Ch 5 Flashcards
Birk Co. uses a job order cost system. The following debits (credit) appeared in Birk’s work-in-process account for the month of April 20X2:
April Description Amount
1 Balance $ 4,000
30 Direct materials 24,000
30 Direct labor 16,000
30 Factory overhead 12,800
30 To finished goods (48,000)
Birk applies overhead to production at a predetermined rate of 80% of direct labor cost. Job No. 5, the only job still in process on April 30, 20X2, has been charged with direct labor of $2,000. What was the amount of direct materials charged to Job No. 5?
A.
$3,000 (13%)
B.
$5,200 (68%)
C.
$8,800 (9%)
D.
$24,000
Choice B (Correct): The balance in Birk’s work-in-process at April 30 was $4,000 + $24,000 + $16,000 + $12,800 - $48,000 = $8,800. It consists of direct labor of $2,000 and manufacturing overhead of $2,000 x 80% or $1,600 for a total of $3,600. The remaining $5,200 is direct materials.
Expanded Explanation: The question asks for direct materials charged to Job 5. Job 5 is the only job left in ending WIP. So we know ending WIP consists entirely of Job 5 costs, and the key to answering the question is:
- Figuring out ending WIP, since it’s all Job 5, then
- Separating out the direct materials costs from the other Job 5 costs.
For Step 2, we must recall that the components of WIP are: direct materials, direct labor, and applied overhead.
Step 2 should immediately seem easy because the problem outright tells us Job 5’s direct labor costs are $2,000, and also tells us how to calculate overhead costs. So two of the three components of Job 5 are known or easily calculable.
But actually we’re forgetting that, to set up the equation to solve for x, where x = Job 5 direct materials, we need to know Job 5’s total costs. Again, since Job 5 is the only job in ending WIP, that means we need Step 1, ending WIP. Since Job 5 is the only job in ending WIP, ending WIP will equal Job 5’s total costs.
Figuring out ending WIP is a simple matter of starting with beginning WIP, adding the inputs given during the month, then subtracting the amount sent off to Finished Goods.
Therefore, ending WIP, which consists exclusively of Job 5, equals the following:
$4,000 (beginning WIP)
+ $24,000 (direct materials added to WIP)
+ $16,000 (direct labor added to WIP)
+ $12,800 (applied overhead added to WIP)
- $48,000 (WIP sent off to Finished Goods)
$4,000 + $24,000 + $16,000 + $12,800 - $48,000 = $8,800
Now we know ending WIP is $8,800. Since Job 5 is the only job in ending WIP, ending WIP equals Job 5’s total costs.
Now we can solve for x, direct materials in Job 5: ending WIP direct labor + ending WIP applied overhead + ending WIP direct materials = ending WIP total costs, or:
$2,000 + (80% x $2,000) + x = $8,800
x = $8,800 – $2,000 - $1,600 = $5,200
A company uses process costing to assign product costs. Available inventory information for a period is as follows:
Inventory (in units) Material cost Conversion cost Beginning 0 Started during the period 15,000 $75,000 $55,500 Transferred out 13,500 End of period 1,500 The ending inventory was 25% complete as to the conversion cost. 100% of direct material was added at the beginning of the process. What was the total cost transferred out?
A.
$130,500 (17%)
B.
$123,000 (15%)
C.
$121,500 (39%)
D.
$117,450
C
Process costing is used to allocate production cost (material, labor, overhead) to units where goods are mass-produced (eg, cans of paint). To allocate cost to each unit, equivalent units (EU) of production must be calculated. EU is a theoretical number that represents the total number of units that could have been completed, given the production costs incurred. For example, the EU for 8 units 50% complete is 4 units.
To determine the cost transferred out, first calculate EU of production:
Material Conversion
Units transferred to finished goods 13,500 13,500
Ending work-in-process (WIP):
1,500 units × 100% complete 1,500
1,500 units × 25% complete 375
EU of production 15,000 13,875
Then calculate the total cost of the 13,500 EU transferred to finished goods, as follows:
Total cost Total EU Cost per EU Cost of 13,500
EU transferred
Material $75,000 15,000 $5.00 $67,500
Conversion 55,500 13,875 $4.00 54,000
Total cost $121,500
(Choice A) $130,500 is the sum of total material cost of $75,000 and total conversion cost of $55,500.
(Choice B) $123,000 assumes that the number of units transferred out was 13,875 instead of the correct amount of 13,500.
(Choice D) $117,450 assumes that the total EUs for conversion cost were 15,000 rather than the correct amount of 13,875.
Things to remember: Production costs (material, labor, overhead) are accumulated in work-in-process (WIP) and assigned to all equivalent units. Equivalent units represent the total number of units in WIP and finished goods that theoretically could have been completed, given the production costs incurred during the period.
