ACC 310F Study Guide - Quiz Guide: Fixed Cost, Contribution Margin, Cash Flow

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14 Dec 2018

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Explain how companies use budgets for performance evaluation. Compute return on equity and analyze this ratio from an investor"s perspective. Compute interest coverage ratio and analyze this ratio from a creditor"s perspective. Compute debt to tangible net assets and analyze this ratio from a creditor"s perspective. Compute leverage ratio and analyze this ratio from a creditor"s perspective. Budget is the benchmark for evaluating actual performance. A variance is the difference between an actual result and a budgeted amount. Variance is classified as favorable or unfavorable based on its effect on current profit. Total profit variance = actual profit - master budget profit. Make sure that our operations throughout the budgetary cycle is going as expected. Things are going how you expected at the beginning of the year. May imply that something is happening outside your expectations. Purchasing manager paid more for product than anticipated. Make sure the company is profitable enough to repay the loan.

Related Questions

All of the following are advantages of decentralizationexcept:

to improve customer relations.

to encourage use of expert knowledge.

to increase employee motivation.

to allow goal congruence to be achieved more easily.

All of the following are responsibility centersexcept:

profit centers.

investment centers.

customer centers.

cost centers.

3. Thedifferences between actual and budgeted figures are known as:

fluctuations.

variances.

overages.

underages.

4. Which of thefollowing is a performance measure commonly used to assess theperformance of investment centers?

Return on investment

Profit margin

Current ratio

Gross income

5. Residualincome is calculated as:

revenues less expenses.

contribution margin less minimum acceptable income.

operating income less minimum acceptable income.

sales less variable costs.

6. Which of thefollowing is NOT a strategy for determining the transfer price of aproduct?

Related party discounted price

Market price

Cost or cost-plus a markup

Negotiated price

7. Employeecapabilities, information system capabilities, and the companyâsâclimate for actionâ are important factors of the:

employee perspective.

customer perspective.

internal business perspective.

learning and growth perspective.

8. AssumeCucumber Company expects each division to earn an 8% target rate ofreturn. Assume the Companyâs Pickle Division had the followingresults:

Sales $24,500,000

Operatingincome 1,250,000

Totalassets 15,500,000

The Divisionâs ROI is:

8.1%.

15.8%.

5.1%.

8.0%.

Assume Ametrine Company expects each division to earn an 8%target rate of return. Assume the Companyâs Division A had thefollowing results:

Sales $24,500,000

Operatingincome 1,250,000

Totalassets 15,500,000

The Divisionâs RI is:

â$10,000.

$10,000.

â$710,000.

$710,000.

10. Which of the followingare examples of KPIs?

Average customer satisfaction ratings

Number of repeat customers

Sales revenue growth

All of the above are examples of KPIs

Which of the following is NOT an advantage of using standardcosts and variances?

Use as a performance benchmark for evaluation of actualcosts

Use as a basis for components of the master budget

Simplification of bookkeeping

Change in behavior of managers to obtain desired variances

One level of a companyâs flexible budget was prepared forproduction of 8,000 units. Total costs were $38,000 and includeddirect materials, direct labor, and variable overhead at $1.50,$2.50, and $0.50 per unit respectively. What is the total cost ofproduction of 8,500 units?

$ 2,000

$38,000

$38,250

$40,250

3. The directlabor price variance was unfavorable and much greater thananticipated. Who would be in the best position to explain why theunfavorable variance occurred?

Both the production and human resource supervisors

The production supervisor

The purchasing manager

Both the purchasing manager and production supervisor

4. A managerpurchased better quality materials for a slightly higher cost thananticipated. However, as a result, there was less spoilage thannormal. What is the effect on the price and quantity variancesrespectively?

Favorable, favorable

Favorable, unfavorable

Unfavorable, favorable

Unfavorable, unfavorable

5. Acompany uses a single raw material in its production process. Thestandard price for a unit of material is $2.00. During the monththe company purchased and used 600 units of this material at aprice of $2.25 per unit. The standard quantity required perfinished product is 2 units and during the month, the companyproduced 310 finished units. How much was the material pricevariance?

$150 favorable

$150 unfavorable

$155 favorable

$155 unfavorable

6. Acompany uses a single raw material in its production process. Thestandard price for a unit of material is $2.00. During the monththe company purchased and used 600 units of this material at aprice of $2.25 per unit. The standard quantity required perfinished product is 2 units and during the month, the companyproduced 310 finished units. How much was the material quantityvariance?

