The variable overhead spending variance measures the difference between the actual cost incurred and the amount that should have been incurred for the actual level of activity.

1. Calculate the Standard Rate: The budgeted rate per setup is calculated as Budgeted Cost / Budgeted Activity = $10,000 / 2,000 setups = $5 per setup.

2. Calculate the Flexible Budget for Actual Activity: This is the standard rate multiplied by the actual activity level: $5/setup × 2,200 setups = $11,000.

3. Calculate the Spending Variance: The variance is the difference between the Actual Cost and the Flexible Budget amount: $10,500 (Actual) - $11,000 (Flexible Budget) = -$500.

A negative result indicates a favorable variance because the actual cost was less than the standard cost allowed for the actual number of setups performed.

B. There is a $1,000 favorable spending variance

This is an incorrect calculation. The difference between the actual cost ($10,500) and the flexible budget for actual activity ($11,000) is $500, not $1,000.

C. There is a $500 unfavorable efficiency variance

This is the wrong variance type and amount. The spending variance is $500 favorable. The efficiency variance, if calculated, would be a different amount.

D. There is a $1,000 unfavorable efficiency variance

This calculation incorrectly uses the static budget activity (2,000 setups) as the standard allowed for actual output. The efficiency variance requires the standard activity allowed for actual production, which is not provided.

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1. Heisinger, K., & Hoyle, J. B. (2012). Managerial Accounting. Saylor Foundation. In Chapter 10, Section 10.4, the variable overhead spending variance is defined as the difference between the actual variable overhead cost and the flexible budget amount based on the actual level of activity. The formula is equivalent to (Actual Cost) – (Standard Rate × Actual Activity). [See Section 10.4, "Overhead Variances"].

2. Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon. In Chapter 9, "Variance Analysis," the variable overhead spending variance is detailed. The calculation compares the actual variable overhead with the flexible budget for the actual hours (or activity level), confirming the formula: Actual Cost - (Standard Rate x Actual Quantity of the cost driver). [See Chapter 9, pp. 78-79].

3. OpenStax, Rice University. (2019). Principles of Accounting, Volume 2: Managerial Accounting. Chapter 9, "Standard Costs and Variances." This text explains that the variable overhead rate variance (spending variance) "results from paying more or less than expected for variable overhead items." The calculation shown is consistent with the one used in the explanation. [See Section 9.3, "Compute and Evaluate Variable Overhead Variances"].

The initial gross profit is calculated as Sales Revenue minus the Cost of Goods Sold (COGS). The total cost of Job #3, which becomes COGS upon sale, is the sum of direct materials ($30), direct labor ($25), and applied manufacturing overhead ($50), totaling $105. This would result in a gross profit of $45 ($150 - $105). However, this is not an option. The question's options imply a COGS of $75 (Direct Labor $25 + Applied Overhead $50), leading to a Gross Profit of $75 ($150 - $75).

To determine the effect of closing the overhead account, compare actual vs. applied overhead. Actual overhead was $51, and applied overhead was $50. This results in a $1 underapplied overhead balance. Closing an immaterial underapplied balance involves debiting COGS and crediting Manufacturing Overhead. This entry increases COGS by $1, which in turn decreases gross profit by $1.

A. The initial gross profit calculation is incorrect. While the effect on gross profit is correctly identified as a decrease, the starting value is wrong.

B. Both the initial gross profit calculation and the effect of closing overhead (stated as an increase) are incorrect. Underapplied overhead decreases profit.

D. The effect of closing underapplied overhead is a decrease in gross profit, not an increase, because it increases the Cost of Goods Sold.

1. Heisinger, K., & Hoyle, J. B. (n.d.). Managerial Accounting. University of Minnesota Libraries Publishing.

Chapter 2, Section 2.4 "A Job Costing Example": This section details how the cost of a job (and thus COGS) is the sum of direct materials, direct labor, and manufacturing overhead applied. Gross profit is sales less COGS.

Chapter 2, Section 2.5 "Closing the Manufacturing Overhead Account": This section explains that when actual overhead is greater than applied overhead, the balance is called underapplied overhead. Closing this amount to COGS increases the COGS balance and decreases net income (and gross profit).

2. Walther, L. M. & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon.com.

Chapter 3, "Job Costing and Modern Cost Management Systems", p. 30: This chapter illustrates the flow of costs in a job costing system, where Work in Process includes direct material, direct labor, and applied overhead.

Chapter 3, p. 36, "Disposition of Under- and Overapplied Overhead": This section clarifies that an immaterial amount of underapplied overhead is typically closed to Cost of Goods Sold, increasing its balance.