On January 1 Maples had two jobs in process: #506 with assigned costs of $10,500 and #507 with assigned costs of $14,250. During January three new jobs, #508 through #510, were started and three jobs, #506, #507, and #508, were completed. Materials and labor costs added during January were as follows:
Job number Materials Labor 506 $0 $2,000 507 0 1,500 508 4,000 3,600 509 3,800 2,000 510 2,600 3,100 Manufacturing overhead is assigned at the rate of 200 percent of labor. What is the January cost of goods manufactured and transferred from work-in-process?
A.
$25,300 (17%)
B.
$35,850 (20%)
C.
$42,950 (18%)
D.
$50,050
D testlet 33
Cost of goods manufactured
Job number 506 507 508 Total
Materials used $0 $0 $4,000 $4,000
+ Labor incurred 2,000 1,500 3,600 7,100
+ Overhead (200% direct labor) 4,000 3,000 7,200 14,200
= Manufacturing costs incurred $6,000 $4,500 $14,800 $25,300
+ Beginning work-in-process 10,500 14,250 0 24,750
− Ending work-in-process 0 0 0 0
= Cost of goods manufactured $16,500 $18,750 $14,800 $50,050
Manufacturing costs (material, labor, overhead) are assigned to specific jobs in work-in-process (WIP). Some costs (eg, material) may be assigned all at once at the beginning of WIP. Other costs, such as labor, may be assigned to a job evenly throughout the production process.
Cost of goods manufactured (COGM) is the total cost of goods for jobs that were completed during the period and transferred from WIP to finished goods (FG). COGM is essentially backed into by taking manufacturing costs incurred, adding beginning WIP, and subtracting ending WIP.
To calculate January COGM, only the completed jobs need be reviewed: #506, #507, and #508. Because material and labor are given, only overhead must be calculated. Overhead is assigned at a rate of 200% of labor, or twice the labor cost. For example, #507 had $1,500 of labor cost, so overhead is $3,000.
The total COGM of $50,050 transferred to FG consists of manufacturing costs incurred ($25,300) plus beginning WIP ($24,750) minus ending WIP ($0).
Things to remember:
Cost of goods manufactured (COGM) is the total manufacturing cost assigned to completed jobs during a period. COGM is the sum of materials used, direct labor incurred, and overhead, plus the beginning work-in-process (WIP) minus the ending WIP.
Kode Co. manufactures a major product that gives rise to a byproduct called May. May’s only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May’s sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a byproduct to a joint product, what would be the effect on Kode’s overall gross margin?
A. No effect (45%)
B.
Gross margin increases by $1 for each unit of May sold. (15%)
C.
Gross margin increases by $3 for each unit of May sold. (36%)
D.
Gross margin increases by $4 for each unit of May sold
Choice B (Correct): Correct! Under Kode’s current system, each sale of May will result in a net debit to cash of $3 with a corresponding credit to cost of sales. If May were treated as a joint product instead of a byproduct, sales would be increased by $4 for each unit of May sold and, since cost of sales is not being reduced, it will be higher by $3 per unit of May sold. As a result, the gross margin increases by $1 per unit of May sold, which will also be the increase in selling expenses resulting in no change to total profit.
The $1 in now SG&A, not COGS
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 2/3% complete, then ending work-in-process should be allocated
A.
50% of all normal defective unit costs. (19%)
B.
40% of all normal defective unit costs. (19%)
C.
50% of the material costs and 40% of the conversion costs of all normal defective unit costs. (14%)
D.
66 2/3% of the normal defective unit costs
A
Normal spoilage (ie, defective units) resulting from the manufacturing process is a product cost; abnormal spoilage is a period cost. The dollar amount of normal spoilage must be identified during the production process and assigned to units in production at the time the spoilage is identified.
In this example, the department chose to identify and assign defective cost at the 40% point of completion. Because ending work-in-process (WIP) is already 66 2/3% complete, 100% of the defective units have been identified, and the cost for those defective units has been assigned (ie, included in product cost) to WIP units. Because the number of units in ending WIP equals the number of units transferred to finished goods (FG), the cost of defective units would be allocated equally (ie, 50 / 50) to WIP and FG (Choices B and D).
(Choice C) Material is added at the beginning of the process, and conversion costs (labor and overhead) are incurred evenly throughout the manufacturing process. Therefore, 100% of the material cost and 66 2/3% of the conversion costs would be allocated to ending WIP.
Things to remember:
For this scenario, defective units were identified when work-in-process (WIP) was 40% complete; given that WIP is 66 2/3% complete, all defective units have been identified. As the number of units in ending WIP equals the number of units transferred to finished goods, the cost of defective units is allocated to both equally (ie, 50 / 50).
A company’s standard costs for direct labor are as follows:
Direct labor
Standard quantity Standard price
1 hour per unit $15 per hour
Last month, the company produced and sold 100 units of its product using 110 direct labor hours at a rate of $16 per hour. What amount is the company’s direct labor efficiency variance for last month?
A.
$260 (2%)
B.
$160 (13%)
C.
$150 (72%)
D.
