is $1,000 [(8,500 – 9,000) × $2]. Because actual materials used exceeded budgeted materials, the variance is unfavorable.

15

Nile Co. is a manufacturer whose cost assignment and product costing procedures follow activity-based costing principles. Activities have been identified and classified as being either value-adding or nonvalue-adding as to each product. Which of the following activities used in Nile’s production process is nonvalue-adding?
A Heat treatment activity.
B Drill press activity.
C Raw materials storage activity.
D Design engineering activity.

C Raw materials storage activity.
This answer is correct.
Analysis by activity provides for better cost control because of identification of nonvalue-adding activities. A value-added activity contributes to customer satisfaction or meets a need of the entity. A nonvalue-adding activity does not make such a contribution. It can be eliminated, reduced, or redesigned without impairing the quantity, quality, or responsiveness of the product or service desired by customers or the entity. For example, raw materials storage may be greatly reduced or eliminated in a just-in-time (JIT) production system without affecting customer value.

16

Central Winery manufactured two products, A and B. Estimated demand for product A was 10,000 bottles and for product B was 30,000 bottles. The estimated sales price per bottle for A was $6.00 and for B was $8.00. Actual demand for product A was 8,000 bottles and for product B was 33,000 bottles. The actual price per bottle for A was $6.20 and for B was $7.70. What amount would be the total selling price variance for Central Winery?
A $3,700 unfavorable.
B $3,700 favorable.
C $14,100 favorable.
D $8,300 unfavorable.

D $8,300 unfavorable.
This answer is correct.
The selling price variance equals the actual unit sales times the difference between the actual and budgeted prices. For A, it equals $1,600 F [8,000 × ($6.20 actual – $6.00)]. For B, it equals $9,900 U [33,000 × ($8.00 – $7.70 actual)]. The total is $8,300 U ($9,900 U – $1,600F).

17


Black, Inc., employs a weighted-average method in its process costing system. Black’s work-in-process inventory on June 30 consists of 40,000 units. These units are 100% complete with respect to materials and 60% complete with respect to conversion costs. The equivalent unit costs are $5.00 for materials and $7.00 for conversion costs. What is the total cost of the June 30 work-in-process inventory?
A $480,000
B $200,000
C $288,000
D $368,000

D $368,000
This answer is correct.
Because the weighted-average method of process costing is used, no distinction is made between current-period and prior-period costs. Given 40,000 physical units that are 100% complete with regard to materials, the equivalent-unit cost of materials is $200,000 [(40,000 × 100%) × $5]. Given also that these units are 60% complete with regard to conversion costs, the equivalent-unit cost of conversion is $168,000 [(40,000 × 60%) × $7]. The total cost of work-in-process given equivalent-unit data is therefore $368,000 ($200,000 + $168,000).

18


A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct labor efficiency variance?
A $30,000 unfavorable.
B $25,000 unfavorable.
C $25,000 favorable.
D $30,000 favorable.

D $30,000 favorable.
This answer is correct.
The labor usage (efficiency) variance is the difference between the standard hours and the actual hours worked, times the standard wage rate. Standard hours to produce 10,000 widgets are 5,000 hours (10,000 × 0.5 hour)

Labor efficiency variance

=

(SQ – AQ) × SP

=

(5,000 hours – 3,000 hours) × $15

=

2,000 hours × 15

=

$30,000 favorable

19

The difference between standard hours at standard wage rates and actual hours at standard wage rates is referred to as which of the following types of variances?
A Indirect labor spending.
B Labor rate.
C Direct labor spending.
D Labor usage.

D Labor usage.
This answer is correct.
The labor usage (efficiency) variance is the variance attributable to a difference between the budgeted hours and the actual hours worked, times the standard hourly wage [(SQ – AQ) × SP or (SQ × SP) – (AQ × SP)].

20

Standards for a product of Acme Mfg. Co. was 10,000 units of raw materials at a price of $20 per unit. The product’s actual usage of materials was 11,200 units at $18.50 per unit. What was Acme’s materials price variance?
A $15,000 favorable.
B $16,800 favorable.
C $24,000 unfavorable.
D $7,200 unfavorable.

B $16,800 favorable.
This answer is correct.
The materials price variance equals the actual quantity of materials purchased (in this question the assumption is that the amount used and purchased is the same) times the difference between the standard price and the actual price.

Materials price variance

=

AQ × (SP – AP)

=

11,200 units × ($20 – $18.50)

=

11,200 units × ($1.50)

=

$16,800 favorable
View Subunit 20.4 Outline

21

Which of the following types of variances would a purchasing manager most likely influence?
A Direct materials quantity.
B Direct labor efficiency.
C Direct labor rate.
D Direct materials price.

D Direct materials price.
This answer is correct.
The purchasing manager is in charge of purchasing the materials used in production. It is his/her responsibility to negotiate the best possible price for materials subject to quantity, quality, availability, and other factors. The actual price of the materials is used in the calculation of the direct materials price variance.
View Subunit 20.4 Outline

22

Weighted-average and first-in, first-out (FIFO) equivalent units would be the same in a period when which of the following occurs?
A Both a beginning and an ending inventory exist but are not necessarily equal.
B No ending inventory exists.
C Beginning inventory units equal ending inventory units.
D No beginning inventory exists.