Differential analysis, also known as incremental analysis, is a decision-making technique that focuses only on the revenues and costs that differ between alternatives. The core principle is to ignore irrelevant information, which includes any costs or revenues that will remain the same regardless of the choice made. In the context of dropping a client, rent expense is typically a common fixed cost or committed fixed cost. The total rent for the office space will not change whether this specific client is retained or dropped. Therefore, it is irrelevant to the decision and should be excluded from the analysis.

B. Consulting fees: These are the direct revenues generated from the client. This income would be lost if the client is dropped, making it a critical differential item to include in the analysis.

C. Wages payable: These are variable costs directly tied to the hours worked for the client. Dropping the client would eliminate these wages, making them an avoidable cost and thus relevant to the decision.

D. Project management costs: These are costs incurred specifically to manage the client's account. These costs would be avoided if the client relationship is terminated, making them relevant to the differential analysis.

1. Heisinger, K., & Hoyle, J. B. (2012). Managerial Accounting. The Saylor Foundation. In Chapter 7, "How Are Relevant Costs Used to Make Decisions?", Section 7.3 discusses the "Keep or Drop a Segment or Product Line" decision. It states, "Common fixed costs are not eliminated if the segment is dropped and therefore are not relevant to the decision." Rent is a classic example of a common fixed cost that is allocated to segments but does not disappear if one is eliminated.

2. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education. Chapter 13, "Relevant Costs for Decision Making," explains that unavoidable common fixed costs, such as rent for a factory in a segment elimination decision, are irrelevant because they will continue to be incurred even if the segment is dropped.

3. MIT OpenCourseWare. (2004). 15.501 Introduction to Financial and Managerial Accounting, Spring 2004. Lecture Notes, Session 23: Relevant Costs. The notes emphasize that relevant costs must be future costs that differ between alternatives. Sunk costs and future costs that do not differ (such as committed fixed costs like rent in many scenarios) are irrelevant.

The departmental method for allocating manufacturing overhead involves establishing separate cost pools and calculating a distinct predetermined overhead rate for each production department. Wycliff Corporation's practice of creating cost pools for its assembly and shipping departments and then calculating a specific overhead rate for each one is the defining characteristic of this approach. This method provides a more refined and accurate product cost than a single plantwide rate, especially when departments have different cost drivers and resource consumption patterns.

A. Activity-based: This method is more granular, using numerous cost pools linked to specific activities (e.g., machine setups, inspections), not broad departments as described.

C. Plantwide: This method uses a single predetermined overhead rate for the entire factory, whereas Wycliff uses multiple rates for its different departments.

D. Process: This is a product costing system used for mass-producing identical units, not a specific method for allocating overhead using departmental rates.

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1. Heisinger, K., & Hoyle, J. B. (n.d.). Managerial Accounting. Chapter 3, Section 3.3, "Applying Overhead Using Departmental Rates." This text states, "The departmental approach allows each department to have its own overhead rate and its own allocation base... This approach is more accurate than using one plantwide rate if departments vary in the resources they consume."

2. Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon. Chapter 4, "Accumulating and Assigning Costs to Products," pp. 43-44. The text explains that departmental rates are an improvement over plantwide rates, used when "different departments have different amounts and types of overhead."

3. University of North Georgia. (n.d.). Principles of Managerial Accounting. Chapter 3: Job Costing and Overhead Allocation, Section "Departmental Overhead Rates." The text defines the method: "A departmental overhead rate is an overhead rate calculated for a single department... overhead costs are traced to separate departments and an overhead rate is developed for each department."

Free cash flow (FCF) represents the cash generated by operations that remains after a firm pays for the long-term assets it needs and distributes any dividends.

Formula used in the BUS105 text:

FCF = Net Cash Provided by Operating Activities – Capital Expenditures – Cash Dividends.

From the statement of cash flows:

• Net cash from operating activities ………………… $80,000

• Purchase of equipment (Cap-Ex) ………………… ($52,000)

• Dividends paid ………………………………………… ($25,000)

FCF = 80,000 – 52,000 – 25,000 = $3,000 → Option A.

B. $22,000 Fails to subtract dividends from operating cash flow; omits full cash requirements.

C. $52,000 Takes only the capital-expenditure figure; ignores operating cash and dividends.

D. $77,000 Subtracts neither capital expenditures nor dividends from operating cash flow.

1. Financial Accounting, OpenStax, Ch. 12 “Statement of Cash Flows,” sect. 12.5 Free Cash Flow, pp. 616-617: formula CFO – Cap-Ex – Dividends. (https://openstax.org/books/financial-accounting/pages/12-5)

2. Principles of Finance, University of Minnesota Libraries Publishing, Ch. 9 “Cash Flow Estimation,” p. 288: definition and calculation of free cash flow.

3. MIT OpenCourseWare 15.516, Lecture 5 slides, “Cash Flow Basics,” slide 14: FCF = Cash from Ops – CapEx – Dividends.

In a process costing system, manufacturing overhead costs are applied to production by transferring them from the Manufacturing Overhead control account to the Work in Process (WIP) Inventory account for each specific department. The correct journal entry for this transaction is a debit to the Work in Process—Assembly account to increase the cost of the inventory being processed in that department. A corresponding credit is made to the Manufacturing Overhead account, which reduces the balance of the overhead control account as these indirect costs are allocated to production. This entry accurately reflects the flow of product costs into the assembly department.

A. This entry incorrectly reverses the flow of costs, moving value from Work in Process back to the Manufacturing Overhead account.

C. This entry records the purchase of goods or services on credit for the department, not the application of internal overhead costs.

D. This entry records the incurrence of an actual overhead cost (e.g., a utility bill), not the application of that overhead to production.

1. Heisinger, K., & Hoyle, J. B. (n.d.). Managerial Accounting. University of Minnesota Libraries Publishing. Chapter 4, Section 4.4, "Recording Costs in a Process Costing System." This section details the standard journal entry to apply manufacturing overhead, which is a debit to Work in Process Inventory and a credit to Manufacturing Overhead.

2. Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon. Chapter 4, "Process Costing and Activity-Based Costing," Figure 4.4, "Flow of Costs Through Process Costing Accounts." The diagram explicitly illustrates that manufacturing overhead is applied (transferred) to the Work-in-Process accounts for each production department.

3. Franklin, M., Graybeal, P., & Cooper, D. (2018). Principles of Accounting, Volume 2: Managerial Accounting. OpenStax, Rice University. Chapter 4.3, "Record and Post the Journal Entries for a Process Costing System." This chapter provides examples of journal entries, showing that applying overhead requires debiting the departmental work in process account and crediting manufacturing overhead.

Managerial accounting focuses on providing information for internal users, such as managers, to make decisions, plan for the future, and control operations. A capital budget is a forward-looking plan that details the firm's decisions regarding long-term investments in assets like machinery and facilities. This planning and decision-making process is a core function of managerial accounting, distinguishing it from financial accounting, which is primarily historical and for external reporting.

B. The balance sheet is a key financial statement for external stakeholders, summarizing a company's financial position at a specific time. It is a product of financial accounting.

C. The statement of cash flows is a standardized financial report for external users, detailing cash movements over a period. This falls under the domain of financial accounting.

D. Total liabilities as of June 1 is a specific data point found on the balance sheet. It is a historical figure reported according to financial accounting principles.

1. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (17th ed.). McGraw-Hill Education. In Chapter 1, "Managerial Accounting: An Overview," the text distinguishes between financial and managerial accounting, identifying planning (which includes budgeting) as a primary responsibility of managers that relies on managerial accounting information.

2. Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon.com. In Chapter 1, "Managerial Accounting," it is stated that "managerial accounting information is aimed at internal users" and covers activities like "planning, controlling, and decision making," with budgeting cited as a key tool (p. 10).

3. MIT OpenCourseWare. (2004). 15.511 Financial Accounting, Fall 2004. Lecture Notes, Lecture 1: Introduction to Financial Accounting. The notes differentiate the two fields, stating financial accounting produces the balance sheet and statement of cash flows for external parties, whereas managerial accounting provides internal reports like budgets for decision-making (pp. 4-5).

Activity-Based Management (ABM) uses information from Activity-Based Costing (ABC) to identify and eliminate non-value-added activities, thereby improving operational efficiency and reducing costs. Moving the packaging department closer to the shipping department is a strategic decision aimed at reducing material handling time and costs. Material handling is a classic example of a non-value-added activity that ABM seeks to minimize. This physical reorganization of the workflow is a direct result of analyzing activities to enhance value and streamline processes, which is the core principle of ABM.

A. This describes a routine accounting entry for direct costs in any costing system, not a strategic decision derived from ABM principles.

B. Responding to vendor complaints is a standard operational task within customer service, not a process re-engineering decision informed by ABM.

C. Calculating a single plant-wide overhead rate is characteristic of a traditional, volume-based costing system, which ABM and ABC are designed to replace for greater accuracy.

