Chapter 16 Fundamentals of Variance Analysis

Chapter 16 Fundamentals of Variance Analysis True / False Questions 1. In essence, the terms "master budget" and "operating budget" mean the same thing and can be used interchangeably. True False 2. Variances are the difference between actual results and budgeted results. True False 3. In general, and holding all other things constant, an unfavorable variance decreases operating profits. True False 4. A favorable variance is not necessarily good, and an unfavorable variance is not necessarily bad. True False 5. The terms "master budget" and "flexible budget" mean the same thing and can be used interchangeably. True False 6. A flexible budget adjusts the static budget to reflect the actual activity level achieved during the period. True False 16-1

7. If the budgeted activity level is greater than the actual activity level, then the total budgeted costs of the master budget will be greater than the total budgeted costs of the flexible budget. True False 8. The difference between operating profits in the master budget and operating profits in the flexible budget is called a sales price variance. True False 9. The sales activity variance is the result of a difference between budgeted units sold and actual units sold. True False 10. The sales price variance is the actual selling price per unit times the difference between budgeted number of units and the actual number of units sold. True False 11. Production cost variances are input variances, while sales activity variances are output variances. True False 12. The flexible and master budget amounts are the same for fixed marketing and administrative costs. True False 13. The standard cost for a unit of output is the standard price per unit of input times the standard number of inputs per one unit of output. True False 16-2

14. Both the actual material used and the standard quantity allowed for material is based on the actual output attained. True False 15. It is possible to have a favorable direct material price variance and an unfavorable direct material efficiency variance. True False 16. The materials price variance is computed by multiplying the difference between the actual price and the standard price by the actual quantity of materials used in production. True False 17. The direct labor efficiency variance can be the result of poor supervision or poor scheduling by divisional managers. True False 18. Variance analysis for fixed production costs is virtually the same as for variable production costs. True False 19. The budget (or spending) variance for fixed production costs is the difference between the actual fixed costs and the budgeted fixed costs on the master budget. True False 20. The production volume variance is the difference between fixed costs on the flexible budget and the fixed costs on the master budget. True False 16-3

Multiple Choice Questions 21. Which of the following statements is (are) true? (A) A favorable variance is not necessarily good, and an unfavorable variance is not necessarily bad. (B) The master budget includes operating budgets (e.g., production budget) and financial budgets (e.g., cash budget). A. Only A is true. B. Only B is true. C. Both A and B are true. D. Neither A nor B is true. 22. An operating budget would not include a: A. cash budget. B. sales budget. C. labor budget. D. production budget. E. operating expense budget. 23. A variance can best be described as: A. benchmarks common to other firms in the same industry. B. differences between planned results and actual results. C. useful for performance evaluations but not making decisions. D. generally accepted accounting principles when standards are used. 16-4

24. The most fundamental variance analysis compares: A. standard material prices with actual material prices. B. standard direct labor rates with actual direct labor rates. C. budgeted sales revenue with actual sales revenue. D. budgeted operating income with actual operating income. 25. In general, the terms favorable and unfavorable are used to describe the effect of a variance on: A. net income. B. sales revenue. C. production costs. D. operating expenses. E. balance sheet. 26. Which of the following statements regarding variances is (are) false? (A) In general and holding all other things constant, an unfavorable variance decreases operating profits. (B) A favorable variance is not always good, and an unfavorable variance is not always bad. A. Only A is false. B. Only B is false. C. Both A and B are false. D. Neither A nor B is false. 16-5

27. Which of the following variances will always be favorable when actual sales exceeds budgeted sales? A. Variable cost. B. Fixed cost. C. Sales activity. D. Operating profit. E. Contribution margin. 28. The purpose of the flexible budget is to: A. allow management some latitude in meeting goals. B. eliminate cyclical fluctuations in production reports by ignoring variable costs. C. compare actual and budgeted results at virtually any level of production. D. reduce the total time in preparing the annual budget. 29. The basic difference between a master budget and a flexible budget is that a: A. flexible budget considers only variable costs but a master budget considers all costs. B. flexible budget allows management latitude in meeting goals whereas a master budget is based upon a fixed standard. C. master budget is for an entire production facility but a flexible budget is applicable to single departments only. D. master budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range. 16-6

30. The slope of the flexible budget-line is the: A. selling price per unit. B. variable cost per unit. C. fixed cost per unit. D. contribution margin per unit. E. operating profit per unit. 31. The intercept of the flexible budget-line is total: A. sales. B. variable costs. C. fixed costs. D. contribution margin. E. assets. 32. When using a flexible budget, what will happen to variable costs on a per-unit basis as production increases within the relevant range? A. Decrease. B. Increase. C. Remain unchanged. D. Fixed costs are not considered in flexible budgeting. 33. The difference between operating profits in the master budget and operating profits in the flexible budget is called: A. sales activity variance. B. flexible budget variance. C. production volume variance. D. total operating profit variance. 16-7

34. Which of the following statements is (are) true regarding the sales activity variance? (A) The sales activity variance is the actual selling price per unit times the difference between the budgeted units and actual units. (B) If the sales activity variance for sales revenue is unfavorable, then the contribution margin sales activity variance will be unfavorable. A. Only A is true. B. Only B is true. C. Neither A and B is true. D. Both A and B are true. 35. The sales price variance is the difference between the actual sales revenues and the: A. budgeted selling price multiplied by the budgeted number of units sold. B. budgeted selling price multiplied by the actual number of units sold. C. actual selling price multiplied by the budgeted number of units sold. D. actual selling price multiplied by the actual number of units sold. 36. If the total materials variance for a given operation is favorable, why must this variance be further evaluated as to price and usage? A. There is no need to further evaluate the total materials variance if it is favorable. B. Generally accepted accounting principles require that all variances be analyzed in three stages. C. All variances must appear in the annual report to equity owners for proper disclosure. D. A further evaluation lets management evaluate the activities of the purchasing and production functions. 16-8

37. Which department is customarily held responsible for an unfavorable materials quantity variance? A. Quality control. B. Purchasing. C. Engineering. D. Production. 38. When are the following direct materials variances ideally reported? A. Option a B. Option b C. Option c D. Option d 39. In the general model, a price variance is calculated as: A. (AP AQ) - (AP SQ) B. (AP SQ) - (SP SQ) C. (AP AQ) - (SP AQ) D. (AP AQ) - (SP SQ) 40. In the general model, an efficiency variance is calculated as: A. (SP AQ) - (SP SQ) B. (AP SQ) - (SP SQ) C. (AP AQ) - (SP SQ) D. (AP AQ) - (SP AQ) 16-9

41. Which of the following direct labor variances uses the standard hours allowed for the actual number of units produced? A. Option a B. Option b C. Option c D. Option d 42. Which of the following is the most probable reason a company would experience an unfavorable labor rate variance and a favorable labor efficiency variance? A. The mix of workers assigned to the particular job was heavily weighted towards the use of higher paid experienced individuals. B. The mix of workers assigned to the particular job was heavily weighted towards the use of new relatively low paid unskilled workers. C. Because of the production schedule, workers from other production areas were assigned to assist this particular process. D. Defective materials caused more labor to be used in order to produce a standard unit. 43. Which variance will be unfavorable due to employees working more hours than allowed for the actual number of units produced? A. Price (rate). B. Efficiency. C. Sales activity. D. Production volume. 16-10

44. In general, the direct labor efficiency variance is the responsibility of the: A. purchasing agent. B. company president. C. production manager. D. industrial engineering. E. marketing department. 45. The variable overhead price variance is due to: A. price items only. B. efficiency items only. C. both price and efficiency items. D. neither price or efficiency items. 46. If overhead is applied to production using direct labor hours and the direct labor efficiency variance is favorable, then the variable overhead efficiency variance is: A. favorable. B. unfavorable. C. either favorable or unfavorable. D. neither favorable nor unfavorable. 47. The production volume variance is computed by the difference between the: A. actual fixed overhead and applied fixed overhead. B. actual fixed overhead and budget at actual level of activity reached. C. actual fixed overhead and budget at denominator level of activity planned. D. budget at actual levels of activity reached and fixed overhead applied. 16-11

48. Which of the following is not an alternative name for the production volume variance? A. Capacity variance. B. Idle capacity variance. C. Denominator variance. D. Fixed overhead efficiency variance. 49. The production volume variance must be computed when a company uses: A. activity-based costing. B. process costing. C. job-order costing. D. full-absorption costing. E. variable costing. 50. Which of these variances is least significant for cost control? A. Labor price variance. B. Material quantity variance. C. Fixed overhead price variance. D. Production volume variance. E. Labor efficiency variance. 51. A debit balance in the labor-efficiency variance account indicates that: A. standard hours exceed actual hours. B. actual hours exceed standard hours. C. standard rate and standard hours exceed actual rate and actual hours. D. actual rate and actual hours exceed standard rate and standard hours. 16-12

55. What is the sales revenue in the flexible budget? A. $139,000. B. $156,000. C. $169,000. D. $180,000. 56. What is the flexible budget contribution margin? A. $39,000. B. $45,000. C. $52,000. D. $58,000. 16-14

57. What is the master budget sales revenue? A. $124,000. B. $148,000. C. $156,000. D. $180,000. 58. What is the master budget contribution margin? A. $52,000. B. $47,500. C. $45,000. D. $39,000. 16-15

59. What is the activity variance for the variable manufacturing costs? A. $4,000. B. $14,000. C. $24,000. D. $34,000. 60. Is the activity variance for the variable manufacturing costs favorable or unfavorable? A. Favorable. B. Unfavorable. 16-16

61. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. What is the direct materials price variance for November? A. $14,250. B. $14,400. C. $16,000. D. $17,100. 16-17

62. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. Is the direct materials price variance favorable or unfavorable? A. Favorable. B. Unfavorable. 16-18

63. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. What is the direct materials efficiency (quantity) variance for November? A. $14,250. B. $14,400. C. $16,000. D. $17,100. 16-19

64. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. Is the direct materials efficiency (quantity) variance favorable or unfavorable? A. Favorable. B. Unfavorable. 16-20

65. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. What is the direct labor price (rate) variance for November? A. $1,800. B. $1,900. C. $2,000. D. $2,090. E. $2,200. 16-21

66. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. Is the direct labor price (rate) variance favorable or unfavorable? A. Favorable. B. Unfavorable. 16-22

67. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. What is the direct labor efficiency variance for November? A. $1,800. B. $1,900. C. $2,000. D. $2,090. E. $2,200. 16-23

68. Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. Is the direct labor efficiency variance favorable or unfavorable? A. Favorable. B. Unfavorable. 16-24

71. The following information summarizes the standard cost for producing one metal tennis racket frame. In addition, the variances for one month's production are given. Assume that all inventory accounts have zero balances at the beginning of the month. What was the actual price paid for the direct material during the month, assuming all materials purchased were put into production? A. $4.34. B. $4.22. C. $4.11. D. $4.00. E. $3.90. 16-27

72. Data on Goodman Company's direct-labor costs are given below: What was Goodman's actual direct-labor rate? A. $3.60. B. $3.80. C. $4.00. D. $5.80. 73. Data on Goodman Company's direct-labor costs are given below: What was Goodman's standard direct-labor rate? A. $3.54. B. $3.80. C. $4.00. D. $5.80. 16-28

74. Blue Company produces Trivets. Based on its master budget, the company should produce 1,000 Trivets each month, working 2,500 direct labor hours. During May, only 900 Trivets were produced. The company worked 2,400 direct labor hours. The standard hours allowed for May production would be: A. 2,500 hours. B. 2,400 hours. C. 2,250 hours. D. 1,800 hours. 75. Information on Barber Company's direct labor costs for the month of January is as follows: What is Barber's direct labor price (rate) variance? A. $17,250. B. $20,700. C. $18,750. D. $21,000. 76. Information on Barber Company's direct labor costs for the month of January is as follows: Is the direct labor price (rate) variance favorable or unfavorable? A. Favorable. B. Unfavorable. 16-29

77. The following data pertains to the direct materials cost for the month of October: What is the direct materials efficiency (quantity) variance? A. $950 favorable. B. $950 unfavorable. C. $1,000 favorable. D. $1,000 unfavorable. E. $50 unfavorable. 78. The Landry Company has developed standards for labor. During June, 75 units were scheduled and 100 were produced. Data related to labor are: What is the labor rate variance for June? A. $30 unfavorable. B. $31 favorable. C. $31 unfavorable. D. $30 favorable. 16-30

