Exam Prep Ch.6 Performance Evaluation Variance Analysis

Chapter 6

Performance Evaluation: Variance Analysis

CHAPTER LEARNING OBJECTIVES

1. Prepare a flexible budget and explain its use in evaluating performance. (Unit 6.1)

A flexible budget is a budget that is prepared as if the actual unit sales levels are known. All cost and price standards are the same as in the static budget, but volume (that is, the unit sales) is the same as the company’s actual results. The preparation of a flexible budget facilitates the evaluation of operations when actual sales levels differ from the static budget sales levels. The difference between the flexible budget amounts and the static budget amounts is the sales volume variance, which can be attributed solely to the difference in unit sales levels. The difference between the flexible budget amounts and the actual results is the flexible budget variance, which reveals how well operations' personnel controlled prices and costs.

1. Calculate the direct materials price and quantity variances. (Unit 6.2)

1. Identify potential causes of the direct materials price and quantity variances. (Unit 6.2)

Direct materials price variances can be caused by an unexpected change in the supplier’s price, by the purchase of large volumes (in bulk), or by the purchase of a different quality of material than called for by the material standard. Direct materials quantity variances can be caused by workers’ experience level, the quality of materials used in production, a machine malfunction, or employee theft.

1. Calculate the direct labor rate and efficiency variances. (Unit 6.3)

1. Identify potential causes of the direct labor rate and efficiency variances. (Unit 6.3)

Direct labor rate variances can be caused by using workers of a different skill level than called for by the standard or by paying overtime. Direct labor efficiency variances can be caused by workers’ experience level, the quality of the materials used in production, a machine malfunction, or the level of supervision.

1. Calculate the variable overhead spending and efficiency variances. (Unit 6.4)

1. Calculate the fixed overhead spending variance. (Unit 6.4)

Actual fixed overhead cost – Budgeted fixed overhead cost

1. Identify potential causes of the variable overhead spending and efficiency variances and the fixed overhead spending variance. (Unit 6.4)

The variable overhead spending variance can be caused by paying more or less for variable overhead items than budgeted or by using variable overhead items more or less efficiently than allowed by the standard, or both. The variable overhead efficiency variance results from using the variable overhead activity base more or less efficiently than allowed by standard. If variable overhead truly varies with this activity base, then as use of the activity base goes up or down, variable overhead costs will go up or down with it. The fixed overhead spending variance results simply from spending more or less than budgeted on fixed overhead items.

True False Statements

1. The master budget is an example of a flexible budget.
2. A variance is the difference between actual results and budgeted or expected results.
3. For a static budget, the difference between actual results and budgeted results is referred to as budget slack.
4. A variance is labeled as “favorable” or “unfavorable” indicating the effect on managers’ bonuses.
5. A favorable variance occurs when the flexible budget operating income amount is greater than the actual operating income.
6. An unfavorable variance is a variance that decreases operating income relative to the budgeted amount.
7. Management by exception focuses on all variances, regardless of size or importance.
8. A material variance is one that is large enough to make a difference in the outcome of a decision.
9. A flexible budget is a budget based on the budgeted sales volume at the beginning of the period.
10. All differences between the flexible budget and actual performance result from selling prices and costs, rather than from differences in sales volume.
11. Since a flexible budget is based on actual sales volume, it cannot be prepared until after the end of the period.
12. The flexible budget variance is the difference between the static budgeted amounts and the flexible budgeted amounts.
13. The sales volume variance is the difference between the flexible budget and the static budget.
14. The flexible budget variance reflects how efficiently the company operated in producing a given level of sales.
15. The flexible budget variance is influenced most heavily by forces external to the operating process.
16. The difference between actual sales volume and the flexible budget sales volume has no impact on the price and quantity variances.
17. The direct materials price variance is calculated using the standard quantity of direct materials purchased, the actual price paid for the direct materials, and the standard price for the direct materials purchased.
18. The direct materials quantity variance is caused by using more or less material than the standard quantity allowed for actual production.
19. Because the production managers are the ones to negotiate the purchase price, they are typically held accountable for the direct materials price variance.
20. The major factor in the amount of material used in production is the quality of the material.
21. The flexible budget variance for direct labor is separated into two components: a direct labor rate variance and a direct labor price variance.
22. The direct labor rate variance is the part of the direct labor flexible budget variance that arises when the actual wage rate differs from the standard wage rate.
23. The direct labor efficiency variance is the part of the direct labor flexible budget variance that is caused by using more or less direct labor hours than the standard allows.
24. Variances have very important meanings, even before their causes are identified.
25. If a company’s workforce consists of a number of new hires, then their lack of training could lead to an unfavorable direct labor efficiency variance.
26. The variable overhead spending variance is the difference between the actual cost of variable overhead items and the amount of variable overhead cost that is expected to be incurred at the budgeted level of activity base experienced.
27. The fixed overhead spending variance is the difference between actual fixed overhead cost and the budgeted fixed overhead cost on the flexible budget.
28. An unfavorable variable overhead efficiency variance may be caused by using too many variable overhead items.
29. When a variable overhead spending variance is identified, managers will want to talk with the purchasing manager about the purchase and use of variable overhead items.
30. When a variable overhead efficiency variance is identified, managers will want to talk with the production manager to evaluate the use of the activity base.

Answers to True-False Questions

Multiple Choice

1. The master budget is an example of a
   1. static budget.
   2. flexible budget.
   3. pro-forma budget.
   4. cash budget.
2. A static budget is one that is
   1. based on the actual sales volume achieved during the period.
   2. developed for a single level of expected output.
   3. one component of the operating budget.
   4. always used to compare with the actual results.
3. Most companies monitor their performance
   1. frequently.
   2. when costs are exceeding budgeted amounts.
   3. at the end of each quarter.
   4. annually.
4. The difference between actual results and budgeted results is referred to as
   1. a variance.
   2. management by exception.
   3. a flexible budget.
   4. a flexible outcome.
5. The difference between actual results and master budget amounts is referred to as
   1. an efficiency variance.
   2. a spending variance.
   3. a static budget variance.
   4. a flexible budget variance.
6. Variances are labeled as
   1. avoidable or unavoidable.
   2. favorable or unfavorable.
   3. spending or efficiency.
   4. committed or discretionary.
7. A favorable variance is a variance that
   1. increases costs relative to the budgeted amount.
   2. decreases cash relative to the budgeted amount.
   3. increases operating income relative to the budgeted amount.
   4. decreases operating income relative to the budgeted amount.
8. An unfavorable variance is a variance that
   1. increases cash relative to the budgeted amount.
   2. decreases costs relative to the budgeted amount.
   3. increases operating income relative to the budgeted amount.
   4. decreases operating income relative to the budgeted amount.
9. Investigating the cause of a variance is a part of a manager’s responsibility under which of the following management functions?
   1. Planning
   2. Controlling
   3. Evaluating
   4. Decision-making
10. To identify a variance without indicating whether it is favorable (F) or unfavorable (U) does not indicate
    1. the impact of the variance on operating income.
    2. the amount of the variance.
    3. whether the amount relates to price or quantity.
    4. whether the amount relates to rate or efficiency.
11. Materiality can be measured in terms of
    1. absolute dollars.
    2. whether favorable or unfavorable.
    3. type of variance.
    4. efficiency.
12. Which of the following are factors that managers may use in deciding whether to investigate a variance?
    1. Materiality and the effect of netting large and small variances
    2. The effect of netting large and small variances and whether favorable or unfavorable
    3. Whether the variance will increase or decrease operating income and materiality
    4. Materiality and whether the variance will increase or decrease total costs
13. All differences between the flexible budget and actual performance result from
    1. sales.
    2. operations.
    3. differences in quantities.
    4. differences in costs.
14. Flexible budgets are used as a tool for
    1. control, planning, and materiality.
    2. evaluation, materiality, and flexibility.
    3. planning flexibility, and evaluation.
    4. control, planning, and evaluation.
15. The flexible budget variance is the difference between
    1. the static budget and the flexible budget.
    2. the flexible budget and actual results.
    3. the actual quantity and budgeted quantity.
    4. the actual price and the standard price.
16. The sales volume variance is the difference between
    1. the static budget and the flexible budget.
    2. the flexible budget and actual results.
    3. the actual quantity and budgeted quantity.
    4. the actual price and the standard price.
17. The flexible budget variance reflects
    1. how efficiently the company operated in producing a given sales volume.
    2. how effectively the company reached its strategic goals.
    3. a different volume of activity than used in the static budget.
    4. the amount of each resource originally planned for usage in operations.
18. The flexible budget variance is influenced most heavily by actions of the
    1. budget committee.
    2. operations personnel.
    3. sales personnel.
    4. executives of the company.
19. The sales volume variance reflects
    1. how efficiently the company operated in producing a given level of sales.
    2. how effectively the company reached its strategic goals.
    3. a different volume of activity than that specified in the static budget.
    4. the amount of each resource actually used in operations.
20. The sales volume variance is influenced most heavily by actions of the
    1. budget committee.
    2. operations personnel.
    3. sales and marketing personnel.
    4. executives of the company.
21. The actual sales volume is 69,000 units and the budgeted sales volume is 70,000 units. If the actual sales price is $6 and the budgeted sales price is $6.50, what is the sales volume variance for sales revenue?
    1. $6,500 unfavorable
    2. $6,500 favorable
    3. $6,000 unfavorable
    4. $6,000 favorable
22. The static budget sales revenue is $69,000 and the flexible budget sales revenue is $70,000. If the actual sales price is $6 and the budgeted sales price is $6.50, what is the sales volume variance?
    1. $1,000 favorable
    2. $1,000 unfavorable
    3. $6,000 favorable
    4. $6,500 unfavorable
23. The sales volume variance helps managers understand
    1. the effects of price changes on actual results.
    2. flexible budget variances.
    3. why the company’s actual total revenue differs from the amount budgeted.
    4. the impact of greater actual sales over budgeted sales due to selling more units.
24. Which of the following variances would not be investigated by a manager following the management by exception principle?
    1. A 10% favorable variance in raw materials price
    2. A 10% unfavorable variance in direct labor rates
    3. A 10% unfavorable variance in payroll tax expense
    4. An unfavorable variance that has increased by 5% in each of the last five months
25. The difference between static budget revenue and flexible budget revenue is referred to as the
    1. flexible budget variance.
    2. static budget variance.
    3. sales price variance.
    4. sales volume variance.
26. The difference between actual units sold and the original budgeted units to be sold is the reason for which variance?
    1. Price variance
    2. Quantity variance
    3. Flexible budget variance
    4. Sales volume variance
27. The flexible budget variance for materials has which of the following two components?
    1. Direct materials price variance and direct materials quantity variance
    2. Direct materials price variance and indirect materials price variance
    3. Direct materials quantity variance and indirect materials quantity variance
    4. Direct materials rate variance and direct materials quality variance
28. The direct materials price variance is calculated using which three amounts?
    1. Actual quantity purchased, standard quantity purchased, actual price paid
    2. Actual quantity purchased, standard quantity purchased, standard price paid
    3. Standard quantity purchased, actual price paid, standard price paid
    4. Actual quantity purchased, actual price paid, standard price paid
29. Kevin Jarvis is the controller of Bitterroot Industries. He prepared the following budgeted income statement at various levels of sales. After careful review, and after discussions with the sales and production managers, the CEO determines that the best alternative is to base the budget on a sales volume of 30,000 units.

