Quiz 5 Solution

Quiz #5 – ACCT 5002 V (Fall 2022)
1. Which of the following statements is true?

The only difference between the static budget and flexible budget is
that the flexible budget is prepared using planned output.
A variance is the difference between the actual cost for the current year
and the previous year.
Management by exception is the practice of focusing management
attention on areas where performance meets expectations.
A static budget is a budget that can be changed or altered after it is
developed?
Note: This question was written in error – Static budget cannot be changed or altered after it is
developed. All students will receive a mark for this question.
Q. 2 A company makes table lamps, for which the following standards have been developed:
Standard Inputs Standard Price

Expected for Each Expected per
Unit of Output Unit of Output
Direct materials 20 kilograms $2 per kilogram
Direct labour 6 hours $8 per hour
During January, production of 100 lamps was expected, but 110 lamps were actually completed. The
company had switched to a new supplier and was eager to see the impact of this new supplier for raw
materials. During the month, direct materials purchased and used were 2,100 kilograms at an actual
price of $2.20 per kilogram. Direct labour cost for the month was $5,310, and the actual pay per hour
was $9.00.
Required:
a) Compute the direct material price and efficiency variance. Include if these were favourable or
unfavourable?
b) Compute the direct labour rate and efficiency variance. Include if these were favourable or
unfavourable?
c) Comment on your results?
Solution: part a & b - (1 mark for each line – 0.5 caculation, 0.5 F or U)
a) Direct material price variance: ($2.20 - $2.00) × 2,100 = $420 unfavourable

Direct material efficiency variance: $2.00 x (2,100kg – 2,200kg (110 lamps x 20kg/lamp) = $200 favourable
b) Direct labour rate variance: $5,310 – ($5310/$9 = 590 DLH x $8) = $590 unfavourable
Alternatively: $5,310/$9 = 590 DLH actual, thus 590 x ($9 - $8) = $590 unfavourable
Direct labour efficiency variance: [$5,310/9 - 110(6)] × $8 = $560 favourable
c) The company was eager to see the results of switching to the new supplier. The price was
unfavourable meaning they paid a higher price for the materials, however they used less in
production $200 favourable. There was also an unfavourable labour variance taking longer to
produce the goods, likely causing overtime and a higher (unfavourable) rate variance.
1 mark – discussion on materials, 1 mark – discussion on labour.
3. Which of the following statements is False?
A favourable variance can be automatically interpreted as "good news".

The most important task in variance analysis is to determine why
variances occur, and use that information to promote learning and
continual improvement.
Managers generally have more control over efficiency variances than
rate variances.
The direct manufacturing labour rate variance is likely to be
unfavourable if higher-skilled workers are put on a job midway through
the year.
Explanation: A favourable variance in one value chain function may lead to an unfavourable variance in
another.
4. Which of the following reasons is unlikely to be related to an

unfavourable variance for labour costs?
labour used was less skilled than usual.
excessive equipment downtime.
rate variance in direct materials purchased at the standard quality.
poor work scheduling.
5. In flexible budgets, costs that remain the same regardless of the output
levels within the relevant range are:
Allocated costs
Fixed costs
Variable costs
Budgeted costs
6. A favourable production-volume variance indicates that the company:
has allocated more fixed overhead costs than budgeted.
should increase capacity.

produced more than it has sold.
has a total economic gain from using excess capacity.
7. Leek Company predicted that the fixed overhead would be $200,000 in

April 2022. Production amounted to 60,000 actual and 50,000 budgeted
decks of cards. Each deck takes approximately 0.20 machine hours to
produce. The actual overhead costs per machine hour are $25. What is
the production-volume variance?
$40,000 favourable
$150,000 unfavourable
$150,000 favourable
$40,000 unfavourable
Explanation: $200,000 - (60,000 × ($200,000/50,000)) = $40,000 favourable
8. Derma Company applies overhead on the basis of direct labor hours in

department B. Two direct labor hours are required for each product unit.
Planned production for the period was budgeted at 9,000 units.
Manufacturing overhead was budgeted at $135,000 for the period, 20%
of this cost is fixed. The 17,200 hours worked during the period resulted
in
production of 8,500 units. Variable manufacturing overhead costs
incurred were $108,500, and fixed manufacturing overhead costs were
$28,000.
Required -
a. Compute the predetermined overhead rate that would have been used during
the year, showing separately the variable and fixed components of the rate. [2
marks]
b. Calculate the over or under-applied overhead for the period. [2 mark]
c. Compute the variable overhead spending and efficiency variances and the
fixed overhead budget and volume variances? [4 marks]
Solution:
a) POR: $135,000 / 18,000 hours (9,000 units x 2DLH) = $7.50 (6.00 variable / 1.50 fixed)
1 mark for $7.50 (0.5 marks for each $6.00 VC, $$1.50 FC)
b) Underapplied MOH
= Actual total overhead - Applied total overhead
= $136,500 - (8,500 x 2 x 7.50)
=$136,500 - $127,500 = $9,000 Underapplied (1 mark $9,000, 1 mark underapplied)
c) Variances (1 mark for each – 0.5 for number, 0.5 for U or F)
Variable Overhead Spending Variance
Actual Hours Actual Rate Budgeted Rate Variance

17,200 6.30814 6.00 5,300 U
Variable Overhead Efficiency Variance
Budgeted Rate Actual Hours Allowed Variance
6.00 17,200 17,000 1,200 U
Standard Hours
Fixed Overhead Budget Variance = Budgeted FOH – Actual FOH

= $27,000 - $28,000
= 1,000U
Fixed Overhead Volume Variance = Budgeted FOH – Applied FOH

= $27,000 - (8,500 units x 2 hours x $1.50)
= 27,000 - 25,500
= 1,500 U
Sum of variances = $9,000U

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Quiz #5 – ACCT 5002 V (Fall 2022)

1. Which of the following statements is true?

Standard Inputs Standard Price

a) Direct material price variance: ($2.20 - $2.00) × 2,100 = $420 unfavourable

1 mark – discussion on materials, 1 mark – discussion on labour.

3. Which of the following statements is False?

A favourable variance can be automatically interpreted as "good news".

4. Which of the following reasons is unlikely to be related to an

rate variance in direct materials purchased at the standard quality.

poor work scheduling.

6. A favourable production-volume variance indicates that the company:

has allocated more fixed overhead costs than budgeted.

should increase capacity.

7. Leek Company predicted that the fixed overhead would be $200,000 in

8. Derma Company applies overhead on the basis of direct labor hours in

c) Variances (1 mark for each – 0.5 for number, 0.5 for U or F)

Variable Overhead Spending Variance

Actual Hours Actual Rate Budgeted Rate Variance

Variable Overhead Efficiency Variance

Budgeted Rate Actual Hours Allowed Variance

6.00 17,200 17,000 1,200 U

Fixed Overhead Budget Variance = Budgeted FOH – Actual FOH

Fixed Overhead Volume Variance = Budgeted FOH – Applied FOH

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