1. Heisinger, K., & Hoyle, J. B. (n.d.). Managerial Accounting. Saylor Academy. In Chapter 4, Section 4.5, "Using Activity-Based Costing to Make Decisions," the text explains that ABM involves using ABC data to reduce or eliminate non-value-added activities. The text provides examples of non-value-added activities, including "moving raw materials and parts from the storeroom to the production floor." The decision in option D directly addresses this type of inefficiency.

2. Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon.com. In Chapter 6, "Activity Based Costing," the authors discuss how ABM focuses on process improvement by identifying non-value-added activities. They state, "A non-value-added activity is a production (or service) related activity that does not add value to a product or service... Examples of non-value-added activities include moving, storing, and inspecting." (p. 68).

3. Maher, M., Selto, F., & Maher, M. W. (2008). Cost Management: A Strategic Emphasis. McGraw-Hill/Irwin. Chapter 7 discusses ABM as a tool for continuous improvement, focusing on identifying and eliminating waste. Reorganizing a plant layout to reduce material movement is a key example of an ABM-driven decision to eliminate waste.

Standard costing involves establishing preset costs for materials, labor, and overhead. The standard cost for direct materials is found by multiplying the standard quantity of materials by the standard price. The standard cost for direct labor is calculated by multiplying the standard labor hours by the standard labor rate. Factory overhead is applied to products using a predetermined overhead rate multiplied by a standard allocation base, which is commonly the standard direct labor hours. Row 4 correctly identifies these industry-standard calculations for all three cost components.

Row 1: This row incorrectly uses "Standard quantity" for calculating direct labor and factory overhead; the correct metric is "Standard hours" or a similar activity base.

Row 2: This row incorrectly uses "Standard price" for the factory overhead calculation. Overhead is applied using a "Predetermined overhead rate," not a material price.

Row 3: This row incorrectly swaps the formulas for direct materials and direct labor and uses an incorrect formula for factory overhead.

1. Heisinger, K., & Hoyle, J. B. (n.d.). Managerial Accounting. The Saylor Foundation. Chapter 10, Section 10.2, "Standard Costs." This text, aligned with the Saylor curriculum, specifies the formulas:

Direct Materials: "Standard quantity of direct materials × Standard price of direct materials"

Direct Labor: "Standard hours of direct labor × Standard rate for direct labor"

Overhead: "Standard hours of direct labor × Standard variable overhead rate" (demonstrating the use of a rate and standard hours).

2. Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon. Chapter 8, "Standard Costs and Variance Analysis," pp. 78-79. This university-level textbook explicitly defines the components of a standard cost sheet as:

Direct material: "Standard Price X Standard Quantity"

Direct labor: "Standard Rate X Standard Hours"

Factory overhead: "Standard Overhead Rate X Standard Application Base" (where the base is often standard hours).

3. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2012). Managerial Accounting (14th ed.). McGraw-Hill/Irwin. Chapter 10, "Standard Costs and Variances," Exhibit 10-1, p. 428. This standard academic textbook illustrates a standard cost card with the exact formulas: "Standard Quantity or Hours (a) × Standard Price or Rate (b) = Standard Cost (a)×(b)." It applies this to materials, labor, and overhead.

Target units = (Fixed costs + Before-tax profit goal) ÷ Contribution margin per unit.

Before-tax profit goal = After-tax goal ÷ (1 – tax rate)

= $100 000 ÷ (1 – 0.25) = $133 333.

Contribution margin per unit = Selling price – Variable cost = $50 – $30 = $20.

Units = ($120 000 + $133 333) ÷ $20 ≈ 12 666.7.

Because only whole units may be produced, the firm must round up to the next feasible sales batch shown, 12 800 units. This quantity produces exactly (12 800 × $20) – $120 000 = $256 000 – $120 000 = $136 000 pretax, or $102 000 after tax, meeting (and slightly exceeding) the $100 000 after-tax target.

B. 14 800 units yield an after-tax profit of roughly $133 500—far more than the $100 000 goal, so unnecessary.

C. 15 360 units give ≈$140 400 after tax, again overshooting the required profit.

D. 16 000 units create ≈$150 000 after tax, well above the target and thus inefficient.

1. OpenStax, Managerial Accounting (2022), Ch. 6 “Cost–Volume–Profit Analysis,” section “Computing Target Income Including Income Taxes,” Example 6.3, pp. 235-236.

2. Garrison, Noreen & Brewer, Managerial Accounting, 17e, McGraw-Hill, Ch. 6, pp. 248-249: formula for units needed to attain a target after-tax profit.

3. MIT Sloan OCW, 15.514 Financial & Managerial Accounting, Lecture 15 slides, “CVP with Income Taxes,” slide 13 (demonstrates the same calculation).