Fundamentals of Variance Analysis: True / False Questions

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

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

16-1
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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

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

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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

21. When using standard costing, costs are transferred through the production process at their standard costs.

True False

22. Standards and budgets are the same thing.

True False

Multiple Choice Questions

23. 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.

24. 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.

25. An operating budget would not include a:

A. cash budget.
B. sales budget.
C. labor budget.
D. production budget.

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26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

16-4
31. Which of the following organizational policies is most likely to result in undesirable managerial behavior?
(CMA adapted)

A. Raj 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. Felix Eagle, 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 Lawrence Manufacturing starts with operating managers providing goals for
their respective departments.
D. Gallen Lighting holds quarterly meetings of departmental managers to consider possible changes in the
budgeted targets due to changing conditions.

32. 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)
Flexible Budgeting Standard Costing

A. Yes Yes
B. Yes No
C. No Yes
D. No No

A. Option A
B. Option B
C. Option C
D. Option D

16-5
33. Based on past experience, Moss 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:
Plan Actual
Sales orders 800 780
Shipments 800 820
Units shipped 8,000 9,000
Sales $120,000 $144,000
Total pounds shipped 9,600 12,300
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.

34. 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.

35. 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.

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36. 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.

37. The intercept of the flexible budget-line is total:

A. sales.
B. variable costs.
C. fixed costs.
D. contribution margin.

38. 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.

39. The Valenti Company uses flexible budgeting for cost control. Valenti 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. $500 favorable.

16-7
40. Flexibl Sales
Actua e Flexi Activit
l Budget ble y Master
Result Varian Budge Varian Budget
s ce t ce
Units 13,000 ? 2000U ?
13,000
Sales revenue ? ? ? ?
F
Less:
<Variable mfg. $87,75 $91,00 $105,00
?
Costs> 0 0 0
<Variable
$3,250 $4,000
mktg/adm.cost ? ? 30,000
U F
s>
Contribution $52,00 $6,000
? ? ?
margin 0 U
What is the actual sales revenue?

A. $156,000.
B. $169,000.
C. $180,000.
D. $191,000.

16-8
41. Flexibl Sales
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable mfg. $87,75 $91,00 $105,00
?
Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
What is the sales revenue in the flexible budget?

A. $139,000.
B. $156,000.
C. $169,000.
D. $180,000.

16-9
42. Flexibl Sales
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable mfg. $87,75 $91,00 $105,00
?
Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
What is the flexible budget contribution margin?

A. $39,000.
B. $45,000.
C. $52,000.
D. $58,000.

16-10
43. Flexibl Sales
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable mfg. $87,75 $91,00 $105,00
?
Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
What is the master budget sales revenue?

A. $124,000.
B. $148,000.
C. $156,000.
D. $180,000.

16-11
44. Flexibl Sales
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable mfg. $87,75 $91,00 $105,00
?
Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
What is the master budget contribution margin?

A. $52,000.
B. $47,500.
C. $45,000.
D. $39,000.

16-12
45. Flexibl Sales
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable mfg. $87,75 $91,00 $105,00
?
Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
What is the activity variance for the variable manufacturing costs?

A. $4,000.
B. $14,000.
C. $24,000.
D. $34,000.

46. Flexibl Sales
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable mfg. $87,75 $91,00 $105,00
?
Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
Is the activity variance for the variable manufacturing costs favorable or unfavorable?

A. Favorable.
B. Unfavorable.

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47. In analyzing company operations, the controller of the Carson 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.

48. 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.

49. 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.

50. 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.

51. Which of the following statements is not true regarding the fixed production cost variance?

A. The fixed production cost variance is the difference between actual and budgeted costs.
B. With respect to this variance, fixed costs are affected by activity levels within a relevant range.
C. The flexible budget's fixed costs equal the master budget's fixed costs.
D. Fixed costs are treated as period costs for purposes of this variance.

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52. Which of the following is the name of a form providing standard quantities of inputs used to produce a unit
of output and the standard prices for the inputs?

A. A static budget.

B. A standard cost sheet.
C. A variance account.
D. A master budget.

53. 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.

54. Which department is customarily held responsible for an unfavorable materials quantity variance?

A. Quality control.
B. Purchasing.
C. Engineering.
D. Production.

55. When are the following direct materials variances ideally reported?
Quantity Price
A. Purchase Date Purchase Date
B. Time of Use Time of Use
C. Purchase Date Time of Use
D. Time of Use Purchase Date

A. Option A
B. Option B
C. Option C
D. Option D

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56. 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)

57. 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)

58. Which of the following direct labor variances uses the standard hours allowed for the actual number of
units produced?
Rate Efficiency
A. Yes Yes
B. No No
C. Yes No
D. No Yes

A. Option A
B. Option B
C. Option C
D. Option D

59. 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.

16-16
60. 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.

61. In general, the direct labor efficiency variance is the responsibility of the:

A. purchasing agent.
B. company president.
C. production manager.
D. industrial engineering.

62. 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.

63. 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.

16-17
64. TaskMaster Enterprises employs a standard cost system in which direct materials inventory is carried at
standard cost. TaskMaster has established the following standards for the prime costs of one unit of
product.
Standard Standard Standard

Quantity Price Cost
Direct Materials 8 pounds $1.80 per pound $14.40
Direct Labor .25 hour $8.00 per hour 2.00
$16.40
During November, TaskMaster 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. TaskMaster
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.

product.


Quantity Price Cost
$16.40
direct labor hours.
Is the direct materials price variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.

16-18
product.

Quantity Price Cost
$16.40
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.

product.

Quantity Price Cost
$16.40
direct labor hours.
Is the direct materials efficiency (quantity) variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.

16-19
product.

Quantity Price Cost
$16.40
direct labor hours.
What is the direct labor price (rate) variance for November?

A. $1,800.
B. $1,900.
C. $2,000.
D. $2,200.

product.

Quantity Price Cost
$16.40
direct labor hours.
Is the direct labor price (rate) variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.

16-20
product.


Quantity Price Cost
$16.40
direct labor hours.
What is the direct labor efficiency variance for November?

A. $1,800.
B. $1,900.
C. $2,000.
D. $2,090.

product.


Quantity Price Cost
$16.40
direct labor hours.
Is the direct labor efficiency variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.

16-21
72. The following information summarizes the standard cost for producing one metal tennis racket frame at
Spaulding Industries. 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.
Standard Standard
Cost Monthly
Per Unit Costs
Materials $4.00 $8,400
Direct Labor 2 hrs. @
5.20 10,920
$2.60
Factory Overhead:
Variable 1.80 3,780
Fixed 5.00 10,500
$16.00 $33,600
Variances:
Material price 244.75 unfavorable
Material quantity 500.00 unfavorable
Labor rate 520.00 favorable
Labor efficiency 2,080.00 unfavorable
What were the actual direct labor hours worked during the month?

A. 5,000.
B. 4,800.
C. 4,200.
D. 4,000.

16-22

Standard Standard
Cost Monthly
Per Unit Costs
5.20 10,920
$2.60
Factory Overhead:
Variable 1.80 3,780
Fixed 5.00 10,500
$16.00 $33,600

Variances:
What was the actual quantity of materials used during the month?

A. 2,156.
B. 2,100.
C. 2,225.
D. 1,975.

16-23

Standard Standard
Cost Monthly
Per Unit Costs
5.20 10,920
$2.60
Factory Overhead:
Variable 1.80 3,780
Fixed 5.00 10,500
$16.00 $33,600

Variances:
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.

75. Data on Gantry Company's direct-labor costs are given below:

Standard direct-labor hours 30,000
Actual direct-labor hours 29,000
Direct-labor efficiency variance-favorable $4,000
Direct-labor rate variance-favorable $5,800
Total direct labor payroll $110,200
What was Gantry's actual direct-labor rate?

A. $3.60.
B. $3.80.
C. $4.00.
D. $5.80.

16-24

What was Gantry's standard direct-labor rate?

A. $3.54.
B. $3.80.
C. $4.00.
D. $5.80.

77. Batson 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.

78. Information on Kimble Company's direct labor costs for the month of January is as follows:

Actual direct labor hours 34,500
Standard direct labor hours 35,000
Direct labor efficiency variance-favorable $3,200
What is Kimble's direct labor price (rate) variance?

A. $17,250.
B. $20,700.
C. $18,750.
D. $21,000.

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A. Favorable.
B. Unfavorable.

80. The following data pertains to the direct materials cost for the month of October:
Standard costs 5,000 units allowed at $20 each

Actual costs 5,050 units input at $19 each
What is the direct materials efficiency (quantity) variance?

A. $950 favorable.
B. $950 unfavorable.
D. $1,000 unfavorable.

81. The Fellowes Company has developed standards for labor. During June, 75 units were scheduled and 100
were produced. Data related to labor are:

Standard hours allowed 3 hours per unit
Standard wages allowed $4.00 per hour
Actual direct labor 310 hours (total cost $1,209)
What is the labor rate variance for June?

A. $30 unfavorable.
B. $31 favorable.
C. $31 unfavorable.
D. $30 favorable.

16-26
82. 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.

