Chapter 7 The Master Budget and Flexible Budgeting

Each manage, regardless of level –TRUE

Activity-based budgeting provides better decision making information – TRUE

Budgeting helps management anticipate – TRUE

Long run and short-run planning – FALSE

Kaizen budgeting allows for budgeting of small incremental increases – FALSE

After a budgeting is agreed upon and finalized – FALSE

A four quarter rolling budget encourages management to be thinking – TRUE

The master budget reflects the impact of operating decisions – FALSE

Kaizen budgeting does not make sense for profit centers – FALSE

Activity-based budgeting (ABB) focuses on budgeting cost of activities – TRUE

Budgeting includes only the financial aspects – FALSE

Few businesses plan to fail – TRUE

Activity-based costing analysis takes a long-run perspective – TRUE

Budgeted financial statements are also referred – TRUE

Activity-based budgeting and Kaizen budgeting – FALSE

Kaizen budgeting encourages small incremental – TRUE

Even in the face of changing conditions –FALSE

A responsibility center is a part – TRUE

Activity based budgeting would permit the use of – TRUE

Budgets can play both planning and control – TRUE

ST CLAIRE – 17 PER UNIT

SHAMOKIN -11,200 HOURS OF MOLDING, 22,400 HOURS OF POLISHING

SHAMOKIN – 784,000
WILGERS – 2,000

GALLIART – 61,200

DEARMOND – 20,100

SCHULTZ – 180,000

BEAR – 39,068

ACCOUNTS PAYABLE,APRIL – 38,740

ACCOUNTS PAYABLE, MAY – 36,704

Denny Door - 48,000

Cooper - 177,000

Comfy Inc. - 130,000 yards

Darla Draperies – 260,000

Chase Company – 1,440,000

Luncho Inc. – 320,000

MC Answers

C. Obsolescence

B. leasing additional

C. production budget

B. DM,DMI, (Budgeted units)

Chapter 8: Standard Cost Accounting

1. When computing variances from standard costs, the difference between actual and standard
price multiplied by actual quantity yields: 

Answer: Price variance

2.The following information pertains to William Company:

Standard materials allowed     $25,000  
Unfavorable materials price variance         3,000
Favorable materials usage variance         2,000
   
Actual payroll      $30,000
Unfavorable labor rate variance             500
Unfavorable labor efficiency variance.             2,500
   
What is the entry to record the direct labor cost and variances? 
Answer:
Work in process                             27,000
Labor rate variance                            500
Labor efficiency variance               2,500
     Payroll                                                                  30,000

3. If a company follows a practice of isolating variances at the earliest point in time, what would
be the appropriate time to isolate and recognize a direct material price variance? 
Answer: When material is purchased

4. Alyssa Corporation uses a standard cost system.  Direct labor information for Product CER for
the month of October is as follows:
Standard rate   $8.00   per hour
Actual rate paid   $8.30   per hour
Standard hours allowed for actual production      1,400   hours
Labor efficiency variance   $ 800   unfavorable

What are actual hours worked? 

Answer: 1,500

5. In a standard cost system, when the materials price variance is recorded at the time the
material is purchased,  the materials purchase price variance is obtained by multiplying the: 
Answer: Actual quantity purchased by the difference between actual price and standard
price

6. Thomas Company uses a standard cost system and recognizes the materials purchase price
variance at the time materials are purchased.  Information for raw materials for Product RBI for
the month of October follows:
Standard unit price    $1.75 
Actual purchase price per unit    $1.65 
Actual quantity purchased    4,000   units
Actual quantity used    3,900   units
Standard quantity allowed for actual production          3,800   units

What is the materials purchase price variance?

Answer: $400 favorable

7. Factors to be considered in setting labor standards include all of the following except:

Answer: The purchasing manager’s estimate of suppliers’ prices.

8. PHI Company began its operations on January 1 and produces a single product that sells for
$35.00 per unit.  5,000 units were produced and 4,000 units were sold during the year.

Standard costs per unit follow:

         Standard cost
Raw materials              $12.50 
Direct labor                  6.50 
Factory overhead.                                4.00 
    
What is entry to record the finished goods? 
Answer:
Finished goods                 115,000
       Work in process                           115,000

9. Characteristics of ideal standards include all of the following except: 

Answer: They take into account normal waste and spoilage.