79. Given the following information in standard costing: What is the total direct labor cost variance? A. $3,160 favorable. B. $3,160 unfavorable. C. $2,360 favorable. D. $2,360 unfavorable. 80. Information for Nighttime Company's direct labor cost for February is as follows: What were the standard direct labor hours for February? A. 70,000. B. 69,000. C. 72,000. D. 71,400. 16-31

81. What is the fixed overhead spending (budget) variance? A. $200. B. $400. C. $300. D. $240. 82. Is the fixed overhead spending (budget) variance favorable or unfavorable? A. Favorable. B. Unfavorable. 16-32

83. What is the production volume variance? A. $200. B. $400. C. $300. D. $240. 84. Is the production volume variance favorable or unfavorable? A. Favorable. B. Unfavorable. 16-33

85. Dickey Company had total underapplied overhead of $15,000. Additional information is as follows: What is the actual total overhead for the period? A. $50,000. B. $45,000. C. $80,000. D. $87,000. 86. What is the fixed overhead spending (budget) variance for May? A. $1,000 unfavorable. B. $3,000 unfavorable. C. $2,000 unfavorable. D. $2,000 favorable. E. $3,000 favorable. 16-34

87. What is the production volume variance for May? A. $2,000. B. $3,000. C. $6,000. D. $8,000. E. $9,000. 88. Is the production volume variance favorable or unfavorable? A. Favorable. B. Unfavorable. 89. A standard cost system may be used in: (CPA adapted) A. job-order costing but not process costing. B. either job-order costing or process costing. C. process costing but not job-order costing. D. neither process costing nor job-order costing. 16-35

90. When a manager is concerned with monitoring total cost, total revenue, and net profit conditioned upon the level of productivity, an accountant should normally recommend: (CPA adapted) A. Option a B. Option b C. Option c D. Option d 91. In analyzing company operations, the controller of the Jason Corporation found a $250,000 favorable flexible budget revenue variance. The variance was calculated by comparing the actual results with the flexible budget. This variance can be wholly explained by: (CMA adapted) A. the total flexible budget variance. B. the total static budget variance. C. changes in unit selling prices. D. changes in the number of units sold. 16-36

92. The standard unit cost is used in the calculation of which of the following variances? (CPA adapted) A. Option a B. Option b C. Option c D. Option d 93. A favorable materials price variance coupled with an unfavorable materials usage variance would most likely result from: (CMA adapted) A. machine efficiency problems. B. product mix production changes. C. labor efficiency problems. D. the purchase of lower-than-standard-quality materials. 94. Excess direct labor wages resulting from overtime premium will be disclosed in which type of variance? (CPA adapted) A. Yield. B. Quantity. C. Labor efficiency. D. Labor rate. 16-37

95. The budget for the month of May was for 9,000 units at a direct materials cost of $15 per unit. Direct labor was budgeted at 45 minutes per unit for a total of $81,000. Actual output for the month was 8,500 units with $127,500 in direct materials and $77,775 in direct labor expense. The direct labor standard of 45 minutes was obtained throughout the month. Variance analysis of the performance for the month of May would show a(n): (CMA adapted) A. favorable materials efficiency (quantity) variance of $7,500. B. favorable direct labor efficiency variance of $1,275. C. unfavorable direct labor efficiency variance of $1,275. D. unfavorable direct labor price (rate) variance of $1,275. 96. Tub Company uses a standard cost system. The following information pertains to direct labor for product B for the month of October: What were the actual hours worked for the month of October? A. 1,800. B. 1,810. C. 2,190. D. 2,200. 97. The fixed factory overhead application rate is a function of a predetermined activity level. If standard hours allowed for good output equal this predetermined activity level for a given period, the volume variance will be: (CPA adapted) A. zero. B. favorable. C. unfavorable. D. either favorable or unfavorable, depending on the budgeted overhead. 16-38

98. Which one of the following variances is of least significance from a behavioral control perspective? (CMA adapted) A. Unfavorable materials quantity variance amounting to 20% of the quantity allowed for the output attained. B. Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the output attained. C. Favorable materials price variance obtained by purchasing raw materials from a new vendor. D. Fixed factory overhead volume variance resulting from management's decision midway through the fiscal year to reduce its budgeted output by 20%. 99. Which of the following organizational policies is most likely to result in undesirable managerial behavior? (CMA adapted) A. Patel Chemicals sponsors television coverage of cricket matches between national teams representing India and Pakistan. The expenses of such media sponsorship are not allocated to its various divisions. B. Joe Walk, the chief executive officer of Eagle Rock Brewery, wrote a memorandum to his executives stating, "Operating plans are contracts and they should be met without fail." C. The budgeting process at Madsen Manufacturing starts with operating managers providing goals for their respective departments. D. Fullbright Lighting holds quarterly meetings of departmental managers to consider possible changes in the budgeted targets due to changing conditions. E. At Fargo Transportation, managers are expected to provide explanations for variances from the budget in their departments. 16-39

100. Based on past experience, a company has developed the following budget formula for estimating its shipping expenses. The company's shipments average 12 lbs. per shipment: Shipping costs = $16,000 + ($0.50 lbs. shipped). The planned activity and actual activity regarding orders and shipments for the current month are given in the following schedule: The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation would be: (CMA adapted) A. $20,680. B. $20,920. C. $20,800. D. $22,150. 101. When computing standard cost variances, the difference between actual and standard price multiplied by actual quantity yields a(n): (CMA adapted) A. combined price and quantity variance. B. efficiency variance. C. price variance. D. quantity variance. 16-40

102. Todco planned to produce 3,000 units of its single product, Teragram, during November. The standard specifications for one unit of Teragram include six pounds of material at $0.30 per pound. Actual production in November was 3,100 units of Teragram. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120. Based on these variances, one could conclude that: (CMA adapted) A. more materials were purchased than were used. B. more materials were used than were purchased. C. the actual cost of materials was less than the standard cost. D. the actual usage of materials was less than the standard allowed. 103. Tower Company planned to produce 3,000 units of its single product, Titactium, during November. The standards for one unit of Titactium specify six pounds of materials at $0.30 per pound. Actual production in November was 3,100 units of Titactium. There was a favorable materials price variance of $380 and an unfavorable materials quantity variance of $120. Based on these variances, one could conclude that: (CMA adapted) A. more materials were purchased than were used. B. more materials were used than were purchased. C. the actual cost per pound for materials was less than the standard cost per pound. D. the actual usage of materials was less than the standard allowed. 104. An unfavorable direct labor efficiency variance could be caused by: (CMA adapted) A. an unfavorable materials quantity variance. B. an unfavorable variable overhead rate variance. C. a favorable materials quantity variance. D. a favorable variable overhead rate variance. 16-41

105. Variable manufacturing overhead is applied to products on the basis of standard direct laborhours. If the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be: (CMA adapted) A. favorable. B. unfavorable. C. either favorable or unfavorable. D. zero. Essay Questions 16-42

106. The Hageness Company has had great difficulty in controlling overhead costs. At a recent convention, the president heard about a control device for overhead costs known as a flexible budget and she has hired you to implement this budgeting program. After some effort, you develop the following cost formulas for the company's machining department. These costs are based on a normal operating range of 15,000 to 23,000 machine-hours per month: During March, the first month after your preparation of the above data, the machining department worked 18,000 machine-hours and produced 9,000 units of product. The actual costs of this production were: The department had originally been budgeted to work 19,000 machine-hours during March. Required: Prepare a performance report for the machining department for the month of March including columns for the (a) actual results, (b) flexible budget, (c) flexible budget variance, (d) master budget, and (e) sales activity variance. 16-43

108. Eastern Company manufactures special electrical equipment and parts. Eastern employs a standard cost accounting system with separate standards established for each product. A special transformer is manufactured in the Transformer Department. Production volume is measured by direct labor hours in this department and a flexible budget system is used to plan and control department overhead. Standard costs for the special transformer are determined annually in September for the coming year. The standard cost of a transformer was computed at $67.00 as shown below. Overhead rates were based upon normal and expected monthly capacity, both of which were 4,000 direct labor hours. Practical capacity for this department is 5,000 direct labor hours per month. Variable overhead costs are expected to vary with the number of direct labor hours actually used. During October, 800 transformers were produced. This was below expectations because a work stoppage occurred at the copper supplier and shipments were delayed. The following costs were incurred in October: Required: Compute each of the following variances, showing all your work. Be sure to indicate whether the variances are favorable or unfavorable. a. Direct materials price variance for both iron and copper. b. Direct material efficiency (quantity) variance for both iron and copper. c. Direct labor rate variance. d. Direct labor efficiency variance. 16-45

16-46

109. Eastern Company manufactures special electrical equipment and parts. Eastern employs a standard cost accounting system with separate standards established for each product. A special transformer is manufactured in the Transformer Department. Production volume is measured by direct labor hours in this department and a flexible budget system is used to plan and control department overhead. Standard costs for the special transformer are determined annually in September for the coming year. The standard cost of a transformer was computed at $67.00 as shown below. Overhead rates were based upon normal and expected monthly capacity, both of which were 4,000 direct labor hours. Practical capacity for this department is 5,000 direct labor hours per month. Variable overhead costs are expected to vary with the number of direct labor hours actually used. During October, 800 transformers were produced. This was below expectations because a work stoppage occurred at the copper supplier and shipments were delayed. Required: Compute each of the following variances, showing all your work. Be sure to indicate whether the variances are favorable or unfavorable. a. Variable overhead spending variance. b. Variable overhead efficiency variance. 16-47

c. Fixed overhead spending (budget) variance. d. Production volume variance. 16-48

110. Western Company manufactures special electrical equipment and parts. Western employs a standard cost accounting system with separate standards established for each product. A special transformer is manufactured in the Transformer Department. Production volume is measured by direct labor hours in this department and a flexible budget system is used to plan and control department overhead. Standard costs for the special transformer are determined annually in September for the coming year. The standard cost of a transformer was computed at $57.00 as shown below. Overhead rates were based upon normal and expected monthly capacity, both of which were 4,000 direct labor hours. Practical capacity for this department is 5,000 direct labor hours per month. Variable overhead costs are expected to vary with the number of direct labor hours actually used. During October, 900 transformers were produced. This was below expectations because a work stoppage occurred during contract negotiations with the labor force. Once the contract was settled, the wage rate was increased to $7.25/hour and overtime was scheduled in an attempt to catch up to expected production levels. The following costs were incurred in October: 600 of the 1,400 hours were subject to overtime premium. The total overtime premium is included in variable overhead in accordance with company accounting practices. Required: 16-49

114. The XYZ Company uses a standard cost accounting system and estimates production for the year to be 60,000 units. At this volume, the company's variable overhead costs are $0.50 per direct labor hour. The company's single product has a standard cost of $30.00 per unit. Included in the $30.00 is $13.20 for direct materials (3 yards) and $12.00 of direct labor (2 hours). Production information for the month of March follows: Required: Prepare the journal entries to record the following: a. Incurring actual overhead. b. Application of overhead to production. c. Closing of overhead accounts and recognizing variances. d. Transferring production to finished goods. 16-54

115. The Acme Company uses a standard cost accounting system and estimates production for the year to be 60,000 units. At this volume, the company's variable overhead costs are $0.50 per direct labor hour. The company's single product has a standard cost of $30.00 per unit. Included in the $30.00 is $13.20 for direct materials (3 yards) and $12.00 of direct labor (2 hours). Production information for the month of March follows: Required: Prepare the journal entries to record the following: a. Purchase and use of direct materials (Assume materials are used as purchased and no inventory is maintained). b. Recognition of direct labor. c. Incurring actual overhead. d. Application of overhead to production. e. Closing of overhead accounts and recognizing variances. f. Transferring production to finished goods. 16-55

117. The condensed flexible budget of the Scooter Company for the year is given as $160,000 + $1.25/direct labor hour. The company produces a single product that requires 2.5 direct laborhours to complete. Assume that the company chooses 100,000 direct labor-hours as the denominator level of activity, but actually worked 96,000 hours during the year producing 37,000 units. Actual overhead costs for the year are: Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the variable overhead price variance and the variable overhead efficiency variance. b. Compute the fixed overhead spending (budget) variance and the production volume variance. 16-57