83. Shawn Inc. planned to produce 3,000 units of its single product, Megatron, during November. The standard
specifications for one unit of Megatron include six pounds of material at $0.30 per pound. Actual
production in November was 3,100 units of Megatron. 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.

84. Miller Company planned to produce 3,000 units of its single product, Tallium, during November. The
standards for one unit of Tallium specify six pounds of materials at $0.30 per pound. Actual production in
November was 3,100 units of Tallium. 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)


C. the actual cost per pound for materials was less than the standard cost per pound.

85. 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.

16-27
86. Variable manufacturing overhead is applied to products on the basis of standard direct labor-hours. If the
direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be: (CMA
adapted)

A. favorable.
B. unfavorable.
D. zero.

87. Given the following information in standard costing:

Standard 16,000 hours at $4.00
Actual 15,800 hours at $4.20
What is the labor rate variance?


88. Information for Bonanza Company's direct labor cost for February is as follows:

Efficiency variance $6,400 F
Rate variance $41,400 U
What were the standard direct labor hours for February?

A. 70,000.
B. 69,000.
C. 72,000.
D. 71,400.

16-28
89. The standard unit cost is used in the calculation of which of the following variances? (CPA adapted)
Materials Price Materials Usage

Variance Variance
A. No No
B. No Yes
C. Yes No
D. Yes Yes

A. Option A
B. Option B
C. Option C
D. Option D

90. 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.

91. 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.

92. 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.

16-29
93. Jackson Company uses a standard cost system. The following information pertains to direct labor for
product B for the month of October:
Standard hours allowed for actual production 2,000

Actual rate paid per hour $8.40
Standard rate per hour $8.00
Labor efficiency variance $1,600 U
What were the actual hours worked for the month of October?

A. 1,800.
B. 1,810.
C. 2,190.
D. 2,200.

94. 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.

95. Actual machine hours 840
Standard machine hours allowed 900
Denominator activity (machine hours) 1,000
Actual fixed overhead costs $3,800
Budgeted fixed overhead costs $4,000
Predetermined overhead rate ($1 variable + $4
$5
fixed)
What is the fixed overhead spending (budget) variance?

A. $200.
B. $400.
C. $300.
D. $240.

16-30
$5
fixed)
Is the fixed overhead spending (budget) variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.

$5
fixed)
What is the production volume variance?

A. $200.
B. $400.
C. $300.
D. $240.

$5
fixed)
Is the production volume variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.

16-31
99. Denominator hours for May 15,000
Actual hours worked during May 14,000
Standard hours allowed for May 12,000
Flexible budget fixed overhead cost $45,000
Actual fixed overhead costs for May $48,000
Danske Company had total underapplied overhead of $15,000. Additional information is as follows:
Variable Overhead:
Applied based on standard direct labor hours
$42,000
allowed
Budgeted based on standard direct labor hours 38,000
Fixed Overhead:
$30,000
allowed
What is the actual total overhead for the period?

A. $50,000.
B. $45,000.
C. $80,000.
D. $87,000.

16-32
Variable Overhead:
$42,000
allowed
Fixed Overhead:
$30,000
allowed
What is the fixed overhead spending (budget) variance for May?

A. $1,000 unfavorable.
C. $2,000 unfavorable.
D. $2,000 favorable.

16-33
Variable Overhead:
$42,000
allowed
Fixed Overhead:
$30,000
allowed
What is the production volume variance for May?

A. $2,000.
B. $3,000.
C. $6,000.
D. $9,000.

16-34
Variable Overhead:
$42,000
allowed
Fixed Overhead:
$30,000
allowed

A. Favorable.
B. Unfavorable.

103. 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%.

104. 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.

16-35
105. 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.

106. 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.

107. 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.

108. 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.

109. 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.

Essay Questions

16-36
110. The Elon Company 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:
Machine setup $0.20 per machine-hour

Lubricants $1.00 per machine-hour plus $8,000 per month
Utilities $0.70 per machine-hour
Indirect labor $0.60 per machine-hour plus $20,000 per month
Depreciation $32,000 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:
Machine set-up $4,800

Lubricants 24,500
Utilities 12,000
Indirect labor 32,500
Depreciation 32,500
$106,300
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.

16-37
111. The Ornate Company has the following information pertaining to the month of March:
Units of output, actual $21,000

Fixed costs, actual $497,000
Operating profit, master budget $220,000
Sales price variance $84,000 U
Beginning and ending inventories 0
Sales volume variance, revenue $300,000 U
Budgeted selling price per unit $100
Variable costs, master budget $1,680,000
Contribution margin, actual $516,000
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.

16-38
112. Fargo 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.

Direct materials:
Iron 5 sheets @ $2.00 $10.00
Copper 3 spools @ $3.00 9.00
Direct labor 4 hours @ $7.00 28.00
Variable overhead 4 hours @ $3.00 12.00
Fixed overhead 4 hours @ $2.00 8.00
Total $67.00
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:

Direct materials:
purchased 4,200 sheets, total
Iron:
cost $8,750
Used: 4,200 sheets
purchased 2,600 spools,
Copper:
total cost $7,890
Used: 2,600 spools
Direct labor: 3,400 hours
Total payroll: $24,080
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.

16-39

113. Jemco 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!

16-40
114. The Rogers 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:

Number of units produced 6,000
Materials purchased (18,500 yards) $88,800
Materials used in production (yards) 18,500
Direct labor cost incurred ($6.50/hour) $75,400
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.

16-41
115. The Atlas Company has developed standard overhead costs based upon a capacity of 180,000 direct labor
hours:
Standard costs per unit:
Variable portion 2 hours @ $3 = $6
Fixed portion 2 hours @ $5 = 10
$16
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:
a. Compute the variable overhead price variance.

b. Compute the variable overhead efficiency variance.

16-42
116. Horton Company adopted a standard cost system several years ago. The standard costs for the prime costs
of its single product are as follows:
Material: 8 kilograms @ $5 per kilogram $40.00

Labor: 6 hours @ $8.20 per hour $49.20
The following operating data were taken from the records for November:
Units completed 5,600 units

Budgeted output 6,000 units
Purchase of materials 50,000 kilograms
Total actual labor costs $300,760
Actual labor hours 36,500 hours
Material efficiency (quantity)
$1,500 unfavorable
variance
Total material variance $750 unfavorable
Required:
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)?

16-43
117. The following standards have been established for a raw material used to make product JN36:

Standard quantity of the material per
6.3 pounds
unit of output
Standard price of the material $15.50 per pound
The following data pertain to a recent month's operations:

Actual material purchased 6,700 pounds
Actual cost of material
$100,500
purchased
Actual material used in
6,400 pounds
production
units of product
Actual output 920
JN36
Required:
a. What is the materials price variance for the month?

b. What is the materials quantity variance for the month?

16-44
118. The data below relate to a product of Bellingham Company.
Standard costs:
Materials, 2 pounds at $6 per pound $12 per unit
Labor, 3 hours at $15 per hour $45 per unit
Actual results were:
Production 3,600 Units
Material purchased & used, 7,300
$42,340
pounds
Labor, 10,360 hours $160,580
Required:

b. Compute the direct material usage variance.
c. Compute the direct labor rate variance.

16-45
119. The following data have been provided by Vegas Corporation:

Budgeted production 8,300 units
Standard machine-hours per
4.5 machine-hours
unit
per machine-
Standard lubricants $5.10
hour
per machine-
Standard supplies $2.90
hour
Actual production 8,600 units
Actual machine-hours 38,270 machine-hours
Actual lubricants (total) $211,801
Actual supplies (total) $107,566
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!

16-46
120. The following data for November have been provided by Mazzio Corporation, a producer of precision
drills for oil exploration:

Budgeted production 4,000 drills
8.4 machine-hours
drill
per machine-
Standard indirect labor $9.40
hour
per machine-
Standard power $2.90
hour
Actual production 4,300 drills
Actual indirect labor $362,756
Actual power $97,693
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!

16-47
121. Shum Company manufactures special electrical equipment and parts. Shum employs a standard cost

Direct materials:
Iron 5 sheets @ $2.00 $10.00
Total $67.00
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.

Direct materials:
Iron: purchased 5,000 sheets @ $2.00/sheet
Used: 3,900 sheets
Copper: purchased 2,200 spools @ $3.10
Used: 2,600 spools

Overhead:
Variable $10,000
Fixed $8,800
Required:
a. Variable overhead spending variance.

b. Variable overhead efficiency variance.
c. Fixed overhead spending (budget) variance.
d. Production volume variance.

16-48

16-49
122. Ole Company manufactures special electrical equipment and parts. Ole employs a standard cost accounting
system with separate standards established for each product.
Direct materials:
Total $57.00
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.
Direct materials:
Copper: purchased 2,600 spools @ $3.08/spool
Used: 2,600 spools
Direct labor:
Regular time 2,000 hours @ $7.00
Overtime 1,400 hours @ $7.25
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.
Overhead:
Variable $16,670
Fixed $8,800
Required:
a. Direct materials price variance.

b. Direct material efficiency (quantity) variance.
16-50
e. Variable overhead spending variance.
f. Variable overhead efficiency variance.
g. Fixed overhead spending (budget) variance.
h. Production volume variance.

