Cost

Chapter 16 - Fundamentals of Variance Analysis
Chapter 16
Fundamentals of Variance Analysis
True / False Questions
1. In essence, the terms "master budget" and "operating budget" mean the same thing and can
be used interchangeably.
True False
2. Variances are the difference between actual results and budgeted results.
True False
3. In general, and holding all other things constant, an unfavorable variance decreases
operating profits.
True False
4. A favorable variance is not necessarily good, and an unfavorable variance is not necessarily
bad.
True False
5. The terms "master budget" and "flexible budget" mean the same thing and can be used
interchangeably.
True False
6. A flexible budget adjusts the static budget to reflect the actual activity level achieved
during the period.
True False
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7. If the budgeted activity level is greater than the actual activity level, then the total budgeted
costs of the master budget will be greater than the total budgeted costs of the flexible budget.
True False
8. The difference between operating profits in the master budget and operating profits in the
flexible budget is called a sales price variance.
True False
9. The sales activity variance is the result of a difference between budgeted units sold and
actual units sold.
True False
10. The sales price variance is the actual selling price per unit times the difference between
budgeted number of units and the actual number of units sold.
True False
11. Production cost variances are input variances, while sales activity variances are output
variances.
True False
12. The flexible and master budget amounts are the same for fixed marketing and
administrative costs.
True False
13. The standard cost for a unit of output is the standard price per unit of input times the
standard number of inputs per one unit of output.
True False
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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. In setting standards, allowances usually include normal inefficiencies (e.g., defects in the
direct material, inexperienced workers, and coffee breaks).
True False
17. The direct labor efficiency variance can be the result of poor supervision or poor
scheduling by divisional managers.
True False
18. Variance analysis for fixed production costs is virtually the same as for variable
production costs.
True False
19. The budget (or spending) variance for fixed production costs is the difference between the
actual fixed costs and the budgeted fixed costs on the master budget.
True False
20. The production volume variance is the difference between fixed costs on the flexible
budget and the fixed costs on the master budget.
True False
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Multiple Choice Questions
21. Which of the following statements is (are) true?

(A) A favorable variance is not necessarily good, and an unfavorable variance is not
necessarily bad.
(B) The master budget includes operating budgets (e.g., production budget) and financial
budgets (e.g., cash budget).
A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.
22. An operating budget would not include a

A. cash budget.
B. sales budget.
C. labor budget.
D. production budget.
E. operating expense budget.
23. A variance can best be described as

A. benchmarks common to other firms in the same industry.
B. differences between planned results and actual results.
C. useful for performance evaluations but not making decisions.
D. generally accepted accounting principles when standards are used.
24. The most fundamental variance analysis compares

A. standard material prices with actual material prices.
B. standard direct labor rates with actual direct labor rates.
C. budgeted sales revenue with actual sales revenue.
D. budgeted operating income with actual operating income.
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25. In general, the terms favorable and unfavorable are used to describe the effect of a
variance on
A. net income.
B. sales revenue.
C. production costs.
D. operating expenses.
E. balance sheet.
26. Which of the following statements regarding variances is (are) false?

(A) In general and holding all other things constant, an unfavorable variance decreases
operating profits.
(B) A favorable variance is not always good, and an unfavorable variance is not always bad.
A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.
27. Which of the following variances will always be favorable when actual sales exceeds
budgeted sales?
A. variable cost
B. fixed cost
C. sales activity
D. operating profit
E. contribution margin
28. The purpose of the flexible budget is to

A. allow management some latitude in meeting goals.
B. eliminate cyclical fluctuations in production reports by ignoring variable costs.
C. compare actual and budgeted results at virtually any level of production.
D. reduce the total time in preparing the annual budget.
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29. The basic difference between a master budget and a flexible budget is that a
A. flexible budget considers only variable costs but a master budget considers all costs.
B. flexible budget allows management latitude in meeting goals whereas a master budget is
based upon a fixed standard.
C. master budget is for an entire production facility but a flexible budget is applicable to
single departments only.
D. master budget is based on one specific level of production and a flexible budget can be
prepared for any production level within a relevant range.
30. The slope of the flexible budget-line is the

A. selling price per unit.
B. variable cost per unit.
C. fixed cost per unit.
D. contribution margin per unit.
E. operating profit per unit.
31. The intercept of the flexible budget-line is total

A. sales.
B. variable costs.
C. fixed costs.
D. contribution margin.
E. assets.
32. When using a flexible budget, what will happen to variable costs on a per-unit basis as
production increases within the relevant range?
A. Decrease.
B. Increase.
C. Remain unchanged.
D. Fixed costs are not considered in flexible budgeting.
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flexible budget is called
A. sales activity variance.
B. flexible budget variance.
C. production volume variance.
D. total operating profit variance.
34. Which of the following statements is (are) true regarding the sales activity variance?
(A) The sales activity variance is the actual selling price per unit times the difference between
the budgeted units and actual units.
(B) If the sales activity variance for sales revenue is unfavorable, then the contribution margin
sales activity variance will be unfavorable.
A. Only A is true.
B. Only B is true.
C. Neither A and B is true.
D. Both A and B are true.
35. The sales price variance is the difference between the actual sales revenues and the
A. budgeted selling price multiplied by the budgeted number of units sold.
B. budgeted selling price multiplied by the actual number of units sold.
C. actual selling price multiplied by the budgeted number of units sold.
D. actual selling price multiplied by the actual number of units sold.
36. If the total materials variance for a given operation is favorable, why must this variance be
further evaluated as to price and usage?
A. There is no need to further evaluate the total materials variance if it is favorable.
B. Generally accepted accounting principles require that all variances be analyzed in three
stages.
C. All variances must appear in the annual report to equity owners for proper disclosure.
D. A further evaluation lets management evaluate the activities of the purchasing and
production functions.
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37. Which department is customarily held responsible for an unfavorable materials quantity
variance?
A. Quality control.
B. Purchasing.
C. Engineering.
D. Production.
38. When are the following direct materials variances ideally reported?
A. a
B. b
C. c
D. d
39. In the general model, a price variance is calculated as

A. (AP  AQ) - (AP  SQ)
B. (AP  SQ) - (SP  SQ)
C. (AP  AQ) - (SP  AQ)
D. (AP  AQ) - (SP  SQ)
40. In the general model, an efficiency variance is calculated as

A. (SP  AQ) - (SP  SQ)
B. (AP  SQ) - (SP  SQ)
C. (AP  AQ) - (SP  SQ)
D. (AP  AQ) - (SP  AQ)
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41. Which of the following direct labor variances uses the standard hours allowed for the
actual number of units produced?
A. a
B. b
C. c
D. d
42. Which of the following is the most probable reason a company would experience an
unfavorable labor rate variance and a favorable labor efficiency variance?
A. The mix of workers assigned to the particular job was heavily weighted towards the use of
higher paid experienced individuals.
B. The mix of workers assigned to the particular job was heavily weighted towards the use of
new relatively low paid unskilled workers.
C. Because of the production schedule, workers from other production areas were assigned to
assist this particular process.
D. Defective materials caused more labor to be used in order to produce a standard unit.
43. Which variance will be unfavorable due to employees working more hours than allowed
for the actual number of units produced?
A. Price (rate)
B. Efficiency
C. Sales activity
D. Production volume
44. In general, the direct labor efficiency variance is the responsibility of the
A. purchasing agent.
B. company president.
C. production manager.
D. industrial engineering.
E. marketing department.
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45. The variable overhead price variance is due to

A. price items only.
B. efficiency items only.
C. both price and efficiency items.
D. neither price or efficiency items.
46. If overhead is applied to production using direct labor hours and the direct labor efficiency
variance is favorable, then the variable overhead efficiency variance is
A. favorable.
B. unfavorable.
C. either favorable or unfavorable.
D. neither favorable not unfavorable.
47. The production volume variance is computed by the difference between the
A. actual fixed overhead and applied fixed overhead.
B. actual fixed overhead and budget at actual level of activity reached.
C. actual fixed overhead and budget at denominator level of activity planned.
D. budget at actual levels of activity reached and fixed overhead applied.
48. Which of the following is not an alternative name for the production volume variance?
A. capacity variance
B. idle capacity variance
C. denominator variance
D. fixed overhead efficiency variance
49. The production volume variance must be computed when a company uses
A. activity-based costing.
B. process costing.
C. job-order costing.
D. full-absorption costing.
E. variable costing.
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50. Which of these variances is least significant for cost control?