118. The Standard Company has developed standard overhead costs based upon a capacity of 180,000 direct labor hours: During April, 85,000 units were scheduled for production; however, only 80,000 units were actually produced. The following data relate to April: Actual direct labor cost incurred was $644,000 for 165,000 actual hours of work. Actual overhead incurred totaled $1,378,000; $518,000 variable and $860,000 fixed. All inventories are carried at standard cost. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the variable overhead price variance. b. Compute the variable overhead efficiency variance. 16-58

122. The following information relates to the month of April for The Marilyn Manufacturing Company, which uses a standard cost accounting system. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. What is the variable overhead efficiency variance? b. What is the fixed overhead spending variance? c. What is the fixed production volume variance? 16-62

123. The following information relates to the month of April for The Marilyn Manufacturing Company, which uses a standard cost accounting system. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. What is the variable overhead efficiency variance? b. What is the variable overhead price variance? c. What is the fixed production volume variance? 16-63

124. The data below relate to a product of Benoit Company. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the direct material price variance. b. Compute the direct material usage variance. c. Compute the direct labor rate variance. d. Compute the direct labor efficiency variance. 16-64

133. Compound Y23Z is used by Mcfadin Corporation to make one of its products. The standard cost of compound Y23Z is $38.70 per ounce and the standard quantity is 4.6 per unit of output. Data concerning the compound in the most recent month appear below: The raw material was purchased on account. Required: a. Record the purchase of the raw material in a journal entry. b. Record the use of the raw material in production in a journal entry. 16-73

134. The standards for product A22G specify 8.2 direct labor-hours per unit at $11.90 per direct laborhour. Last month 200 units of product A22G were produced using 1,700 direct labor-hours at a total direct labor wage cost of $20,060. Required: a. What was the labor rate variance for the month? b. What was the labor efficiency variance for the month? c. Prepare a journal entry to record direct labor costs during the month, including the direct labor variances. 16-74

135. Wahlen Corporation has provided the following data concerning its direct labor costs for November: Required: Prepare the journal entry to record the incurrence of direct labor costs. 136. Explain the difference between operating budgets, financial budgets, and flexible budgets. 16-75

137. Explain the difference between the sales volume variance and the production volume variance. 138. Explain how standards and budgets are different. 139. Explain two reasons why splitting production costs into price and efficiency variances is beneficial for management control. 16-76

140. Explain two reasons for preparing a variance analysis. 16-77

141. The Clayton Company uses a standard cost system in which manufacturing overhead costs are applied to units of the company's single product on the basis of standard direct labor-hours (DLHs). The standard cost card for the product follows: The following data pertain to last year's activities: The company manufactured 18,000 units of product during the year. A total of 70,200 yards of material was purchased during the year at a cost of $3.75 per yard. All of this material was used to manufacture the 18,000 units. The company worked 29,250 direct labor-hours during the year at a cost of $7.80 per hour. The denominator activity level was 22,500 direct labor-hours. Budgeted fixed manufacturing overhead costs were $135,000 while actual manufacturing overhead costs were $133,200. Actual variable overhead costs were $61,425. Required: a. Compute the direct materials price and quantity variances for the year. b. Compute the direct labor rate and efficiency variances for the year. c. Compute the variable overhead rate and efficiency variances for the year. d. Compute the fixed manufacturing overhead budget and volume variances for the year. 16-78

144. Fastic Corporation makes a product with the following standard costs: The company reported the following results concerning this product in August. The materials price variance is recognized when materials are purchased. Variable overhead is applied on the basis of direct labor-hours. Required: a. Compute the materials quantity variance. b. Compute the materials price variance. c. Compute the labor efficiency variance. d. Compute the direct labor rate variance. e. Compute the variable overhead efficiency variance. f. Compute the variable overhead rate variance. 16-81

145. Igel Corporation makes a product with the following standard costs: The company reported the following results concerning this product in September. The company applies variable overhead on the basis of direct labor-hours. The direct materials purchases variance is computed when the materials are purchased. Required: a. Compute the materials quantity variance. b. Compute the materials price variance. c. Compute the labor efficiency variance. d. Compute the direct labor rate variance. e. Compute the variable overhead efficiency variance. f. Compute the variable overhead rate variance. 16-82

146. Schlager Corporation makes a product with the following standard costs: The company reported the following results concerning this product in August. The company applies variable overhead on the basis of direct labor-hours. The direct materials purchases variance is computed when the materials are purchased. Required: a. Compute the materials quantity variance. b. Compute the materials price variance. c. Compute the labor efficiency variance. d. Compute the direct labor rate variance. e. Compute the variable overhead efficiency variance. e. Compute the variable overhead rate variance. 16-83

147. Leerar Corporation makes a product with the following standard costs: In December the company produced 4,200 units using 34,870 ounces of the direct material and 1,900 direct labor-hours. During the month, the company purchased 39,700 ounces of the direct material at a total cost of $111,160. The actual direct labor cost for the month was $35,530 and the actual variable overhead cost was $3,990. The company applies variable overhead on the basis of direct labor-hours. The direct materials purchases variance is computed when the materials are purchased. Required: a. Compute the materials quantity variance. b. Compute the materials price variance. c. Compute the labor efficiency variance. d. Compute the direct labor rate variance. e. Compute the variable overhead efficiency variance. f. Compute the variable overhead rate variance. 16-84

148. Diamond Company produces a single product. The company has set the following standards for materials and labor: During the past month, the company purchased 7,000 pounds of direct materials at a cost of $17,500. All of this material was used in the production of 1,300 units of product. Direct labor cost totaled $36,750 for the month The following variances have been computed: Required: 1. For direct materials: a. Compute the standard price per pound of materials. b. Compute the standard quantity allowed for materials for the month's production. c. Compute the standard quantity of materials allowed per unit of product. 2. For direct labor: a. Compute the actual direct labor cost per hour for the month. b. Compute the labor rate variance. 16-85

149. In the new cost management scheme of things, what are some of the disadvantages of the traditional standard cost system (list at least four)? 16-86

150. Slyman Manufacturing Inc. has developed the following standards for one of its products. The materials are not substitutable. The records for March showed the following actual results: Required: (1) Calculate the following variances: (a) Material purchase price variance for material 1. (b) Material quantity variance for material 1. (c) Material purchase price variance for material 2. (d) Material quantity variance for material 2. (e) Labor rate variance. (f) Labor efficiency variance. 2) Give at least one possible cause for each of the following variances: (a) material 2 quantity variance. (b) labor rate variance. (c) labor efficiency variance. 16-87

151. Ruth Industries developed the following standards for one of its products: Actual results for September were: Required: (1) Calculate the following variances: (a) Material purchase price variance. (b) Material quantity variance. (c) Labor rate variance. (d) Labor efficiency variance. (2) Why would it be inappropriate to calculate the Material price variance at the time the material is used; might there be a situation when it might be all right to do so? 16-88

152. O'Malley Company manufactures a single product. The following standards have been developed for it: During May, the following actual activities occurred: Material purchased, 12,000 pounds for $45,600; material used in the production of 2,000 units of product, 13,000 pounds; direct labor, 3,500 hours costing $56,000. Required: (1) Compute the following variances: (a) material quantity variance. (b) labor rate variance. (c) labor efficiency variance. 2) Give one possible explanation for each of the 3 variances computed. 16-89

Chapter 16 Fundamentals of Variance Analysis Answer Key True / False Questions 1. In essence, the terms "master budget" and "operating budget" mean the same thing and can be used interchangeably. FALSE The operating budget is part of the master budget, along with financial budgets. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Using Budgets for Performance Evaluation 2. Variances are the difference between actual results and budgeted results. TRUE This is a definition of a variance. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Using Budgets for Performance Evaluation 16-90

3. In general, and holding all other things constant, an unfavorable variance decreases operating profits. TRUE Just as a favorable variance increases profits, an unfavorable variance decreases profits. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Profit Variance 4. A favorable variance is not necessarily good, and an unfavorable variance is not necessarily bad. TRUE A favorable or unfavorable variance in one period may have long term impacts in the opposite direction. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Profit Variance 5. The terms "master budget" and "flexible budget" mean the same thing and can be used interchangeably. FALSE A master budget and a static budget mean the same thing. Blooms: Remember 16-91

Difficulty: 1 Easy Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 6. A flexible budget adjusts the static budget to reflect the actual activity level achieved during the period. TRUE This is a basic principle of a flexible budget. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 7. If the budgeted activity level is greater than the actual activity level, then the total budgeted costs of the master budget will be greater than the total budgeted costs of the flexible budget. TRUE The master budget is based on the budgeted activity level, while the flexible budget is based on the actual activity level. Blooms: Remember Difficulty: 3 Hard Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 16-92

8. The difference between operating profits in the master budget and operating profits in the flexible budget is called a sales price variance. FALSE This is a sales activity variance. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-03 Compute and interpret the sales activity variance. Topic Area: Sales Activity Variance 9. The sales activity variance is the result of a difference between budgeted units sold and actual units sold. TRUE This is the definition of the sales activity variance. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-03 Compute and interpret the sales activity variance. Topic Area: Sales Activity Variance 10. The sales price variance is the actual selling price per unit times the difference between budgeted number of units and the actual number of units sold. FALSE Sales price variance is the difference between actual and budgeted selling price times the actual number sold. Blooms: Remember 16-93

Difficulty: 1 Easy Learning Objective: 16-04 Prepare and use a profit variance analysis. Topic Area: Sales Price Variance 11. Production cost variances are input variances, while sales activity variances are output variances. TRUE Costs are based on inputs, revenues are based on outputs. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-04 Prepare and use a profit variance analysis. Topic Area: Variable Production Cost Variances 12. The flexible and master budget amounts are the same for fixed marketing and administrative costs. TRUE Fixed costs do not change with changes in activity level within the relevant range. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-04 Prepare and use a profit variance analysis. Topic Area: Marketing and Administrative Variances 16-94

13. The standard cost for a unit of output is the standard price per unit of input times the standard number of inputs per one unit of output. TRUE This is the definition of standard cost. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-04 Prepare and use a profit variance analysis. Topic Area: Variable Production Costs 14. Both the actual material used and the standard quantity allowed for material is based on the actual output attained. TRUE Standard quantity allowed = standard per unit actual output. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 15. It is possible to have a favorable direct material price variance and an unfavorable direct material efficiency variance. TRUE Purchasing a lower quality material will yield a favorable price variance (since it is less costly) but may result in an unfavorable efficiency because of higher than expected waste due to poor quality. 16-95

Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 16. The materials price variance is computed by multiplying the difference between the actual price and the standard price by the actual quantity of materials used in production. FALSE The materials price variance is computed by multiplying the difference between the actual and standard price by the actual quantity of materials purchased. AACSB: Reflective Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 17. The direct labor efficiency variance can be the result of poor supervision or poor scheduling by divisional managers. TRUE Poor scheduling may cause wasted time. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 16-96

18. Variance analysis for fixed production costs is virtually the same as for variable production costs. FALSE There are no efficiency variances for fixed production costs. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Fixed Cost Variances 19. The budget (or spending) variance for fixed production costs is the difference between the actual fixed costs and the budgeted fixed costs on the master budget. TRUE This is the definition of the budget/spending variance. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Fixed Cost Variances 20. The production volume variance is the difference between fixed costs on the flexible budget and the fixed costs on the master budget. FALSE The production volume variance is the difference between the fixed costs on the flexible budget and the fixed overhead applied to production. Blooms: Remember 16-97

Difficulty: 1 Easy Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Absorption Costing: The Production Volume Variance Multiple Choice Questions 21. Which of the following statements is (are) true? (A) A favorable variance is not necessarily good, and an unfavorable variance is not necessarily bad. (B) The master budget includes operating budgets (e.g., production budget) and financial budgets (e.g., cash budget). A. Only A is true. B. Only B is true. C. Both A and B are true. D. Neither A nor B is true. Both statements are true. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Profit Variance 16-98

22. An operating budget would not include a: A. cash budget. B. sales budget. C. labor budget. D. production budget. E. operating expense budget. The cash budget is a financial budget. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Using Budgets for Performance Evaluation 23. A variance can best be described as: A. benchmarks common to other firms in the same industry. B. differences between planned results and actual results. C. useful for performance evaluations but not making decisions. D. generally accepted accounting principles when standards are used. Variances are internal to a company and are useful for decision making as well as performance evaluation. The statement is a basic explanation of a variance. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Profit Variance 16-99

