Test Bank - Chapter 16

Chapter 16
Fundamentals of Variance Analysis
Multiple Choice Questions
72. In the general model, a price variance is calculated as

A) (AP x AQ) – (AP x SQ)
B) (AP x SQ) – (SP x SQ)
C) (AP x AQ) – (SP x AQ)
D) (AP x AQ) – (SP x SQ)
Answer: C Difficulty: Simple Learning Objective: 5

AACSB: Analytic
73. In the general model, an efficiency variance is calculated as

A) (SP x AQ) – (SP x SQ)
B) (AP x SQ) – (SP x SQ)
C) (AP x AQ) – (SP x SQ)
D) (AP x AQ) – (SP x AQ)
Answer: A Difficulty: Simple Learning Objective: 5

AACSB: Analytic
Part B: Computational Questions
88. The Redrock Company uses flexible budgeting for cost control. Redrock produced 10,800 units
of product during October, incurring material costs of $13,000. Its master budget for the reflected
indirect material costs of $180,000 at a production volume of 144,000 units. What was the
flexible budget variance for the indirect material costs in October?
A) $1,100 favorable
B) $1,100 unfavorable
C) $2,000 favorable
D) $2,000 unfavorable
E) $ 500 favorable
Answer: E Difficulty: Moderate Learning Objective: 2

Response:
($180,000/144,000) x 10,800 = $13,500
$13,500 - 13,000 = $500 favorable
AACSB: Analytic
Use the following to answer questions 89-95:
Test Bank, Chapter 16 417

Flexible Sales
Actual Budget Flexible Activity Master
Results Variance Budget Variance Budget
Units 13,000 ? 2000 U ?
Sales revenue ? 13,000F ? ? ?
Less:
<Variable mfg. Costs> $87,750 $91,000 ? $105,000
<Variable mktg/adm.costs> ? $3,250U ? $4,000F 30,000
Contribution margin $52,000 ? ? $6,000U ?
89. What is the actual sales revenue?

A) $156,000.
B) $169,000.
C) $180,000.
D) $191,000.
E) Some other answer _______________.
Answer: B Difficulty: Complex Learning Objective: 2

Response: First, solve for actual variable marketing & administrative costs = $29,250
Second, add actual contribution margin to the actual variable costs to find actual sales = $169,000
AACSB: Analytic
90. What is the sales revenue in the flexible budget?

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

Response: $169,000 (actual sales from previous question) - $13,000 = $156,000
AACSB: Analytic
91. What is the flexible budget contribution margin?

A) $39,000.
B) $45,000.
C) $52,000.
D) $58,000.
Answer: A Difficulty: Complex Learning Objective: 2

Response: $156,000 - $91,000 - $26,000 = $39,000
AACSB: Analytic
92. What is the master budget sales revenue?

A) $124,000.
418 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

B) $148,000.
C) $156,000.
D) $180,000.
Answer: D Difficulty: Complex Learning Objective: 2

Response:
($156,000/13,000) = $12 selling price
$12 x (13,000 + 2,000) = $180,000
AACSB: Analytic
93. What is the master budget contribution margin?

A) $52,000.
B) $47,500.
C) $45,000.
D) $39,000.
Answer: C Difficulty: Complex Learning Objective: 2

Response: $180,000 - $105,000 - $30,000 = $45,000
AACSB: Analytic
94. What is the activity variance for the variable manufacturing costs?
A) $ 4,000
B) $14,000
C) $24,000
D) $34,000
Answer: B Difficulty: Simple Learning Objective: 3

Response: $180,000 - $105,000 - $30,000 = $45,000
AACSB: Analytic
95. Refer to the previous question. Is the variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic
Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard
cost. Arrow has established the following standards for the prime costs of one unit of product.
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, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The
total factory wages for November were $42,000, 90% of which were for direct labor. Arrow
manufactured 19,000 units of product during November using 142,500 pounds of direct materials and
5,000 direct labor hours.
96. What is the direct materials price variance for November?

