Topic 2 – Strategy and Responsibility Accounting
1)Business strategy focuses on. ANS: improving the competitive position of a corporation's products or services within a specified market segment.
2)According to Porter, the competitive strategy that applies to the ability to provide unique and superior value to the buyer in terms of product quality, special features, or
after-sale service is called. ANS: differentiation.
3)Which of the following is the best description of goals? Ans: a broad indication of organizational intentions
4)__________ is an organization’s ability to offer products or services that are perceived by its customers as being superior and unique relative to those of its competitors.
Ans :Product differentiation
5)An organization that is using the cost leadership approach would. Ans:focus on productivity through efficiency improvements.
6)Which of the following is a major difference between business-level and corporate-level strategies? ANS: breadth of focus
7)Which of the following is a major source of competitive advantage? A)acquiring scarce resources b.investing in extending technology to its vendors c.developing
proprietary software d. all of the above
8)According to Porter, if a company is targeting a broad strategic market, it must choose either _____or _____. Ans. low-cost leadership; differentiation
9)A manager of a revenue center is responsible for all of the following EXCEPT: ANS the acquisition cost of the product or service sold
10)A controllable cost is any cost that can be _________ by a responsibility center manager for a period of time.ans: influence
11) Responsibility accounting: ans: focuses on whom should be asked about the information
12) A PRIMARY consideration in assigning a cost to a responsibility center is: ans who can best explain the change in that cost
Topic 3 – Budgets: Control Purpose
1. A budget serves as a benchmark against which: A. actual results can be compared.
2. The difference between the revenue or cost projection that a person provides, and a realistic estimate of the revenue or cost, is called: B. budgetary slack.
3. People create budgetary slack because: A. Their performance will look better if they beat the budget. B. There is no incentive to provide accurate forecasts. C. It helps them
cope with uncertainty. D. They believe their budget requests will be cut. E. All of the above.
4. The following events took place when Managers A, B, and C were preparing budgets for the upcoming period:I. Manager A increased property tax expenditures by 2%
when she was informed of a recent rate hike by local authorities.II. Manager B reduced sales revenues by 4% when informed of recent aggressive actions by a new
competitor.III. Manager C, who supervises employees with widely varying skill levels, used the highest wage rate in the department when preparing the labor budget.
Assuming that the percentage amounts given are reasonable, which of the preceding cases is (are) an example of building slack in budgets? C. III only.
5. Consider the following statements about budgetary slack: I. Managers build slack into a budget so that they stand a greater chance of receiving favorable performance
evaluations.II. Budgetary slack is used by managers to guard against uncertainty and unforeseen events.III. Budgetary slack is used by managers to guard against dollar cuts
by top management in the resource allocation process.Which of the above statements is (are) true? E. I, II, and III.
6. Company A uses a heavily participative budgeting approach whereas at Company B, top management develops all budgets and imposes them on lower-level personnel.
Which of the following statements is false? C. Budget padding will likely be a greater problem at Company B.
7.Building in budgetary slack includes C.making budgeted targets more easily achievable.
8.To reduce budgetary slack management may B.use external benchmark performance measures.
9. If a manager builds slack into a budget, how would that manager handle estimates of revenues and expenses? Under estimate REVENUES && overestimate EXPENSES
Topic 4 Variance 1
1. Which of the following situations cannot occur together during the same accounting period? ANS: None of the above, as all of these situations are possible :::1.
Unfavorable labor rate variance and favorable labor efficiency variance 2. Unfavourable labor efficiency variance and favorable materials quantity variance. 3. Favorable
labor rate variance and unfavorable total labor variance 4. Favorable labor efficiency variance and favorable materials quantity variance.
2. A favorable price variance for direct materials indicates that ANS: a lower price than planned was paid for materials.
3. A favorable efficiency variance for direct manufacturing labor indicates that ANS: less direct manufacturing labor-hours were used during production than planned
for actual output
4. An unfavorable price variance for direct materials might indicate ANS:that the purchasing manager purchased in smaller quantities due to a change to just-in-time
5. A favorable efficiency variance for direct materials might indicate ANS: an overskilled workforce.
Topic 5 variance ii
1 Flexible budgets reflect a company’s anticipated costs based on variations in: ANS activity levels
2 The relationship between activity and total budgeted overhead cost is represented by which of the following formulas? ANS (Budgeted variable overhead cost per unit x
total activity units) + budgeted fixed overhead costs.