24. The most fundamental variance analysis compares: A. standard material prices with actual material prices. B. standard direct labor rates with actual direct labor rates. C. budgeted sales revenue with actual sales revenue. D. budgeted operating income with actual operating income. The most fundamental variance is comparing incomes rather than components of income. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Profit Variance 25. In general, the terms favorable and unfavorable are used to describe the effect of a variance on: A. net income. B. sales revenue. C. production costs. D. operating expenses. E. balance sheet. What impact does a variance have on profit? Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Profit Variance 16-100

26. Which of the following statements regarding variances is (are) false? (A) In general and holding all other things constant, an unfavorable variance decreases operating profits. (B) A favorable variance is not always good, and an unfavorable variance is not always bad. A. Only A is false. B. Only B is false. C. Both A and B are false. D. Neither A nor B is false. Both statements are true. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Profit Variance 27. Which of the following variances will always be favorable when actual sales exceeds budgeted sales? A. Variable cost. B. Fixed cost. C. Sales activity. D. Operating profit. E. Contribution margin. The question asks about sales; therefore, the answer should be expressed in terms of sales. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Profit Variance 16-101

28. The purpose of the flexible budget is to: A. allow management some latitude in meeting goals. B. eliminate cyclical fluctuations in production reports by ignoring variable costs. C. compare actual and budgeted results at virtually any level of production. D. reduce the total time in preparing the annual budget. The budget is restated to actual output level, along with the variable costs, to make the budget and actual results comparable. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 29. The basic difference between a master budget and a flexible budget is that a: A. flexible budget considers only variable costs but a master budget considers all costs. B. flexible budget allows management latitude in meeting goals whereas a master budget is based upon a fixed standard. C. master budget is for an entire production facility but a flexible budget is applicable to single departments only. D. master budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range. The master budget is a benchmark, calculated at one specific level of activity, which allows the flexible budget tool to be used, adjusting variable costs, to allow for a comparison of actual and budget amounts. Blooms: Remember Difficulty: 2 Medium 16-102

Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 30. The slope of the flexible budget-line is the: A. selling price per unit. B. variable cost per unit. C. fixed cost per unit. D. contribution margin per unit. E. operating profit per unit. The slope of the line indicates the additional variable cost per unit as additional units are sold. The line itself is considered the total cost curve. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 31. The intercept of the flexible budget-line is total: A. sales. B. variable costs. C. fixed costs. D. contribution margin. E. assets. This is a carry-over from CVP. The fixed cost is the a intercept on the y axis. Even at zero activity fixed cost are incurred. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-02 Develop and use flexible budgets. 16-103

Topic Area: Flexible Budgeting 32. When using a flexible budget, what will happen to variable costs on a per-unit basis as production increases within the relevant range? A. Decrease. B. Increase. C. Remain unchanged. D. Fixed costs are not considered in flexible budgeting. The cost behavior of a variable unit cost is to remain constant within the relevant range. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 33. The difference between operating profits in the master budget and operating profits in the flexible budget is called: A. sales activity variance. B. flexible budget variance. C. production volume variance. D. total operating profit variance. This is the definition of sales activity variance. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-03 Compute and interpret the sales activity variance. Topic Area: Sales Activity Variance 16-104

34. Which of the following statements is (are) true regarding the sales activity variance? (A) The sales activity variance is the actual selling price per unit times the difference between the budgeted units and actual units. (B) If the sales activity variance for sales revenue is unfavorable, then the contribution margin sales activity variance will be unfavorable. A. Only A is true. B. Only B is true. C. Neither A and B is true. D. Both A and B are true. (A) The sales activity variance uses budgeted selling price. (B) is true a unfavorable variance is the result of actual sales being less than budgeted. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-03 Compute and interpret the sales activity variance. Topic Area: Sales Activity Variance 35. The sales price variance is the difference between the actual sales revenues and the: A. budgeted selling price multiplied by the budgeted number of units sold. B. budgeted selling price multiplied by the actual number of units sold. C. actual selling price multiplied by the budgeted number of units sold. D. actual selling price multiplied by the actual number of units sold. The sales price variance is derived from the difference between the actual revenue and budgeted selling price multiplied by the actual number of units sold. Blooms: Remember Difficulty: 2 Medium 16-105

Learning Objective: 16-04 Prepare and use a profit variance analysis. Topic Area: Sales Price Variance 36. If the total materials variance for a given operation is favorable, why must this variance be further evaluated as to price and usage? A. There is no need to further evaluate the total materials variance if it is favorable. B. Generally accepted accounting principles require that all variances be analyzed in three stages. C. All variances must appear in the annual report to equity owners for proper disclosure. D. A further evaluation lets management evaluate the activities of the purchasing and production functions. A breakdown between price and usage is necessary because the remedies are different, and it's important to determine whether both components or only one component needs corrective action. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Cost Variance Analysis 37. Which department is customarily held responsible for an unfavorable materials quantity variance? A. Quality control. B. Purchasing. C. Engineering. D. Production. The production department may initially be looked at for correction of this variance, but the cause might be a result of purchasing buying inferior materials. 16-106

Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 38. When are the following direct materials variances ideally reported? A. Option a B. Option b C. Option c D. Option d Most frequently, material price variance is recorded when materials are received followed in frequency by when shipped (F.O.B point of origin), and then when used. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 16-107

39. In the general model, a price variance is calculated as: A. (AP AQ) - (AP SQ) B. (AP SQ) - (SP SQ) C. (AP AQ) - (SP AQ) D. (AP AQ) - (SP SQ) (AP AQ) - (SP AQ) or (AP - SP) AQ Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: General Model 40. In the general model, an efficiency variance is calculated as: A. (SP AQ) - (SP SQ) B. (AP SQ) - (SP SQ) C. (AP AQ) - (SP SQ) D. (AP AQ) - (SP AQ) (SP AQ) - (SP SQ) or SP (AQ - SQ) Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: General Model 16-108

41. Which of the following direct labor variances uses the standard hours allowed for the actual number of units produced? A. Option a B. Option b C. Option c D. Option d The efficiency variance is derived by comparing standard price ( SP ) multiplied by actual quantity of input ( AQ ), with standard price ( SP ) multiplied by standard quantity of input allowed for actual good output produced ( SQ ). Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 16-109

42. Which of the following is the most probable reason a company would experience an unfavorable labor rate variance and a favorable labor efficiency variance? A. The mix of workers assigned to the particular job was heavily weighted towards the use of higher paid experienced individuals. B. The mix of workers assigned to the particular job was heavily weighted towards the use of new relatively low paid unskilled workers. C. Because of the production schedule, workers from other production areas were assigned to assist this particular process. D. Defective materials caused more labor to be used in order to produce a standard unit. The average pay rate is higher than standard, but more experienced workers are more efficient since they have more experience, are more intelligent, or have more training. Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 43. Which variance will be unfavorable due to employees working more hours than allowed for the actual number of units produced? A. Price (rate). B. Efficiency. C. Sales activity. D. Production volume. Efficiency variance is the difference of actual hours and standard hours. Blooms: Apply Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. 16-110

Topic Area: Direct Labor 44. In general, the direct labor efficiency variance is the responsibility of the: A. purchasing agent. B. company president. C. production manager. D. industrial engineering. E. marketing department. The production manager would be the first place to turn followed by the purchasing manager (inferior material), the facilities manager (dangerous or hostile work environment. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 45. The variable overhead price variance is due to: A. price items only. B. efficiency items only. C. both price and efficiency items. D. neither price or efficiency items. The main focus is price of actual items versus the budgeted price, but price can indirectly be impacted by efficiency. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Production Overhead 16-111

46. If overhead is applied to production using direct labor hours and the direct labor efficiency variance is favorable, then the variable overhead efficiency variance is: A. favorable. B. unfavorable. C. either favorable or unfavorable. D. neither favorable nor unfavorable. If labor and overhead are both measured in actual hours of labor the two efficiency variances move in the same direction. Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Production Overhead 47. The production volume variance is computed by the difference between the: A. actual fixed overhead and applied fixed overhead. B. actual fixed overhead and budget at actual level of activity reached. C. actual fixed overhead and budget at denominator level of activity planned. D. budget at actual levels of activity reached and fixed overhead applied. Production volume = budget - applied. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Absorption Costing: The Production Volume Variance 16-112

48. Which of the following is not an alternative name for the production volume variance? A. Capacity variance. B. Idle capacity variance. C. Denominator variance. D. Fixed overhead efficiency variance. The production volume variance is not related to efficiency (volume flowing through the facility) it is related to the capacity of the facility. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Absorption Costing: The Production Volume Variance 49. The production volume variance must be computed when a company uses: A. activity-based costing. B. process costing. C. job-order costing. D. full-absorption costing. E. variable costing. Full absorption costing treats fixed production overhead as a product cost and applies it to production. Variable costing treats fixed costs as period costs. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Absorption Costing: The Production Volume Variance 16-113

50. Which of these variances is least significant for cost control? A. Labor price variance. B. Material quantity variance. C. Fixed overhead price variance. D. Production volume variance. E. Labor efficiency variance. The production volume variance is created when actual outputs did not match the planned outputs. This is less controllable than inputs. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Performance Measurement and Control in a Cost Center 51. A debit balance in the labor-efficiency variance account indicates that: A. standard hours exceed actual hours. B. actual hours exceed standard hours. C. standard rate and standard hours exceed actual rate and actual hours. D. actual rate and actual hours exceed standard rate and standard hours. A debit balance would be an unfavorable variance. Since it is efficiency, actual hours must have exceeded standard hours. Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Appendix: Recording Costs in a Standard Cost System 16-114

52. If materials are carried in the direct materials inventory account at standard cost, then it is reasonable to assume that the: A. raw materials inventory account is understated. B. price variance is recognized when materials are purchased. C. company does not follow generally accepted accounting principles. D. price variance is recognized when materials are placed into production. If materials are at standard then the price variance has been recognized when inventory has been shipped by the supplier with terms of F.O.B point of origin, or inventory has been physically received into Raw Materials Inventory. Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Appendix: Recording Costs in a Standard Cost System 53. The Redrock Company uses flexible budgeting for cost control. Redrock produced 10,800 units of product during October, incurring indirect material costs of $13,000. Its master budget for the reflected indirect material costs of $180,000 at a production volume of 144,000 units. What was the flexible budget variance for the indirect material costs in October? A. $1,100 favorable. B. $1,100 unfavorable. C. $2,000 favorable. D. $2,000 unfavorable. E. $500 favorable. ($180,000/144,000) 10,800 = $13,500; $13,500-13,000 = $500 favorable Blooms: Analyze Difficulty: 2 Medium 16-115

Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 54. What is the actual sales revenue? A. $156,000. B. $169,000. C. $180,000. D. $191,000. Solve for variable marketing & administrative costs $30,000 - $4,000 + $3,250 = $29,250. Add $29,250 to actual contribution margin of $52,000 and actual variable costs of $87,750 = sales revenue of $169,000 Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Sales Activity Variance 16-116

55. What is the sales revenue in the flexible budget? A. $139,000. B. $156,000. C. $169,000. D. $180,000. $169,000 (actual sales from previous question) - $13,000 = $156,000 Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Sales Activity Variance 16-117

56. What is the flexible budget contribution margin? A. $39,000. B. $45,000. C. $52,000. D. $58,000. $156,000 - $91,000 - ($29,250 - $3,250 = $26,000) = $39,000 Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Sales Activity Variance 16-118

57. What is the master budget sales revenue? A. $124,000. B. $148,000. C. $156,000. D. $180,000. ($156,000/13,000) = $12 selling price; $12 (13,000 units + 2,000 units) = $180,000 Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Sales Activity Variance 16-119

58. What is the master budget contribution margin? A. $52,000. B. $47,500. C. $45,000. D. $39,000. $180,000 - $105,000 - $30,000 = $45,000 Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Sales Activity Variance 16-120

59. What is the activity variance for the variable manufacturing costs? A. $4,000. B. $14,000. C. $24,000. D. $34,000. $105,000 - $91,000 = $14,000 Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-03 Compute and interpret the sales activity variance. Topic Area: Sales Activity Variance 16-121

60. Is the activity variance for the variable manufacturing costs favorable or unfavorable? A. Favorable. B. Unfavorable. Less was spent than was budgeted so the variance is favorable. Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-03 Compute and interpret the sales activity variance. Topic Area: Sales Activity Variance 16-122

