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Exam Review for Introduction to Managerial Accounting | ACC 102, Study notes of Management Accounting

Material Type: Notes; Class: INTRODUCTION TO MANAGERIAL ACCOUNTING; Subject: Accounting; University: Harper College; Term: Summer 2008;

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Revised July 2008
Page 1 of 20
EXAM REVIEW
ACCOUNTING 102 - UNIT III - CHAPTERS 7, 8, & 9
STUDY SUGGESTIONS
Review your class notes, homework exercises and problems.
Review
Summary, Review Problem and Glossary
at the end of each chapter.
Use your
Study Guide,
especially Multiple Choice and True & False questions
Review the resource materials and practice quizzes and exams available on the
Textbook Website
:
http://highered.mcgraw-hill.com/sites/0073048836/informationcenterview0/
Additional review materials are available online at sites such as:
http://www.cliffsnotes.com/WileyCDA/Section/id-305261.html
CHAPTER 7 – PREPARING THE MASETR BUDGET
Know the major benefits of budgeting and how and why budgets are used.
Know the sequence in which the budgets are prepared.
Be able to prepare a Sales Budget and Schedule of Expected Cash Collections.
Be able to prepare a Production Budget.
Be able to prepare a Direct Materials Budget and a Schedule of Expected Cash
Disbursements.
Be able to prepare a Cash Budget.
Understand the other budgets described in the chapter.
Be able to explain responsibility accounting and zero-based budgeting.
CHAPTER 8 - STANDARD COSTS
Understand the nature of standards: what they are, how they arise, why they are
important and the different types of standards available that exist.
Understand the nature of variances: what they are, how they arise and why they
are important.
Be able to prepare journal entries to record actual and standard costs and the
related variances.
Be able to compute the following variances
a.
Direct materials price and quantity variances
b.
Direct labor rate and efficiency variances
c.
Variable manufacturing overhead spending and efficiency variances
Remember that the direct materials price variance is based on the quantity of
materials purchased and the direct materials quantity variance is based on the
quantity of materials used. This is the only variance where this situation occurs.
If the direct materials inventory is different at the beginning and end of the
variance period, then the quantity purchased and the quantity used are not the
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Download Exam Review for Introduction to Managerial Accounting | ACC 102 and more Study notes Management Accounting in PDF only on Docsity!

Revised July 2008

Page 1 of 20

EXAM REVIEW

ACCOUNTING 102 - UNIT III - CHAPTERS 7, 8, & 9

STUDY SUGGESTIONS

Review your class notes, homework exercises and problems. Review Summary, Review Problem and Glossary at the end of each chapter. Use your Study Guide, especially Multiple Choice and True & False questions Review the resource materials and practice quizzes and exams available on the Textbook Website : http://highered.mcgraw-hill.com/sites/0073048836/informationcenterview0/ Additional review materials are available online at sites such as: http://www.cliffsnotes.com/WileyCDA/Section/id-305261.html

CHAPTER 7 – PREPARING THE MASETR BUDGET

 Know the major benefits of budgeting and how and why budgets are used.  Know the sequence in which the budgets are prepared.  Be able to prepare a Sales Budget and Schedule of Expected Cash Collections.  Be able to prepare a Production Budget.  Be able to prepare a Direct Materials Budget and a Schedule of Expected Cash Disbursements.  Be able to prepare a Cash Budget.  Understand the other budgets described in the chapter.  Be able to explain responsibility accounting and zero-based budgeting.

CHAPTER 8 - STANDARD COSTS

 Understand the nature of standards: what they are, how they arise, why they are important and the different types of standards available that exist.  Understand the nature of variances: what they are, how they arise and why they are important.  Be able to prepare journal entries to record actual and standard costs and the related variances.  Be able to compute the following variances a. Direct materials price and quantity variances b. Direct labor rate and efficiency variances c. Variable manufacturing overhead spending and efficiency variances  Remember that the direct materials price variance is based on the quantity of materials purchased and the direct materials quantity variance is based on the quantity of materials used. This is the only variance where this situation occurs. If the direct materials inventory is different at the beginning and end of the variance period, then the quantity purchased and the quantity used are not the

same.