D No beginning inventory exists.
This answer is correct.
Equivalent units of production (EUP) is the number of complete goods that could have been produced using the inputs consumed during the period. Two methods of calculating EUP are in common use: weighted-average and FIFO. Under the weighted-average method, units in beginning inventory are treated as if they were started and completed during the current period. Beginning inventory is therefore not included in the EUP calculation. Under the FIFO method, units in beginning inventory are part of the EUP calculation. If no beginning inventory exists, then weighted-average and FIFO EUP would be the same.
View Subunit 20.1 Outline

23

Kew Co. had 3,000 units in work-in-process at April 1 that were 60% complete as to conversion cost. During April, 10,000 units were completed. At April 30, the 4,000 units in work-in-process were 40% complete as to conversion cost. Direct materials are added at the beginning of the process. How many units were started during April?
A 11,000
B 9,000
C 10,000
D 9,800

A 11,000
This answer is correct.
The following physical flow formula may be used to calculate the unknown:
BWIP + Units started

=

Units completed + EWIP
3,000 + Units started

=

10,000 + 4,000
Units started

=

11,000
View Subunit 20.2 Outline

24

In a process cost system, the application of factory overhead usually is recorded as an increase in
A Work-in-process inventory control.
B Cost of goods sold.
C Factory overhead control.
D Finished goods inventory control.

A Work-in-process inventory control.
This answer is correct.
The principal distinction between process costing and job-order costing systems is that the latter use subsidiary WIP and finished goods ledgers to account for separate jobs. However, the same general ledger accounts are used in both systems, and cost flow among accounts is also the same. Both systems increase work-in-process control to record applied overhead.
View Subunit 20.1 Outline

25

Virgil Corp. uses a standard cost system. In May, Virgil purchased and used 17,500 pounds of materials at a cost of $70,000. The materials quantity variance was $2,500 unfavorable and the standard materials allowed for May production was 17,000 pounds. What was the materials price variance for May?
A $15,000 favorable.
B $17,500 unfavorable.
C $15,000 unfavorable.
D $17,500 favorable.

D $17,500 favorable.
This answer is correct.
The materials quantity (usage or efficiency) variance can be used to derive the standard price for materials as follows:
(SQ – AQ) × SP

=

Materials quantity variance
(17,000 lbs. – 17,500 lbs.) × SP

=

–$2,500
–500 lbs. × SP

=

–$2,500
SP

=

$5 per lb.
The materials price variance equals the actual amount purchased times the difference between the standard price and actual price.
Materials price variance

=

AQP × (SP – AP)

=

$17,500 × ($5 – $4)

=

$17,500 favorable, since the actual amount is less than the budgeted amount.
View Subunit 20.4 Outline

26

Management has reviewed the standard cost variance analysis and is trying to explain an unfavorable labor efficiency variance of $8,000. Which of the following is the most likely cause of the variance?
A The new labor contract increased wages.
B The department manager has chosen to use highly skilled workers.
C The quality of raw materials has improved greatly.
D The maintenance of machinery has been inadequate for the last few months.

D The maintenance of machinery has been inadequate for the last few months.
This answer is correct.
The labor efficiency variance is the difference between the standard number of hours and the actual number worked, times the standard hourly wage. An unfavorable labor efficiency variance may have many causes, for example, (1) improper or inadequate maintenance, (2) use of unskilled workers, (3) poor scheduling, (4) use of low-grade materials, or (5) unrealistic standards. Inadequate maintenance of machinery might cause machines to work inefficiently and even lead to breakdowns. This would result in additional unplanned labor hours and worker downtime.
View Subunit 20.4 Outline

27

In the computation of manufacturing cost per equivalent unit, the weighted-average method of process costing considers
A Current costs minus cost of beginning work-in-process inventory.
B Current costs plus cost of beginning work-in-process inventory.
C Current costs only.
D Current costs plus cost of ending work-in-process inventory.

B Current costs plus cost of beginning work-in-process inventory.
This answer is correct.
The weighted-average method of process costing combines the costs of work done in the previous period and the current period. Thus, the cost of the equivalent units is equal to the current cost (current period) plus the cost of BWIP (previous period).
View Subunit 20.1 Outline

28

In an activity-based costing system, what should be used to assign a department’s manufacturing overhead costs to products produced in varying lot sizes?
A Multiple cause-and-effect relationships.
B Relative net sales values of the products.
C A single cause-and-effect relationship.
D A product’s ability to bear cost allocations.

A Multiple cause-and-effect relationships.
This answer is correct.
Instead of using a single allocation base for overhead, an ABC system determines the multiple activities associated with the incurrence of costs and then accumulates a cost pool for each activity using the appropriate activity base (cost driver). Consequently, overhead is assigned based on the multiple cause-and-effect relationships between activities and their cost drivers.