69. The following information summarizes the standard cost for producing one metal tennis racket frame. In addition, the variances for one month's production are given. Assume that all inventory accounts have zero balances at the beginning of the month. What were the actual direct labor hours worked during the month? A. 5,000. B. 4,800. C. 4,200. D. 4,000. E. 3,400. $10,920 + $2,080 = $13,000 $2.60 = 5,000 direct labor hours Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 16-131

70. The following information summarizes the standard cost for producing one metal tennis racket frame. In addition, the variances for one month's production are given. Assume that all inventory accounts have zero balances at the beginning of the month. What was the actual quantity of materials used during the month? A. 2,156. B. 2,100. C. 2,225. D. 1,975. $8,400 + $500 = $8,900 $4.00 = 2,225 Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 16-132

72. Data on Goodman Company's direct-labor costs are given below: What was Goodman's actual direct-labor rate? A. $3.60. B. $3.80. C. $4.00. D. $5.80. $110,200/29,000 = $3.80 Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 16-134

73. Data on Goodman Company's direct-labor costs are given below: What was Goodman's standard direct-labor rate? A. $3.54. B. $3.80. C. $4.00. D. $5.80. (29,000-30,000) SR = 4,000; SR = $4.00 Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 74. Blue Company produces Trivets. Based on its master budget, the company should produce 1,000 Trivets each month, working 2,500 direct labor hours. During May, only 900 Trivets were produced. The company worked 2,400 direct labor hours. The standard hours allowed for May production would be: A. 2,500 hours. B. 2,400 hours. C. 2,250 hours. D. 1,800 hours. 2,500/1,000 = 2.5 hours per unit; 2.5 900 = 2,250 16-135

Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 75. Information on Barber Company's direct labor costs for the month of January is as follows: What is Barber's direct labor price (rate) variance? A. $17,250. B. $20,700. C. $18,750. D. $21,000. Actual rate = ($241,500/34,500) = $7/hr; (34,500-35,000) SR = 3,200; SR = $6.40 per hour; ($7 - $6.40) 34,500 = $20,700 unfavorable Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 16-136

76. Information on Barber Company's direct labor costs for the month of January is as follows: Is the direct labor price (rate) variance favorable or unfavorable? A. Favorable. B. Unfavorable. Actual wage rate was higher than standard so the variance is unfavorable. Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 77. The following data pertains to the direct materials cost for the month of October: What is the direct materials efficiency (quantity) variance? A. $950 favorable. B. $950 unfavorable. C. $1,000 favorable. D. $1,000 unfavorable. E. $50 unfavorable. (5,050-5,000) $20 = $1,000 unfavorable 16-137

Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 78. The Landry Company has developed standards for labor. During June, 75 units were scheduled and 100 were produced. Data related to labor are: What is the labor rate variance for June? A. $30 unfavorable. B. $31 favorable. C. $31 unfavorable. D. $30 favorable. [($1,209/310) = $3.90 - $4.00] 310 = $31 favorable Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 16-138

79. Given the following information in standard costing: What is the total direct labor cost variance? A. $3,160 favorable. B. $3,160 unfavorable. C. $2,360 favorable. D. $2,360 unfavorable. (15,800 $4.00) - (15,800 $4.20) = $3,160 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 16-139

80. Information for Nighttime Company's direct labor cost for February is as follows: What were the standard direct labor hours for February? A. 70,000. B. 69,000. C. 72,000. D. 71,400. (69,000 - SH) SR = $6,400 favorable; [($483,000/69,000) - SR] 69,000 = $41,400 unfavorable; SR = $6.40; SH = 70,000 Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 16-140

81. What is the fixed overhead spending (budget) variance? A. $200. B. $400. C. $300. D. $240. $3,800 - $4,000 = $200 favorable Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Fixed Cost Variances 82. Is the fixed overhead spending (budget) variance favorable or unfavorable? A. Favorable. B. Unfavorable. Less was spent than budgeted so the variance is favorable. 16-141

Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Fixed Cost Variances 83. What is the production volume variance? A. $200. B. $400. C. $300. D. $240. $4,000 - ($4 900) = $400 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Absorption Costing: The Production Volume Variance 16-142

84. Is the production volume variance favorable or unfavorable? A. Favorable. B. Unfavorable. Fewer units were produced than budgeted. Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Absorption Costing: The Production Volume Variance 16-143

85. Dickey Company had total underapplied overhead of $15,000. Additional information is as follows: What is the actual total overhead for the period? A. $50,000. B. $45,000. C. $80,000. D. $87,000. ($30,000 + $42,000) + $15,000 = $87,000 Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Fixed Cost Variances 16-144

86. What is the fixed overhead spending (budget) variance for May? A. $1,000 unfavorable. B. $3,000 unfavorable. C. $2,000 unfavorable. D. $2,000 favorable. E. $3,000 favorable. $48,000 - $45,000 = $3,000 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Fixed Cost Variances 16-145

87. What is the production volume variance for May? A. $2,000. B. $3,000. C. $6,000. D. $8,000. E. $9,000. $45,000 - [($45,000/15,000) 12,000] = $9,000 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Absorption Costing: The Production Volume Variance 88. Is the production volume variance favorable or unfavorable? A. Favorable. B. Unfavorable. Standard hours were less than denominator hours. 16-146

Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Absorption Costing: The Production Volume Variance 89. A standard cost system may be used in: (CPA adapted) A. job-order costing but not process costing. B. either job-order costing or process costing. C. process costing but not job-order costing. D. neither process costing nor job-order costing. Standard costing is an option in either. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Using Budgets for Performance Evaluation 16-147

90. When a manager is concerned with monitoring total cost, total revenue, and net profit conditioned upon the level of productivity, an accountant should normally recommend: (CPA adapted) A. Option a B. Option b C. Option c D. Option d Standard costing focuses on costs only; flexible budgeting focuses on both costs & revenues and thus profits. Blooms: Apply Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Using Budgets for Performance Evaluation 16-148

91. In analyzing company operations, the controller of the Jason Corporation found a $250,000 favorable flexible budget revenue variance. The variance was calculated by comparing the actual results with the flexible budget. This variance can be wholly explained by: (CMA adapted) A. the total flexible budget variance. B. the total static budget variance. C. changes in unit selling prices. D. changes in the number of units sold. Since the flexible budget is based on actual output, the variation could only come from the selling price. Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-03 Compute and interpret the sales activity variance. Topic Area: Flexible Budgeting 16-149

92. The standard unit cost is used in the calculation of which of the following variances? (CPA adapted) A. Option a B. Option b C. Option c D. Option d The standard unit cost is used for both price and usage variances. The price variance emphasizes the standard price; the usage uses both standard usage and price. Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 16-150

93. A favorable materials price variance coupled with an unfavorable materials usage variance would most likely result from: (CMA adapted) A. machine efficiency problems. B. product mix production changes. C. labor efficiency problems. D. the purchase of lower-than-standard-quality materials. Lower material price may be due to lower quality, causing a higher quantity to be used. Efficiency and mix do not depend on material prices. Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 94. Excess direct labor wages resulting from overtime premium will be disclosed in which type of variance? (CPA adapted) A. Yield. B. Quantity. C. Labor efficiency. D. Labor rate. Overtime just changes the wage rate so it would be the labor rate. Workers are not necessarily more or less efficient when working overtime. Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 16-151

95. The budget for the month of May was for 9,000 units at a direct materials cost of $15 per unit. Direct labor was budgeted at 45 minutes per unit for a total of $81,000. Actual output for the month was 8,500 units with $127,500 in direct materials and $77,775 in direct labor expense. The direct labor standard of 45 minutes was obtained throughout the month. Variance analysis of the performance for the month of May would show a(n): (CMA adapted) A. favorable materials efficiency (quantity) variance of $7,500. B. favorable direct labor efficiency variance of $1,275. C. unfavorable direct labor efficiency variance of $1,275. D. unfavorable direct labor price (rate) variance of $1,275. There is no information to compute material variances. Since the labor hour/unit did not change, there is no labor efficiency. The labor rate variance is: $81,000/9,000 = $9.00 standard labor cost per unit; $77,775 - ($9 8,500) = $1,275 unfavorable direct labor rate variance Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Cost Variance Analysis 16-152

96. Tub Company uses a standard cost system. The following information pertains to direct labor for product B for the month of October: What were the actual hours worked for the month of October? A. 1,800. B. 1,810. C. 2,190. D. 2,200. (AH - 2,000) $8.00 = $1,600 unfavorable; AH = 2,200 Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Cost Variance Analysis 97. The fixed factory overhead application rate is a function of a predetermined activity level. If standard hours allowed for good output equal this predetermined activity level for a given period, the volume variance will be: (CPA adapted) A. zero. B. favorable. C. unfavorable. D. either favorable or unfavorable, depending on the budgeted overhead. There is no volume variance when output = planned 16-153

Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Absorption Costing: The Production Volume Variance 98. Which one of the following variances is of least significance from a behavioral control perspective? (CMA adapted) A. Unfavorable materials quantity variance amounting to 20% of the quantity allowed for the output attained. B. Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the output attained. C. Favorable materials price variance obtained by purchasing raw materials from a new vendor. D. Fixed factory overhead volume variance resulting from management's decision midway through the fiscal year to reduce its budgeted output by 20%. Fixed production volume variances are affected by changes in production and in general are not controllable to the manager. Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Performance Measurement and Control in a Cost Center 16-154

99. Which of the following organizational policies is most likely to result in undesirable managerial behavior? (CMA adapted) A. Patel Chemicals sponsors television coverage of cricket matches between national teams representing India and Pakistan. The expenses of such media sponsorship are not allocated to its various divisions. B. Joe Walk, the chief executive officer of Eagle Rock Brewery, wrote a memorandum to his executives stating, "Operating plans are contracts and they should be met without fail." C. The budgeting process at Madsen Manufacturing starts with operating managers providing goals for their respective departments. D. Fullbright Lighting holds quarterly meetings of departmental managers to consider possible changes in the budgeted targets due to changing conditions. E. At Fargo Transportation, managers are expected to provide explanations for variances from the budget in their departments. (a) The television sponsorship costs are not controllable by the divisions. (b) Operating plans need to be adjusted for actual output. Treating them as static contracts may cause managers to play games. (c) Participative budgeting is a good thing. (d) Participating in changing quarterly targets will keep the budgets current. (e) Explaining variances will not lead to undesirable behavior. Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Using Budgets for Performance Evaluation 16-155

100. Based on past experience, a company has developed the following budget formula for estimating its shipping expenses. The company's shipments average 12 lbs. per shipment: Shipping costs = $16,000 + ($0.50 lbs. shipped). The planned activity and actual activity regarding orders and shipments for the current month are given in the following schedule: The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation would be: (CMA adapted) A. $20,680. B. $20,920. C. $20,800. D. $22,150. $16,000 + ($0.50 12,300) = $22,150 Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 16-156

101. When computing standard cost variances, the difference between actual and standard price multiplied by actual quantity yields a(n): (CMA adapted) A. combined price and quantity variance. B. efficiency variance. C. price variance. D. quantity variance. Materials price variance = AQ(AP - SP) AACSB: Reflective Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 16-157

103. Tower Company planned to produce 3,000 units of its single product, Titactium, during November. The standards for one unit of Titactium specify six pounds of materials at $0.30 per pound. Actual production in November was 3,100 units of Titactium. There was a favorable materials price variance of $380 and an unfavorable materials quantity variance of $120. Based on these variances, one could conclude that: (CMA adapted) A. more materials were purchased than were used. B. more materials were used than were purchased. C. the actual cost per pound for materials was less than the standard cost per pound. D. the actual usage of materials was less than the standard allowed. See calculation below. Solution: Materials quantity variance = SP(AQ - SQ) (SP x AQ - $5,580*) = $120 U SP x AQ = $5,580 + $120 = $5,700 * 6 pounds x 3,100 units x $0.30 = $5,580 Materials price variance = AQ(AP - SP) (AQ x AP - $5,700) = $(380) AQ x AP = $5,700 - $380 = $5,320 AACSB: Reflective Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 16-159

104. An unfavorable direct labor efficiency variance could be caused by: (CMA adapted) A. an unfavorable materials quantity variance. B. an unfavorable variable overhead rate variance. C. a favorable materials quantity variance. D. a favorable variable overhead rate variance. Labor efficiency variance = SR(AH - SH) AACSB: Reflective Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Labor 105. Variable manufacturing overhead is applied to products on the basis of standard direct laborhours. If the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be: (CMA adapted) A. favorable. B. unfavorable. C. either favorable or unfavorable. D. zero. See solution below. Solution: Labor efficiency variance = SR(AH - SH) Variable overhead efficiency variance = SR(AH - SH) AACSB: Reflective Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. 16-160

