EXAM 3 Review Word Problems

Answers to Exam 3 Review Questions

Chapter 10: Flexible Budgets and Variances

1. Definition: Flexible Budget and Flexible Budget Variance
A flexible budget adjusts to the actual level of output, showing expected variable and fixed costs. Flexible budget variance is the difference between the flexible budget amount and the actual results.

2. Calculate Flexible Budget
Flexible budgets are calculated by adjusting variable costs to the actual level of output, keeping fixed costs constant. Example:

• Variable costs per unit: $318.50

• Actual output: 1,200 units

Calculation:
Variable Costs = $318.50 × 1,200 = $382,200
Fixed Costs = $31,800
Total = $414,000

3. Purpose of Standard Costs
Standard costs serve as benchmarks for measuring performance and controlling production costs. They apply to both job order and process cost systems.

4. Purpose of Standard Cost System
Used for:

• Budget preparation

• Cost control

• Performance evaluation

5. Definition and Calculation: Material Variances

• Material Price Variance (MPV): (Actual Price - Standard Price) × Actual Quantity

• Material Quantity Variance (MQV): Standard Price × (Actual Quantity - Standard Quantity)

• Total Material Variance: MPV + MQV

6. Definition and Calculation: Direct Labor Variance

• Labor Rate Variance (LRV): (Actual Rate - Standard Rate) × Actual Hours Worked

• Labor Efficiency Variance (LEV): Standard Rate × (Actual Hours Worked - Standard Hours Allowed)

• Total Direct Labor Variance: LRV + LEV

7. Calculate Variable Overhead Efficiency Variance Formula: Standard Rate × (Actual Activity - Standard Activity)

Chapter 12: Joint Processes

1. Definition of Joint Process
A joint process is a production process that yields multiple outputs from a single input. Example: Refining crude oil produces gasoline, diesel, and kerosene.

2. Purpose of Joint Cost Allocation and Definition Joint cost allocation assigns costs to primary outputs of the joint process based on:

• Physical measures (e.g., weight, volume)

• Monetary measures (e.g., sales value)

3. Joint Costs Allocation to Byproducts and Scrap Byproducts and scrap are typically allocated costs based on:

• Sales value at split-off point for byproducts

• Scrap is often treated as a reduction of overall joint costs.

4. Definition of By-Product
A by-product is an incidental product of lesser value than the main product(s).

5. Example of Allocating Joint Costs Using Physical Measures Example: Joint cost = $10,000, output = 1,000 lbs. Product A: 600 lbs, Product B: 400 lbs. Allocation:

• Product A: (600 / 1,000) × $10,000 = $6,000

• Product B: (400 / 1,000) × $10,000 = $4,000

6. Calculate Split-Off or Process Further Decision Compare incremental revenues to incremental costs beyond split-off. If incremental revenues exceed costs, process further.

Chapter 13: Management Control Systems

1. Primary Components of Control System

• Detector: Measures actual performance

• Assessor: Compares actual vs. standard performance

• Effector: Adjusts processes based on assessment

• Communication Network: Transmits information between components

2. Characteristics of Centralized and Decentralized Systems

• Centralized: Top management retains authority; suitable for small, stable organizations.

• Decentralized: Authority delegated to subunits; promotes flexibility and faster decision-making.

3. Four Types of Responsibility Centers

• Cost Center: Focuses on controlling costs (e.g., production department).

• Revenue Center: Focuses on generating revenue (e.g., sales department).

• Profit Center: Manages both costs and revenues to maximize profit (e.g., retail store branch).

• Investment Center: Responsible for revenues, costs, and asset utilization (e.g., company division).

4. Types of Transfer Pricing

• Cost-Based: Uses actual or standard cost

• Market-Based: Uses market prices

• Negotiated: Agreed upon by buyer and seller

• Dual Pricing: Separate prices for buyer and seller

5. Characteristics of Responsibility Reports Include:

• Budgeted vs. actual revenues and costs

• Variance analysis

• Asset utilization metrics