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Exam 13: Relevant Costs for Decision Making

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Question 31

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Critically analyse how variance analysis may be applied to a service organisation

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Variance analysis can be a valuable tool...

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Question 32

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A manufacturing company has a standard costing system based on direct labour-hours (DLHs) as the measure of activity. Data from the company's flexible budget for manufacturing overhead are given below: $\begin{array}{lrr} \text { Denominator level of activity } &3,700&\text { DLHs }\\ \text { Overhead costs at the denominator activity level: } &\\ \text { Variable overhead cost } &£ 28,490\\ \text { Fixed owerhead cost } &£ 47,545\\ \text { The following data pertain to operations for the most recent period:} &\\ \text { Actual hours } &3,900&\text { DLHs }\\ \text { Standard hours 3,900allowed for the actual output } &3,850&\text { DLHs }\\ \text { Actual total variable overhead cost } &£ 29,445\\ \text {Actual total fixed overhead cost } &£47,995 \\\end{array}$ - What was the fixed overhead budget variance for the period to the nearest pound

A) £615 F
B) £2,120 U
C) £1,478 U
D) £450 U

E) B) and C)
F) None of the above

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Question 33

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Franklin Glass Works uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of direct labour-hours. Each unit requires two standard hours of labour for completion. The denominator activity for the year was based on budgeted production of 200,000 units. Total overhead was budgeted at £900,000 for the year, and the fixed overhead rate was £3.00 per unit. The actual data pertaining to the manufacturing overhead for the year are presented below: $\begin{array} { l l } \text { Actual production } & 198,000 \text { units } \\\text { Actual direct labour-hours } & 440,000 \text { direct labour-hours } \\\text { Actual variable overhead } & £ 352,000 \\\text { Actual fixed overhead } & £ 575,000\end{array}$ - Franklin's fixed overhead volume variance for the year is

Discuss the relevance of Production mix and yield variances. What useful information could they give you?

The Euro Company wants to compare the performance of three business units. All the business units produce the same product with similar output per month. The company uses a flexible budget to plan and control manufacturing overhead costs. Overhead costs are applied to products on the basis of direct labour-hours. The standard cost card shows that 5 direct labour-hours are required per unit of product. Phelps Company had the following budgeted and actual data for March: $\begin{array}{lll}&\text { Actual }&\text { Budgeted }\\ \text { Units produced } & 11,000 & 10,000 \\\text { Directlabour-hours } & 65,000 & 60,000 \\\text { Variable overhead costs } & £ 84,000 &£ 80,000 \\\text { Fiked overhead costs } & £ 44,000 &£ 40,000\end{array}$ $\text { *Represents the denom inator activity for the month. }$ German Business Unit $\begin{array}{lll}&\text { Actual }&\text { Budgeted }\\ \text { Units produced } & 11,000 & 10,000 \\\text { Directlabour-hours } & 65,000 & 60,000 \\\text { Variable overhead costs } & £ 84,000 &£ 80,000 \\\text { Fiked overhead costs } & £ 44,000 &£ 40,000\end{array}$ $\text { *Represents the denom inator activity for the month. }$ French Business Unit $\begin{array}{lll}&\text { Actual }&\text { Budgeted }\\ \text { Units produced } & 11,000 & 10,000 \\\text { Directlabour-hours } & 65,000 & 60,000 \\\text { Variable overhead costs } & £ 84,000 &£ 80,000 \\\text { Fiked overhead costs } & £ 44,000 &£ 40,000\end{array}$ $\text { *Represents the denom inator activity for the month. }$ - The variable overhead efficiency variance for March for the Italian Business Unit is

