Practice Exam
Chapter 9 Which of the following statements is correct? |
| Unfavorable cost variances always indicate bad performance. | | Favorable cost variances always indicate good performance. | | Both of the above statements are correct. | | Neither of the above statements are correct. |
Managers should not assume that unfavorable cost variances always indicate bad performance and that favorable cost variances always indicate good performance. Unfavorable cost variances may result from an increase in revenues (e.g., ingredient costs may be higher than expected because more meals were served in a restaurant than anticipated). And, favorable cost variances may result from a decrease in revenues (e.g., ingredient costs may be lower than expected because less meals were served in a restaurant than anticipated). | A company's static budget estimate of total overhead costs was $805,000 based on the assumption that 23,000 units would be produced and sold. The company estimates that 20% of its overhead is variable and the remainder is fixed. The total overhead cost according to the flexible budget if 27,000 units were produced and sold is (Do not round intermediate calculations.): |
| $837,000 | | $805,000 | → | $833,000 | | $913,500 |
First, determine the budgeted variable overhead as follows.
Budgeted variable overhead = Budgeted overhead cost of $805,000 × 20% (variable portion) = $161,000
Next, determine the budgeted variable overhead per unit as follows.
Budgeted variable overhead of $161,000 ÷ 23,000 units produced and sold = $7.0 per unit Then, determine the budgeted fixed overhead as follows.
Budgeted fixed overhead = Budgeted overhead cost of $805,000 × 80% (fixed portion) = $644,000.
Finally, the flexible budget at 27,000 units is determined as follows.
Budgeted variable overhead of (27,000 units × $7.00 per unit variable overhead) + budgeted fixed overhead of $644,000 = $833,000 |
An activity variance is the difference
| Unfavorable cost variances always indicate bad performance. | | Favorable cost variances always indicate good performance. | | Both of the above statements are correct. | | Neither of the above statements are correct. |
Managers should not assume that unfavorable cost variances always indicate bad performance and that favorable cost variances always indicate good performance. Unfavorable cost variances may result from an increase in revenues (e.g., ingredient costs may be higher than expected because more meals were served in a restaurant than anticipated). And, favorable cost variances may result from a decrease in revenues (e.g., ingredient costs may be lower than expected because less meals were served in a restaurant than anticipated). | A company's static budget estimate of total overhead costs was $805,000 based on the assumption that 23,000 units would be produced and sold. The company estimates that 20% of its overhead is variable and the remainder is fixed. The total overhead cost according to the flexible budget if 27,000 units were produced and sold is (Do not round intermediate calculations.): |
| $837,000 | | $805,000 | → | $833,000 | | $913,500 |
First, determine the budgeted variable overhead as follows.
Budgeted variable overhead = Budgeted overhead cost of $805,000 × 20% (variable portion) = $161,000
Next, determine the budgeted variable overhead per unit as follows.
Budgeted variable overhead of $161,000 ÷ 23,000 units produced and sold = $7.0 per unit Then, determine the budgeted fixed overhead as follows.
Budgeted fixed overhead = Budgeted overhead cost of $805,000 × 80% (fixed portion) = $644,000.
Finally, the flexible budget at 27,000 units is determined as follows.
Budgeted variable overhead of (27,000 units × $7.00 per unit variable overhead) + budgeted fixed overhead of $644,000 = $833,000 |
An activity variance is the difference