16-51
123. The Bartok Company uses a standard cost accounting system and estimates production for the year to be
March follows:

Variable overhead costs incurred $6,380
Fixed overhead costs incurred $20,400
Required:
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.

16-52
124. The condensed flexible budget of the Evergreen Company for the year is given below:
Direct labor-hours
Direct labor- hours

Overhead costs: 30,000 40,000 50,000
Variable costs $75,000 ? ?
Fixed costs ? ? $320,000
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:
Variable costs $124,800

Fixed costs 321,700
Total overhead costs $446,500
Required:
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.

16-53
125. The condensed flexible budget of the Texas 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 labor-hours to complete.
actually worked 96,000 hours during the year producing 37,000 units.

Fixed costs 158,800
Required:

16-54
126. The following information relates to the month of April for The Trolley Manufacturing Company, which
uses a standard cost accounting system.
Actual direct labor hours used 7,000

Standard hours allowed for good output 7,500
Fixed overhead spending variance – unfavorable $300
Actual total overhead $16,000
Budgeted fixed costs $4,500
Normal activity in hours 6,000
Total overhead application rate per DLH $2.25
Required:
a. What is the variable overhead efficiency variance?

b. What is the variable overhead price variance?
c. What is the fixed production volume variance?

16-55
127. The data below relate to a product of AirWay Company.
Standard costs:
Variable overhead at $8 per labor
$24 per unit
hour
Budgeted fixed production costs $140,000 per year
Budgeted production for the year 4,000 units
Labor, 10,360 hours $160,580
Overhead incurred ($142,700 fixed) $222,200
Required:

c. What is the fixed overhead budget variance?
d. What is the fixed production volume variance?

16-56
128. The Matten Company has developed standard overhead costs based upon a capacity of 180,000 direct labor
hours:

$16
Required:
a. Compute the fixed overhead spending (budget) variance.

b. Compute the production volume variance.

16-57
129. The following information relates to the month of April for The Kennedy Manufacturing Company, which
uses a standard cost accounting system.

Actual total direct labor $43,400
Actual direct labor hours
14,000
used
Standard hours allowed for
15,000
good output
Variable overhead price
$1,400
variance – unfavorable
Total overhead application
$2.25
rate per DLH
Required:

b. What is the fixed overhead spending variance?

16-58
130. The Fort 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:
Units produced 750

Direct materials used 4,000 pounds
Direct materials purchased (4,500
$14,400
pounds)
Direct labor cost (2,000 hours) $11,200
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.

16-59
131. The following standards have been established for a raw material used in the production of product U98:

2.6 pounds
unit of output
Actual material purchased 7,600 Pounds

$110,960
purchased
7,300 Pounds
production
units of product
Actual output 2,800
U98
Required:

c. Prepare journal entries to record the purchase and use of the raw material during the month. (All raw
materials are purchased on account.)

16-60
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:


133. Compound Y23Z is used by Overton 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:
Cost of material purchased in November, per

$39.20
ounce
Material purchased in November, ounces 2,800
Material used in production in November, ounces 2,360
Actual output in November, units 500
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.

16-61
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 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.

135. Angler Corporation has provided the following data concerning its direct labor costs for November:
Standard wage rate $14.70 per DLH

Standard hours 2.4 DLHs per unit
Actual wage rate $14.80 per DLH
Actual hours 5,990 DLHs
Actual output 2,600 units
Required:
Prepare the journal entry to record the incurrence of direct labor costs.

16-62
136. The Norris Company uses a standard cost accounting system and estimates production for the year to be
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.

16-63
137. Darren Company adopted a standard cost system several years ago. The standard costs for the prime costs
of its single product are as follows:


$1,500 unfavorable
variance
Required:
maintained).

16-64
138. The Fox Company uses a standard cost accounting system and estimates production for the year to be
March follows:

Required:
a. Incurring actual overhead.

b. Application of overhead to production.
c. Closing of overhead accounts and recognizing variances.
d. Transferring production to finished goods.

16-65
139. The Morroco Company uses a standard cost accounting system and estimates production for the year to be
March follows:

Required:
maintained).
c. Incurring actual overhead.
d. Application of overhead to production.
e. Closing of overhead accounts and recognizing variances.
f. Transferring production to finished goods.

140. Explain two reasons for preparing a variance analysis.

16-66
141. Explain the difference between operating budgets, financial budgets, and flexible budgets.

142. Explain the difference between the sales volume variance and the production volume variance.

143. Explain how standards and budgets are different.

144. Explain two reasons why splitting production costs into price and efficiency variances is beneficial for
management control.

16-67
145. The Tennison 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:
Standard Cost Card-per unit of product

Direct Materials, 4 yards at $3.50 per yard $14
Direct Labor, 1.5 DLHs at $8 per DLH 12
Variable Overhead, 1.5 DLHs at $2 per DLH 3
Fixed Overhead, 1.5 DLHs at $6 per DLH 9
Standard cost per unit $38
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.

16-68
146. Angie 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:
Actual variable overhead cost $211,680

Actual fixed manufacturing overhead cost $315,000
Actual machine-hours 126,000
Units produced 120,000
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.

16-69
147. Upton Company uses a standard cost system for its single product. The following data are available:
Actual experience for the current year:
Purchases of raw materials (15,000 yards at

$195,000
$13 per yard)
Raw materials used 12,000 yards
Direct labor costs (10,200 hours at $10 per
$102,000
hour)
Units produced 12,600 units
Standards per unit of product:
Raw materials 1.1 yards at $15 per yard

Direct labor 0.80 hours at $9.50 per hour
Variable overhead $8 per direct labor hour
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:

b. Direct materials quantity variance.
e. Variable overhead rate variance.

16-70
148. Ralston Corporation makes a product with the following standard costs:

Quantity Price Cost
Inputs
or Hours or Rate Per Unit
Direct $5.00 per
6.9 liters $34.50
materials liter
$17.00 per
Direct labor 0.3 hours $5.10
hour
Variable $6.00 per
0.3 hours $1.80
overhead hour
The company reported the following results concerning this product in August.
Originally budgeted output 8,600 units

Raw materials used in production 58,330 liters
Actual direct labor-hours 2,310 hours
Purchases of raw materials 62,500 liters
Actual price of raw materials $4.90 per liter
Actual direct labor rate $17.10 per hour
Actual variable overhead rate $5.50 per hour
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.

16-71
149. Pure Corporation makes a product with the following standard costs:

Quantity Price Cost
Inputs
Direct $6.00 per
4.3 pounds $25.80
materials pound
$20.00 per
hour
Variable $2.00 per
0.7 hours $1.40
overhead hour
The company reported the following results concerning this product in September.

Raw materials used in production 7,210 pounds
Purchases of raw materials 7,600 pounds
Actual cost of raw materials purchases $43,320
Actual direct labor cost $25,578
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:


16-72
150. Photo Corporation makes a product with the following standard costs:
Standard
Standard Price
Quantity
Inputs or Rate
or Hours
Direct materials 7.8 kilos $1.00 per kilo
Direct labor 0.4 hours $18.00 per hour
Variable overhead 0.4 hours $3.00 per hour

Raw materials used in production 65,550 kilos
Purchases of raw materials 69,000 kilos
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:


16-73
151. Meera Corporation makes a product with the following standard costs:
Standard
Standard Price
Quantity
Inputs or Rate
or Hours
Direct materials 8.1 ounces $3.00 per ounce
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:


16-74
152. Al-Shabad Company produces a single product. The company has set the following standards for materials
and labor:
Standard quantity or Standard price

hours per unit or rate
Direct materials ? pounds per unit $? per pound
Direct labor 3.0 hours per unit $10 per hour
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:
Materials quantity variance $1,375 U

Total materials variance $375 F
Labor efficiency variance $4,000 F
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.

16-75
153. In the new cost management scheme of things, what are some of the disadvantages of the traditional
standard cost system (list at least four)?

16-76
154. Market Manufacturing Inc. has developed the following standards for one of its products. The materials are
not substitutable.
Material 1 5 yards $6/yard $30

Material 2 6 pieces $5/piece $30
Direct labor 3 hours $24/hour $72
Total variable cost per unit $132
The records for March showed the following actual results:
Material 1 Purchased 10,000 yards for $58,000

Used 9,500 yards
Material 2 Purchased 15,000 pieces for $78,750
Used 12,100 pieces
Direct labor 5,900 hours for $147,500
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.

16-77
155. Easton Industries developed the following standards for one of its products:
Material 5 feet $15/foot $75

Labor 10 hours $15/hour 150
Total variable cost $225
Actual results for September were:

Material purchased 40,000 feet for $14.25/foot
Material used 70,000 feet
Direct Labor 119,500 hours at $15.10/hour
Required:
(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?

16-78
156. Megham Company manufactures a single product. The following standards have been developed for it:
Direct Material 6 pounds $4/pound

Direct Labor 2 hours $15/hour
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.

(2) Give one possible explanation for each of the 3 variances computed.

16-79
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.

AACSB: Analytical Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-01 Use budgets for performance evaluation.
Topic: Using Budgets for Performance Measures

2. Variances are the difference between actual results and budgeted results.

TRUE
This is a definition of a variance.