Actual results for the year were 28,000 units, reflected in the following income statement:

What is the flexible budget variance for direct material?

1. $28,000 favorable
2. $28,000 unfavorable
3. $6,000 favorable
4. $34,000 unfavorable

($17 × 28,000) ̶ $504,000 = $28,000 unfavorable

1. Kevin Jarvis is the controller of Bitterroot Industries. Kevin prepared the following budgeted income statement at various levels of sales. After careful review of the budgeted income statements, and after discussions with the sales and production managers, the CEO determines that the best alternative is to base the budget on a sales volume of 30,000 units.

Actual results for the year were 28,000 units, reflected in the following income statement:

What is the flexible budget variance for direct labor?

1. $14,000 favorable
2. $14,000 unfavorable
3. $16,000 favorable
4. $30,000 unfavorable

($15 x 28,000) − $434,000 = $14,000 unfavorable.

1. Kevin Jarvis is the controller of Bitterroot Industries. Kevin prepared the following budgeted income statement at various levels of sales. After careful review of the budgeted income statements, and after discussions with the sales and production managers, the CEO determines that the best alternative is to base the budget on a sales volume of 30,000 units.

Actual results for the year were 28,000 units, reflected in the following income statement:

What is the sales volume variance for direct material?

1. $28,000 favorable
2. $28,000 unfavorable
3. $6,000 unfavorable
4. $34,000 favorable
5. Kevin Jarvis is the controller of Bitterroot Industries. Kevin prepared the following budgeted income statement at various levels of sales. After careful review of the budgeted income statements, and after discussions with the sales and production managers, the CEO determines that the best alternative is to base the budget on a sales volume of 30,000 units.

Actual results for the year were 28,000 units, reflected in the following income statement:

What is the sales volume variance for direct labor?

1. $28,000 favorable
2. $28,000 unfavorable
3. $6,000 unfavorable
4. $30,000 favorable
5. Kevin Jarvis is the controller of Bitterroot Industries. Kevin prepared the following budgeted income statement at various levels of sales. After careful review of the budgeted income statements, and after discussions with the sales and production managers, the CEO determines that the best alternative is to base the budget on a sales volume of 30,000 units.

Actual results for the year were 28,000 units, reflected in the following income statement:

What is the flexible budget variance for variable overhead?

1. $5,600 favorable
2. $5,600 unfavorable
3. $30,400 favorable
4. $34,000 unfavorable

$18 × 28,000 = $504,000 ̶ $509,600 = $5,600 unfavorable.

