143. In terms of the variance-investigation decision under uncertainty, which of the following
items contains a cross-listing of costs associated with each of two states of nature (random vs.
nonrandom variance) and each of two management actions (investigate the variance vs. do not
investigate the variance)?
144. Which of the following would not be considered a possible cause of a controllable (i.e., a
systematic) variance?
145. The term used to refer to persistent variances (i.e., those that are likely to recur until
corrected) is
146. What are the steps in establishing the standard application rate for variable factory
overhead cost? Does the procedure differ for product-costing versus cost control purposes?
Explain.
147. What are the steps in determining the standard fixed factory overhead application rate?
Does the procedure differ for product-costing versus cost-control purposes? Explain.
148. “Firms need to use the capacity of the equipment or division that is the ‘bottleneck’ of the
manufacturing process as the denominator volume in setting the fixed overhead allocation rate.
1. What type of variance is related to this “denominator?” Explain.
2. Define the terms theoretical capacity, practical capacity, and budgeted capacity utilization. Of
the three, which is considered most relevant for setting the predetermined overhead application
rate
for internal reporting purposes
, particularly for fixed overhead costs? Explain.
149. The Wentworth Company manufactures modular furniture for the home and uses a
monthly variance system to control costs of the manufacturing departments. Edward Collins is
the supervisor of the Assembly Department and is reviewing the monthly variance analysis for
November, which showed a significant cost overrun (i.e., negative cost variance). Collins has
gathered the following information to assist him in deciding whether or not to investigate the
unfavorable cost variance for the Assembly Department:
Estimated cost (I) to investigate the variance $4,000
Estimated probability that the Assembly Department is operating properly, that is,
the probability that the observed variance is a random event = (1 –
p
) = 90%
If the Assembly Department is operating out of control (i.e., improperly):
Estimated cost (C) to correct the process = $8,000
Estimated loss (L) if the observed variance is the result of a nonrandom cause
but the company fails to investigate = $40,000
Required:
Recommend whether Wentworth Company should investigate the observed unfavorable cost
variance. Support your answer by:
1. Preparing a payoff table for use in making the decision.
2. Computing the expected value of the cost of each of the two actions that management can
take: investigate the variance, or do not investigate the variance. (Let
p
= the probability that the
process is out of control, that is, the probability of a nonrandom variance, and (1 –
p
) = the
probability that the process is in control, that is, the probability that the observed variance is due
to random causes.)
150. The Wentworth Company manufactures modular furniture for the home and uses a
monthly variance system to control costs of the manufacturing departments. Edward Collins is
the supervisor of the Assembly Department and is reviewing the monthly variance analysis for
November, which showed a significant cost overrun (i.e., negative cost variance). Collins has
gathered the following information to assist him in deciding whether or not to investigate the
unfavorable cost variance for the Assembly Department:
Estimated cost (I) to investigate the variance $4,000
Estimated probability that the Assembly Department is operating properly, that is, the probability
that the observed variance is a random event = (1 –
p
) = 90%
If the Assembly Department is operating out of control (i.e., improperly):
Estimated cost (C) to correct the process = $8,000
Estimated loss (L) if the observed variance is the result of a nonrandom cause but the company
fails to investigate = $40,000
Required:
Collins is uncertain about the probability estimate of 90% for proper operation of the Assembly
Department. Determine the probability estimate that would cause Collins to be indifferent
between the two possible managerial actions: investigate or don’t investigate the variance.
151. Erie Co. uses machine hours to apply standard overhead cost to production. The following
data pertain to October:
Master budget data:
Units 2,500
Total machine hours (denominator volume) 100,000
Total variable overhead cost $250,000
Total fixed overhead cost $50,000
Actual operating results:
Variable overhead cost incurred $265,000
Fixed overhead cost incurred $54,000
Units manufactured 2,250
Actual machine hours 96,000
Required:
Compute the following variances using machine hours as the activity variable used to assign
standard overhead costs to production. Show calculations.
1. Variable overhead spending variance
2. Variable overhead efficiency variance
3. Fixed overhead spending variance
4. Fixed overhead production-volume variance
152. Bluetop Company uses a standard cost system. For the month of April, the firm budgeted
$160,000 for total factory overhead based on 40,000 machine hours. The standard calls for 4
machine hours for each finished units. During April the firm used 39,000 machine hours to
manufacture 9,500 units and incurred $159,000 in total factory overhead.
Required:
1. Determine the total amount of standard factory overhead cost charged to production in April.
2. Provide the correct journal entry to record the application of standard factory overhead costs
to production. (Assume that the company uses a single overhead account, Manufacturing
Overhead.)
153. McAllister Company’s master budget for the year just completed was based on 100%
capacity and included 40,000 machine hours and $240,000 total factory overhead. Budgeted fixed
overhead at 75% of factory capacity would be $160,000 (and 30,000 machine hours). The
company actually operated at 90% capacity for the year, and incurred $252,000 total factory
overhead cost.
Required:
1. Determine the factory overhead flexible-budget variance for the year. Show calculations.
2. Calculate the factory overhead production volume variance for the year. Show calculations.
154. Bike Pedals manufactures bicycle seats. The company budgeted to manufacture 25,000
seats in April with 0.05 standard machine hours per seat. Total variable factory overhead was
budgeted at $30,000 for the operation. During April the company manufactured 30,000 seats
using 1,600 machine hours. It incurred $34,000 of variable factory overhead (VOH) costs.
Required:
Determine each of the following variances. Show calculations.
1. Variable overhead spending variance.
2. Variable overhead efficiency variance.
3. Variable overhead flexible-budget variance.
155. Ben Simon Corp. has the following information about its standards and production
activity for the month of November:
Total actual factory overhead cost incurred:
Variable overhead $31,350
Fixed overhead 25,000
Standard factory overhead rate:
Variable overhead $3.10 per unit
Fixed overhead $2.00 per unit
Denominator volume (in units) 12,000
Actual units produced during November 9,600
Required:
Calculate and show supporting calculations for each of the following variances:
1. Variable overhead flexible-budget variance.
2. Fixed overhead spending variance.
3. Fixed overhead production volume variance.
156. Dillard, Inc., has developed the following standard cost data based on a denominator
volume of 60,000 direct labor hours (DLHs). Budgeted fixed overhead is $360,000 and budgeted
variable overhead is $180,000 at this level of activity.
Direct material (3 lbs. @ $2.00/lb.) $6.00
Direct labor (0.5 hrs. @ $8.00/hr.) 4.00
Factory overhead (0.5 hrs. @ $9.00/hr.) 4.50
Total standard cost per unit $14.50
During the last period, the company used 48,000 DLHs to produce 128,000 units. It incurred the
following manufacturing costs:
Actual costs incurred:
Direct material (380,000 lbs.) $779,000
Direct labor (63,000 hrs.) 507,150
Variable overhead 220,000
Fixed overhead 365,000
Required:
Determine all variances for direct materials, direct labor, and factory overhead. Use a 4-variance
breakdown (decomposition) of the total overhead variance for the period. Assume that the direct
materials price variance is calculated at point of production, not point of purchase. Note: this
problem requires knowledge from Chapter 14.