$110
C
Variance analysis is designed to assist management in maintaining control over production costs for material, labor, and overhead. For example, the labor usage variance (also called the efficiency variance) generally is used to hold a factory foreman accountable for inefficient use of labor.
The variance is the difference between total actual labor hours and total standard labor hours multiplied by the standard labor rate per hour. When the total actual hours are greater than the total standard hours, an unfavorable variance is generated because more labor costs were incurred than anticipated.
The company’s direct labor efficiency variance is $150 unfavorable, calculated as follows:
(Total actual labor hours − Total standard labor hours) × Standard labor rate per hour
(110 − 100) × $15 = $150
(Choice A) A variance of $260 is the total labor variance (the price variance of $110 plus the quantity variance of $150).
(Choice B) A variance of $160 [(110 − 100) × $16] incorrectly uses the actual rate per hour rather than the standard rate. The efficiency variance examines only the controllable component, which is the labor hours used. The standard is set by the budgeting department.
(Choice D) A variance of $110 [($16 − $15) × 110] multiplies the difference in rate per hour by the actual hours. This is the labor price (ie, rate) variance, not the usage variance.
Things to remember:
The labor quantity (ie, efficiency) variance examines whether labor hours are being used efficiently. It is the difference between total actual hours and total standard hours multiplied by the standard rate per hour. When actual hours exceed standard hours, an unfavorable variance is generated.
The standard direct labor cost to produce one pound of output for a company is presented below. Related data regarding the planned and actual production activities for the current month for the company are also given below.
Direct labor standard 0.4 DLH @ $12.00 per DLH
Planned production 15,000 pounds
Actual production 15,500 pounds
Actual direct labor costs (6,250 DLH*) $75,250
*DLH = Direct labor hours
The company’s direct labor efficiency variance for the month would be
A.
$3,000 unfavorable (39%)
B.
$3,000 favorable (6%)
C.
$600 unfavorable (47%)
D.
$600 favorable
C
Remember that the quantity variance is based on the difference between actual hours and standard hours allowed (ie, 6,200) for the actual production, not the planned production (ie, 6,000).
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following information summarizes operations relating to laptop computer model #KJK20 during the quarter ending March 31:
Units Direct materials
Work-in-process inventory, January 1 100 $70,000
Started during the quarter 500
Completed during the quarter 400
Work-in-process inventory, March 31 200
Costs added during the quarter $750,000
The company uses the FIFO method to compute the costs. Beginning work-in-process inventory was 50% complete for direct materials. Ending work-in-process inventory was 75% complete for direct materials. What were the equivalent units of production with regard to direct materials for the quarter ended March?
A.
450 (7%)
B.
500 (62%)
C.
550 (17%)
D.
600
B
Process costing is used to apply product cost (ie, material, labor, and overhead costs) to units that are mass-produced (eg, same-model laptops). To apply product cost to each unit, equivalent units (EUs) of production must first be calculated. EUs represent the total number of units that could have been completed, given the amount of production costs incurred. For example, 8 units that are 50% complete equal 4 EUs.
There are two methods of applying process costing to production: the weighted-average method and FIFO. FIFO includes only units completed during the period (400), as well as units in process at the end of the period (200), adjusted for the percentage of completion (75%). Any units included in beginning inventory are deducted as beginning inventory is excluded from the FIFO EU calculation.
Calculate the value of direct materials costs in the ending work-in-process (WIP) inventory under the FIFO method, as follows:
EU of production:
Units completed (given) 400
Plus units in ending WIP (200 × 75% complete) 150
Less units in beginning WIP (100 × 50% complete) (50)
EU of production 500
Things to remember:
The FIFO method for calculating equivalent units (EUs) uses only the units and costs completed during the period as well as units in process at the end of the period. FIFO excludes costs and units included in beginning inventory.
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 (7%)
B.
$8,300 unfavorable (66%)
C.
$3,700 favorable (20%)
D.
$14,100 favorable
Choice B (Correct): The selling price variance is the difference between the standard sales price per unit and the actual sales price per unit multiplied by the actual unit sales. The total selling price variance for Central Winery is the sum of the variance for each product.
(Standard unit sales price – Actual unit sales price) x Actual unit sales = Selling price variance
Product A:
($6.00 - $6.20) x 8,000 = -$1,600 Favorable variance
Product B:
($8.00 - $7.70) x 33,000 = $9,900 Unfavorable variance
$9,900 - $1,600 = $8,300 Unfavorable total selling price variance
Recall that this is a selling price variance, not a cost variance. This is an unfavorable variance as a company wants the selling price to be higher than standard. The materials price variance equation sets up the difference between actual and standard price as Standard Price – Actual Price. Therefore, a lower actual price leads to a positive, favorable variance, because the company paid a lower price than expected for materials. The opposite is true regarding the much less common selling price variance – a higher actual price is desired. A company wants to be pleasantly surprised by the selling price it actually charges.
