Question

XYZ Co. buys raw wool from local sheepherders, separates the wool into two grades—fine and superfine—and then dyes the wool. The company’s joint costs include $50,000 for the raw wool and $6,000 for separating the raw wool into two intermediate products. The undyed fine wool and undyed superfine wool each can be sold at the split-off point for $55,000 and $75,000, respectively. The cost of further processing the undyed fine wool and undyed superfine wool is $20,000 and $30,000, respectively. Furthermore, the sales values of dyed fine wool and dyed superfine wool are $90,000 and $100,000, respectively. Which product should be processed further so that the company can make more profit?

	A.	Undyed fine wool only
	B.	Neither undyed fine wool nor undyed superfine wool
	C.	Both undyed fine wool and undyed superfine wool
	D.	Undyed superfine wool only

A&B Co. provides house cleaning services. The company uses the number of jobs to measure activity. At the beginning of April, the company budgeted for 80 jobs, but the actual number of jobs turned out to be 90. A report comparing the budgeted revenues and costs to the actual revenues and costs appears below:

A&B Co.
For the Month Ended April 30
		Revenue/Cost Formulas	Actual Results	Planning Budget
Number of jobs (Q)			90	80
Revenue		$100Q	8,900	8,000
Expenses:
	Variable expenses	?	3,800	3,200
	Fixed expense	?	2,100	2,500
Total expenses			5,900	5,700
Net operating income			3,000	2,300

What is the amount of activity variance for fixed expenses in A&B’s performance report for April?

	A.	$400 unfavorable
	B.	$400 favorable
	C.	$0
	D.	$312.5 favorable

XYZ Co. used to rent out a small annex attached to the rear of the building for $30,000 per year. The renter’s lease will expire soon, and rather than renewing the lease, the company has decided to use the annex to manufacture a new product, with estimated costs of $40,000 and estimated profits of $90,000. What is the opportunity cost of using the annex to manufacture the new product?

	A.	$20,000
	B.	$50,000
	C.	$40,000
	D.	$30,000

A&B Co. provides house cleaning services. The company uses the number of jobs to measure activity. At the beginning of April, the company budgeted for 80 jobs, but the actual number of jobs turned out to be 90. A report comparing the budgeted revenues and costs to the actual revenues and costs appears below:

A&B Co.
For the Month Ended April 30
		Revenue/Cost Formulas	Actual Results	Planning Budget
Number of jobs (Q)			90	80
Revenue		$100Q	8,900	8,000
Expenses:
	Variable expenses	?	3,800	3,200
	Fixed expense	?	2,100	2,500
Total expenses			5,900	5,700
Net operating income			3,000	2,300

What is the amount of activity variance for variable expenses in A&B’s performance report for April?

	A.	$400 unfavorable
	B.	$600 favorable
	C.	$600 unfavorable
	D.	$400 favorable

Answer 1

1.

	Undyed fine wool	Undyed superfine wool
Sales value after further processing	$90,000	$100,000
Sales value at split off point	55,000	75,000
Incremental sales	35,000	25,000
Less: Further processing cost	20,000	30,000
Incremental profit	$15,000	$(5,000)

As per above results, Undyed fine wool should be processed further.

2.

Activity variance for fixed expense = Flexible budget - Planning budget

Activity variance for fixed expense = $2,500 - 2,500 = $0

Hence option C is correct.

3.

Opportunity cost to manufacture the new product = ($90,000-40,000) - $30,000

Opportunity cost to manufacture the new product = $50,000 - 30,000 = $20,000

Hence option A is correct.

4.

Activity variance for variable expense = Flexible budget - Planning budget

Activity variance for variable expense = $3,600 (3,200/80*90) - 3,200

Activity variance for variable expense = $400 Unfavorable

Hence option A is correct.