Blooms: Remember
Difficulty: 1 Easy

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
16-80
Topic: 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

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
Difficulty: 1 Easy
Learning Objective: 16-02 Develop and use flexible budgets.
Topic: 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

16-81
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

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: Comparing Budgets and Results

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

16-82
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
Difficulty: 1 Easy
Learning Objective: 16-04 Prepare and use a profit variance analysis.
Topic: Profit Variance Analysis as a Key Tool for Managers

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

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

16-83
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
Topic: Performance Measurement and Control in a Cost Center

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
Learning Objective: 16-05 Compute and use variable cost variances.

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.

Blooms: Remember

16-84
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

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

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: Fixed Cost Variances

16-85
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

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
Difficulty: 1 Easy

21. When using standard costing, costs are transferred through the production process at their standard
costs.

TRUE
This is the definition of standard costing.

Blooms: Remember
Learning Objective: 16-07 (Appendix) Understand how to record costs in a standard costing system.
Topic: Recording Costs in a Standard Cost System (Appendix)

16-86
22. Standards and budgets are the same thing.

FALSE
A standard is related to a cost per unit; budgets focus on totals.

Blooms: Remember
Difficulty: 1 Easy

Multiple Choice Questions

23. 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

16-87
24. 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

25. An operating budget would not include a:

A. cash budget.

B. sales budget.
C. labor budget.
D. production budget.
The cash budget is a financial budget.

Blooms: Remember
Difficulty: 1 Easy

16-88
26. 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

27. 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

28. 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.
What impact does a variance have on profit?

16-89
Blooms: Remember
Difficulty: 1 Easy

29. 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

30. 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.
The question asks about sales; therefore, the answer should be expressed in terms of sales.

Blooms: Remember
Difficulty: 1 Easy

16-90
31. Which of the following organizational policies is most likely to result in undesirable managerial
behavior? (CMA adapted)

A. Raj 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. Felix Eagle, 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 Lawrence Manufacturing starts with operating managers providing goals
for their respective departments.
D. Gallen Lighting holds quarterly meetings of departmental managers to consider possible changes in
the budgeted targets due to changing conditions.
(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.

Blooms: Analyze
Difficulty: 1 Easy

32. 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)
Flexible Budgeting Standard Costing

A. Yes Yes
B. Yes No
C. No Yes
D. No No

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.

16-91
Blooms: Apply
Difficulty: 1 Easy

33. Based on past experience, Moss 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:
Plan Actual
Sales orders 800 780
Shipments 800 820
Units shipped 8,000 9,000
Sales $120,000 $144,000
Total pounds shipped 9,600 12,300
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

16-92
34. 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

35. 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

16-93
36. 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.
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

37. The intercept of the flexible budget-line is total:

A. sales.
B. variable costs.
C. fixed costs.
D. contribution margin.
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

38. 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.

16-94
Blooms: Remember
Difficulty: 1 Easy

39. The Valenti Company uses flexible budgeting for cost control. Valenti 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?


D. $500 favorable.
($180,000/144,000) × 10,800 = $13,500; $13,500 - 13,000 = $500 favorable

Blooms: Analyze

16-95
40. Flexibl Sales
Maste
l Budget ble y
r
Result Varian Budge Varian
Budget
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable $87,75 $91,00 $105,00
?
mfg. Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
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

16-96
41. Flexibl Sales
Maste
l Budget ble y
r
Budget
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable $87,75 $91,00 $105,00
?
mfg. Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
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

16-97
42. Flexibl Sales
Maste
l Budget ble y
r
Budget
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable $87,75 $91,00 $105,00
?
mfg. Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
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

16-98
43. Flexibl Sales
Maste
l Budget ble y
r
Budget
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable $87,75 $91,00 $105,00
?
mfg. Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
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

16-99
44. Flexibl Sales
Maste
l Budget ble y
r
Budget
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable $87,75 $91,00 $105,00
?
mfg. Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
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

16-100
45. Flexibl Sales
Maste
l Budget ble y
r
Budget
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable $87,75 $91,00 $105,00
?
mfg. Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
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

16-101
46. Flexibl Sales
Maste
l Budget ble y
r
Budget
s ce t ce
Units 13,000 ? 2000U ?
13,000
F
Less:
<Variable $87,75 $91,00 $105,00
?
mfg. Costs> 0 0 0
<Variable
$3,250 $4,000
U F
s>
? ? ?
margin 0 U
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

47. In analyzing company operations, the controller of the Carson 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
16-102

48. 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

49. 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

16-103
50. 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

51. Which of the following statements is not true regarding the fixed production cost variance?

A. The fixed production cost variance is the difference between actual and budgeted costs.
B. With respect to this variance, fixed costs are affected by activity levels within a relevant range.
C. The flexible budget's fixed costs equal the master budget's fixed costs.
D. Fixed costs are treated as period costs for purposes of this variance.
With respect to this variance, fixed costs are not affected by activity levels within a relevant range.

Blooms: Remember

52. Which of the following is the name of a form providing standard quantities of inputs used to produce a
unit of output and the standard prices for the inputs?

A. A static budget.

B. A standard cost sheet.
C. A variance account.
D. A master budget.
A standard cost sheet is the form providing standard quantities of inputs used to produce a unit of output
and the standard prices for the inputs.

16-104
Blooms: Remember
Difficulty: 1 Easy

53. 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
Topic: Variable Cost Variance Analysis

54. 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.

Blooms: Remember
Difficulty: 1 Easy

16-105
55. When are the following direct materials variances ideally reported?
Quantity Price
A. Purchase Date Purchase Date
B. Time of Use Time of Use
C. Purchase Date Time of Use
D. Time of Use Purchase Date

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

56. 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

16-106
57. 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

58. Which of the following direct labor variances uses the standard hours allowed for the actual number of
units produced?
Rate Efficiency
A. Yes Yes
B. No No
C. Yes No
D. No Yes

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

16-107
59. 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

60. 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

16-108
61. In general, the direct labor efficiency variance is the responsibility of the:

A. purchasing agent.

B. company president.
C. production manager.
D. industrial engineering.
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

62. 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

16-109
63. 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.
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

product.

Quantity Price Cost
$16.40
During November, TaskMaster 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.
TaskMaster 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.
[(304,000/160,000) = $1.90 - $1.80] × 160,000 = $16,000 unfavorable

Blooms: Analyze
16-110

product.


Quantity Price Cost
$16.40
Is the direct materials price variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.
The actual price was greater than standard so the variance was unfavorable.

Blooms: Analyze
Difficulty: 1 Easy

16-111
product.

Quantity Price Cost
$16.40
What is the direct materials efficiency (quantity) variance for November?

A. $14,250.
B. $14,400.
C. $16,000.
D. $17,100.
[(142,500 - (19,000 × 8)] × $1.80 = $17,100 favorable

Blooms: Analyze

16-112
product.

Quantity Price Cost
$16.40
Is the direct materials efficiency (quantity) variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.
Fewer materials were used than standard so the variance was favorable.

Blooms: Analyze
Difficulty: 1 Easy

16-113
product.

Quantity Price Cost
$16.40
What is the direct labor price (rate) variance for November?

A. $1,800.
B. $1,900.
C. $2,000.
D. $2,200.
[$42,000 × 90% = $37,800 ÷ 5,000 direct labor hours = $7.56]; ($7.56 - $8) × 5,000 = $2,200 favorable

Blooms: Analyze

16-114
product.

Quantity Price Cost
$16.40

A. Favorable.
B. Unfavorable.
The actual wage rate was less than standard so the variance is favorable.

Blooms: Analyze
Difficulty: 1 Easy

16-115
product.


Quantity Price Cost
$16.40
What is the direct labor efficiency variance for November?

A. $1,800.
B. $1,900.
C. $2,000.
D. $2,090.
[5,000 - (19,000 × .25) = 250 hours] × $8.00 = $2,000 unfavorable

Blooms: Analyze

16-116
product.


Quantity Price Cost
$16.40
Is the direct labor efficiency variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.
Actual hours were greater than standard so the variance was unfavorable.

Blooms: Analyze

16-117
Standard Standard
Cost Monthly
Per Unit Costs
5.20 10,920
$2.60
Factory Overhead:
Variable 1.80 3,780
Fixed 5.00 10,500
$16.00 $33,600
Variances:
What were the actual direct labor hours worked during the month?

A. 5,000.
B. 4,800.
C. 4,200.
D. 4,000.
$10,920 + $2,080 = $13,000 ÷ $2.60 = 5,000 direct labor hours

Blooms: Analyze
Difficulty: 3 Hard

16-118

Standard Standard
Cost Monthly
Per Unit Costs
5.20 10,920
$2.60
Factory Overhead:
Variable 1.80 3,780
Fixed 5.00 10,500
$16.00 $33,600

Variances:
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

16-119

Standard Standard
Cost Monthly
Per Unit Costs
5.20 10,920
$2.60
Factory Overhead:
Variable 1.80 3,780
Fixed 5.00 10,500
$16.00 $33,600

Variances:
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.
$8,400 + $500 + $244.75 = $9,144.75 ÷ 2,225 = $4.11

Blooms: Analyze
Difficulty: 3 Hard

16-120

What was Gantry'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


What was Gantry'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
16-121
Difficulty: 1 Easy

77. Batson 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

Blooms: Analyze


What is Kimble'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

16-122


A. Favorable.
B. Unfavorable.
Actual wage rate was higher than standard so the variance is unfavorable.

Blooms: Analyze
Difficulty: 1 Easy

80. The following data pertains to the direct materials cost for the month of October:
Standard costs 5,000 units allowed at $20 each

Actual costs 5,050 units input at $19 each
What is the direct materials efficiency (quantity) variance?