1. The algebraic equation for the direct materials price variance is
   1. Direct materials price variance = AQ_purch × (AP – SP)
   2. Direct materials price variance = SQ_purch × (AP – SP)
   3. Direct materials price variance = SP × (AQ_purch – SQ_purch)
   4. Direct materials price variance = AP × (AQ_purch – SQ_purch)
2. If you know the total dollar amount of direct materials purchased but not the actual unit price, which of the following can you use to calculate the unit price?
   1. Multiply the total units used by the standard unit price.
   2. Divide the total purchases amount by the actual number of units used.
   3. Divide the total purchases amount by the actual number of units purchased.
   4. Multiply the standard price per unit times the actual quantity used.
3. The direct materials quantity variance is calculated using which three amounts?
   1. Actual quantity used, standard quantity allowed for actual production, actual price paid
   2. Actual quantity used, standard quantity allowed for actual production, standard price allowed
   3. Standard quantity used, actual price paid, standard price paid
   4. Actual quantity used, actual price paid, standard price paid
4. The direct materials quantity variance is part of the direct materials flexible budget variance that is caused by
   1. using more or less material than the standard quantity allowed for actual production.
   2. using more or less material than the standard quantity allowed for budgeted production.
   3. purchasing more inventory than used.
   4. paying more or less than the standard cost per unit for direct materials.
5. The algebraic equation for the direct materials quantity variance is
   1. direct materials quantity variance = AQ_used × (AP – SP)
   2. direct materials quantity variance = SQ_used × (AP – SP)
   3. direct materials quantity variance = SP × (AQ_used – SQ)
   4. direct materials quantity variance = AP × (AQ_used – SQ)
6. Which of the following employees is typically held accountable for the direct materials price variance?
   1. Controller
   2. Purchasing manager
   3. Production manager
   4. Engineering department manager
7. Which of the following is a possible reason why actual prices might differ from standard prices, resulting in a direct materials price variance?
   1. The company may order more materials than it expects to use.
   2. The company may receive more materials than ordered.
   3. The vendors may change their prices as a result of changes in the market.
   4. The company may purchase fewer materials than used.
8. Which of the following employees is typically held accountable for the direct material quantity variance?
   1. Controller
   2. Purchasing manager
   3. Production manager
   4. Engineering department manager
9. Which of the following is a factor in the amount of material used in production, resulting in a direct materials quantity variance?
   1. The quality of the material
   2. The number of production workers
   3. The supervision provided by the production manager
   4. The quantity of materials on hand
10. Why is the direct materials price variance based on the quantity of materials purchased, but the direct materials quantity variance on the quantity of materials used?
    1. Managers need to isolate variances and take corrective action as soon as possible.
    2. Production managers are only interested in the quantity purchased.
    3. The quantity used in production is not known until units are produced.
    4. Managers are required by GAAP to isolate the price variance at the latest point possible.
11. If the actual price of direct material is $10 per unit while the standard price of the direct material is $11,
    1. the direct materials quantity variance will be favorable.
    2. the direct materials quantity variance will be unfavorable.
    3. the direct materials price variance will be favorable.
    4. the direct materials price variance will be unfavorable.
12. If the actual price of direct materials is $200 and the standard price of the direct materials is $180,
    1. there will be no direct materials quantity variance.
    2. the direct materials quantity variance will be unfavorable.
    3. the direct materials price variance will be favorable.
    4. the direct materials price variance will be unfavorable.
13. If the actual price of direct materials purchased is $200 per unit while the standard price for direct materials is $180 per unit and the total direct material used is 1,000 units while the standard direct materials allowed for actual production is 1,200 units,
    1. the direct materials quantity variance will be favorable
    2. the direct materials quantity variance will be unfavorable
    3. the direct materials price variance will be favorable
    4. the direct materials price variance will be $0.
14. If the direct materials purchased costs $200 per unit while the standard price for direct materials is $180, and the total direct material used is 1,000 units while the standard direct materials allowed for actual production is 980 units,
    1. the direct materials quantity variance will be favorable.
    2. the direct materials quantity variance will be unfavorable.
    3. the direct materials price variance will be favorable.
    4. there will be no direct materials price variance.
15. Backyard Creations purchased 7,000 feet of copper tubing at a price of $2.70 per foot and used 7,200 feet during the period. The standard price of the copper tubing was $2.50 per foot. What is Backyard Creations’ direct materials price variance for the period?
    1. $1,400 favorable
    2. $1,400 unfavorable
    3. $540 favorable
    4. $540 unfavorable
16. Backyard Creations purchased 7,200 feet of copper tubing at a price of $2.60 per foot and used 7,500 feet during the period. The standard price of the copper tubing was $2.70 per foot. What is Backyard Creations’ direct materials price variance for the period?
    1. $720 favorable
    2. $720 unfavorable
    3. $750 favorable
    4. $750 unfavorable
17. Johnston Manufacturing Company purchased 14,000 switches to make 6,000 units. The standard allows for 2 switches per unit. The company actually used 12,500 to produce the 6,000 units. Johnston budgeted $0.75 per switch, but because they received a discount for purchasing more than 10,000 switches, they received a discount of $0.05 per switch and paid $0.70 each. What is Johnston’s direct materials price variance for the period?
    1. $500 favorable
    2. $600 favorable
    3. $625 favorable
    4. $700 favorable
18. Johnston Manufacturing Company purchased 14,000 switches to make 6,000 units. The standard allows for 2 switches per unit. The company actually used 14,500 to produce the 6,000 units. Johnston budgeted $0.75 per switch but had to pay $0.80 per switch. What is Johnston’s direct materials price variance for the period?
    1. $500 unfavorable
    2. $600 unfavorable
    3. $700 unfavorable
    4. $725 unfavorable
19. Johnston Manufacturing Company purchased 14,000 switches to make 6,000 units. The standard allows for 2 switches per unit. The company actually used 12,500 to produce the 6,000 units. Johnston budgeted $0.75 per switch, but because they received a discount for purchasing more than 10,000 switches, they received a discount of $0.05 per switch and paid $0.70 each. What is Johnston’s direct materials quantity variance for the period?
    1. $375 unfavorable
    2. $375 favorable
    3. $1,125 favorable
    4. $1,500 favorable
20. Johnston Manufacturing Company purchased 14,000 switches to make 6,000 units. The standard allows for 2 switches per unit. The company actually used 14,500 to produce the 6,000 units. Johnston budgeted $0.75 per switch but had to pay $0.80 per switch. What is Johnston’s direct materials quantity variance for the period?
    1. $1,875 unfavorable
    2. $1,875 favorable
    3. $2,000 unfavorable
    4. $1,000 favorable
21. Backyard Creations purchased 7,000 feet of copper tubing at a price of $2.70 per foot and used 7,200 feet during the period. The standard quantity allowed for the units produced is 7,300 and the standard price of the copper tubing is $2.50 per foot. What is Backyard Creations’ direct materials quantity variance for the period?
    1. $250 favorable
    2. $500 favorable
    3. $750 favorable
    4. $250 unfavorable.
22. Backyard Creations purchased 7,800 feet of copper tubing at a price of $2.30 per foot and used 7,500 feet during the period. The standard quantity allowed for the units produced is 7,300 and the standard price of the copper tubing is $2.50 per foot. What is Backyard Creations’ direct materials quantity variance for the period?
    1. $460 unfavorable
    2. $500 unfavorable
    3. $750 unfavorable
    4. $1,250 unfavorable
23. When analyzing direct materials price and quantity variances, the responsibility typically lies with
    1. controller and CFO.
    2. purchasing manager and production manager.
    3. purchasing and cost accounting manager.
    4. sales manager and production manager.
24. Purchasing a higher quality of materials than is specified by the standard will likely result in
    1. a favorable price variance.
    2. a favorable quantity variance.
    3. an unfavorable quantity variance.
    4. a favorable price variance and an unfavorable quantity variance.
25. In June, Indigo Manufacturing purchased 6,000 gallons of blue dye used to produce stone-washed denim clothing. The price per gallon was $1.24 and the company used 5,400 gallons of the dye during the month. The standard price for the dye is $1.26. What is the materials price variance for Indigo for June?
26. $120 unfavorable
27. $120 favorable
28. $108 favorable
29. $108 unfavorable
30. In June, Indigo Manufacturing purchased 6,000 gallons of blue dye used to produce stone-washed denim clothing. The price per gallon was $1.24 and the company used 5,400 gallons of the dye during the month to produce 42,660 yards of dyed denim fabric. The standard allows for 8 yards of fabric per gallon of dye. The standard price for the dye is $1.26. What is the materials quantity variance for Indigo for June?
31. $85.05 favorable
32. $85.05 unfavorable
33. $108 favorable
34. $108 unfavorable
35. Holly Industries manufactures artificial holiday wreaths. Its most popular wreath requires 3 yards of artificial pine boughs and 15 sprigs of holly berries. In August, the company purchased 4,000 yards of artificial pine bough, and 20,000 sprigs of holly berries. Holly paid $2.65 per yard for the artificial pine bough and purchased 4 boxes of 5,000 sprigs of holly berries for $7,000 per box. The standard price for artificial pine bough is $2.60 per yard, and the standard price per sprig of holly berry is $1.45. During August, Holly produced 1,250 wreaths and used 3,625 yards of artificial pine bough and 19,000 sprigs of holly berries. What is Holly’s direct materials price variance for artificial pine boughs for August?
36. $200 favorable
37. $200 unfavorable
38. $325 favorable
39. $325 unfavorable
40. Holly Industries manufactures artificial holiday wreaths. Its most popular wreath requires 3 yards of artificial pine boughs and 15 sprigs of holly berries. In August, the company purchased 4,000 yards of artificial pine bough, and 20,000 sprigs of holly berries. Holly paid $2.65 per yard for the artificial pine bough and purchased 4 boxes of holly berries for $7,000 per box, each box containing 5,000 sprigs. The standard price for artificial pine bough is $2.60 per yard, and the standard price per sprig of holly berry is $1.45. During August, Holly produced 1,250 wreaths and used 3,625 yards of artificial pine bough and 19,000 sprigs of holly berries. What is Holly’s direct materials price variance for sprigs of holly berries for August?
41. $1,000 unfavorable
42. $1,000 favorable
43. $362.50 favorable
44. $362.50 unfavorable
45. Holly Industries manufactures artificial holiday wreaths. Its most popular wreath requires 3 yards of artificial pine boughs and 15 sprigs of holly berries. In August, the company purchased 4,000 yards of artificial pine bough, and 20,000 sprigs of holly berries. Holly paid $2.65 per yard for the artificial pine bough and purchased 4 boxes of holly berries for $7,000 per box, each box containing 5,000 sprigs. The standard price for artificial pine bough is $2.60 per yard, and the standard price per sprig of holly berry is $1.45. During August, Holly produced 1,250 wreaths and used 3,625 yards of artificial pine bough and 19,000 sprigs of holly berries. What is Holly’s direct materials quantity variance for artificial pine boughs for August?
46. $200 favorable
47. $200 unfavorable
48. $325 favorable
49. $325 unfavorable
50. The direct materials quantity variance is based on the amount of materials
    1. purchased.
    2. on hand.
    3. used.
    4. budgeted.
51. Which of the following is a feasible explanation for an unfavorable direct materials quantity variance?
    1. Purchased more materials than specified because the larger quantity resulted in a price discount
    2. Purchased a higher-quality material than specified in the standard
    3. A machine that was out of alignment caused several units of product to be scrapped
    4. Higher-paid experienced factory workers were assigned to the product
52. Holly Industries manufactures artificial holiday wreaths. Its most popular wreath requires 3 yards of artificial pine boughs and 15 sprigs of holly berries. In August, the company purchased 4,000 yards of artificial pine bough, and 20,000 sprigs of holly berries. Holly paid $2.65 per yard for the artificial pine bough and purchased 4 boxes of 5,000 sprigs of holly berries for $7,000 per box. The standard price for artificial pine bough is $2.60 per yard, and the standard price per sprig of holly berry is $1.45. During August, Holly produced 1,250 wreaths and used 3,625 yards of artificial pine bough and 19,000 sprigs of holly berries. What is Holly’s direct materials quantity variance for sprigs of holly berries for August?
53. $1,000 unfavorable
54. $1,000 favorable
55. $362.50 favorable
56. $362.50 unfavorable
57. The direct materials price variance is based on the amount of materials
    1. purchased.
    2. on hand.
    3. used.
    4. budgeted.
58. A rush order for overnight delivery of materials is likely to result in
    1. an unfavorable materials quantity variance.
    2. an unfavorable materials price variance.
    3. a favorable materials quantity variance.
    4. a favorable materials price variance.
59. Employee theft of direct materials is likely to result in a(n)
    1. unfavorable materials quantity variance.
    2. unfavorable materials price variance.
    3. favorable materials quantity variance.
    4. favorable materials price variance.
60. The direct labor flexible budget variance is due to
    1. what the company pays for labor and how efficiently employees work.
    2. what the company pays for labor and how management allocates the labor rate.
    3. how efficiently employees work and how management allocates the workers to products.
    4. solely due to what the company pays for labor.
61. The two components of the direct labor flexible budget variance are the direct labor
    1. price variance and the direct labor quantity variance.
    2. rate variance and the direct labor efficiency variance.
    3. rate variance and the direct labor standard variance.
    4. efficiency variance and the direct labor standard variance.
62. Actual direct labor costs may differ from the flexible budget amounts because
    1. the company may set a standard wage rate, and the market forces may require a change in that rate.
    2. employees may be compensated based on the number of units produced.
    3. the labor contract may require a higher wage rate than what the company is paying.
    4. employees always operate at the desired efficiency level.
63. Which of the following is not a reason that actual direct labor costs may differ from the flexible budget amounts?
    1. The purchasing manager resigned and a higher-paid replacement was hired.
    2. After the company set the standard wage rate, the union reached an agreement that required a pay raise for all factory workers.
    3. Because the air conditioner in the factory was not working properly, workers did not work as efficiently as expected in the hot afternoons.
    4. Unanticipated breakdowns in factory machinery increased production time.
64. The direct labor rate variance arises when
    1. actual wage rates differ from the standard wage rate.
    2. actual hours worked differ from budgeted hours.
    3. the number of units produced differs from those budgeted.
    4. the total budgeted labor cost differs from the actual labor cost.
65. Which of the following is not used in the calculation of the direct labor rate variance?
    1. Standard wage rate
    2. Actual wage rate
    3. Standard hours worked
    4. Actual hours worked
66. The algebraic equation for the direct labor rate variance is
    1. direct labor rate variance = AQ × (AP – SP).
    2. direct labor rate variance = SQ × (AP – SP).
    3. direct labor rate variance = SP × (AQ – SQ).
    4. direct labor rate variance = AP × (AQ – SQ).
67. The direct labor efficiency variance is caused by
    1. lack of efficiency in preparing the budget.
    2. using more or less direct labor hours than the standard allows.
    3. setting a higher or lower wage standard than is practical.
    4. paying more or less than the standard allows for total labor costs.
68. Which of the following is not used in calculating the direct labor efficiency variance?
    1. The actual quantity of direct labor hours used
    2. The standard quantity of direct labor hours allowed for actual production
    3. The actual wage rate
    4. The standard wage rate
69. The algebraic equation for the direct labor efficiency variance is
    1. direct labor efficiency variance = AQ × (AP – SP).
    2. direct labor efficiency variance = SQ × (AP – SP).
    3. direct labor efficiency variance = SP × (AQ – SQ).
    4. direct labor efficiency variance = AP × (AQ – SQ).
70. If a company uses more direct labor hours than the standard allowed, the result is
    1. an inflated Wages and Salaries Payable account on the balance sheet.
    2. an unfavorable direct labor hour variance.
    3. a favorable efficiency variance.
    4. a reduction in operating income.
71. The standard number of direct labor hours used in calculating the direct labor efficiency variance is based on
    1. the static budget.
    2. the actual number of finished units produced.
    3. the number of units in the production budget.
    4. the number of units sold.
72. Why do variances have little meaning until their causes are identified?
    1. Because they cannot be calculated correctly until the causes are known
    2. Because identifying their causes allows managers to take correct action
    3. Because identifying their causes will immediately increase net income
    4. Because identifying their causes will immediately decrease net income
73. Which of the following is typically held responsible for direct labor rate variances?
    1. The human resources manager
    2. The controller
    3. The production manager
    4. The line supervisor in the factory
74. Which of the following is not a reason wage rates may vary from the standard?
    1. To get a job done on time, a manager may need to use more highly skilled, higher-paid workers than prescribed by the standard.
    2. If a manager must pay overtime to meet production requirements, a direct labor rate variance will likely result.
    3. At the time standards are set, managers generally do not have a good idea of the wage rates they will need to pay.
    4. Managers may request a raise for efficient employees.
75. Which of the following is a method companies use to reduce their labor costs?
    1. Paying overtime to get a job done in fewer days
    2. Offshoring
    3. Mandating across the board wage rate decreases
    4. Produce more units of product
76. Which of the following is not a method companies use to reduce their labor costs?
    1. Offshoring
    2. Outsourcing
    3. Contract negotiations
    4. Paying overtime so production can be finished early
77. When managers investigate a direct labor efficiency variance, they are trying to
    1. place blame on the person responsible for the variance.
    2. understand why workers took a longer or shorter amount of time than expected to produce a product.
    3. find out which workers were paid more than the standard rate.
    4. determine the total cost of labor for production
78. Which of the following is not a factor that could influence worker productivity?
    1. The level of skill and training workers possess
    2. The amount of automation used in the production process
    3. Workers’ level of fatigue will affect the direct labor efficiency variance
    4. The quality of direct material used
79. Which of the following is a factor that could influence worker productivity?
    1. The level of skill and training workers possess will affect their productivity
    2. Workers’ level of fatigue
    3. The quality of direct material used
80. Which of the following is not a factor that could influence worker productivity?
    1. Machine breakdowns
    2. A lack of adequate supervision
    3. The cost of variable overhead
    4. Workers that are working overtime
81. If the actual average wage rate is $4.50 per direct labor hour, but the standard wage rate is $4.70 per direct labor hour, the direct labor
    1. efficiency variance will be favorable.
    2. efficiency variance will be unfavorable.
    3. rate variance will be favorable.
    4. rate variance will be unfavorable.
82. Assembly line workers at Thompson Manufacturing worked a total of 12,000 direct labor hours to produce 36,000 units. The standard for producing one unit is 15 minutes at a wage rate of $10.00. If the actual wage rate was $10.50 per direct labor hour, Thompson’s direct labor rate variance is
    1. $6,000 favorable
    2. $6,000 unfavorable
    3. $4,500 favorable
    4. $4,500 unfavorable
83. Assembly line workers at Thompson Manufacturing worked a total of 12,000 direct labor hours to produce 36,000 units. The standard for producing one unit is 15 minutes at a wage rate of $10.70. If the actual wage rate was $10.50 per direct labor hour, Thompson’s direct labor rate variance is
    1. $2,400 favorable
    2. $4,800 unfavorable
    3. $9,450 favorable
    4. $4,500 unfavorable
84. Assembly line workers at Thompson Manufacturing worked a total of 8,800 direct labor hours to produce 36,000 units. The standard for producing one unit is 15 minutes at a wage rate of $10. If the actual wage rate was $10.50 per direct labor hour, Thompson’s direct labor efficiency variance is
    1. $2,000 favorable
    2. $2,000 unfavorable
    3. $2,100 favorable
    4. $2,100 unfavorable
85. Assembly line workers at Thompson Manufacturing worked a total of 9,300 direct labor hours to produce 36,000 units. The standard for producing one unit is 15 minutes at a wage rate of $10.50. If the actual wage rate was $10 per direct labor hour, Thompson’s direct labor efficiency variance is
    1. $2,000 favorable
    2. $3,000 favorable
    3. $3,150 unfavorable
    4. $4,500 unfavorable
86. Jasmine Manufacturing produces the glass vases used by florists. Each vase requires 15 minutes of direct labor time for which glass blowers are budgeted at $30 per hour. During November, Jasmine produced 10,000 glass vases which required 2,550 hours of direct labor. Jasmine paid wages to the glass blowers of $74,500 during November. What is Jasmine’s direct labor rate variance for November?
87. $2,000 unfavorable
88. $2,000 favorable
89. $1,500 favorable
90. $1,500 unfavorable
91. Jasmine Manufacturing produces the glass vases used by florists. Each vase requires 15 minutes of direct labor time for which glass blowers are budgeted $30 per hour. During November, Jasmine produced 10,000 glass vases which required 2,550 hours of direct labor. Jasmine paid wages to the glass blowers of $74,500 during November. What is Jasmine’s direct labor efficiency variance for November?
92. $2,000 unfavorable
93. $2,000 favorable
94. $1,500 favorable
95. $1,500 unfavorable
96. Hobart Company manufactures patio umbrellas. The direct labor standard for each umbrella is 1.25 direct labor hours at a standard rate of $12.00 per hour. During June, Hobart used 36,000 direct labor hours to produce 30,000 umbrellas. Hobart’s direct labor payroll totaled $428,400. What is Hobart’s direct labor rate variance for November?
97. $3,600 unfavorable
98. $3,600 favorable
99. $18,000 favorable
100. $18,000 unfavorable
101. Hobart Company manufactures patio umbrellas. The direct labor standard for each umbrella is 1.25 direct labor hours at a standard rate of $12.00 per hour. During June, Hobart used 36,000 direct labor hours to produce 30,000 umbrellas. Hobart’s direct labor payroll totaled $428,400. What is Hobart’s direct labor efficiency variance for November?
102. $3,600 unfavorable
103. $3,600 favorable
104. $18,000 favorable
105. $18,000 unfavorable
106. Which of the following is not a reason variable overhead costs might differ from the flexible budget costs?
     1. Executives’ salaries may increase or decrease.
     2. The prices paid to acquire variable overhead items can increase or decrease.
     3. Variable overhead items can be used more or less efficiently than planned.
     4. When the company is less efficient with respect to that production activity, variable overhead is used more or less efficiently.
107. The difference between the actual cost of variable overhead items and the amount of variable overhead cost that is expected to be incurred at the actual level of activity base experienced is the
     1. the variable overhead flexible budget variance.
     2. the manufacturing overhead expense variance.
     3. the variable overhead efficiency variance.
     4. the variable overhead spending variance.
108. The variable overhead spending variance is calculated as
     1. Actual cost − (actual quantity × standard price).
     2. Actual cost − (standard quantity × standard price).
     3. Standard cost − (actual quantity × actual price).
     4. Actual results minus the variable overhead flexible budget amount.
109. The variable overhead spending variance
     1. is the difference between the actual cost of variable overhead items and the amount of variable overhead cost that is expected to be incurred at the actual level of activity base experienced.
     2. relates to the efficient use of the activity base rather than the efficient use of the variable overhead item.
     3. captures whether the company has paid more or less for variable overhead items.
     4. is unfavorable when more variable overhead items are used than allowed at the level of activity achieved.
110. The variable overhead spending variance captures
     1. whether the company has paid more or less for variable overhead items.
     2. the relative efficiency with which variable overhead items are used.
     3. whether the company is more or less efficient with respect to the production activity, since variable overhead varies with production activity.
     4. whether the company used more or fewer variable overhead items and the relative efficiency with which variable overhead items are used.
111. The variable overhead spending variance has to do with the efficient use of
     1. the activity base.
     2. the overhead items.
     3. all variable manufacturing costs.
112. The variable overhead variance is separated into which of the following components?
     1. Volume variance and efficiency variance
     2. Quantity variance and efficiency variance
     3. Spending variance and efficiency variance
     4. Spending variance and volume variance
113. If a company incurs a lot of different variable overhead costs and the activity base is only slightly related to their consumption, which of the following statements is true?
     1. The variable overhead efficiency variance will be meaningless.
     2. The variable overhead spending variance will be meaningless.
     3. Both the variable overhead efficiency variance and the variable overhead spending variance will be meaningless.
     4. The variable overhead spending variance will be extremely informative.
114. The variance that captures the effect of efficient use of the activity base on the cost of variable overhead is the variable overhead
     1. spending variance.
     2. efficiency variance.
     3. volume variance.
     4. activity variance.
115. The variable overhead efficiency variance is calculated as
     1. actual cost − (actual quantity × standard price).
     2. actual cost − (standard quantity × standard price).
     3. standard price × (actual quantity × standard quantity).
     4. actual results minus flexible budget amount.
116. When a manager is investigating and understanding the cause of the variable overhead spending variance, he will most likely want to talk to the
     1. controller.
     2. production manager.
     3. purchasing manager.
     4. design engineer.
117. When the production manager is investigating and understanding the cause of the variable overhead spending variance relating to indirect materials, he will most likely want to talk to the
     1. inventory manager.
     2. purchasing agent.
     3. design engineer.
     4. both the inventory manager and the purchasing agent.
118. Since fixed overhead does not vary with volume within the relevant range, the flexible budget amount will always agree with the
     1. actual results.
     2. static budget.
     3. fixed overhead spending variance.
     4. fixed overhead efficiency variance.
119. The flexible budget variance for fixed overhead is known as the
     1. static budget variance.
     2. fixed overhead efficiency variance.
     3. the fixed overhead volume variance.
     4. the fixed overhead spending variance.
120. Normally, managers will not see many fixed overhead spending variances because
     1. many fixed costs are contracted for or known ahead of time.
     2. fixed costs vary in proportion to activity, so differences do not normally arise.
     3. most fixed costs are allocated (such as depreciation), so no differences occur.
     4. actual fixed costs rarely differ from budgeted fixed costs.
121. If a company that applies variable overhead on the basis of direct labor hours records an unfavorable direct labor efficiency variance, the variable overhead efficiency variance will be
     1. unfavorable.
     2. favorable.
     3. zero.
     4. Undeterminable based on the given information.
122. Paula’s Peach Preserves produces jars of gourmet peach jam. Paula prepared the following standard cost card for each 18-ounce jar of jam:

• 1. 150,000 jars
  2. 161,112 jars
  3. 155,556 jars
  4. 71,854 jars

1. Which of the following is not an explanation for a favorable variable overhead spending variance?
   1. Paid less than expected for indirect material
   2. Used variable overhead items efficiently
   3. Paid less than expected for indirect labor
   4. Efficient use of the activity base
2. R&N Manufacturing produces music boxes. This year’s budget was based on the production of 3,000 music boxes using a standard of 3 direct labor hours per music box and $4 variable overhead per direct labor hour. R&N incurred 9,200 hours to produce 2,950 music boxes. If actual variable overhead for the year is $32,000, what is R&N’s variable overhead spending variance?
   1. $4,000 favorable
   2. $4,000 unfavorable
   3. $4,800 favorable
   4. $4,800 unfavorable
3. R&N Manufacturing produces music boxes. This year’s budget was based on the production of 3,000 music boxes using a standard of 3 direct labor hours per music box and $3.10 variable overhead per direct labor hour. R&N incurred 9,500 hours to produce 2,950 music boxes. If actual variable overhead for the year is $32,000, what is R&N’s variable overhead spending variance?
   1. $2,550 favorable
   2. $2,550 unfavorable
   3. $4,100 favorable
   4. $4,100 unfavorable
4. R&N Manufacturing produces music boxes. The fixed overhead rate is $5.10 per direct labor hour, and the company budgeted for 4,600 direct labor hours for the year. During the year, R&N produced 2,500 music boxes using 4,800 direct labor hours. Actual fixed overhead for the year was $23,000. What is the company’s fixed overhead spending variance?
   1. $460 favorable
   2. $460 unfavorable
   3. $1,480 favorable
   4. $1,480 unfavorable
5. R&N Manufacturing produces music boxes. The fixed overhead rate is $5.10 per direct labor hour, and the company budgeted for 4,400 direct labor hours for the year. During the year, R&N produced 2,500 music boxes using 4,800 direct labor hours. Actual fixed overhead for the year was $23,000. What is the company’s fixed overhead spending variance?
   1. $560 favorable
   2. $560 unfavorable
   3. $1,480 favorable
   4. $1,480 unfavorable
6. Melrose Manufacturing produces gourmet blackberry preserves. Melrose based its current year budget on a production level of 540,000 jars of preserves using ½ hour direct labor time for each jar (which includes hand-sorting and trimming the berries). Total budgeted variable overhead for the year was $1,242,000. During the year, Melrose used 280,000 direct labor hours to produce 550,000 jars of blackberry preserves. Actual variable overhead for the year was $1,246,000. What is Melrose’s variable overhead spending variance?
7. $42,000 favorable
8. $42,000 unfavorable
9. $23,000 favorable
10. $23,000 unfavorable
11. Melrose Manufacturing produces gourmet blackberry preserves. Melrose based its current year budget on a production level of 540,000 jars of preserves using ½ hour direct labor time for each jar (which includes hand-sorting and trimming the berries). Total budgeted variable overhead for the year was $1,242,000. During the year, Melrose used 280,000 direct labor hours to produce 550,000 jars of blackberry preserves. Actual variable overhead for the year was $1,246,000. What is Melrose’s variable overhead efficiency variance?
12. $4,000 unfavorable
13. $4,000 favorable
14. $23,000 favorable
15. $23,000 unfavorable
16. Melrose Manufacturing produces gourmet blackberry preserves. Melrose based its current year budget on a production level of 540,000 jars of preserves using ½ hour direct labor time for each jar (which includes hand-sorting and trimming the berries). Total budgeted variable overhead for the year was $1,242,000. During the year, Melrose used 280,000 direct labor hours to produce 550,000 jars of blackberry preserves. Actual variable overhead for the year was $1,246,000. What is Melrose’s flexible budget variable overhead variance?
17. $27,000 unfavorable
18. $19,000 favorable
19. $4,000 unfavorable
20. $23,000 unfavorable
21. Nora, Inc. manufactures components used by a major cell phone manufacturer. During the year, Nora produced 160,000 components and used 40,500 direct labor hours. Nora based its current year budget on a production level of 150,000 components each of which requires 15 minutes of direct labor time. Total budgeted variable overhead for the year was $131,250. Actual variable overhead for the year was $145,800. What is Nora’s flexible budget variable overhead variance?
22. $5,800 favorable
23. $5,800 unfavorable
24. $4,050 unfavorable
25. $4,050 favorable

$131,250 ÷ ((0.25 × 150,000) = $3.50/hr;

$145,800 – (40,000 × $3.50) = $5,800 unfavorable

1. Adobe Company produces electric lawn mowers suitable for home and industrial use. During the year Adobe produced 54,000 mowers, using 163,000 direct labor hours. Adobe’s fixed overhead rate is $12 per direct labor hour and the company budgeted 166,500 direct labor hours. Actual fixed overhead for the year was $1,996,000. What is Adobe’s fixed overhead spending variance?
2. $2,000 unfavorable
3. $2,000 favorable
4. $40,000 favorable
5. $42,000 favorable
6. Culver, Inc. manufactures motors used in electric toothbrushes and other small appliances. Culver’s fixed overhead rate is $7.60 and the company budgeted 165,000 direct labor hours for the year. During the year Culver produced 320,000 motors and used 164,000 direct labor hours. Culver’s fixed overhead spending variance was $3,500 unfavorable for the year. What was Culver’s actual fixed overhead for the year?
7. $1,250,500
8. $1,257,500
9. $1,246,400
10. $1,249,900
11. $140,257
12. $127,600
13. $120,955
14. $128,412
15. $2.00/DLH
16. $2.10/DLH
17. $2.07/DLH
18. $2.03/DLH

122,000 ÷ 183,000 = 124,000 ÷ x; x = 186,000 dlh budgeted;

$378,100 + $12,500 = $390,600;