A) $14,250
B) $14,400
C) $16,000
D) $17,100
Answer: C Difficulty: Moderate Learning Objective: 5

Response: [(304,000/160,000) - $1.80] x 160,000 = $16,000 unfavorable
AACSB: Analytic
97. Is the direct materials price variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic
98. What is the direct materials efficiency (quantity) variance for November?
A) $14,250
B) $14,400
C) $16,000
D) $17,100
Answer: D Difficulty: Moderate Learning Objective: 2

Response: [(142,500 - (19,000 x 8)] x $1.80 = $17,100 favorable
AACSB: Analytic
99. Is the direct materials efficiency (quantity) variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic

100. What is the direct labor price (rate) variance for November?
A) $1,800
B) $1,900
C) $2,000
D) $2,090
E) $2,200

Response: ($7.56 - $8) x 5,000 = $2,200 favorable
AACSB: Analytic
101. Is the direct labor price (rate) variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic
102. What is the direct labor efficiency variance for November?

A) $1,800
B) $1,900
C) $2,000
D) $2,090
E) $2,200

Response: [5,000 - (19,000 x .25)] x $8.000 = $2,000 unfavorable
AACSB: Analytic
103. Is the direct labor efficiency variance favorable or unfavorable?

A) favorable
B) unfavorable
Answer: B Difficulty: Moderate Learning Objective: 5

AACSB: Analytic
The following information summarizes the standard cost for producing one metal tennis racket frame. In
addition, the variances for one month's production are given. Assume that all inventory accounts have
zero balances at the beginning of the month.
Standard Cost Standard

Per Unit Monthly Costs

Materials $ 4.00 $ 8,400
Direct Labor 2 hrs. @ $2.60 5.20 10,920
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
(The change is explained in number 106)
104. What were the actual direct labor hours worked during the month?
A) 5,000.
B) 4,800.
C) 4,200.
D) 4,000.
E) 3,400.

Response:
Number of units = $33,600/16.00 = 2,100
[AH - (2,100 x 2)] x $2.60 = $2,080 U; AH = 5,000
AACSB: Analytic
105. What were the actual quantity of materials used during the month?
A) 2,156.
B) 2,100.
C) 2,225.
D) 1,975.

Response:
($4.00 x AQ) - (2,100 x $4.00) = $500 U
AQ = 2,225
AACSB: Analytic
106. What was the actual price paid for the direct material during the month?
A) $4.34.
B) $4.22.
C) $4.11.
D) $4.00.
E) $3.90.

Response:
(AP - $4.00) 2,225 = $244.75 U
AP = $4.11 (rounded)
AACSB: Analytic
Data on Goodman 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 payroll $110,200
107. What was Goodman's actual direct-labor rate?

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

Response: $110,200/29,000 = $3.80
AACSB: Analytic
108. What was Goodman's standard direct-labor rate?

A) $3.54
B) $3.80
C) $4.00
D) $5.80
E) Some other answer ______________.
Answer: C Difficulty: Simple Learning Objective: 2

Response: (29,000 - 30,000) x SR = 4,000; SR = $4.00
AACSB: Analytic
109. Blue Company produces Trivets. Based on its master budget, the company should produce 1,000
Trivets each month, working 2,500 direct labor hours. During May, only 900 Trivets were
produced. The company worked 2,400 direct labor hours. The standard hours allowed for May
production would be
A) 2,500 hours.
B) 2,400 hours.
C) 2,250 hours.
D) 1,800 hours.


Response:
2,500/1,000 = 2.5 hours per unit
2.5 x 900 = 2,250
AACSB: Analytic
Information on Barber Company's direct labor costs for the month of January 2008 is as follows:
Actual direct labor hours 34,500

Standard direct labor hours 35,000
Total direct labor payroll $241,500
Direct labor efficiency variance-favorable $ 3,200
110. What is Barber's direct labor price (rate) variance?

A) $17,250
B) $20,700
C) $18,750
D) $21,000
E) some other answer _______________.