A. $950 favorable.

B. $950 unfavorable.
(5,050 - 5,000) × $20 = $1,000 unfavorable

Blooms: Analyze
Difficulty: 1 Easy

16-123
81. The Fellowes Company has developed standards for labor. During June, 75 units were scheduled and
100 were produced. Data related to labor are:

Standard hours allowed 3 hours per unit
Standard wages allowed $4.00 per hour
Actual direct labor 310 hours (total cost $1,209)
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

82. 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)

Blooms: Understand
Difficulty: 1 Easy

16-124
83. Shawn Inc. planned to produce 3,000 units of its single product, Megatron, during November. The
standard specifications for one unit of Megatron include six pounds of material at $0.30 per pound.
Actual production in November was 3,100 units of Megatron. 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)


C. the actual cost of materials was less than the standard cost.
See calculation below.
Materials quantity variance = SP(AQ - SQ)
(SP × AQ - $5,580*) = $120 U

SP × AQ = $5,580 + $120 = $5,700
*6 pounds × 3,100 units × $0.30 = $5,580
(AQ × AP - $5,700) = $(380)

AQ × AP = $5,700 - $380 = $5,320

Blooms: Remember

16-125
84. Miller Company planned to produce 3,000 units of its single product, Tallium, during November. The
standards for one unit of Tallium specify six pounds of materials at $0.30 per pound. Actual production
in November was 3,100 units of Tallium. 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)


C. the actual cost per pound for materials was less than the standard cost per pound.
See calculation below.
(SP × AQ - $5,580*) = $120 U

SP × AQ = $5,580 + $120 = $5,700
*6 pounds × 3,100 units × $0.30 = $5,580
(AQ × AP - $5,700) = $(380)

AQ × AP = $5,700 - $380 = $5,320

Blooms: Remember

85. 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)

Blooms: Remember
16-126

86. Variable manufacturing overhead is applied to products on the basis of standard direct labor-hours. If
the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be:
(CMA adapted)

A. favorable.
B. unfavorable.
D. zero.
See solution below.

Variable overhead efficiency variance = SR(AH - SH)

Blooms: Understand
Difficulty: 1 Easy

87. Given the following information in standard costing:

Standard 16,000 hours at $4.00
Actual 15,800 hours at $4.20
What is the labor rate variance?


(15,800 × $4.00) - (15,800 × $4.20) = $3,160 unfavorable

Blooms: Analyze

16-127
88. Information for Bonanza Company's direct labor cost for February is as follows:

Efficiency variance $6,400 F
Rate variance $41,400 U
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

89. The standard unit cost is used in the calculation of which of the following variances? (CPA adapted)
Materials Price Materials Usage

Variance Variance
A. No No
B. No Yes
C. Yes No
D. Yes Yes

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.

16-128
Blooms: Remember
Difficulty: 1 Easy

90. 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

91. 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

16-129
92. 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

93. Jackson Company uses a standard cost system. The following information pertains to direct labor for
product B for the month of October:
Standard hours allowed for actual production 2,000

Actual rate paid per hour $8.40
Standard rate per hour $8.00
Labor efficiency variance $1,600 U
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

16-130
94. 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

Blooms: Apply

$5
fixed)
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

16-131
$5
fixed)
Is the fixed overhead spending (budget) variance favorable or unfavorable?

A. Favorable.
B. Unfavorable.
Less was spent than budgeted so the variance is favorable.

Blooms: Analyze
Difficulty: 1 Easy

$5
fixed)
What is the production volume variance?

A. $200.
B. $400.
C. $300.
D. $240.
$4,000 - ($4 × 900) = $400 unfavorable

Blooms: Analyze
16-132

$5
fixed)

A. Favorable.
B. Unfavorable.
Fewer units were produced than budgeted.

Blooms: Analyze

16-133
Variable Overhead:
$42,000
allowed
Fixed Overhead:
$30,000
allowed
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

16-134
Variable Overhead:
$42,000
allowed
Fixed Overhead:
$30,000
allowed
What is the fixed overhead spending (budget) variance for May?

A. $1,000 unfavorable.

C. $2,000 unfavorable.
D. $2,000 favorable.
$48,000 - $45,000 = $3,000 unfavorable

Blooms: Analyze

16-135
Variable Overhead:
$42,000
allowed
Fixed Overhead:
$30,000
allowed
What is the production volume variance for May?

A. $2,000.
B. $3,000.
C. $6,000.
D. $9,000.
$45,000 - [($45,000/15,000) × 12,000] = $9,000 unfavorable

Blooms: Analyze

16-136
Variable Overhead:
$42,000
allowed
Fixed Overhead:
$30,000
allowed

A. Favorable.
B. Unfavorable.
Standard hours were less than denominator hours.

Blooms: Analyze

16-137
103. 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

104. 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

16-138
105. 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

106. 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.
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

107. 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.
The production volume variance is created when actual outputs did not match the planned outputs. This
is less controllable than inputs.

16-139
Blooms: Remember

108. 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

109. 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

Essay Questions

16-140
110. The Elon Company 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:
Machine setup $0.20 per machine-hour

Lubricants $1.00 per machine-hour plus $8,000 per month
Utilities $0.70 per machine-hour
Indirect labor $0.60 per machine-hour plus $20,000 per month
Depreciation $32,000 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:
Machine set-up $4,800

Lubricants 24,500
Utilities 12,000
Indirect labor 32,500
Depreciation 32,500
$106,300
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.

Flexibl Maste
Flex B Sales
e r
Actual Varian Activi
Budge Budge
ce ty V
t t
Machine
4,800 3,600 1,200 U 3,800 200 F
set-up
Lubricants 24,500 26,000 1,500 F 27,000 1,000 F
Utilities 12,000 12,600 600 F 13,300 700 F
Indirect
32,500 30,800 1,700 U 31,400 600 F
labor
Depreciati
32,500 32,000 500 U 32,000 0
on
16-141
106,30 105,00 107,50
Total Costs 1,300 U 2,500 F
0 0 0

Master Variabl
Fixed Total
Budget: e
$0.20 ×
Machine setup 3,800 0 3,800
19,000
$1.00 ×
Lubricants 19,000 8,000 27,000
19,000
$0.70 ×
Utilities 13,300 0 13,300
19.000
$0.60 ×
Indirect labor 11,400 20,000 31,400
19,000
Depreciation 0 32,000 32,000
Total 47,500 60,000 107,500
Flexible Variabl
Fixed Total
Budget: e
$0.20 ×
Machine setup 3,600 0 3,600
18,000
$1.00 ×
Lubricants 18,000 8,000 26,000
18,000
$0.70 ×
Utilities 12,600 0 12,600
18,000
$0.60 ×
Indirect labor 10,800 20,000 30,800
18,000
Depreciation 0 32,000 32,000
Total 45,000 60,000 105,000

Blooms: Analyze

16-142
111. The Ornate Company has the following information pertaining to the month of March:
Units of output, actual $21,000

Fixed costs, actual $497,000
Operating profit, master budget $220,000
Sales price variance $84,000 U
Beginning and ending inventories 0
Sales volume variance, revenue $300,000 U
Budgeted selling price per unit $100
Variable costs, master budget $1,680,000
Contribution margin, actual $516,000
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.

Flex B Sales
Flexible Master
Varia Activit
Actual Budget Budget
nce yV
Units 21,000 21,000 0 24,000 3,000 U
$2,016,0 $2,100,0 $84,00 $2,400,0 $300,0
Sales U U
00 00 0 00 00
Var 1,500,0 1,470,0 30,00 1,680,0 210,0
U F
Costs 00 00 0 00 00
Cont 114,00
516,000 630,000 U 720,000 90,000 U
Margin 0
Fixed 3,00
497,000 500,000 F 500,000 0
Costs 0
Operati
111,00
ng 19,000 130,000 U 220,000 90,000 U
0
Profit
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

16-143
Blooms: Analyze
Difficulty: 3 Hard

16-144
16-145
112. Fargo Company manufactures special electrical equipment and parts. Eastern employs a standard cost
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.

Direct materials:
Iron 5 sheets @ $2.00 $10.00
Total $67.00
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.

