Predetermined Overhead Rates, Flexible Budgets, and Absorption/Variable Costing

Chapter 3: Predetermined Overhead Rates, Flexible Budgets, and Absorption/Variable Costing 1. Absorption costing is commonly used for external reporting. True False 2. Absorption costing is commonly used for internal reporting. True False 3. Variable costing is commonly used for internal reporting. True False 4. Variable costing is commonly used for external reporting. True False 5. In an actual cost system, factory overhead is assigned directly to products and services. True False 6. In a normal cost system, factory overhead is assigned directly to products and services. True False 7. In a normal cost system, factory overhead is assigned to an overhead control account and then allocated to products and services. True False 1 | P a g e 8. In an actual cost system, factory overhead is assigned to an overhead control account and then allocated to products and services. True False 9. A debit to the Factory Overhead account represents actual overhead costs. True False 10. A debit to the Factory Overhead account represents applied overhead costs. True False 11. A credit to the Factory Overhead account represents actual overhead costs. True False 12. A credit to the Factory Overhead account represents applied overhead costs. True False 13. If actual overhead exceeds applied overhead, factory overhead is said to be overapplied. True False 14. If actual overhead exceeds applied overhead, factory overhead is said to be underapplied. True False 15. If overapplied factory overhead is immaterial, the account is closed by a credit to Cost of Goods Sold. True False 16. If overapplied factory overhead is material, the account is closed by a credit to Cost of Goods Sold. True False 17. If overapplied factory overhead is immaterial, the account is closed by a debit to Cost of Goods Sold. True False 18. If underapplied factory overhead is immaterial, the account is closed by a debit to Cost of Goods Sold. True False 19. If underapplied factory overhead is immaterial, the account is closed by a credit to Cost of Goods Sold. True False 20. If underapplied factory overhead is material, it is prorated among Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold. True False 21. The estimated maximum potential activity for a specified time is known as theoretical capacity. True False 22. Practical capacity does not adjust for routine downtime in a production process. True False 23. Normal capacity considers present and future production levels and cyclical fluctuations. True False 24. Expected capacity is a long-run measure of activity. True False 25. Practical capacity is the capacity that can be achieved during normal working hours. True False 26. The regression equation y = a+ bX assumes that the function is curvilinear in nature. True False 3 | P a g e 27. The regression equation y = a+ bX assumes that the function is linear in nature. True False 28. The slope of a regression line is determined by dividing the change in activity level by the change in total cost. True False 29. The slope of a regression line is determined by dividing the change in total cost by the change in activity level. True False 30. The high-low method excludes outliers from the calculation of the slope of a regression line. True False 31. When using the high-low method, fixed costs are computed before the variable component is computed. True False 32. When using the high-low method, the variable component is computed before computing the fixed component. True False 33. A flexible budget is a planning document that presents expected variable and fixed overhead costs at different activity levels. True False 34. A master budget is a planning document that presents expected variable and fixed overhead costs at different activity levels. True False 35. Plantwide overhead rates provide a more accurate computation of factory overhead than departmental overhead rates True False 36. Plantwide overhead rates provide a less accurate computation of factory overhead than departmental overhead rates True False 37. Absorption costing conforms with generally accepted accounting principles. True False 38. Direct costing conforms with generally accepted accounting principles. True False 39. The Internal Revenue Service allows the use of both variable and absorption costing. True False 40. Sales minus cost of goods sold is referred to as variable contribution margin. True False 41. Phantom profits result when absorption costing is used and sales exceed production. True False 42. Phantom profits result when absorption costing is used and production exceeds sales. True False 43. If production exceeds sales, absorption costing net income exceeds variable costing net income. True False 44. If production exceeds sales, absorption costing net income is less than variable costing net income. True False 5 | P a g e 45. If sales exceed production, absorption costing net income is less than variable costing net income. True False 46. If sales exceed production, absorption costing net income exceeds variable costing net income. True False 47. In a(n) ____________________ cost system, factory overhead is assigned directly to products and services. ________________________________________ 48. In a(n) ____________________ cost system, factory overhead is assigned to an overhead control account and then allocated to products and services. ________________________________________ 49. The dollar amount of overhead assigned to work-in-process inventory using a predetermined rate is known as ____________________ overhead. ________________________________________ 50. If actual overhead exceeds applied overhead, factory overhead is said