10. A manufacturer generally wants to set a standard that: 

Answer: Is high enough to provide motivation and promote efficiency, but is still
attainable.

11. The following information pertains to Genie Company:

Standard materials allowed     $12,000  
Unfavorable materials price variance 2,000
Favorable materials usage variance    1,000
   
Actual payroll    $20,000
Unfavorable labor rate variance    1,500
Unfavorable labor efficiency variance.       500
   
What is the entry to record the direct materials cost and variances, assuming that the price
variance is recorded when the materials are put into production? 
Answer:
Work in process                         12,000
Materials price variance             2,000
     Materials quantity variance                    1,000
     Materials                                                13,000

12. Woodside Company manufactures tables with vinyl tops.  The standard material cost for the
vinyl used per Style-R table is $7.20 based on 8 square feet of vinyl at a cost of $.90 per square
foot.  A production run of 1,000 tables in January resulted in usage of 8,300 square feet of vinyl
at a cost of $.85 per square foot, a total cost of $7,055.  If the materials price variance was
recorded when the material was issued to production, that variance was: 
Answer: $415 favorable.
13. Earl Company's direct labor costs for the month of January follow:
Actual direct labor hours    18,000
Standard direct labor hours    19,000
Direct labor rate variance--unfavorable              $  1,800
Total payroll    $117,000

What was Earl's direct labor efficiency variance?

Answer: $6,400 favorable

14. Which of the following terms best identifies the function of standard costs where any
deviation from standards can be quickly detected and responsibility pinpointed so appropriate
action may be taken? 
Answer: Management by exception

15. The materials quantity variance, in a standard cost system, is the: 

Answer: Difference between the actual and standard quantities multiplied by the standard
unit price.

16. The direct labor costs for Boundary Company follow:

Standard direct labor hours     34,000
Actual direct labor hours     33,000
Direct labor efficiency variance--favorable      $ 12,000
Direct labor rate variance--favorable     $  1,650
Total payroll     $394,350

What was Boundary's standard direct labor rate? 

Answer: $ 12.00

17. Information relating to direct labor for the McGill Company follow:
 
Actual direct labor hours             5,600
Standard direct labor hours             5,400
Total direct labor per payroll                   $53,200
Standard labor rate per hour        $9.00

The entry to record the direct labor cost is: 

Answer:
Work in process                         48,600
Labor rate variance                      2,800
Labor efficiency variance             1,800
         Payroll                                                              53,200
18. RHO Company began its operations on January 1 and produces a single product that sells
for $10.25 per unit.  Standard capacity is 80,000 units per year.  The 80,000 units were produced
and 70,000 units were sold during the year.

Manufacturing costs and selling and administrative expenses follow:

  Fixed Costs       Variable Costs
Raw materials   --        $2.50 per unit produced
Direct labor   --        1.50 per unit produced
Factory overhead  $120,000        1.00 per unit produced
Selling and      80,000 .      50 per unit sold      
administrative

What is the standard cost of manufacturing a unit of product? 

Answer: $6.50

19. The purpose of standard costing is to: 

Answer: Control costs and promote efficiency.

20. Factors to be considered in setting materials standards include all of the following except: 
Answer: Time necessary to perform tasks.

______________________________________________________________________________________________________________________________________________

 Isolating variances – when material is purchased

 Deviation from standards – management by exception
 In a standard cost system - Actual quantity purchased by the difference between actual price
and standard price
 A manufacturer generally wants to set a standard that - Is high enough to provide motivation
and promote efficiency, but is still attainable.
 When computing variances from standard costs - Price variance
 Factors to be considered in setting labor standards - The purchasing manager’s estimate of
suppliers’ prices.
 Characteristics of ideal standards – They take into account normal waste and spoilage.
 The materials quantity variance - Difference between the actual and standard quantities
multiplied by the standard unit price.
 The purpose of standard costing is to - Control costs and promote efficiency.
 Factors to be considered in setting materials standards, except - Time necessary to perform
tasks.
 Input-output – actual output @ standard hours
 The actual hourly rate – Labor Rate Variance
 An unfavourable labor efficiency – number of actual hours worked in excess of the standard
hours allowed multiplied by the standard labor rate
 What type of direct material – UNFAVORABLE, FAVORABLE

 Woodside – 415 favorable

 Woodside – 270 unfavorable
 Thomas - 400 favorable
 Thomas – 175 unfavorable
 Newstead – 2800 unfavorable
 Brussels – 1,200 unfavorable
 RHO Company – 6.50
 Earl – 6,400
 Alyssa – 1,500
 Boundary – 12.00
 Ben – 22,000
 Lee – 9.25


 William Company -
Work in process 27,000
Labor rate variance 500
Labor efficiency variance 2,500
Payroll 30,000

 PHI Company - Finished goods 115,000

Work in process 115,000

 McGill –
Work in process 48,600
 Labor rate variance 2,800
Labor efficiency variance 1,800
Payroll 53,200

 Genie Company -
Work in process 12,000
Materials price variance 2,000
Materials quantity variance 1,000
Materials 13,000
semifinals

One valuable measure of the customer perspective of the balanced scorecard is market share. True

The learning and growth perspective of the balanced scorecard evaluates the profitability of the strategy. false

Employee satisfaction is a measure of the internal business perspective of the balanced scorecard.false

The customer perspective under the balanced scorecard approach would include measures on cost reduction. false

The primary purpose of the balanced scorecard is to obtain increased operating profits for the current year.false

When evaluating managers and employees under the balanced scorecard approach, only financial measures should be
considered.false

An increase of operating income from one year to the next indicates a company’s strategy was successful.false

To evaluate the success of its strategy, a company can subdivide the change in operating income into growth, price-
recovery, and productivity components.true

When implementing a balanced scorecard, the cause-and-effect linkages are always precise.false

To achieve success, it is important to set nonfinancial objectives as well as financial objectives.true

What are the four key perspectives in the balanced scorecard?      Explain each briefly.

The four key perspectives in the balanced scorecard are the financial, customer, internal business processes and learning and
growth. Financial perspective focuses on how will the company should appear to its shareholders to succeed financially and
an example in measuring this is through gross margin percentage. Customer perspective focuses on how to satisfy its
shareholders and customers with regards to where they should excel in their business processes and an example in
measuring this is the company's market share in the industry. Internal business processes perspective focus on how they
should appear to its customers that ensures as well in achieving its vision and an example in measuring this is through the
percentage of on-time deliveries. Lastly, learning and growth perspective focuses on how can the company sustain its ability
to change, improve and grow and an example in measuring this is through employee turnover.

What is the primary purpose of the balanced scorecard?

The primary purpose of a balanced scorecard is to translate or realize an organization's mission and strategy into a set of
performance measures that put that strategy into action with clearly stated objectives, measures, targets and initiatives. It is
important to a company because aside from being monetary in nature it focuses on other aspects that are important to the
company like its human resources, how to hit their customers' wants and desires and as well as the processes in producing
their outputs.

On a cost of quality report, appraisal costs:

are incurred to identify which products do not conform to specification before they are shipped.

Product testing is an example of which type of cost on a cost of quality report? 

Appraisal.

The cost of activities that are incurred to correct defective products before they are shipped are: 

internal failure costs.

On a cost of quality report, scrap and spoilage are repairs on defective equipment are examples of: 

internal failure costs.

Cost of activities incurred to remedy shipment of defective products to customers are classified as: 

external failure costs.

Dye and Dye, Attorneys-at-Law, each bill 1,500 hours per year and receive pay of $100,000 each.  Four paralegals work for
the firm and each receives pay of $40,000 and works 2,000 hours per year. Overhead of $396,000 is anticipated, of which
$300,000 is attorney support, and the rest is paralegal support. Determine overhead under each of the following
circumstances:

a.A simplified cost approach is used based on hours.

b A simplified cost approach is used based on payroll dollars.

.

c. An activity-based costing approach is used.  Attorney support is based on labor costs, and paralegal support is based on
hours worked.

ANSWERS:
a.  A simplified cost approach is used based on hours. → $36 per hour,

b.  A simplified cost approach is used based on payroll dollars. → $1.50 of overhead per dollar of attorney payroll,

c.  An activity-based costing approach is used.  Attorney support is based on labor costs, and paralegal support is based on
hours worked. → $12 per hour of paralegal support

Walters and Witt, a law firm, is analyzing the profitability of its cases.  During the year, the firm represented the Umberg
Company in numerous routine legal issues, for which it charged a monthly retainer fee of $2,500.  Budget information for the
firm follows:

Secretarial support → $180/ partner labor hour,

Fringe benefits → 20% professional labor dollars,

Office support → $24/ professional labor hour

A. 
1.Secretarial support - $180 / partner labor hour 

2.Fringe benefits - 20% professional labor dollars

3.Office support - $24 / professional labor hour

Solution:

1. 900,000/5,000 = 180

2. 400,000/2,000,000 = 20%

3. 1,200,000/50,000 = 24

Budgeted hours:

Partners - 500k/100 = 5,000 hrs

Associates - 900k/60 = 15,000 hrs

Paralegals - 600k/20 = 30,000 hrs

Total hourss =  50,000 hrs

B. 