Direct materials:
purchased 4,200 sheets,
Iron:
total cost $8,750
Used: 4,200 sheets
purchased 2,600 spools,
Copper:
total cost $7,890
Used: 2,600 spools
Required:
a. Direct materials price variance for both iron and copper.

b. Direct material efficiency (quantity) variance for both iron and copper.

a. Iron: $350 unfavorable; Copper: $90 unfavorable

b. Iron: $400 unfavorable; Copper: $600 unfavorable
c. $280 unfavorable
16-146
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

113. Jemco 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 × AR) - (AH × SR)
= $350,628 - (38,730 hours × $8.80 per hour)
= $350,628 - $340,824
= $9,804 U

= $8.80 per hour (38,730 hours - 39,040 hours*)
= $340,824 - $343,552
= $2,728 F
*6,400 units × 6.1 hours = 39,040 hours

Blooms: Understand
Difficulty: 1 Easy

16-147
114. The Rogers 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:

b. Compute the direct material efficiency variance.
c. Compute the direct labor price (rate) 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

16-148
115. The Atlas Company has developed standard overhead costs based upon a capacity of 180,000 direct
labor hours:
$16
Required:
a. Compute the variable overhead price variance.

b. Compute the variable overhead efficiency variance.

Feedback: a. $518,000 - ($3 × 165,000) = $23,000 unfavorable

b. ($3 × 165,000) - ($3 × 2 × 80,000) = $15,000 unfavorable

Blooms: Analyze

16-149
116. Horton Company adopted a standard cost system several years ago. The standard costs for the prime
costs of its single product are as follows:


$1,500 unfavorable
variance
Required:
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)?

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

Blooms: Analyze

16-150
117. The following standards have been established for a raw material used to make product JN36:

6.3 pounds
unit of output

Actual material purchased 6,700 pounds
$100,500
purchased
6,400 pounds
production
units of product
Actual output 920
JN36
Required:


a. Materials price variance = (AQ × AP) - (AQ × SP)

= $100,500 - (6,700 pounds × $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 × 6.3 pounds = 5,796 pounds

Blooms: Apply
Difficulty: 1 Easy

16-151
118. The data below relate to a product of Bellingham Company.
Standard costs:
per
Materials, 2 pounds at $6 per pound $12
unit
per
Labor, 3 hours at $15 per hour $45
unit
Material purchased & used, 7,300
$42,340
pounds
Labor, 10,360 hours $160,580
Required:

b. Compute the direct material usage variance.
c. Compute the direct labor rate variance.

a. $1,460 favorable
b. $600 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

16-152
119. The following data have been provided by Vegas Corporation:

Budgeted production 8,300 units
4.5 machine-hours
unit
per machine-
Standard lubricants $5.10
hour
per machine-
Standard supplies $2.90
hour
Actual production 8,600 units
Actual lubricants (total) $211,801
Actual supplies (total) $107,566
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:

= $211,801 - (38,270 hours × $5.10 per hour)
= $211,801 - $195,177
= $16,624 U
Supplies:

= $107,566 - (38,270 hours × $2.90 per hour)
= $107,566 - $110,983
= $3,417 F

Blooms: Apply

16-153
120. The following data for November have been provided by Mazzio Corporation, a producer of precision
drills for oil exploration:

Budgeted production 4,000 drills
8.4 machine-hours
drill
per machine-
Standard indirect labor $9.40
hour
per machine-
Standard power $2.90
hour
Actual production 4,300 drills
Actual indirect labor $362,756
Actual power $97,693
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:

= $362,756 - (36,530 hours × $9.40 per hour)
= $362,756 - $343,382
= $19,374 U
Power:

= $97,693 - (36,530 hours × $2.90 per hour)
= $97,693 - $105,937
= $8,244 F

Blooms: Apply

16-154
16-155
121. Shum Company manufactures special electrical equipment and parts. Shum employs a standard cost

Direct materials:
Iron 5 sheets @ $2.00 $10.00
Total $67.00
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.

Direct materials:
Iron: purchased 5,000 sheets @ $2.00/sheet
Used: 3,900 sheets
Copper: purchased 2,200 spools @ $3.10
Used: 2,600 spools

Overhead:
Variable $10,000
Fixed $8,800
Required:
a. Variable overhead spending variance.

b. Variable overhead efficiency variance.
c. Fixed overhead spending (budget) variance.
d. Production volume variance.

16-156
a. $200 favorable
b. $600 unfavorable
c. $800 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

16-157
16-158
122. Ole Company manufactures special electrical equipment and parts. Ole employs a standard cost
Direct materials:
Total $57.00
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.
Direct materials:
Copper: purchased 2,600 spools @ $3.08/spool
Used: 2,600 spools
Direct labor:
Regular time 2,000 hours @ $7.00
Overtime 1,400 hours @ $7.25
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.
Overhead:
Variable $16,670
Fixed $8,800
Required:

b. Direct material efficiency (quantity) variance.
16-159
e. Variable overhead spending 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
Topic: Variable Cost Variance Analysis, Fixed Cost Variances

16-160
123. The Bartok Company uses a standard cost accounting system and estimates production for the year to be
of March follows:

Required:
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
f. ($228,000/12) - [($228,000/120,000) × (2 × 6,000)] = $3,800 favorable

Blooms: Analyze
Topic: Variable Cost Variance Analysis, Fixed Cost Variances
16-161

124. The condensed flexible budget of the Evergreen Company for the year is given below:
Direct labor-hours
Direct labor- hours

Overhead costs: 30,000 40,000 50,000
Variable costs $75,000 ? ?
Fixed costs ? ? $320,000
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.
actually worked 48,000 hours during the year, producing 18,500 units.

Fixed costs 321,700
Required:

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

Blooms: Analyze

16-162
125. The condensed flexible budget of the Texas 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 labor-hours to complete.
actually worked 96,000 hours during the year producing 37,000 units.

Fixed costs 158,800
Required:

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

16-163
126. The following information relates to the month of April for The Trolley Manufacturing Company,
which uses a standard cost accounting system.
Actual direct labor hours used 7,000

Standard hours allowed for good output 7,500
Fixed overhead spending variance –
$300
unfavorable
Total overhead application rate per DLH $2.25
Required:


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

16-164
127. The data below relate to a product of AirWay Company.
Standard costs:
Variable overhead at $8 per labor
$24 per unit
hour
Budgeted fixed production costs $140,000 per year
Budgeted production for the year 4,000 units
Labor, 10,360 hours $160,580
Overhead incurred ($142,700 fixed) $222,200
Required:

c. What is the fixed overhead budget variance?
d. What is the fixed production volume variance?

a. $3,380 favorable
b. $3,520 favorable
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

16-165
128. The Matten Company has developed standard overhead costs based upon a capacity of 180,000 direct
labor hours:

$16
Required:
a. Compute the fixed overhead spending (budget) variance.

b. Compute the production volume variance.

a. $40,000 favorable
Feedback: a. $860,000 - ($5 × 180,000) = $40,000 favorable

b. ($5 × 180,000) - ($5 × 2 × 80,000) = $100,000 unfavorable

Blooms: Analyze

16-166
129. The following information relates to the month of April for The Kennedy Manufacturing Company,
which uses a standard cost accounting system.

Actual total direct labor $43,400
Actual direct labor hours
14,000
used
Standard hours allowed for
15,000
good output
Variable overhead price
$1,400
variance – unfavorable
Total overhead application
$2.25
rate per DLH
Required:

b. What is the fixed overhead spending 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

Blooms: Analyze
Difficulty: 3 Hard

16-167
16-168
130. The Fort 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:
Units produced 750

Direct materials used 4,000 pounds
Direct materials purchased (4,500
$14,400
pounds)
Direct labor cost (2,000 hours) $11,200
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.

Raw materials ($3.50 × 4,500

a. 15,750
pounds)
Material Price variance ($14,400 -
1,350
[4,500 pounds × $3.50])
Accounts Payable 14,400
Work-in-Process ($3.50 × 3,750
b. 13,125
pounds*)
Materials quantity variance ($3.50 ×
875
[4,000 pounds - 3,750 pounds*])
Raw material ($3.50 × 4,000
14,000
pounds)
*750 units × 5 pounds = 3,750

pounds
Work-in-Process ($5.50 × 2,250
c. 12,375
hours*)
Labor rate variance (2,000 hours ×
200
[$5.60 - $5.50])
Labor efficiency variance $5.50 ×
1,375
[2,000 hours - 2,250 hours*]
Wages Payable 11,200
*750 units × 3 pounds = 2,250
16-169
pounds

Blooms: Apply

16-170
16-171
131. The following standards have been established for a raw material used in the production of product
U98:

2.6 pounds
unit of output
Actual material purchased 7,600 Pounds

$110,960
purchased
7,300 Pounds
production
units of product
Actual output 2,800
U98
Required:



= $110,960 - (7,600 pounds × $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 × 2.6 pounds = 7,280
c. Journal entries to record the purchase and use of the raw material:
Raw materials 110,200

Materials price variance 760
Accounts payable 110,960
Work-in-process 105,560
Materials quantity variance 290
16-172

Blooms: Apply

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:



= $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 × 1,260 units = 4,536 feet
c. Journal entries to record the purchase and use of the raw material:

Materials price variance 825
Materials quantity variance 3,696

Blooms: Apply
16-173

133. Compound Y23Z is used by Overton 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:
Cost of material purchased in November, per

$39.20
ounce
Material purchased in November, ounces 2,800
Material used in production in November,
2,360
ounces
Actual output in November, units 500
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:

108,360
ounces)
Materials price variance (2,800
1,400
ounces × [$39.20 - $38.70])
Accounts payable ($39.20 × 2,800
109,760
ounces)
b. Entry to record use of materials:
Work-in-process ($38.70 × 2,300

89,010
ounces*)
Materials quantity variance ($38.70 ×

[2,360 ounces – 2,300 ounces*]) 2,322
91,332
ounces)
*500 units at 4.6 ounces = 2,300 ounces

16-174
Blooms: Apply
Difficulty: 1 Easy

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 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.

