Question & Answer

            Direct costs in flexible budget

Paper Bright Industries uses flexible budgeting to assess budgeted expectations against actual performance. Last month Paper Bright produced 12 000 units and incurred direct materials cost of $150 000. Its static budget for the year has a direct materials cost of $200 000 for 150 000 units.

Required

(a) Calculate the direct materials cost in the flexible budget.

(b) Calculate the direct materials flexible budget variance.

Selection of appropriate standard

Franklin Industries’ CEO was talking with the CFO about the appropriate standard to use for the new product being launched in the coming year. The CEO argued that standards based on ideal performance would enable profits to be maximised through improved efficiency. The CFO argued, however, that the standard should be based on attainable performance or recent average historical performance.

Required

Briefly comment on which standard is best for Franklin Industries to use in developing the standard cost for the new product.

            Software Galore sells gaming software that is downloaded to the customer’s device on purchase. The owner, Fred, was talking with a friend who sang the praises of flexible budgeting in his manufacturing business. Fred was wondering whether a flexible budget would benefit his business decision making. Comment.

 Variance analysis is only useful for organisations using a standard costing system. Discuss.

Should management be excited if all variances for the period are           favourable?

Should management be upset if all variances for the period are unfavourable?

Why might the role of the accountant be referred to as one of a ‘detective’ in relation to variance analysis?

            Explain what a favourable variance and an unfavourable variance mean in relation to revenue and costs.

Distinguish between a price variance and an efficiency variance.

Suppose that utilities are considered a fixed cost for a retail clothing outlet. Why might we expect a variance to occur for the cost of utilities?

List several ways that variances can be used to improve future operations. 

Explain how accountants and managers decide which cost variances to monitor.

Discuss the different types of budget variances that can be calculated.

 Which item has the same value for both the static budget and the flexible budget?

Explain the difference between a static budget and a flexible budget.

Discuss the behavioural issues that need to be considered when establishing a standard cost.

            Discuss the different methods that an organisation can use to determine standard costs.

Explain the difference between an ideal standard and a currently          attainable standard.

Which type of entities would be suited to the use of a standard cost  system?

          Reciprocal method.

Paul’s Valley Protection Service has three support departments (S1, S2 and S3) and three operating departments (P1, P2, and P3). The direct costs of each department are $30 000 for S1, $20 000 for S2, and $40 000 for S3. The proportions of service provided by each support department to the others are given in the following table.

Required

Using the reciprocal method, allocate the support department costs to the operating departments.

Reciprocal method

The Brown and Brinkley Brokerage firm is organised into two major sales divisions: institutional clients and retail clients. The firm also has two support departments: research and administration. The research department’s costs are allocated to the other departments based on a log of hours spent on tasks for each user. The administration department’s costs are allocated based on the number of employees in each department.

Records are available for last period as follows.

Required

Using the reciprocal method, determine the total cost of operations for each sales division. Use either simultaneous equations or Excel Solver.

Costing for a hospital

Mercy Hospital uses a costing system for all patients who have surgery. The hospital uses a budgeted overhead rate for allocating overhead to patient stays. In March, the operating room had a budgeted allocation base of 1000 operating hours. The budgeted operating room overhead costs were $66 000.

Patient Dwight Schuller was in the operating room four hours during March. Other costs related to Schuller’s four-hour surgery include:

Physician cost is not included because physicians bill patients separately from the hospital billing system.

Required

(a)          Determine the budgeted (i.e., estimated) overhead rate for the operating room.

(b)          Determine the total costs of Schuller’s four-hour surgery.

          Direct method using estimated costs, benchmarking

Devon Ltd allocates support department costs using the direct method and estimated costs. The support department costs are budgeted at $88 000 for department A, $63 000 for department B, and $40 000 for department C. These costs are allocated using the proportion of total cost the firm would pay to an outside service provider.

Required

(a)          Allocate budgeted support department costs using the direct method, first using labour hours and then with the outside cost proportions as the allocation bases.

(b)          Could Devon Ltd use the cost of purchasing outside as an efficiency benchmark for the cost of both the support departments and the user departments? List several advantages and disadvantages of this approach.

Allocating support costs to units

A local hospital is required to account for the total cost of patient care, including support costs. Patients are assigned all direct costs. Support costs are $240 000 per month plus $90 per patient day. This 120-bed hospital averages 80 per cent occupancy.

Required

(a)   Calculate the average daily charge per patient for support costs, assuming 30 days in a month.

(b)   Briefly comment on potential problems in using only one indirect cost pool for support costs given that individual patients receive a range of different treatments while an inpatient.

 Allocation rates – update question (business name)

DataShow’s IT support department budgets its costs at $40 000 per month plus $12 per hour. For November the following were the estimated and actual hours provided by the IT support department to three operating departments.

Required

(a)          What is the support department’s allocation rate if estimated activity is the allocation base?

(b)          What is the support department’s allocation rate if actual activity is the allocation base?

(c)           List one advantage and one disadvantage for each type of allocation rate.