Barton Industries processes chemicals for the pharmaceutical industry.

Wiley Richardson, company

president, was eager to see the operating results for the just completed fiscal year as he believed that
changes that were made during the year would result in increased profit on the expected sales volume of 1
million kg. At the beginning of the year, in response to a 10% increase in production costs, the sales price
had been increased 12%, and the selling and administrative departments had been given strict instructions
to hold expenses at the same level as the previous year. Therefore, Richardson was dismayed to learn that
net income had dropped despite achieving the planned increase in sales volume. Shown below are
comparative operating income statements for Barton Industries for the last two years along with budgeted
operating and financial data. This year's cost of goods sold includes an adjustment of fixed overhead costs
that were under-applied. Actual results were the same as budget, except for production volume. The
company uses the first-in, first-out inventory valuation method, and has an ending inventory of 450,000 kg.
this year.

Barton Industries
Comparative Operating Income Statements
($000 omitted)
Previous Year Current Year
Sales revenue $9,000 $11,200
Cost of goods sold 6,600 8,815
Gross profit $2,400 $ 2,385
Selling and administrative expense 1,500 1,500
Operating income $ 900 $ 885
Barton Industries
Budgeted Operating and Financial Data
Previous Year Current Year
Sales price $10.00/kg. $11.20/kg.
Material cost 1.50/kg. 1.65/kg.
Direct labor cost 2.50/kg. 2.75/kg.
 Barton Industries
Budgeted Operating and Financial Data
Previous Year Current Year
Variable overhead cost 1.00/kg. 1.10/kg.
Fixed overhead cost 3.00/kg. 3.30/kg.
Total fixed overhead costs $3,000,000 $3,300,000
Selling and administrative expense $1,500,000 $1,500,000
Sales volume 900,000 kg. 1,000,000 kg.
Beginning inventory 300,000 kg. 600,000 kg.

REQUIRED:

1. Explain why Barton Industries’ operating income decreased in the current fiscal year despite the sales price and sales volume
increases.
2. Prepare an operating income statement for the current fiscal year for Barton Industries using the variable (direct) costing method.
3. Prepare a reconciliation of the difference in Barton's operating income using the current method of absorption costing and using the
variable (direct) costing method.
4. Identify two advantages and two disadvantages of using variable (direct) costing for internal reporting.

*Source: Retired ICMA CMA Exam Questions.

Great Heart Clinic is a medical service institute that provides various services for its patients. The doctors
working for the institute are required to fill out a note in the medical system for each patient treated. The
system then generates a unique bill for each patient according to the pricing for the specific service or
treatment received. Included in each patient's bill is the applied overhead cost based on direct labor hours.
The clinic created the following overhead budget for this year, but the actual overhead was $296,047.

Direct labor hours 10,000

Overhead costs:
 Indirect material $ 3,500
 Indirect labor 45,000
 Utilities 6,000
 Insurance 78,000
 Property taxes 30,000
  Total $162,500

During this year, the doctors actually charged a total of 12,190 hours as shown below.

Doctor A 2,000
Doctor B 1,850
Doctor C 1,960
Doctor D 2,100
Doctor E 2,500
Doctor F 1,780
 Total 12,190

The overhead variance is deemed material by the CEO, and he wonders why this variance happened and
how to address this variance. The CEO is also considering implementing an activity-based costing (ABC)
system.

REQUIRED:
1. Explain whether the clinic should use a job costing system or a process costing system.
2. Calculate the applied overhead and identify if it is over or under applied. Show your calculations.
3. Identify and explain two shortcomings of using predetermined overhead rates to apply overhead.
4. Identify and explain why there is usually a difference between the applied overhead and the actual
overhead.
5. Identify and explain the appropriate accounting treatment of this under or over applied overhead amount.
6. Describe how an ABC system usually assigns overhead costs.

*Source: Retired ICMA CMA Exam Questions.