Ultimately, with any variance analysis, the accountant has to decide what is considered ‘favorable’ or ‘unfavorable’ in the situation. The order of operation for finding the difference between standard and actual price ultimately does not matter, as long as you step back and consider the meaning of the results.
During 20X0, a department’s three-variance overhead standard costing system reported unfavorable spending and volume variances. The activity level selected for allocating overhead to the product was based on 80% of practical capacity. If 100% of practical capacity had been selected instead, how would the reported unfavorable spending and volume variances be affected?
A.
Increased spending variance, unchanged volume variance. (26%)
B.
Increased spending variance, increased volume variance. (26%)
C.
Unchanged spending variance, increased volume variance. (39%)
D.
Unchanged spending variance, unchanged volume variance.
Choice C (Correct): The spending variance is the difference between amounts budgeted based on actual production and the amounts spent. Neither amount would change if the company were to allocate overhead based on 100% of practical capacity instead of 80%; and the spending variance would remain unchanged. The volume variance relates to the difference between actual production and budgeted production. Since there is an unfavorable volume variance with production budgeted at 80% of capacity, the variance would be even greater if the budget were for 100% of capacity.
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 usage variance?
A.
$25,000 favorable. (4%)
B.
$25,000 unfavorable. (4%)
C.
$30,000 favorable. (72%)
D.
$30,000 unfavorable.
C
Variance analysis is designed to assist management in maintaining control over production costs for material, labor, and overhead. For example, the direct labor usage variance (also called the labor efficiency variance) generally holds the factory foreperson accountable for inefficient use of labor. The variance is the difference between total actual labor hours used and total standard labor hours allowed, multiplied by the standard labor rate per hour.
Note that the information related to material production is not relevant in this question.
When the total actual hours are less than the total standard hours (ie, labor costs incurred were less than anticipated), the variance generated is favorable, not unfavorable (Choice D).
It is helpful to identify the formula inputs prior to calculating the variance, as follows:
The direct labor efficiency variance was $30,000 favorable [(3,000 actual hours − 5,000 standard hours) × $15].
(Choices A and B) A variance of $25,000 [(25,000 – (10,000 ×2)) × $5] is the direct material quantity variance.
Things to remember:
The labor usage variance (ie, labor efficiency variance) is the difference between total actual hours used and total standard hours allowed, multiplied by the standard rate per hour. When the actual hours are fewer than the standard hours, a favorable variance is generated.
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following information summarizes operations relating to laptop computer model #KJK20 during the quarter ending March 31:
Units Direct Materials
Work-in-process inventory, January 1 100 $50,000
Started during the quarter 500
Completed during the quarter 400
Work-in-process inventory, March 31 200
Costs added during the quarter $720,000
Beginning work-in-process inventory was 50% complete for direct materials. Ending work-in-process inventory was 75% complete for direct materials. What is the total value of material costs in ending work-in-process inventory using the FIFO unit cost inventory valuation method?
A.
$183,000 (5%)
B.
$194,000 (14%)
C.
$210,000 (21%)
D.
$216,000
D
Process costing is used to apply product cost (eg, material, labor, overhead) to units that are mass produced (eg, cans of paint). Because the units are uniform, each unit has the same cost. To apply product cost, equivalent units (EUs) of production must be calculated.
Under the FIFO method, only units completed during the period (400), and units in process at the end of the period (200), adjusted for the 75% completion, are allocated work-in-process (WIP) costs. Any beginning inventory units and costs are tracked separately under FIFO and must be deducted from units completed (after adjusting for percent of completion). Units started of 500 are not relevant because they are included in either units completed or WIP units by the end of the month.
The numerator (ie, total cost) includes only costs incurred during the period ($720,000); costs included in beginning inventory are excluded under FIFO. Calculate the value of direct materials costs in ending WIP under the FIFO method as follows:
EU of production:
Units completed (given) 400
Plus units in ending WIP (200 × 75% complete) 150
Less units in beginning WIP (100 × 50% complete) (50)
EU of production 500
Total FIFO average cost of ending WIP:
Total cost $720,000
EU of production ÷ 500
Average cost per EU $1,440
EU in ending WIP × 150
Total FIFO average cost of ending WIP $216,000
Things to remember:
Process costing is used to apply product cost to units that are mass produced (eg, cans of paint). Under the FIFO method of process costing, beginning inventory units and related costs are tracked as a separate amount and are therefore excluded from the equivalent unit calculation.
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following information summarizes operations relating to laptop computer model #KJK20 during the quarter ending March 31:
Units Direct Labor
Work-in-process inventory, January 1 100 $50,000
Started during the quarter 500
Completed during the quarter 400
Work-in-process inventory, March 31 200
Costs added during the quarter $720,000
Beginning work-in-process inventory was 50% complete for direct labor costs. Ending work-in-process inventory was 75% complete for direct labor costs. What is the total value of direct labor costs in ending work-in–process inventory using the weighted-average unit cost inventory valuation method?
A.
$183,000. (5%)
B.
