Introduction to Management Accounting, 16e, Global Edition (Horngren)
Chapter 8 Flexible Budgets and Variance Analysis
8.1 Questions
1) An example of a favorable variance is ________.
A) actual revenues are less than expected revenues
B) actual expenses are less than expected expenses
C) actual material prices are greater than expected material prices
D) expected labor costs are less than actual labor costs
Answer: B
Diff: 2
LO: 8-1
AACSB: Analytic skills
Learning Outcome: Discuss standard costing and variance analysis
2) Spending less than budgeted for maintenance costs will result in a(n) ________ variance. When actual
revenues exceed budgeted revenues, this results in a(n) ________ variance.
A) unfavorable; unfavorable
B) unfavorable; favorable
C) favorable; unfavorable
D) favorable; favorable
Answer: D
Diff: 2
LO: 8-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
3) Unfavorable variances ________ represent bad decisions made by managers.
A) always
B) sometimes
C) never
D) none of the above
Answer: B
Diff: 1
LO: 8-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
4) If actual expenses are less than expected expenses, the expense variance will be unfavorable.
Answer: FALSE
Diff: 2
LO: 8-1
AACSB: Analytic skills
Learning Outcome: Discuss standard costing and variance analysis
1
Copyright © 2014 Pearson Education
5) A favorable expense variance is when budgeted expenses are less than actual expenses.
Answer: FALSE
Diff: 2
LO: 8-1
AACSB: Analytic skills
Learning Outcome: Discuss standard costing and variance analysis
8.2 Questions
1) A budget prepared for one expected level of activity is called a ________.
A) flexible budget
B) static budget
C) variable budget
D) rolling budget
Answer: B
Diff: 1
LO: 8-2
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
2) A budget prepared for different levels of activity is called a ________.
A) rolling budget
B) operating budget
C) flexible budget
D) static budget
Answer: C
Diff: 1
LO: 8-2
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
3) The static budget is based on the ________ level of output and the flexible budget is based on the
________ level of output.
A) actual; expected
B) expected; actual
C) expected; planned
D) actual; projected
Answer: B
Diff: 2
LO: 8-2
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
2
Copyright © 2014 Pearson Education
4) A static budget is prepared for one expected level of activity.
Answer: TRUE
Diff: 1
LO: 8-2
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
5) A static budget has multiple levels of activity.
Answer: FALSE
Diff: 1
LO: 8-2
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
6) A flexible budget is different from a variable budget.
Answer: FALSE
Diff: 1
LO: 8-2
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
7) A flexible budget adjusts for changes in sales volume and other cost-drivers.
Answer: TRUE
Diff: 1
LO: 8-2
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
8.3 Questions
1) To calculate the numbers in a flexible budget, managers use ________.
A) cost functions developed from regression analysis
B) flexible budget formulas
C) cost functions obtained from the high-low method
D) all of the above
Answer: D
Diff: 2
LO: 8-3
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
3
Copyright © 2014 Pearson Education
2) When preparing a flexible budget income statement, ________ costs are constant at different levels of
activity.
A) variable
B) step
C) contributed
D) fixed
Answer: D
Diff: 2
LO: 8-3
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
3) Which of the following statements is FALSE?
A) Flexible budgets are prepared for a range of activity.
B) Flexible budgets are matched to actual levels of activity.
C) A flexible budget is also called a variable budget.
D) Flexible budgets are based on different assumptions about cost behavior than those used for static
budgets.
Answer: D
Diff: 2
LO: 8-3
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
4) Oroz Company had the following information available:
Expected Costs and Selling Price Based on 5,000 units:
Variable manufacturing costs per unit
Fixed manufacturing costs per unit
Selling price per unit
Expected production level
$32
$20
$70
5,000 units
In the flexible budget at 10,000 units, what is the total manufacturing cost?
A) $250,000
B) $420,000
C) $520,000
D) $700,000
Answer: B
Diff: 2
LO: 8-3
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
4
Copyright © 2014 Pearson Education
5) Perez Company had the following information available:
Expected Costs and Selling Price Based on 5,000 Units:
Variable manufacturing costs per unit
Fixed manufacturing costs per unit
Selling price per unit
Expected production level
$32
$20
$70
5,000 units
In the flexible budget at 15,000 units, what is the total manufacturing cost?
A) $480,000
B) $580,000
C) $680,000
D) $780,000
Answer: B
Diff: 2
LO: 8-3
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
6) Huntsman Company's variable selling and administrative expenses are $48,000 at a production level of
6,000 units. If the production level is 8,000 units, what are the variable selling administrative expenses?
A) $48,000
B) $56,000
C) $64,000
D) $80,000
Answer: C
Diff: 1
LO: 8-3
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
7) Which of the following is used to develop flexible budgets?
A) fixed overhead variances
B) static budget variances
C) flexible budget variances
D) cost functions
Answer: D
Diff: 1
LO: 8-3
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
5
Copyright © 2014 Pearson Education
8) A company that has an activity-based costing system with multiple cost drivers will prepare a(n)
________ budget.
A) financial planning
B) short-range planning
C) activity-based flexible
D) strategic
Answer: C
Diff: 2
LO: 8-3
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
9) When should a company use an activity-based flexible budget with multiple cost drivers instead of a
simple flexible budget with one cost driver?
A) when a significant portion of costs vary with only one cost driver
B) when a significant portion of costs vary with the number of units of output
C) when a significant portion of costs vary with the number of units of sales
D) when a significant portion of costs vary with cost drivers other than units of output
Answer: D
Diff: 2
LO: 8-3
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
10) Perez Company uses activity-based costing. The company is trying to estimate the costs of the
processing activity in the factory. The company has developed the following flexible budget formula:
Y = $10.50X + $13,000
Where: Y = Total processing cost per quarter and X = Number of machine hours
If 10,000 machine hours are used next quarter, total variable costs are ________ and total fixed costs are
________.
A) $105,000; $13,000
B) $105,000; $130,000,000
C) $113,000; $130,000,000
D) $10.50; $13,000
Answer: A
Diff: 2
LO: 8-3
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
6
Copyright © 2014 Pearson Education
11) Garcia Company planned to produce 12,000 units. This level of activity required 40 setups at a cost of
$18,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost
was $26,000. What is the static budget amount for total setup costs?
A) $21,000
B) $25,500
C) $26,000
D) $38,000
Answer: D
Diff: 2
LO: 8-3
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
12) Sanchez Company planned to produce 12,000 units. This level of activity required 20 setups at a cost
of $22,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost
was $26,000. At 10,000 units, what is the flexible budget amount for total setup costs?
