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business
cost accounting

Questions and Answers of Cost Accounting

WHAT IS THE STARTING POINT OF A MASTER BUDGET AND WHY?LO.1
HOW ARE THE VARIOUS COMPONENTS IN A MASTER BUDGET PREPARED, AND HOW DO THEY RELATE TO ONE ANOTHER?LO.1
WHY IS THE CASH BUDGET SO IMPORTANT IN THE MASTER BUDGETING PROCESS?LO.1
WHAT BENEFITS ARE PROVIDED BY A BUDGET?LO.1
(APPENDIX) HOW DOES A BUDGET MANUAL FACILITATE THE BUDGETING PROCESS?LO.1
Budgeting is important so that companies• can visualize the future and move in a focused direction.• plan effectively.• agree on and communicate organizational goals and objectives.• develop
Strategic planning and budgeting are related because they• tie the long-term and short-term (tactical) plans together.• use the same underlying key variables to iden¬ tify success.• harmonize
The starting point of a master budget• reflects a single level of output demand.• is static to facilitate the numerous arrangements (employees, suppliers, prices, resource quality, capacity
Master budget components• include the»- Sales budget, which reflects units and dollars.»- Production budget, which adds sales and de¬ sired finished goods ending inventory and subtracts finished
The cash budget is critical to the master budgeting process because it• is essential for an organization to have cash to survive.• translates accrual-based information (such as sales revenues)
Budgets benefit organizations by• guiding management to align organizational goals with activities and resource commitments.• promoting employee participation and depart¬ mental coordination.•
Why is the master budget an important source of information for managers and operating personnel?LO.1
How does the strategic plan influence preparation of the master budget?LO.1
Distinguish between a tactical plan and a strategic plan. How are these plans related?LO.1
After a master budget has been prepared, what is its role in managerial con¬ trol?LO.1
Differentiate between the operating and financial budgets that are contained in a master budget. Why are both types needed?LO.1
Discuss the sequence in which the major components of the master budget are prepared. Why is it necessary to prepare the components in such a se¬ quence?LO.1
Why is a firm’s production budget influenced by the finished goods inven¬ tory policy?LO.1
The cash budget and the pro forma statement of cash flows both provide in¬ formation about cash. What information about cash is common to these two sources, and what information is unique to the two
What is budgetary slack, and what actions might top managers take to rid their firms’ budgets of slack?LO.1
(Appendix) Why is it necessary for a company to prepare a budget manual?LO.1
(Revenue budget) In 2006, the Teachers’ Credit Union (TCU) had $2,000,000 in business loans at an average interest rate of 5.5 percent as well as $1,600,000 in consumer loans with an average rate
(Production budget) Jessica Corp. has the following projected sales, in units, for the first four months of 2006:The company desires to have an ending inventory each month equal to one-half of next
(Production budget) David Company’s sales budget has the following unit sales projections for each quarter of calendar year 2006:Sales for the first quarter of 2007 are expected to be 600,000
iaterial purchases budget) San Angelo Co. has projected sales of 42,960 pairs of cowboy boots in October. Each pair of boots requires 2.5 linear feet of leather. The beginning inventory of leather
material purchases budget) King Culvert Company has budgeted sales of 380,000 feet of its concrete culvert products for June 2006. Each foot of product requires 8 pounds of concrete ($0.11 per pound)
(Production and related schedules) Lewis Corp. manufactures and sells plastic boxes and trays. Sales are projected to be evenly spread over the annual pe¬ riod. Estimated product sales and material
(Cash collections) Clark Inc. is preparing its first-quarter monthly cash bud¬ get for 2006. The following information is available about actual and ex-pected sales:Tracing collections from prior
(Cash budget) The October 1, 2006, Accounts Receivable balance for Rosa Architectural Company is $607,500. Of that balance, $450,000 represents re¬ maining accounts receivable from September
(Cash collections, accounts receivable) Leon’s Club is developing a forecast for June 2006 cash receipts from sales. Total sales for June 2006 are ex¬ pected to be $850,000. Of each month’s
(Cash balance) Some projected information for May 2006 for Elaine Corp. follows:Using this information, what is the company’s projected increase in cash for May 2006?LO.1 Income after income tax
(Cash disbursements) Use the following information to determine Larose Co.’s projected cash disbursements for May 2006.LO.1 Sales for May $2,000,000 Gross profit on sales 40% Wages expense for
(Cash budget) The following cash budget is for the second quarter of next year. Complete the missing numbers on the cash budget, assuming that the accountant has requested a minimum cash balance of
(Various budgets) Compute the required answer for each of the following in¬ dependent situations.a. For next year, Harrington Suits projects $20,000,000 of sales and total fixed manufacturing costs
(Projected income statement) Last year's income statement for Joyner Com-pany follows.This year, sales in units are expected to increase by 20 percent; material and labor costs are expected to
(Budgeted income; cash; accounts receivable) In preparing its budget for July, Dynamic Inc. has the following accounts receivable information available:a. What is the projected balance of Accounts
(Pro forma income statement) The following budget information is available for Global Company for May.• Sales are expected to be $400,000. All sales are on account, and a provi¬ sion for bad debts
(Pro forma income) You have been asked to determine whether the pur¬ chase of a new piece of production machinery can be cost justified for your company. The machine will increase fixed overhead by