Response:
Actual rate = $241,500/34,500) = $7/hr
(34,500 - 35,000) x SR = 3,200; SR = $6.40 per hour
($7 - $6.40) * 34,500 = $20,700 unfavorable
AACSB: Analytic

A) favorable
B) unfavorable

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

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

A) $ 950 favorable
B) $ 950 unfavorable

C) $1,000 favorable
D) $1,000 unfavorable
E) $ 50 unfavorable
Answer: D Difficulty: Simple Learning Objective: 5

Response: (5,050 - 5,000) x $20 = $1,000 unfavorable
AACSB: Analytic
113. The Landry 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

Response: [($1,209/310) - $4.00] x 310 = $31 favorable
AACSB: Analytic
114. Given the following information in standard costing:
Standard 16,000 hours at $4.00

Actual 15,800 hours at $4.20
What is the total direct labor cost variance?

A) $2,630, favorable
B) $2,630, unfavorable
C) $2,360, favorable
D) $2,360, unfavorable

Response: (15,800x $4.00) - (15,800 x $4.20) = $3,160 unfavorable
AACSB: Analytic
Dash 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 @ $5.00 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
Purchases of materials 50,000 kilograms
Total actual labor costs $300,760
Actual hours of labor 36,500 hours
Material efficiency (quantity) variance $1,500 unfavorable
Total material variance $ 750 unfavorable
115. What is the direct labor price (rate) variance for November?
A) $1,460
B) $4,100
C) $4,120
D) $5,740
E) Some other amount _______________.
Answer: A Difficulty: Moderate Learning Objective: 5

Response: ($300,760/36,500 - $8.20) x 36,500 = $1,460 unfavorable
AACSB: Analytic

A) favorable
B) unfavorable

AACSB: Analytic
117. What is the direct labor efficiency variance for November?

A) $ 4,100
B) $ 5,740
C) $15,580
D) $23,780

Response: [36,500 - (6 x 5,600)] x $8.20 = $23,780 unfavorable
AACSB: Analytic
118. Is the direct labor efficiency variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic

119. What is the actual kilograms of material used in the production process during November?
A) 45,100 kg
B) 49,900 kg
C) 50,000 kg
D) 51,500 kg

Response:
[AQ-used - (8 x 5,600)] x $5.00 = $1,500 unfavorable
AQ-used = 45,100
AACSB: Analytic
120. Assume the purchasing department is responsible for the material price variance, what is the
actual price paid per kilogram of material during November?
A) $4.495
B) $4.985
C) $5.015
D) $5.135

Response:
750 U = $1,500 U + Price variance; Price variance = $750 F
(AP - $5.00) x 50,000 = $750 favorable; AP = $4.985
AACSB: Analytic
121. What is the total amount of direct material and direct labor costs transferred to the finished goods
account for November?
A) $499,520.
B) $535,200.
C) $550,010.
D) $561,040.

Response: ($40.00 + $49.20) x 5,600 = $499,520
AACSB: Analytic

122. Information for Nighttime Company's direct labor cost for February is as follows:
Actual direct labor hours 69,000

Total direct labor payroll $483,000
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

Response:
(69,000 - SH) x SR = $6,400 favorable
[($483,000/69,000) - SR] x 69,000 = $41,400 unfavorable
SR = $6.40; SH = 70,000
AACSB: Analytic
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 fixed) $ 5
123. What is the fixed overhead spending (budget) variance?

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

Response: $3,800 - $4,000 = $200 favorable
AACSB: Analytic
124. Is the fixed overhead spending (budget) variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic

125. What is the production volume variance?
A) $200
B) $400
C) $300
D) $240

Response: $4,000 ($4 x 900) = $400 unfavorable
AACSB: Analytic
126. Is the production volume variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic
127. Dickey Company had total underapplied overhead of $15,000. Additional information is as
follows:
Variable Overhead:
Applied based on standard direct labor hours allowed $42,000
Budgeted based on standard direct labor hours 38,000
Fixed Overhead:
Applied based on standard direct labor hours allowed $30,000
Budgeted based on standard direct labor hours 27,000
What is the actual total overhead for the period?