A) $7,500
B) $22,000
C) $26,000
D) $29,500
Answer: D
Diff: 2
LO: 8-3
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
7
Copyright © 2014 Pearson Education
13) Fill in the blanks to complete the flexible budget for Mammoth Company. Assume the different levels
of output are in the relevant range.
____________________________________________________________
Budget
Various Levels of Output
Formula
Per Unit
Units
3,000
4,000
5,000
Sales
$25
_____
_____
_____
Variable costs:
Manufacturing
_____
_____
$32,000
_____
Administrative
$2.625
_____
_____
_____
Fixed costs:
Manufacturing
Administrative
_____
$12,500
_____
_____
$25,000
_____
Operating income
_____
_____
_____
Answer:
3,000
4,000
5,000
Sales
$75,000
$100,000
$125,000
Variable costs:
Manufacturing
24,000
32,000
40,000
Administrative
7,875
10,500
13,125
Fixed costs:
Manufacturing
25,000
25,000
25,000
Administrative
12,500
12,500
12,500
Operating income
$5,625
$20,000
$34,375
Diff: 2
LO: 8-3
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
8
Copyright © 2014 Pearson Education
14) Use the following data to prepare a flexible budget for possible production levels of 5,000, 5,500 and
6,000 units. Assume all levels of production are in the same relevant range.
Sales price
Variable costs:
Manufacturing
Administrative
Selling
$12.00 per unit
$6.00 per unit
$1.50 per unit
$0.50 per unit
Fixed costs(at 5,000 units):
Manufacturing
$15,000
Administrative
$5,000
Answer: Units
5,000
5,500
6,000
Sales
$60,000
$66,000
$72,000
Variable costs:
Manufacturing
30,000
33,000
36,000
Administrative
7,500
8,250
9,000
Selling
2,500
2,750
3,000
Contribution margin
20,000
22,000
24,000
Fixed costs:
Manufacturing
15,000
15,000
15,000
Administrative
5,000
5,000
5,000
Operating income
$0
$2,000
$4,000
Diff: 2
LO: 8-3
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
8.4 Questions
1) The activity-level variance for fixed costs equals zero when ________.
A) the actual level of output equals the static budget level of output
B) the actual level of output is greater than the static budget level of output
C) the actual level of output is less than the static budget level of output
D) all of the above
Answer: D
Diff: 3
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
9
Copyright © 2014 Pearson Education
2) In the relevant range, the sales-activity variance for fixed costs is always ________.
A) greater than the flexible budget variance
B) less than the flexible budget variance
C) greater than the static budget variance
D) zero
Answer: D
Diff: 3
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
3) The static budget variance is the difference between the ________ and the ________.
A) amounts for the flexible budget; amounts for the static budget
B) flexible budget variance; activity level variance
C) actual results; amounts for the static budget
D) actual results; amounts for the flexible budget
Answer: C
Diff: 2
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
4) The static budget variance is equal to the sum of ________ and ________.
A) direct materials variance; direct labor variance
B) fixed overhead variance; variable overhead variance
C) flexible budget variance; activity-level variance
D) direct materials price variance; direct materials quantity variance
Answer: C
Diff: 2
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
10
Copyright © 2014 Pearson Education
5) Kilsdonk Company has the following information available:
Budgeted cost of direct materials at 900,000 units
Budgeted cost of direct materials at 820,000 units
Actual cost of direct materials at 820,000 units
Actual level of output(units)
Planned level of output(units)
$900,000
$820,000
$840,000
820,000
900,000
The cost driver of product costs is units of output. What is the static budget variance for direct material
costs?
A) $20,000 Unfavorable
B) $20,000 Favorable
C) $60,000 Favorable
D) $60,000 Unfavorable
Answer: C
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
6) Margaret Duffy Company has the following information available:
Budgeted cost of direct materials at 900,000 units
Budgeted cost of direct materials at 820,000 units
Actual cost of direct materials at 820,000 units
Actual level of output(units)
Planned level of output(units)
$900,000
$820,000
$840,000
820,000
900,000
The cost driver of product costs is units of output. What is the flexible budget variance for direct material
costs?
A) $20,000 Unfavorable
B) $20,000 Favorable
C) $60,000 Favorable
D) $60,000 Unfavorable
Answer: A
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
11
Copyright © 2014 Pearson Education
7) Corrao Company had a static budgeted operating income of $8.6 million. Actual operating income was
$6.4 million. The flexible budget operating income at the actual level of output is $7,000,000. What is the
static-budget variance of operating income?
A) $1.6 million Favorable
B) $1.6 million Unfavorable
C) $2.2 million Favorable
D) $2.2 million Unfavorable
Answer: D
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
8) For the current year, LeBombard Company's static budget sales were $225,000. Actual sales for the
current year were $220,000. Actual sales last year were $219,000. Expected sales last year were $225,000.
What is the static budget variance for sales in the current year?
A) $5,000 Favorable
B) $5,000 Unfavorable
C) $6,000 Favorable
D) $6,000 Unfavorable
Answer: B
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
9) Differences between the actual results and the flexible budget at the actual level of output achieved are
________ variances.
A) static budget
B) activity budget
C) flexible budget
D) operating budget
Answer: C
Diff: 2
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
12
Copyright © 2014 Pearson Education
10) Conner Company has the following information:
Actual operating loss at 5,000 units
Budgeted operating income at 5,000 units
Budgeted operating income at 10,000 units
Planned level of operations
Actual level of operations
$(11,000)
$5,000
$12,000
10,000 units
5,000 units
Assume units of output are the cost driver for product costs. What is the static budget variance for
operating income?
A) $11,000 Unfavorable
B) $12,000 Unfavorable
C) $23,000 Unfavorable
D) $23,000 Favorable
Answer: C
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
11) Potter Company has the following information:
Actual operating loss at 5,000 units
Budgeted operating income at 5,000 units
Budgeted operating income at 10,000 units
Planned level of operations
Actual level of operations
$(11,000)
$5,000
$12,000
10,000 units
5,000 units
Assume the cost driver of product costs is units of production. What is the flexible budget variance for
operating income?
A) $5,000 Unfavorable
B) $11,000 Unfavorable
C) $16,000 Unfavorable
D) $16,000 Favorable
Answer: C
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
13
Copyright © 2014 Pearson Education
12) Assume sales are the cost driver for product costs. The difference between the static budget amount
for sales and the flexible budget amount for sales at the actual level of sales is called the ________. The
difference between the flexible budget amount for sales at the actual level of sales and the actual amount
for sales is called the ________.
A) static variance; flexible budget variance
B) master variance; flexible budget variance
C) quantity variance; static budget variance
D) sales activity variance; flexible budget variance
Answer: D
Diff: 2
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
13) Differences between actual results and the static budget at the original planned level of output are
________ variances.
A) flexible budget
B) financial budget
C) operating budget
D) static budget
Answer: D
Diff: 2
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
14) Flexible budget variances are the deviations of actual results from the ________.
