Budget Actual Variance Revenues $59,000 $60,000 $1,000 F Cost of goods sold 42,000 43,400 1,400 U Wages 6,700 7,000 300 U General 1,300 900 400 F Fixed costs 5,000 5,000 0 Operating income $ 4,000 $ 3,700 $ 300 U
A variable cost is one that remains constant on a per-unit basis but varies in total with changes in activity. Examples of variable costs include direct material, direct labor, and (possibly) utilities. A fixed cost is one that remains constant in total but varies on a per-unit basis with changes in activity. Examples of fixed costs include straight-line depreciation, insurance, and the supervisor's salary. DIF: Moderate OBJ: 2-1
14) The textbook discusses three levels of variances, Level 0, Level 1, Level 2, and Level 3. Briefly explain the meaning of each of those levels and provide an example of a variance at each of those levels. Answer: A Level 0 variance is simply the difference between actual operating income and planned operating income in the static budget.
Answer: The four methods are: 1. Net Present Value (NPV); 2. Internal Rate of Return (IRR); 3. Payback; and 4. Accrual Accounting Rate of Return (AARR). NPV has advantages in that it uses discounted cash flows, and can deal with uneven cash flows, considers the inflows and outflows of the project. A disadvantage of NPV is that the results indicate if it achieves a particular cost of capital or not, but it does not indicate what the rate of return actually is. The IRR method generates an expected rate of return for the investment given the time of the project and the discounting of cash flows. A disadvantage of the IRR is that the results are expressed in the form of a percentage rather than in dollars and it is difficult to use when the project has uneven cash flows. The payback is simple to use, and adapts to both even and uneven cash flows. It also highlights the liquidity of a project. A disadvantage to the payback is that it does not consider either the time value of money, or the cash flows that occur after the payback time period. The AARR method uses the information that is most often found in financial statements including net income and depreciation. A drawback is that the method does not take into account the time value of money or the cash flows of the project.
manufacturing overhead, a spending variance for the fixed overhead component, an efficiency variance for the variable overhead, and a production-volume variance for the fixed overhead. When the firm uses a 3-variance approach, the fixed and variable spending variance is combined into a single variance, while the variable overhead efficiency is still shown separately and the fixed overhead production- volume variance is singled out. In the 2-variance method, the fixed and variable spending variances are combined into one amount along with the variable efficiency, and then the fixed production-volume is shown as a separate variance. The 1-variance method shows the difference between the actual costs incurred and the flexible-budget amount for the output level achieved.
Again, using a unit of sales mix as the unit of analysis, one unit of sales mix sells for $56. Since the contribution margin is $20 on one unit of sales mix, the CM ratio on one unit of sales mix is $20/$56 = .3571. This implies that variable costs as a percentage of sales are equal to 1 - .3571 = .6429. Income before income taxes equal to 15 percent of sales can be found by solving a formula of the following type:
58) Wharf Fisheries processes many of its seafood items to the demands of its largest customers, most of which are large retail distributors. To keep the accounting system simple, it has always assigned cost by the weight of the finished product. However, with increased competition, it has had to watch its prices closely and, in recent years, several items have incurred zero profit margins. After several weeks of investigation, your consulting firm has found that, while weight is important in processing of seafood, numerous items have very distinct processing steps and some items are processed through more steps than others.
When standard costing is used in conjunction with process costing, the costing procedure is simplified. Standard costing eliminates the calculation in each new period of a new production cost because the standards are established as on going norms for (at least) a one-year period of time. Standard costing in a process costing system is essentially a FIFO system that permits variances to be recognized during the period.
18) Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below: