Ch7 – Flexible Budgets & Variances | Test Bank 17e - Horngrens Cost Accounting 17th Global Edition | Test Bank with Answer Key by Srikant M. Datar, Madhav V. Rajan. DOCX document preview.

Ch7 – Flexible Budgets & Variances | Test Bank 17e

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Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 7 Flexible Budgets, Direct-Cost Variances, and Management Control

Objective 7.1

1) A master budget is:

A) a budget which starts from a zero base

B) based on the level of expected output at the start of the budget period

C) developed at the end of a period

D) a type of flexible budget once actual results are known

Diff: 1

Objective: 1

AACSB: Analytical thinking

2) Management by exception is a practice whereby managers focus more closely on:

A) variances in the larger departments

B) areas not operating as anticipated and less closely on areas that are operating as anticipated

C) activity-based budgeting

D) unfavorable variances

Diff: 1

Objective: 1

AACSB: Analytical thinking

3) A variance is:

A) the difference between actual fixed cost per unit and standard variable cost per unit

B) the standard units of inputs for one output

C) the difference between an actual result and a budgeted performance

D) the difference between actual variable cost per unit and standard fixed cost per unit

Diff: 1

Objective: 1

AACSB: Analytical thinking

4) An unfavorable variance indicates that:

A) the actual costs are less than the budgeted costs

B) the actual revenues exceed the budgeted revenues

C) the actual units sold are less than the budgeted units

D) the budgeted contribution margin is less than the actual amount

Diff: 2

Objective: 1

AACSB: Analytical thinking

5) A favorable variance indicates that:

A) budgeted costs are less than actual costs

B) actual revenues exceed budgeted revenues

C) actual operating income is less than the budgeted amount

D) budgeted contribution margin is more than the actual amount

Diff: 2

Objective: 1

AACSB: Analytical thinking

6) Lincoln Corporation used the following data to evaluate their current operating system. The company sells items for $19 each and used a budgeted selling price of $19 per unit.

Actual Budgeted

Units sold 48,000 units 39,000 units

Variable costs $167,000 $152,000

Fixed costs $41,000 $50,000

What is the static-budget variance of revenues?

A) $171,000 favorable

B) $171,000 unfavorable

C) $6,000 favorable

D) $9,000 unfavorable

Diff: 2

Objective: 1

AACSB: Application of knowledge

7) Lincoln Corporation used the following data to evaluate their current operating system. The company sells items for $18 each and used a budgeted selling price of $18 per unit.

Actual Budgeted

Units sold 45,000 units 31,000 units

Variable costs $161,000 $150,000

Fixed costs $44,000 $50,000

What is the static-budget variance of variable costs?

A) $6,000 favorable

B) $11,000 unfavorable

C) $14,000 favorable

D) $5,000 unfavorable

Diff: 2

Objective: 1

AACSB: Application of knowledge

8) Lincoln Corporation used the following data to evaluate their current operating system. The company sells items for $18 each and used a budgeted selling price of $18 per unit.

Actual Budgeted

Units sold 43,000 units 33,000 units

Variable costs $166,000 $150,000

Fixed costs $41,000 $58,000

What is the static-budget variance of operating income?

A) $164,000 favorable

B) $164,000 unfavorable

C) $181,000 favorable

D) $181,000 unfavorable

Diff: 3

Objective: 1

AACSB: Application of knowledge

9) Schooner Corporation used the following data to evaluate its current operating system. The company sells items for $23 each and used a budgeted selling price of $23 per unit.

Actual Budgeted

Units sold 171,000 units 187,000 units

Variable costs $1,081,000 $1,285,000

Fixed costs $800,000 $774,000

What is the static-budget variance of revenues?

A) $368,000 favorable

B) $368,000 unfavorable

C) $16,000 favorable

D) $16,000 unfavorable

Diff: 2

Objective: 1

AACSB: Application of knowledge

10) Schooner Corporation used the following data to evaluate its current operating system. The company sells items for $25 each and used a budgeted selling price of $25 per unit.

Actual Budgeted

Units sold 173,000 units 181,000 units

Variable costs $1,081,000 $1,285,000

Fixed costs $806,000 $770,000

What is the static-budget variance of variable costs?

A) $36,000 favorable

B) $36,000 unfavorable

C) $204,000 favorable

D) $204,000 unfavorable

Diff: 2

Objective: 1

AACSB: Application of knowledge

11) Schooner Corporation used the following data to evaluate its current operating system. The company sells items for $24 each and used a budgeted selling price of $24 per unit.

Actual Budgeted

Units sold 177,000 units 184,000 units

Variable costs $1,090,000 $1,290,000

Fixed costs $804,000 $780,000

What is the static-budget variance of operating income?

A) $8,000 favorable

B) $176,000 unfavorable

C) $32,000 favorable

D) $7,000 unfavorable

Diff: 3

Objective: 1

AACSB: Application of knowledge

12) Daniels Corporation used the following data to evaluate their current operating system. The company sells items for $19 each and had used a budgeted selling price of $20 per unit.

Actual Budgeted

Units sold 280,000 units 279,000 units

Variable costs $980,000 $881,000

Fixed costs $58,000 $45,000

What is the static-budget variance of revenues?

A) $299,000 favorable

B) $260,000 favorable

C) $260,000 unfavorable

D) $299,000 unfavorable

Diff: 2

Objective: 1

AACSB: Application of knowledge

13) Daniels Corporation used the following data to evaluate their current operating system. The company sells items for $19 each and had used a budgeted selling price of $20 per unit.

Actual Budgeted

Units sold 280,000 units 270,000 units

Variable costs $990,000 $887,000

Fixed costs $60,000 $47,000

What is the static-budget variance of variable costs?

A) $116,000 favorable

B) $116,000 unfavorable

C) $103,000 favorable

D) $103,000 unfavorable

Diff: 2

Objective: 1

AACSB: Application of knowledge

14) Daniels Corporation used the following data to evaluate their current operating system. The company sells items for $18 each and had used a budgeted selling price of $19 per unit.

Actual Budgeted

Units sold 280,000 units 278,000 units

Variable costs $960,000 $886,000

Fixed costs $60,000 $51,000

What is the static-budget variance of operating income?

A) $325,000 favorable

B) $325,000 unfavorable

C) $316,000 favorable

D) $316,000 unfavorable

Diff: 3

Objective: 1

AACSB: Application of knowledge

15) Johnson Company had planned for operating income of $10 million in the master budget with a contribution margin of $3 million, but actually achieved operating income of only $7 million and a contribution margin of $2.5 million.

A) The static-budget variance for operating income is $3 million favorable.

B) The static-budget variance for operating income is $3 million unfavorable.

C) The flexible-budget variance for operating income is $3 million favorable.

D) The flexible-budget variance for operating income is $3 million unfavorable.

Diff: 2

Objective: 1

AACSB: Analytical thinking

16) A disadvantage of a static budget is:

A) It is very difficult to develop.

B) It is based on only one level of activity.

C) It can only be utilized at the end of the period.

D) The variances of a static budget are difficult to calculate.

Diff: 2

Objective: 1

AACSB: Analytical thinking

17) A master budget is called a static budget because it is developed around a single planned output level.

Diff: 1

Objective: 1

AACSB: Analytical thinking

18) The static budget is based on the actual level of output achieved by the end of the budget period.

Diff: 1

Objective: 1

AACSB: Analytical thinking

19) For revenue items, a favorable variance means that actual revenues are less than expected.

Diff: 2

Objective: 1

AACSB: Application of knowledge

20) A variance is the difference between the actual cost for the current and expected (or budgeted) performance.

Diff: 2

Objective: 1

AACSB: Analytical thinking

21) A favorable expense variance results when actual costs exceed budgeted costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

22) Management by exception is the practice of concentrating on areas not operating as anticipated (such as a cost overrun) and placing less attention on areas operating as anticipated.

Diff: 1

Objective: 1

AACSB: Analytical thinking

23) A favorable variance indicates that budgeted costs are less than actual costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

24) A favorable variance should be ignored by management.

Diff: 1

Objective: 1

AACSB: Analytical thinking

25) Variances are used for evaluating performance and for motivating managers.

Diff: 2

Objective: 1

AACSB: Analytical thinking

26) Static-budget variance for operating income is calculated by taking a difference between static-budget operating income and actual operating income.

Diff: 2

Objective: 1

AACSB: Analytical thinking

27) Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance.

A static budget variance is the difference between the actual results and the corresponding budgeted amounts in the static budget. A flexible-budget variance is the difference between an actual result and the corresponding flexible-budget amount based on the actual output in the budget period.

Diff: 2

Objective: 1

AACSB: Analytical thinking

Objective 7.2

1) The flexible budget contains:

A) budgeted amounts for actual output

B) static budget amounts for planned output

C) actual costs for actual output

D) actual costs for planned output

Diff: 1

Objective: 2

AACSB: Analytical thinking

2) Which of the following items will be same for a flexible budget and a master budget?

A) total variable cost

B) total expected fixed costs

C) total contribution margin

D) total expected revenues

Diff: 2

Objective: 2

AACSB: Analytical thinking

3) A flexible budget:

A) is another name for management by exception

B) is developed at the end of the period

C) is based on the budgeted level of output

D) provides favorable operating results

Diff: 1

Objective: 2

AACSB: Analytical thinking

4) The difference between the actual amounts and the flexible budget amounts for the actual output is the:

A) flexible budget variance

B) sales-volume variance

C) static budget variance

D) standard cost variance

Diff: 1

Objective: 2

AACSB: Analytical thinking

5) A company budgets 11,000 units of sales based on a projected selling price of $14. The actual units sold were 18,000 at a price of $9. What is the flexible budget for sales?