Topic Area: Direct Labor, Variable Production Overhead Essay Questions 16-161

Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 16-163

107. The Kessler Company has the following information pertaining to the month of March: Required: Prepare a performance report for March including columns for the (a) actual results, (b) flexible budget, (c) flexible budget variance, (d) master budget, and (e) sales activity variance. Feedback: Budgeted sales volume = Actual volume + (Sales Activity Variance-Revenue/Selling price) = 21,000 + (300,000/100) = 24,000 units Master budget sales revenue = 24,000 $100 = $2,400,000 Master budget fixed cost = $2,400,000-1,680,000 = CM $720,000-220,000 profit = $500,000 Flexible budget sales revenue = 21,000 $100 = $2,100,000 Actual sales = $2,100,000 - $84,000 sales price variance = $2,016,000 Variable cost/unit = $1,680,000/24,000 = $70 21,000 units = $1,470,000 Actual variable costs = $2,016,000 revenue - $516,000 CM = $1,500,000 Blooms: Analyze Difficulty: 3 Hard 16-164

Learning Objective: 16-02 Develop and use flexible budgets. Topic Area: Flexible Budgeting 16-165

a. Iron: $350 unfavorable; Copper: $90 unfavorable b. Iron: $400 unfavorable; Copper: $600 unfavorable c. $280 unfavorable d. $1,400 unfavorable Feedback: a. Iron: $8,750 - ($2.00 4,200) = $350 unfavorable; Copper: $7,890 - ($3.00 2,600) = $90 unfavorable b. Iron: [4,200 - (5 800)] $2.00 = $400 unfavorable; Copper: [2,600 - (3 800)] $3.00 = $600 unfavorable c. $24,080 - ($7.00 3,400) = $280 unfavorable d. [3,400 - (4 800)] $7.00 = $1,400 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Cost Variance Analysis 16-167

c. Fixed overhead spending (budget) variance. d. Production volume variance. a. $200 favorable b. $600 unfavorable c. $800 unfavorable d. $1,600 unfavorable Feedback: a. $10,000 - ($3.00 3,400) = $200 favorable b ($3.00 3,400) - [$3.00 (4 800)] = $600 unfavorable c. $8,800 - ($2.00 4,000) = $800 unfavorable d. ($2.00 4,000) - ($2.00 3,200) = $1,600 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Variable Production Overhead, Fixed Cost Variances 16-169

Compute each of the following variances, showing all your work. Be sure to indicate whether the variances are favorable or unfavorable. a. Direct materials price variance. b. Direct material efficiency (quantity) variance. c. Direct labor rate variance. d. Direct labor efficiency variance. e. Variable overhead spending variance. f. Variable overhead efficiency variance. g. Fixed overhead spending (budget) variance. h. Production volume variance. a. $208 unfavorable b. $300 favorable c. $350 unfavorable d. $1,400 favorable e. $6,470 unfavorable f. $600 favorable g. $800 unfavorable h. $800 unfavorable Feedback: a. ($3.08 - $3.00) 2,600 = $208 unfavorable b. [2,600 - (3 900)] $3.00 = $300 favorable c. [($7.00 2,000) + ($7.25 1,400)] - ($7.00 3,400) = $350 unfavorable d. [3,400 - (4 900)] $7.00 = $1,400 favorable e. $16,670 - ($3.00 3,400) = $6,470 unfavorable f. ($3.00 3,400) - [$3.00 (4 900)] = $600 favorable g. $8,800 - ($2.00 4,000) = $800 unfavorable h. ($2.00 4,000) - [($2.00 (4 900)] = $800 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Variable Cost Variance Analysis, Fixed Cost Variances 16-171

111. The XYZ Company uses a standard cost accounting system and estimates production for the year to be 60,000 units. At this volume, the company's variable overhead costs are $0.50 per direct labor hour. The company's single product has a standard cost of $30.00 per unit. Included in the $30.00 is $13.20 for direct materials (3 yards) and $12.00 of direct labor (2 hours). Production information for the month of March follows: Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the direct material price variance. b. Compute the direct material efficiency variance. c. Compute the direct labor price (rate) variance. d. Compute the direct labor efficiency variance. a. $7,400 unfavorable b. $2,200 unfavorable c. $5,800 unfavorable d. $2,400 favorable Feedback: a. $88,800 - [($13.20/3) 18,500] = $88,800 - [$4.40 18,500] = $7,400 unfavorable b. [18,500 - (3 6,000)] $4.40 = $2,200 unfavorable c. $75,400 - [$6.00 ($75,400/$6.50)] = $5,800 unfavorable d. [11,600 - (2 6,000)] $6.00 = $2,400 favorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Cost Variance Analysis 16-172

112. The XYZ Company uses a standard cost accounting system and estimates production for the year to be 60,000 units. At this volume, the company's variable overhead costs are $0.50 per direct labor hour. The company's single product has a standard cost of $30.00 per unit. Included in the $30.00 is $13.20 for direct materials (3 yards) and $12.00 of direct labor (2 hours). Production information for the month of March follows: Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the predetermined overhead rate/hr used for the year. b. Compute the budgeted fixed costs for the month. c. Compute the variable overhead spending variance. d. Compute the variable overhead efficiency variance. e. Compute the fixed overhead spending (budget) variance. f. Compute the production volume variance. a. $2.40 per DLH b. $19,000 c. $580 unfavorable d. $200 favorable e. $1,400 unfavorable f. $3,800 favorable Feedback: a. $30.00 - $13.20 - $12.00 = $4.80/unit or $2.40 per DLH b. $4.80 60,000 = $288,000; Total OH; $0.50 (2 60,000) = $60,000 Variable OH; Budgeted fixed OH = $288,000 - $60,000 = $228,000; per month $228,000/12 = $19,000 c. $6,380 - ($0.50 11,600) = $580 unfavorable d. ($0.50 11,600) - [$0.50 (2 6,000)] = $200 favorable e. $20,400 - ($228,000/12) = $1,400 unfavorable 16-173

f. ($228,000/12) - [($228,000/120,000) (2 6,000)] = $3,800 favorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Variable Cost Variance Analysis, Fixed Cost Variances 16-174

113. The XYZ Company uses a standard cost accounting system and estimates production for the year to be 60,000 units. At this volume, the company's variable overhead costs are $0.50 per direct labor hour. The company's single product has a standard cost of $30.00 per unit. Included in the $30.00 is $13.20 for direct materials (3 yards) and $12.00 of direct labor (2 hours). Production information for the month of March follows: Required: Prepare the journal entries to record the following: a. Purchase and use of direct materials (Assume materials are used as purchased and no inventory is maintained). b. Recognition of direct labor. Feedback: a. DM Price: $88,800 - [($13.20/3) 18,500] = $88,800 - [$4.40 18,500] = $7,400 unfavorable; DM Efficiency: [18,500 - (3 6,000)] $4.40 = $2,200 unfavorable b. DL rate: $75,400 - [$6.00 ($75,400/$6.50)] = $5,800 unfavorable, DL efficiency: [11,600 - (2 6,000)] $6.00 = $2,400 favorable Blooms: Analyze 16-175

Difficulty: 2 Medium Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Appendix: Recording Costs in a Standard Cost System 16-176

Feedback: Overhead rates: $30.00 - $13.20 - $12.00 = $4.80; Variable = 2 hr $0.50 = $1; Fixed $3.80 Fixed overhead: $4.80 60,000 = $288,000; Total OH; $0.50 (2 60,000) = $60,000 Variable OH; Budgeted fixed OH = $288,000 - $60,000 = $228,000; per month $228,000/12 = $19,000 Variable price: $6,380 - ($.50 11,600) = $580 unfavorable; variable efficiency: ($0.50 11,600) - [$0.50 (2 6,000)] = $200 favorable Fixed price: $20,400 - ($228,000/12) = $1,400 unfavorable; fixed prod volume: ($228,000/12) - [($228,000/120,000) (2 6,000)] = $3,800 favorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Appendix: Recording Costs in a Standard Cost System 16-178

Feedback: a. DM Price: $61,600 - [($13.20/3) 13,300] = $3,080 unfavorable; DM Efficiency: [13,300 - (3 4,500)] $4.40 = $880 favorable b. DL rate: $57,750 - [$6.00 ($57,750/$6.25)] = $2,310 unfavorable, DL efficiency: [9,240 - (2 4,500)] $6.00 = $1,440 unfavorable c. Overhead rates: $30.00 - $13.20 - $12.00 = $4.80; Variable = 2 hr $0.50 = $1; Fixed $3.80; Fixed overhead: $4.80 60,000 = $288,000; Total OH; $0.50 (2 60,000) = $60,000 Variable OH; Budgeted fixed OH = $288,000 - $60,000 = $228,000; per month $228,000/12 = $19,000 16-180

d. Variable price: $4,380 - ($0.50 9,240) = $240 favorable; variable efficiency: ($0.50 9,240) - [$0.50 (2 4,500)] = $120 unfavorable Fixed price: $20,400 - ($228,000/12) = $1,400 unfavorable; fixed prod volume: ($228,000/12) - [($228,000/120,000) (2 4,500)] = $1,900 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Appendix: Recording Costs in a Standard Cost System 16-181

116. The condensed flexible budget of the Scott Company for the year is given below: Direct labor-hours The company produces a single product that requires 2.5 direct labor-hours to complete. The direct labor wage rate is $7.50 per hour. Three yards of raw material are required for each unit of product, at a cost of $5 per yard. Assume that the company chooses 50,000 direct labor-hours as the denominator level of activity, but actually worked 48,000 hours during the year, producing 18,500 units. Actual overhead costs for the year are: Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the variable overhead price variance and the variable overhead efficiency variance. b. Compute the fixed overhead spending (budget) variance and the production volume variance. a. Price: $4,800 unfavorable; efficiency: $4,375 unfavorable b. Budget: $1,700 unfavorable; production volume: $24,000 unfavorable Feedback: Variable OH rate = $75,000/30,000 = $2.50 per DLH; Fixed OH rate = $320,000/50,000 = $6.40 per DLH a. $124,800 - ($2.50 48,000) = $4,800 unfavorable; ($2.50 48,000) - ($2.50 18,500 2.5) = $4,375 unfavorable b. $321,700 - $320,000 = $1,700 unfavorable; $320,000 - ($6.40 18,500 2.5) = $24,000 unfavorable 16-182

Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Variable Production Overhead, Fixed Cost Variances 117. The condensed flexible budget of the Scooter Company for the year is given as $160,000 + $1.25/direct labor hour. The company produces a single product that requires 2.5 direct laborhours to complete. Assume that the company chooses 100,000 direct labor-hours as the denominator level of activity, but actually worked 96,000 hours during the year producing 37,000 units. Actual overhead costs for the year are: Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the variable overhead price variance and the variable overhead efficiency variance. b. Compute the fixed overhead spending (budget) variance and the production volume variance. a. Price: $4,800 unfavorable; efficiency: $4,375 unfavorable b. Budget: $1,200 favorable; production volume: $12,000 unfavorable Feedback: Fixed OH rate = $160,000/100,000 = $1.60 per DLH a. $124,800 - ($1.25 96,000) = $4,800 unfavorable; ($1.25 96,000) - ($1.25 37,000 2.5) = $4,375 unfavorable b. $158,800 - $160,000 = $1,200 favorable; $160,000 - ($1.60 37,000 2.5) = $12,000 unfavorable Blooms: Analyze Difficulty: 2 Medium 16-183

Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Variable Production Overhead, Fixed Cost Variances 118. The Standard Company has developed standard overhead costs based upon a capacity of 180,000 direct labor hours: During April, 85,000 units were scheduled for production; however, only 80,000 units were actually produced. The following data relate to April: Actual direct labor cost incurred was $644,000 for 165,000 actual hours of work. Actual overhead incurred totaled $1,378,000; $518,000 variable and $860,000 fixed. All inventories are carried at standard cost. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the variable overhead price variance. b. Compute the variable overhead efficiency variance. a. $23,000 unfavorable b. $15,000 unfavorable Feedback: a. $518,000 - ($3 165,000) = $23,000 unfavorable b. ($3 165,000) - ($3 2 80,000) = $15,000 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Production Overhead 16-184