to be ____________________. ________________________________________ 51. If actual overhead is less than applied overhead, factory overhead is said to be ____________________. ________________________________________ 52. If underapplied or overapplied factory overhead is material, it is prorated among ________________________________________, ________________________________________, and ___________________________________. ________________________________________ 53. If underapplied or overapplied factory overhead is immaterial, it is charged to ______________________________. ________________________________________ 54. The performance measure that considers routine interruptions is known as ____________________ capacity. ________________________________________ 55. A performance measure that encompasses a firm’s long-run average activity is referred to as ____________________ capacity. ________________________________________ 56. A performance measure that assumes all production factors are operating perfectly is referred to as ____________________ capacity. ________________________________________ 57. A performance measure that is short-run in nature and represents a firm’s anticipated activity level for the upcoming period is ____________________ capacity. ________________________________________ 58. Consider the regression equation y = a + bX. The portion of the equation that represents fixed costs is __________. ________________________________________ 59. Consider the regression equation y = a + bX. The portion of the equation that represents the variable rate is __________. ________________________________________ 60. Consider the regression equation y = a + bX. The portion of the equation that represents the activity base is __________. ________________________________________ 61. An observation that is found outside the relevant range is referred to as a(n) ____________________. ________________________________________ 7 | P a g e 62. When a relationship between several independent variables and one dependent variable is analyzed, the regression is referred to as ____________________. ________________________________________ 63. When a relationship between one independent variable and one dependent variable is analyzed, the regression is referred to as ____________________. ________________________________________ 64. A ______________________________ is a planning document that presents expected variable and fixed overhead costs at different activity levels. ________________________________________ 65. The costing technique that treats fixed manufacturing overhead as a period cost is referred to as ______________ or ____________ costing. ________________________________________ 66. The costing technique that treats all manufacturing costs as inventoriable is referred to as _________________ or ___________ costing. ________________________________________ 67. Sales less variable cost of goods sold is referred to as ________________________________________. ________________________________________ 68. Temporary profits that result when absorption costing is used and production exceeds sales are referred to as _________________________. ________________________________________ 69. Since overhead costs are indirect costs, A. they require some process of allocation. B. they can be easily traced to production. C. a predetermined overhead rate is not advantageous. D. they cannot be allocated. 70. Cost allocation is the assignment of ____ costs to one or more products using a reasonable basis. direct indirect A. yes yes B. yes no C. no no D. no yes 71. An actual cost system differs from a normal cost system in that an actual cost system A. assigns overhead as it occurs during the manufacturing cycle. B. assigns overhead at the end of the manufacturing process. C. does not assign overhead at all. D. does not use an Overhead Control account. 72. In a normal cost system, which of the following is used? Actual direct materials Actual direct labor Actual overhead A. yes no yes B. yes yes yes C. yes yes no D. no yes no 73. Predetermined overhead rates are computed based on estimated overhead costs estimated level of activity A. yes yes B. yes no C. no yes D. no no 9 | P a g e 74. One reason annual overhead application rates are used is A. because of seasonal variability of overhead costs. B. to help budget overhead costs. C. to minimize the overhead cost assigned to products. D. to maximize the overhead cost assigned to products. 75. Which of the following is not a reason to use predetermined overhead rates? A. to overcome the problems of assigning overhead to diverse types of products B. to compensate for fluctuations in monthly overhead costs C. to provide a means for assigning overhead during the period rather than at the end of the period D. to smooth out the amount of overhead cost assigned to products when monthly production activity differs 76. When a manufacturing company has a highly automated manufacturing plant producing many different products, which of the following is the more appropriate basis of applying manufacturing overhead costs to work in process? A. direct labor hours B. direct labor dollars C. machine hours D. cost of materials used 77. A mixed cost has which of the following components? Variable component Fixed component A. yes no B. yes yes C. no no D. no yes 78. In the formula y = a + bX, y represents A. fixed costs. B. total cost. C. variable costs. D. mixed costs. 