Answer to Part 1 Practice Questions

Answer: Question 1.1-Barton Industries

1. Production was less than budget, and fixed overhead costs were under-applied. This caused an unfavorable volume variance that was charged to cost of goods sold.

2. Barton’s operating income using variable costing:

4. Advantages of variable costing for internal reporting:

• Aids in reporting and forecasting contribution margin.

• Because fixed costs are period costs, they are more predictable and controllable.

• Profits vary directly with sales volume and are unaffected by inventory changes.

• Aids CVP analysis/can determine breakeven point Disadvantages of using variable costing for internal reporting:

• Fixed costs may be overlooked as part of the decision-making process.

• Lacks acceptability for external reporting.

• Cannot be used as a basis for income tax calculations.

• Sometimes the distinction between fixed and variable costs is arbitrary.

Answer: Question 1.2-Great Heart

1. The clinic should use a job costing system since the clinic has a wide variety of different services. The job costing system can accumulate costs to a specific job, which better reflect the specific service each patient received.

2. Predetermined overhead rate: $162,500/10,000=$16.25 Applied overhead: $16.25*12,190= $198,088<$296,047, so overhead is under applied

3. The predetermined overhead rate is usually based on overall level of activity without considering the relationships between costs and their drivers. So apply overhead based on this rate usually is not accurate enough to provide management meaningful data to assist them to achieve cost effectiveness. The predetermined overhead rate is an estimated rate, applied overhead maybe quite different from the actual cost.

4. The applied overhead is likely to differ from actual overhead cost incurred for the period. Applied overhead can be higher or lower than the actual overhead because the applied overhead is based on the predetermined overhead rate, which is calculated by using budgeted overhead costs divide estimated activity level of the chosen cost drivers, times the actual level of cost drivers.

5. Since the overhead variance is deemed material, so the under-applied overhead amount usually is prorated among WIP inventory, finished goods inventory, and COGS accounts.

6. ABC assigns overhead costs to products or services using cause-and-effect criteria with several cost pools. The use of both volume-based and nonvolume-based cost drivers is determined according to the consumption of resources in performing various activities. ABC helps clinic assign overhead costs more accurately and manage costs more efficiently to achieve its strategy.

• Identify activities and cost drivers

• Select the cost allocation bases to use for allocating overhead cost

• Identify the overhead costs associated with each cost allocation base on the basis of cause and effect relationship

• Calculate the rate per unit of each cost allocation base

• Calculate overhead costs allocated to the products