$40 favorable

$40 unfavorable

$45 favorable

$45 unfavorable

7. Acompany produced 2,200 units of output during a production processthat normally requires 2 hours of labor per unit of output. Thestandard labor rate is $16 per hour, but the company paid $15 perhour. Actual hours needed to complete the production process were4,600. How much was the labor efficiency variance?

$3,000 favorable

$3,000 unfavorable

$3,200 favorable

$3,200 unfavorable

8. Acompany produced 2,200 units of output during a production processthat normally requires 2 hours of labor per unit of output. Thestandard labor rate is $16 per hour, but the company paid $15 perhour. Actual hours needed to complete the production process were4,600. How much was the labor rate variance?

$4,400 favorable

$4,400 unfavorable

$4,600 favorable

$4,600 unfavorable

9. Which of thefollowing formulas is used to compute variable overheadrate (or spending) variance?

actual hours Ã (actual rate â standard rate)

standard hours allowed Ã (actual rate â standard rate)

actual rate Ã (actual hours â standard hours allowed)

standard rate Ã (actual hours â standard hours allowed)

10. Which of the followingis a true statement regarding fixed overhead volume variance?

If production volume is less than anticipated, then fixedoverhead has been underallocated and the fixed overhead volumevariance is favorable.

If production volume is less than anticipated, then fixedoverhead has been underallocated and the fixed overhead volumevariance is unfavorable.

If production volume is greater than anticipated, then fixedoverhead has been underallocated and the fixed overhead volumevariance is favorable.

If production volume is greater than anticipated, then fixedoverhead has been overallocated and the fixed overhead volumevariance is unfavorable.

You want to sell 10,000 units in April, 15,000 in May, 8,000 units in June at $20 each.

Business Development

You know that our competitor is struggling with manufacturing and supply is low, and your POV is that demand will increase by 10% in April and May

Manufacturing Supervisor

You have seen that raw material supply shipments are being delayed - and you want to keep 15% of next months production needs on hand- also you would like 15% of raw material needs on hand for production of product for next month. You know it takes .5 hours standard to make each unit.

Human Resources

Has settled the labors union by guaranteeing 40 hours minimum a week at $12/hour, but no OT. You expect 5500 direct labor hours standard per month. Based on our payroll system you can expect 1/2 the direct labor to be paid in the month it was incurred and the second 1/2 in the following month.

Purchasing Agent

Your POV is that Supply of raw material is plentiful and you agree with the Manufacturing Supervisor that in fact shipments are slow do to trucking constraints, you want to keep 10% of raw material on hand for next months production needs. The price of wood is not expected fluctuate in the next 3 months at $1/lb standar rate. You know each unit manufactured requires a standard 4lb of wood.

Accounts Receivable Manager

Based on historical data you know that 50% of the current month sales are collected in month while 45% are collected the following month, 5% are never collected.

Treasure

Your goal is to keep $40,000 in the bank as a balance. We have a line of credit we can borrow from- when we fall short

Accountant

Has calculated fixed Manufacturing Overhead as follows (each month)

Variable Manufacturing Overhead at

Utilities

$.5 per unit produced

Controller

Your goal is to help guide and lead the team, and increase profit share over the next quarter, while keeping costs under control. Last years sales goal for the same 3 months was set at 32,000 units which we met. We did that with only keeping 10% of units produced on hand.

Accounts Payable

You know that 50% of our purchases (VE) are paid the same month incurred and the reminder paid the following month. However our expenses (FE) are paid for in the month we incur them. While utilities are paid the 10th of the following month of production.

We manufacture and sell baseball bats, attached is the cross functional working team that has been assigned to come up with a plan for next quarter.

Work with the knowledge you are given to present a plan (budgets) to the board.

Add desired ending Inventory

Material to be purchased

Direct Labor Hours per unit

Total direct labor cost

Total cash collection

Cash Disbursement Budget

April

May

June

Purchases Raw Material

Variable Manufacturing OH

$5,000

Fixed Manufacturing OH

Total Cash Disbursements

Beginning cash Balance

How did you decide on how many units to sell over the next 3 months?

How did the sales goal affect your production budget?

Assume Actual purchases for May of Direct Material were 2% less than budged and Actual price paid for material was $.90/ lb. Calculate the Direct material price variance. Is this a favorable or unfavorable variance?

Assume actual direct labor hours for April were 5,300 with an actual average rate of $12.50, calculate the direct labor rate variance, and determine if this is a favorable or unfavorable variance.

For May actual fixed overhead totaled $34,000, calculate the fixed overhead budget variance, is the favorable or unfavorable?