1. $5.30/DLH
2. $5.00/DLH
3. $5.05/DLH
4. $5.25/DLH

75,000 ÷ 131,250 = 78,000 ÷ x; x = 136,500 dlh budgeted

$689,000 ̶ $6,500 = $682,500

1. $87,800
2. $85,400
3. $88,167
4. $86,967
5. Which of the following overhead variances is correctly paired with a possible explanation for that variance?
   1. Favorable spending variance – efficient use of the activity base
   2. Favorable efficiency variance – paid less than expected for variable overhead items
   3. Unfavorable efficiency variance – used more than expected for variable overhead items
   4. Unfavorable spending variance – used variable overhead items inefficiently
6. Which of the following overhead variances is not correctly paired with a possible explanation for that variance?
   1. Favorable spending variance – incurred a different cost to purchase variable overhead items
   2. Favorable efficiency variance – efficient use of the activity base
   3. Unfavorable efficiency variance – paid more than expected for variable overhead items
   4. Unfavorable spending variance – used variable overhead items inefficiently

Answers to Multiple-Choice Questions

Matching

1. Match the following terms to the appropriate statement by placing the letter to the left of each statement.

1. h – Static budget variance
2. c – Direct materials quantity variance
3. j – Variable overhead spending variance
4. f – Sales price variance
5. d – Fixed overhead spending variance
6. e – Flexible budget variance
7. b – Direct labor rate variance
8. i– Variable overhead efficiency variance
9. a– Direct labor efficiency variance
10. g – Sales volume variance

Brief Exercises

1. Morgan’s, Inc. has provided you with the following financial information:

Required:

Prepare a static budget.

1. Morgan’s, Inc. has provided you with the following financial information:

Required:

Prepare a flexible budget.

1. New Rock, Inc. sells video games it has purchased from a local distributor. The following static budget is based on sales of 8,000 games. However, New Rock only sold 7,800 games during the year. Fixed costs are 30% of total operating expenses

Required:

Prepare a flexible budget.

Selling price per unit = $512,000 ÷ 8,000 = $64.00

Variable cost of goods sold per unit = $230,000 ÷ 8,000 = $28.75

Variable operating expenses = ($220,000 × 70%) ÷ 8 = $19.25

1. Adler Industries uses a standard cost system in which direct material is carried at standard cost. Adler has established the following standards for one unit of product: standard quantity of 8 pounds, standard price $1.80 per pound. During January, Adler purchased 160,000 pounds of direct material at a cost of $304,000 and used 142,500 pounds in production of 18,700 units.

Required:

Calculate the direct materials price variance and indicate whether the variance is favorable or unfavorable.

$304,000 – ($1.80 × 160,000) = $16,000 unfavorable

1. Adler Industries uses a standard cost system in which direct material is carried at standard cost. Adler has established the following standards: standard quantity of 8 pounds per unit, standard price $1.80 per pound. During January, Adler purchased 160,000 pounds of direct material at a cost of $304,000 and used 142,500 pounds in production of 18,700 units.

Required:

Calculate the direct materials quantity variance and indicate whether the variance is favorable or unfavorable.

142,500 – (8 × 18,700) = 7,100;

7,100 × $1.80 = $12,780 favorable

1. Academy Awards makes plaques and trophies. Last year the company’s direct labor payroll totaled $140,000 for 17,300 direct labor hours. The standard wage rate is $7.75 per direct labor hour.

Required:

Calculate Academy Awards’ direct labor rate variance for the period.

$140,000 – ($7.75 × 17,300) = $5,925 unfavorable

1. Adler Industries uses a standard cost system. Adler has established the following standards for one unit of product: standard labor of .25 hour and standard wage rate of $12 per hour. During January, Adler used 5,000 hours of direct labor and paid $62,500 in wages in producing 18,700 units.

Required:

Calculate the direct labor rate variance and indicate whether the variance is favorable or unfavorable.

$62,500 – ($12 × 5,000) = $2,500 unfavorable

1. Adler Industries uses a standard cost system. Adler has established the following standards for one unit of product: standard labor of 0.25 hour and standard wage rate of $12 per hour. During January, Adler used 5,000 hours of direct labor and paid $62,500 in wages in producing 18,700 units.

Required:

Calculate the direct labor efficiency variance and indicate whether the variance is favorable or unfavorable.

5,000 – (0.25 × 18,700) = 325;

325 × $12 = $3,900 unfavorable

1. Academy Awards makes plaques and trophies. Last year the company’s workers clocked 600 more direct labor hours than the flexible budget amount of 10,000 hours to complete 30,000 plaques and trophies. All workers were paid $12 per hour, which was $0.50 more than the standard wage rate.

Required:

Calculate Academy Awards’ direct labor efficiency variance for the period.

($11.50 × 10,600) – ($11.50 × 10,000) = $6,900 unfavorable

1. Camping Supplies produces light-weight cots. The company plans to produce 10,000 cots this year. Fixed overhead costs for the factory are budgeted to be $50,000. The company actually spent $48,000 on fixed overhead and produced 8,000 cots.

Required:

Calculate the fixed overhead spending variance.

$50,000 ̶ $48,000 = $2,000 favorable

Exercises

1. Morgan’s, Inc. has provided you with the following financial information:

Required:

Prepare a performance report for the period in good form.

1. Universal Outfitters, Inc. is a manufacturer of aluminum folding picnic tables. The company controller has provided you with the following financial information:

Required:

Prepare a performance report for the period.

1. Ledbetter’s Adventures manufactures outdoor camp ovens. In planning for the coming year, the budget committee is considering two different sales targets: 2,000 ovens or 2,600 ovens. Ovens sell for $280 each. The standard cost information for an oven is as follows:

Required:

Prepare a flexible budget for the three sales levels under consideration. Omit the heading.

Variable cost of goods sold per unit = $90 + $35 + $40 = $165

1. Margie’s Creations manufactures ceramic figurines. In planning for the coming year, the budget committee is considering two different sales targets: 6,000 figurines and 8,000 figurines. Figurines sell for $39 each. The standard cost information for one figurine is as follows:

Required:

Prepare a flexible budget for the three sales levels under consideration. Omit the heading.

Variable cost of goods sold per unit = $6 + $10 + $4 = $20

1. Amos, Inc. uses a standard cost system in which direct materials are carried at standard cost. Standards for one unit of product are: standard quantity of 8½ gallons and standard price $1.85 per gallon. During March, Amos purchased 150,000 gallons of direct materials at a cost of $300,000 and used 150,500 gallons in production of 18,000 units.

Required:

Calculate the direct materials price and quantity variances and indicate whether each variance is favorable or unfavorable.

Direct material price variance = $300,000 – ($1.85 × 150,000) = $22,500 unfavorable

Direct material quantity variance = 150,500 – (8.5 × 18,000) = 2,500;

2,500 × 1.85 = $4,625 favorable

1. Luckett Company’s standards call for two feet of direct materials for each unit. The standard price of one foot is $2. Actual production was 50,000 units requiring 105,000 feet of direct materials. Luckett purchased 107,000 feet at a unit price of $2.10 per foot.

Required:

Calculate the direct materials price and quantity variances and indicate whether the variances are favorable or unfavorable.

Direct material price variance = ($2.10 – $2.00) × 107,000 = $10,700 unfavorable

Direct material quantity variance = $2.00 × [105,000 – (2 × 50,000)] = $10,000 unfavorable

1. Thrope, Inc. purchased 1,700 pounds of direct materials at a price of $1.20 per pound. The standard price of the material is $1.30 per pound. Thrope used 1,500 pounds in production while the standard pounds allowed for actual production was 1,300.

Required:

Calculate the direct materials price and quantity variances and indicate whether the variances are favorable or unfavorable.

Direct material price variance = ($1.20 × 1,700) – ($1.30 × 1,700) = $170 favorable

Direct material quantity variance = ($1.30 × 1,500) – ($1.30 × 1,300) = $260 unfavorable

1. Nantucket, Inc. uses a standard cost system in which direct materials are carried at standard cost. Standards for one unit of product are: standard quantity of 2 feet, standard price $1.50 per foot. During May, Nantucket purchased 16,000 feet of direct material at a cost of $30,000 and used 15,500 feet in production of 7,500 units.

Required:

Calculate the direct materials price and quantity variances and indicate whether the variances are favorable or unfavorable.

Direct material price variance = $30,000 – ($1.50 × 16,000) = $6,000 unfavorable

Direct material quantity variance = 15,500 – (2 × 7,500) = 500; 500 × $1.50 = $750 unfavorable

1. Amos, Inc. uses a standard cost system with the following labor standards for one unit of product: standard hours 0.2 and standard wage rate $12. During January, Amos incurred 3,700 hours of direct labor and paid $45,325 in wages in production of 18,000 units.

Required:

Calculate the direct labor rate and efficiency variances and indicate whether the variances are favorable or unfavorable.

Direct labor rate variance = $45,325 – ($12 × 3,700) = $925 unfavorable

Direct labor efficiency variance = [3,700 – (0.2 × 18,000)] × $12 = $1,200 unfavorable

1. Nantucket, Inc. uses a standard cost system with the following labor standards for one unit of product: standard hours, 12 minutes, and standard wage rate, $10. During December, Nantucket incurred 3,500 hours of direct labor and paid $34,000 in wages in production of 18,000 units.

Required:

Calculate the direct labor rate and efficiency variances and indicate whether the variances are favorable or unfavorable.