A) flexible budget amounts for the achieved level of activity
B) flexible budget amounts for the static level of activity
C) static budget amounts for the expected level of activity
D) static budget amounts for last year's level of activity
Answer: A
Diff: 2
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
15) The amount of actual operating income may differ from the static budget amount for operating
income because ________.
A) actual output levels were not the same as in the static budget
B) actual variable costs were higher than expected variable costs
C) actual fixed costs were higher than expected fixed costs
D) all of the above
Answer: D
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
14
Copyright © 2014 Pearson Education
16) Which is NOT a reason for a static budget variance?
A) Actual sales volume was higher than projected sales volume.
B) Actual variable costs were higher than static budget variable costs.
C) Actual fixed costs were higher than static budget fixed costs.
D) Actual sales volume in current period was higher than projected sales volume in last period.
Answer: D
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
17) If sales are the cost driver, unfavorable flexible budget variances result from ________.
A) actual costs exceeding planned costs
B) planned costs exceeding actual costs
C) actual sales exceeding planned sales
D) planned sales exceeding actual sales
Answer: A
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
18) Flexible budget variances are the difference between the actual results and ________.
A) the static budget for the planned level of output
B) the flexible budget for the planned level of output
C) the flexible budget for the actual level of output
D) the master budget for the planned level of output
Answer: C
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
15
Copyright © 2014 Pearson Education
19) The following data are for Pablo Corporation:
Units
Sales
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
18,000
$360,000
234,000
$126,000
76,000
$50,000
Static Budget
16,000
$320,000
192,000
$128,000
80,000
$48,000
Flexible Budget for
Actual Sales Activity
18,000
$360,000
216,000
$144,000
80,000
$64,000
The flexible budget variance for operating income is ________.
A) $2,000 Favorable
B) $2,000 Unfavorable
C) $14,000 Favorable
D) $14,000 Unfavorable
Answer: D
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
20) The following data are for California Closets:
Units
Sales
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
18,000
$360,000
234,000
$126,000
76,000
$50,000
Static Budget
16,000
$320,000
192,000
$128,000
80,000
$48,000
Flexible Budget for
Actual Sales Activity
18,000
$360,000
216,000
$144,000
80,000
$64,000
The sales activity variance for operating income is ________.
A) $14,000 Favorable
B) $14,000 Unfavorable
C) $16,000 Favorable
D) $16,000 Unfavorable
Answer: C
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
16
Copyright © 2014 Pearson Education
21) The following data are for Sandy Corporation:
Units
Sales
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
18,000
$360,000
234,000
$126,000
76,000
$50,000
Static Budget
16,000
$320,000
192,000
$128,000
80,000
$48,000
Flexible Budget for
Actual Sales Activity
18,000
$360,000
216,000
$144,000
80,000
$64,000
The static budget variance for operating income is ________.
A) $2,000 Favorable
B) $2,000 Unfavorable
C) $16,000 Favorable
D) $16,000 Unfavorable
Answer: A
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
22) If the flexible budget variance was $6,000 Favorable and the sales activity variance was $3,000
Favorable, then the static budget variance was ________.
A) $3,000 Favorable
B) $3,000 Unfavorable
C) $9,000 Favorable
D) $9,000 Unfavorable
Answer: C
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
23) Who is usually responsible for sales activity variances for income?
A) operating managers in factory
B) marketing managers
C) research and development function
D) product design function
Answer: B
Diff: 2
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
17
Copyright © 2014 Pearson Education
24) If the sales activity variance was $8,000 Favorable and the static budget variance was $10,000
Favorable, then the flexible budget variance was ________.
A) $2,000 Favorable
B) $2,000 Unfavorable
C) $18,000 Favorable
D) $18,000 Unfavorable
Answer: A
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
25) The sales activity variance for ________ will always be zero.
A) sales
B) contribution margin
C) variable costs
D) fixed costs
Answer: D
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
26) Brad Company planned to produce 12,000 units. This level of production required 20 setups at a cost
of $18,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup cost
was $26,000. What is the static budget variance for setup costs?
A) $2,000 Favorable
B) $2,000 Unfavorable
C) $2,500 Favorable
D) $2,500 Unfavorable
Answer: A
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
27) Leshan Company planned to produce 12,000 units. This level of production required 20 setups at a
cost of $18,000 plus $500 per setup. Actual production was 10,000 units, requiring 15 setups. Actual setup
cost was $26,000. What is the flexible budget variance for setup costs?
A) $500 Favorable
B) $500 Unfavorable
C) $2,000 Favorable
D) $2,000 Unfavorable
Answer: B
Diff: 3
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
18
Copyright © 2014 Pearson Education
28) Which statement would NOT be a reason for a flexible budget variance?
A) Material prices were different than expected.
B) Labor prices were different than expected.
C) Actual volume of activity was different than expected.
D) Amount of labor used per unit of output was different than expected.
Answer: C
Diff: 3
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Discuss standard costing and variance analysis
29) Total static budget variances are equal to the sum of activity-level variances and flexible budget
variances.
Answer: TRUE
Diff: 3
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
30) The static budget variance is the difference between actual results and the static budget for the
original planned level of output.
Answer: TRUE
Diff: 2
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
31) If the total sales-activity variance and the static-budget variance are equal, there is no flexible budget
variance.
Answer: TRUE
Diff: 2
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
19
Copyright © 2014 Pearson Education
32) The following data are for the month of January for the Soloway Company. Assume the cost driver is
the number of units sold.
Static budget data:
Sales of 9,000 pairs at $90 per pair
Variable costs of $69 per pair
Total fixed costs $108,000
Actual results:
Sales of 9,600 pairs at $87 per pair
Variable costs of $72 per pair
Total fixed costs $109,200
Required:
A) What is the static budget operating income?
B) What is the sales activity variance for operating income?
C) What is the flexible budget variance for operating income?
Answer:
Actual
Flexible Budget
Sales
$835,200
$864,000
Variable costs
691,200
662,400
Fixed costs
109,200
108,000
Operating income
$34,800
$93,600
Static Budget
$810,000
621,000
108,000
$81,000
A) $81,000
B) $12,600 Favorable
C) $58,800 Unfavorable
Diff: 2
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
20
Copyright © 2014 Pearson Education
33) Sunday Corporation prepared the following performance report for variable overhead costs for the
last quarter of the year. Machine hours are the cost driver for all overhead costs.