A. labor price variance
B. material quantity variance
C. fixed overhead price variance
D. production volume variance
E. labor efficiency variance
51. A debit balance in the labor-efficiency variance account indicates that

A. standard hours exceed actual hours.
B. actual hours exceed standard hours.
C. standard rate and standard hours exceed actual rate and actual hours.
D. actual rate and actual hours exceed standard rate and standard hours.
52. If materials are carried in the direct materials inventory account at standard cost, then it is
reasonable to assume that the
A. raw materials inventory account is understated.
B. price variance is recognized when materials are purchased.
C. company does not follow generally accepted accounting principles.
D. price variance is recognized when materials are placed into production.
53. The Redrock Company uses flexible budgeting for cost control. Redrock produced 10,800
units of product during October, incurring indirect material costs of $13,000. Its master
budget for the reflected indirect material costs of $180,000 at a production volume of 144,000
units. What was the flexible budget variance for the indirect material costs in October?
A. $1,100 favorable
B. $1,100 unfavorable
C. $2,000 favorable
D. $2,000 unfavorable
E. $500 favorable
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54. What is the actual sales revenue?

A. $156,000.
B. $169,000.
C. $180,000.
D. $191,000.
55. What is the sales revenue in the flexible budget?

A. $139,000.
B. $156,000.
C. $169,000.
D. $180,000.
56. What is the flexible budget contribution margin?

A. $39,000.
B. $45,000.
C. $52,000.
D. $58,000.
57. What is the master budget sales revenue?

A. $124,000.
B. $148,000.
C. $156,000.
D. $180,000.
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58. What is the master budget contribution margin?

A. $52,000.
B. $47,500.
C. $45,000.
D. $39,000.
59. What is the activity variance for the variable manufacturing costs?
A. $4,000
B. $14,000
C. $24,000
D. $34,000
60. Is the activity variance for the variable manufacturing costs favorable or unfavorable?
A. favorable
B. unfavorable
Arrow Industries employs a standard cost system in which direct materials inventory is
carried at standard cost. Arrow has established the following standards for the prime costs of
one unit of product.
During November, Arrow purchased 160,000 pounds of direct materials at a total cost of
$304,000. The total factory wages for November were $42,000, 90% of which were for direct
labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds
of direct materials and 5,000 direct labor hours.
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61. What is the direct materials price variance for November?

A. $14,250
B. $14,400
C. $16,000
D. $17,100
62. Is the direct materials price variance favorable or unfavorable?

A. favorable
B. unfavorable
63. What is the direct materials efficiency (quantity) variance for November?
A. $14,250
B. $14,400
C. $16,000
D. $17,100
64. Is the direct materials efficiency (quantity) variance favorable or unfavorable?

A. favorable
B. unfavorable
65. 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
66. Is the direct labor price (rate) variance favorable or unfavorable?

A. favorable
B. unfavorable
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67. What is the direct labor efficiency variance for November?

A. $1,800
B. $1,900
C. $2,000
D. $2,090
E. $2,200
68. Is the direct labor efficiency variance favorable or unfavorable?

A. favorable
B. unfavorable
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.
69. 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.
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70. What were the actual quantity of materials used during the month?
A. 2,156.
B. 2,100.
C. 2,225.
D. 1,975.
71. What was the actual price paid for the direct material during the month, assuming all
materials purchased were put into production?
A. $4.34.
B. $4.22.
C. $4.11.
D. $4.00.
E. $3.90.
Data on Goodman Company's direct-labor costs are given below:
72. What was Goodman's actual direct-labor rate?

A. $3.60
B. $3.80
C. $4.00
D. $5.80
73. What was Goodman's standard direct-labor rate?

A. $3.54
B. $3.80
C. $4.00
D. $5.80
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74. Blue Company produces Trivets. Based on its master budget, the company should produce
1,000 Trivets each month, working 2,500 direct labor hours. During May, only 900 Trivets
were produced. The company worked 2,400 direct labor hours. The standard hours allowed
for May production would be
A. 2,500 hours.
B. 2,400 hours.
C. 2,250 hours.
D. 1,800 hours.
Information on Barber Company's direct labor costs for the month of January is as follows:
75. What is Barber's direct labor price (rate) variance?

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

A. favorable
B. unfavorable
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77. The following data pertains to the direct materials cost for the month of October:
What is the direct materials efficiency (quantity) variance?

A. $950 favorable
B. $950 unfavorable
C. $1,000 favorable
E. $50 unfavorable
78. The Landry Company has developed standards for labor. During June, 75 units were
scheduled and 100 were produced. Data related to labor are:
What is the labor rate variance for June?

A. $30 unfavorable
B. $31 favorable
C. $31 unfavorable
D. $30 favorable
79. Given the following information in standard costing:
What is the total direct labor cost variance?

A. $3,160, favorable
B. $3,160, unfavorable
C. $2,360, favorable
D. $2,360, unfavorable
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80. Information for Nighttime Company's direct labor cost for February is as follows:
What were the standard direct labor hours for February?

A. 70,000
B. 69,000
C. 72,000
D. 71,400
81. What is the fixed overhead spending (budget) variance?

A. $200
B. $400
C. $300
D. $240
82. Is the fixed overhead spending (budget) variance favorable or unfavorable?

A. favorable
B. unfavorable
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83. What is the production volume variance?

A. $200
B. $400
C. $300
D. $240
84. Is the production volume variance favorable or unfavorable?

A. favorable
B. unfavorable
85. Dickey Company had total underapplied overhead of $15,000. Additional information is
as follows:
What is the actual total overhead for the period?

A. $50,000
B. $45,000
C. $80,000
D. $87,000
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86. What is the fixed overhead spending (budget) variance for May?
A. $1,000 unfavorable
C. $2,000 unfavorable
D. $2,000 favorable
E. $3,000 favorable
87. What is the production volume variance for May?