$194,000. (17%)
C.
$210,000. (67%)
D.
$216,000.
C
Process costing is used to apply product cost (eg, direct material) to inventory units that are mass produced (ie, every unit has the same cost, like cans of paint). Equivalent units (EUs) of production are used to allocate cost.
In this case, the weighted-average (WA) method includes units completed during the period (400), as well as units in process at the end of the period (200), adjusted for the percentage of completion (75%). Remember that the units in beginning inventory will be reflected in one of those categories by the end of the quarter.
The numerator (ie, total cost) includes beginning inventory costs ($50,000) and costs incurred during the period ($720,000). Calculate the value of direct labor costs in ending work-in-process inventory under the WA method, as follows:
EU of production:
Units completed (given) 400
Units in ending WIP (200 × 75% complete) + 150
EU of production 550
Total weighted average cost of ending WIP:
Total cost ($50,000 + $720,000) $770,000
Divided by EU of production 550
Weighted average cost per EU $1,400
Times EU in ending WIP 150
Total weighted average cost of ending WIP $210,000
Things to remember:
Process costing is used to apply product cost (eg, direct material) to inventory units that are mass produced (eg, cans of paint). Equivalent units (EUs) of production are used to allocate cost. Under the weighted-average method, EUs include units completed during the period as well as units in process at the end of the period, adjusted for the percentage of completion.
Oregano Company manufactures soft drinks. In the mixing department, a variety of ingredients are mixed together while being heated at precise temperatures. The materials are added uniformly throughout the process and, when the process is complete, the output is transferred to the bottling department. Oregano uses process costing to report manufacturing costs. Production information for the month of April, Year 3, was as follows:
Beginning work in process 150,000 gallons valued at $108,000 and 30% complete
Started during April 750,000 gallons
Completed during April 600,000 gallons
Ending work in process 300,000 gallons and 40% complete
Conversion costs $1,755,000
What amount of cost of goods was transferred to the bottling department using the FIFO method?
A.
$1,551,000 (45%)
B.
$1,552,500 (18%)
C.
$1,560,000 (25%)
D.
$1,863,000
A
Process costing is used to allocate production costs to units where goods are mass produced (eg, gallons of mixed soft drink). To allocate cost to each unit, equivalent units (EUs) of production must be calculated. EU is a theoretical number that represents the total number of units that could have been completed, given the production costs incurred.
The first in, first out (FIFO) method assumes beginning work in process will be completed first. The cost per EU is first determined as follows:
cost per EU= conversion costsEUs produced
The cost of goods transferred out can then be determined as follows:
(EUs transferred out x cost per EU)+beginning inventory
Here, the FIFO cost of goods transferred out is $1,551,000, calculated as follows.
EUs:
Beginning inventory (150,000 gallons × 70% completed this month)
(30% completed in prior month) 105,000
Gallons started and completed (600,000 − 150,000 beginning inventory) 450,000
Ending inventory (300,000 gallons x 40% completed) 120,000
Total 675,000
Conversion cost per EU ($1,755,000 / 675,000) $2.60
FIFO cost of goods transferred out
Beginning inventory conversion cost (105,000 × $2.60) $273,000
Started and completed conversion cost (450,000 × $2.60)
$1,170,000
Beginning work in process inventory
$108,000
Total
$1,551,000
(Choices B, C, and D) These choices do not reflect cost of goods transferred out using the FIFO method.
Things to remember:
Process costing uses equivalent units produced to determine a per-unit cost. The per-unit cost determines both the cost of equivalent units transferred out as well as partially complete units comprising ending work in process inventory
Financial data related to a company’s unit production for the current month are as follows:
What amount is the company’s variable factory overhead variance for the current month?
A.
($70,000) (14%)
B.
($25,000) (21%)
C.
$65,000 (39%)
D.
$125,000
C Variable overhead (VOH) consists of manufacturing expenses (other than direct material and direct labor) that vary with production volume, such as factory electricity. Total VOH variance comprises the spending and efficiency variances. Direct labor hours are used for actual hours worked and standard hours allowed.
Standard hours allowed is the number of hours that should have been worked for the actual production volume. Depending on the information given in the question, a shortcut method may be used to compute the total VOH variance by comparing actual VOH cost with standard VOH cost.
Prior to calculating the variance(s), identify the inputs needed:
Standard overhead rate = total rate 30 - fixed rate 3 = 27
Standard overhead cost = 20,000x27 = 540,000
Using the shortcut method, the total VOH variance is $65,000 ($475,000 − $540,000) favorable as total actual variable overhead is less than the standard VOH allowed.
(Choice A) This is the variable overhead spending variance of ($70,000), which nets the total actual VOH of $475,000 to the flexible budget amount of $405,000 (15,000 hours × standard rate of $27).
(Choice B) An amount of ($25,000) implies actual VOH of $475,000 was compared with the standard total VOH of $450,000 (15,000 hours × total standard rate of $30), not just the variable portion.