Cost Driver(Machine Hours)
Variable Overhead Costs:
Utilities
Indirect Labor
Supplies
Maintenance
Total Variable Overhead Costs
Static
Actual
Budget
38,000
35,000
Variances
$15,700
$14,000
$1,700 U
86,500
80,500
6,000 U
26,000
21,000
5,000 U
44,900
42,000
2,900 U
$173,100
$157,500
$15,600 U
The cost formulas used for the variable overhead costs are:
Variable Overhead Costs
Utilities
Indirect Labor
Supplies
Maintenance
Cost Formula
$0.40 per machine hour
$2.30 per machine hour
$0.60 per machine hour
$1.20 per machine hour
Your boss called you into the office and reprimanded you for the unfavorable variances. The boss says
you are fired unless you can explain why the variances are all unfavorable.
Required:
Calculate the flexible budget variances and the activity-level variances for each cost.
Answer:
Utilities
Indirect Labor
Supplies
Maintenance
Total
Actual
$15,700
86,500
26,000
44,900
$173,100
Flexible
Activity
Budget
Flexible
Level
Variances
Budget
Variances
$500 U
$15,200
$1,200 U
900 F
87,400
6,900 U
3,200 U
22,800
1,800 U
700 F
45,600
3,600 U
$2,100 U
$171,000 $13,500 U
Static
Budget
$14,000
80,500
21,000
42,000
$157,500
Diff: 3
LO: 8-4
AACSB: Analytic skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
21
Copyright © 2014 Pearson Education
34) Differentiate between a static budget variance and a flexible budget variance.
Answer: A static budget variance is the difference between the originally planned (static) amount and the
actual amount. In the case of sales, the static budget variance for sales is the difference between sales at
the planned level of operations and sales at the actual level of operations.
A flexible budget variance is the difference between the actual amount and the amount that is expected
for the actual level of output achieved. In the case of sales, the flexible budget variance is the difference
between sales at the actual level of operations and expected sales at the actual level of operations.
Diff: 3
LO: 8-4
AACSB: Reflective thinking skills
Learning Outcome: Prepare a flexible budget and discuss the interpretation and use of flexible budgets
8.5 Questions
1) One variance often influences another variance. If the direct materials price variance is favorable, then
it is possible that this variance will cause ________.
A) the direct materials quantity variance to be unfavorable
B) the direct labor price variance to be unfavorable
C) the direct labor price variance to be favorable
D) the direct materials quantity variance to be favorable
Answer: A
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
2) Which of the following is NOT an example of efficient performance?
A) Direct labor hours used per unit were less than expected.
B) Direct material used per unit was less than expected.
C) More outputs were achieved with less inputs than predicted.
D) More outputs were produced than expected.
Answer: D
Diff: 2
LO: 8-5
AACSB: Analytic skills
Learning Outcome: Discuss standard costing and variance analysis
3) Purple Rain Company planned to sell 35,000 units. Actual sales were 30,000 units. Based on this
information, Blue Company was ________.
A) efficient
B) inefficient
C) effective
D) ineffective
Answer: D
Diff: 1
LO: 8-5
AACSB: Analytic skills
Learning Outcome: Discuss standard costing and variance analysis
22
Copyright © 2014 Pearson Education
4) Yellow Cake Company planned to produce and sell 900 units at a total cost of $180,000. Actual
production and sales were 900 units at a cost of $170,000. The company was ________.
A) efficient and ineffective
B) inefficient and ineffective
C) inefficient and effective
D) efficient and effective
Answer: D
Diff: 1
LO: 8-5
AACSB: Analytic skills
Learning Outcome: Discuss standard costing and variance analysis
5) ________ is the degree to which an organization minimizes the ________ used to achieve an objective.
A) Efficiency; costs
B) Efficiency; resources
C) Effectiveness; resources
D) Effectiveness; costs
Answer: B
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
6) When a firm meets a sales goal, it is said to be ________. When a firm incurs more direct material costs
to manufacture products than expected, the firm is said to be ________.
A) effective; ineffective
B) efficient; inefficient
C) effective; inefficient
D) efficient; ineffective
Answer: C
Diff: 2
LO: 8-5
AACSB: Analytic skills
Learning Outcome: Discuss standard costing and variance analysis
7) A favorable materials price variance can affect all of the following variances except ________.
A) labor rate variance
B) labor efficiency variance
C) materials quantity variance
D) flexible budget variance for direct materials
Answer: A
Diff: 2
LO: 8-5
AACSB: Analytic skills
Learning Outcome: Discuss standard costing and variance analysis
23
Copyright © 2014 Pearson Education
8) Which of the following statements about perfection standards is TRUE?
A) It is generally believed that they have a negative influence on employee morale.
B) They are expressions of the most efficient performance possible.
C) They usually result in unfavorable variances.
D) All of the above
Answer: D
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
9) Variances should be investigated if they ________.
A) are favorable
B) are unfavorable
C) are smaller than the variances in the prior period
D) exceed certain dollar amounts or percentage deviations from the budget
Answer: D
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
10) Favorable variances do not require investigation.
Answer: FALSE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
11) Favorable flexible budget variances are always good news.
Answer: FALSE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
12) Sales-activity variances measure how efficient managers have been in meeting the planned sales goal.
Answer: FALSE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
24
Copyright © 2014 Pearson Education
13) Perfection standards and ideal standards are different.
Answer: FALSE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
14) Ideal standards make no provision for waste, spoilage and machine breakdowns.
Answer: TRUE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
15) Ideal standards have an adverse effect on employee motivation.
Answer: TRUE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
16) As the terms are used in the budgeting process, it is possible for a company to be efficient at the same
time it is ineffective.
Answer: TRUE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
17) Efficiency is the degree to which a goal or objective is met.
Answer: FALSE
Diff: 1
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
18) Currently attainable standards do not make allowances for spoilage and waste.
Answer: FALSE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
25
Copyright © 2014 Pearson Education
19) Currently attainable standards are levels of performance that can be achieved by realistic levels of
effort.
Answer: TRUE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
20) The unfavorable variances resulting from ideal standards are intended to constantly remind
personnel of the continuous need for improvement.
Answer: TRUE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
21) One of the first questions a manager should consider when explaining a large variance is whether
expectations are valid.
Answer: TRUE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
22) In most companies, variances are investigated only if they exceed a minimum dollar amount or
percentage deviation from budgeted amounts.
Answer: TRUE
Diff: 2
LO: 8-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss standard costing and variance analysis
26
Copyright © 2014 Pearson Education
8.6 Questions
1) The following information is available for Munter Manufacturing Company.
-- Direct materials price standard is $3.25 per pound.
-- Direct materials quantity standard is six pounds per finished unit.
-- Budgeted production is 25,000 finished units.
-- 175,000 pounds of direct materials were purchased for $525,000.
-- 175,000 pounds of direct materials were used in production.
-- 25,600 finished units of product were produced.
What is the direct materials price variance?
A) $43,750 Unfavorable
B) $43,750 Favorable
C) $350,000 Unfavorable
D) $350,000 Favorable
Answer: B
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
2) The following information is available for Maher Manufacturing Company.
-- Direct materials price standard is $3.25 per pound.
-- Direct materials quantity standard is six pounds per finished unit.
-- Budgeted production is 25,000 finished units.
-- 175,000 pounds of direct materials were purchased for $525,000.
-- 175,000 pounds of direct materials were used in production.
-- 25,600 finished units of product were produced.
What is the direct materials quantity variance?
A) $21,400 Unfavorable
B) $21,400 Favorable
C) $69,550 Unfavorable
D) $69,550 Favorable
Answer: C
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
27
Copyright © 2014 Pearson Education
3) The following information is presented for the Marathon Manufacturing Company.
— Direct labor rate standard is $11.55.
— Direct labor efficiency standard is 2.5 hours per unit.
— Budgeted production is 1,200 units.
— Production required 2,910 direct labor hours at a cost of $33,174.
— Actual production is 1,150 units.
What is the direct labor price variance?
A) $172.50 Favorable
B) $180.00 Unfavorable
C) $436.50 Favorable
D) $435.50 Unfavorable
Answer: C
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
4) The direct materials price variance reflects the effects of ________.
A) changing input prices, holding the quality of outputs constant
B) changing input quantities, holding the input price constant
C) changing input prices, holding the quantity of inputs constant
D) changing input quantities, while changing the input price
Answer: C
Diff: 2
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
5) The following information is presented for the Maybeel Manufacturing Company.
— Direct labor rate standard is $11.55.
— Direct labor efficiency standard is 2.5 hours per unit.
— Budgeted production is 1,200 units.
— Production required 2,910 direct labor hours at a cost of $33,174.
— Actual production is 1,150 units.
What is the direct labor efficiency variance?
A) $404.25 Favorable
B) $404.25 Unfavorable
C) $1,039.50 Favorable
D) $1,039.50 Unfavorable
Answer: B
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
28
Copyright © 2014 Pearson Education
6) Johnsen Company reported a flexible budget variance for direct labor of $8,000 Favorable for the
current year. If the direct labor price variance was $2,000 Unfavorable, what was the direct labor
efficiency variance?
A) $6,000 Unfavorable
B) $6,000 Favorable
C) $10,000 Favorable
D) $10,000 Unfavorable
Answer: C
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
7) Christian Company reported a flexible budget variance for direct materials costs of $10,000 Favorable
for the current year. If the direct materials price variance was $2,000 Favorable, what was the direct
materials quantity variance?
A) $8,000 Unfavorable
B) $8,000 Favorable
C) $12,000 Favorable
D) $12,000 Unfavorable
Answer: B
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
8) A company has the following information available about one of its products:
Standard price per pound of input
Actual price per pound of input
Standard inputs per unit of output
Actual units of output
Direct Materials Quantity Variance
$25
$24
3 pounds
2,770
$250 F
How many pounds of material were used?
A) $8,300
B) $8,310
C) $8,320
D) $8,330
Answer: A
Diff: 3
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
29
Copyright © 2014 Pearson Education
9) A company has the following information available about one of its products:
Standard price per pound of input
Actual price per pound of input
Standard inputs per unit of output
Actual units of output
Direct Materials Price Variance
Actual pounds of input used
?
$27
3 pounds
3,000
$18,000 F
9,000
What is the standard price per pound of input?
A) $25
B) $27
C) $29
D) $33
Answer: C
Diff: 3
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
10) Beckowski Company had the following information available for its specialty product:
Standards for one unit of product:
Direct Materials: 5 pounds at $2 per pound
Direct Labor: 0.50 hour at $16 per hour
Materials and Labor Used to produce 8,500 units:
Direct Materials: 46,000 pounds at ? per pound
Direct Labor: 4,000 hours at $16.80 per hour
If the Direct Materials Price Variance is $4,600 Unfavorable, what is the actual cost per pound of direct
materials used?
A) $1.80
B) $1.90
C) $2.00
D) $2.10
Answer: D
Diff: 3
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
30
Copyright © 2014 Pearson Education
11) Parrish Company had the following information available for its specialty product:
Standards for one unit of product:
Direct Materials: 5 pounds at $2 per pound
Direct Labor: 0.50 hour at $16 per hour
Materials and Labor Used to produce 8,500 units:
Direct Materials: ? pounds at $2.10 per pound
Direct Labor: 4,000 hours at $16.80 per hour
If the Direct Materials Quantity Variance is $7,000 Unfavorable, what is the actual quantity of direct
materials used?
A) 7,000
B) 42,500
C) 46,000
D) 47,000
Answer: C
Diff: 3
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
12) Cornell Company had the following information available for its specialty product:
Standards for one unit of product:
Direct Materials: 5 pounds at $2 per pound
Direct Labor: 0.50 hour at $16 per hour
Materials and Labor Used to produce 8,500 units:
Direct Materials: 46,000 pounds at $3 per pound
Direct Labor: 4,000 hours at ? per hour
If the Direct Labor Price Variance is $4,600 Unfavorable, what is the actual labor rate per hour?
A) $16.00
B) $16.50
C) $17.10
D) $17.15
Answer: D
Diff: 3
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
31
Copyright © 2014 Pearson Education
13) Gollerowski Company had the following information available for its specialty product:
Standards for one unit of product:
Direct Materials: 5 pounds at $2 per pound
Direct Labor: 0.50 hour at $16 per hour
Materials and Labor Used to produce 8,500 units:
Direct Materials: 46,000 pounds at 4 per pound
Direct Labor: ? hours at $17 per hour
If the Direct Labor Efficiency Variance is $4,000 Unfavorable, what are the actual number of hours
worked?
A) $4,000
B) $4,250
C) $4,400
D) $4,500
Answer: D
Diff: 3
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
14) The quantity variance for direct materials can be computed by multiplying the standard price by the
difference between the ________.
A) standard inputs allowed and expected inputs allowed at actual output
B) quantity of inputs actually used and the quantity of inputs that should have been used for the expected
output
C) standard inputs allowed and expected inputs allowed for expected output
D) quantity of inputs actually used and the quantity of inputs that should have been used for actual
output
Answer: D
Diff: 2
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
15) Rate variances are the same as ________ variances. Efficiency variances are the same as ________
variances.