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

A. favorable
B. unfavorable
89. A standard cost system may be used in (CPA adapted)

A. job-order costing but not process costing.
B. either job-order costing or process costing.
C. process costing but not job-order costing.
D. neither process costing nor job-order costing.
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90. When a manager is concerned with monitoring total cost, total revenue, and net profit
conditioned upon the level of productivity, an accountant should normally recommend (CPA
adapted)
A. a
B. b
C. c
D. d
91. In analyzing company operations, the controller of the Jason Corporation found a
$250,000 favorable flexible budget revenue variance. The variance was calculated by
comparing the actual results with the flexible budget. This variance can be wholly explained
by (CMA adapted)
A. the total flexible budget variance.
B. the total static budget variance.
C. changes in unit selling prices.
D. changes in the number of units sold.
92. The standard unit cost is used in the calculation of which of the following variance? (CPA
adapted)
A. a
B. b
C. c
D. d
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93. A favorable materials price variance coupled with an unfavorable materials usage variance
would most likely result from (CMA adapted)
A. Machine efficiency problems.
B. Product mix production changes.
C. Labor efficiency problems.
D. The purchase of lower-than-standard-quality materials.
94. Excess direct labor wages resulting from overtime premium will be disclosed in which
type of variance? (CPA adapted)
A. Yield.
B. Quantity.
C. Labor efficiency.
D. Labor rate.
95. The budget for the month of May was for 9,000 units at a direct materials cost of $15 per
unit. Direct labor was budgeted at 45 minutes per unit for a total of $81,000. Actual output for
the month was 8,500 units with $127,500 in direct materials and $77,775 in direct labor
expense. The direct labor standard of 45 minutes was obtained throughout the month.
Variance analysis of the performance for the month of May would show a(n) (CMA adapted)
A. Favorable materials efficiency (quantity) variance of $7,500.
B. Favorable direct labor efficiency variance of $1,275.
C. Unfavorable direct labor efficiency variance of $1,275.
D. Unfavorable direct labor price (rate) variance of $1,275.
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96. Tub Company uses a standard cost system. The following information pertains to direct
labor for product B for the month of October:
What were the actual hours worked for the month of October?
A. 1,800
B. 1,810
C. 2,190
D. 2,200
97. The fixed factory overhead application rate is a function of a predetermined activity level.
If standard hours allowed for good output equal this predetermined activity level for a given
period, the volume variance will be (CPA adapted)
A. Zero.
B. Favorable.
C. Unfavorable.
D. Either favorable or unfavorable, depending on the budgeted overhead.
98. Which one of the following variances is of least significance from a behavioral control
perspective? (CMA adapted)
A. Unfavorable materials quantity variance amounting to 20% of the quantity allowed for the
output attained.
B. Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for
the output attained.
C. Favorable materials price variance obtained by purchasing raw materials from a new
vendor.
D. Fixed factory overhead volume variance resulting from management's decision midway
through the fiscal year to reduce its budgeted output by 20%.
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99. Which of the following organizational policies is most likely to result in undesirable
managerial behavior? (CMA adapted)
A. Patel Chemicals sponsors television coverage of cricket matches between national teams
representing India and Pakistan. The expenses of such media sponsorship are not allocated to
its various divisions.
B. Joe Walk, the chief executive officer of Eagle Rock Brewery, wrote a memorandum to his
executives stating, "Operating plans are contracts and they should be met without fail."
C. The budgeting process at Madsen Manufacturing starts with operating managers providing
goals for their respective departments.
D. Fullbright Lighting holds quarterly meetings of departmental managers to consider
possible changes in the budgeted targets due to changing conditions.
E. At Fargo Transportation, managers are expected to provide explanations for variances from
the budget in their departments.
100. Based on past experience, a company has developed the following budget formula for
estimating its shipping expenses. The company's shipments average 12 lbs. per shipment:
Shipping costs = $16,000 + ($0.50  lbs. shipped)
The planned activity and actual activity regarding orders and shipments for the current month
are given in the following schedule:
The actual shipping costs for the month amounted to $21,000. The appropriate monthly
flexible budget allowance for shipping costs for the purpose of performance evaluation would
be (CMA adapted)
A. $20,680
B. $20,920
C. $20,800
D. $22,150
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Essay Questions
101. The Hageness Company has had great difficulty in controlling overhead costs. At a
recent convention, the president heard about a control device for overhead costs known as a
flexible budget and she has hired you to implement this budgeting program. After some effort,
you develop the following cost formulas for the company's machining department. These
costs are based on a normal operating range of 15,000 to 23,000 machine-hours per month:
During March, the first month after your preparation of the above data, the machining
department worked 18,000 machine-hours and produced 9,000 units of product. The actual
costs of this production were:
The department had originally been budgeted to work 19,000 machine-hours during March.
Required:
Prepare a performance report for the machining department for the month of March including
columns for the (a) actual results, (b) flexible budget, (c) flexible budget variance, (d) master
budget, and (e) sales activity variance.
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102. The Kessler Company has the following information pertaining to the month of March:
Required:
Prepare a performance report for March including columns for the (a) actual results, (b)
flexible budget, (c) flexible budget variance, (d) master budget, and (e) sales activity
variance.
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103. Eastern Company manufactures special electrical equipment and parts. Eastern employs
a standard cost accounting system with separate standards established for each product.
A special transformer is manufactured in the Transformer Department. Production volume is
measured by direct labor hours in this department and a flexible budget system is used to plan
and control department overhead. Standard costs for the special transformer are determined
annually in September for the coming year. The standard cost of a transformer was computed
at $67.00 as shown below.
Overhead rates were based upon normal and expected monthly capacity, both of which were
4,000 direct labor hours. Practical capacity for this department is 5,000 direct labor hours per
month. Variable overhead costs are expected to vary with the number of direct labor hours
actually used. During October, 800 transformers were produced. This was below expectations
because a work stoppage occurred at the copper supplier and shipments were delayed.
The following costs were incurred in October:
Required: Compute each of the following variances, showing all your work. Be sure to
indicate whether the variances are favorable or unfavorable.
a. Direct materials price variance for both iron and copper
b. Direct material efficiency (quantity) variance for both iron and copper
c. Direct labor rate variance
d. Direct labor efficiency variance
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a. Variable overhead spending variance
b. Variable overhead efficiency variance
c. Fixed overhead spending (budget) variance
d. Production volume variance
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105. Western Company manufactures special electrical equipment and parts. Western employs
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.
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
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a. Direct materials price variance

b. Direct material efficiency (quantity) variance
e. Variable overhead spending variance
f. Variable overhead efficiency variance
g. Fixed overhead spending (budget) variance
h. Production volume variance
106. The XYZ Company uses a standard cost accounting system and estimates production for
the year to be 60,000 units. At this volume, the company's variable overhead costs are $.50
per direct labor hour.
The company's single product has a standard cost of $30.00 per unit. Included in the $30.00 is
$13.20 for direct materials (3 yards) and $12.00 of direct labor (2 hours). Production
information for the month of March follows:
Required: (Be sure to indicate whether the variances are favorable or unfavorable.)
a. Compute the direct material price variance.
b. Compute the direct material efficiency variance.
c. Compute the direct labor price (rate) variance.
d. Compute the direct labor efficiency variance.
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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.
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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.
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a. Incurring actual overhead
b. Application of overhead to production.
c. Closing of overhead accounts and recognizing variances.
d. Transferring production to finished goods.
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110. The Acme Company uses a standard cost accounting system and estimates production for

c. Incurring actual overhead
d. Application of overhead to production.
e. Closing of overhead accounts and recognizing variances.
f. Transferring production to finished goods.
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111. The condensed flexible budget of the Scott Company for the year is given below:
Direct labor-hours
The company produces a single product that requires 2.5 direct labor-hours to complete. The
direct labor wage rate is $7.50 per hour. Three yards of raw material are required for each unit
of product, at a cost of $5 per yard.
Assume that the company chooses 50,000 direct labor-hours as the denominator level of
activity, but actually worked 48,000 hours during the year producing 18,500 units.
Actual overhead costs for the year are:
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.
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112. The condensed flexible budget of the Scooter Company for the year is given as $160,000
+ $1.25/direct labor hour. The company produces a single product that requires 2.5 direct
labor-hours to complete.
variance.
variance.
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113. The Standard Company has developed standard overhead costs based upon a capacity of
180,000 direct labor hours:
During April, 85,000 units were scheduled for production; however, only 80,000 units were
actually produced. The following data relate to April:
Actual direct labor cost incurred was $644,000 for 165,000 actual hours of work.
Actual overhead incurred totaled $1,378,000; $518,000 variable and $860,000 fixed.
All inventories are carried at standard cost.
a. Compute the variable overhead price variance.
b. Compute the variable overhead efficiency variance.
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a. Compute the fixed overhead spending (budget) variance.
b. Compute the production volume variance.
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115. Dash Company adopted a standard cost system several years ago. The standard costs for
the prime costs of its single product are as follows:
The following operating data were taken from the records for November:
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)?
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16-41
117. The following information relates to the month of April for The Marilyn Manufacturing
Company, which uses a standard cost accounting system.
a. What is the variable overhead efficiency variance?
b. What is the fixed overhead spending variance?
c. What is the fixed production volume variance?
16-42
b. What is the variable overhead price variance?
16-43
119. The data below relate to a product of Benoit Company.
b. Compute the direct material usage variance.
c. Compute the direct labor rate variance.
16-44
120. The data below relate to a product of Valois Company.
c. What is the fixed overhead budget variance?
d. What is the fixed production volume variance?
121. Explain the difference between operating budgets, financial budgets, and flexible
budgets.
16-45
122. Explain the difference between the sales volume variance and the production volume
variance.
123. Explain how standards and budgets are different.
124. Explain two reasons why splitting production costs into price and efficiency variances is
beneficial for management control.
125. Explain two reasons for preparing a variance analysis.
16-46
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: Analytic
AICPA: FN-Decision Making
Bloom's: Comprehension
Difficulty: Easy
Learning Objective: 1
Topic Area: Using Budgets for Performance Evaluation
2. Variances are the difference between actual results and budgeted results.
TRUE
This is the fundamental definition of variance.
AACSB: Analytic
Difficulty: Easy
16-47
3. In general, and holding all other things constant, an unfavorable variance decreases
operating profits.
TRUE
A favorable variance increases operating profits.
AACSB: Analytic
Difficulty: Medium
Topic Area: Profit Variance
4. A favorable variance is not necessarily good, and an unfavorable variance is not necessarily
bad.
TRUE
A favorable or unfavorable variance in one period may have long term impacts in the opposite
direction.
AACSB: Analytic
Difficulty: Medium
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.
AACSB: Analytic
Difficulty: Easy
Topic Area: Flexible Budgeting
16-48
6. A flexible budget adjusts the static budget to reflect the actual activity level achieved
during the period.
TRUE
This is the basic principle of a flexible budget.
AACSB: Analytic
Difficulty: Medium
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, the flexible budget is based on the
actual activity level.
AACSB: Analytic
Difficulty: Hard
flexible budget is called a sales price variance.
FALSE
This is a sales activity variance.
AACSB: Analytic
Difficulty: Easy
Topic Area: Sales Activity Variance
16-49
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.
AACSB: Analytic
Difficulty: Easy
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.
AACSB: Analytic
Difficulty: Easy
Topic Area: Sales Price Variance
11. Production cost variances are input variances, while sales activity variances are output
variances.
TRUE
Costs are based on inputs, revenues are based on outputs.
AACSB: Analytic
Difficulty: Easy
Topic Area: Variable Production Cost Variances
16-50
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.
AACSB: Analytic
Difficulty: Easy
Topic Area: Marketing and Administrative Variances
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.
AACSB: Analytic
Difficulty: Medium
Topic Area: Variable Production Costs
14. Both the actual material used and the standard quantity allowed for material is based on
the actual output attained.
TRUE
Standard quantity allowed = standard per unit  actual output.
AACSB: Analytic
Difficulty: Medium
Topic Area: Direct Materials
16-51
15. It is possible to have a favorable direct material price variance and an unfavorable direct
material efficiency variance.
TRUE
For example, 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.
AACSB: Analytic
Difficulty: Medium
16. In setting standards, allowances usually include normal inefficiencies (e.g., defects in the
direct material, inexperienced workers, and coffee breaks).
TRUE
This would give us a practical (vs a theoretical) standard,
AACSB: Analytic
Difficulty: Medium
Topic Area: Variable Cost Variance Analysis
17. The direct labor efficiency variance can be the result of poor supervision or poor
scheduling by divisional managers.
TRUE
For example, poor scheduling may cause wasted time.
AACSB: Analytic
Difficulty: Medium
Topic Area: Direct Labor
16-52
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.
AACSB: Analytic
Difficulty: Easy
Topic Area: Fixed Cost Variances
19. The budget (or spending) variance for fixed production costs is the difference between the
actual fixed costs and the budgeted fixed costs on the master budget.
TRUE
This is the definition of the budget/spending variance.
AACSB: Analytic
Difficulty: Medium
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.
AACSB: Analytic
Difficulty: Easy
Topic Area: Absorption Costing: The Production Volume Variance
16-53
Multiple Choice Questions
21. Which of the following statements is (are) true?

(A) A favorable variance is not necessarily good, and an unfavorable variance is not
necessarily bad.
(B) The master budget includes operating budgets (e.g., production budget) and financial
budgets (e.g., cash budget).
A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.
Both statements are true.
AACSB: Analytic
Difficulty: Easy
22. An operating budget would not include a

A. cash budget.
B. sales budget.
C. labor budget.
D. production budget.
E. operating expense budget.
The cash budget is a financial budget.
AACSB: Analytic
Difficulty: Easy
16-54
23. A variance can best be described as

A. benchmarks common to other firms in the same industry.
B. differences between planned results and actual results.
C. useful for performance evaluations but not making decisions.
D. generally accepted accounting principles when standards are used.
Variances are internal to a company and are useful for decision making as well as
performance evaluation.
AACSB: Analytic
Difficulty: Easy
24. The most fundamental variance analysis compares

A. standard material prices with actual material prices.
B. standard direct labor rates with actual direct labor rates.
C. budgeted sales revenue with actual sales revenue.
D. budgeted operating income with actual operating income.
The most fundamental variance is comparing incomes rather than components of income.
AACSB: Analytic
Difficulty: Easy
16-55
25. In general, the terms favorable and unfavorable are used to describe the effect of a
variance on
A. net income.
B. sales revenue.
C. production costs.
D. operating expenses.
E. balance sheet.
What impact does a variance have on profit?
AACSB: Analytic
Difficulty: Easy
26. Which of the following statements regarding variances is (are) false?

(A) In general and holding all other things constant, an unfavorable variance decreases
operating profits.
(B) A favorable variance is not always good, and an unfavorable variance is not always bad.
A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.
Both statements are true.
AACSB: Analytic
Difficulty: Easy
16-56
27. Which of the following variances will always be favorable when actual sales exceeds
budgeted sales?
A. variable cost
B. fixed cost
C. sales activity
D. operating profit
E. contribution margin
If actual sales are greater than budget, budgeted profits will be higher.
AACSB: Analytic
Difficulty: Easy
28. The purpose of the flexible budget is to

A. allow management some latitude in meeting goals.
B. eliminate cyclical fluctuations in production reports by ignoring variable costs.
C. compare actual and budgeted results at virtually any level of production.
D. reduce the total time in preparing the annual budget.
The budget is restated to actual output level.
AACSB: Analytic
Difficulty: Medium
16-57
29. The basic difference between a master budget and a flexible budget is that a
A. flexible budget considers only variable costs but a master budget considers all costs.
B. flexible budget allows management latitude in meeting goals whereas a master budget is
based upon a fixed standard.
C. master budget is for an entire production facility but a flexible budget is applicable to
single departments only.
D. master budget is based on one specific level of production and a flexible budget can be
prepared for any production level within a relevant range.
The master budget is prepared beforehand based on a single forecast; the flexible budget is
prepared after the actual output is known.
AACSB: Analytic
Difficulty: Medium
30. The slope of the flexible budget-line is the

A. selling price per unit.
B. variable cost per unit.
C. fixed cost per unit.
D. contribution margin per unit.
E. operating profit per unit.
The flexible budget line measures costs. The slope is the variable cost.
AACSB: Analytic
Difficulty: Easy
16-58
31. The intercept of the flexible budget-line is total

A. sales.
B. variable costs.
C. fixed costs.
D. contribution margin.
E. assets.
At zero activity there are no variable costs. All costs at that point are fixed.
AACSB: Analytic
Difficulty: Easy
32. When using a flexible budget, what will happen to variable costs on a per-unit basis as
production increases within the relevant range?
A. Decrease.
B. Increase.
C. Remain unchanged.
D. Fixed costs are not considered in flexible budgeting.
Variable costs by definition are constant (within the relevant range) on a per unit basis.
AACSB: Analytic
Difficulty: Easy
16-59
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.
AACSB: Analytic
Difficulty: Easy
34. Which of the following statements is (are) true regarding the sales activity variance?
(A) The sales activity variance is the actual selling price per unit times the difference between
the budgeted units and actual units.
(B) If the sales activity variance for sales revenue is unfavorable, then the contribution margin
sales activity variance will be unfavorable.
A. Only A is true.
B. Only B is true.
C. Neither A and B is true.
D. Both A and B are true.
(A) The sales activity variance uses budgeted selling price. (B) is true—a unfavorable
variance is the result of actual sales being less than budgeted.
AACSB: Analytic
Difficulty: Easy
16-60
35. The sales price variance is the difference between the actual sales revenues and the
A. budgeted selling price multiplied by the budgeted number of units sold.
B. budgeted selling price multiplied by the actual number of units sold.
C. actual selling price multiplied by the budgeted number of units sold.
D. actual selling price multiplied by the actual number of units sold.
(Actual price - budgeted price)  actual volume
AACSB: Analytic
Difficulty: Medium
Topic Area: Sales Price Variance
36. If the total materials variance for a given operation is favorable, why must this variance be
further evaluated as to price and usage?
A. There is no need to further evaluate the total materials variance if it is favorable.
B. Generally accepted accounting principles require that all variances be analyzed in three
stages.
C. All variances must appear in the annual report to equity owners for proper disclosure.
D. A further evaluation lets management evaluate the activities of the purchasing and
production functions.
GAAP does not require any specific analysis of variances. In the annual report, if variances
are reported it is in aggregate form, not broken down.
AACSB: Analytic
Difficulty: Easy
16-61
37. Which department is customarily held responsible for an unfavorable materials quantity
variance?
A. Quality control.
B. Purchasing.
C. Engineering.
D. Production.
Production is responsible for the usage of the materials.
AACSB: Analytic
Difficulty: Easy
38. When are the following direct materials variances ideally reported?
A. a
B. b
C. c
D. d
Price variances are reported when they occur, which is purchase date. Quantity occurs at time
of use.
AACSB: Analytic
Difficulty: Easy
16-62
39. In the general model, a price variance is calculated as

A. (AP  AQ) - (AP  SQ)
B. (AP  SQ) - (SP  SQ)
C. (AP  AQ) - (SP  AQ)
D. (AP  AQ) - (SP  SQ)
Can also be written (AP - SP)  AQ
AACSB: Analytic
Difficulty: Easy
Topic Area: General Model
40. In the general model, an efficiency variance is calculated as

A. (SP  AQ) - (SP  SQ)
B. (AP  SQ) - (SP  SQ)
C. (AP  AQ) - (SP  SQ)
D. (AP  AQ) - (SP  AQ)
Can also be written SP  (AQ - SQ)
AACSB: Analytic
Difficulty: Easy
Topic Area: General Model
16-63
41. Which of the following direct labor variances uses the standard hours allowed for the
actual number of units produced?
A. a
B. b
C. c
D. d
Rate is based on actual hours input only.
AACSB: Analytic
Difficulty: Easy
42. Which of the following is the most probable reason a company would experience an
unfavorable labor rate variance and a favorable labor efficiency variance?
A. The mix of workers assigned to the particular job was heavily weighted towards the use of
higher paid experienced individuals.
B. The mix of workers assigned to the particular job was heavily weighted towards the use of
new relatively low paid unskilled workers.
C. Because of the production schedule, workers from other production areas were assigned to
assist this particular process.
D. Defective materials caused more labor to be used in order to produce a standard unit.
The average pay rate is higher than standard, but more experienced workers are more efficient
since they have more experience.
AACSB: Analytic
Bloom's: Application
Difficulty: Medium
16-64
43. Which variance will be unfavorable due to employees working more hours than allowed
for the actual number of units produced?
A. Price (rate)
B. Efficiency
C. Sales activity
D. Production volume
Efficiency variance is the difference of actual hours and standard hours.
AACSB: Analytic
Difficulty: Easy
44. In general, the direct labor efficiency variance is the responsibility of the
A. purchasing agent.
B. company president.
C. production manager.
D. industrial engineering.
E. marketing department.
The production manager is the only one listed that has direct authority over the labor workers.
AACSB: Analytic
Difficulty: Easy
16-65
45. The variable overhead price variance is due to

A. price items only.
B. efficiency items only.
C. both price and efficiency items.
D. neither price or efficiency items.
The price variance is due to actual costs and the relationship between variable overhead and
direct labor not being perfect.
AACSB: Analytic
Difficulty: Medium
Topic Area: Variable Production Overhead
46. If overhead is applied to production using direct labor hours and the direct labor efficiency
variance is favorable, then the variable overhead efficiency variance is
A. favorable.
B. unfavorable.
C. either favorable or unfavorable.
D. neither favorable not unfavorable.
Both variances are caused by actual labor hours being less than standard.
AACSB: Analytic
Difficulty: Medium
16-66
47. The production volume variance is computed by the difference between the
A. actual fixed overhead and applied fixed overhead.
B. actual fixed overhead and budget at actual level of activity reached.
C. actual fixed overhead and budget at denominator level of activity planned.
D. budget at actual levels of activity reached and fixed overhead applied.
Production volume = budget - applied.
AACSB: Analytic
Difficulty: Medium
48. Which of the following is not an alternative name for the production volume variance?
A. capacity variance
B. idle capacity variance
C. denominator variance
D. fixed overhead efficiency variance
The production volume variance is not related to efficiency—it is related to capacity.
AACSB: Analytic
Difficulty: Easy
16-67
49. The production volume variance must be computed when a company uses
A. activity-based costing.
B. process costing.
C. job-order costing.
D. full-absorption costing.
E. variable costing.
Full absorption costing treats fixed production overhead as a product cost and applies it to
production. Variable costing treats fixed costs as period costs.
AACSB: Analytic
Difficulty: Easy
50. Which of these variances is least significant for cost control?

A. labor price variance
B. material quantity variance
C. fixed overhead price variance
D. production volume variance
E. labor efficiency variance
The production volume variance is created when actual outputs did not match the planned
outputs. This is less controllable than inputs.
AACSB: Analytic
Difficulty: Medium
Topic Area: Performance Measurement and Control in a Cost Center
16-68
51. A debit balance in the labor-efficiency variance account indicates that

A. standard hours exceed actual hours.
B. actual hours exceed standard hours.
C. standard rate and standard hours exceed actual rate and actual hours.
D. actual rate and actual hours exceed standard rate and standard hours.
A debit balance would be an unfavorable variance. Since it is efficiency, actual hours must
have exceeded standard hours.
AACSB: Analytic
Difficulty: Medium
Topic Area: Appendix: Recording Costs in a Standard Cost System
52. If materials are carried in the direct materials inventory account at standard cost, then it is
reasonable to assume that the
A. raw materials inventory account is understated.
B. price variance is recognized when materials are purchased.
C. company does not follow generally accepted accounting principles.
D. price variance is recognized when materials are placed into production.
If the materials are at standard, the price variation would have been removed.
AACSB: Analytic
Difficulty: Medium
16-69
53. The Redrock Company uses flexible budgeting for cost control. Redrock produced 10,800
units of product during October, incurring indirect material costs of $13,000. Its master
budget for the reflected indirect material costs of $180,000 at a production volume of 144,000
units. What was the flexible budget variance for the indirect material costs in October?
A. $1,100 favorable
C. $2,000 favorable
E. $500 favorable
($180,000/144,000)  10,800 = $13,500; $13,500 - 13,000 = $500 favorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-70
54. What is the actual sales revenue?

A. $156,000.
B. $169,000.
C. $180,000.
D. $191,000.
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
Bloom's: Analysis
Difficulty: Hard
55. What is the sales revenue in the flexible budget?

A. $139,000.
B. $156,000.
C. $169,000.
D. $180,000.
$169,000 (actual sales from previous question) - $13,000 = $156,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
16-71
56. What is the flexible budget contribution margin?

A. $39,000.
B. $45,000.
C. $52,000.
D. $58,000.
$156,000 - $91,000 - $26,000 = $39,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
57. What is the master budget sales revenue?

A. $124,000.
B. $148,000.
C. $156,000.
D. $180,000.
($156,000/13,000) = $12 selling price; $12  (13,000 + 2,000) = $180,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
16-72
58. What is the master budget contribution margin?

A. $52,000.
B. $47,500.
C. $45,000.
D. $39,000.
$180,000 - $105,000 - $30,000 = $45,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
59. What is the activity variance for the variable manufacturing costs?
A. $4,000
B. $14,000
C. $24,000
D. $34,000
105,000 - 91,000 = 14,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
60. Is the activity variance for the variable manufacturing costs favorable or unfavorable?
A. favorable
B. unfavorable
Less was spent than budgeted.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-73
Arrow Industries employs a standard cost system in which direct materials inventory is
carried at standard cost. Arrow has established the following standards for the prime costs of
one unit of product.
During November, Arrow purchased 160,000 pounds of direct materials at a total cost of
$304,000. The total factory wages for November were $42,000, 90% of which were for direct
labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds
of direct materials and 5,000 direct labor hours.
61. 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) - $1.80]  160,000 = $16,000 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-74
62. Is the direct materials price variance favorable or unfavorable?

A. favorable
B. unfavorable
Actual price was greater than standard.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
63. 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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
64. Is the direct materials efficiency (quantity) variance favorable or unfavorable?

A. favorable
B. unfavorable
Less materials were used than standard.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
16-75
65. 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
($7.56 - $8)  5,000 = $2,200 favorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium

A. favorable
B. unfavorable
The actual wage rate was less than standard.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
16-76
67. What is the direct labor efficiency variance for November?

A. $1,800
B. $1,900
C. $2,000
D. $2,090
E. $2,200
[5,000 - (19,000  .25)]  $8.00 = $2,000 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
68. Is the direct labor efficiency variance favorable or unfavorable?

A. favorable
B. unfavorable
Actual hours were greater than standard.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-77
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.
69. 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.
Number of units = $33,600/16.00 = 2,100; [AH - (2,100  2)]  $2.60 = $2,080 U; AH =

5,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
16-78
70. What were the actual quantity of materials used during the month?
A. 2,156.
B. 2,100.
C. 2,225.
D. 1,975.
($4.00  AQ) - (2,100  $4.00) = $500 U; AQ = 2,225
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
71. What was the actual price paid for the direct material during the month, assuming all
materials purchased were put into production?
A. $4.34.
B. $4.22.
C. $4.11.
D. $4.00.
E. $3.90.
(AP - $4.00) 2,225 = $244.75U; AP = $4.11 (rounded)
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Data on Goodman Company's direct-labor costs are given below:
16-79
72. What was Goodman's actual direct-labor rate?

A. $3.60
B. $3.80
C. $4.00
D. $5.80
$110,200/29,000 = $3.80
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
73. What was Goodman's standard direct-labor rate?

A. $3.54
B. $3.80
C. $4.00
D. $5.80
(29,000 - 30,000)  SR = 4,000; SR = $4.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
16-80
74. Blue Company produces Trivets. Based on its master budget, the company should produce
1,000 Trivets each month, working 2,500 direct labor hours. During May, only 900 Trivets
were produced. The company worked 2,400 direct labor hours. The standard hours allowed
for May production would be
A. 2,500 hours.
B. 2,400 hours.
C. 2,250 hours.
D. 1,800 hours.
2,500/1,000 = 2.5 hours per unit; 2.5  900 = 2,250
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Information on Barber Company's direct labor costs for the month of January is as follows:
75. What is Barber's direct labor price (rate) variance?

A. $17,250
B. $20,700
C. $18,750
D. $21,000
Actual rate = ($241,500/34,500) = $7/hr; (34,500 - 35,000)  SR = 3,200; SR = $6.40 per

hour; ($7 - $6.40) * 34,500 = $20,700 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
16-81

A. favorable
B. unfavorable
Actual wage rate was higher than standard.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
77. The following data pertains to the direct materials cost for the month of October:
What is the direct materials efficiency (quantity) variance?

A. $950 favorable
B. $950 unfavorable
C. $1,000 favorable
E. $50 unfavorable
(5,050 - 5,000)  $20 = $1,000 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
16-82
78. The Landry Company has developed standards for labor. During June, 75 units were
scheduled and 100 were produced. Data related to labor are:
What is the labor rate variance for June?

A. $30 unfavorable
B. $31 favorable
C. $31 unfavorable
D. $30 favorable
[($1,209/310) - $4.00]  310 = $31 favorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
79. Given the following information in standard costing:
What is the total direct labor cost variance?

A. $3,160, favorable
B. $3,160, unfavorable
C. $2,360, favorable
D. $2,360, unfavorable
(15,800  $4.00) - (15,800  $4.20) = $3,160 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-83
80. Information for Nighttime Company's direct labor cost for February is as follows:
What were the standard direct labor hours for February?

A. 70,000
B. 69,000
C. 72,000
D. 71,400
(69,000 - SH)  SR = $6,400 favorable; [($483,000/69,000) - SR]  69,000 = $41,400

unfavorable; SR = $6.40; SH = 70,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
16-84
81. What is the fixed overhead spending (budget) variance?

A. $200
B. $400
C. $300
D. $240
$3,800 - $4,000 = $200 favorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
82. Is the fixed overhead spending (budget) variance favorable or unfavorable?

A. favorable
B. unfavorable
Less was spent than budgeted.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
83. What is the production volume variance?

A. $200
B. $400
C. $300
D. $240
$4,000 - ($4  900) = $400 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-85

A. favorable
B. unfavorable
Fewer units were produced than budgeted.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
85. Dickey Company had total underapplied overhead of $15,000. Additional information is
as follows:
What is the actual total overhead for the period?

A. $50,000
B. $45,000
C. $80,000
D. $87,000
($30,000 + $42,000) + $15,000 = $87,000
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-86
86. What is the fixed overhead spending (budget) variance for May?
A. $1,000 unfavorable
C. $2,000 unfavorable
D. $2,000 favorable
E. $3,000 favorable
$48,000 - $45,000 = $3,000 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
87. What is the production volume variance for May?

A. $2,000
B. $3,000
C. $6,000
D. $8,000
E. $9,000
$45,000 - [($45,000/15,000)  12,000] = $9,000 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-87

A. favorable
B. unfavorable
Standard hours were less than denominator hours.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
89. A standard cost system may be used in (CPA adapted)

A. job-order costing but not process costing.
B. either job-order costing or process costing.
C. process costing but not job-order costing.
D. neither process costing nor job-order costing.
Standard costing is an option in either.
AACSB: Analytic
Difficulty: Easy
16-88
90. When a manager is concerned with monitoring total cost, total revenue, and net profit
conditioned upon the level of productivity, an accountant should normally recommend (CPA
adapted)
A. a
B. b
C. c
D. d
Standard costing focuses on costs only; flexible budgeting focuses on both costs & revenues
and thus profits.
AACSB: Analytic
Difficulty: Easy
91. In analyzing company operations, the controller of the Jason Corporation found a
$250,000 favorable flexible budget revenue variance. The variance was calculated by
comparing the actual results with the flexible budget. This variance can be wholly explained
by (CMA adapted)
A. the total flexible budget variance.
B. the total static budget variance.
C. changes in unit selling prices.
D. changes in the number of units sold.
Since the flexible budget is based on actual output, the variation could only come from the
selling price.
AACSB: Analytic
Difficulty: Medium
16-89
92. The standard unit cost is used in the calculation of which of the following variance? (CPA
adapted)
A. a
B. b
C. c
D. 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.
AACSB: Analytic
Difficulty: Easy
93. A favorable materials price variance coupled with an unfavorable materials usage variance
would most likely result from (CMA adapted)
A. Machine efficiency problems.
B. Product mix production changes.
C. Labor efficiency problems.
D. The purchase of lower-than-standard-quality materials.
Lower material price may be due to lower quality, causing a higher quantity to be used.
Efficiency and mix do not depend on material prices.
AACSB: Analytic
Difficulty: Medium
16-90
94. Excess direct labor wages resulting from overtime premium will be disclosed in which
type of variance? (CPA adapted)
A. Yield.
B. Quantity.
C. Labor efficiency.
D. Labor rate.
Overtime just changes the wage rate so it would be the labor rate. Workers are not necessarily
more or less efficient when working overtime.
AACSB: Analytic
Difficulty: Medium
95. The budget for the month of May was for 9,000 units at a direct materials cost of $15 per
unit. Direct labor was budgeted at 45 minutes per unit for a total of $81,000. Actual output for
the month was 8,500 units with $127,500 in direct materials and $77,775 in direct labor
expense. The direct labor standard of 45 minutes was obtained throughout the month.
Variance analysis of the performance for the month of May would show a(n) (CMA adapted)
A. Favorable materials efficiency (quantity) variance of $7,500.
B. Favorable direct labor efficiency variance of $1,275.
C. Unfavorable direct labor efficiency variance of $1,275.
D. Unfavorable direct labor price (rate) variance of $1,275.
There is no information to compute material variances. Since the labor hour/unit did not
change, there is no labor efficiency. The labor rate variance is: $81,000/9,000 = $9.00
standard labor cost per unit; $77,775 - ($9  8,500) = $1,275 unfavorable direct labor rate
variance
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-91
96. Tub Company uses a standard cost system. The following information pertains to direct
labor for product B for the month of October:
What were the actual hours worked for the month of October?
A. 1,800
B. 1,810
C. 2,190
D. 2,200
(AH - 2,000)  $8.00 = $1,600 unfavorable; AH = 2,200
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
97. The fixed factory overhead application rate is a function of a predetermined activity level.
If standard hours allowed for good output equal this predetermined activity level for a given
period, the volume variance will be (CPA adapted)
A. Zero.
B. Favorable.
C. Unfavorable.
D. Either favorable or unfavorable, depending on the budgeted overhead.
There is no volume variance when output = planned
AACSB: Analytic
Difficulty: Medium
16-92
98. Which one of the following variances is of least significance from a behavioral control
perspective? (CMA adapted)
A. Unfavorable materials quantity variance amounting to 20% of the quantity allowed for the
output attained.
B. Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for
the output attained.
C. Favorable materials price variance obtained by purchasing raw materials from a new
vendor.
D. Fixed factory overhead volume variance resulting from management's decision midway
through the fiscal year to reduce its budgeted output by 20%.
Fixed production volume variances are affected by changes in production and in general are
not controllable to the manager.
AACSB: Analytic
Difficulty: Medium
Topic Area: Performance Measurement and Control in a Cost Center
16-93
99. Which of the following organizational policies is most likely to result in undesirable
managerial behavior? (CMA adapted)
A. Patel Chemicals sponsors television coverage of cricket matches between national teams
representing India and Pakistan. The expenses of such media sponsorship are not allocated to
its various divisions.
B. Joe Walk, the chief executive officer of Eagle Rock Brewery, wrote a memorandum to his
executives stating, "Operating plans are contracts and they should be met without fail."
C. The budgeting process at Madsen Manufacturing starts with operating managers providing
goals for their respective departments.
D. Fullbright Lighting holds quarterly meetings of departmental managers to consider
possible changes in the budgeted targets due to changing conditions.
E. At Fargo Transportation, managers are expected to provide explanations for variances from
the budget in their departments.
(a) The television sponsorship costs are not controllable by the divisions. (b) Operating plans
need to be adjusted for actual output. Treating them as static contracts may cause managers to
play games. (c) Participative budgeting is a good thing. (d) Participating in changing quarterly
targets will keep the budgets current. (e) Explaining variances will not lead to undesirable
behavior.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
16-94
100. Based on past experience, a company has developed the following budget formula for
estimating its shipping expenses. The company's shipments average 12 lbs. per shipment:
Shipping costs = $16,000 + ($0.50  lbs. shipped)
The planned activity and actual activity regarding orders and shipments for the current month
are given in the following schedule:
The actual shipping costs for the month amounted to $21,000. The appropriate monthly
flexible budget allowance for shipping costs for the purpose of performance evaluation would
be (CMA adapted)
A. $20,680
B. $20,920
C. $20,800
D. $22,150
$16,000 + ($.50  12,300) = $22,150
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-95
Essay Questions
101. The Hageness Company has had great difficulty in controlling overhead costs. At a
recent convention, the president heard about a control device for overhead costs known as a
flexible budget and she has hired you to implement this budgeting program. After some effort,
you develop the following cost formulas for the company's machining department. These
costs are based on a normal operating range of 15,000 to 23,000 machine-hours per month:
During March, the first month after your preparation of the above data, the machining
department worked 18,000 machine-hours and produced 9,000 units of product. The actual
costs of this production were:
The department had originally been budgeted to work 19,000 machine-hours during March.
Required:
Prepare a performance report for the machining department for the month of March including
columns for the (a) actual results, (b) flexible budget, (c) flexible budget variance, (d) master
budget, and (e) sales activity variance.
16-96
Feedback:
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-97
102. The Kessler Company has the following information pertaining to the month of March:
Required:
Prepare a performance report for March including columns for the (a) actual results, (b)
flexible budget, (c) flexible budget variance, (d) master budget, and (e) sales activity
variance.
Feedback: Budgeted sales volume = Actual volume + (Sales Activity Variance-

Revenue/Selling price) = 21,000 + (300,000/100) = 24,000 units
Master budget sales revenue = 24,000  $100 = $2,400,000
Master budget fixed cost = $2,400,000 - 1,680,000 = CM $720,000 - 220,000 profit =
$500,000
Flexible budget sales revenue = 21,000  $100 = $2,100,000
Actual sales = $2,100,000 - $84,000 sales price variance = $2,016,000
Variable cost/unit = $1,680,000/24,000 = $70  21,000 units = $1,470,000
Actual variable costs = $2,016,000 revenue - $516,000 CM = $1,500,000
16-98
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
a. Direct materials price variance for both iron and copper
b. Direct material efficiency (quantity) variance for both iron and copper
16-99
a. Iron: $350 unfavorable; Copper: $90 unfavorable

b. Iron: $400 unfavorable; Copper:$600 unfavorable
c. $280 unfavorable
d. $1,400 unfavorable
Feedback: a. Iron: $8,750 -($2.00  4,200) = $350 unfavorable; Copper: $7,890 - ($3.00 
2,600) = $90 unfavorable
b. Iron: [4,200 - (5  800)]  $2.00 = $400 unfavorable; Copper: [2,600 - (3  800)]  $3.00 =
$600 unfavorable
c. $24,080 - ($7.00  3,400) = $280 unfavorable
d. [3,400 - (4  800)]  $7.00 = $1,400 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-100
a. Variable overhead spending variance
b. Variable overhead efficiency variance
c. Fixed overhead spending (budget) variance
d. Production volume variance
16-101
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Topic Area: Variable Production Overhead, Fixed Cost Variances
16-102
105. Western Company manufactures special electrical equipment and parts. Western employs
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.
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
16-103
a. Direct materials price variance