(Essay) Many managers believe that if all amounts in their spending budgets are not spent during a period, they will lose allocations in future periods and that they will receive little or no
(Continuous budgeting) You own a small boat manufacturing company. At a recent manufacturers’ association meeting, you overheard one of the other company owners say that he liked using a continuous
(Research) Find the Web page for a charitable organization that operates in¬ ternationally as well as domestically.a. Prepare a list of activities in which this organization is currently in¬
(Planning) High-level executives have often indicated that competitors’ ac¬ tions are the top external factor impacting their businesses and their busi¬ ness plans.a. Why do you believe that
(Production and purchases budgets) Schorg Products has prepared the fol¬ lowing unit sales forecast for 2006:Estimated ending finished goods inventories are 25,000 units at December 31, 2005; 36,000
(Production; purchases; cash disbursements) Brenda’s Tea Company has bud¬ geted sales of 300,000 cans of iced tea mix during June 2006 and 375,000 cans during July. Production of the mix requires
(Production; purchases; cash budgets) King Hats expects sales and collec¬ tions for the first three months of 2006 to be as follows:The December 31, 2005, balance sheet revealed the following
(Budgeted sales and S&A; other computations) Larson Mfg. has projected cost of goods sold (CGS) for June 2006 of $1,200,000. Of this amount, $75,000 represents fixed overhead costs. Total variable
(Cash budget) The January 31, 2006, balance sheet of Weymann World fol¬ lows:Additional information about the company follows:• Expected sales for February and March are $120,000 and $130,000,
(Cash budget; challenging) Jud’s Department Store typically makes 80 percent of its sales on credit. It bills sales twice monthly, on the 10th of the month for the last half of the prior month’s
Cash budget; challenging) Freeman Manufacturing has incurred substantial losses for several years and has decided to declare bankruptcy. The com¬ pany petitioned the court for protection from
Cash budget; advanced) Collegiate Management Education (CME), Inc., is a nonprofit organization that sponsors a wide variety of management seminars throughout the Southwest. In addition, it is
(Pro forma results) Katherine Company has decided to reprice its sole prod¬ uct, a metal desk, for the upcoming year. Current variable production cost is $50 per unit, and total fixed costs are
(Comprehensive) Moonbeam Co. produces and sells upscale mixers and breadmakers. In October 2006, Moonbeams’s budget department gathered the following data to meet budget requirements for 2006.To
(Master budget preparation; advanced) Color Blaze Company manufactures a red industrial dye. The company is preparing its 2006 master budget and has presented you with the following information.1.
(Preparing and analyzing a budget) Randazzo Ridenour & Co., LLP, a local accounting firm, has a formal budgeting system. The firm has five partners, two managers, four seniors, two secretaries,
(Revising and analyzing an operating budget) Lopez Agency, a division of Chalmette Industries (Cl), offers consulting services to clients for a fee. Cl's corporate management is pleased with the
What is a standard cost card? What information does it contain? How does it relate to a bill of materials and an operations flow document?LO.1
Why are the quantities shown in the bill of materials not always the same quantities shown in the standard cost card? How is the material standard developed?LO.1
A total variance can be calculated for each cost component of a product. Into what variances can this total be separated and to what does each re¬ late? (Discuss separately for material and
What is meant by the term standard hours? Does the term refer to inputs or outputs?LO.1
Why are the overhead spending and overhead efficiency variances said to be controllable? Is the volume variance controllable? Why or why not?LO.1
How are actual and standard costs recorded in a standard cost system?LO.1
What are the three primary uses of a standard cost system? In a business that routinely manufactures the same products or performs the same ser¬ vices, why are standards helpful?LO.1
What is meant by the process of management by exception? How do man¬ agers use a standard cost system in their efforts to control costs?LO.1
Why do managers care about the utilization of capacity? Are they controlling costs when they control utilization?LO.1
(Appendix) What variances can be computed for direct material and direct labor when some materials or labor inputs are substitutes for others? What information does each of these variances
(Direct material variances) Belichick Patio makes wrought iron table and chair sets. During April, the purchasing agent bought 12,800 pounds of scrap iron at $0.89 per pound. During the month, 10,700
(Direct material variances) In November, Gruden Publishing Company’s costs and quantities of paper consumed in manufacturing its 2007 Executive Plan¬ ner and Calendar were as follow:a. Calculate
(Direct labor variances) The accounting firm of Reid and Associates set the following standard for its inventory audit of DelRio Co.: 300 hours at an av¬ erage billing rate of $145. The firm
(Direct labor variances) Snyder Lumber builds standard prefabricated wooden frames for apartment walls. Each frame requires 10 direct labor hours at an average standard hourly rate of $22. During
(Direct material and direct labor variances) In December, Billie Parcells, pres¬ ident of Parcells Co., received the following information from Joe Gibbs, the new controller, in regard to November
(Direct material and labor variances) Steve Spurrier Cottonworks produces 100 percent cotton T-shirts. For each T-shirt, standard direct material and la¬ bor costs follow:Actual March production and
(Missing information for materials and labor) For each independent case, fill in the missing figures.LO.1 Case A Case B Case C Case D Units produced 800 ? 240 1,500 Standard hours per unit 3 0.8 ? ?