(Choice D) An amount of $125,000 implies that the actual VOH rate of $23.75 ($475,000 ÷ 20,000 hours) was compared with the total standard VOH rate of $30 [($23.75 − $30) × 20,000 hours] = $125,000.
Things to remember: Variable overhead (VOH) consists of manufacturing expenses (other than direct material and direct labor) that vary with production volume. Variable overhead factory variance is the spending variance plus the efficiency variance. Depending on the information provided, a shortcut method may be used by comparing actual total VOH cost with standard total VOH cost.
Jones, a department manager, exercises control over the department’s costs. Following is selected information relating to the department for July:
The department’s unfavorable spending variance for July was
A.
$0 (1%)
B.
$2,000 (11%)
C.
$5,000 (24%)
D.
$7,000
D
Total overhead spending variance consists of a variable and a fixed portion. Variable OH (eg, machine maintenance) varies with production volume, while fixed OH (eg, factory supervisor’s salary) remains relatively constant within a given production range. When total actual OH exceeds total standard/budgeted OH, the combined overhead variance will be unfavorable, and vice versa.
The $5,000 variable OH spending variance is the difference between the actual amount of $85,000 and the standard allowed amount of $80,000. The $2,000 fixed OH spending variance is the difference between the actual amount of $27,000 and the budgeted amount of $25,000. In both cases the variance is unfavorable as actual costs exceed the budgeted/standard amounts allowed, resulting in a total spending variance of $7,000 unfavorable.
(Choice A) The total spending variance could only be $0 under two scenarios. First, the variable spending variance was the same amount as the fixed variance, but one was favorable and one was unfavorable, netting to $0. Alternatively, actual cost equaled standard/budgeted cost for both the variable and fixed spending variances.
(Choice B) The $2,000 amount is the fixed spending variance only.
(Choice C) The $5,000 amount is the variable spending variance only.
Things to remember:
The total overhead (OH) spending variance consists of a variable and a fixed variance. Variable OH varies with production volume whereas fixed OH remains relatively constant. When total actual OH costs exceed total standard/budgeted OH costs, the combined variance will be unfavorable, and vice versa.
The following information summarizes manufacturing activity for the quarter ending June 30:
Units
Beginning work in process 10,000
Units started into production during the quarter 150,000
Units completed during the quarter 140,000
Ending work in process 20,000
Beginning work-in-process inventory was 70% complete. Ending work-in-process inventory was 25% complete. What was the number of equivalent units produced using the FIFO method?
A.
138,000 (71%)
B.
140,000 (4%)
C.
145,000 (20%)
D.
150,000
A
Process costing is used to apply product cost (ie, material, labor, overhead) to units that are mass produced (eg, cans of paint). Process costing requires partially completed units in ending work-in-process (WIP) inventory to be converted to equivalent units (EU). Any units that are finished goods are considered 100% complete.
Under the FIFO method, only units completed during the period (140,000), and units in process at the end of the period (20,000), adjusted for the 70% completion, are allocated WIP costs. Any beginning inventory units and costs are tracked separately under FIFO and must be deducted from units completed (after adjusting for the beginning percent of completion). Units started of 150,000 are not relevant as they are included in either units completed or units in WIP by the end of the month.
A total of 140,000 units were completed during the quarter, but BI consisted of 10,000 units that were 70% complete. These 7,000 EU are deducted from the total amount of EU completed. Ending WIP consisted of 20,000 units 25% complete (ie, 5,000 EU).
There are 138,000 EU for the quarter ended June 30:
EU of production:
Units completed (given) 140,000
Less EU in beginning inventory (10,000 × 70%) (7,000)
Units in ending WIP (20,000 × 25% complete) 5,000
EU of production 138,000
Things to remember:
Process costing is used to apply product cost to units that are mass produced (eg, cans of paint). Under the FIFO method, equivalent units include only ending units in work-in-process and finished units. Beginning inventory units and related costs are tracked as a separate amount and are therefore excluded from the equivalent unit calculation.
DJ Co. has a job-order cost system. The following debits (credits) appeared in the Work in Process account for the month of March:
March 1, balance $ 12,000
March 31, direct materials 40,000
March 31, direct labor 30,000
March 31, manufacturing overhead applied 27,000
March 31, to finished goods (100,000)
DJ Co. applies overhead at a predetermined rate of 90% of direct labor cost. Job No. 101, the only job still in process at the end of March, has been charged with manufacturing overhead of $2,250. What was the amount of direct materials charged to Job No. 101?
A.
$2,250 (5%)
B.
$2,500 (15%)
C.
$4,250 (67%)
D.
$4,725
C
There are two methods of accumulating and allocating production costs to work in process (WIP), finished goods (FG), and cost of goods sold.
Job order costing is a system for allocating costs to unique products (eg, custom-built homes). Each job becomes its own cost center and is charged for direct material, direct labor, and overhead. Job order costing is generally used when units are relatively expensive and costs can be identified to specific units.
