Hard Practice Test

Flexible Budgets

Introduction to Accounting

Hard Practice Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. The cost of utilities is a variable production cost that varies with machine hours used. The actual cost of utilities was $7,320. The variance to the flexible budget was $320 unfavorable. If 5,000 machine hours are used during the month, the budgeted cost per machine hour was

a. $ 1.32
b. $ 1.75
c. $1.40
d. $1.53

Answer

C. An unfavorable variance means that the actual cost was more than budgeted. Take $7,320 actual – $320 variance = total budgeted amount. Divide the total budgeted amount of $7,000 / 5,000 machine hours to get the $1.40 cost per hour.

2. The company has prepared a flexible budget for production costs. The budget projects $260,000 fixed costs plus $5 per machine hour. The company actually produced 20,000 units using 34,000 machine hours at a total cost of $425,000. The difference between actual costs and budgeted costs is

a. 65,000 unfavorable
b. 5,000 favorable
c. 170,000 favorable
d. 26,000 unfavorable

Answer

B. You must first calculate the budgeted cost for using 34,000 machine hours. Do this by using the projection: $260,000 + ($5 x 34,000 actually used) = $430,000. Actual was $425,000, which is $5,000 less, favorable, than was expected for using 34,000 machine hours.

3. The company uses a flexible budget to plan and control manufacturing overhead costs. Overhead is applied on the basis of machine hours. The standard cost sheet shows that 5 machine hours are required to make one product. The following data is available:

	Actual	Original Budgeted
Units produced	22,000	20,000
Machine hours	105,000	100,000
Variable overhead costs	$91,000	$80,000
Fixed overhead costs	$52,000	$50,000

Calculate the following:

Total budgeted variable overhead costs
Total budgeted fixed overhead costs

Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead budget variance
Fixed overhead volume variance

Answer

Total budgeted variable overhead costs   	$88,000  
   for 22,000 units

Total budgeted fixed overhead costs        	$50,000

Variable overhead spending variance	$7,000 U
Variable overhead efficiency variance	$4,000 F
Fixed overhead budget variance		$2,000 U
Fixed overhead volume variance		$5,000 F

Variable:

AQ x AP $91,000	AQ x SP 105,000 x $0.80 =$84,000			SQ x SP 22,000 x 5 x $0.80 = $88,000
variance	$7,000 U spending		$4,000 F efficiency

Fixed:

Actual $52,000	Budget $50,000			Applied 22,000 x 5 x $0.50 = $55,000
variance	$2,000 U budget		$5,000 F volume

The formulas above are a way to calculate what costs should have been
if you produced 22,000 units. This is the amount on the right side of the
equation above. The actual is on the left. The two variances together for each,
fixed, and variable, will give the total variance to show on the report.

The variable overhead rate per unit is calculated using the original budget information:
$80,000 / 100,000 machine hours = $0.80 per machine hour x 5 hours each = per unit

The fixed overhead rate per unit is calculated using the original budget information:
$50,000 / 100,000 machine hours = $0.50 per machine hour x 5 hours each = per unit

The budgeted per unit rate is then multiplied by the actual units produced to get the
estimated cost of producing 22,000 units to compare to actual and get the variance.

4. The company has originally budgeted to produce and sell 20,000 units and use 5,000 machine hours. At this level of production variable production costs are expected to be $30,000, fixed manufacturing production costs are expected to be $88,000, fixed selling costs are expected to be $24,000 and variable selling costs are expected to be $16,000. Variable production costs are based on machine hours. It takes ¼ of a machine hour to produce a unit. The sales price per unit is $12.

Prepare a flexible budget for sales volumes of 15,000; 20,000; and 25,000.

Answer

Sales Volumes	15,000	20,000	25,000
Sales	180,000	240,000	300,000
– Variable production costs	22,500	30,000	37,500
– Variable selling costs	12,000	16,000	20,000
= Contribution margin	145,500	194,000	242,500
– Fixed production costs	88,000	88,000	88,000
– Fixed selling costs	24,000	24,000	24,000
= Income before tax	33,500	82,000	130,500

Variable costs: calculate a cost per unit based on 5,000 units and use
that cost per unit, which will not change, to get total variable costs above.

Fixed costs will be the same, they do not change.

You need cost per unit information for the flexible budget.
Convert the cost per machine hour to cost per unit

Variable Production costs are $6 per machine hour
$30,000 / 5,000

Variable Selling costs are $0.80 per unit
$16,000 / 20,000

When calculating the production cost per unit.
Take units x .25 x $6 per machine hour

Flexible Budgets