Variance Analysis

| October 22, 2018

Name:___________________ Cost Accounting

I.Theory Questions. For each of the questions listed below, provide
a response within the body of the test itself.
Be thorough, yet concise.

1. What are some
ways that customers affect a firm’s costs?
2. What is the objective of joint cost allocation?
3. When would you
advise a firm to use direct intervention to set transfer prices?

II. Problem

1. The following represents the financial information of
Trovatore Corporation, a manufacturer of electronic components, for two months:

a. Classify these items into prevention, appraisal, internal failure, or
external failure costs.
b. Calculate the ratio of the prevention, appraisal, internal failure, and
external failure costs to sales for March and April.

2. Computer Information Services is a computer software
consulting company. Its three major functional areas are computer programming,
information systems consulting, and software training. Carol Birch, a pricing
analyst in the Accounting Department, has been asked to develop total costs for
the functional areas. These costs will be used as a guide in pricing a new
contract. Birch assembled the following data on overhead from its two service
departments, the Information Systems Department and the Facilities Department.

Required: Allocate the
service department costs to the user departments using the step method.

3. Meredith Motor Works has just acquired a new Battery
Division. The Battery Division produces a standard 12volt battery that it sells
to retail outlets at a competitive price of $20. The retail outlets purchase
about 600,000 batteries a year. Since the Battery Division has a capacity of
1,000,000 batteries a year, top management is thinking that it might be wise
for the company’s Automotive Division to start purchasing batteries from the
newly acquired Battery Division.

The Automotive Division now purchases 300,000 batteries a year from an outside
supplier, at a price of $18 per battery. The discount from the competitive $20
price is a result of the large quantity purchased.

The Battery Division’s cost per battery is shown below:

*Based on 1,000,000 batteries.

Both divisions are to be treated as investment centers, and their performance
is to be evaluated by the ROI formula.

(A) What transfer price would you recommend and why?
(B) What transfer price would you recommend if the Battery Division is now
selling 1,000,000 batteries a year to retail outlets?
(C) Refer to (A). Top Management has decided the transfers between the two
divisions should be at $19. Compute the effect of the transfer on the net
income for the Battery Division, Automotive Division, and the total company.

4. The XYZ Company uses a standard cost accounting system and
estimates production for 2007 to be 60,000 units. At this volume, the company’s
variable overhead costs are $.50 per direct labor hour.

The company’s single product has a standard cost of $30.00 per unit. Included
in the $30.00 is $13.20 for direct materials (3 yards) and $12.00 of direct
labor (2 hours). Production information for the month of March 2007 follows:

Required: (Be sure to indicate whether the variances are favorable or
a. Prepare the standard cost sheet for the company.
b. Compute the direct material price variance, assuming the material price variance
is the responsibility of the company’s purchasing agent.
c. Prepare the journal entry to record the purchase of direct materials.
d. Compute the direct labor efficiency variance.
e. Compute the budgeted fixed overhead costs for the month and for
the year.
f. Compute the fixed overhead volume variance.

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