The Euro Company wants to compare the performance of three business units. All the business units produce the same product with similar output per month. The company uses a flexible budget to plan and control manufacturing overhead costs. Overhead costs are applied to products on the basis of direct labour-hours. The standard cost card shows that 5 direct labour-hours are required per unit of product. Phelps Company had the following budgeted and actual data for March: $\begin{array}{lll}&\text { Actual }&\text { Budgeted }\\ \text { Units produced } & 11,000 & 10,000 \\\text { Directlabour-hours } & 65,000 & 60,000 \\\text { Variable overhead costs } & £ 84,000 &£ 80,000 \\\text { Fiked overhead costs } & £ 44,000 &£ 40,000\end{array}$ $\text { *Represents the denom inator activity for the month. }$ German Business Unit $\begin{array}{lll}&\text { Actual }&\text { Budgeted }\\ \text { Units produced } & 11,000 & 10,000 \\\text { Directlabour-hours } & 65,000 & 60,000 \\\text { Variable overhead costs } & £ 84,000 &£ 80,000 \\\text { Fiked overhead costs } & £ 44,000 &£ 40,000\end{array}$ $\text { *Represents the denom inator activity for the month. }$ French Business Unit $\begin{array}{lll}&\text { Actual }&\text { Budgeted }\\ \text { Units produced } & 11,000 & 10,000 \\\text { Directlabour-hours } & 65,000 & 60,000 \\\text { Variable overhead costs } & £ 84,000 &£ 80,000 \\\text { Fiked overhead costs } & £ 44,000 &£ 40,000\end{array}$ $\text { *Represents the denom inator activity for the month. }$ -The fixed overhead budget variance for March for the German Business Unit is

Outline the advantages of ABC variance analysis

"A budget should be fixed and not flexible. How can you change the figures once you've budgeted?" Discuss.

Baxter Corporation's master budget calls for the production of 5,000 units of its product monthly. The master budget includes indirect labour of £144,000 annually; Baxter considers indirect labour to be a variable cost. During the month of April, 4,500 units of product were produced, and indirect labour costs of £10,100 were incurred. A performance report utilizing flexible budgeting would report a spending variance for indirect labour of

The variable overhead efficiency variance is most effective in measuring

A volume variance and an efficiency variance are computed for fixed overhead costs

The flexible budget is a dynamic tool, in that a budget can be constructed to compare to any level of actual costs within the relevant range

The economic impact of the inability to reach a target denominator level of activity would best be measured by

Wicks Company has established a flexible budget for manufacturing overhead based on direct labour-hours. Budgeted costs at 100,000 direct labour-hours are as follows: $\begin{array} { l l } \text { Variable costs (total) :}\\\text { Packing supplies } & £ 70,000 \\ \text { Indirect labour } & £ 90,000\\ \text { Fixed costs (total) :}\\ \text { Utilities}& £50,000\\ \text { Rent}& £20,000\\ \text { Insurance}& £10,000 \end{array}$ - At an activity level of 70,000 direct labour-hours, the flexible budget would show the budgeted amount for utilities as

Which of the following are problems in overhead cost control? I. Overhead is us ually made up of many separate costs. II. The separate overhead costs are often small in pound amount. III. The separate overhead costs are often the responsibility of different managers.

A fixed overhead budget variance occurs as the result of a difference between the denominator level of activity (in hours) and the standard hours allowed for the actual output of the period

Franklin Glass Works uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of direct labour-hours. Each unit requires two standard hours of labour for completion. The denominator activity for the year was based on budgeted production of 200,000 units. Total overhead was budgeted at £900,000 for the year, and the fixed overhead rate was £3.00 per unit. The actual data pertaining to the manufacturing overhead for the year are presented below: $\begin{array} { l l } \text { Actual production } & 198,000 \text { units } \\\text { Actual direct labour-hours } & 440,000 \text { direct labour-hours } \\\text { Actual variable overhead } & £ 352,000 \\\text { Actual fixed overhead } & £ 575,000\end{array}$ - The standard hours allowed for actual production for the year total

At the end of the year, actual manufacturing overhead costs were £110,000 and applied manufacturing overhead costs were £118,800. If the denominator activity for the year was 20,000 machine-hours, and if 22,000 standard machine-hours were allowed for the year's production, the predetermined overhead rate per machine-hour was

Rameriz Company erred in selecting a denominator activity and chose a much higher level than was realistic. This error would most likely result in a large

The variable overhead spending variance is most effective in measuring