79. In the formula y = a + bX, a represents A. mixed cost. B. variable cost. C. total cost. D. fixed cost. 80. In relationship to changes in activity, variable overhead changes in total per unit A. no no B. no yes C. yes yes D. yes no 81. In relationship to changes in activity, fixed overhead changes in total per unit A. yes yes B. no no C. no yes D. yes no 82. If the level of activity increases, A. variable cost per unit and total fixed costs increase. B. fixed cost per unit and total variable cost increase. C. total cost will increase and fixed cost per unit will decrease. D. variable cost per unit and total cost increase. 83. Weaknesses of the high-low method include all of the following except A. only two observations are used to develop the cost function. B. the high and low activity levels may not be representative. C. the method does not detect if the cost behavior is nonlinear. D. the mathematical calculations are relatively complex. 11 | P a g e 84. If there is no "a" value in a linear cost equation, this is an indication that the cost is A. fixed. B. mixed. C. variable. D. either fixed or mixed. 85. An outlier is A. something that happens outside the organization that does not affect production. B. always used in analyzing a mixed cost. C. something that happens inside the organization that does not affect production. D. typically not used in analyzing a mixed cost. 86. Applied overhead consists of which of the following? A. actual activity times predetermined overhead rate B. estimated activity times predetermined overhead rate C. actual activity times actual overhead rate D. estimated activity times actual overhead rate 87. If a company used two overhead accounts (actual overhead and applied overhead), the one that would receive the most debits would be A. actual overhead. B. applied overhead. C. both would receive an equal number of debits. D. impossible to determine without additional information. 88. If underapplied overhead is considered to be immaterial, it is closed to which of the following accounts? Work in Process Finished Goods Cost of Goods Sold A. yes yes yes B. no yes yes C. yes no no D. no no yes 89. Overapplied overhead will result if A. the plant is operated at less than expected capacity. B. overhead costs incurred were greater than estimated overhead costs. C. overhead costs incurred were less than overhead costs charged to production. D. overhead costs incurred were greater than overhead charged to production. 90. Actual overhead exceeds applied overhead and the amount is immaterial. Which of the following will be true? Upon closing, Overhead is Cost of Goods Sold will A. underapplied increase B. overapplied decrease C. overapplied increase D. underapplied decrease 91. If actual overhead is less than applied overhead, which of the following will be true? Upon closing, Overhead is Cost of Goods Sold is A. underapplied credited B. underapplied debited C. overapplied debited D. overapplied credited 92. The estimated maximum potential activity for a specified time is: A. theoretical capacity B. practical capacity C. normal capacity D. expected capacity 93. The measure of activity that allows for routine variations in manufacturing activity is: A. theoretical capacity B. practical capacity C. normal capacity D. expected capacity 13 | P a g e 94. The measure of production that considers historical and estimated future production levels and cyclical fluctuations is referred to as: A. theoretical capacity B. practical capacity C. normal capacity D. expected capacity 95. A short-run measure of activity that represents a firm’s anticipated activity level for an upcoming period based upon expected demand is referred to as: A. theoretical capacity B. practical capacity C. normal capacity D. expected capacity 96. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a A. mixed cost. B. predictor. C. direct cost. D. cost driver. 97. Thibodeaux Tailors has gathered information on utility costs for the past year. The controller has decided that utilities are a function of the hours worked during the month. The following information is available and representative of the company’s utility costs: Hours worked Utility cost incurred Low point 1,300 $ 903 High point 1,680 1,074 If 1,425 hours are worked in a month, total utility cost (rounded to the nearest dollar) using the high-low method should be A. $947. B. $954. C. $959. D. $976. 98. Welch Corporation uses a predetermined overhead application rate of $.30 per direct labor hour. During the year it incurred $345,000 dollars of actual overhead, but it planned to incur $360,000 of overhead. The company applied $363,000 of overhead during the year. How many direct labor hours did the company plan to incur? A. 1,150,000 B. 1,190,000 C. 1,200,000 D. 1,210,000 99. Machine Master, Inc. had the following data regarding monthly power costs: Month Machine hours Power cost Jan 300 $680 Feb 600 720 Mar 400 695 Apr 200 640 Assume that management expects 500 machine hours in May. Using the high-low method, calculate May’s power cost using machine hours as the basis for prediction. A. $700 B. $705 C. $710 D. $1,320 100. Davis Corporation has developed the following flexible budget formula for monthly overhead: For output of less than 200,000 units: $36,600 + $.80(units) For output of 200,000 units or more: $43,000 + $.80(units) How much overhead should Davis expect if the firm plans to produce 200,000 units? A. $52,600 B. $59,000 C. $196,600 D. $203,000 101. Landon Corporation wishes to develop a single predetermined overhead rate. The company's expected annual fixed overhead is $340,000 and its variable overhead cost per machine hour is $2. The company's relevant range is from 200,000 to 600,000 machine hours. Landon expects to operate at 425,000 machine hours for the coming year. The plant's theoretical capacity is 850,000. The predetermined overhead rate per machine hour should be A. $2.40. B. $2.57. C. $2.80. D. $2.85