b. Direct material efficiency (quantity) variance
e. Variable overhead spending variance
f. Variable overhead efficiency variance
g. Fixed overhead spending (budget) variance
h. Production volume variance
a. $208 unfavorable
b. $300 favorable
c. $350 unfavorable
d. $1,400 favorable
e.$6,470 unfavorable
f. $600 favorable
g. $800 unfavorable
h. $800 unfavorable
Feedback: a. ($3.08 - $3.00)  2,600 = $208 unfavorable

b. [2,600 - (3  900)]  $3.00 = $300 favorable
c. [($7.00  2,000) + ($7.25  1,400)] - ($7.00  3,400) = $350 unfavorable
d. [3,400 - (4  900)]  $7.00 = $1,400 favorable
e. $16,670 - ($3.00  3,400) = $6,470 unfavorable
f. ($3.00  3,400) - [$3.00  (4  900)] = $600 favorable
g. $8,800 - ($2.00  4,000) = $800 unfavorable
h. ($2.00  4,000) - [($2.00  (4  900)] = $800 unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Topic Area: Variable Cost Variance Analysis, Fixed Cost Variances
16-104
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-105
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; $.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. $6,380 - ($.50  11,600) = $580 unfavorable
d. ($.50  11,600) - [$.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
16-106
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Topic Area: Variable Cost Variance Analysis, Fixed Cost Variances

16-107
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-108

a. Incurring actual overhead
b. Application of overhead to production.
c. Closing of overhead accounts and recognizing variances.
d. Transferring production to finished goods.
16-109
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; $.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) = $580 unfavorable; variable efficiency: ($.50 
11,600) - [$.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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-110
110. The Acme Company uses a standard cost accounting system and estimates production for

c. Incurring actual overhead
d. Application of overhead to production.
e. Closing of overhead accounts and recognizing variances.
f. Transferring production to finished goods.
16-111
Feedback: a. DM Price: $61,600 - [($13.20/3)  13,300] = $3,080 unfavorable; DM

Efficiency: [13,300 - (3  4,500)]  $4.40 = $880 favorable
b. DL rate: $57,750 - [$6.00  ($57,750/$6.25)] = $2,310 unfavorable, DL efficiency: [9,240 -
(2  4,500)]  $6.00 = $1,440 unfavorable
c. Overhead rates: $30.00 - $13.20 - $12.00 = $4.80; Variable = 2 hr  $0.50 = $1; Fixed
$3.80; Fixed overhead: $4.80  60,000 = $288,000; Total OH; $.50  (2  60,000) = $60,000
Variable OH; Budgeted fixed OH = $288,000 - $60,000 = $228,000; per month $228,000/12 =
$19,000
d. Variable price: $4,380 - ($.50  9,240) = $240 favorable; variable efficiency: ($.50  9,240)
- [$.50  (2  4,500)] = $120 unfavorable
Fixed price: $20,400 - ($228,000/12) = $1,400 unfavorable; fixed prod volume:
16-112
($228,000/12) - [($228,000/120,000)  (2  4,500)] = $1,900 unfavorable
16-113
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
11. The condensed flexible budget of the Scott Company for the year is given below:
Direct labor-hours
The company produces a single product that requires 2.5 direct labor-hours to complete. The
direct labor wage rate is $7.50 per hour. Three yards of raw material are required for each unit
of product, at a cost of $5 per yard.
variance.
variance.
16-114
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-115
112. The condensed flexible budget of the Scooter Company for the year is given as $160,000
+ $1.25/direct labor hour. The company produces a single product that requires 2.5 direct
labor-hours to complete.
variance.
variance.
a. price: $4,800 unfavorable; efficiency: $4,375 unfavorable

b. budget: $1,200 favorable; production volume: $12,000 unfavorable
Feedback: Fixed OH rate = $160,000/100,000 = $1.60 per DLH

a. $124,800 - ($1.25  96,000) = $4,800 unfavorable; ($1.25  96,000) - ($1.25  37,000 
2.5) = $4,375 unfavorable
b. $158,800 - $160,000 = $1,200 favorable; $160,000 - ($1.60  37,000  2.5) = $12,000
unfavorable
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-116
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-117
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-118
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-119

Feedback: a. Total material variance $750 unfavorable - $1,500 efficiency = price $750
favorable
b. price: ($300,760/36,500 - $8.20)  36,500 = $1,460 unfavorable; efficiency: [36,500 - (6 
5,600)]  $8.20 = $23,780 unfavorable
16-120
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
16-121
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
16-122
119. The data below relate to a product of Benoit Company.
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-123
120. The data below relate to a product of Valois Company.
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
16-124
121. 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 good 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.
AACSB: Analytic
Difficulty: Medium
122. 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.
AACSB: Analytic
Difficulty: Medium
Topic Area: Sales Activity Variance, Production Volume Variance
16-125
123. 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.
AACSB: Analytic
Difficulty: Medium
Topic Area: Remedying Motivational Problems of Transfer Pricing Policies
124. 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.
AACSB: Analytic
Difficulty: Medium
125. 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.
AACSB: Analytic
Difficulty: Medium
16-126

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Chapter 16 - Fundamentals of Variance Analysis

True / False Questions

Multiple Choice Questions

21. Which of the following statements is (are) true?

22. An operating budget would not include a

23. A variance can best be described as

24. The most fundamental variance analysis compares

26. Which of the following statements regarding variances is (are) false?

28. The purpose of the flexible budget is to

30. The slope of the flexible budget-line is the

31. The intercept of the flexible budget-line is total

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

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

45. The variable overhead price variance is due to

50. Which of these variances is least significant for cost control?

51. A debit balance in the labor-efficiency variance account indicates that

54. What is the actual sales revenue?

55. What is the sales revenue in the flexible budget?

56. What is the flexible budget contribution margin?

57. What is the master budget sales revenue?

58. What is the master budget contribution margin?

61. What is the direct materials price variance for November?

62. Is the direct materials price variance favorable or unfavorable?

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

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

67. What is the direct labor efficiency variance for November?

68. Is the direct labor efficiency variance favorable or unfavorable?

Data on Goodman Company's direct-labor costs are given below:

72. What was Goodman's actual direct-labor rate?

73. What was Goodman's standard direct-labor rate?

75. What is Barber's direct labor price (rate) variance?

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

What is the direct materials efficiency (quantity) variance?

What is the labor rate variance for June?

79. Given the following information in standard costing:

What is the total direct labor cost variance?

What were the standard direct labor hours for February?

81. What is the fixed overhead spending (budget) variance?

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

83. What is the production volume variance?

84. Is the production volume variance favorable or unfavorable?

What is the actual total overhead for the period?

87. What is the production volume variance for May?

88. Is the production volume variance favorable or unfavorable?

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

a. Direct materials price variance

Required: Prepare the journal entries to record the following:

Required: Prepare the journal entries to record the following:

Required: Prepare the journal entries to record the following:

Required: Prepare the journal entries to record the following:

119. The data below relate to a product of Benoit Company.

120. The data below relate to a product of Valois Company.

123. Explain how standards and budgets are different.

125. Explain two reasons for preparing a variance analysis.

Chapter 16 Fundamentals of Variance Analysis Answer Key

True / False Questions

This is the fundamental definition of variance.

A favorable variance increases operating profits.

A master budget and a static budget mean the same thing.