3 Which of the following is not an overhead variance? ANS Variable-overhead volume variance.
Formulas for variances Formulas for variances
:- Total Budgeted monthly overhead cost = (Budgeted variable – overhead cost per activity unit X total activity units) + budgeted fixed – overhead cost per month
:- Variable overhead : 1. Variable overhead spending variance = actual variable overhead – (AH X SVR ) OR OR (AH X AVR ) – (AH X SVR)
Where AH : denoted accrual process hours :::::: AVR :- actual variable overhead rate AH) ::::::: SVR:- standard variable overhead rate
:- Variable overhead spending variance = AH(AVR – SVR)
:- variable overhead efficiency variance = (AH × SVR) – (SH × SVR) where SH= standard process hours OR :::::: SVR (AH – SH)
:- Fixed overhead budgeted variance = Actual Fixed overhead – budgeted fixed overhead
:- Fixed overhead volume variance = budgeted fixed overhead – applied fixed overhead
:- Direct material Price variance = PQ(AP- SP) where PQ= quantity purchased :: AP = Actual Price :::: SP= standard price
:- Direct material Quantity Variance = SP(AQ – SQ) where AQ= Actual quantity used ::::SQ = standard quantity allowed
:- Direct labor rate variance = AH(AR- SR) where AH= Actual hours used ;;AR= actual rate per hour ;; SR= standard rate per hour
:-direct labout efficiency varience = SR (AH –SH) where SH = standard hours allowed
Question 1 Greenfields Ltd manufactures cleaning products at its Balcatta plant. Unfortunately, during the recent floods, part of the company’s accounting records was
destroyed.The company accountant has been able to gather the following data from the waterlogged files, and has asked you to help reconstruct the missing data.
All of the raw materials purchased
during the period were used in
Standard quantity per unit of output ? ? Calculate: i) Standard quantity of
Standard price or rate per unit of input $8 per kg ? direct material per unit of output
Actual quantity used per unit of output ? 3.5 hours I) DM Quantity Var = ( AQ –SQ) SP
Actual price or rate per unit of input $7 per kg $21 per hour 40,000U = ($30,000 – SQ) $8
Actual output 10,000 units 10,000 units =240,000 - $8 *SQ
Direct material price variance $30,000 F - SQ = 25,000 kg
Direct material quantity variance ? - SQ/ Unit = 25000/10000
Total of direct material variances $10,000 U - = 2.50kg/unit
Direct labour rate variance - ?
Direct labour efficiency variance - $100,000 F
Total of direct labour variances - $ 65,000 F
ii) standard quantity of iii) standard direct labour IV) Actual quantity of direct DM Price var = (AP- SP) PQ v) direct labour rate
direct labour per unit per hour material used per unit of output $30,000 F = ($7 - $8) PQ variance
DL effic var = (AH – SH) SR DL rate var = (AR –SR) AH Total DM Variance = $10,000 U PQ = 30,000 kg Total DL variance = $ 65000
$100,000F = (35000 – SH) $20 $35,000 U = ($21 – SR) DM Price Variance = $ 30,000F As PQ=AQ DL effic = 100,000F
SH = 40,000 hours 35000 DM quantity Variance = $40,000U AQ=30,000 kg DL rate Var = $35000U
Sh/DLH = 4hrs per unit SR = $20/DLH AQ per unit = 30,000/10000
B) Which managers are generally held responsible for the material price variance and the material quantity variance? Explain your answer. ANS Production
managers are generally held responsible for the material quantity variance because they make decisions that affect how materials are used in production. Purchasing managers
are held responsible for the material price variance because they make the decisions that affect how much is paid for the materials purchased.
C) explain how standard costing system can be used to control costs in a manufacturing department? ANS Standard costs are the theoretical costs of purchasing
material and producing a product. They provide a benchmark against which actual costs may be compared.They allow the calculation of variances. Significant variances may
be investigated to determine the cause of problems, or the source of positive variances. Corrections may be made to processes, and behaviours to help ensure that
unfavourable variances do not reoccur, (and favourable variances do happen again).Responsibility for certain variances is assigned to those departments or managers who are
in the best position to influence performance in those areas
Question 2Gumnut Corporation produces containers of frozen food. During April, Gumnut produced 1,450 cases of food and incurred the following actual costs.
Variable overhead $ 11,000 Calculate the following
Fixed overhead 26,000 A) direct material price variance = PQ ( AP – SP)
Actual labour costs (8,000 direct labour hours) 151,200 = 30,000 ($2.20* - $20) which = $6,000 unfavourable
Actual material costs (30,000 kilograms purchased and used) 66,000 *$2.20 = $66,000 / 30,000
Standard cost and annual budget information are as follows:
Standard costs per Case
Direct labour (5 hours at $18) $ 90.00 B) Direct material quantity variance = SP(AQ-SQ)
Direct material (20 kg at $2) 40.00 = $2.00 (30,000 – 29000*)
Variable overhead (5 hours at $1.50) 7.50 = $2,000 unfavourable
Fixed overhead (5 hours at $3) 15.00 *29000 lbs =1450 X 20lbs per unit
Total $152.50 C) Direct labour rate variance = AH(AR – SR)
= 8,000 ( $18.90* - $18.00)
Annual Budget Information = $7200 Unfavourable
Variable overhead $150,000 *$ 18.90 = 151,200 / 8000
Fixed overhead $300,000
Planned activity for year 100,000 direct labour hours
D) direct labour efficiency e) variable overhead spending F)variable overhead efficiency G) fixed overhead budget h) fixed overhead volume
variance = SR(AH – SH) variance variance = SVR ( AH –SH ) variance = variance
= $18.00 (8,000-7250*) = $1.50 (8,000 – 7250) actual fixed overhead – =Actual fixed overhead –
= $13,500 Unfavourable =Actual variable overhead – = $1,125 Unfavourable budgeted fixed overhead applied fixed overhead
*7250 hours = 1450 units X (AH x SVR) = $26,000 - $25,000* = $25,000 - $21,750* =
5hrs per unit =$11,000 – (8000) ($1.50)= = $1000 unfavourable $3,250(positive)
$1,000 favourable *$25,000 = $ 30,000
(annual)/12 months *$21750 = 1450 units x %15.00
Consistent with the discussion in the text, we choose not to interpret the volume variance as either favorable or unfavorable. Some accountants would designate a positive
volume variance as "unfavorable" and a negative volume variance as "favorable."