LOOKING FOR SOLUTION TO PART 2,3,4

Section I: Cost-Volume-Profit Analysis

The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead:$0.40

Variable Selling Expenses: $1.10

Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below. All CVP calculations shouldbe completed in the Hampshire Company Spreadsheet. Note:The CVP analysis satisfies Part A of Section I.

Compute net income before tax.

Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.

Calculate the break-even point in units and dollars of revenue.Note: This is a required part of the CVP analysis andsatisfies Part C of Section I.

Calculate the margin of safety:

In units

In sales dollars

As a percentage

Calculate the degree of operating leverage.

Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.

Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.

A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.

Additionally, complete Parts B and D of Section I as outlined inthe Final Project Guidelines and Rubric document.

Section II: Inventory Management

The information below represents the beginning and endinginventory amounts along with the production and sales for the monthin umbrella units.

Beginning Inventory: 0 Umbrellas

Production: 80,000 Umbrellas

Sales: 60,000 Umbrellas

Ending Inventory: 20,000Umbrellas

Using the information provided above and the costs and salesinformation provided in Section I, complete the following in theHampshire Company Spreadsheet in order to assist you in respondingto all components of Section II:

Prepare a variable costing income statement.

Prepare an absorption costing income statement.

Additionally, complete Parts A through E of Section II asoutlined in the Final Project Guidelines and Rubric document.

Section III: Benchmarking

The management of the Hampshire Company would like to implementbenchmarking. Standard costs have been established and arepresented below. You will want to complete a variance analysis toinclude efficiency and price variances for materials (cloth andhandle assemblies) and labor based on the following data:

Units Produced = 80,000

Units Sold = 60,000

Direct Materials Purchased and Used

Actual square yards of cloth purchased and used: 128,000

Actual price incurred per yard: $1.25

Actual handles purchased and used: 80,808

Actual price per handle/rib/stretcher assembly: $0.99

Direct Manufacturing Labor Used

Actual direct labor hours used: 15,748

Actual price per hour: $7.62

Direct labor costs: $120,000

Standard Rates

Standard labor hours per unit: 0.20

Standard labor price per hour: $7.50

Square yards material per unit: 1.50

Standard price per yard: $1.15

Handle/rib/stretcher assembly per unit: 1

Standard price per handle assembly: $1.05

Companies can use variance analysis and benchmarking to measureperformance within their own company and against competitors. Thiscan be done by setting standards/budgets and comparing a completedvariance analysis to results from prior periods or comparing themto competitorsâ results. Using the information provided above,complete the following calculations (steps 1 and 2) in theHampshire Company Spreadsheet. This will assist you in respondingto all components of Section III.

Calculate price variances for material and labor and denotewhether they are favorable or unfavorable.

Calculate efficiency variances for material and labor and denotewhether they are favorable or unfavorable.

In order to measure performance and make use of the varianceanalysis completed, management understands the need to compareresults with their competitors. Following the steps outlined below,you will research benchmarking and propose the most effectiveapproach for your company. Respond to Parts A through C of SectionIII as outlined in the Final Project Guidelines and Rubricdocument.

Section IV: Alternative Costing Method

Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor:$8.00

In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:

	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost per Unit	$3	$3.10
Direct Labor Cost per Hour	$7.50	$8.00
Variable Manufacturing Overhead	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Table 1: Direct Cost Information and Activities

Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.

Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:

1.Calculate the allocation rates foreach cost driver using ABC.

2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.

3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.

4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.

Based on your calculations from steps 1â4, respond to Parts Athrough C in Section IV as outlined in the Final Project Guidelinesand Rubric document.

Section V: Memo to Management

The management of the Hampshire Company is very interested inmeasuring performance. They would like you to recommend a strategyto increase business performance. They are not sure whether theyshould focus on product differentiation or cost leadership.Research additional performance tools to include the balancedscorecard. During your research, consider what performancemeasurements you would use based on the four perspectives. Provideexamples.

In your recommendation, you will want to include the outcome ofyour previous quantitative analysis and research performed relatedto cost-volume-profit (CVP), variable and absorption costing,just-in-time (JIT), standard costs, variances, and benchmarking.You will want to review key points and make recommendations basedon your current research and prior analysis completed and researchperformed.

Your two- to three-page memo to management must be submitted asa Word document and must include your responses to Parts A throughC of Section V as outlined in the Final Project Guidelines andRubric document.

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ACC 310F Study Guide - Quiz Guide: Fixed Cost, Contribution Margin, Cash Flow

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