36) Abby Company has just implemented a new costaccounting system that provides two variances for fixed manufacturing overhead. While the company's managers are familiar with the concept of spending variances, they are unclear as to how to interpret the production-volume overhead variances. Currently, the company has a production capacity of 54,000 units a month, although it generally produces only 46,000 units. However, in any given month the actual production is probably something other than 46,000.
8) What are six reasons that joint costs should be allocated to individual products or services? Answer: The first reason joint costs should be allocated to compute inventoriable costs and cost of goods sold is for financial accounting purposes and for income tax reporting. The second reason the costs should be allocated to also allow for computing cost of goods sold and inventoriable costs for internal reporting purposes to compute division profits and to evaluate division managers. The third reason that joint costs need to be allocated is so that costs will be reimbursed under contracts using a cost plus system, often found in government contracts. A fourth reason for the cost allocation is to allow for proper valuation and settlement in insurance claims for damages. A fifth reason is that joint products may be regulated and proper costing is essential. The sixth reason for allocating joint costs is to support litigation where the joint product is a key input.
Answer: Using accrual accounting to evaluate the performance of a manager may create conflicts with using discounted cash flow (DCF) methods for capital budgeting because frequently a project using a DCF method will not report strong operating income results in the early years of the project under accrual accounting. If this is the case, a manager might be tempted not to use DCF methods even though the decisions based on them might be in the best interests of the company over the long run. The conflict can be reduced by evaluating managers on a project-by-project basis and by looking at their ability to achieve the amounts and timing of forecasted cash flows.
a. Work in Process Inventory and a credit to Finished Goods Inventory. b. Finished Goods Inventory and a credit to Cost of Goods Sold. c. Cost of Goods Sold and a credit to Finished Goods Inventory. d. Finished Goods Inventory and a credit to Work in Process Inventory.
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:
The assignment of costs in a process costing system first involves determining total production costs. These costs are then assigned to units completed and transferred out during the period and to the units in Work in Process Inventory at the end of the period. To assign costs, the cost per equivalent unit must be established using either the FIFO or weighted average method. The cost per EUP is then multiplied by the number of equivalent units in the component being costed. Transferred-out costs using the weighted average method are computed as the number of units transferred times the total price per equivalent unit. When using FIFO, transferred-out units are computed as follows: the costs in beginning WIP are added to the current period costs to complete the units which sums to the total cost of beginning WIP; the units started and completed are priced at current period costs; the total of the costs of beginning inventory and units started and completed are then transferred out.
33) Coffey Company maintains a very large direct materials inventory because of critical demands placed upon it for rush orders from large hospitals. Item A contains hard-to-get material Y. Currently, the standard cost of material Y is $4.00 per gram. During February, 22,000 grams were purchased for $4.10 per gram, while only 20,000 grams were used in production. There was no beginning inventory of material Y.
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