119. The Standard Company has developed standard overhead costs based upon a capacity of 180,000 direct labor hours: During April, 85,000 units were scheduled for production; however, only 80,000 units were actually produced. The following data relate to April: Actual direct labor cost incurred was $644,000 for 165,000 actual hours of work. Actual overhead incurred totaled $1,378,000; $518,000 variable and $860,000 fixed. All inventories are carried at standard cost. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the fixed overhead spending (budget) variance. b. Compute the production volume variance. a. $40,000 favorable b. $100,000 unfavorable Feedback: a. $860,000 - ($5 180,000) = $40,000 favorable b. ($5 180,000) - ($5 2 80,000) = $100,000 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Fixed Cost Variances 16-185

120. Dash Company adopted a standard cost system several years ago. The standard costs for the prime costs of its single product are as follows: The following operating data were taken from the records for November: Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. What is the direct labor price (rate) variance for November? b. What is the direct labor efficiency variance for November? c. What is the actual kilograms of material used in the production process during November? d. Assume the purchasing department is responsible for the material price variance, what is the actual price paid per kilogram of material during November (assume no increase/decrease in inventory during the month)? a. $1,460 unfavorable b. $23,780 unfavorable c. 45,100 kilograms d. $4.985 Feedback: a. ($300,760/36,500 - $8.20) 36,500 = $1,460 unfavorable b. [36,500 - (6 5,600)] $8.20 = $23,780 unfavorable c. [AQ-used - (8 5,600)] $5.00 = $1,500 unfavorable; AQ-used = 45,100 d. 750 U = $1,500 U + Price variance; Price variance = $750 F; (AP - $5.00) 50,000 = $750 favorable; AP = $4.985 16-186

Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Cost Variance Analysis 16-187

121. Dash Company adopted a standard cost system several years ago. The standard costs for the prime costs of its single product are as follows: The following operating data were taken from the records for November: Required: Prepare the journal entries to record the following: a. Purchase and use of direct materials (Assume materials are used as purchased and no inventory is maintained). b. Recognition of direct labor. Feedback: a. Total material variance $750 unfavorable - $1,500 efficiency = price $750 favorable b. Price: ($300,760/36,500 - $8.20) 36,500 = $1,460 unfavorable; efficiency: [36,500 - (6 5,600)] $8.20 = $23,780 unfavorable 16-188

Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Appendix: Recording Costs in a Standard Cost System 122. The following information relates to the month of April for The Marilyn Manufacturing Company, which uses a standard cost accounting system. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. What is the variable overhead efficiency variance? b. What is the fixed overhead spending variance? c. What is the fixed production volume variance? a. $1,500 favorable b. $600 unfavorable c. $2,250 favorable Feedback: Fixed overhead rate: $9,000/12,000 = $0.75/DLH; Variable rate: $2.25 - $0.75 = $1.50 a. (14,000 $1.50) - (15,000 $1.50) = $1,500 favorable b. Actual variable overhead: (14,000 $1.50) + 1,400 unfavorable price variance = $22,400; actual fixed overhead: $32,000 - $22,400 = $9,600; Spending: $9,600 - $9,000 = $600 unfavorable c. $9,000 - (15,000 $0.75) = $2,250 favorable 16-189

Blooms: Analyze Difficulty: 3 Hard Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Fixed Cost Variances 123. The following information relates to the month of April for The Marilyn Manufacturing Company, which uses a standard cost accounting system. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. What is the variable overhead efficiency variance? b. What is the variable overhead price variance? c. What is the fixed production volume variance? a. $750 favorable b. $700 unfavorable c. $1,125 favorable Feedback: Fixed overhead rate: $4,500/6,000 = $0.75/DLH; Variable rate: $2.25 - $0.75 = $1.50 a. (7,000 $1.50) - (7,500 $1.50) = $750 favorable b. Actual fixed overhead: $4,500 + $300 unfavorable spending variance = $4,800; actual variable overhead: $16,000 - $4,800 = $11,200; Price: $11,200 - ($1.50 7,000) = $700 unfavorable c. $4,500 - (7,500 $0.75) = $1,125 favorable Blooms: Analyze Difficulty: 3 Hard 16-190

Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Variable Production Overhead, Fixed Cost Variances 124. The data below relate to a product of Benoit Company. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. Compute the direct material price variance. b. Compute the direct material usage variance. c. Compute the direct labor rate variance. d. Compute the direct labor efficiency variance. a. $1,460 favorable b. $600 unfavorable c. $5,180 unfavorable d. $6,600 favorable Feedback: a. $42,340 - (7,300 $6) = $1,460 favorable b. (7,300 $6) - (3,600 2 $6) = $600 unfavorable c. $160,580 - (10,360 $15) = $5,180 unfavorable d. (10,360 $15) - (3,600 3 $15) = $6,600 favorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Cost Variance Analysis 16-191

125. The data below relate to a product of Valois Company. Required: (Be sure to indicate whether the variances are favorable or unfavorable.) a. What is the variable overhead efficiency variance? b. What is the variable overhead price variance? c. What is the fixed overhead budget variance? d. What is the fixed production volume variance? a. $3,380 favorable b. $3,520 favorable c. $2,700 unfavorable d. $14,000 unfavorable Feedback: Actual variable overhead: $222,200 - $142,700 = $79,500 Fixed rate: $140,000/4,000 = $35/unit a. $79,500 - (10,360 $8) = $3,380 favorable b. (10,360 $8) - (3,600 3 $8) = $3,520 favorable c. $142,700 - $140,000 = $2,700 unfavorable d. $140,000 - (3,600 $35) = $14,000 unfavorable Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Variable Production Overhead, Fixed Cost Variances 16-192

126. The following standards have been established for a raw material used to make product P62: The following data pertain to a recent month's operations: Required: a. What is the materials price variance for the month? b. What is the materials quantity variance for the month? a. Materials price variance = (AQ x AP) - (AQ x SP) = $100,500 - (6,700 pounds x $15.50 per pound) = $100,500 - $103,850 = $3,350 F b. Materials quantity variance = SP(AQ - SQ) = $15.50 per pound (6,400 pounds - 5,796 pounds*) = $99,200 - $89,838 = $9,362 U *920 units x 6.3 pounds = 5,796 pounds AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials 16-193

127. The following data for November have been provided by Rickenbaker Corporation, a producer of precision drills for oil exploration: Required: Compute the variable overhead rate variances for indirect labor and for power for November. Indicate whether each of the variances is favorable (F) or unfavorable (U). Show your work! Indirect labor: Variable overhead rate variance = (AH x AR) - (AH x SR) = $362,756 - (36,530 hours x $9.40 per hour) = $362,756 - $343,382 = $19,374 U Power: Variable overhead rate variance = (AH x AR) - (AH x SR) = $97,693 - (36,530 hours x $2.90 per hour) = $97,693 - $105,937 = $8,244 F AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Production Overhead 16-194

128. The following data have been provided by Tiano Corporation: Required: Compute the variable overhead rate variances for lubricants and for supplies. Indicate whether each of the variances is favorable (F) or unfavorable (U). Show your work! Lubricants: Variable overhead rate variance = (AH x AR) - (AH x SR) = $211,801 - (38,270 hours x $5.10 per hour) = $211,801 - $195,177 = $16,624 U Supplies: Variable overhead rate variance = (AH x AR) - (AH x SR) = $107,566 - (38,270 hours x $2.90 per hour) = $107,566 - $110,983 = $3,417 F AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Production Overhead 16-195

129. Vitko Corporation makes automotive engines. For the most recent month, budgeted production was 6,000 engines. The standard power cost is $8.80 per machine-hour. The company's standards indicate that each engine requires 6.1 machine-hours. Actual production was 6,400 engines. Actual machine-hours were 38,730 machine-hours. Actual power cost totaled $350,628. Required: Determine the rate and efficiency variances for the variable overhead item power cost and indicate whether those variances are unfavorable or favorable. Show your work! Standard machine-hours allowed for the actual output = 6.1 6,400 = 39,040 Variable overhead rate variance = (AH x AR) - (AH x SR) = $350,628 - (38,730 hours x $8.80 per hour) = $350,628 - $340,824 = $9,804 U Variable overhead efficiency variance = SR(AH - SH) = $8.80 per hour (38,730 hours - 39,040 hours*) = $340,824 - $343,552 = $2,728 F *6,400 units x 6.1 hours = 39,040 hours AICPA FN: Measurement Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Production Overhead 16-196

130. The Lahn Company produces and sells a single product. Standards have been established for the product as follows: Direct materials: 5 pounds @ $3.50 per pound = $17.50 Direct labor: 3 hours @ $5.50 per hour = $16.50 Actual cost and usage figures for the past month follow: Required: Prepare journal entries to record: a. The purchase of raw materials. b. The usage of raw materials in production. c. The incurrence of direct labor cost. *750 units x 5 pounds = 3,750 pounds *750 units x 3 pounds = 2,250 pounds AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. 16-197

Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Direct Materials, Direct Labor, Recording Costs in a Standard Cost System 16-198

131. The following standards have been established for a raw material used in the production of product O99: The following data pertain to a recent month's operations: Required: a. What is the materials price variance for the month? b. What is the materials quantity variance for the month? c. Prepare journal entries to record the purchase and use of the raw material during the month. (All raw materials are purchased on account.) a. Materials price variance = (AQ x AP) - (AQ x SP) = $110,960 - (7,600 pounds x $14.50 per pound) = $110,960 - $110,200 = $760 U b. Materials quantity variance = SP(AQ - SQ) = $14.50 per (7,300 pounds - 7,280 pounds*) = $105,850 - $105,560 = $290 U *2,800 units x 2.6 pounds = 7,280 c. Journal entries to record the purchase and use of the raw material: AICPA FN: Measurement 16-199

132. The standards for product J42 call for 3.6 feet of a raw material that costs $14.00 per feet. Last month, 5,500 feet of the raw material were purchased for $76,175. The actual output of the month was 1,260 units of product J42. A total of 4,800 feet of the raw material were used to produce this output. Required: a. What is the materials price variance for the month? b. What is the materials quantity variance for the month? c. Prepare journal entries to record the purchase and use of the raw material during the month. (All raw materials are purchased on account.) a. Materials price variance = (AQ AP) - (AQ SP) = $76,175 - (5,500 feet $14 per foot) = $76,175 - $77,000 = $825 F b. Materials quantity variance = (AQ - SQ*) SP = $14 per foot (4,800 feet - 4,536 feet*) = $67,200 - $63,504 = $3,696 U *3.6 feet x 1,260 units = 4,536 feet c. Journal entries to record the purchase and use of the raw material: AICPA FN: Measurement 16-201

Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Direct Materials, Recording Costs in a Standard Cost System 133. Compound Y23Z is used by Mcfadin Corporation to make one of its products. The standard cost of compound Y23Z is $38.70 per ounce and the standard quantity is 4.6 per unit of output. Data concerning the compound in the most recent month appear below: The raw material was purchased on account. Required: a. Record the purchase of the raw material in a journal entry. b. Record the use of the raw material in production in a journal entry. a. Entry to record purchase of materials: b. Entry to record use of materials: *500 units at 4.6 ounces = 2,300 ounces AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy 16-202

Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Direct Materials, Recording Costs in a Standard Cost System 134. The standards for product A22G specify 8.2 direct labor-hours per unit at $11.90 per direct labor-hour. Last month 200 units of product A22G were produced using 1,700 direct laborhours at a total direct labor wage cost of $20,060. Required: a. What was the labor rate variance for the month? b. What was the labor efficiency variance for the month? c. Prepare a journal entry to record direct labor costs during the month, including the direct labor variances. a. Labor rate variance = (AH AR) - (AH SR) = $20,060 - (1,700 hours $11.90) = $20,060 - $20,230 = $170 F b. Labor efficiency variance = SR(AH - SH) = $11.90 per hour x (1,700 hours - 1,640 hours*) = $20,230 - $19,516 = $714 U *8.2 hours x 200 units = 1,640 hours c. Journal entry to record the direct labor costs: AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. 16-203

Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Direct Labor, Recording Costs in a Standard Cost System 135. Wahlen Corporation has provided the following data concerning its direct labor costs for November: Required: Prepare the journal entry to record the incurrence of direct labor costs. *2,600 units x 2.4 DLHs = 6,240 DLHs AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system. Topic Area: Direct Labor, Recording Costs in a Standard Cost System 16-204