A) $252,000

B) $162,000

C) $154,000

D) $99,000

Diff: 2

Objective: 2

AACSB: Analytical thinking

6) An unfavorable flexible-budget variance for variable costs may be the result of:

A) using more input quantities than were budgeted

B) paying lower prices for inputs than were budgeted

C) selling output at a higher selling price than budgeted

D) selling less quantity compared to the budgeted

Diff: 3

Objective: 2

AACSB: Analytical thinking

7) In a flexible budget:

A) variable costs are calculated proportionately for the budgeted level of sales

B) fixed costs are calculated proportionately for the actual level of sales

C) fixed costs are kept at the same level of static budget

D) variable costs are kept at the same level of static budget

Diff: 2

Objective: 2

AACSB: Analytical thinking

8) Which of the following information is needed to prepare a flexible budget?

A) actual units sold

B) actual variable cost

C) actual selling price per unit

D) actual fixed cost

Diff: 3

Objective: 2

AACSB: Analytical thinking

9) Which of the following is true of flexible budget?

A) It calculates total variable cost by multiplying actual units by budgeted variable cost per unit.

B) It calculates total fixed cost by multiplying actual units by budgeted fixed cost per unit.

C) It calculates revenues by multiplying budgeted units by actual selling price per unit.

D) It calculates contribution margin by multiplying budgeted units by actual contribution margin per unit.

Diff: 2

Objective: 2

AACSB: Analytical thinking

10) A flexible-budget variance is $600 favorable for unit-related costs. This indicates that costs were:

A) $600 more than the master budget

B) $600 less than for the planned level of activity

C) $600 more than standard for the achieved level of activity

D) $600 less than standard for the achieved level of activity

Diff: 2

Objective: 2

AACSB: Analytical thinking

11) Goddard Inc. planned to use $153 of material per unit but actually used $140 of material per unit, and planned to make 1,100 units but actually made 940 units.

The flexible-budget amount for materials is:

A) $168,300

B) $143,820

C) $154,000

D) $131,600

Diff: 2

Objective: 2

AACSB: Application of knowledge

12) Goddard Inc. planned to use $156 of material per unit but actually used $141 of material per unit, and planned to make 1,150 units but actually made 920 units.

The flexible-budget variance for materials is:

A) $13,800 favorable

B) $13,800 unfavorable

C) $17,250 unfavorable

D) $17,250 favorable

Diff: 2

Objective: 2

AACSB: Application of knowledge

13) Goddard Inc. planned to use $155 of material per unit but actually used $147 of material per unit, and planned to make 1,110 units but actually made 1,000 units.

The sales-volume variance for materials is:

A) $8,000 favorable

B) $16,170 unfavorable

C) $17,050 favorable

D) $8,000 unfavorable

Diff: 2

Objective: 2

AACSB: Application of knowledge

14) Harland Corporation currently produces cardboard boxes in an automated process. Expected production per month is 20,000 units, direct material costs are $2.50 per unit, and manufacturing overhead costs are $15,000 per month. Manufacturing overhead is all fixed costs. What are the flexible budgets for 14,000 and 20,000 units, respectively?

A) $14,000; $65,000

B) $14,000; $30,000

C) $50,000; $65,000

D) $50,000; $30,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

15) Alberts Incorporated planned to use materials of $11 per unit but actually used materials of $15 per unit and planned to make 1,560 units but actually made 1,730 units.

The flexible-budget amount for materials is:

A) $17,160

B) $23,400

C) $19,030

D) $25,950

Diff: 2

Objective: 2

AACSB: Application of knowledge

16) Alberts Incorporated planned to use materials of $11 per unit but actually used materials of $13 per unit and planned to make 1,590 units but actually made 1,780 units.

The flexible-budget variance for materials is:

A) $3,180 favorable

B) $3,560 unfavorable

C) $3,180 unfavorable

D) $3,560 favorable

Diff: 2

Objective: 2

AACSB: Application of knowledge

17) Alberts Incorporated planned to use materials of $9 per unit but actually used materials of $14 per unit and planned to make 1,640 units but actually made 1,770 units.

The sales-volume variance for materials is:

A) $1,170 favorable

B) $1,820 unfavorable

C) $1,170 unfavorable

D) $1,820 favorable

Diff: 2

Objective: 2

AACSB: Application of knowledge

18) Better Products Inc. planned to use $43 of material per unit but actually used $32 of material per unit and planned to make 1,510 units but actually made 1,340 units.

The flexible-budget amount for materials is:

A) $57,620

B) $64,930

C) $48,320

D) $42,880

Diff: 2

Objective: 2

AACSB: Application of knowledge

19) Better Products Inc. planned to use $36 of material per unit but actually used $34 of material per unit and planned to make 1,520 units but actually made 1,310 units.

The flexible-budget variance for materials is:

A) $3,040 favorable

B) $3,040 unfavorable

C) $2,620 unfavorable

D) $2,620 favorable

Diff: 2

Objective: 2

AACSB: Application of knowledge

20) Better Products Inc. planned to use $40 of material per unit but actually used $30 of material per unit and planned to make 1,560 units but actually made 1,310 units.

The sales-volume variance for materials is:

A) $10,000 favorable

B) $10,000 unfavorable

C) $7,500 unfavorable

D) $7,500 favorable

Diff: 2

Objective: 2

AACSB: Application of knowledge

21) Zebra Corporation currently produces baseball caps in an automated process. Expected production per month is 17,000 units, direct material costs are $7.50 per unit, and manufacturing overhead costs are $60,000 per month. Manufacturing overhead is entirely fixed costs. What is the flexible budget for 11,000 and 17,000 units, respectively?

A) $60,000; $187,500

B) $60,000; $105,000

C) $142,500; $187,500

D) $142,500; $105,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

22) The actual information pertains to the month of June. As a part of the budgeting process, Great Cabinets Company developed the following static budget for June. Great Cabinets is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static

Results Budget Budget

Sales volume (in units) 18,000 23,000

Sales revenues $900,000 $ $1,150,000

Variable costs 360,000 $ ________ 463,910

Contribution margin 540,000 $ 686,090

Fixed costs 275,300 $ ________ 269,500

Operating profit $264,700 $ $416,590

The flexible budget will report ________ for variable costs. (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.)

A) $592,774

B) $460,000

C) $363,060

D) $463,910

Diff: 2

Objective: 2

AACSB: Application of knowledge

23) The actual information pertains to the month of June. As a part of the budgeting process, Great Cabinets Company developed the following static budget for June. Great Cabinets is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static

Results Budget Budget

Sales volume (in units) 20,000 22,000

Sales revenues $1,000,000 $ $1,100,000

Variable costs 480,000 $ _______ 530,200

Contribution margin 520,000 $ 569,800

Fixed costs 276,200 $ _______ 270,600

Operating profit $243,800 $ $299,200

The flexible budget will report ________ for the fixed costs.

A) $303,820

B) $270,600

C) $530,200

D) $246,000

Diff: 2

Objective: 2

AACSB: Analytical thinking

24) The actual information pertains to the month of June. As a part of the budgeting process, Great Cabinets Company developed the following static budget for June. Great Cabinets is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static

Results Budget Budget

Sales volume (in units) 17,000 21,000

Sales revenues $935,000 $ $1,155,000

Variable costs 391,000 $ ________ 480,270

Contribution margin 544,000 $ 674,730

Fixed costs 275,800 $ ________ 268,600

Operating profit $268,200 $ $406,130

The flexible-budget variance for variable costs is: (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.)

A) $2,210 unfavorable

B) $202,275 unfavorable

C) $89,270 favorable

D) $137,930 favorable

Diff: 2

Objective: 2

AACSB: Application of knowledge

25) A flexible budget allows management to compare actual results with budgeted results for the actual activity level.

Diff: 1

Objective: 2

AACSB: Analytical thinking

26) The only difference between the static budget and flexible budget is that the static budget is prepared using actual prices charged and costs per units incurred.

Diff: 2

Objective: 2

AACSB: Analytical thinking

27) A flexible-budget variance can be subdivided into the static-budget variance and the sales-volume variance.

Diff: 2

Objective: 2

AACSB: Analytical thinking

28) Expected performance is also called budgeted performance.

Diff: 1

Objective: 2

AACSB: Analytical thinking

29) Studies show that variance analysis is no longer a popular tool of corporate managers as they have adopted various other forms of performance evaluation.

Diff: 2

Objective: 2

AACSB: Analytical thinking

30) When preparing a flexible budget, fixed costs must be adjusted to reflect actual costs at actual output.

Diff: 2

Objective: 2

AACSB: Analytical thinking

31) An unfavorable variance is conclusive evidence of poor performance.

Diff: 1

Objective: 2

AACSB: Analytical thinking

32) When actual revenues exceed budgeted revenues, a favorable variance arises.

Diff: 1

Objective: 2

AACSB: Analytical thinking

33) A favorable flexible-budget variance for variable costs may be the result of using more input quantities than were budgeted.

Diff: 1

Objective: 2

AACSB: Analytical thinking

34) The president of the company, Peter Francis, has come to you for help. Use the following data to prepare a flexible budget for possible sales/production levels of 10,000, 15,000, and 20,000 units. Show the contribution margin at each activity level.

Sales price $30 per unit

Variable costs:

Manufacturing $10 per unit

Administrative $ 3 per unit

Selling $ 1 per unit

Fixed costs:

Manufacturing $70,000

Administrative $30,000

Flexible Budget for Various Levels

of Sales/Production Activity

Units 10,000 15,000 20,000

Sales $300,000 $450,000 $600,000

Variable costs:

Manufacturing 100,000 150,000 200,000

Administrative 30,000 33,000 36,000

Selling 10,000 11,000 12,000

Total variable costs 140,000 194,000 248,000

Contribution margin 160,000 256,000 352,000

Fixed costs:

Manufacturing 70,000 70,000 70,000

Administrative 30,000 30,000 30,000

Operating income/(loss) $ 60,000 $ 156,000 $ 252,000

Diff: 3

Objective: 2

AACSB: Application of knowledge

35) Nicholas Company manufacturers TVs. Some of the company's data was misplaced. Use the following information to replace the lost data:

Analysis

Actual

Results

Flexible Variances

Flexible Budget

Sales-

Volume Variances

Static Budget

Units Sold

112,500

112,500

103,125

Revenues

$42,080

$1,000 F

(A)

$1,400 U

(B)

Variable Costs

(C)

$200 U

$15,860

$2,340 F

$18,200

Fixed Costs

$8,280

$860 F

$9,140

$9,140

Operating Income

$17,740

(D)

$16,080

(E)

$15,140

Required:

a. What are the respective flexible-budget revenues (A)?

b. What are the static-budget revenues (B)?

c. What are the actual variable costs (C)?

d. What is the total flexible-budget variance (D)?

e. What is the total sales-volume variance (E)?

f. What is the total static-budget variance?

a. $42,080 - $1,000 = $41,080

b. $41,080 + $1,400 = $42,480

c. $15,860 + $200 = $16,060

d. $17,740 - $16,080 = $1,660 favorable

e. $16,080 - $15,140 = $940 favorable

f. $17,740 - $15,140 = $2,600 favorable

Diff: 3

Objective: 2

AACSB: Application of knowledge

36) List the steps involved in developing the flexible budget.

Calculate flexible-budget revenues (budgeted selling price × actual quantity).

Calculate flexible-budget costs (budgeted per-unit variable cost × actual quantity plus fixed costs).

Diff: 2

Objective: 2

AACSB: Application of knowledge

Objective 7.3

1) The actual information pertains to the month of June. As part of the budgeting process, Colonial Fencing Company developed the following static budget for September. Colonial is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static

Results Budget Budget

Sales volume (in units) 19,000 20,500

Sales revenues $510,000 $ $615,000

Variable costs 256,000 $ ________ 300,000

Contribution margin $254,000 $ 315,000

Fixed costs 235,000 $ ________ 228,000

Operating profit $19,000 $ $87,000

The flexible budget for sales revenues will be? (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.)

A) $615,000

B) $510,000

C) $635,500

D) $570,000

Diff: 3

Objective: 3

AACSB: Application of knowledge

2) The actual information pertains to the third quarter. As part of the budgeting process, the Duck Decoy Department of Paralith Incorporated had developed the following static budget for the third quarter. Duck Decoy is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static

Results Budget Budget

Sales volume (in units) 15,000 11,000

Sales revenues $245,000 $ $235,000

Variable costs 139,000 $ ________ 184,000

Contribution margin 106,000 $ 51,000

Fixed costs 42,000 $ ________ 31,000

Operating profit $64,000 $ $20,000

The flexible budget will report ________ for variable costs. (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.)

A) $101,970

B) $250,950

C) $45,000

D) $184,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

3) The actual information pertains to the third quarter. As part of the budgeting process, the Duck Decoy Department of Paralith Incorporated had developed the following static budget for the third quarter. Duck Decoy is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static

Results Budget Budget

Sales volume (in units) 15,000 13,000

Sales revenues $236,000 $ $234,000

Variable costs 166,000 $ ________ 182,000

Contribution margin 70,000 $ 52,000

Fixed costs 41,000 $ ________ 31,000

Operating profit $29,000 $ $21,000

The flexible budget will report ________ for the fixed costs.

A) $73,923

B) $31,000 Favorable

C) $31,000

D) $10,000 Unfavorable

Diff: 2

Objective: 3

AACSB: Application of knowledge

4) The actual information pertains to the third quarter. As part of the budgeting process, the Duck Decoy Department of Paralith Incorporated had developed the following static budget for the third quarter. Duck Decoy is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static

Results Budget Budget

Sales volume (in units) 16,000 12,000

Sales revenues $241,000 $ $233,000

Variable costs 148,000 $ ________ 183,000

Contribution margin 93,000 $ 50,000

Fixed costs 36,000 $ ________ 33,000

Operating profit $57,000 $ $17,000

The flexible-budget variance for variable costs is: (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.)

A) $35,000 favorable

B) $37,000 unfavorable

C) $35,000 unfavorable

D) $96,000 favorable

Diff: 2

Objective: 3

AACSB: Application of knowledge

5) The sales-volume variance is sometimes due to:

A) the difference between selling price and budgeted selling price

B) quality problems leading to customer dissatisfaction

C) unexpected increase in manufacturing labor time

D) unexpected increase in the use of quantities of inputs of raw material

Diff: 2

Objective: 3

AACSB: Analytical thinking

6) An unfavorable sales-volume variance could result from:

A) an inappropriate assignment of labor or machines to specific jobs

B) competitors taking market share

C) an inefficiency of a purchasing manager in bargaining with suppliers

D) a decrease in actual selling price compared to anticipated selling price

Diff: 2

Objective: 3

AACSB: Analytical thinking

7) If a sales-volume variance was caused by poor-quality products, then the ________ would be in the best position to explain the variance.

A) production manager

B) sales supervisor

C) financial supervisor

D) logistic manager

Diff: 2

Objective: 3

AACSB: Analytical thinking

8) The actual information pertains to the third quarter. As part of the budgeting process, the controller for Foley Manufacturing had developed the following static budget for the third quarter. The company is in the process of preparing the flexible budget and understanding the results.

Actual Flexible Static

Results Budget Budget

Sales volume (in units) 11,000 10,000

Sales revenues $238,000 $ $230,000

Variable costs 150,000 $ ________ 180,000

Contribution margin 88,000 $ 50,000

Fixed costs 36,000 $ ________ 35,000

Operating profit $ 52,000 $ $ 15,000

The primary reason for high actual operating profits was:

A) the variable-cost variance

B) increased fixed costs

C) flexible budget variance for revenues

D) lower sales volume than planned

Diff: 3

Objective: 3

AACSB: Application of knowledge

9) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:

Actual Results

Flexible Budget Variances

Flexible Budget

Sales-Volume Variances

Static Budget

Units sold

490,000

490,000

448,350

Revenues

$187,250

$5,000 F

(A)

$6,260 U

(B)

Variable costs

(C)

$890 U

$71,260

$10,800 F

$82,060

Fixed costs

$36,670

$3,740 F

$40,410

0

$40,410

Operating income

$78,430

(D)

$70,580

(E)

$66,040

What amounts are reported for revenues in the flexible-budget (A) and the static-budget (B), respectively?

A) $192,250; $175,990

B) $182,250; $188,510

C) $187,250; $185,990

D) $180,990; $188,510

Diff: 2

Objective: 3

AACSB: Application of knowledge

10) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:

Actual Results

Flexible Budget Variances

Flexible Budget

Sales-Volume Variances

Static Budget

Units sold

490,000

490,000

448,350

Revenues

$187,950

$4,900 F

(A)

$6,260 U

(B)

Variable costs

(C)

$850 U

$72,070

$10,400 F

$82,470

Fixed costs

$36,670

$3,700 F

$40,370

0

$40,370

Operating income

$78,360

(D)

$70,610

(E)

$66,470

What are the actual variable costs (C)?

A) $71,220

B) $72,920

C) $72,070

D) $82,470

Diff: 2

Objective: 3

AACSB: Application of knowledge

11) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:

Actual Results

Flexible Budget Variances

Flexible Budget

Sales-Volume Variances

Static Budget

Units sold

490,000

490,000

448,450

Revenues

$186,850

$5,000 F

(A)

$6,460 U

(B)

Variable costs

(C)

$870 U

$70,870

$10,300 F

$81,170

Fixed costs

$36,710

$3,780 F

$40,490

0

$40,490

Operating income

$78,400

(D)

$70,490

(E)

$66,650

What is the total flexible-budget variance (D)?

A) $11,750 favorable

B) $0

C) $3,840 favorable

D) $7,910 favorable

Diff: 2

Objective: 3

AACSB: Application of knowledge

12) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:

Actual Results

Flexible Budget Variances

Flexible Budget

Sales-Volume Variances

Static Budget

Units sold

490,000

490,000

447,950

Revenues

$186,550

$4,400 F

(A)

$6,460 U

(B)

Variable costs

(C)

$860 U

$70,970

$10,700 F

$81,670

Fixed costs

$36,510

$3,750 F

$40,260

0

$40,260

Operating income

$78,210

(D)

$70,920

(E)

$66,680

What is the total sales-volume variance (E)?

A) $11,530 unfavorable

B) $7,290 unfavorable

C) $4,240 favorable

D) $11,530 favorable

Diff: 2

Objective: 3

AACSB: Application of knowledge

13) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:

Actual Results

Flexible Budget Variances

Flexible Budget

Sales-Volume Variances

Static Budget

Units sold

500,000

500,000

458,850

Revenues

$185,050

$4,400 F

(A)

$6,460 U

(B)

Variable costs

(C)

$800 U

$68,740

$10,900 F

$79,640

Fixed costs

$36,770

$3,750 F

$40,520

0

$40,520

Operating income

$78,740

(D)

$71,390

(E)

$66,950

What is the total static-budget variance?

A) $11,790 favorable

B) $7,350 favorable

C) $4,440 unfavorable

D) $4,440 favorable

Diff: 2

Objective: 3

AACSB: Application of knowledge

14) Which of the following variances will always be favorable when actual sales exceed budgeted sales?

A) variable cost

B) fixed cost

C) sales volume

D) operating profit

Diff: 2

Objective: 3

AACSB: Application of knowledge

15) A flexible-budget variance pertaining to revenues is often called a sales-volume variance.

Diff: 2

Objective: 3

AACSB: Analytical thinking

16) A difference between the static-budget and the flexible-budget amounts is called the sales-volume variance.

Diff: 1

Objective: 3

AACSB: Analytical thinking

17) The flexible-budget variance for revenues arises from the difference between the actual selling price and the budgeted selling price and the difference between budgeted sales volume (units) and actual sales volume (units).

Diff: 2

Objective: 3

AACSB: Analytical thinking

18) Bennett Street Table Company manufactures tables for schools. The 2020 operating budget is based on sales of 45,000 units at $55 per table. Operating income is anticipated to be $240,000. Budgeted variable costs are $35 per unit, while fixed costs total $660,000.

Actual income for 2020 was a surprising $569,000 on actual sales of 46,000 units at $60 each. Actual variable costs were $34 per unit and fixed costs totaled $627,000.

Required:

Prepare a variance analysis report with both flexible-budget and sales-volume variances.

Variance Analysis

Actual Results

Flexible Variances

Flexible Budget

Volume Variances

Sales-Static

Units sold

46,000

46,000

44,000

Sales

$2,760,000

$230,000 F

$2,530,000

$55,000 F

$2,475,000

Variable costs

1,564,000

46,000 F

1,610,000

35,000 U

1,540,000

Contribution margin

$1,196,000

$276,000 F

$920,000

$20,000 F

$900,000

Fixed costs

627,000

33,000 F

660,000

0

660,000

Operating income

$569,000

$309,000 F

$260,000

$20,000 F

$240,000

Total flexible-budget variance = $217,000 favorable.

Total sales-volume variance = $40,000 favorable.

Diff: 3

Objective: 3

AACSB: Application of knowledge

Objective 7.4

1) The flexible-budget variance for direct cost inputs can be further subdivided into a:

A) static-budget variance and a sales-volume variance

B) sales-volume variance and an efficiency variance

C) price variance and an efficiency variance

D) static-budget variance and a price variance

Diff: 1

Objective: 4

AACSB: Analytical thinking

2) An efficiency variance reflects the difference between:

A) actual input quantities used last period and current period

B) an actual input quantity and a budgeted input quantity

C) an actual input quantity used in a company and its main competitors

D) a standard input quantity in a company and its main competitors

Diff: 1

Objective: 4

AACSB: Analytical thinking

3) Which of the following is the correct formula for the materials price variance?

A) (Actual price of input - Budgeted price of input) × Budgeted quantity of input

B) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Budgeted price of input

C) (Actual price of input - Budgeted price of input) × Actual quantity of input

D) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Actual price of input

Diff: 2

Objective: 4

AACSB: Analytical thinking

4) Which of the following is a disadvantage of using the standards developed by a firm itself to develop a budget?

A) A firm's inefficiencies will be part of the data.

B) They are not based on realized benchmarks and can be unrealistic.

C) The expected future changes are not included in the standards.

D) The flexible-budget amounts are difficult to determine.

Diff: 2

Objective: 4

AACSB: Analytical thinking

5) J.C Coats Inc. carefully develops standards for its coat making operation. Its specifications call for 2 square yards of wool per coat. The budgeted price of wool is $44 per square yard. The actual price for the wool was $36 and the usage was only 1.70 yards of wool per coat. What would be the standard cost per output for the wool?

A) $61.20 per coat

B) $72.00 per coat

C) $88.00 per coat

D) $74.80 per coat

Diff: 1

Objective: 4

AACSB: Analytical thinking

6) Standard cost per output unit for each variable direct cost input is calculated by multiplying:

A) standard input allowed for one output unit by standard price per input unit

B) standard input allowed for one output unit by actual price per input unit

C) actual input allowed for one output unit by standard price per input unit

D) actual input allowed for one output unit by actual price per input unit

Diff: 1

Objective: 4

AACSB: Analytical thinking

7) Standard material cost per kg of raw material is $6.50. Standard material allowed per unit is 5 Kg. Actual material used per unit is 6.00 Kg. Actual cost per kg is $6.00. What is the standard cost per output unit?

A) $30.00

B) $36.00

C) $32.50

D) $39.00

Diff: 2

Objective: 4

AACSB: Application of knowledge

8) Standard labor rate is $7.50 per hour. Standard labor allowed per unit is 0.7 hours. Actual cost per labor hour is $7.00 and actual labor hour per unit is 1 hours. What is the standard labor cost per output unit?

A) $4.90

B) $5.25

C) $7.50

D) $7.00

Diff: 2

Objective: 4

AACSB: Application of knowledge

9) A standard price is the minimum price a company will have to pay for a unit of input.

Diff: 2

Objective: 4

AACSB: Analytical thinking

10) To prepare budgets based on actual data from past periods is preferred since past inefficiencies are EXCLUDED.

Diff: 2

Objective: 4

AACSB: Analytical thinking

11) A firm's inefficiencies, such as the wastage of direct materials, are incorporated in past data. Hence the data represents the ideal performance of a firm.

Diff: 2

Objective: 4

AACSB: Analytical thinking

12) A standard is attainable through efficient operations but allows for normal disruptions such as machine breakdowns and defective production.

Diff: 2

Objective: 4

AACSB: Analytical thinking

13) One advantage of using standard times to develop a budget is they are simple to compile, are based solely on the past actual history, and do not require expected future changes to be taken into account.

Diff: 1

Objective: 4

AACSB: Analytical thinking

14) The textbook discusses three levels of variances, Level 0, Level 1, Level 2, and Level 3. Briefly explain the meaning of each of those levels and provide an example of a variance at each of those levels.

A Level 1 variance would be any of the differences between the static budget and the actual results that make up operating income. Examples of such differences could include the following items:

Units sold (Static budget - actual)

Revenues (Static budget - actual)

Material costs (Static budget - actual)

Direct manufacturing labor (Static budget - actual)

Variable manufacturing overhead (Static budget - actual)

Contribution margin (Static budget - actual)

Fixed costs (Static budget - actual)

A Level 2 variance subdivides the level 0 variance (which is the total of the Level 1 variances) into a sales volume variance and a flexible-budget variance. The sales volume variance is the difference between the flexible budget amount and the corresponding static budget amount. The flexible budget variance is an actual result and the corresponding flexible budget amount based on the actual output level in the budget period. Specific examples of Level 2 variances could include any of the items shown in the list of Level 1 variances.

A Level 3 variance would include price variances that reflect the difference between the actual input price and a budgeted input price, such as the direct material price variance, the direct labor rate variance, and the variable overhead rate variance. Level 3 variances would also include efficiency variances that reflect the difference between an actual input quantity and a budgeted input quantity. Examples would include material quantity variances, labor efficiency variances, and variable overhead efficiency variances.

Diff: 3

Objective: 4

AACSB: Analytical thinking

15) Explain how the flexible-budget variance for direct materials is subdivided to provide further insight to management.

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 7.5

1) Which of the following can be a reason for a favorable price variance for direct materials?

A) a decrease in the price of materials due to an oversupply of materials

B) an unexpected increase in the price of materials

C) less amount of material used during production than planned for actual output

D) workers taking less time to produce the products than was expected

Diff: 2

Objective: 5

AACSB: Analytical thinking

2) A favorable efficiency variance for direct manufacturing labor indicates that:

A) a lower wage rate than planned was paid for direct labor

B) a higher wage rate than planned was paid for direct labor

C) less direct manufacturing labor-hours were used during production than planned for actual output

D) more direct manufacturing labor-hours were used during production than planned for actual output

Diff: 2

Objective: 5

AACSB: Analytical thinking

3) Which of the following is the correct formula for the materials price variance?

A) (Actual price of input - Budgeted price of input) × Budgeted quantity of input

B) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Budgeted price of input

C) (Actual price of input - Budgeted price of input) × Actual quantity of input

D) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Actual price of input

Diff: 2

Objective: 5

AACSB: Analytical thinking

4) A favorable efficiency variance for direct labor might indicate that:

A) lower-quality materials were purchased

B) work is scheduled efficiently

C) there is an unexpected increase in direct labor rates

D) management hired underskilled workers

Diff: 3

Objective: 5

AACSB: Analytical thinking

5) A favorable price variance for direct manufacturing labor might indicate that:

A) employees were paid more than planned

B) unexpected increase in direct labor rates

C) underskilled employees are being hired

D) congestion due to scheduling problems

Diff: 3

Objective: 5

AACSB: Analytical thinking

6) An unfavorable efficiency variance for direct manufacturing labor might indicate that:

A) there is unexpected increase in direct labor rates

B) work is scheduled inefficiently

C) lower-quality materials were purchased

D) more higher-skilled workers were scheduled than planned

Diff: 3

Objective: 5

AACSB: Analytical thinking

7) Heavy Products, Inc. (HPI) developed standard costs for direct material and direct labor. In 2020, HPI estimated the following standard costs for one of their major products, the 10-gallon plastic container.

Budgeted quantity Budgeted price

Direct materials 0.10 pounds $80 per pound

Direct labor 0.20 hours $25 per hour

During June, Heavy Products produced and sold 19,000 containers using 2500 pounds of direct materials at an average cost per pound of $82 and 1900 direct manufacturing labor-hours at an average wage of $26.00 per hour.

June's direct material flexible-budget variance is:

A) $38,000 unfavorable

B) $5000 favorable

C) $53,000 unfavorable

D) $1900 favorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

8) Heavy Products, Inc. (HPI) developed standard costs for direct material and direct labor. In 2020, HPI estimated the following standard costs for one of their major products, the 10-gallon plastic container.

Budgeted quantity Budgeted price

Direct materials 0.10 pounds $80 per pound

Direct labor 0.15 hours $20 per hour

During June, Heavy Products produced and sold 18,000 containers using 2200 pounds of direct materials at an average cost per pound of $83 and 1800 direct manufacturing labor-hours at an average wage of $21.56 per hour.

The direct material price variance during June is:

A) $6600 unfavorable

B) $38,600 favorable

C) $38,600 unfavorable

D) $2808 favorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

9) Heavy Products, Inc. (HPI) developed standard costs for direct material and direct labor. In 2020, HPI estimated the following standard costs for one of their major products, the 10-gallon plastic container.

Budgeted quantity Budgeted price

Direct materials 0.90 pounds $60 per pound

Direct labor 0.10 hours $30 per hour

During June, Heavy Products produced and sold 19,000 containers using 1,200 pounds of direct materials at an average cost per pound of $63 and 17,100 direct manufacturing labor-hours at an average wage of $31.25 per hour.

The direct manufacturing labor price variance during June is:

A) $21,375 unfavorable

B) $21,375 favorable

C) $3600 unfavorable

D) $950,400 unfavorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

10) Heavy Products, Inc. (HPI) developed standard costs for direct material and direct labor. In 2020, HPI estimated the following standard costs for one of their major products, the 10-gallon plastic container.

Budgeted quantity Budgeted price

Direct materials 0.80 pounds $50 per pound

Direct labor 0.15 hours $25 per hour

During June, Heavy Products produced and sold 20,000 containers using 1000 pounds of direct materials at an average cost per pound of $52 and 3000 direct manufacturing labor-hours at an average wage of $50.75 per hour.

The direct manufacturing labor efficiency variance during June is:

A) $22,838 unfavorable

B) $77,250 favorable

C) $515,000 unfavorable

D) $0

Diff: 2

Objective: 5

AACSB: Application of knowledge

11) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.

Budgeted quantity Budgeted price

Direct materials 0.30 pounds $50 per pound

Direct labor 0.60 hours $12 per hour

During July, GII produced and sold 4,000 containers using 1,350 pounds of direct materials at an average cost per pound of $48 and 2,450 direct manufacturing labor hours at an average wage of $12.25 per hour.

July's direct material flexible-budget variance is:

A) $4,800 unfavorable

B) $7,500 favorable

C) $9,900 unfavorable

D) $0

Diff: 2

Objective: 5

AACSB: Application of knowledge

12) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.

Budgeted quantity Budgeted price

Direct materials 0.40 pounds $20 per pound

Direct labor 0.80 hours $15 per hour

During July, GII produced and sold 4,000 containers using 1,700 pounds of direct materials at an average cost per pound of $15 and 3,225 direct manufacturing labor hours at an average wage of $15.25 per hour.

The direct material price variance during July is:

A) $20,000 unfavorable

B) $8,500 favorable

C) $8,500 unfavorable

D) $2,000 unfavorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

13) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.

Budgeted quantity Budgeted price

Direct materials 0.20 pounds $40 per pound

Direct labor 0.10 hours $18 per hour

During July, GII produced and sold 4,000 containers using 1,000 pounds of direct materials at an average cost per pound of $37 and 475 direct manufacturing labor hours at an average wage of $18.75 per hour.

The direct material efficiency variance during July is:

A) $5,000 unfavorable

B) $7,400 favorable

C) $8,000 unfavorable

D) $5,000 favorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

14) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.

Budgeted quantity Budgeted price

Direct materials 0.60 pounds $20 per pound

Direct labor 0.30 hours $14 per hour

During July, GII produced and sold 4,000 containers using 2,700 pounds of direct materials at an average cost per pound of $19 and 1,290 direct manufacturing labor hours at an average wage of $14.30 per hour.

The direct manufacturing labor flexible-budget variance during July is:

A) $1,260.00 unfavorable

B) $900.00 favorable

C) $1,647.00 unfavorable

D) $3,300.00 favorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

15) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.

Budgeted quantity Budgeted price

Direct materials 0.20 pounds $20 per pound

Direct labor 0.60 hours $18 per hour

During July, GII produced and sold 3000 containers using 700 pounds of direct materials at an average cost per pound of $16 and 1825 direct manufacturing labor hours at an average wage of $18.30 per hour.

The direct manufacturing labor price variance during July is:

A) $450.00 unfavorable

B) $547.50 unfavorable

C) $540.00 favorable

D) $800.00 unfavorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

16) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.

Budgeted quantity Budgeted price

Direct materials 0.30 pounds $50 per pound

Direct labor 0.50 hours $18 per hour

During July, GII produced and sold 4000 containers using 1400 pounds of direct materials at an average cost per pound of $45 and 2090 direct manufacturing labor hours at an average wage of $18.75 per hour.

The direct manufacturing labor efficiency variance during July is:

A) $1620.00 unfavorable

B) $1567.50 favorable

C) $3187.50 favorable

D) $1687.50 unfavorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

17) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.

Budgeted quantity Budgeted price

Direct materials 1 pounds $5.40 per pound

Direct labor 0.50 hours $13.00 per hour

During September, MCP produced and sold 1,000 units using 1,300 pounds of direct materials at an average cost per pound of $5.00 and 480 direct labor hours at an average wage of $13.15 per hour.

September's direct material flexible-budget variance is:

A) $400 unfavorable

B) $120 favorable

C) $1,100 unfavorable

D) $520 favorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

18) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.

Budgeted quantity Budgeted price

Direct materials 1 pounds $8.60 per pound

Direct labor 0.20 hours $13.00 per hour

During September, MCP produced and sold 1,000 units using 1,400 pounds of direct materials at an average cost per pound of $8.00 and 160 direct labor hours at an average wage of $13.50 per hour.

The direct material price variance during September is:

A) $840 favorable

B) $840 unfavorable

C) $2,600 unfavorable

D) $2,600 favorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

19) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.

Budgeted quantity Budgeted price

Direct materials 2 pounds $2.30 per pound

Direct labor 0.40 hours $15.00 per hour

During September, MCP produced and sold 1,000 units using 2,200 pounds of direct materials at an average cost per pound of $2.00 and 360 direct labor hours at an average wage of $15.15 per hour.

The direct material efficiency variance during September is:

A) $660 favorable

B) $660 unfavorable

C) $460 favorable

D) $460 unfavorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

20) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.

Budgeted quantity Budgeted price

Direct materials 7 pounds $7.30 per pound

Direct labor 0.50 hours $10.00 per hour

During September, MCP produced and sold 2,000 units using 14,400 pounds of direct materials at an average cost per pound of $7.00 and 950 direct labor hours at an average wage of $10.40 per hour.

The direct labor flexible-budget variance during September is:

A) $120.00 favorable

B) $120.00 unfavorable

C) $520.00 favorable

D) $520.00 unfavorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

21) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.

Budgeted quantity Budgeted price

Direct materials 6 pounds $4.25 per pound

Direct labor 0.50 hours $15.00 per hour

During September, MCP produced and sold 2,000 units using 12,400 pounds of direct materials at an average cost per pound of $4.00 and 950 direct labor hours at an average wage of $15.15 per hour.

The direct labor price variance during September is:

A) $750.00 unfavorable

B) $150.00 favorable

C) $142.50 unfavorable

D) $142.50 favorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

22) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.

Budgeted quantity Budgeted price

Direct materials 4 pounds $7.25 per pound

Direct labor 0.60 hours $17.00 per hour

During September, MCP produced and sold 2,000 units using 8,200 pounds of direct materials at an average cost per pound of $7.00 and 1,160 direct labor hours at an average wage of $17.50 per hour.

The direct labor efficiency variance during September is:

A) $680 favorable

B) $700 unfavorable

C) $600 favorable

D) $100 unfavorable

Diff: 2

Objective: 5

AACSB: Application of knowledge

Answer the following questions using the information below:

These questions refer to flexible-budget variance formulas with the following descriptions for the variables: A = Actual; B = Budgeted; P = Price; Q = Quantity.

23) Which variance is calculated using the formula (AQ - BQ) BP?

A) efficiency variance

B) price variance

C) total flexible-budget variance

D) spending variance

Diff: 2

Objective: 5

AACSB: Analytical thinking

24) Which variance is calculated by using the formula: (AP - BP) AQ?

A) efficiency variance

B) price variance

C) total flexible-budget variance

D) material spending variance

Diff: 2

Objective: 5

AACSB: Analytical thinking

25) The flexible-budget variance for materials is $2,000 (U). The sales-volume variance is $18,000 (U). The price variance for material is $38,000 (F). The efficiency variance for direct manufacturing labor is $12,000 (F). Calculate the efficiency variance for materials.

A) $40,000 favorable

B) $18,000 unfavorable

C) $6,000 favorable

D) $40,000 unfavorable

Diff: 3

Objective: 5

AACSB: Application of knowledge

26) Which of the following is the correct formula for the materials price variance?

A) (Actual price of input - Budgeted price of input) × Budgeted quantity of input

B) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Budgeted price of input

C) (Actual price of input - Budgeted price of input) × Actual quantity of input

D) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Actual price of input

Diff: 2

Objective: 4

AACSB: Analytical thinking

27) A company purchases $650,000 of materials on credit. The standard cost for the materials is $675,000. Which of the following would be the correct journal entries to record the purchase under a standard costing system?

A)

Direct Materials Control $675,000

Direct Materials Price Variance $25,000

Accounts Payable Control $650,000

B)

WIP Control $675,000

Direct Materials Price Variance $25,000

Accounts Payable Control $650,000

C)

Accounts Payable Control $650,000

Direct Materials Price Variance $25,000

Direct Materials Control $675,000

D)

Accounts Payable Control $650,000

Direct Materials Price Variance $25,000

WIP Control $675,000

Diff: 1

Objective: 5

AACSB: Analytical thinking

28) These questions refer to flexible-budget variance formulas with the following descriptions for the variables: A = Actual; B = Budgeted; P = Price; Q = Quantity. The best label for the formula [(AP)(AQ) - (BP)(BQ)] is the:

A) efficiency variance.

B) price variance

C) total flexible-budget variance

D) spending variance

Diff: 2

Objective: 5

AACSB: Analytical thinking

29) Handley Manufacturing Company has prepared the following flexible budget for August and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible Variances

Budget Price Efficiency

Material A $44,000 $1,000F $3,400U

Material B 66,000 200U 1,800F

Direct manufacturing labor 80,000 600U 2,300F

The most likely explanation of the above variances for Material A is that:

A) a lower price than expected was paid for Material A

B) higher-quality raw materials were used than were planned

C) the company used a higher-priced supplier

D) Material A used during September was $2,000 less than expected

Diff: 3

Objective: 5

AACSB: Application of knowledge

30) Handley Manufacturing Company has prepared the following flexible budget for August and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible Variances

Budget Price Efficiency

Material A $45,000 $1,100F $3,200U

Material B 61,000 800U 2,000F

Direct manufacturing labor 83,000 600U 2,500F

The actual amount spent for Material B was:

A) $58,200

B) $59,800

C) $61,000

D) $62,200

Diff: 2

Objective: 5

AACSB: Application of knowledge

31) Handley Manufacturing Company has prepared the following flexible budget for August and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible Variances

Budget Price Efficiency

Material A $48,000 $1,900F $3,400U

Material B 69,000 800U 1,600F

Direct manufacturing labor 88,000 900U 2,200F

The actual amount spent for direct manufacturing labor was:

A) $88,000

B) $91,100

C) $89,300

D) $86,700

Diff: 2

Objective: 5

AACSB: Application of knowledge

32) Handley Manufacturing Company has prepared the following flexible budget for August and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible Variances

Budget Price Efficiency

Material A $40,000 $1,600F $3,200U

Material B 68,000 500U 1,900F

Direct manufacturing labor 85,000 200U 2,700F

The most likely explanation of the above direct manufacturing labor variances is that:

A) the average wage rate paid to employees was less than expected

B) employees did not work as efficiently as expected to accomplish the job

C) the company may have assigned more experienced employees this month than originally planned

D) management may have a problem with budget slack and might be using lax standards for both labor-wage rates and expected efficiency

Diff: 3

Objective: 5

AACSB: Analytical thinking

33) Madden's Camera Shop has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible Variances

Budget Price Efficiency

Material A $27,000 $2,000U $1,200F

Material B 32,000 400F 700U

Material C 46,000 1,800U 2,300F

The actual amount spent for Material A was:

A) $30,200

B) $26,200

C) $27,800

D) $23,800

Diff: 2

Objective: 5

AACSB: Application of knowledge

34) Madden's Camera Shop has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible Variances

Budget Price Efficiency

Material A $26,000 $1,200U $1,600F

Material B 39,000 400F 800U

Material C 46,000 1,400U 2,400F

The actual amount spent for Material B was:

A) $38,600

B) $37,800

C) $40,200

D) $39,400

Diff: 2

Objective: 5

AACSB: Application of knowledge

35) Madden's Camera Shop has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

Flexible Variances

Budget Price Efficiency

Material A $29,000 $1,200U $1,900F

Material B 37,000 800F 700U

Material C 44,000 1,500U 2,500F

The explanation that lower-quality materials were purchased is most likely for:

A) Material A

B) Material B

C) Material C

D) both Material A and C

Diff: 3

Objective: 5

AACSB: Analytical thinking

36) The flexible-budget variance is the total of price variance and efficiency variance.

Diff: 1

Objective: 5

AACSB: Analytical thinking

37) The price variance is the difference between the actual price and the budgeted price of the input, multiplied by the actual quantity of input.

Diff: 1

Objective: 5

AACSB: Analytical thinking

38) For any actual level of output, the efficiency variance is the difference between actual quantity of input used and the budgeted quantity of input allowed to produce actual output, multiplied by the budgeted price.

Diff: 1

Objective: 5

AACSB: Analytical thinking

39) From the perspective of control, the direct materials price variance should be isolated at the time of sales.

Diff: 2

Objective: 5

AACSB: Analytical thinking

40) When referring to direct labor, the price variance is often called the rate variance.

Diff: 1

Objective: 5

AACSB: Analytical thinking

41) With a direct materials price variance of $40,000 F and direct materials efficiency, direct manufacturing labor price, and direct labor efficiency variances of $60,000 U, 20,000 U, and 15,000 U, the write-off to cost of goods sold if these are deemed immaterial would be a debit of $55,000.

Diff: 1

Objective: 5

AACSB: Analytical thinking

42) Nancy's Draperies manufactures curtains. A certain window curtain requires the following:

Direct materials standard 10 square yards at $5 per yard

Direct manufacturing labor standard 5 hours at $10

During the second quarter, the company made 1,500 curtains and used 14,000 square yards of fabric costing $72,000. Direct labor totaled 7,600 hours for $83,600.

Required:

a. Compute the direct materials price and efficiency variances for the quarter.

b. Compute the direct manufacturing labor price and efficiency variances for the quarter.

a. Direct materials variances:

Actual unit cost = $72,000/14,000 square yards

= $5.14 per square yard

Price variance = 14,000 × ($5.00 - $5.14)

= $1,960 unfavorable

Efficiency variance = $5.00 × [14,000 - (1,500 × 10)]

= $5,000 favorable

b. Direct manufacturing labor variances:

Actual labor rate = $83,600/7,600

= $11.00 per hour

Price variance = 7,600 × ($11.00 - $10.00)

= $7,600 unfavorable

Efficiency variance = $10.00 × (7,600 - 7,500)

= $1,000 unfavorable

Diff: 3

Objective: 5

AACSB: Application of knowledge

43) Fine Lumber Inc. mills and finishes furniture kits. A certain kit requires the following:

Direct materials standard 2 square yards at $13.50 per yard

Direct manufacturing labor standard 1.5 hours at $20.00 per hour

During the third quarter, the company made 1,500 kits and used 3,150 square yards of wood costing $42,600. Direct labor totaled 2,100 hours for $46,150.

Required:

a. Compute the direct materials price and efficiency variances for the quarter.

b. Compute the direct manufacturing labor price and efficiency variances for the quarter.

a. Direct materials variances:

Actual unit cost = $42,600/3,150 square yards

= $13.33 per square yard

Price variance = 3,150 × ($13.50 - $13.33)

= $535.50 favorable

Efficiency variance = $13.50 × [3,150 - (1,500 × 2)]

= $2,025 unfavorable

b. Direct manufacturing labor variances:

Actual labor rate = $46,150/2,100

= $21.98 per hour

Price variance = 2,100 × ($21.98 - $20.00)

= $4,150 unfavorable

Efficiency variance = $20.00 × (2,100 - (1,500 × 1.5)

= $3,000 favorable

Diff: 3

Objective: 5

AACSB: Application of knowledge

44) The following data for the Prender Company pertain to the production of 800 urns during August.

Direct Materials (all materials purchased were used):

Standard cost: $4.80 per pound of urn.

Total actual cost: $4,480.

Standard cost allowed for units produced was $4,800.

Materials efficiency variance was $96 unfavorable.

Direct Manufacturing Labor:

Standard cost is 2 urns per hour at $19.20 per hour.

Actual cost per hour was $19.60.

Labor efficiency variance was $288 favorable.

Required:

a. What is standard direct material amount per urn?

b. What is the direct material price variance?

c. What is the total actual cost of direct manufacturing labor?

d. What is the labor price variance for direct manufacturing labor?

a. Standard cost per urn = $4,800 / 800

= $6.00 per urn

Standard number of pounds per urn = $6.00 / $4.80

= 1.25 pound per urn

b. Materials price variance = Total variance - efficiency variance

= ($4,480 − $4,800) − $96 unfavorable

= $416 favorable

c. Total standard labor cost of actual hours = ((800/2) × $19.2) − $288 favorable

= $7,392

Actual hours = $7,392/19.2 = 385 hours

Total actual costs = 385 × $19.60 = $7,546

d. Labor price variance = $7,546 − $7,392

= $154 unfavorable

Diff: 3

Objective: 5

AACSB: Application of knowledge

45) The following data for the Green Garden Supplies Company pertains to the production of 2,000 garden spades during March. The spade consists of a wooden handle and a metal forged tool that comes in contact with the ground.

Direct Materials (all materials purchased were used):

Standard cost: $1.00 per handle and $3.00 per metal tool.

Total actual cost: $9,000.

Materials flexible-budget efficiency variance was $500 unfavorable.

Direct Manufacturing Labor:

Standard cost is 5 garden spades per hour at $20.00 per hour.

Actual cost per hour was $21.00.

Labor efficiency variance was $500 favorable.

Required:

a. What is the standard direct material amount per garden spade?

b. What is the standard cost allowed for all units produced?

c. What is the total direct materials flexible-budget variance?

d. What is the direct material flexible-budget price variance?

e. What is the total actual cost of direct manufacturing labor?

f. What is the labor price variance for direct manufacturing labor?

a. Standard cost per garden spade = $1.00 (handle) + $3.00 (tool)

= $4.00 per garden spade

b. Standard cost allowed for all units = 2,000 × $4.00

= $8,000 per garden spade

c. Total materials variance = $8,000 − $9,000

= $1,000 unfavorable = $1,000 unfavorable

d. Materials price variance = Total variance - efficiency variance

= ($9,000 − $8,000) − $500 unfavorable

= $500 unfavorable

e. Total standard labor cost of actual hours = ((2,000/5) × $20) − $500 favorable

= $7,500

Actual hours = $7,500/20 = 375 hours

Total actual costs = 375 × $21 = $7,875

f. Labor price variance = $7,500 − $7,875

= $375 unfavorable

Diff: 3

Objective: 5

AACSB: Application of knowledge

46) The following data for the telephone company pertain to the production of 450 rolls of telephone wire during June. Selected items are omitted because the costing records were lost in a windstorm.

Direct Materials (All materials purchased were used.)

Standard cost per roll: a pounds at $4.00 per pound.

Total actual cost: b pounds costing $9,600.

Standard cost allowed for units produced was $9,000.

Materials price variance: c .

Materials efficiency variance was $80 unfavorable.

Direct Manufacturing Labor

Standard cost is 3 hours per roll at $8.00 per hour.

Actual cost per hour was $8.25.

Total actual cost: d .

Labor price variance: e .

Labor efficiency variance was $400 unfavorable.