View Subunit 20.3 Outline

29

An equivalent unit of direct materials or conversion cost is equal to
A A unit of work-in-process inventory.
B Fifty percent of the direct materials or conversion cost of a unit of finished goods inventory (assuming a linear production pattern).
C The amount of direct materials or conversion cost necessary to complete one unit of production.
D The amount of direct materials or conversion cost necessary to start a unit of production in work-in-process.

C The amount of direct materials or conversion cost necessary to complete one unit of production.
This answer is correct.
Equivalent units of production (EUP) measure the amount of work performed in each production phase in terms of fully processed units during a given period. Incomplete units are restated as the equivalent amount of completed units. The calculation is made separately for direct materials and conversion cost (direct labor and overhead).
View Subunit 20.1 Outline

30

Quick Co. was analyzing variances for one of its operations. The initial budget forecast production of 20,000 units during the year with a variable manufacturing overhead rate of $10 per unit. Quick produced 19,000 units during the year. Actual variable manufacturing overhead costs were $210,000. What amount would be Quick’s flexible budget variance for the year?

A. $10,000 unfavorable.
B. $20,000 favorable.
C. $10,000 favorable.
D. $20,000 unfavorable.

D. $20,000 unfavorable.
Answer (D) is correct.
The flexible budget variance is the difference between the variable overhead applied and the actual costs incurred. The variable overhead costs applied was $190,000 (19,000 units × $10 per unit). Actual variable manufacturing overhead costs were $210,000. Thus, the flexible budget variance for the year was $20,000 unfavorable ($190,000 – $210,000), and variable overhead was underapplied by $20,000.
(20.5.86)

31

The fixed factory overhead application rate is a function of a predetermined activity level. If standard hours allowed for good output equal this predetermined activity level for a given period, the volume variance will be

A. Either favorable or unfavorable, depending on the budgeted overhead.
B. Zero.
C. Unfavorable.
D. Favorable.

B. Zero.
Answer (B) is correct.
The volume variance is the difference between the amount of fixed overhead applied and the amount budgeted. Thus, given no difference between the predetermined activity level and the standard input allowed for the actual output, no variance occurs.
(20.5.94)

32

A basic assumption of activity-based costing (ABC) is that

A. Products or services require the performance of activities, and activities consume resources.
B. Only costs that respond to unit-level drivers are product costs.
C. Only variable costs are included in activity cost pools.
D. All manufacturing costs vary directly with units of production.

A. Products or services require the performance of activities, and activities consume resources.
Answer (A) is correct.
ABC identifies activities needed to provide products or services, assigns costs to those activities, and then reassigns costs to the products or services based on their consumption of activities. ABC helps to manage costs by providing more detailed analyses of costs than traditional methods. It also facilitates cost reduction by determining what activities do and do not add value to the product or service.
(20.3.47)

33

Standards for a product of Acme Mfg. Co. was 10,000 units of raw materials at a price of $20 per unit. The product’s actual usage of materials was 11,200 units at $18.50 per unit. What was Acme’s materials price variance?

A. $24,000 unfavorable.
B. $15,000 favorable.
C. $16,800 favorable.
D. $7,200 unfavorable.

Answer (C) is correct.
The materials price variance equals the actual quantity of materials purchased (in this question the assumption is that the amount used and purchased is the same) times the difference between the standard price and the actual price.

Materials price variance

=

AQ × (SP – AP)

=

11,200 units × ($20 – $18.50)

=

11,200 units × ($1.50)

=

$16,800 favorable
(20.4.72)

34

The standard direct materials cost to produce a unit of Lem is 4 meters of materials at $2.50 per meter. During May, 4,200 meters of materials costing $10,080 were purchased and used to produce 1,000 units of Lem. What was the materials price variance for May?

A. $420 favorable.
B. $80 unfavorable.
C. $480 unfavorable.
D. $400 favorable.

A. $420 favorable.
Answer (A) is correct.
The actual price paid for materials during May ($10,080 actual cost ÷ 4,200 meters used) is $2.40 per meter. The materials price variance equals the actual quantity of materials purchased, times the difference between the actual price of materials and the standard price. The materials price variance for the month can thus be calculated as follows:
Materials price variance

=

AQ × (SP – AP)

=

4,200 meters × ($2.50 – $2.40)

=

4,200 meters × .10

=

$420 favorable

35

A department adds material at the beginning of a process and identifies defective units when the process is 40% complete. At the beginning of the period, there was no work in process. At the end of the period, the number of work-in-process units equaled the number of units transferred to finished goods. If all units in ending work in process were 66% complete, then ending work in process should be allocated

A. None of the normal defective unit costs.
B. 50% of the material costs and 40% of the conversion costs of all normal defective unit costs.
C. 50% of all normal defective unit costs.

C. 50% of all normal defective unit costs.
Answer (C) is correct.
Inspection occurs when the units are 40% complete. Hence, EWIP, which is 66% complete, contains good units only. Because normal spoilage attaches to good units, and the units transferred to finished goods equal those in EWIP, the normal defective unit costs should be allocated 50% to EWIP and 50% to finished goods.
(20.1.9)