Why is the flexible budget variance the same amount as the spending variance for fixed manufacturing overhead?

Why is the flexible budget variance the same amount as the spending variance for fixed manufacturing overhead?

There is no efficiency variance for fixed overhead. Because the overhead is fixed not variable.

What are the steps in developing a budgeted fixed overhead rate ?

What are the steps in developing a budgeted fixed overhead rate ?

1.Choose the period to use for the budget,
2.Select the cost-allocation base to use in allocating fixed overhead costs to output produced,
3.Identify the fixed-overhead costs associated with each cost-allocation base, and
4.Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced.

How does standard costing differ from actual costing?

How does standard costing differ from actual costing?

Standard costing assigns predetermined estimated values to each of your materials, labor, overhead. actual costing assigns ever changing actual costs to each component in manufacturing process.

How does the planning of fixed overhead costs differ from the planning of actual costing ?

How does the planning of fixed overhead costs differ from the planning of actual costing ?

At the start of an accounting period, a larger percentage of fixed overhead costs are locked-in than is the case with variable overhead costs. When planning fixed overhead costs, a company must choose the appropriate level of capacity or investment that will benefit the company over a long time. This is a strategic decision.

Describe three reasons for an unfavorable direct manufacturing labor efficiency variance ?

Describe three reasons for an unfavorable direct manufacturing labor efficiency variance ?

Longer time to make each jacket due to poor quality jackets, slower work, unskilled workers, standards set too high due to lack of evaluation in workers and environment.

List three causes of a favorable direct materials price variance?

List three causes of a favorable direct materials price variance?

1. Purchasing officer negotiated more skillfully than was planned in the budget, 
2. Purchasing manager bought in larger lot sizes than budgeted, thus obtaining quantity discounts, 
3. Materials prices decreased unexpectedly due to, say, industry oversupply,

List four reasons for using standard costs.

List four reasons for using standard costs.

(i) cost management,
(ii) pricing decisions,
(iii) budgetary planning and control, and
(iv) financial statement preparation.

Describe the steps in developing a flexible budget?

Describe the steps in developing a flexible budget?

Step 1. Identify actual output, based on budgeted selling price and actual quantity of output.


Step 2. Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output.


Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output
unit, actual quantity of output, and budgeted fixed costs.

Why might managers find a flexible-budget analysis more informative than a static-budget analysis?

Why might managers find a flexible-budget analysis more informative than a static-budget analysis?

Flexible has more detailed analysis on variance. Better measure of sale price and cost performance comparing actual revenues and costs and costs

Distinguish between a favorable variance and an favorable variance?

Distinguish between a favorable variance and an favorable variance?

A favorable variance (denoted F) is a variance that has the effect of increasing operating income relative to the budgeted amount. An unfavorable variance--denoted U--is a variance that has the effect of decreasing operating income.

What are two possible sources of information a company might use to compute the budgeted amount?

What are two possible sources of information a company might use to compute the budgeted amount?

Two sources of information about budgeted amounts are

(a) Past amounts and
(b) Detailed engineering studies.

What is the relationship between management by exception and variance analysis?

What is the relationship between management by exception and variance analysis?

Management by exception is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected. Variance analysis helps managers identify areas not operating as expected. The larger the variance, the more likely an area is not operating as expected.

What are the main costs and limitations of implementing ABC systems?

What are the main costs and limitations of implementing ABC systems?

The main costs and limitations of ABC are the measurements necessary to implement the systems. Even basic ABC systems require many calculations to determine costs of products and services. Activity-cost rates often need to be updated regularly. Very detailed ABC systems are costly to operate and difficult to understand. Sometimes the allocations necessary to calculate activity costs often result in activity-cost pools and quantities of cost-allocation bases being measured with error. When measurement errors are large, activity-cost information can be misleading.

Describe four signs that help indicate when ABC systems are likely to provide the most benefits?

Describe four signs that help indicate when ABC systems are likely to provide the most benefits?

1. Significant amount of Indirect costs are allocated using one or two cost pools.
2. All or most indirect cost identified as output level unit costs.
3. Products make diverse demands on resources because of differences in volume process steps, batch size.
4. Operations staff has substantial disagreements with reported costs of manufacturing and marketing products and services.

Describe four decisions for which ABC information is useful ?

Describe four decisions for which ABC information is useful ?

1. Pricing and product mix decisions,
2. Cost reduction and process improvement decisions,
3. Product design decisions, and
4. Decisions for planning and managing activities.

Why is it important to classify costs into a cost hierarchy?

Why is it important to classify costs into a cost hierarchy?

Cost pools will be homogenous/ to get closer to true costs, peanut butter costing.

What is an activity based approach to designing a costing system?

What is an activity based approach to designing a costing system?

An activity-based approach refines a costing system by focusing on individual activities as the fundamental cost objects. It uses the cost of these activities as the basis for assigning costs to other cost objects such as products or services.

Define costing refinement? Describe three guidelines for costing refinement ?

Define costing refinement? Describe three guidelines for costing refinement ?

The use of simple costing system that reduces the use of broad averages for assigning the cost of resources to cost objects.

Three guidelines for refinement are

1. Direct cost tracing- Classify as many of the total costs as direct costs as is economically feasible.

2. Indirect cost tracing-Expand the number of indirect cost pools until each of these pools is more homogenous.

3. Cost allocation base-Use the cause-and-effect criterion, when possible, to identify the cost-allocation base for each indirect-cost pool.

Why should managers worry about product overcosting or undercosting ?

Why should managers worry about product overcosting or undercosting ?

-Overcosting may result in competitors entering a market and taking market share for products that a company erroneously believes are low-margin or even unprofitable.
-Undercosting may result in companies selling products on which they are in fact losing money, when they erroneously believe them to be profitable.

What is broad averaging and what consequences can it have on costs.

What is broad averaging and what consequences can it have on costs.

Simple costing approach to allocate overhead costs in an easy inexpensive way. Product diversity can lead to inaccurate costs as individual product/services uses these resources in non uniform ways.

When might a company use budgeted costs rather than actual costs to compute direct-labor rates.

When might a company use budgeted costs rather than actual costs to compute direct-labor rates.

To compute direct labor rates because it may be difficult to trace direct labor costs to jobs as they are completed.

Three alternative ways to dispose of underallocated or overallocated costs.

Three alternative ways to dispose of underallocated or overallocated costs.

1. Proration based on the total amount of indirect costs allocated (before proration) in
the ending balances of work in process, finished goods, and cost of goods sold.

2. Proration based on total ending balances (before proration) in work in process, Finished goods, and cost of goods sold.

3. Year-end write-off to Cost of Goods Sold. The adjusted allocation rate approach that restates all overhead entries using actual indirect cost rates rather than budgeted indirect cost rates.

4. The adjusted allocation rate approach that restates all overhead entries using actual
indirect cost rates rather than budgeted indirect cost rates.

Describe three different debit entries to work in process control T account under normal costing.

Describe three different debit entries to work in process control T account under normal costing.

(a) direct materials used (credit to Materials Control),
(b) direct manufacturing labor billed to job (credit to Wages Payable Control), and
(c) manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated).

Distinguish between actual and normal job costing.

Distinguish between actual and normal job costing.

Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates: Normal costing traces direct costs to cost object by using (actual direct costs *actual quantities of direct cost input). It allocates indirect costs through budgeted indirect cost rates instead of actual indirect costs rate which actual costing uses

Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect costs ?

Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect costs ?

1. The numerator reason--the longer the time period, the less the influence of seasonal
patterns in overhead costs, and
2. The denominator reason--the longer the time period, the less the effect of variations in
output levels or quantities of the cost-allocation bases on the allocation of fixed costs.

Describe three major source documents used in job costing systems?

Describe three major source documents used in job costing systems?

1. Job cost sheet, a document that records and accumulates all costs assigned to a specific job,
2.Materials requisition record, a document that contains information about the cost of direct materials used on a specific job and
3.:abor-time sheet, a document that contains information about the amount of labor time used for a specific job.

Describe the seven steps of job costing?

Describe the seven steps of job costing?

(1) identify the job that is the chosen cost object,
(2) identify the direct costs of the job
(3) select the cost-allocation bases to use for allocating indirect costs to the job,
(4) identify the indirect costs associated with each cost-allocation base,
(5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job,
(6) compute the indirect costs allocated to the job,
(7) compute the total cost of the job
by adding all direct and indirect costs assigned to the job.

How does job costing differ from process- costing ?

How does job costing differ from process- costing ?

In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or
service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units.

Define:cost pool, cost tracing, cost allocation, and cost allocation base.

Define:cost pool, cost tracing, cost allocation, and cost allocation base.

Cost pool -- A grouping of individual indirect cost items.

Cost tracing -- The assigning of direct costs to the chosen cost object.

Cost allocation -- The assigning of indirect costs to the chosen cost object.

Cost allocation base -- A factor that links in a systematic way an indirect cost or group of
indirect costs to cost objects.

List six step in estimating a cost function.

List six step in estimating a cost function.

1. choose dependent variable.
2. identify independent variables.
3.collect data on variables.
4.Plot Data.
5. Estimate cost function.
6.Evaluate cost driver of the estimated cost function.

When using the the high-low method should you base the high and low observation on the dependent variable or cost driver?

When using the the high-low method should you base the high and low observation on the dependent variable or cost driver?

Cost driver

Describe three criteria for evaluation cost functions and cost drivers.

Describe three criteria for evaluation cost functions and cost drivers.

1)Economic plausibility.
2)Goodness of fit.
3)Slope of regression line.

What two assumptions are frequently made when estimating a cost function?

What two assumptions are frequently made when estimating a cost function?

1)Variation in the single level of a single activity (cost driver) explain the variations in total cost.

2) Cost behavior is approximated by a linear function in a relevant range.

Give example of allocation bases used to allocate support- department cost pools to operating cost pools.

Give example of allocation bases used to allocate support- department cost pools to operating cost pools.

1. Number of employees
2.Square feet of space
3. Machine hours

Describe three alternative linear cost functions.

Describe three alternative linear cost functions.

Variable Cost Function- when total cost change in relation to the change in the level of activity in a relevant range.Fixed Cost function- when total costs are constant despite changes in level of activity in the relevant range. Mixed- has both fixed and variable elements. Total cost change but not in relation to level of activity or relevant range.

What role does the Cost Accounting standards Board ?

What role does the Cost Accounting standards Board ?

All contracts with U.S. Companies must comply with Cost accounting standards issued by C.A.S.B.

Describe how dual-rate method is useful to decision managers in making decisions.

Describe how dual-rate method is useful to decision managers in making decisions.

It provides information to the managers about fixed and variable costs. Knowing how both costs behave is useful in decision making.

How do budgeted cost rates motivate the support-department managers to improve efficiency.

How do budgeted cost rates motivate the support-department managers to improve efficiency.

Because the supplier department bears the risk of an unfavorable cost variances

Distinguish among the three methods of allocating the costs of support departments to operating departments.

Distinguish among the three methods of allocating the costs of support departments to operating departments.

Direct- allocates each support departments costs directly to the operating department.

Step Down allocates support department costs to other support and operating departments in a sequential matter partially recognizing that mutual services provided among all support departments.

Reciprocal- allocates support department costs to operating department by fully recognizing the mutual services provided.

What is conceptually the most defensible method for allocating support department costs? Why?

What is conceptually the most defensible method for allocating support department costs? Why?

Reciprocal method. Because it fully recognizes the method services provided by all services.

Distinguish between two methods of allocating costs.

Distinguish between two methods of allocating costs.

Stand-alone- uses information pertaining to each user of a cost object as a separate entity to determine cost allocation weights.

Incremental- ranks individual users of a cost object in the order of most responsible for common costs and then ranking is used to allocate costs among those users.

Describe how companies are increasingly facing revenue allocation decisions.

Describe how companies are increasingly facing revenue allocation decisions.

Companies are increasingly selling products or services for a single price revenue allocation is required when managers in charge of developing or marketing products in a bundle are evaluated using, product specific revenues.

What is the difference between a linear and nonlinear cost function. Give an example of each.

What is the difference between a linear and nonlinear cost function. Give an example of each.

Linear cost function is when within a relevant ranges the graph of total costs compared to the level of activity related to that cost is a straight line. Example Telephone line 10,000 fixed +2./min charge for phone use. NON-Linear within a relevant range the graph of total cost vs the level of single activity related to that cost isn't a straight line. Example: Step cost function

"High correlation between two variables...cause and the others is the affect?" do you agree explain?

"High correlation between two variables...cause and the others is the affect?" do you agree explain?

No. Just because two variables have high correlation just means they are moving together not that one causes the other.

Name four approaches to estimating a cost function.

Name four approaches to estimating a cost function.

1. Industrial engineering method.
2. Conference Method.
3. Account analysis method.
4. Quantitative analysis of current or past cost relationships.

Describe the conference method for estimating a cost function. What are two advantages of this method?

Describe the conference method for estimating a cost function. What are two advantages of this method?

This method estimates cost functions through analysis and opinions of costs and their drivers from various departments of a company. Two advantages are speed which costs estimates can be developed and the pooling of knowledge from experts across functional areas.

Define learning curve. Outline two models that can be used when incorporating learning into the estimation of cost functions.

Define learning curve. Outline two models that can be used when incorporating learning into the estimation of cost functions.

A learning curve is a function that measures how labor hours per unit decline as units of production increase due to workers learning and improving.

Model 1:Cumulative in learning model- As cumulative average declines by a certain percentage cumulative quantity of units produced doubles.

Model 2: Incremental unit-time- the time needed to produce the last unit decreases by a constant percentage as cumulative quantity of units produced doubles.

Discuss four frequently encountered problems when collecting cost data on variables included in a cost function.

Discuss four frequently encountered problems when collecting cost data on variables included in a cost function.

1.fixed costs are allocated as if they are variable.
2.Extreme values of observations occur.
3. Relationship between the cost and cost driver isn't stationary.
4. Inflation occurred in a dependent variable or cost driver, or both.

Distinguish between the single-rate and dual rate method ?

Distinguish between the single-rate and dual rate method ?

Single rate method- allocates costs in each pool to 1 cost object making no distinction between fixed and variable costs.

Dual rate method- allocates costs into two separate fixed and variable cost pools using a different allocation base for each

Define Opportunity Cost.

Define Opportunity Cost.

The contribution to income that is forgone (rejected) by not using a limited resource in its next-best alternative use.

Can the constant in the cost function be used as an estimate for fixed cost (when calculating maintenance, etc.)?

Can the constant in the cost function be used as an estimate for fixed cost (when calculating maintenance, etc.)?

The cost function is an estimate of how costs behave within the relevant range, not at cost levels outside the relevant range.

Describe the account analysis method for estimating a cost function.

Describe the account analysis method for estimating a cost function.

It estimates cost functions by classifying cost accounts in the subsidiary ledger as variable, fixed or mixed with respect to the identified level of activity. Typically, managers use qualitative, rather than quantitative, analysis when making these cost-classification decisions.

Name 4 approaches to estimating a cost function ?

Name 4 approaches to estimating a cost function ?

1. Industrial engineering method
2. Conference method
3. Account analysis method
4. Quantitative analysis of current or past cost relationships

Describe three alternative linear cost functions ?

Describe three alternative linear cost functions ?

1. Variable Cost Function: A cost function in which total costs change in proportion to the changes in the level of activity in the relevant range.

2. Fixed Cost Function: A cost function in which total costs do not change with the changes in the level of activity in the relevant range.

3. Mixed Cost Function: A cost function that has both variable and fixed elements. Total costs change but not in proportion to the changes in the level of activity in the relevant range.

What two assumptions are frequently made when estimating a cost function?

What two assumptions are frequently made when estimating a cost function?

1. Variations in the level of a single activity (the cost driver) explain the variations in the related total cost

2. Cost behavior is approximated by a linear cost function within the relevant range. A linear cost function is a cost function where, within the relevant range, the graph of total costs versus the level of a single activity forms a straight line.

Define Cost-Volume-Profit Analysis ?

Define Cost-Volume-Profit Analysis ?

CVP analysis examines the behavior of total revenues, total costs, and operating income as changes occur in the units sold, selling price, variable cost per unit, or fixed costs of a product.

Define Operating Leverage ?

Define Operating Leverage ?

The effects that fixed costs have on changes in operating income as changes occur in units sold and contribution margin.