Direct labor rate variance = $34,000 – ($10 × 3,500) = $1,000 favorable

Direct labor efficiency variance = 3,500 – (12/60 × 18,000) = 100; 100 × $10 = $1,000 favorable

1. Nantucket, Inc. uses a standard cost system. Workers were paid a total of $48,000 during the month of December. The company’s standard wage rate was $10 per hour, and the direct labor rate variance for the month was $1,200 unfavorable.

Required:

How many hours were worked during December?

$48,000 − $1,200 = $46,800; $46,800 ÷ $10 = 4,680 hours

1. The following labor standards have been set for a product:

The following data pertain to operations for the period.

Required:

Calculate the direct labor rate and efficiency variances and indicate whether the variances are favorable or unfavorable.

Direct labor rate variance = $120,000 – ($15 × 8,100) = $1,500 favorable

Direct labor efficiency variance = [8,100 – (9 × 850)] × $15 = $6,750 unfavorable

1. The following labor standards have been set for a product:

The following data pertain to operations for the period.

Required:

Calculate the direct labor rate and efficiency variances and indicate whether the variances are favorable or unfavorable.

Direct labor rate variance = $135,000 – ($12 × 11,000) = $3,000 unfavorable

Direct labor efficiency variance = [11,000 – (12 × 1,000)] × $12 = $12,000 favorable

1. R&N Sports has budgeted $57,000 for fixed overhead for the period. This budget was based on the following items: depreciation of $24,000, rent of $4,000, production supervisor salaries of $27,000, and other fixed costs of $2,000. Actual overhead incurred is $52,000. Production was budgeted at 8,000 units while actual production is 8,100.

Required:

Calculate the fixed overhead spending variance.

$52,000 ̶ $57,000 = $5,000 favorable

1. The following standards for variable manufacturing overhead have been established for Windsor, Inc. a manufacturer of reproduction vintage hats.

Standard hours per unit 2.5 hours

Standard variable overhead rate $15.80 per direct labor hour

The following data pertain to operations for the month of July.

Actual direct labor hours 4,200

Actual total variable overhead cost $63,050

Actual production 1,800 units

Required:

Calculate the variable overhead spending variance and the variable overhead efficiency variance for July and indicate whether the variances are favorable or unfavorable.

Variable overhead spending variance = $63,050 – (4,200 × $15.80) = $3,310 favorable

Variable overhead efficiency variance = [4,200 − (1,800 × 2.5)] × $15.80 = $4,740 favorable

1. Management by exception focuses only on those variances that management considers important. List three factors that managers use in deciding whether or not to investigate a variance and give an example of each.
2. Materiality – A material variance is one that is large enough to make a difference in the outcome of a decision. An example would be a large material quantity variance.
3. The existence of a trend – If a particular expense account has been running a variance for several periods, a manager might decide to investigate the variance even if it does not appear to be a material one.
4. The level of control the manager has over the expense – If a manager cannot control how the company incurs the expense, variance analysis will identify little that can be done to reduce the expense. For example, managers do not set property tax rates, so they would not be likely to investigate a variance in property tax expense.
5. While the sales manager may be ecstatic to learn he has exceeded his sales goal, the production manager may not share that enthusiasm, because having more sales than anticipated requires overtime for workers and additional maintenance on some machinery. Managers use budgeting to control and evaluate their operations. Two types of budgets that are discussed in this chapter are the static budget and the flexible budget. How do the two budgets differ and explain how the flexible budget is used in evaluating performance.

A static budget variance presents only the difference between actual results and budgeted results, developed for a single level of output. A flexible budget is prepared as if the actual sales levels are known. All costs and price standards are the same as in the static budget, but the volume is the same as the company’s actual results. The difference between the flexible budget and the static budget is the sales volume variance, which can be attributed solely to the difference in unit sales levels.

The preparation of a flexible budget facilitates the evaluation of operations when actual sales levels differ from static-budget sales levels because it adjusts amounts to what is allowed at the activity level achieved.

1. The flexible budget breaks down into the price and quantity variances for direct materials.

Required:

• 1. List two reasons why actual prices might differ from standard prices, resulting in a direct materials price variance.
  2. List two reasons why actual materials usage might differ from standard material usage, resulting in a direct materials quantity variance.

1. The direct materials price variance can be caused by an unexpected increase in the supplier’s price, by the purchase of large volume (bulk), or by the purchase of a different quality of material than called for by the material standard.
2. The materials quantity variances can be caused by workers’ experience level, the quality of materials used in production, a machine malfunction, or employee theft.
3. The flexible budget breaks down into the rate and efficiency variances for direct labor.

Required:

• 1. List two reasons why actual wage rates might differ from standard wage rates, resulting in a direct labor rate variance.
  2. List two reasons why actual labor hours might differ from standard labor hours, resulting in a direct labor efficiency variance.

1. Direct labor rate variances can be caused by using workers of a different skill level than called for by the standard, by paying overtime, or giving employees raises that were unplanned.
2. Direct labor efficiency variances can be caused by workers’ experience level, the quality of the materials used in production, a machine malfunction, or the level of supervision.
3. Suppose you are investigating direct materials variances. You find that the direct materials price variance is favorable, but the direct materials quantity variance is unfavorable. Assuming that the quantity purchased and used were equal, what circumstances could explain both variances?

Price and quality are typically related. Purchasing a lower quality of materials than allowed in the standard would result in favorable price variance. However, the lower-quality materials may have resulted in reworks (or waste) during the production process, requiring more material to be used. This would create an unfavorable quantity variance.

1. Indirect materials are classified as manufacturing overhead. How might indirect materials generate an unfavorable variance that is not related to the efficient use of the variable overhead activity driver?

Overhead items will cost more or less than budgeted due to changes in costs of those items or their inefficient use. For example, utility costs may be more than budgeted because of a rate increase or because employees waste electricity. Indirect materials can be stolen; they can spoil, shrink, or become obsolete.

Problems

1. Hunter Company produces personalized towel wraps. During May, the company’s actual wage rate was $12.50. The standard wage rate is $12 per hour, and the standard hours allowed for actual production was 9,000. The favorable direct labor efficiency variance for May was $1,200.

Required:

How many hours were actually worked during May?

($12 × 9,000) ̶ $1,200 = $106,800; $106,800 ÷ $12 = 8,900 actual hours worked during May

1. Joan’s Style manufactures dining room tables for both home and restaurant locations. Kona Clair, the company’s controller, developed the following standard costs for each 5-foot table. Ms. Clair developed these standards based on the company manufacturing 1,200 tables per month.

Standard Price Standard Quantity Standard Cost

Direct materials $45.00 per linear foot 5 linear feet $225.00

Direct labor 18.50 per DLH 12 DLH 222.00

Variable overhead 16.20 per DLH 12 DLH 194.40

Fixed overhead 28.60 per DLH 12 DLH 343.20

Total standard cost per table $984.60

At the end of the current month, Kona reported the following operational results:

• The company actually manufactured 1,100 tables during the month.
• 5,900 linear feet of direct materials were purchased during the month at a total cost of $258,420.
• 5,400 linear feet of direct materials were used to manufacture the tables.
• 13,400 direct labor hours were worked at a total cost of $242,880.
• Actual variable overhead was $234,600.
• Actual fixed overhead was $410,500.

Required:

a. Calculate the direct material price variance for the month.

b. Calculate the direct material quantity variance for the month.

c. Calculate the direct labor rate variance for the month.

d. Calculate the direct labor efficiency variance for the month.

e. Calculate the variable overhead spending variance for the month.

f. Calculate the variable overhead efficiency variance for the month.

g. Calculate the fixed overhead spending variance for the month.

a. Direct materials price variance

b. Direct materials quantity variance

c. Direct labor rate variance

d. Direct labor efficiency variance

e. Variable overhead spending variance

f. Variable overhead efficiency variance

g. Fixed overhead spending variance

1. Paul Benny picked up the monthly report that Eve Lynch left on his desk. He was pleased to see the favorable variance for operating income. He had pushed hard to exceed budgeted monthly production by 325 units. Paul was puzzled by some of line items in the report. He wonders whether it’s an error that most of the operating expenses are higher than the budget after all his hard work to manage the production line to improve efficiency and reduce costs. The report Paul reviewed is shown below:

Paul called Eve into his office to discuss all the unfavorable variances in the operating costs. Paul is very confused about how the budgeted operating income for the month is favorable, and yet there are so many unfavorable variances on the operating costs. Eve has promised Paul to investigate and report back any findings. Eve has also gathered the following additional information about the month’s performance, and the standard cost card for a unit of product.

• Direct materials purchased: 132,600 pounds at a total of $729,300
• Direct materials used: 132,600 pounds
• Direct labor hours worked: 34,450 at a total cost of $347,945
• Machine hours used: 53,235

The standard cost card for a unit of product.