Know how to compute Fixed Overhead Variances:

(1) (2) (3) Actual Costs Actual Quantity Standard Quantity Incurred of Inputs of Inputs Allowed for Output at Standard Price/Rate at Standard Price/Rate

or

Static= Flexible Budget Applied to WIP Fixed Overhead Cost* | | |

Dollar-driven Variances Quantity-driven Variances Column (1) - (2) Column (2) - (3) Variable overhead spending Variable overhead efficiency Fixed overhead budget Fixed overhead volume

  • May also be calculated as: Standard hours X Fixed Predetermined Rate

Equations:

Budget Variance = Actual Fixed Overhead – Budgeted Fixed Overhead

Volume Variance = Fixed Predetermined Rate*(Denominator HR – Standard HRS)

SAMPLE PROBLEMS

Problem 1 - Production Budget The TS Company has budgeted sales for 2003 as follows: Month January February March April May Unit Sales 10,000 12,000 14,000 16,000 11, The ending inventory of finished goods for each month should equal 25% of the next month’s budgeted sales in units. The finished goods inventory at the start of the year is 2,500 units. Four pounds of raw material are required for each unit produced. Raw materials on hand at the start of the year total 4,200 pounds. The raw materials inventory at the end of each month should equal 10% of the next month’s production needs in material.

Required: a) Prepare a production budget for the first quarter of 2003. Include a column for the quarter’s total. b) Prepare a direct material purchases budget for the first quarter of 2003. Include a column for the quarter’s total.

Problem 2 - Cash Budget Berwin Products needs a cash budget for October. The following information is available: a. The cash balance at the beginning of October is $9, b. The actual sales for August and September and expected sales for October are: August September October Cash sales $ 6,500 $ 5,250 $ 7, Sales on account 20,000 30,000 40, Total sales $26,500 $35,250 $47,

Sales on account are collected over a three-month period in the following ratio: 10% in the month of sale, 70% in the month following sale 18% in the second month following sale remaining 2% are uncollectible.

c. Purchases of inventory will total $25,000 for October; 20% will be paid for in October. Accounts payable from September's inventory purchases is $16,000, all of which will be paid in October. d. Selling and administrative expenses are budgeted at $13,000 for October; of which $4,000 is for depreciation.

e. Equipment costing $18,000 will be purchased for cash during October, and cash

  1. In a cash budget for the month of April, the total cash receipts will be: a. $74, b. $57, c. $114, d. $97,

Questions 4-6 refer to the following:

The Panza Company makes and sells only one product called a TTC. The company is in the process of preparing its Selling and Administrative Expense Budget for next year. The following budget data are available: Monthly Fixed Variable Cost C o s t per TTC Sold Sales Commissions $0. Shipping $1. Advertising $40,000 $0. Executive Salaries $25, Depreciation on Office Equipment $20, Other $ 7,

All of these expenses (except depreciation) are paid in cash in the month they are incurred.

  1. If the company has budgeted to sell 18,000 Dobs in January, then the total budgeted variable selling and administrative expenses for January will be: a. $14, b. $23, c. $37, d. $41,
  2. If the company has budgeted to sell 16,000 Dobs in February, then the total budgeted fixed selling and administrative expenses for February are: a. $36, b. $92, c. $72, d. $108,
  3. If the company has budgeted to sell 20,000 Dobs in March, then the budgeted cash disbursements for selling and administrative expenses for March would be: a. $138, b. $133, c. $118, d. $ 72,

Problem 4 - Variances and Journal Entries Massachusetts Mills is a manufacturer of men's hunting clothing. During May, the company produced 4,800 units of product.

The actual and standard costs for the month of May were as follows: Direct materials: Standard: 4.0 yards at $3.60 per yard Actual: 4.4 yards at $3.35 per yard Direct labor: Standard: 1.6 hours at $4.50 per hour Actual: 1.4 hours at $4.85 per hour Variable manufacturing overhead: Standard: 1.6 hours at $1.80 per hour Actual: 1.4 hours at $2.15 per hour

A comparison of total standard and actual costs for the period is given below: Actual costs: 4,800 units at 24.54 ............... $117, Standard costs: 4800 units at $24.48 .......... 117, Difference in cost – unfavorable ................. $ 288

There was no inventory of materials on hand at the beginning of May. During the month, 21,120 yards of material were purchased at a cost of $70,752, all of which were used during the month.

Required: a) For direct materials:

  1. Compute the price and quantity variances for the month of May
  2. Prepare the journal entries to record all activity relating to direct materials. b) For direct labor:
  3. Compute the rate and efficiency variances.
  4. Prepare a journal entry to record all activity relating to direct labor cost. c) Compute the variable overhead spending and efficiency variances for May.