A) spending; effective
B) activity; static
C) usage; quantity
D) price; quantity
Answer: D
Diff: 1
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
32
Copyright © 2014 Pearson Education
16) A ________ is most likely to be held accountable for price variances for direct materials.
A) machine operator
B) production supervisor
C) purchasing manager
D) marketing director
Answer: C
Diff: 1
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
17) In which of the following scenarios can Eastman Company NOT have favorable flexible budget
variance for direct materials?: When direct material price variance is ________, and when direct material
quantity variance is ________,
A) favorable; unfavorable
B) unfavorable; favorable
C) unfavorable; unfavorable
D) favorable; favorable
Answer: C
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
18) If the direct labor price variance is $800 Favorable and the direct labor usage variance is $700
Unfavorable, then ________.
A) the flexible budget variance for direct labor is $100 Favorable
B) actual total wages paid were $800 more than expected
C) actual labor hours were less than expected
D) actual material prices were less than expected
Answer: A
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
33
Copyright © 2014 Pearson Education
19) The following information is for Brankov Corporation:
Direct Materials (measured in pounds)
Standard price per unit of input
Actual price per unit of input
Standard inputs per unit of output
Actual units of input
Actual units of output
$20
$18
3 pounds
8,300 pounds
2,770 units
What is the flexible budget variance for direct materials?
A) $16,400 Favorable
B) $16,400 Unfavorable
C) $16,800 Favorable
D) $16,800 Unfavorable
Answer: C
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
20) Barber Company produces 2,500 units. Each unit was expected to require 2 labor hours at a cost of $10
per hour. Total labor cost was $52,250 for 4,750 hours worked. Direct labor is measured in labor hours.
What is the direct labor price variance?
A) $2,500 Favorable
B) $2,500 Unfavorable
C) $4,750 Favorable
D) $4,750 Unfavorable
Answer: D
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
21) Butters Company produces 2,500 units. Each unit was expected to require 2 labor hours at a cost of
$10 per hour. Total labor cost was $52,250 for 4,750 hours worked. Direct labor is measured in labor
hours. What is the direct labor quantity variance?
A) $2,500 Favorable
B) $2,500 Unfavorable
C) $2,750 Favorable
D) $2,750 Unfavorable
Answer: A
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
34
Copyright © 2014 Pearson Education
22) Ivanovich Company produces 2,500 units. Each unit was expected to require 2 labor hours at a cost of
$10 per hour. Total labor cost was $52,250 for 4,750 hours worked. Direct labor is measured in labor
hours. What is the flexible budget variance for direct labor?
A) $2,250 Favorable
B) $2,250 Unfavorable
C) $7,500 Favorable
D) $7,500 Unfavorable
Answer: B
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
23) The Cheeseman Company makes tables and the following standards have been developed:
Direct Materials
Direct Labor
Standard Inputs Expected
For Each Unit of Output
10 pounds
3 hours
Standard Price Expected
Per Unit of Input
$4 per pound
$16 per hour
Production of 230 tables was expected in July, but 250 tables were actually completed. Direct materials
purchased and used were 2,200 pounds at an actual price of $4.50 per pound. Direct labor cost for the
month was $10,620, and the actual pay per hour was $18.00. What is the direct material price variance for
July?
A) $800 Favorable
B) $800 Unfavorable
C) $1,100 Favorable
D) $1,100 Unfavorable
Answer: D
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
35
Copyright © 2014 Pearson Education
24) The Cornell Company makes tables for which the following standards have been developed:
Direct Materials
Direct Labor
Standard Inputs Expected
For Each Unit of Output
10 pounds
3 hours
Standard Price Expected
Per Unit of Input
$4 per pound
$16 per hour
Production of 200 tables was expected in July, but 220 tables were actually completed. Direct materials
purchased and used were 2,000 pounds at an actual price of $4.40 per pound. Direct labor cost for the
month was $10,620, and the actual pay per hour was $18.00. What is the direct material quantity variance
for July?
A) $800 Favorable
B) $800 Unfavorable
C) $880 Favorable
D) $880 Unfavorable
Answer: A
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
25) The Matthew Company makes tables for which the following standards have been developed:
Direct Materials
Direct Labor
Standard Inputs Expected
For Each Unit of Output
17 pounds
3 hours
Standard Price Expected
Per Unit of Input
$5.20 per pound
$16 per hour
Production of 200 tables was expected in May, but 220 tables were actually completed. Direct materials
purchased and used were 2,100 pounds at an actual price of $4.40 per pound. Direct labor cost for the
month was $10,620, and the actual pay per hour was $18.00. What is the direct labor price variance for the
month of May?
A) $1,180 Favorable
B) $1,180 Unfavorable
C) $1,200 Favorable
D) $1,200 Unfavorable
Answer: B
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
36
Copyright © 2014 Pearson Education
26) The Quinn Company makes tables for which the following standards have been developed:
Direct Materials
Direct Labor
Standard Inputs Expected
For Each Unit of Output
10 pounds
3 hours
Standard Price Expected
Per Unit of Input
$4 per pound
$16 per hour
Production of 200 tables was expected in June, but 220 tables were actually completed. Direct materials
purchased and used were 2,100 pounds at an actual price of $4.40 per pound. Direct labor cost for the
month was $10,620, and the actual pay per hour was $18.00. What is the direct labor quantity variance for
the month of June?
A) $1,120 Favorable
B) $1,120 Unfavorable
C) $1,260 Favorable
D) $1,260 Unfavorable
Answer: A
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
27) The Brucker Company makes mugs for which the following standards have been developed:
Direct Materials
Direct Labor
Standard Inputs Expected
For Each Unit of Output
5 ounces
1.5 hours
Standard Price Expected
Per Unit of Input
$2 per ounce
$8 per hour
Production of 400 mugs was expected in July, but 440 mugs were actually completed. Direct materials
purchased and used were 2,100 ounces at an actual price of $2.30 per ounce. Direct labor cost for the
month was $5,310, and the actual pay per hour was $9.00. What is the direct material price variance for
July?
A) $400 Favorable
B) $400 Unfavorable
C) $630 Favorable
D) $630 Unfavorable
Answer: D
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
37
Copyright © 2014 Pearson Education
28) The Savage Company makes mugs for which the following standards have been developed:
Direct Materials
Direct Labor
Standard Inputs Expected
For Each Unit of Output
5 ounces
1.5 hours
Standard Price Expected
Per Unit of Input
$2 per ounce
$8 per hour
Production of 400 mugs was expected in July, but 440 mugs were actually completed. Direct materials
purchased and used were 2,100 ounces at an actual price of $2.20 per ounce. Direct labor cost for the
month was $5,310, and the actual pay per hour was $9.00. What is the direct material quantity variance
for July?