(Overhead variances) Wannstedt Corp. has a fully automated bicycle produc¬ tion facility in which almost 97 percent of conversion costs are driven by machine hours. Gregg Williams, the company’s
(Computation of all overhead variances) The manager of Missouri’s Depart¬ ment of Transportation has determined that it typically takes 30 minutes for the department’s employees to register a
(Four-variance approach; journal entries) Vermeil Manufacturing set 60,000 di¬ rect labor hours as the 2006 capacity measure for computing its predeter¬ mined variable overhead rate. At that level,
(Missing data; three-variance approach) Jeff Fisher Corporation’s flexible bud¬ get fonmila for total overhead is $720,000 plus $16 per direct labor hour.The combined overhead rate is $40 per
(Variances and cost control) Cowher Dimension applies overhead using ma¬ chine hours. The total overhead application rate is $40 per hour based on a normal monthly capacity of 24,000 machine hours.
(Variances and conversion cost category) Billick Brake manufactures brake rotors. Until recently, the company applied overhead to production using di¬ rect labor hours. However, company facilities
(Developing standard cost card and discussion) Johnna Fox Desserts Com¬ pany produces fruit-flavored frozen desserts. Company products have typi¬ cally had strong regional sales, but recently other
Behavioral implications of standard costing) Contact a local company that uses a standard cost system. Make an appointment with a manager at that company to interview her or him on the following
(Standard setting; team project) As a four-person team, choose an activity that is commonly performed every day, such as taking a shower/bath, preparing a meal, or doing homework. Have each team
(Cost control evaluation) The Jim Haslett Concrete Company makes precast concrete steps for use with manufactured housing. The company had the following 2007 budget based on expected production of
(Ethics essay) Jack Austin is a plant manager who has done a good job of controlling some overhead costs during the current period and a poor job of controlling others. Austin’s boss has asked him
(Direct labor variances; advanced) Many companies face the prospect of pay¬ ing workers overtime wages; some of these payments are at time-and-a-half wages.a. How does overtime pay affect direct
Essay ethics) An HMO medical program began reimbursing hospitals ac¬ cording to diagnostic-related groups (DRGs). Each DRG has a specified stan¬ dard "length of stay.” If a patient leaves the
(Appendix) Herman Edwards Company produces 12-ounce cans of mixed pecans and cashews. Standard and actual information follows.Determine the material price, mix, and yield variances.LO.1 Standard
(Appendix) Mike Shanahan Ltd. is a mechanical engineering firm that em¬ ploys both engineers and draftspeople. The average hourly rates are $80 for engineers and $40 for draftspeople. For one
(Appendix) Holly Sherman Legal Services has three labor classes: secretaries, paralegals, and attorneys. Standard wage rates are as follows: secretaries, $25 per hour; paralegals, $40 per hour; and
(Material and labor variances) Jim Mora Marine uses a standard cost system for materials and labor in producing fishing boats. Production requires three materials: fiberglass, paint, and a
(Variance calculation and journal entries) DomCapers Toy Co. makes small plastic toys having the following material and labor standards:During October, 29,000 pounds of material were acquired at
Incomplete data) Schottenheimer Medical Supply manufactures latex surgical gloves. Most processing is done by machines, which can produce 400 pairs of gloves per hour. Each pair of gloves requires
(incomplete data Capers Home Study Products makes wooden lap desks. A small fire on October 1 partially destroyed the records relating to September’s production. The charred remains of the standard
(Adjusting standards) Lovie Corp., started in early 2000, manufactures tradi¬ tional Hawaiian dresses. At that time, the following material and labor stan¬ dards were developed:Material 3.0 yards
(Calculation of four variances) Murlarkey’s Ceramics has an expected monthly capacity of 3,000 units but only 1,900 units were produced and 2,000 direct labor hours were used during October 2006
(Four-variance approach; journal entries) Mike Tice Products makes picnic ta¬ bles, swings, and benches. Standard hours allowed for each product are as follows:The standard variable overhead rate is
(Variance analysis with unknowns) Dennis Green Co. produces neon signs. The company’s standard costs for labor and overhead follow:Calculate the amounts for the following unknowns:a. Total applied
(Combined overhead rates) Kwan and Yamaguchi Industries manufactures a down-filled sleeping bag with the following standard cost information for 2007:• Each sleeping bag requires 1 hour of machine
(Comprehensive) Tom Coughlin Co. manufactures metal screen doors with the following standard quantity and cost information:Overhead rates were based on normal monthly capacity of 6,000 machine
(Comprehensive; all variances; all methods) B. Callahan Painting Services paints interiors of residences and commercial structures. The firm’s manage¬ ment has established cost standards per 100
(Variancc disposition) Dennis Erickson Manufacturing had the following vari¬ ances at year-end 2006:a. Prepare the journal entry at December 31 to dispose of the variances, assuming that all are

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