Process costing is a system applicable to a continuous process of production of the same or similar goods (eg, cans of red paint). Process costing is generally used when units are relatively inexpensive and when it is difficult to trace costs to specific units being produced, such as when units are mass produced.
In this scenario, after transferring $100,000 to FG, the ending WIP of $9,000 exclusively consists of costs for Job No. 101. Manufacturing overhead is given as $2,250, which is 90% of direct labor. Therefore, direct labor is $2,250/90%, or $2,500. Direct material of $4,250 can be backed into (ie, plugged) by deducting direct labor and overhead from the total job cost of $9,000.
Things to remember:
Job order costing is a system for allocating costs to unique products. Job order costing is generally used when units are relatively expensive and costs can be identified to specific units (eg, custom-built homes). Direct material, direct labor, and overhead are charged to the given job number.
Merry Co. has two major categories of factory overhead: material handling and quality control. The costs expected for these categories for the coming year are as follows:
Material handling $120,000
Quality inspection $200,000
The plant currently applies overhead based on direct labor hours. The estimated direct labor hours are 80,000 per year. The plant manager is asked to submit a bid and assembles the following date on a proposed job:
Direct materials $4,000 Direct labor (2,000 hours) $6,000
What is the estimated product cost on the proposed job?
A.
$8,000 (8%)
B.
$10,000 (13%)
C.
$14,000 (11%)
D.
$18,000
Choice D (Correct): The estimated product cost is the sum of applied overhead and prime costs.
Applied overhead
Applied overhead equals the overhead rate multiplied by the estimated cost driver hours.
Material handling $120,000
Quality inspection 200,000
Total overhead 320,000
Overhead rate = Total overhead / Total overhead cost driver
$320,000 / 80,000 = $4.00
Applied overhead = Estimated overhead cost driver hours x Overhead rate
2,000 x $4.00 = $8,000
Prime costs
Direct labor $6,000
Direct material 4,000
Prime costs 10,000
Estimated product cost
Estimated product cost = Applied overhead + Prime costs
$8,000 + $10,000 = $18,000
A company that produces a single product using a continuous process had no work in process on April 1. During the month of April, 10,000 units were started and 9,000 completed units were transferred. The ending work-in-process inventory was complete as to materials and 50% complete as to conversion. The cost of direct materials was $114,000, and the cost of direct labor amounted to $38,000. Manufacturing overhead is assigned at the rate of 50% of direct materials. For the purpose of determining the cost of goods manufactured in April, what is the cost per equivalent whole unit?
A.
$23.22 (15%)
B.
$21.40 (44%)
C.
$20.90 (25%)
D.
$15.40
B
Process costing is used to apply product cost (material, labor, overhead) to units that are mass-produced (eg, cans of paint). To apply product cost to each unit, calculate the equivalent units (EUs) of production. An EU is a theoretical number that represents the total number of units that could have been completed, given the amount of production costs incurred. In the image above, the EU for 8 units that are 50% complete is 4 units.
To determine the cost of goods manufactured in April, first calculate the EU of production:
Material Conversion
Units transferred to finished goods inventory 9,000 9,000
Ending work-in-process inventory
1,000 × 100% complete 1,000
1,000 × 50% complete 500
EU of production 10,000 9,500
The total cost per EU is calculated as follows:
Total cost Total EU Cost per EU
Material $114,000 10,000 $11.40
Conversion 95,000* 9,500 10.00
Total cost $21.40
*Direct labor of $38,000 plus overhead of $57,000 ($114,000 × 50%).
Finally, the cost per EU is applied to the number of EU in each area of inventory. Total material cost of $114,000 is allocated to work-in-process inventory for $11,400 (1,000 units × $11.40), and $102,600 (9,000 units × $11.40) is allocated to finished goods.
Things to remember: Equivalent units (EUs) must be calculated for both work-in-process and finished goods inventory to properly allocate the cost of production (material, labor and overhead) to all units, both completed and in process. An EU is a theoretical number that represents the total number of units that could have been completed, given the amount of production costs incurred
The following direct labor information pertains to the manufacture of product Glu:
Time required to make one unit 2 direct labor hours
Number of direct workers 50
Number of productive hours per week, per worker 40
Weekly wages per worker $500
Workers’ benefits treated as direct labor costs 20% of wages
What is the standard direct labor cost per unit of product Glu?
A.
$30 (65%)
B.
$24 (13%)
C.
$15 (16%)
D.
$12
Choice A (Correct) and Choices B, C, D (Incorrect): A worker earns $500 for 40 hours of work per week, or $12.50 per hour. Each unit requires 2 hours for a total cost per unit of $25. Benefits of 20% of $25, or $5, are also considered part of the direct labor cost, resulting in a standard direct labor cost of $30 per unit.