A) $200 Favorable
B) $200 Unfavorable
C) $220 Favorable
D) $220 Unfavorable
Answer: A
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
29) The Tulip Company makes mugs for which the following standards have been developed:
Direct Materials
Direct Labor
Standard Inputs Expected
For Each Unit of Output
5 ounces
2.5 hours
Standard Price Expected
Per Unit of Input
$2 per ounce
$8 per hour
Production of 400 mugs was expected in August, but 440 mugs were actually completed. Direct materials
purchased and used were 2,100 ounces at an actual price of $2.20 per ounce. Direct labor cost for the
month was $5,310, and the actual pay per hour was $9.00. What is the direct labor price variance for
August?
A) $420 Favorable
B) $420 Unfavorable
C) $590 Favorable
D) $590 Unfavorable
Answer: D
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
38
Copyright © 2014 Pearson Education
30) The Banks Company makes mugs for which the following standards have been developed:
Direct Materials
Direct Labor
Standard Inputs Expected
For Each Unit of Output
5 ounces
1.5 hours
Standard Price Expected
Per Unit of Input
$2 per ounce
$8 per hour
Production of 400 mugs was expected in July, but 440 mugs were actually completed. Direct materials
purchased and used were 2,100 ounces at an actual price of $2.30 per ounce. Direct labor cost for the
month was $5,310, and the actual pay per hour was $9.00. What is the direct labor quantity variance for
July?
A) $560 Favorable
B) $560 Unfavorable
C) $630 Favorable
D) $630 Unfavorable
Answer: A
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
31) In a manufacturing area of a firm, poor product design and problems with the quality of materials
will, more than likely, result in a(n) ________ variance or ________ variance.
A) unfavorable material efficiency; unfavorable labor usage
B) favorable material efficiency; unfavorable labor price
C) unfavorable material price; unfavorable labor rate
D) unfavorable material price; unfavorable labor usage
Answer: A
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
32) One cause of a flexible budget variance for direct labor may be a difference between standard and
actual hourly wage rates for factory workers.
Answer: TRUE
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
39
Copyright © 2014 Pearson Education
33) A quantity variance for direct materials measures the deviation between the quantity of inputs that
should have been used to achieve the actual output and the actual quantity of inputs used to achieve the
actual output.
Answer: TRUE
Diff: 2
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
34) The direct materials price variance is based on the standard quantity of inputs allowed for the actual
output.
Answer: FALSE
Diff: 2
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
35) The flexible budget variance for direct labor can be broken down into a price variance and an
effectiveness variance.
Answer: FALSE
Diff: 2
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
36) The quantity variance and efficiency variance for direct labor are different types of variances.
Answer: FALSE
Diff: 1
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
37) The flexible budget variance for direct labor equals the labor price variance plus the labor quantity
variance.
Answer: TRUE
Diff: 2
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
38) A favorable materials price variance may lead to an unfavorable materials usage variance.
Answer: TRUE
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
40
Copyright © 2014 Pearson Education
39)
Std. price per unit of input
Actual price per unit of input
Std. inputs allowed per unit of output
Actual units of input
Direct Material
$12 per foot
$14 per foot
5 feet
2,500 feet
Actual units of output
Direct Labor
$14 per hour
$13 per hour
3 hours
1,550 hours
600 units
Required:
Compute the price and quantity variances for direct materials and direct labor.
Answer: Direct material:
Price variance: ($14 - $12) × 2,500 = $5,000 Unfavorable
Quantity variance: [2,500 - (600 × 5)] × $12 = $6,000 Favorable
Direct labor:
Price variance: ($13 - $14) × 1,550 = $1,550 Favorable
Quantity variance: [1,550 - (600 × 3)] × $14 = $3,500 Favorable
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
40) The following data was obtained for a company that makes statues:
Direct material
Direct labor
Standard Inputs Expected
For Each Unit of Output
5 pounds
1.5 hours
Standard Price
Per Unit of Input
$12 per pound
$12 per hour
During the month of July, the company actually produced 1,000 statutes, which is 100 units less than
expected. Direct material purchased and used amounted to 5,500 pounds at a cost of $12.50 per pound.
Actual direct labor was 1,450 hours at an actual cost of $13.00 per hour.
Required:
A) Compute the price and quantity variances for direct materials.
B) Compute the price and quantity variances for direct labor.
Answer: A) Price variance = ($12.50 - $12.00) × 5,500 = $2,750 Unfavorable
Quantity variance = (5,500 - 5,000) × $12 = $6,000 Unfavorable
B) Price variance = ($13.00 - $12.00) × 1,450 = $1,450 Unfavorable
Quantity variance = (1,450 - 1,500) × $12.00 = $600 Favorable
Diff: 2
LO: 8-6
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
41
Copyright © 2014 Pearson Education
41) What are some common causes of unfavorable quantity variances for direct labor?
Answer: Some common causes are poor quality of material, untrained workers, poor workmanship,
changes in production method, new workers, machine breakdowns, faulty product designs, and
inefficient machines.
Diff: 2
LO: 8-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
8.7 Questions
1) Variable overhead efficiency variances are unfavorable when ________.
A) the actual cost-driver activity exceeds the standard activity allowed for the actual output
B) the actual cost-driver activity is less than the standard activity allowed for the actual output
C) the actual cost-driver activity exceeds the standard activity allowed for the static budget output
D) the actual cost-driver activity is less than the standard activity allowed for the static budget output
Answer: A
Diff: 3
LO: 8-7
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
2) Simmons Company has the following information available for variable overhead costs. Direct labor
hours are the cost driver for variable overhead costs.
Actual variable overhead costs
Standard variable overhead costs
Actual direct labor hours
Standard direct labor hours per unit
Units produced
$4,700
$1.20 per hour
3,750 hours
5 hours
700
What is the variable overhead spending variance?
A) $200 Favorable
B) $200 Unfavorable
C) $500 Favorable
D) $500 Unfavorable
Answer: B
Diff: 3
LO: 8-7
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
42
Copyright © 2014 Pearson Education
3) Dooley Company has the following information available for variable overhead costs. Direct labor
hours are the cost driver for variable overhead costs.
Actual variable overhead costs
Standard variable overhead costs
Actual direct labor hours
Standard direct labor hours per unit
Units produced
$4,700
$1.20 per hour
3,750 hours
5 hours
700
What is the variable overhead efficiency variance?
A) $300 Favorable
B) $300 Unfavorable
C) $500 Favorable
D) $500 Unfavorable
Answer: B
Diff: 3
LO: 8-7
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
4) Indian Company has the following information available for variable overhead costs. Direct labor
hours are the cost driver for variable overhead costs.