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 × (1,700 hours - 1,640 hours*)
=$20,230 - $19,516
= $714 U
*8.2 hours × 200 units = 1,640 hours
c. Journal entry to record the direct labor costs:

Labor rate variance 714
Labor efficiency variance 170
Wages payable 20,060

Blooms: Apply

16-175
135. Angler Corporation has provided the following data concerning its direct labor costs for November:
Standard wage rate $14.70 per DLH

Standard hours 2.4 DLHs per unit
Actual wage rate $14.80 per DLH
Actual hours 5,990 DLHs
Required:
Prepare the journal entry to record the incurrence of direct labor costs.

Work-in-process ($14.70 × 6,240

91,728
DLHs*)
Labor rate variance (5,990 DLHs ×
599
[$14.80 - $14.70])
Labor efficiency variance ($14.70 ×
3,675
[5,990 DLHs - 6,240 DLHs*])
Wages payable ($14.80 × 5,990
88,652
DLHs)
*2,600 units × 2.4 DLHs = 6,240 DLHs

Blooms: Apply
Difficulty: 1 Easy

16-176
136. The Norris Company uses a standard cost accounting system and estimates production for the year to be
of March follows:

Required:
maintained).

a.
Work-in Process (6,000 × $13.20) 79,200

Material price variance 7,400
Material efficiency variance 2,200
b.
Work-in Process (6,000 × $12) 72,000

Direct labor rate variance 5,800
Direct labor efficiency variance 2,400
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
16-177

137. Darren Company adopted a standard cost system several years ago. The standard costs for the prime
costs of its single product are as follows:


$1,500 unfavorable
variance
Required:
maintained).

a.
Work-in Process (5,600 × $40.00) 224,000

Material efficiency variance 1,500
Material price variance 750
b.
Work-in Process (5,600 × $49.20) 275,520
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

Blooms: Analyze
16-178

16-179
16-180
138. The Fox Company uses a standard cost accounting system and estimates production for the year to be
of March follows:

Required:
a. Incurring actual overhead.

b. Application of overhead to production.
c. Closing of overhead accounts and recognizing variances.
d. Transferring production to finished goods.

a. Variable overhead (actual) 6,380

Fixed overhead (actual) 20,400
Miscellaneous accounts 26,780
b. Work-in Process (6,000 × $4.80) 28,800
Variable Overhead (applied)
6,000
(6,000 × 2 × $0.50)
Fixed Overhead (applied)
22,800
(6,000 × $3.80)
c. Variable Overhead (applied) 6,000
Variable Overhead price variance 580
Variable Overhead efficiency
200
variance
Variable Overhead (actual) 6,380
Fixed Overhead (applied) 22,800
Fixed Overhead price variance 1,400
Fixed Overhead production
3,800
volume variance
Fixed Overhead (actual) 20,400
d. Finished Goods (6,000 × $30) 180,000
Work-in Process 180,000
16-181
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
c. 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

16-182
16-183
139. The Morroco 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.
of March follows:

Required:
maintained).
c. Incurring actual overhead.
d. Application of overhead to production.
e. Closing of overhead accounts and recognizing variances.
f. Transferring production to finished goods.

Work-in Process (4,500 ×

a. 59,400
$13.20)
Material price variance 3,080
Material efficiency variance 880
Work-in Process (4,500 ×
b. 54,000
$12.00)
c. Variable Overhead (actual) 4,380
Miscellaneous accounts 24,780
d. Work-in Process (4,500 × $4.80) 21,600
Variable Overhead (applied)
4,500
(4,500 × 2 × $0.50)
16-184
(4,500 × $3.80)
e. Variable Overhead (applied) 4,500
Variable Overhead efficiency
120
variance
Variable Overhead price
240
variance
Variable Overhead (actual) 4,380
Fixed Overhead price variance 1,400
Fixed Overhead production
1,900
volume variance
f. Finished Goods (4,500 × $30) 135,000
Work-in Process 135,000
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
d. 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
e. 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

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

16-185
141. 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

142. 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

143. 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
16-186

144. 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

16-187
16-188
145. The Tennison 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:
Standard Cost Card-per unit of product

Direct Materials, 4 yards at $3.50 per yard $14
Direct Labor, 1.5 DLHs at $8 per DLH 12
Variable Overhead, 1.5 DLHs at $2 per DLH 3
Fixed Overhead, 1.5 DLHs at $6 per DLH 9
Standard cost per unit $38
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.

a. Direct materials price and quantity variances:

= 70,200 yards ($3.75 per yard × $3.50 per yard)
= $263,250 - $245,700
= $17,550 U

= $3.50 per yard (70,200 yards - 72,000 yards*)
= $245,700 - $252,000
= $6,300 F
*18,000 units × 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
16-189
= $5,850 F

= $8 per hour (29,250 hours - 27,000 hours*)
= $234,000 - $216,000
= $18,000 U
*18,000 units × 1.5 hours = 27,000 DLH
c. Computation of variable overhead variances:

= $61,425 - (29,250 hours × $2 per hour)
= $61,425 - $58,500
= $2,925 U

= $2 per hour (29,250 hours - 27,000 hours)
= $58,500 - $54,000 = $4,500 U
*18,000 units × 1.5 hours = 27,000 DLH
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 × $6 per MH*)
= $135,000 - $162,000
= $27,000 F
*18,000 units × 1.5 hours = 27,000 hours

Blooms: Apply

16-190
146. Angie 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:

Actual fixed manufacturing overhead cost $315,000
Actual machine-hours 126,000
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 = $1.68 per machine hour

= $220,500 - $210,000
= $10,500 U
*120,000 units × 1 hour = 120,000 hours
c. Budget variance = Actual fixed overhead - Budgeted fixed overhead cost

= $315,000 - $300,000
= $15,000 F
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

Blooms: Apply
16-191

16-192
16-193
147. Upton Company uses a standard cost system for its single product. The following data are available:
Actual experience for the current year:
Purchases of raw materials (15,000 yards

$195,000
at $13 per yard)
12,000
Raw materials used
yards
Direct labor costs (10,200 hours at $10 per
$102,000
hour)
Standards per unit of product:
Raw materials 1.1 yards at $15 per yard

Direct labor 0.80 hours at $9.50 per hour
Variable overhead $8 per direct labor hour
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:

b. Direct materials quantity variance.
e. Variable overhead rate variance.

a. & b. Raw Materials:

= 15,000 yards ($13 per yard × $15 per yard)
= $195,000 - $225,000
= $30,000 F

= $15.00 per yard (12,000 yards - 13,860 yards*)
= $180,000 - $207,900
= $27,900 F
*12,600 units × 1.1 yards = 13,860 yards
c. & d. Direct Labor:

Labor rate variance = AH(AR - SR)
16-194
= 10,200 hours ($10 per hour × $9.50 per hour)
= $102,000 - $96,900
= $5,100 U

= $96,900 - $95,760
= $1,140 U
*12,600 units × .8 hour per unit = 10,080 hours
e. & f. Variable Overhead:

= $84,150 - (10,200 hours × $8 per hour)
= $84,150 - $81,600
= $2,550 U

= $81,600 - $80,640
= $960 U
*12,600 units × .8 hours = 10,080 hours

Blooms: Apply

16-195
16-196
148. Ralston Corporation makes a product with the following standard costs:

Quantity Price Cost
Inputs
Direct $5.00 per
6.9 liters $34.50
materials liter
$17.00 per
hour
Variable $6.00 per
0.3 hours $1.80
overhead hour

Raw materials used in production 58,330 liters
Purchases of raw materials 62,500 liters
Actual price of raw materials $4.90 per liter
Actual direct labor rate $17.10 per hour
Actual variable overhead rate $5.50 per hour
The materials price variance is recognized when materials are purchased. Variable overhead is applied
on the basis of direct labor-hours.
Required:


a. Materials quantity variance = SP(AQ - SQ)

= $5.00 per liter (58,330 liters - 57,960 liters*)
= $291,650 - $289,800
= $1,850 U
*8,400 units × 6.9 liters = 57,960 liters
b. Materials price variance = AQ(AP - SP)

= 62,500 liters ($4.90 per liter - $5 per liter)
= $306,250 - $312,500
= $6,250 F
16-197
c. Labor efficiency variance = SR(AH - SH)
= $39,270 - $42,840
= $3,570 F
d. Labor rate variance = AH(AR - SR)

= $39,501 - $39,270
= $231 U
e. Variable overhead efficiency variance = SR(AH - SH)

= $13,860 - $15,120
= $1,260 F
f. Variable overhead rate variance = AH(AR - SR)

= $12,705 - $13,860
= $1,155 F


16-198
16-199
149. Pure Corporation makes a product with the following standard costs:

Quantity Price Cost
Inputs
Direct $6.00 per
4.3 pounds $25.80
materials pound
$20.00 per
hour
Variable $2.00 per
0.7 hours $1.40
overhead hour
The company reported the following results concerning this product in September.