Required:

Compute the missing elements in the report represented by the lettered items.

a. Standard cost per roll = $9,000/450 = $20.00

Standard number of pounds per roll = $20/$4 = 5 pounds per roll

b. Actual pounds = ($9,000 + $80)/$4 = 2,270 pounds

c. Materials price variance = $9,600 - ($9,000 + $80)

= $520 unfavorable

d. Total standard labor cost of actual hours = (450 × 3 × $8) + $400 = $11,200

Actual hours = $11,200/$8 = 1,400

Total actual cost = 1,400 × $8.25 = $11,550

e. Labor price variance = $11,550 - $11,200 = $350 unfavorable

Diff: 3

Objective: 5

AACSB: Application of knowledge

47) Littrell Company produces chairs and has determined the following direct cost categories and budgeted amounts:

Standard Inputs Standard Cost

Category for 1 output per input

Direct Materials 1.00 $7.50

Direct Labor 0.30 9.00

Direct Marketing 0.50 3.00

Actual performance for the company is shown below:

Actual output: (in units) 4,000

Direct Materials:

Materials costs $30,225

Input purchased and used 3,900

Actual price per input $7.75

Direct Manufacturing Labor:

Labor costs $11,470

Labor-hours of input 1,240

Actual price per hour $9.25

Direct Marketing Labor:

Labor costs $5,880

Labor-hours of input 2,100

Actual price per hour $2.80

Required:

a. What is the combined total of the flexible-budget variances?

b. What is the price variance of the direct materials?

c. What is the price variance of the direct manufacturing labor and the direct marketing labor, respectively?

d. What is the efficiency variance for direct materials?

e. What are the efficiency variances for direct manufacturing labor and direct marketing labor, respectively?

a. Actual Results Flexible Budget Variances

Direct materials $30,225 $30,000 $225 U

Direct manufacturing labor 11,470 10,800 670 U

Direct marketing labor 5,880 6,000 120 F

$47,575 $46,800 $775 U

b. ($7.75 - $7.50) × (3,900) = $975 unfavorable

c. Manufacturing Labor ($9.25 - $9.00) × 1,240 = $310 unfavorable

Marketing Labor ($2.80 - $3.00) × 2,100 = $420 favorable

d. [3,900 - (4,000 units × 1.00)] × $7.50 = $750 favorable

e. Manufacturing Labor = [1,240 hours - (4,000 × 0.30 hours)] × $9.00 = $360 unfavorable

Marketing Labor = [2,100 hours - (4,000 × 0.50 hours)] × $3.00 = $300.00 unfavorable

Diff: 3

Objective: 5

AACSB: Application of knowledge

48) Give at least three good reasons why a favorable price variance for direct materials might be reported.

a. The purchasing manager skillfully negotiated a better purchase price.

b. The purchasing manager changed to a lower-priced supplier.

c. The purchasing manager purchased in larger quantities resulting in quantity discounts.

d. The purchasing manager changed to lower-quality materials.

e. An unexpected industry oversupply resulted in decreased prices for materials.

f. Budgeted purchase prices were not carefully set.

Diff: 3

Objective: 5

AACSB: Application of knowledge

49) Give at least three good reasons why an unfavorable efficiency variance for direct manufacturing labor might be reported.

a. More lower-skilled workers were scheduled than planned.

b. Work was inefficiently scheduled.

c. Machines were not properly maintained.

d. Budgeted time standards were too tight.

Diff: 3

Objective: 5

AACSB: Application of knowledge

50) A company uses a standard costing system and with its journal entries isolates any direct materials price variance at the time the materials are purchased and isolates any direct materials efficiency variance at the time the direct materials are used by increasing the Work-in-Process Control account. For a particular production run, the company purchases $650,000 of direct materials on credit while the standard cost of that purchase is $700,000. Because of some improvements in the manufacturing process, the flexible budgeted amount for materials requisitioned for the production run was only $680,000.

Required:

Record the journal entry and the requisition of the materials onto the production floor, assuming standard costing is used.

Direct Materials Control 700,000

Direct Materials Price Variance 50,000

Accounts Payable Control 650,000

Work-in-Process Control 680,000

Direct Materials Efficiency Variance 20,000

Direct Materials Control 700,000

Diff: 3

Objective: 5

AACSB: Application of knowledge

Objective 7.6

1) A purchasing manager's performance is best evaluated using information such as:

A) usage efficiency and direct materials price variance

B) direct materials flexible-budget variance

C) direct manufacturing labor flexible-budget variance

D) price and terms bargaining effectiveness, achievement of quality goals, and direct materials price variance

Diff: 3

Objective: 6

AACSB: Analytical thinking

2) Which of the following could be a reason for a favorable material price variance?

A) the purchasing manager bargaining effectively with suppliers

B) the purchasing manager giving orders for small quantity to reduce storage cost

C) the purchasing manager accepting a bid from the highest-priced supplier to ensure the quality of material

D) the personnel manager hiring under skilled workers

Diff: 2

Objective: 6

AACSB: Analytical thinking

3) Efficiency is:

A) the degree to which a predetermined objective or target is met

B) the difference between an actual input quantity and a budgeted input quantity

C) the continuous process of comparing a firm's performance levels against the best levels of performance in competing companies

D) the relative amount of inputs used to achieve a given output level

Diff: 1

Objective: 6

AACSB: Analytical thinking

4) Which of the following is true of variance?

A) Managers should interpret a favorable variance as "good news".

B) Managers should not simply interpret a favorable variance as good but should understand why the variance occurred.

C) A small variance or zero variance definitively reveals efficient performance.

D) Managers' performance must be evaluated solely on single variance.

Diff: 2

Objective: 6

AACSB: Analytical thinking

5) The degree to which a predetermined objective or target is met is known as:

A) efficiency

B) variance

C) effectiveness

D) marking

Diff: 2

Objective: 6

AACSB: Analytical thinking

6) If management experiences an unfavorable direct materials efficiency variance, which of the following would NOT be the possible corrective action?

A) improve the design of the product

B) provide additional training for the direct laborers

C) purchase higher quality materials

D) negotiate lower prices for material acquisition

Diff: 2

Objective: 6

AACSB: Analytical thinking

7) Which of the following statements is true about analyzing a single variance?

A) It should be overemphasized to take proper decision.

B) It should be evaluated in isolation from other variances.

C) It can lead to different other variances.

D) It should be used for quality evaluation.

Diff: 2

Objective: 6

AACSB: Analytical thinking

8) Variance analysis should be used:

A) to understand why variances arise and to improve future performance

B) as the sole source of information for performance evaluation

C) to punish employees that do not meet standards

D) to set the standards which are very easy to achieve to encourage employees to focus on meeting standards

Diff: 3

Objective: 6

AACSB: Analytical thinking

9) Cost variances should be investigated:

A) when they are considered within the "in-control" range as determined by management

B) when the variance is more than a certain percentage of budgeted costs, as determined by management

C) even though the cost of investigation exceeds the benefit as determined by management

D) when the variance is less than a certain percentage of budgeted costs, as determined by management

Diff: 3

Objective: 6

AACSB: Analytical thinking

10) The emphasis on variance analysis and its use in performance evaluation must be such that:

A) managers focus on setting easy to attain targets

B) larger unfavorable variances should result in negative consequences for personnel held accountable

C) management should set targets that challenge but are reasonably achievable and require creativity and resourcefulness by personnel held accountable

D) management should stretch resources to meet goals even if continuous improvement and quality suffers

Diff: 2

Objective: 6

AACSB: Analytical thinking

11) Nonfinancial performance measures:

A) are usually used in combination with financial measures for control purposes

B) are rarely used to evaluate overall efficiency

C) allow managers to make informed tradeoffs

D) are often the sole basis of a manager's performance evaluations

Diff: 2

Objective: 6

AACSB: Analytical thinking

12) Which of the following is an example of nonfinancial performance measure?

A) percentage of products started and completed without requiring any rework

B) direct manufacturing labor efficiency variance

C) direct materials price variance

D) quantity discounts obtained on order of large quantity

Diff: 2

Objective: 6

AACSB: Analytical thinking

13) A company has a policy "investigate all variances exceeding $3,000 or 15% of the budgeted cost, whichever is lower." There is a variance of $2,000 in repair and maintenance costs of $12,000. What does the company do in the given situation?

A) It should be ignored as it is less than $3,000.

B) It deserves more attention as it is more than 15% of total repair cost.

C) It should be considered an in-control occurrence.

D) It should be investigated as all variances are equally important.

Diff: 2

Objective: 6

AACSB: Analytical thinking

14) The term for understanding why actual performance deviates from planned performance is:

A) variance calculation

B) organizational learning

C) favorable variance

D) continuous improvement

Diff: 2

Objective: 6

AACSB: Analytical thinking

15) Effectiveness is:

A) the relative amount of inputs used to achieve a given output level

B) the continuous process of comparing a firm's performance levels against the best levels of performance in competing companies

C) the degree to which a predetermined objective or target is met

D) is a practice whereby managers focus more closely on areas that are not operating as expected and less closely on areas that are

Diff: 2

Objective: 6

AACSB: Analytical thinking

16) Which of the following is NOT a good criteria, rule or reason as to why variances should be investigated?

A) Variances should be investigated when they are considered material.

B) Generally, materiality is based on an objective criterion such as a set percentage of deviation from the budgeted amount.

C) In some instances, subjective judgment may replace an objective rule of thumb.

D) It is equally important to investigate favorable variances as well as unfavorable.

Diff: 2

Objective: 6

AACSB: Analytical thinking

17) A favorable variance can be automatically interpreted as "good news."

Diff: 1

Objective: 6

AACSB: Analytical thinking

18) Continuous improvement through the use of standard costs is the process of repeatedly identifying the causes of variances, taking corrective actions, and evaluating results.

Diff: 1

Objective: 6

AACSB: Analytical thinking

19) If variance analysis is used for performance evaluation, managers are encouraged to meet targets using creativity and resourcefulness.

Diff: 2

Objective: 6

AACSB: Analytical thinking

20) When using variance analysis for performance evaluation, managers often focus on effectiveness and efficiency as two of the common attributes used in comparing expected results with actual results.

Diff: 2

Objective: 6

AACSB: Analytical thinking

21) For critical items such as product defects, a small variance may prompt investigation.

Diff: 2

Objective: 6

AACSB: Analytical thinking

22) A variance within an acceptable range is considered to be an "in-control occurrence" and calls for no investigation or action by managers.

Diff: 1

Objective: 6

AACSB: Analytical thinking

23) In variance analysis, if any single performance measure is underemphasized, managers will tend to make decisions that will cause the particular performance measure to look good.

Diff: 2

Objective: 6

AACSB: Analytical thinking

24) Efficiency is the relative amount of inputs used to achieve a given output level.