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

Response: ($30,000 + $42,000) + $15,000 = $87,000
AACSB: Analytic
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

128. What is the fixed overhead spending (budget) variance for May?
A) $1,000 unfavorable
B) $3,000 unfavorable
C) $2,000 unfavorable
D) $2,000 favorable
E) $3,000 favorable

Response: $48,000 - $45,000 = $3,000 unfavorable
AACSB: Analytic
129. What is the production volume variance for May?

A) $2,000
B) $3,000
C) $6,000
D) $8,000
E) $9,000

Response: $45,000 - [($45,000/15,000) x 12,000] = $9,000 unfavorable
AACSB: Analytic

A) favorable
B) unfavorable

AACSB: Analytic
The Standard 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.

131. What is the variable overhead spending variance for April?
A) $15,000
B) $23,000
C) $38,000
D) $80,000

Response: $518,000 - ($3 x 165,000) = $23,000 unfavorable
AACSB: Analytic
132. Is the variable overhead spending variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic
133. What is the variable overhead efficiency variance for April?

A) $15,000
B) $23,000
C) $38,000
D) $80,000

Response: ($3 x 165,000) - ($3 x 2 x 80,000) = $15,000 unfavorable
AACSB: Analytic
134. Is the variable overhead spending variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic
135. What is the fixed overhead spending (budget) spending variance for April?
A) $ 40,000
B) $ 60,000
C) $100,000
D) $120,000

Response: $860,000 - ($5 x 180,000) = $40,000 favorable
AACSB: Analytic

136. Is the fixed overhead spending (budget) variance favorable or unfavorable?
A) favorable
B) unfavorable

AACSB: Analytic
137. What is the production volume variance for April?

A) $ 40,000
B) $ 60,000
C) $100,000
D) $120,000

Response: ($3 x 180,000) - ($5 x 2 x 80,000) = $100,000 unfavorable
AACSB: Analytic

A) favorable
B) unfavorable

AACSB: Analytic
The following information relates to the month of April for The Marilyn Manufacturing Company, which
uses a standard cost accounting system.
Actual total direct labor $43,400

Actual direct hours labor used (DLH) 14,000
Standard hours allowed for good output 15,000
Direct labor rate variance-unfavorable $ 1,400
Actual total overhead $32,000
Budgeted fixed costs $ 9,000
"Normal" activity in hours 12,000
Total overhead application rate per standard DLH $2.25
Marilyn uses a two-way analysis for its overhead variances.
139. What was Marilyn's controllable variance for April?

A) $ 500
B) $1,500

C) $1,750
D) $2,000
E) $2,250

Response:
$9,000/12,000 = $.75/DLH for fixed OH rate; Variable OH rate = $1.50/DLH
$32,000 - [$9,000 + ($1.50 x 15,000)] = $500 unfavorable
AACSB: Analytic
140. Is the controllable variance favorable or unfavorable?

A) favorable
B) unfavorable

AACSB: Analytic
141. What was Marilyn's production volume variance for April?

A) $ 500
B) $1,500
C) $1,750
D) $2,000
E) $2,250

Response: $.75/DLH x (15,000 - 12,000) = $2,250 favorable
AACSB: Analytic

A) favorable
B) unfavorable

AACSB: Analytic
Part C: Professional Examination Questions
143. 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.

AACSB: Analytic

144. 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

AACSB: Analytic
145. In analyzing company operations, the controller of the Jason Corporation found a $250,000
favorable flexible budget revenue variance. The variance was calculated by comparing the actual
results with the flexible budget. This variance can be wholly explained by (CMA adapted)
A) the total flexible budget variance.
B) the total static budget variance.
C) changes in unit selling prices.
D) changes in the number of units sold.
Answer: C Difficulty: Moderate Learning Objective: 2,3

AACSB: Analytic
146. If the total materials variance (actual cost of materials used compared with the standard cost of
the standard amount of materials required) for a given operation is favorable, why must this
variance be further evaluated as to price and efficiency? (CPA adapted)
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) Determining price and usage variances allows management to evaluate the efficiency of the
purchasing and production functions.