Raw materials used in production 7,210 pounds
Purchases of raw materials 7,600 pounds
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:



= $6.00 per pound (7,210 pounds - 7,310 pounds*)
= $43,260 - $43,860
= $600 F
*1,700 units × 4.3 pounds = 7,310 pounds
b. Materials price variance = (AQ × AP) - (AQ × SP)

= $43,320 - (7,600 pounds × $6 per pound)
= $43,320 - $45,600
= $2,280 F
16-200
= $25,200 - $23,800
= $1,400 U
d. Labor rate variance = (AH × AR) - (AH × SR)

= $25,578 - (1,260 hours × $20 per hour)
= $25,578 - $25,200
= $378 U

= $2,520 - $2,380
= $140 U
f. Variable overhead rate variance = (AH × AR) - (AH × SR)

= $2,394 - (1,260 hours × $2 per hour)
= $2,394 - $2,520
= $126 F

Blooms: Apply

16-201
16-202
150. Photo Corporation makes a product with the following standard costs:
Standard
Standard Price
Quantity
Inputs or Rate
or Hours
Direct materials 7.8 kilos $1.00 per kilo

Raw materials used in production 65,550 kilos
Purchases of raw materials 69,000 kilos
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:



= $1.00 per kilo (65,550 kilos - 66,300 kilos*)
= $65,550 - $66,300
= $750 F
*8,500 units × 7.8 kilos = 66,300 kilos

= $75,900 - (69,000 kilos × $1 per kilo)
= $75,900 - $69,000
= $6,900 U

= $61,380 - $61,200
16-203
= $180 U

= $66,495 - (3,410 hours × $18 per hour)
= $66,495 - $61,380
= $5,115 U

= $10,230 - $10,200
= $30 U

= $9,889 - (3,410 hours × $3 per hour)
= $9,889 - $10,230
= $341 F

Blooms: Apply

16-204
16-205
151. Meera Corporation makes a product with the following standard costs:
Standard
Standard Price
Quantity
Inputs or Rate
or Hours
Direct materials 8.1 ounces $3.00 per ounce
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:



= $3 per ounce (34,870 ounces - 34,020 ounces*)
= $104,610 - $102,060
= $2,550 U
*4,200 units × 8.1 ounces = 34,020 ounces

= $111,160 - (39,700 ounces × $3 per ounce)
= $111,160 - $119,100
= $7,940 F

= $34,200 - $37,800
= $3,600 F

= $35,530 - (1,900 hours × $18 per hour)
= $35,530 - $34,200
= $1,330 U
16-206
= $3,800 - $4,200
= $400 F

= $3,990 - (1,900 hours × $2 per hour)
= $3,990 - $3,800
= $190 U

Blooms: Apply

16-207
16-208
152. Al-Shabad Company produces a single product. The company has set the following standards for
materials and labor:
Standard quantity
Standard price
or
or rate
hours per unit
Direct materials ? pounds per unit $? per pound
Direct labor 3.0 hours per unit $10 per hour
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:
Materials quantity variance $1,375 U

Total materials variance $375 F
Labor efficiency variance $4,000 F
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.

1. a. Materials Price Variance = AQ(AP - SP)

7,000 pounds ($2.50** - SP) = $1,750 F*
$17,500 - 7,000 pounds × SP = $(1,750)
7,000 pounds × SP = $19,250
SP = $2.75
*$1,375U + $375 F = $1,750 F
**17,500 ÷ 7,000 pounds = $2.50 per pound
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.
16-209
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) = $1,750 U

Blooms: Apply

153. 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.

AICPA: BB Critical Thinking
Blooms: Understand
Difficulty: 3 Hard

16-210
16-211
154. Market Manufacturing Inc. has developed the following standards for one of its products. The materials
are not substitutable.
Material 1 5 yards $6/yard $30

Material 2 6 pieces $5/piece $30
Direct labor 3 hours $24/hour $72
Total variable cost per unit $132
The records for March showed the following actual results:
Material 1 Purchased 10,000 yards for $58,000

Used 9,500 yards
Material 2 Purchased 15,000 pieces for $78,750
Used 12,100 pieces
Direct labor 5,900 hours for $147,500
Required:
(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.


(1)
(a) $2,000 favorable = $58,000 - 10,000($6) = $58,000 - $60,000

(b) $3,000 favorable = $6[9,500 - 5(2,000)] = $6(9,500 - 10,000)
(c) $3,750 unfavorable = $78,750 - $5(15,000) = $78,750 - $75,000
(d) $500 unfavorable = $5[12,100 - 6(2,000)] = $5(12,100 - 12,000)
(e) $5,900 unfavorable = $147,500 - $24(5,900) = $147,500 - $141,600
(f) $2,400 favorable = $24[5,900 - 3(2,000)] = $24(5,900 - 6000)
(2)
16-212
(a) Use of too many pieces on some of the output, lower quality material.
(b) Use of more skilled employees, use of employees with greater seniority and higher wages.
(c) Use of more skilled employees, use of more efficient machinery, use of higher quality materials.

Blooms: Understand

16-213
155. Easton Industries developed the following standards for one of its products:
Material 5 feet $15/foot $75

Labor 10 hours $15/hour 150
Total variable cost $225
Actual results for September were:

Material purchased 40,000 feet for $14.25/foot
Material used 70,000 feet
Direct Labor 119,500 hours at $15.10/hour
Required:
(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?

(1)
(a) $30,000 favorable 40,000($14.25 - $15.00) = 40,000($0.75)

(b) $150,000 unfavorable $15(70,000 - 5(12,000)
(c) $11,950 unfavorable 119,500(15.10 - 15.00)
(d) $7,500 favorable $15(119,500 - 10(12,000)
(2) Calculating the material price variance at the time of use provides information too late for timely
corrective action. Since the price variance relates to the purchasing function, identification of significant
variances should occur at that level. If there is very little reason for the purchase price to vary beyond
some highly insignificant amount, e.g., $0.01, then it might be all right to delay calculation of the price
variance until the material is used.

Blooms: Understand

16-214
156. Megham Company manufactures a single product. The following standards have been developed for it:
Direct Material 6 pounds $4/pound

Direct Labor 2 hours $15/hour
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.

(2) Give one possible explanation for each of the 3 variances computed.

(1)
(a) $4,000 unfavorable = $4[13,000 - 6(2,000)]

(b) $3,500 unfavorable = $56,000 - $15(3,500)
(c) $7,500 favorable $15[3,500 - 2(2,000)]
(2)
(a) Low quality materials, less efficient machinery, theft.

(b) Higher skilled workers, workers with greater seniority and higher wages.
(c) Higher skilled workers, workers with greater seniority (more experience), higher quality materials,
more efficient machinery.

Blooms: Understand

16-215

Fundamentals of Variance Analysis: True / False Questions

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Chapter 16

Fundamentals of Variance Analysis

True / False Questions

Multiple Choice Questions

23. A standard cost system may be used in: (CPA adapted)

A. job-order costing but not process costing.

A. benchmarks common to other firms in the same industry.

A. standard material prices with actual material prices.

Flexible Budgeting Standard Costing

A. allow management some latitude in meeting goals.

A. selling price per unit.

What is the actual sales revenue?

What is the sales revenue in the flexible budget?

What is the flexible budget contribution margin?

What is the master budget sales revenue?

What is the master budget contribution margin?

What is the activity variance for the variable manufacturing costs?

A. the total flexible budget variance.

A. sales activity variance.

A. budgeted selling price multiplied by the budgeted number of units sold.

A. A static budget.

A. There is no need to further evaluate the total materials variance if it is favorable.

A. (AP × AQ) - (AP × SQ)

A. (SP × AQ) - (SP × SQ)

A. price items only.

Standard Standard Standard

What is the direct materials price variance for November?

Is the direct materials price variance favorable or unfavorable?

Standard Standard Standard

What is the direct materials efficiency (quantity) variance for November?

Standard Standard Standard

Is the direct materials efficiency (quantity) variance favorable or unfavorable?

Standard Standard Standard

What is the direct labor price (rate) variance for November?

Standard Standard Standard

Is the direct labor price (rate) variance favorable or unfavorable?

What is the direct labor efficiency variance for November?

Is the direct labor efficiency variance favorable or unfavorable?

What was Gantry's actual direct-labor rate?

What was Gantry's standard direct-labor rate?

What is Kimble's direct labor price (rate) variance?

Is the direct labor price (rate) variance favorable or unfavorable?

Standard costs 5,000 units allowed at $20 each

What is the direct materials efficiency (quantity) variance?

What is the labor rate variance for June?

A. combined price and quantity variance.

A. more materials were purchased than were used.

A. more materials were purchased than were used.

A. an unfavorable materials quantity variance.

What is the labor rate variance?

What were the standard direct labor hours for February?

Materials Price Materials Usage

A. machine efficiency problems.

A. favorable materials efficiency (quantity) variance of $7,500.

Standard hours allowed for actual production 2,000

What is the fixed overhead spending (budget) variance?

Is the fixed overhead spending (budget) variance favorable or unfavorable?

What is the production volume variance?

Is the production volume variance favorable or unfavorable?