FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Concept explainers

Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for …
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on t…
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Acme Financial issues letters of credit to importers for overseas purchases. The company charges a nonrefundable application fee of $4,000 and, on approval, an additional service fee of 2.0% of the amount of credit requested. The company's budget for the year just completed included fixed expenses for office salaries and wages of $685,200, leasing office space and equipment of $59,000, and utilities and other operating expenses of $11,000. In addition, the budget also included variable expenses for supplies and other variable overhead costs of $1,280,000. The company estimated these variable overhead costs to be $2,000 for each letter of credit approved and issued. The company approves, on average, 75% of the applications it receives. During the year, the company received 600 requests and approved 70% of them. The total variable overhead was 10.0% higher than the standard amount applied; the total fixed expenses were 5.0% lower than the amount budgeted. In addition to these expenses, the company paid a $270,000 insurance premium for the letters of credit issued. The insurance premium is 1.0% of the amount of credit issued in U.S. dollars. The actual amount of credit issued often differs from the amount requested due to fluctuations in exchange rates and variations in the amount shipped versus the amount ordered by importers. The strength of the dollar during the year decreased the insurance premium by 10.0%. Required: 1. Calculate (or determine) the following budgeted overhead costs for the year: (a) the variable overhead application rate (per letter of credit issued) (b) the insurance cost percentage (c) the fixed overhead application rate (per letter of credit issued) 2. Prepare an analysis of the overhead cost variances for the year just completed and in so doing answer the following questions: (a) What is the total overhead flexible-budget variance for the period? (b) What is the overhead volume variance for the period? (c) What is the total overhead cost variance for the year? Indicate whether each of the above variances is favorable (F) or unfavorable (U). (For all requirements, round your answers to the nearest whole dollar amount.) 1a. The variable overhead application rate (per letter of credit issued) 1b. The insurance cost percentage 1c. The fixed overhead application rate (per letter of credit issued) 2a. Total overhead flexible-budget variance for the period 2b. The overhead volume variance for the period 2c. The total overhead cost variance for the year % Unfavorable Unfavorable Unfavorable
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Transcribed Image Text:Acme Financial issues letters of credit to importers for overseas purchases. The company charges a nonrefundable application fee of $4,000 and, on approval, an additional service fee of 2.0% of the amount of credit requested. The company's budget for the year just completed included fixed expenses for office salaries and wages of $685,200, leasing office space and equipment of $59,000, and utilities and other operating expenses of $11,000. In addition, the budget also included variable expenses for supplies and other variable overhead costs of $1,280,000. The company estimated these variable overhead costs to be $2,000 for each letter of credit approved and issued. The company approves, on average, 75% of the applications it receives. During the year, the company received 600 requests and approved 70% of them. The total variable overhead was 10.0% higher than the standard amount applied; the total fixed expenses were 5.0% lower than the amount budgeted. In addition to these expenses, the company paid a $270,000 insurance premium for the letters of credit issued. The insurance premium is 1.0% of the amount of credit issued in U.S. dollars. The actual amount of credit issued often differs from the amount requested due to fluctuations in exchange rates and variations in the amount shipped versus the amount ordered by importers. The strength of the dollar during the year decreased the insurance premium by 10.0%. Required: 1. Calculate (or determine) the following budgeted overhead costs for the year: (a) the variable overhead application rate (per letter of credit issued) (b) the insurance cost percentage (c) the fixed overhead application rate (per letter of credit issued) 2. Prepare an analysis of the overhead cost variances for the year just completed and in so doing answer the following questions: (a) What is the total overhead flexible-budget variance for the period? (b) What is the overhead volume variance for the period? (c) What is the total overhead cost variance for the year? Indicate whether each of the above variances is favorable (F) or unfavorable (U). (For all requirements, round your answers to the nearest whole dollar amount.) 1a. The variable overhead application rate (per letter of credit issued) 1b. The insurance cost percentage 1c. The fixed overhead application rate (per letter of credit issued) 2a. Total overhead flexible-budget variance for the period 2b. The overhead volume variance for the period 2c. The total overhead cost variance for the year % Unfavorable Unfavorable Unfavorable
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