Question 4 The Mancusco Company uses a flexible budget and standard costs to aid planning and control of its machining manufacturing operations. Its normal-costing
system for manufacturing has two direct-cost categories (direct materials and direct manufacturing labour – both variable) and two indirect – cost categories variable
manufacturing overhead and fixed manufacturing overhead, both allocated using direct manufacturing labour – hours).
At the 40,000 budgeted direct manufacturing labour-hour level for August, budgeted direct manufacturing labour is $800,000, budgeted variable manufacturing overhead is
$480,000, and budgeted fixed manufacturing overhead is $640,000.
The following actual results are for August:
:- Direct materials price variance (based on purchases) $176,000 F
:- Direct materials efficiency variance 69,000 U
:- Direct manufacturing labour costs incurred 522,750
:- Variable manufacturing overhead flexible-budget variance 10,350 U
:- Variable manufacturing overhead efficiency variance 18,000 U
:- Fixed manufacturing overhead incurred 597,460
:- Fixed manufacturing overhead spending variance 42,540 F
The standard cost per pound of direct materials is $11.50. The standard allowance is three pounds of direct materials for each unit of product. During August 30,000 units of
product were produced. There was no beginning inventory of direct materials. There was no beginning or ending work in process. In August, the direct materials price
variance was $1.10 per pound.
In July, labour unrest caused a major slowdown in the price of production, resulting in an unfavourable direct manufacturing labour efficiency variance of $45,000. There was
no direct manufacturing labour price variance. Labour unrest persisted into August. Some workers quit. Their average wage rate in August exceeded the standard average
wage rate by $0.50 per hour.
A)Compute the following for August:
i)Total pounds of direct materials purchased $176,000 / $1.10 = 160,000 pounds
ii) Total pounds of excess direct materials used $69,000/$11.50 = 6,000 pounds
iii) Variable manufacturing overhead spending variance $10,350 - $18,000 = $7,650F
iV) Total number of actual direct manufacturing labour-hours used = $800,000/ 40,000 hours = $20 per hour
actual direct manufacturing labour rate = $20 + $0.50 = $20.50
actual direct manufacturing labour – hours = $522,750 / $20.50 = 25,500 hours
V) Total number of standard direct manufacturing labour-hours allowed for the units produce
= $480,000 ÷ 40,000 = $12 per direct manuf. labour-hour
Variable manuf. overhead efficiency variance of $18,000 ÷ $12 = 1,500 excess hours
Actual hours – Excess hours = Standard hours allowed 25,500 – 1,500 = 24,000 hours
Vi) Production-volume variance ==Budgeted fixed manufacturing overhead rate= $640,000 ÷ 40,000 hours = $16 per direct manuf. labour-hour
Fixed manufacturing overhead allocated = $16 24,000 hours = $384,000
Production-volume variance = $640,000 – $384,000 = $256,000 U
B)Describe how Mancusco’s control of variable manufacturing overhead items differs from its control of fixed manufacturing overhead items ANS The control of
variable manufacturing overhead requires the identification of the cost drivers for such items as energy, supplies, and repairs. Control often entails monitoring nonfinancial
measures that affect each cost item, one by one. Examples are kilowatts used, quantities of lubricants used, and repair parts and hours used. The most convincing way to
discover why overhead performance did not agree with a budget is to investigate possible causes, line item by line item .Individual fixed overhead items are not usually
affected very much by day-to-day control. Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes have planning
horizons covering six months or a year (for example, management salaries) and sometimes covering many years (for example, long-term leases and depreciation on plant and
Relationship between two variences Yes, the two variances are related. (1 mark) Both are computed by comparing actual labour time to the standard hours allowed for the
output of the period. Thus, if there is an unfavorable labour efficiency variance, there will also be an unfavorable variable overhead efficiency variance.
B) Independent to requirement (A), should the performance of Glitzy Company be deemed less than satisfactory if all of its variances are unfavourable? The
performance of a division should not be considered as less than satisfactory simply because all variances are unfavourable. A firm expects unfavourable variances if it uses an
ideal performance standard. As long as the firm is making satisfactory progresses toward the standard, unfavourable variances are measures of progresses needed to attain the
goal; they are not measures of unsatisfactory performances. On the other hand, an unfavourable variance may signal that the performance of the division is below the
expectation if the firm uses a currently attainable standard. Firms with currently attainable standards expect the division to meet the goals in each and every operation.