Actual variable overhead costs
Standard variable overhead costs
Actual direct labor hours
Standard direct labor hours per unit
Units produced
$5,120
$3.00 per hour
2,000 hours
3 hours
1,000
What is the variable overhead spending variance?
A) $880 Favorable
B) $1,000 Unfavorable
C) $3,880 Favorable
D) $3,880 Unfavorable
Answer: A
Diff: 3
LO: 8-7
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
43
Copyright © 2014 Pearson Education
5) Switsdorf Company has the following information available for variable overhead costs. Direct labor
hours are the cost driver for variable overhead costs.
Actual variable overhead costs
Standard variable overhead costs
Actual direct labor hours
Standard direct labor hours per unit
Units produced
$5,120
$3.00 per hour
2,000 hours
3 hours
1,000
What is the variable overhead efficiency variance?
A) $1,000 Favorable
B) $2,000 Unfavorable
C) $2,000 Favorable
D) $3,000 Favorable
Answer: D
Diff: 3
LO: 8-7
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
6) At 60,000 machine hours, Norwall Company's static budget for variable overhead costs is $180,000. At
60,000 machine hours, the company's static budget for fixed overhead costs is $300,000. Machine hours
are the cost driver of all overhead costs. The static budget is based on 60,000 machine hours. At 60,000
machine hours, the company produces 40,000 units. The following data is available:
Actual units produced and sold
Actual machine hours
Actual variable overhead costs
Actual fixed overhead costs
42,000
64,000
$185,600
$302,400
What is the variable overhead spending variance?
A) $6,400 Unfavorable
B) $6,400 Favorable
C) $1,000 Favorable
D) $1,000 Unfavorable
Answer: B
Diff: 3
LO: 8-7
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
44
Copyright © 2014 Pearson Education
7) The flexible budget variance for variable overhead costs is composed of a(n) ________ variance and a(n)
________ variance.
A) efficiency; effective
B) spending; rate
C) quantity; efficiency
D) spending; efficiency
Answer: D
Diff: 2
LO: 8-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
8) The variable overhead efficiency variance depends on whether the quantity of the cost driver used is
more or less than ________.
A) the standard amount of output for the expected amount of output
B) the quantity allowed for the expected amount of output
C) the quantity allowed for the static budget amount of output
D) the standard quantity allowed for the actual output
Answer: D
Diff: 2
LO: 8-7
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
9) The variable overhead spending variance combines ________ and ________ effects.
A) price; quantity
B) price; efficiency
C) efficiency; sales activity
D) rate; sales activity
Answer: A
Diff: 2
LO: 8-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
10) Variable overhead efficiency variances are unfavorable when actual cost driver activity exceeds the
________.
A) standard cost-driver activity allowed for the actual output
B) activity allowed for the expected output
C) activity allowed for the planned output
D) activity allowed for last period's output
Answer: A
Diff: 2
LO: 8-7
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
45
Copyright © 2014 Pearson Education
11) The variable overhead spending variance is the difference between the actual variable overhead cost
and the amount of variable overhead cost budgeted for the actual level of cost driver activity.
Answer: TRUE
Diff: 2
LO: 8-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
12) The variable overhead efficiency variance indicates to management how much variable overhead cost
it may waste by not controlling the use of cost-driver activity.
Answer: TRUE
Diff: 2
LO: 8-7
AACSB: Reflective thinking skills
13)
Answer: Spending variance = $20,570 - (2,450 × $8) = $970 Unfavorable
Efficiency variance = [2,450 - (500 × 5)] × $8 = $400 Favorable
variances
Diff: 2
LO: 8-7
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
8.8 Questions
1) For fixed overhead costs, the spending variance is ________ equal to the flexible-budget variance.
A) always
B) sometimes
C) never
D) indeterminate
Answer: A
Diff: 2
LO: 8-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
46
Copyright © 2014 Pearson Education
2) Wendel Company has actual fixed overhead costs of $14,700. Fixed overhead costs based on the flexible
budget and the actual use of the cost driver are $14,400. Actual variable overhead costs are $14,500. What
is the flexible-budget variance for fixed overhead costs?
A) $300 Favorable
B) $300 Unfavorable
C) $100 Favorable
D) $100 Unfavorable
Answer: B
Diff: 3
LO: 8-8
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
3) Wetzel Company has actual fixed overhead costs of $14,500. Fixed overhead costs based on the flexible
budget and the standard use of the cost driver are $14,400. Actual variable overhead costs are $14,700.
Flexible budget costs for variable overhead costs are $15,000. What is the flexible-budget variance for
fixed overhead costs?
A) $100 Favorable
B) $100 Unfavorable
C) $300 Favorable
D) $300 Unfavorable
Answer: B
Diff: 3
LO: 8-8
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
4) The efficiency variance for fixed overhead costs ________.
A) is greater than the flexible budget variance for fixed overhead costs
B) is greater than the spending variance for fixed overhead costs
C) is greater than the flexible budget variance for variable overhead costs
D) does not exist
Answer: D
Diff: 2
LO: 8-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
47
Copyright © 2014 Pearson Education
5) At 60,000 machine hours, Clark Company's static budget for variable overhead costs is $180,000. At
60,000 machine hours, the company's static budget for fixed overhead costs is $300,000. Machine hours
are the cost driver of all overhead costs. The static budget is based on 60,000 machine hours. At 60,000
machine hours, the company produces 40,000 units. The following data is available:
Actual units produced and sold
Actual machine hours
Actual variable overhead costs
Actual fixed overhead costs
42,000
64,000
$185,600
$302,400
What is the fixed overhead spending variance?
A) $2,400 Unfavorable
B) $2,400 Favorable
C) $1,000 Favorable
D) $1,000 Unfavorable
Answer: A
Diff: 3
LO: 8-8
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
6) The flexible budget variance for fixed overhead costs equals the ________ variance.
A) efficiency
B) spending
C) static budget
D) operating budget
Answer: B
Diff: 2
LO: 8-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
48
Copyright © 2014 Pearson Education
7) Sloth Company reports the following information for the last year of operations:
Actual fixed overhead costs(7,000 units)
Budgeted fixed overhead costs(10,000 units)
Planned level of operations(in units)
Actual level of operations(in units)
$77,000
80,000
10,000
7,000
What is the fixed overhead spending variance?
A) $3,000 Favorable
B) $21,000 Unfavorable
C) $24,000 Unfavorable
D) $30,000 Favorable
Answer: A
Diff: 2
LO: 8-8
AACSB: Analytic skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
8) In the relevant range, fixed overhead costs do not vary with cost driver activity.
Answer: TRUE
Diff: 2
LO: 8-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss and calculate the direct material, direct labor and overhead variances
49
Copyright © 2014 Pearson Education