Standard Price Standard Quantity Standard Cost

Direct materials $5.50 per pound 10 pounds $ 55.00

Direct labor $10.00 per DLH 2.6 DLH 26.00

Variable overhead $7.00 per MH 4 MH 28.00

Fixed overhead $3.58 per MH 4 MH 14.32

Total standard cost per unit $123.32

Required:

a. Calculate the direct material price variance for the month.

b. Calculate the direct material quantity variance for the month.

c. Calculate the direct labor rate variance for the month.

d. Calculate the direct labor efficiency variance for the month.

e. Calculate the variable overhead spending variance for the month.

f. Calculate the variable overhead efficiency variance for the month.

g. Calculate the fixed overhead spending variance for the month.

h. Prepare a performance report that will assist Paul in evaluating his efforts to control production costs.

i. Based on your review of the performance report you prepared, do you think Paul did a good job of controlling production expenses during the month? Why or why not?

a. & b. Direct Materials

c. & d. Direct Labor

e. & f. Variable Overhead

g. Fixed Overhead Spending Variance

h.

i. The performance report that Eve gave Paul compared costs budgeted for 13,000 units to actual costs for 13,325 units. Flexible budgeting shows that Paul did a favorable job managing production operations for the month. While the price/rate/spending variances were unfavorable, Paul more than made up for it with the favorable quantity/efficiency variances.

1. Chillcott Manufacturing produces ceiling fans. A master budget was prepared by the controller based on sales of 19,500 fans for the month of May. The budgeted income statement for the period follows:

During May, Chillcott produced and sold 23,400 fans and had the following actual results:

Required:

1. Prepare a flexible budget for May.
2. Calculate Chillcott’s static budget variance for May.
3. Will the static budget variance that you calculated in part (b) be useful to management? Why or why not?
4. Based on the available information, prepare a performance report for management.
5. Comment on the results of your report.
6. ^{Direct materials = $877,000 ÷ 19,500 fans = $45}

^{Direct labor = $390,000 ÷ 19,500 fans = $20}

^{Variable overhead = $585,000 ÷ 19,500 fans = $30}

b.

1. No, the static budget variance is of little use to managers. It is impossible to determine from the static budget variance whether the variances are due to changes in prices or changes in volume.

d.

e. The flexible budget suggests that if budget objectives had been met with higher sales, the operating income should have been $546,000. In fact, operating income was only $490,100. It appears that the average sales price had to be reduced to sell more units. While direct materials costs came in under budget, direct labor and variable overhead costs exceeded budget. Perhaps overtime was worked or lesser skilled workers had to be hired to achieve the higher level of production/sales. Management needs to identify why costs increased to be able to anticipate future results.

1. Mirada Manufacturing produces stained glass lamp shades. The standard cost card for a lamp shade is as follows:

Standard Price Standard Quantity Standard Cost

Direct materials $4.80/pound 1.25 pounds $ 6.00

Direct labor $36.00 per DLH 0.25 DLH 9.00

Variable overhead $12.00 per DLH 0.25 DLH 3.00

Fixed overhead $18.00 per DLH 0.25 DLH 4.50

Total standard cost per shade $22.50

Ron Shop, operations manager, became upset when he reviewed the unfavorable variances for April. He asked Heidi Cotton, controller, for more information. She provided the following overhead budgets, along with the actual results for April.

• The company purchased and used 115,000 pounds of glass during the month.
• Glass purchases during the month were made at $4.35 per pound.
• The direct labor payroll ran $744,150, with an actual hourly rate of $36.30 per direct labor hour.
• The annual budgets were based on the production of 1,000,000 shades, using 250,000 direct labor hours.
• The company actually produced 82,000 shades during the month.

Variable Overhead Budget

Fixed Overhead Budget

Required:

1. Calculate the direct materials price and quantity variances for April.
2. Calculate the direct labor rate and efficiency variances for April.
3. Calculate the variable overhead spending and efficiency variances for April.
4. Calculate the fixed overhead spending variance for April.
5. Provide an explanation for each variance you calculated.
6. Which of these variances should Ron be held responsible for? Why?

a. Direct Materials

b. Direct Labor

c. Variable Overhead

d. Fixed Overhead Spending Variance

e. Direct materials – lower quality materials were purchased, costing the company less (Favorable price), but requiring more material per shade (Unfavorable quantity).

Direct labor – the same skill-level workers were used as budgeted, but were paid a higher rate, perhaps overtime for some period of time, to achieve the higher production level (Unfavorable rate); the workers were able to meet the standard time to produce the shades, so no efficiency variance was recorded.

Variable overhead – indirect labor and equipment power exceeded the budget by a substantial amount. It is possible that machines were left running but not productive. The additional production may have caused the company to hire additional workers to meet the production schedule.

Fixed overhead – the unfavorable variance is due to increases in the costs of depreciation and utilities. The increase in depreciation must be due to the purchase of new equipment or a change in the life of a depreciable asset; the fixed portion of utilities is set by the utility company and not under the control of the company.

f. Direct materials – if the quantity variance is due to the purchase of inferior materials, then Ron, the operations manager, should not be held responsible.

Direct labor – it is unlikely that Ron sets the labor rates, though he may be the one who authorizes the extra hours for overtime or hiring a higher-paid class of workers.

Variable overhead – Ron needs to be questioned about the indirect labor and utility usage. He is the one who has direct authority over these areas, though there may be very good reasons for the increases in cost.

Fixed overhead – depreciation and utilities costs are likely outside Ron’s control.

Essay

1. Assume you have been assigned to a team responsible for using the flexible budget to assist in determining managers’ bonuses. When you approach the production manager about some variances, he says, “I don’t know why your team can’t just use the budget we developed at the beginning of the year. It was based on last year’s actual numbers which seems reasonable. I don’t understand this ‘flexible budget’ stuff. When I compare my actual results with our beginning of the year budget, I have beat the budget, so that should be sufficient. That will save us all a lot of time and effort.” Explain to the production manager why a flexible budget is better than a static budget and its use in evaluating performance.

A flexible budget is a budget that is prepared based on the actual sales levels. All costs and price standards are the same as in the static budget, but volume (that is, the unit sales) is the same as the company’s actual results. The preparation of a flexible budget facilitates the evaluation of operations when actual sales levels differ from static-budget sales levels. The difference between the flexible budget and actual results is the flexible budget variance, which reveals how well operations’ personnel controlled prices and costs. The production manager may be under budget, but if fewer units were produced than were budgeted, using a flexible budget will show, for example, whether the production department used too much material for the level of units actually produced.

1. Your friend has accepted a position with a large manufacturing company as production manager. She has found out that she must analyze and report any variances that relate to production. She has been told that managers use a method called “management by exception” and is concerned that any variance will be viewed negatively by her supervisors.

Required:

Explain to your friend the concept of “management by exception” and put her mind at ease about all variances being viewed as negative and explain what factors may be considered when deciding what variances to investigate.

As part of the control function, managers investigate the cause of each material variance, so that corrective action can be taken. Not all variances warrant investigation. Management by exception focuses only on those variances they consider important. Materiality is one measure managers use to determine if a variance should be investigated. A material variance is one that is large enough to make a difference to the decision maker. Small variances could be the result of combining several accounts with large offsetting variances. Managers need to wait until more detail is available before deciding which variances to investigate. Another factor to consider is the existence of a trend. Finally, managers generally do not investigate variances for which they have no control.

1. Assume R&N Manufacturing has always used a static budget approach to analyze variances, but the new controller has suggested that the company implement a flexible budget strategy.

Required:

• 1. What are the direct materials and direct labor variances that the controller will be analyzing?
  2. Give an example of what may cause each variance to be favorable.
  3. Give an example of what may cause each variance to be unfavorable.

1. The direct materials variances are the price variance and the quantity variance.

The direct labor variances are the rate variance and the efficiency variance.

1. The direct material price variance may be favorable if the company receives a volume discount that was not budgeted.

The direct material quantity variance may be favorable if a higher-quality material is used than what was budgeted.

The direct labor rate variance may be favorable if less skilled workers than were in the budget are used.

The favorable direct labor efficiency variance may be caused by using a higher-skill level of employees than that budgeted.

1. An unfavorable direct material price variance may be caused from vendor price increases.

An unfavorable direct material quantity may be caused if a machine has a malfunction during production.

An unfavorable direct labor rate variance may be caused by factory employees working overtime.

An unfavorable direct labor efficiency variance may be caused by a machine malfunction.

1. Variable overhead cost consists of indirect production costs that are expected to vary with production activity. How is the variable overhead spending variance calculated and list potential causes of the variance?

The variable overhead spending variance is the difference between the actual cost of variable overhead items and the amount of variable overhead cost that is expected to be incurred at the actual level of activity base experienced. This variance captures whether the company has paid more or less for variable overhead items. It also captures the relative efficiency with which variable overhead items are used. If a company incurs a lot of different variable overhead costs and the activity base is only slightly related to their consumption, then the spending variance will be virtually meaningless.

1. Because fixed overhead does not vary with changes in the level of activity, some managers do not see a need to investigate variances relating to fixed costs. However, that is not the case.
   1. How is the fixed overhead spending variance calculated?
   2. Discuss items that generally do not affect the fixed overhead variance and those that might affect the fixed overhead variances.
2. The fixed overhead spending variance is calculated by subtracting the budgeted fixed overhead cost from the actual fixed overhead cost.
3. Since fixed costs do not change with a change in the level of activity, the static budget and the flexible budget will report the same amount. Items like depreciation, insurance and maintenance are generally known or contracted, so they will generally not affect the variance. However, some items such as advertising which might be cancelled and unexpected maintenance costs may affect the variance.