$14, 940

Solution:

6,260 (2300+2520+1440)+ 8,620 (4140+1252+3288)= 14,940

C.

$15,060

Solution:

30,000 - 14,940 = 15, 060

Lots of Locks is an upscale hair salon with eight stylists.  It’s budget information follows:

Budgeted direct labor cost $320,000

Budgeted overhead 160,000

Budgeted labor rate per hour.                  $20

   

Since all of the stylists are paid the same rate, the proprietor allocates overhead to jobs based on direct labor hours.  Angela
Arnold brought her wedding party to Lots of Locks for styling.  It took three designers two hours each and the supplies
totaled $50.  How much overhead was applied to the Arnold job?

$60

Boyle’s Body Shop repairs automobiles that have been involved in collisions.  It’s budget information follows:

Budgeted direct labor cost $200,000

Budgeted overhead 500,000

Budgeted labor rate per hour.              $10

   

Since all of Boyle’s technicians are paid the same rate, Boyle allocates overhead to jobs based on direct labor hours.  Paul
Evans brought his car to Boyle for fender repair.  It took 5 hours and the new parts for the job totaled $200.  What was the
total cost of the Evans job? 

$375

Boyle’s Body Shop repairs automobiles that have been involved in collisions.  It’s budget information follows:

Budgeted direct labor cost $200,000

Budgeted overhead 500,000

Budgeted labor rate per hour.                $10

   

Since all of Boyle’s technicians are paid the same rate, Boyle allocates overhead to jobs based on direct labor hours.  Paul
Evans brought his car to Boyle for fender repair.  It took 5 hours and the new parts for the job totaled $200.  If Evans was
charged $500, what was the percentage of profit to the selling price? 

25%

A report that compares the budgeted costs for the job to the actual costs incurred and indicates the variances is a: 

Cost performance report

The first budget to be prepared for a professional services firm should be the: 

Revenue budget.

Which of the following is a characteristic of a service organization?

Service is consumed at time it is provided

Which of the following is generally not considered a service organization?

Auto dealerships

 Examples of service businesses that would use job order costing would include all of the following except: 

a “quick oil change” shop that offers only basic maintenance services.

A service firm, such as a law firm, would choose direct labor dollars over direct labor hours as a cost driver for overhead
because:

Overhead is more related to dollars charged than hours worked.

An example of a direct cost that can be specifically identified with a job and does not have to be allocated to the job using
an overhead rate is:

travel expenses.

Consider the budget information for Bert and Ernie Design firm:

Professional labor $1,000,000

Administrative labor 200,000

Lease expense 50,000

Design equipment depreciation  25,000

Samples and books 10,000

Utilities 20,000

Professional hours 100,000  hours

Number of rooms redone 2,000 rooms

Bert and Ernie decide there are two cost pools, design support, which is assigned to jobs based on the number of rooms
redone, and facilities costs, which is assigned to jobs based on the number of professional labor hours.  The design support
cost pool includes design equipment depreciation and samples and books.  The lease expense and utilities are considered
facilities costs.

What is the budgeted rate per cost driver for design support? 

$17.50

Shepherd and Ford, a CPA firm uses activity-based costing to determine the costs of its cases.  Information about costs
follow:

Cost Pool Budgeted Costs    Budgeted Cost Driver Budgeted Rate

Paraprofessional support  $1,800,000 professional labor cost    $.30 / professional labor dollar
$540,000

$300 / partner labor hour

Secretarial support 900,000 3,000 partner labor hours

25,000 professional labor hours $20 / professional labor hour

Facilities  500,000

The Harrison audit required 80 professional hours, 20 of which were partner hours, and labor costs totaled $20,000.  How
much overhead was assigned to the Harrison audit? 

$13,600