Under Pick Co.’s job order costing system, manufacturing overhead is applied to work in process using a predetermined annual overhead rate. During January, Pick’s transactions included the following:
Direct materials issued to production $ 90,000
Indirect materials issued to production 8,000
Manufacturing overhead incurred 125,000
Manufacturing overhead applied 113,000
Direct labor costs 107,000
Pick had neither beginning nor ending work-in-process inventory. What was the cost of jobs completed in January?
A.
$302,000 (0%)
B.
$310,000 (42%)
C.
$322,000 (14%)
D.
$330,000
B
Don’t compare with mfg o/h incurred
There are two methods of accumulating and allocating production costs to work in process (WIP), finished goods (FG), and cost of goods sold.
Job order costing is a system for allocating costs to unique products (eg, custom-built homes). Each job becomes its own cost center and is charged for direct material, direct labor, and applied overhead.
Process costing is a system applicable to a continuous process of production of the same or similar goods (eg, cans of red paint). Process costing is generally used when units are relatively inexpensive and when it is difficult to trace costs to specific units.
Because Pick Co. uses a job order costing system, job costs will consist of actual direct materials of $90,000, actual direct labor of $107,000, and manufacturing overhead applied of $113,000, for a total cost of $310,000.
Job cost systems use actual material and labor information because direct costs are easy to quantify. However, overhead consists of many indirect costs and can be difficult to determine, so a standard cost called applied overhead is used. The applied overhead amount is derived using a predetermined overhead rate. Actual manufacturing overhead is not used to measure total manufacturing costs.
Things to remember:
Job cost systems use actual material and labor information because direct costs are easy to quantify. Overhead consists of many indirect costs and can be difficult to determine, so a standard cost called applied overhead is used. The applied overhead amount is derived using a predetermined overhead rate.
Baby Frames, Inc., evaluates manufacturing overhead in its factory by using variance analysis. The following information applies to the month of May:
What is the production volume variance?
A.
$1,000 favorable. (18%)
B.
$1,000 unfavorable. (40%)
C.
$2,000 favorable. (12%)
D.
$2,000 unfavorable
B Fixed overhead (FOH) consists of manufacturing costs that do not vary with production volume (eg, indirect manufacturing costs such as a factory supervisor's salary). Since overhead costs are not directly traceable to specific products, these costs must be applied (or allocated) to actual goods produced. The production volume variance (PVV) measures the effect of increases or decreases in production volume on cost allocation.
Higher production levels (ie, greater volume) result in the application of FOH cost to more units, which reduces the per-unit cost and results in a favorable variance. Lower production levels result in the application of FOH to fewer units, which increases the per-unit cost and results in an unfavorable variance.
The FOH PVV of $1,000 is the difference between the budgeted FOH costs of $20,000 and the applied FOH costs of $19,000. Because the actual production volume of 19,000 frames was less than the budgeted volume of 20,000, there was an increased cost per unit resulting in an unfavorable—not a favorable—variance (Choice A).
(Choices C and D) These answer choices give the FOH spending variance of $2,000, not the FOH PVV.
Things to remember: Fixed overhead (FOH) consists of manufacturing costs that do not vary with production volume. Since FOH costs are not directly traceable to specific products, these costs must be applied (or allocated) to actual goods produced. The FOH production volume variance is the difference between the budgeted FOH costs and the applied FOH costs. When the applied FOH costs are less than the budgeted FOH costs, the variance will be unfavorable, and vice versa.
One hundred pounds of Raw Material W is processed into 60 pounds of Product X and 40 pounds of Product Y. Joint costs are $135. Product X is sold for $2.50 per pound and Product Y can be sold for $3.00 per pound or processed further into 30 pounds of Product Z (10 pounds are lost in the second process) at an additional cost of $60. Each pound of Product Z can then be sold for $6. What is the effect on profits of processing Product Y further into Product Z?
A.
$60 increase. (12%)
B.
$30 increase. (17%)
C.
No change. (61%)
D.
$60 decrease.
Production managers may have the option of selling a finished product at one price or further processing it to sell for a higher price. Added costs and revenues will help determine whether further processing is warranted (ie, profitable).
Further processing results in a higher sales price per pound, less product (ie, shrinkage), and added processing costs. The following illustrates that further processing Product Y into Product Z has no impact on profit.
Sell Product Y as is Further process into Product Z
Pounds sold 40 30
Sales price per pound $3 $6
Total revenue $120 $180
Less: added processing costs $0 ($60)
Profit $120 $120
Because the question focuses on the profitability of further processing Product Y, the joint cost information is not relevant.
(Choice A) A $60 increase in profit does not consider the $60 added expense to further process into Product Z.
(Choice B) A $30 increased revenue is the difference between Product Y revenue ($120) and Product Z revenue of $180 incorrectly reduced by the $30 value of 10 pounds lost by further processing. This shrinkage is considered in Product Z revenue.
(Choice D) A $60 decrease in profit considers only the added cost to process Product Z.
Things to remember:
When considering whether further processing of a product impacts profits, additional revenues and costs must be considered as well as any product shrinkage.