136. Explain the difference between operating budgets, financial budgets, and flexible budgets. Operating budgets and financial budgets are part of the master budget and are prepared for a single activity level. The operating budgets include the budgeted income statement, the production budget, and the cost of goods sold budget and reflect the organization's operations. Financial budgets forecast the financial resources and needs due to the operating budget and include the cash budget and the budgeted balance sheet. A flexible budget on the other hand is an after the fact budget that is adjusted for the actual level of output. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Using Budgets for Performance Evaluation 137. Explain the difference between the sales volume variance and the production volume variance. The sales activity or sales volume variance measures the difference between budgeted profits on the master budget versus budgeted profits at the actual sales output level. The variance is due solely to the difference in the sales volume. The production volume variance is the difference between actual production in units and the capacity used to develop the fixed overhead rates. The production volume variance is due to production volume differences, not sales volume differences. Furthermore, the sales volume variance is measuring a difference in profits while the production volume variance is measuring a difference in fixed costs only. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-03 Compute and interpret the sales activity variance. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Sales Activity Variance, Production Volume Variance 16-205

138. Explain how standards and budgets are different. Standards are an estimate of what a unit should cost to produce, given efficient operating conditions. Standards are normally developed on a per unit basis. Budgets are based on an expected level of activity and present the results of plans. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-03 Compute and interpret the sales activity variance. Topic Area: Remedying Motivational Problems of Transfer Pricing Policies 139. Explain two reasons why splitting production costs into price and efficiency variances is beneficial for management control. One reason is there are different causes of a price variance than there are for an efficiency variance. By splitting the costs into the two there is more information as to why the variance may have occurred. A second reason is different managers are responsible for the different variances. Purchasing is normally responsible for material price variances while the production manager is responsible for efficiency variances. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Variable Cost Variance Analysis 16-206

140. Explain two reasons for preparing a variance analysis. Variance analysis is used to (1) evaluate the performance of individuals and business units, and (2) to identify possible sources of deviations between budgeted and actual performance. Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-01 Use budgets for performance evaluation. Topic Area: Using Budgets for Performance Evaluation 16-207

= $245,700 - $252,000 = $6,300 F *18,000 units x 4 yards = 72,000 yards b. Direct labor rate and efficiency variances: Labor rate variance = AH(AR - SR) = 29,250 hours ($7.80 per hour - $8 per hour) = $228,150 - $234,000 = $5,850 F Labor efficiency variance = SR(AH - SH) = $8 per hour (29,250 hours - 27,000 hours*) = $234,000 - $216,000 = $18,000 U *18,000 units x 1.5 hours = 27,000 DLH c. Computation of variable overhead variances: Variable overhead rate variance = (AH x AR) - (AH x SR) = $61,425 - (29,250 hours x $2 per hour) = $61,425 - $58,500 = $2,925 U Variable overhead efficiency variance = SR(AH - SH) = $2 per hour (29,250 hours - 27,000 hours) = $58,500 - $54,000 = $4,500 U *6,000 units x.8 hours = 4,800 hours d. Computation of the fixed manufacturing overhead variances: Budget variance = Actual fixed overhead - Budgeted fixed overhead cost = $133,200 - $135,000 = $1,800 F Volume variance = Budgeted fixed overhead cost - Fixed overhead applied to work in process = $135,000 - (27,000 hours x $6 per MH*) = $135,000 - $162,000 16-209

= $27,000 F *18,000 units x 1.5 hours = 27,000 hours AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Direct Materials, Direct Labor, Variable Production Overhead, Fixed Cost Variances 16-210

142. Mountain Manufacturing uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard machine-hours. At standard, each unit of product requires one machine-hour to complete. The standard variable overhead is $1.75 per machine-hour and Budgeted Fixed Manufacturing Costs are $300,000 per year. The denominator level of activity is 150,000 machine-hours, or 150,000 units. Actual data for the year were as follows: Required: a. What are the predetermined variable and fixed manufacturing overhead rates for the year? b. Compute the variable overhead rate and efficiency variances for the year. c. Compute the fixed manufacturing overhead budget and volume variances for the year. a. Predetermined variable overhead rate = $1.75 MH (given) Predetermined fixed overhead rate = $300,000 150,000 MH = $2 hour b. Variable overhead rate variance = AH(AR - SR) = 126,000 ($1.68 per hour* - $1.75 per hour) = $211,680 - $220,500 = $8,820 F * $211,680 126,000 MHs = $1.69 per machine hour Variable overhead efficiency variance = SR(AH - SH) = $1.75 per hour (126,000 hours - 120,000 hours*) = $220,500 - $210,000 = $10,500 U *6,000 units x.8 hours = 4,800 hours c. Budget variance = Actual fixed overhead - Budgeted fixed overhead cost = $315,000 - $300,000 = $15,000 F 16-211

Volume variance = Budgeted fixed overhead cost - Fixed overhead applied to work in process = $2 per hour (150,000 hours - 120,000 hours) = $300,000 - $240,000 = $60,000 U AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Learning Objective: 16-06 Compute and use fixed cost variances. Topic Area: Direct Variable Production Overhead, Fixed Cost Variances 16-212

143. Thompson Company uses a standard cost system for its single product. The following data are available: Actual experience for the current year: Standards per unit of product: Required: Compute the following variances for raw materials, direct labor, and variable overhead, assuming that the price variance for materials is recognized at point of purchase: a. Direct materials price variance. b. Direct materials quantity variance. c. Direct labor rate variance. d. Direct labor efficiency variance. e. Variable overhead rate variance. f. Variable overhead efficiency variance. a. & b. Raw Materials: Materials price variance = AQ(AP - SP) = 15,000 yards ($13 per yard x $15 per yard) = $195,000 - $225,000 = $30,000 F Materials quantity variance = SP(AQ - SQ) = $15.00 per yard (12,000 yards - 13,860 yards*) = $180,000 - $207,900 = $27,900 F 16-213

*12,600 units x 1.1 yards = 13,860 yards c. & d. Direct Labor: Labor rate variance = AH(AR - SR) = 10,200 hours ($10 per hour x $9.50 per hour) = $102,000 - $96,900 = $5,100 U Labor efficiency variance = SR(AH - SH) = $9.50 per hour (10,200 hours - 10,080 hours*) = $96,900 - $95,760 = $1,140 U *12,600 units x.8 hour per unit = 10,080 hours e. & f. Variable Overhead: Variable overhead rate variance = (AH x AR) - (AH x SR) = $84,150 - (10,200 hours x $8 per hour) = $84,150 - $81,600 = $2,550 U Variable overhead efficiency variance = SR(AH - SH) = $8 per hour (10,200 hours - 10,080 hours*) = $81,600 - $80,640 = $960 U *12,600 units x.8 hours = 10,080 hours AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials, Direct Labor, Variable Production Overhead 16-214

Materials price variance = AQ(AP - SP) = 62,500 liters ($4.90 per liter - $5 per liter) = $306,250 - $312,500 = $6,250 F c. Labor efficiency variance = SR(AH - SH) = $17 per hour (2,310 hours - 2,520 hours*) = $39,270 - $42,840 = $3,570 F *8,400 units x.3 hours = 2,520 hours d. Labor rate variance = AH(AR - SR) = 2,310 hours ($17.10 per hour - $17 per hour) = $39,501 - $39,270 = $231 U e Variable overhead efficiency variance = SR(AH - SH) = $6 per hour (2,310 hours - 2,520 hours*) = $13,860 - $15,120 = $1,260 F *8,400 units x.3 hours = 2,520 hours f. Variable overhead rate variance = AH(AR - SR) = 2,310 hours ($5.50 per hour - $6 per hour) = $12,705 - $13,860 = $1,155 F AICPA FN: Measurement Difficulty: 2 Medium 16-216

Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials, Direct Labor, Variable Production Overhead 16-217

Materials price variance = (AQ x AP) - (AQ x SP) = $43,320 - (7,600 pounds x $6 per pound) = $43,320 - $45,600 = $2,280 F c. Labor efficiency variance = SR(AH - SH) = $20 per hour (1,260 hours - 1,190 hours*) = $25,200 - $23,800 = $1,400 U *1,700 units x.7 hours = 1,190 hours d. Labor rate variance = (AH x AR) - (AH x SR) = $25,578 - (1,260 hours x $20 per hour) = $25,578 - $25,200 = $378 U e. Variable overhead efficiency variance = SR(AH - SH) = $2 per hour (1,260 hours - 1,190 hours*) = $2,520 - $2,380 = $140 U *1,700 units x.7 hours = 1,190 hours f. Variable overhead rate variance = (AH x AR) - (AH x SR) = $2,394 - (1,260 hours x $2 per hour) = $2,394 - $2,520 = $126 F AICPA FN: Measurement 16-219

Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials, Direct Labor, Variable Production Overhead 16-220

Materials price variance = (AQ x AP) - (AQ x SP) = $75,900 - (69,000 kilos x $1 per kilo) = $75,900 - $69,000 = $6,900 U c. Labor efficiency variance = SR(AH - SH) = $18 per hour (3,410 hours - 3,400 hours*) = $61,380 - $61,200 = $180 U *8,500 units x.4 hours = 3,400 hours d. Labor rate variance = (AH x AR) - (AH x SR) = $66,495 - (3,410 hours x $18 per hour) = $66,495 - $61,380 = $5,115 U e. Variable overhead efficiency variance = SR(AH - SH) = $3 per hour (3,410 hours - 3,400 hours*) = $10,230 - $10,200 = $30 U *8,500 units x.4 hours = 3,400 hours f. Variable overhead rate variance = (AH x AR) - (AH x SR) = $9,889 - (3,410 hours x $3 per hour) = $9,889 - $10,230 = $341 F AICPA FN: Measurement Blooms: Apply 16-222

Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials, Direct Labor, Variable Production Overhead 16-223

c. Labor efficiency variance = SR(AH - SH) = $18 per hour (1,900 hours - 2,100 hours*) = $34,200 - $37,800 = $3,600 F *4,200 units x.5 hours = 2,100 hours d. Labor rate variance = (AH x AR) - (AH x SR) = $35,530 - (1,900 hours x $18 per hour) = $35,530 - $34,200 = $1,330 U e. Variable overhead efficiency variance = SR(AH - SH) = $2 per hour (1,900 hours - 2,100 hours*) = $3,800 - $4,200 = $400 F *4,200 units x.5 hours = 2,100 hours f. Variable overhead rate variance = (AH x AR) - (AH x SR) = $3,990 - (1,900 hours x $2 per hour) = $3,990 - $3,800 = $190 U AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-05 Compute and use variable cost variances. Topic Area: Direct Materials, Direct Labor, Variable Production Overhead 16-225

b. Materials Quantity Variance = SP (AQ-SQ) $2.75 (7,000 pounds - SQ) = $1,375 U $19,250 - $2.75 SQ = $1,375 $2.75 SQ = $17,875 SQ = 6,500 pounds c. 6,500 pounds 1,300 units = 5 pounds per unit. 2. a. Labor Efficiency Variance = SR(AH-SH) $10 (AH - 3,900*) = $4,000 F $(4,000) = $10 AH - $39,000 = $(4,000) $10 AH = $35,000 AH = 3,500 Therefore, $36,750 total labor cost 3,500 hours = $10.50/hour. * 1,300 units 3 hours/unit = 3,900 hours. b. Labor Rate Variance = AH(AR-SR) = 3,500 ($10.50 - $10.00) 16-227

149. In the new cost management scheme of things, what are some of the disadvantages of the traditional standard cost system (list at least four)? (1) The variances are at too aggregate a level and are not timely enough to be useful. (2) The variances are too aggregated in that they are not tied to specific product lines, production batches, or flexible manufacturing system cells. (3) There is too much focus on the cost and efficiency of direct labor which is becoming a relatively insignificant factor of production. (4) Successful standard cost systems rely on stable production processes, under flexible manufacturing systems this stability is reduced because of frequent switching among a variety of products on the same production line. (5) The standards are relevant for only a short time because of shorter product life cycles. (6) Traditional standard costing systems tend to focus too much on cost minimization, rather than on increasing product quality or customer service. (7) Variances from standards tend to be small or nonexistent under automated manufacturing processes. (8) Traditional standard costs are not defined broadly enough to capture various important aspects of performance, e.g., the costs of ownership for direct materials. AACSB: Reflective Thinking AICPA FN: Critical Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 16-04 Prepare and use a profit variance analysis. Topic Area: Profit Variance Analysis as a Key Tool for Managers 16-228