Diff: 1

Objective: 6

AACSB: Analytical thinking

25) Efficiency is the degree to which a predetermined objective or target is met.

Diff: 2

Objective: 6

AACSB: Analytical thinking

26) Managerial performance evaluation occurs on two dimensions–effectiveness and economies of scale.

Diff: 2

Objective: 6

AACSB: Analytical thinking

27) A percentage of products started and completed without requiring any rework is an example of nonfinancial performance measure.

Diff: 2

Objective: 6

AACSB: Analytical thinking

28) It is best to rely totally on financial performance measures rather than using a combination of financial and nonfinancial performance measures.

Diff: 2

Objective: 6

AACSB: Analytical thinking

29) The goal of variance analysis is for managers to understand why variances arise, to learn, and to improve future performance.

Diff: 2

Objective: 6

AACSB: Analytical thinking

30) Possible operational causes of an unfavorable direct materials efficiency variance include poor design of products or processes.

Diff: 1

Objective: 6

AACSB: Analytical thinking

31) Effectiveness is the degree to which a predetermined objective or target is met.

Diff: 1

Objective: 6

AACSB: Analytical thinking

32) With disregard to all other factors, the use of high-quality raw materials is likely to result in a favorable efficiency variance and an unfavorable price variance.

Diff: 2

Objective: 5

AACSB: Analytical thinking

33) Direct material price variance is likely to be unfavorable if the purchasing manager switched to a lower-price supplier.

Diff: 2

Objective: 5

AACSB: Analytical thinking

34) With disregard to other factors, direct manufacturing labor efficiency variance is likely to be unfavorable if under skilled workers are put on a job.

Diff: 2

Objective: 5

AACSB: Analytical thinking

35) Coffey Company maintains a very large direct materials inventory because of critical demands placed upon it for rush orders from large hospitals. Item A contains hard-to-get material Y. Currently, the standard cost of material Y is $4.25 per gram. During February, 22,000 grams were purchased for $4.40 per gram, while only 20,000 grams were used in production. There was no beginning inventory of material Y.

Required:

a. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the materials purchasing manager.

b. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the production manager.

c. Discuss the issues involved in determining the price variance at the point of purchase versus the point of consumption.

a. Material price variance = 22,000 × ($4.40 - $4.25)

= $3,300 unfavorable

b. Material price variance = 20,000 × ($4.40 - $4.25)

= $3,000 unfavorable

c. Measuring the price variance at the time of materials purchased is desirable in situations where the amount of materials purchased varies substantially from the amount used during the period. Failure to measure the price variance based on materials purchased could result in a substantial delay in determining that a price change occurred.

Also, if the purchasing manager is to be held accountable for his/her purchasing activities, it is appropriate to have the materials price variances computed at the time of purchase so the manager can include the variances on his/her monthly report. This encourages the purchasing manager to be more responsible for the activities under his/her control. It provides a closer relationship between responsibility and authority and becomes a relevant performance measure.

Diff: 2

Objective: 6

AACSB: Application of knowledge

36) During February the Lungren Manufacturing Company's costing system reported several variances that the production manager was surprised to see. Most of the company's monthly variances are under $125, even though they may be either favorable or unfavorable. The following information is for the manufacture of garden gates, its only product:

1. Direct materials price variance, $800 unfavorable.

2. Direct materials efficiency variance, $1,800 favorable.

3. Direct manufacturing labor price variance, $4,000 favorable.

4. Direct manufacturing labor efficiency variance, $600 unfavorable.

Required:

a. Provide the manager with some ideas as to what may have caused the price variances.

b. What may have caused the efficiency variances?

a. Direct materials' unfavorable price variance may have been caused by: (1) paying a higher price than the standard for the period, (2) changing to a new vendor, or (3) buying higher-quality materials.

Direct manufacturing labor's favorable price variance may have been caused by: (1) changing the work force by hiring lower-paid employees, (2) changing the mix of skilled and unskilled workers, or (3) not giving pay raises as high as anticipated when the standards were set for the year.

b. Direct materials' favorable efficiency variance may have been caused by: (1) employees/machinery working more efficiency and having less scrap and waste materials, (2) buying better-quality materials, or (3) changing the production process.

Direct manufacturing labor's unfavorable efficiency variance may have been caused by: (1) poor working conditions, (2) changes in the production process (learning something new initially takes longer), (3) different types of direct materials to work with, or (4) poor attitudes on behalf of the workers.

Diff: 3

Objective: 6

AACSB: Analytical thinking

37) Mayberry Company had the following journal entries recorded for the end of June. Unfortunately, the company's only accountant quit on July 10 and the president is at a loss as to the company's performance for the month of June.

Materials Control 300,000

Direct Materials Price Variance 10,000

Accounts Payable Control 290,000

Work-in-Process Control 120,000

Direct Materials Efficiency Variance 8,000

Materials Control 128,000

Work-in-Process Control 850,000

Direct Manufacturing Labor Price Variance 15,000

Direct Manufacturing Labor Efficiency Variance 18,000

Wages Payable Control 847,000

Required:

a. What kind of performance did the company have for June? Explain each variance.

b. Why is Direct Materials given in two entries?

a. The first entry is for materials purchases. The credit entry indicates a favorable variance. This could be an indicator that the purchasing agent did a good job or he/she bought inferior goods.

Production was not as lucky in June. The debit entry for materials efficiency indicates that more materials were used than should have been under the operating plans for the month.

For labor, the price was unfavorable, while the efficiency was favorable. This could have been caused by using higher-priced workers who were, in fact, better workers. Of course, there are many other possible causes.

b. recording variances for direct materials is completed with two separate entries since the price variance is isolated at the point of purchase, while the efficiency variance is isolated at the point of use.

Diff: 3

Objective: 6

AACSB: Analytical thinking

38) Waddell Productions makes separate journal entries for all cost accounting-related activities. It uses a standard cost system for all manufacturing items. For the month of June, the following activities have taken place:

Direct Manufacturing Materials Purchased $300,000

Direct Manufacturing Materials Used 250,000

Direct Materials Price Variance 10,000 unfavorable

(at time of purchase)

Direct Materials Efficiency Variance 15,000 favorable

Direct Manufacturing Labor Price Variance 6,000 favorable

Direct Manufacturing Labor Efficiency Variance 4,000 favorable

Direct Manufacturing Labor Payable 170,000

Required:

Record the necessary journal entries to close the accounts for the month.

Materials Control 300,000

Direct Manufacturing Materials Price Variance 10,000

Accounts Payable Control 310,000

Work-in-Process Control 265,000

Direct Materials Efficiency Variance 15,000

Materials Control 250,000

Work-in-Process Control 180,000

Direct Manufacturing Labor Price Variance 6,000

Direct Manufacturing Labor Efficiency Variance 4,000

Wages Payable Control 170,000

Diff: 3

Objective: 6

AACSB: Application of knowledge

39) Describe the purpose of variance analysis.

Diff: 2

Objective: 6

AACSB: Analytical thinking

Objective 7.7

1) The process by which a company's products or services are measured relative to the best possible levels of performance in competing companies is known as:

A) efficiency

B) benchmarking

C) a standard costing system

D) variance analysis

Diff: 1

Objective: 7

AACSB: Analytical thinking

2) Benchmarking is a process:

A) in which overhead costs are absorbed into units of output, or 'jobs'

B) in which a firm's performance levels are compared against the best levels of performance in competing companies or in companies having similar processes

C) which is based on calculating the breakeven point and analyzing the consequences of changes in various factors calculating the breakeven point

D) in which the underlying processes of an organization is optimized using a systematic approach to achieve more efficient goals

Diff: 2

Objective: 7

AACSB: Analytical thinking

3) Which of the following statements is true of benchmarking?

A) It is a systematic approach of optimizing business processes.

B) It fails to help to improve organizational performance as benchmarking data does not provide insight into why costs or revenues differ across companies.

C) It is difficult to ensure that the benchmark numbers are comparable due to the existence of differences across companies.

D) It considers four major business aspects such as financial, customer, internal business processes, and learning and growth.

Diff: 2

Objective: 7

AACSB: Analytical thinking

4) When benchmarking, management accountants are most valuable when they:

A) present differences in the benchmarking data to management

B) highlight differences in the benchmarking data to management

C) provide insight into why costs or revenues differ across companies

D) provide complex mathematical analysis

Diff: 2

Objective: 7

AACSB: Analytical thinking

5) Benchmarking is the continuous process of measuring products, services, and activities against the best possible levels of performance, either inside or outside the organization.

Diff: 1

Objective: 7

AACSB: Analytical thinking

6) Coast to Coast Bus Lines acquired the following data about the operating cost of three of its top competitors.

Operating cost per seat per mile

Competitor A $.11

Competitor B $.15

Competitor C $.16

Management decides to use the average operating cost per seat per mile as a mark. Coast to Coast per seat is 12.5 cents per mile.

A) It is equal to the mark.

B) It compares favorably.

C) It compares unfavorably.

D) It compares favorably to the best performing competitor.

Diff: 2

Objective: 7

AACSB: Analytical thinking

7) It is difficult for firms to find appropriate benchmarks because differences can exist across companies in their strategies, inventory costing methods, depreciation methods, and so on.

Diff: 2

Objective: 7

AACSB: Analytical thinking

8) When benchmarking it is best when management accountants simply analyze the costs and allow management to provide the insight as to why the revenues and costs differ between companies.

Diff: 1

Objective: 7

AACSB: Analytical thinking

9) Benchmarking compares a firm's current performance against its best levels of performance to measure how well the company and managers are doing within the context of its corporate history.

Diff: 2

Objective: 7

AACSB: Analytical thinking

10) What is benchmarking, and how is it useful to a company?

Diff: 2

Objective: 7

AACSB: Analytical thinking

Document Information

Document Type:
DOCX
Chapter Number:
7
Created Date:
Jun 30, 2025
Chapter Name:
Chapter 7 Flexible Budgets, Direct-Cost Variances, and Management Control
Author:
Srikant M. Datar, Madhav V. Rajan

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