AACSB: Analytic
147. The standard unit cost is used in the calculation of which of the following variance? (CPA
adapted)
Materials Price Materials Usage

Variance Variance
A) No No
B) No Yes
C) Yes No
D) Yes Yes

Answer: D Difficulty: Simple Learning Objective: 5
AACSB: Analytic
148. 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.

AACSB: Analytic
149. 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.

AACSB: Analytic
150. The flexible 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 maintained 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.

Response:
$81,000/9,000 = $9.00 standard cost per unit
$77,775 - ($9 x 8,500) = $1,275 unfavorable direct labor rate variance
AACSB: Analytic
151. Tub 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

Response: (AH - 2,000) x $8.00 = $1,600 unfavorable; AH = 2,200
AACSB: Analytic
152. 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.

AACSB: Analytic
153. 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%.

AACSB: Analytic
Essay Questions
154. The Hageness Company has had great difficulty in controlling overhead costs. At a recent
convention, the president heard about a control device for overhead costs known as a flexible
budget and she has hired you to implement this budgeting program. After some effort, you
develop the following cost formulas for the company's machining department. These costs are
based on a normal operating range of 15,000 to 23,000 machine-hours per month:
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 2007, 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 2007.
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.
Answer:
Flexible Flex. Budget Sales Activity

Actual Budget Variance Master Budget Variance
Machine Setup 4,800 3,600 1,200 U 3,800 200 F
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 Labor 32,500 30,800 1,700 U 31,400 600 F
Depreciation 32,500 32,000 500 U 32,000 0F
Total Costs 106,300 105,000 1,300 U 107,500 2,500 F
AACSB: Analytic
155. The Kessler 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.
Answer:
Flexible Flex. Budget Sales Activity

Actual Budget Variance Master Budget Variance
Units 21,000 21,000 0 24,000 3,000 U
Sales 2,016,000 2,100,000 84,000 U 2,400,000 300,000 U
Variable Costs 1,500,000 1,470,000 30,000 U 1,680,000 210,000 F
Contribution
Margin 516,000 630,000 114,000 U 720,000 90,000 U
Fixed Costs 497,000 500,000 3,000 F 500,000 0F
Operating
Profits 19,000 130,000 111,000 U 220,000 90,000 U
AACSB: Analytic
156. Eastern Company manufactures special electrical equipment and parts. Eastern employs a
standard cost accounting system with separate standards established for each product.
A special transformer is manufactured in the Transformer Department. Production volume is

measured by direct labor hours in this department and a flexible budget system is used to plan and
control department overhead.
Standard costs for the special transformer are determined annually in September for the coming
year. The standard cost of a transformer for 2007 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 for 2007, 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, 2007, 800 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 department scheduled overtime in an attempt to catch up to expected production
levels.
The following costs were incurred in October 2007:

DIRECT MATERIALS:
Purchased Used
Iron 5,000 sheets @ $2.00/sheet 3,900 sheets
Copper 2,200 spools @ $3.10/spool 2,600 spools
DIRECT LABOR:
Regular time: 2,000 hours @ $7.00
Overtime: 1,400 hours $ $7.20
600 of the 1,400 hours were subject to overtime premium. The total overtime premium of $2,160
is included in variable overhead in accordance with company accounting practices
OVERHEAD:
Variable overhead $10,000

Fixed overhead $ 8,800
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
(E) Variable overhead spending variance
(F) Variable overhead efficiency variance
(G) Fixed overhead spending (budget) variance
(H) Production volume variance
Answer:
(A) Iron: ($2.00 - $2.00) x 5,000 = $0 favorable
Copper : ($3.10 - $3.00) x 2,200 = $220 unfavorable
(B) Iron: [3,900 – (5 x 800)] x $2.00 = $200 favorable
Copper: [2,600 – (3 x 800)] x $3.00 = $600 unfavorable
(C) [($7.00 x 2,000) + ($7.20 x 1,400)] – ($7.00 x 3,400) = $280 unfavorable
(D) [3,400 – (4 x 800)] x $7.00 = $1,400 unfavorable
(E) $10,000 – ($3.00 x 3,400) = $200 favorable
(F) ($3.00 x 3,400) – [$3.00 x (4 x 800)] = $600 unfavorable
(G) $8,800 – ($2.00 x 4,000) = $800 unfavorable
(H) ($2.00 x 4,000) – ($2.00 x 3,200) = $1,600 unfavorable
AACSB: Analytic
157. The XYZ Company uses a standard cost accounting system and estimates production for 2007 to
be 60,000 units. At this volume, the company's variable overhead costs are $.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 2007 follows:
Number of units produced 6,000

