Exam

1
Exam 3 review

• Use this review in combination with your notes,
  quizzes, homework and the other handout problems
  covered in the class.

2
Exam 3 review

• Chapter 9
• Chapter 10
• Chapter 14

3
Chapter 9

• A budget is?

4
Chapter 9

• A comprehensive set of budgets that covers all
  the activities in an organization is commonly
  known as?

5
Chapter 9

• What type of organizations that is not likely to
  use budgets?

6
Chapter 9

• A pr forma budget is ?

7
Chapter 9

• What would be the logical order to prepare the
  following budgets Direct labor budget, Sales
  budget, Cash budget, and Production budget ?

8
Chapter 9

• QualCo manufactures a product requiring 1 ounces
  of silver per unit. The cost of silver is
  approximately 360 per ounce the company
  maintains an ending silver inventory equal to 10
  of the following month's production usage. The
  following data were taken from the most recent
  quarterly production budget Planned production
  in units
• July August September
• 1,000 1,100 980

9
Chapter 9

• The cost of silver to be purchased in August is
  ?
• 391,680

10
Chapter 9

• Budgetary slack is?

11
Chapter 10
12
Chapter 10

• Management by exception is ?

13
Chapter 10

• List two methods for setting standards

14
Chapter 10

• The Comparison between standard and actual
  performance level is called ?

15
Standard cost is

• Is a predetermined budgeted or estimated cost
  for the production of goods or services, which
  services as a benchmark against which to compare
  the actual cost.

16
Perfection versus practical

• Practical standardsshould be set at levelsthat
  are currentlyattainable with
• reasonable and
• efficient effort.
• Perfection standards
• are unattainable and therefore discouraging to
  most employees.

17
A General Model for Variance Analysis
AQ(AP - SP)
SP(AQ - SQ) AQ Actual Quantity
SP Standard Price AP Actual Price
SQ Standard Quantity
18
The price variance is computed on the entire
quantity purchased. The quantity variance is
computed only on the quantity used.
19
Example

• The following standard have been established for
  a particular product
• Standard quantity per unit of output 9.4 pounds.
• Standard price 16.90

20

• The following data pertain to operations
  concerning the product for the last month
• Actual material purchased 7,300 pounds.
• Actual cost of material purchased 116,435.
• Actual material used in production 7,100 pounds.
• Actual output 740 units.

21
Required

• What is the material price variance?
• What is the material quantity variance?

22
Material price variance

• MPV AQ purchased ( AP SP)
• 7,300 ( 15.95 16.90) 6,935 F

23
Material quantity variance

• MQV SP ( AQ used SQ )
• 16.90 ( 7,100 6,956 ) 2,433.6 UF
• The Standard quantity is the quantity that should
  have been used, if you produced 740 units and the
  standard quantity for each unit is 9.4 pounds,
  then you should have used 6,956 ponds.

24
Another example
25

• The direct-material price variance is
• A. 4,620F.
• B. 5,000F.
• C. 10,000U.
• D. 5,000U.
• E. none of the above.

26
Another example

• XYZ has the following standards
• Direct material
• Standard Qty/ ? Pounds
• Standard price ? Per pound
• Standard cost per unit ?
• During the past month, the company purchased
  7,000 pound of direct material at a cost of
  26,250.

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• All of this material was used in the production
  of 1,300 units of product.
• The following variance have been computed
• Material price variance 1,750 F

28
Required

• Calculate the standard price per pound

29
Standard price per pound

• MPV AQ ( SP AP)
• 1,750 7,000 (Sp 3.75)
• 7000 SP 1750 26250
• SP 28,000 / 7000 4
• AP 26,250 / 7,000pounds 3.75

30
Who is responsible ?

• The MQV is the responsibility of the production
  manager
• the MPV is the responsibility of the purchasing
  manager.

31
Reasons behind variances

• MQV can be caused by
• .Acquisition of materials at a very attractive
  price.
• .Improper employee training.
• .A change in raw-material quality specifications.
• .Adjustment problems with machines.

32
Criticisms of Standard Costing
33
Chapter 14
34
Useful information should be

• 1. Relevant Pertinent to a decision problem
• 2. Accurate Information must be precise.
• 3. Timely Available in time for a decision.

35

• A Sunk cost is ?

36
Relevant Information

• Information is relevant to a decision problem
  when . . .
• It has a bearing on the future,
• It differs among competing alternatives.

37
Examples

• A company considering replacing an old machine
  with a new one, Data on the machines are as
  follow
• New machine
• Price 90,000
• Annual variable expenses 80,000
• Expected life 5 years

38

• Old machine
• Original cost 72,000
• Remaining book vale 60,000
• Disposal value now 15,000
• Annual variable expenses 100,000
• Remaining life 5 years

39
Should they buy the new machine?

• Use only relevant costs
• Saving in variable costs(20,000 X 5) 100,000
• Cost of the new machine (90,000)
• Disposal value 15,000
• Net advantage of the new machine 25,000

40
Outsourcing

• Essex is currently making a part that is used in
  one of its products. The unit cost is
• DM 9
• DL 5
• Variable Mfg. O/H 1
• Depreciation of special machine 3
• Supervisor salary 2
• General factory O/H 10
• Total cost per unit 30

41

• The special machine has no resale value.
• Outside supplier offered to provide the part for
  only 25.
• We can save the supervisor salary in case of
  outsourcing the part, however none of the general
  factory overhead or the depreciation will be
  saved.
• Should we accept the offer?

42
Outsourcing

• Saving from buying the part
• DM 9
• DL 5
• Variable Mfg. O/H 1
• Supervisor salary 2
• Total saving 17
• If we buy we will save 17, but we will pay 25
  the net impact of buying instead of making is 8
  negative per unit.

43

• Joint products

44
Exh. 14-12
Joint Processing of Cocoa Bean
Cocoa butter sales value 750 for 1,500 pounds
Cocoa beans costing 500 per ton
Joint Production process costing 600 per ton
Split-off point
Cocoa powder sales value 500 for 500 pounds
Separable process costing 800
Total joint cost 1,100 per ton
Instant cocoa mix sales value 2,000 for 500
pounds
45
Joint products

• The Sawmill company cuts logs for which
  unfinished lumber and scrap are the immediate
  joint products. The unfinished lumber cam be sold
  as is or processed further. The scrap can also be
  sold as is for gardening supplies or processed
  further into presto logs.

46
Joint products

• Considering the following data
• Lumber Scrap
• Sales value at split off point 140 20
• Sales after further processing 270 50
• Allocated joint product costs 176 24
• Cost of further processing 50 20
• Should we process the scraps further?

47
Joint products

• Additional revenue (50-20) 30
• Additional cost 20
• Net benefits from further processing 10

48

• Thomson Inc. paid 65,000 for a truck two years
  ago. The truck suffered a serious damage from an
  accident. The company can sell the truck "as is"
  for 5,000 alternatively, the truck can be fixed
  at a cost of 21,000, then the truck could be
  sold for 20,000. What alternative is more
  desirable?
• A. Sell "as is.
• B. Fix and sell.
• C. Discard the truck and write its value off.
• D. Neither alternative is desirable, as both
  produce a loss for the firm.