Problem 5 - Sample Multiple Choice Questions

  1. Lion Company’s direct labor costs for the month of January were as follows:

Actual total direct labor hours 20, Standard total direct labor hours 21, Direct labor rate variance—unfavorable $3,000 U Total direct labor cost $126,

What was Lion’s direct labor efficiency variance? a. $6,000 F b. $6,150 F c. $6,300 F d. $6,450 F

  1. The variable overhead spending variance is: a. $30,500 F b. $30,500 U c. $58,500 F d. $58,500 U
  2. The variable overhead efficiency variance is: a. $30,500 F b. $30,500 U c. $58,500 F d. $58,500 U

Problem 6 - Overhead Analysis The Basic Manufacturing Company produces a single product and uses a standard cost system. Overhead is applied to production based on machine hours. According to the company's flexible budget, the following costs should have been incurred at an activity level of 18,000 machine hours ( the denominator activity level chosen for the year): Variable overhead costs ...... $ 31, Fixed overhead costs ............ 72, Total overhead costs ............. $103,

During the year, the following operating results were recorded: Actual machine hours ...................................... 15,000 hours Standard machine hours allowed ................... 16,000 hours Actual variable overhead costs incurred ........$26, Actual fixed overhead costs incurred .......... $70,

At the end of the year, the company's Manufacturing Overhead account contained the following: Manufacturing Overhead Actual costs 96,500 Applied costs 92, Balance 4,

Management would like to determine the cause of the $4,500 under-applied overhead:

Required : (a) Compute the predetermined overhead rate for the year. Break it down into variable and fixed cost elements. (b) Show how the applied cost of $92,000 was computed (c) Compute the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.

Problem 7 - Sample Multiple Choice Questions

  1. Blue Company’s standards call for 2,000 direct labor hours to produce 1,000 units. During May only 900 units were produced and the company worked 2,400 direct labor hours. The standard hours allowed for May production would be: a. 2,500 hours b. 2,400 hours c. 2,250 hours d. 1,800 hours
  2. Information on Dexter Company’s manufacturing overhead costs for last period is given below: Actual direct labor hours worked 40,000 hours Standard hours allowed for actual production 38,000 hours Denominator hours used in computing the predetermined overhead rate 35,000 hours Predetermined overhead rate $4 per DLH Actual overhead costs incurred $150,

Dexter Company uses a standard cost system, and applied manufacturing overhead cost to units of product on the basis of direct labor hours. Given these data, the under- or overapplied overhead cost for the period would be: a. $10,000 overapplied b. $2,000 overapplied c. $10,000 underapplied d. $8,000 underapplied

Questions 3-5 refer to the following:

Zotta Enterprises uses standard costing and applied manufacturing overhead cost to units of product on the basis of direct labor hours (DLHs). Budgeted and actual data relating to manufacturing overhead for last year appear below: Actual fixed overhead cost $38, Denominator activity 20,000 DLH Standard hours allowed for one unit 1.2 DLH Units produced 17, Fixed overhead budged variance $1,300 U

  1. The budgeted fixed factory overhead cost was: a. $24, b. $38, c. $40, d. $37,

SOLUTIONS TO SAMPLE PROBLEMS

Problem 1

A)

January February March Quarter April Units Sold 10,000 12,000 14,000 36,000 16, Ending Inventory 3,000 3,500 4,000 4,000 2,750* Units Needed 13,000 15,500 18,000 40,000 18, Beginning Inventory 2,500 3,000 3,500 2,500 4, Units to be Produced 10,500 12,500 14,500 37,500 14,

  • May sold = 11,000 X 25% = 2,750 ending inventory

B) January February March Quarter April Units to be Produced 10,500 12,500 14,500 37,500 14, Pounds per unit 4 4 4 4 4 Raw Materials Used 42,000 50,000 58,000 150,000 59, Ending Inventory 5,000 5,800 5,900 5, Raw Materials Needed 47,000 55,800 63,900 155, Beginning Inventory 4,200 5,000 5,800 4, Units to be Produced (^) 42,800 50,800 58,100 151,

Problem 2

A) Schedule of expected cash receipts for October:

October cash sales $7, October collections on account August sales: $20,000 X 18% 3, September sales: $30,000 X 70% 21, October sales: $40,000 X 10% 4, Total cash receipts $36,

B) Schedule of payments to suppliers:

September purchases (accounts payable) $16, October purchases: $25,000 X 20% 5, Total cash payments $21,

C) Cash budget for the month of October: Berwin Company Cash Budget For the Month of October

Cash balance, October 1 $ 9, Add: Cash receipts 36, Cash available before financing 45, Less: Cash disbursements Payments to suppliers $21, Selling and administrative expenses 9, Equipment purchases 18, Dividends paid 3, Total disbursements 51, Excess (deficiency) of cash available over disbursements (6,000) Financing Borrowing 11, Cash balance, October 31 $ 5,

Problem 4

(1) (2) (3) Actual Quantity Actual Quantity of Standard Quantity of Inputs of Inputs Allowed for Output at Actual Price at Standard Price at Standard Price

Direct Materials Variances: 21,120 yards 21,120 yards 19,200 yards X $3.35 X $3.60 X $3. $70,752 $76,032 $69, Price Variance $5,280 F Quantity Variance $6,912 U (1)- (2) (2) - (3) Total direct materials variance $1,632 U

Journal Entries Raw Materials (21,120 yards @ $3.60) 76, Materials Price Variance (21,120 yards @.25F) 5, Accounts Payable (21,120 yards @ $3.35) 70,

Work in Process (19,200 yards @ $3.60) 69, Materials Quantity Variances (1,920 yards U @ $3.60) 6, Raw Materials (21,120 yards @ $3.60) 76,

Direct Labor Variances 6,720 hours X $4.85 6,720 hours X $4.50 7,680 hours X $4. $32,592 $30,240 $34, Rate Variance $2,352 U Efficiency Variance $4,320 F (1) - (2) (2) - (3) Total direct labor variance $1,968 F

Actual hours: 4,800 units X 1.4 hours per unit = 6,720 hours Standard hours: 4,800 units X 1.6 hours per unit = 7,680 hours

Journal Entries: Work in Process (7,680 hours @ $4.50) 34, Labor Rate Variance (6,720 hours @ $.35 U) 2, Labor Efficiency Variance (960 hours F @ $4.50) 4, Wages Payable (6,720 hours @ $4.85) 32,

Variable Overhead Variances: 6,720 hours X $2.15 6,720 hours X $1.80 7,680 hours X $1. $14,448 $12,096 $13, Spending Variance $2,352 U Efficiency Variance $1,728 F (1) - (2) (2) - (3) Total variable overhead variance $624U

Summary of Variances

Direct Materials Price Variance $5,280 F Quantity Variance 6,912 U $1,632 U

Direct Labor Rate Variance 2,352 U Efficiency Variance 4,320 F 1,968 F

Variable Overhead Spending Variance 2,352 U Efficiency Variance 1,728 F 624 U

Total Variance – Unfavorable $ 288 U

Problem 6

(a) Predetermined overhead rate: Variable overhead rate: $31,500 / 18,000 hours = $1.75 per machine hour Fixed overhead rate: $72,000 / 18,000 hours = $4.00 per machine hour Total overhead rate: $103,500 / 18,000 hours = $5.75 per machine hour

(b) Applied cost = 16,000 standard hours allowed X $5.75 = $92,

(c) Actual Hours Actual Hours Standard Hours Allowed of input of Input for Output at Actual Rate at Standard Rate at Standard rate

Variable overhead variances: 15,000 hours X 1.75 16,000 hours X $1. $26,500 $26,250 $28, Spending Variance $250 U Efficiency Variance $1,750 F Total Variable Overhead Variance $1,500 F

Fixed Overhead Variances: 16,000 hours X $ $70,000 $72,000 $64, Budget Variance $2,000 F Volume Variance $8,000 U Total Fixed Overhead Variance $6,000 U

Summary of overhead variances: Total Variable overhead variance $1,500 F Total Fixed Overhead variance ....... 6,000 U Total underapplied overhead ........$4,

Problem 7

  1. D 2,000 dlh / 1,000 units = 2 dlh per unit May: 900 units * 2 dlh per unit = 1,800 dlh
  2. B Actual MFG Overhead (debit side) = $150, Applied MFG Overhead (credit side) = $152,000 (38,000 std hrs * $4.00) Overapplied = $2,
  3. D Actual Fixed Overhead Budgeted Fixed Overhead SH * SR (20,000 * $1.945) 17,000 units * 1.2 dlh 20,400 * 1. $38,900 $37,600 $38,

Budgeted fixed factory overhead = Actual overhead - unfavorable budget variance $38,900 - 1,300 = $37,

  1. D Std labor hours allowed: 17,000 units * 1.2 hrs allowed
  2. C Standard Rate: 37,600 budgeted fixed overhead / 20,000 dlh = $1.88 per dlh 20,400 dlh allowed * $1.88 = $38,
  3. D Volume Variance = $37,600 - $38,352 = $752 F