Materials purchased (24,000 yards) $115,200
Materials used in production (yards) 18,500
Variable overhead costs incurred $6,380
Fixed overhead costs incurred $20,400
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, assuming the material price variance is the
responsibility of the company's purchasing agent.
(B) Compute the direct material efficiency variance.
(C) Prepare the journal entry to record the issuance of materials to production assuming all
material variances are recognized when materials are used.
(D) Compute the direct labor price (rate) variance.
(E) Compute the direct labor efficiency variance.
(F) Compute the predetermined overhead rate used for the year.
(G) Compute the budgeted fixed costs for the month.
(H) Compute the variable overhead spending variance.
(I) Compute the variable overhead efficiency variance.
(J) Compute the fixed overhead spending (budget) variance.
(K) Compute the production volume variance.
Answer:
(A) [($115,200/24,000) – ($13.20/3)] x 24,000 =
($4.80 - $4.40) x 24,000 = $9,600 unfavorable
(B) [18,500 – (3 x 6,000)] x $4.40 = $2,200 unfavorable
(C) Work-in-process inventory (18,000 x $4.40) Dr. 79,200
Price variance ($.40 x 18,500) Dr. 7,400
Quantity variance (500 x $4.40) Dr. 2,200
Direct materials inventory (18,500 x $4.80) Cr. 88,800
(D) ($6.50 - $6.00) x ($75,400/$6.50) = $5,800 unfavorable
(E) [11,600 – (2 x 6,000)] x $6.00 = $2,400 favorable
(F) $30.00 - $13.20 - $12.00 = $4.80/unit or $2.40 per DLH
(G) $4.80 x 60,000 = $288,000 Total OH
$.50 x (2 x 60,000) = $60,000 Variable OH
Budgeted fixed OH = $288,000 - $60,000 = $228,000
(H) $6,380 – ($.50 x 11,600) = $580 unfavorable
(I) ($.50 x 11,600) – [$.50 x (2 x 6,000)] = $200 favorable
(J) $20,400 – ($228,000/12) = $1,400 unfavorable
(K) ($228,000/12) – [($228,000/120,000) x (2 x 6,000)] = $3,800 favorable
AACSB: Analytic
158. The condensed flexible budget of the Scott Company for 2007 is given below:
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 in 2007 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: (Be sure to indicate whether the variances are favorable or unfavorable.)
A) Compute the variable overhead spending variance and the variable overhead efficiency
variance.
B) Compute the fixed overhead spending (budget) variance and the production volume variance.
Answer:
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 x 48,000) = $4,800 unfavorable
($2.50 x 48,000) – ($2.50 x 18,500 x 2.5) = $4,375 unfavorable
(B) $321,700 - $320,000 = $1,700 unfavorable
$320,000 – ($6.40 x 18,500 x 2.5) = $24,000 unfavorable
AACSB: Analytic

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What are some of the different types of variances discussed?

What are some of the different types of variances discussed?

How is a flexible budget calculated?

How is a flexible budget calculated?

Chapter 16

Fundamentals of Variance Analysis

Multiple Choice Questions

72. In the general model, a price variance is calculated as

Answer: C Difficulty: Simple Learning Objective: 5

73. In the general model, an efficiency variance is calculated as

Answer: A Difficulty: Simple Learning Objective: 5

Part B: Computational Questions

Answer: E Difficulty: Moderate Learning Objective: 2

Use the following to answer questions 89-95: