CHAPTER 11:
CONTROL AND EVALUATION OF COST CENTERS
Multiple Choice
c
1. The two general types of variable cost variances are the
a. rate variance and spending variance.
b. price variance and budget variance.
c. price variance and quantity variance.
d. quantity variance and efficiency variance.
d
2. A major advantage of using standard costs is that
a. they are easier to compute than actual costs.
b. they are lower than actual costs.
c. products with standard costs can be sold at lower prices.
d. they provide information for control purposes.
a
3. Setting standards
a. has important behavioral implications.
b. is largely a matter of calculating rates and quantities.
c. should be done to make them as tight as possible.
d. is done only for manufacturing activities.
d
4. Which of the following is NOT a quantity variance?
a. Material use variance.
b. Labor efficiency variance.
c. Variable overhead efficiency variance.
d. Fixed overhead budget variance.
a
5. A major drawback to setting standards based on historical results is
that such standards
a. can perpetuate inefficiencies.
b. are harder to compute than are engineered standards.
c. are usually too hard to meet because of inflation.
d. are usually not well received by workers.
b
6. Cascade Company, which has a $3 standard cost per unit and budgeted
production at 1,000 units, actually produced 1,200 units. Total
standard cost for the period is
a. $3,000.
b. $3,600.
c. an amount that cannot be determined without knowing the variances for
the period.
d. none of the above.
c
7. Which variance is LEAST likely to be affected by hiring workers with
less skill than those already working?
a. Material use variance.
b. Labor rate variance.
c. Material price variance.
d. Variable overhead efficiency variance.
148
c
8. Which variance is MOST likely to be affected by buying a more expensive
material that produces less waste and is easier to handle?
a. Labor rate variance.
b. Variable overhead spending variance.
c. Direct labor efficiency variance.
d. Fixed overhead budget variance.
b
9. Filter Company's budget for overhead costs is:
total overhead cost = $50,000 + ($4 x direct labor hours)
Standard direct labor time is 1.5 hours per unit of product. The
standard wage rate is $6 per hour. Standard variable overhead cost for
a unit of product is
a. $4.00.
b. $6.00.
c. $9.00.
d. $10.00.
b 10. The major variance used in controlling fixed costs is the
a. efficiency variance.
b. budget variance.
c. use variance.
d. none of the above.
d 11. If the variable overhead standard is based on direct labor hours and
actual hours worked exceed standard hours allowed, the result is
a. a favorable labor efficiency variance.
b. an unfavorable variable overhead spending variance.
c. a favorable variable overhead spending variance.
d. an unfavorable variable overhead efficiency variance.
a 12. Control charts are used
a. to decide whether to investigate variances.
b. to develop standard costs.
c. to calculate variances.
d. for all of the above purposes.
c 13. An unfavorable labor efficiency variance
a. means that workers were inefficient and their supervisor did a poor
job.
b. causes a favorable variable overhead efficiency variance.
c. can result from an action taken by a manager other than the
supervisor of the workers.
d. should always be investigated and corrected.
d 14. The sum of the material price variance and material use variance always
equals the difference between
a. actual and standard material purchases.
b. actual material purchases and standard material use.
c. standard material purchases and standard material use.
d. none of the above pairs of amounts.
149
c 15. Which set of terms describes the same type of variance?
a. Price variance, rate variance, use variance.
b. Price variance, rate variance, efficiency variance.
c. Use variance, efficiency variance, quantity variance.
d. Use variance, efficiency variance, spending variance.
d 16. A product requires 0.60 standard labor hours, the standard labor rate is
$10 per hour, and production was 300 units. Actual labor cost was $1,862
at $9.80 per hour. Which of the following is true?
a. The labor rate variance was $98 favorable.
b. The labor rate variance was $62 unfavorable.
c. The labor efficiency variance was $62 unfavorable.
d. The labor efficiency variance was $100 unfavorable.
d 17. Cascade Company bought 10,000 pounds of material and used 9,500. The
material price variance was $300 unfavorable and the standard price per
pound is $3. The cost of materials purchased was
a. $28,200
b. $28,800
c. $29,700
d. $30,300
c 18. The standard price of a material is $2 per pound. The company bought
2,000 pounds at $1.90 per pound and used 1,700 pounds. Standard use was
1,800 pounds. The material price variance was
a. $170 favorable.
b. $180 favorable.
c. $200 favorable.
d. $400 favorable.
c 19. A company made 1,200 units with a $550 favorable labor use variance.
There was no labor rate variance and actual labor cost was $19,250. The
actual wage rate was $11. Standard labor time per unit is
a. 0.5 hours
b. 1.0 hour
c. 1.5 hours
d. 2.0 hours
a 20. Which formula calculates a price or rate variance? (AQ = actual
quantity of the factor, AP = actual price of the factor, SQ = standard
price of the factor, SQ = standard quantity of the factor)
a. (AQ x AP) - (AQ x SP).
b. (AQ x AP) - (SQ x AP).
c. (AQ x SP) - (SQ x SP)
d. (AQ x SP) - (SQ x AP).
b 21. Which formula calculates a use or efficiency variance? (AQ = actual
quantity of the factor, AP = actual price of the factor, SQ = standard
price of the factor, SQ = standard quantity of the factor)
a. (AQ x AP) - (SQ x SP).
b. (AQ x SP) - (SQ x SP).
c. (AQ x AP) - (AQ x SP)
d. (SQ x SP) - (SQ x AP).
150
b 22. Using variances to evaluate performance
a. is especially useful to JIT companies.
b. can be misleading because of interdependence among variances.
c. cannot be used with activity-based overhead standards.
d. all of the above.
b 23. Using activity-based costing in setting standards
a. is most valuable for direct labor standards.
b. should provide better variable overhead standards.
c. is unnecessary.
d. gives the same standards that traditional methods do.
c 24. A purchasing manager bought cheaper-than-normal materials that are
difficult to handle. Which combination of variances is LEAST likely to
be affected by this decision?
a. Material use and direct labor use.
b. Material use, direct labor use, and variable overhead efficiency.
c. Direct labor rate and variable overhead budget.
d. Direct labor use and variable overhead efficiency.
d 25. Standard costs are useful for
a. planning.
b. control.
c. performance evaluation.
d. all of the above.
b 26. Which kinds of variances should be investigated?
a. Those that are large and unfavorable.
b. Those that are large and either favorable or unfavorable.
c. All variances, despite their size.
d. Only use variances.
b 27. The material price variance is calculated
a. the same as the labor rate variance.
b. on the quantity of materials bought, not the quantity used.
c. on the quantity of materials used, not the quantity bought.
d. by multiplying the difference between the actual and standard price
of materials times the quantity of materials used.
b 28. Probably the best level at which to set standards is
a. historical performance.
b. currently attainable performance.
c. ideal performance.
d. any of the above.
d 29. The use of ideal standards
a. motivates workers to perform well.
b. results in mostly favorable variances.
c. is preferred by most managers.
d. can cause performance to suffer.
151
d 30. An 80% learning curve means that
a. the incremental time for each unit is 80% of the time of the unit
before it.
b. the cumulative average time is 80% of the cumulative average time at
the previous unit.
c. as production doubles, the incremental time for a unit is 80% of the
time at the previous doubling point.
d. as production doubles, the cumulative average time is 80% of the time
at the previous doubling point.
b 31. In
a.
b.
c.
d.
which company is the learning effect probably most important?
A canner of orange juice.
A manufacturer of airplanes.
A highly automated chemical manufacturer.
A manufacturer of nails.
a 32. Which of the following is NOT a reason why some JIT operations do not
use standards?
a. Standards are often set too tight for JIT operations.
b. Using standards can stifle continuous improvement.
c. Standards focus on cost centers, not on the entire manufacturing
operation.
d. All of the above are reasons.
d 33. The role of activity-based costing in standard costs is to
a. determine the standard material content of products.
b. find value-adding activities.
c. determine the variable overhead rate per direct labor hour.
d. identify drivers of overhead costs.
a 34. A company that uses activity-based costing to develop standard
costs
a. will usually have more than one variable overhead component in
its standard costs.
b. cannot compute variable overhead efficiency variances.
c. will have less information about the profitability of
individual products.
d. all of the above.
d 35. Advanced manufacturers
a. are especially concerned with material price variances.
b. almost always seek out the least expensive vendors.
c. use more materials than conventional manufacturers.
d. are generally more concerned with quality and delivery than with
price.
b 36. For a company whose variable overhead relates to direct labor, the
variable overhead efficiency variance
a. results from efficient or inefficient use of variable overhead
elements.
b. results from efficient or inefficient use of direct labor.
c. is always the same as the direct labor efficiency variance.
d. is more like a budget variance than a use variance.
152
b 37. Acme Company produced 500 units with a $50 unfavorable labor rate
variance. The labor use variance was $180 favorable. Actual labor cost
was $17,870. The standard wage rate was $9. Actual hours were
a. 1,520
b. 1,980
c. 2,000
d. 2,020
a 38. Crunch Company expects a 90% learning curve. The first batch of a new
product required 1,000 hours. The total time for the first four batches
should be
a. 3,240 hours.
b. 3,600 hours.
c. 4,000 hours.
d. some other number of hours.
c 39. Crunch Company expects a 90% learning curve. The first batch of a new
product required 10 hours. The first four batches should take an average
of
a. 10 hours.
b. 9 hours.
c. 8.1 hours.
d. some other number of hours.
c 40. Acme has a standard of 15 parts of component X costing $1.50 each. Acme
purchased 14,910 units of X for $21,950. Acme generated a $415 favorable
price variance and a $3,735 favorable quantity variance. If there were
no changes in the component inventory, how many units of finished
product were produced?
a.
994 units
b. 1,000 units
c. 1,160 units
d. some other number
b 41. Acme has a standard price of $6 per pound for materials. July's results
showed an unfavorable material price variance of $44 and a favorable
quantity variance of $228. If 1,066 pounds were used in production, what
was the standard quantity allowed for materials?
a. 1,066
b. 1,104
c. 1,294
d. some other number
c 42. Genco paid $78,800 to direct labor for the production of 1,500 units.
Standards allow 2 labor hours per unit at a rate of $25.00 per hour.
Actual hours totaled 2,900. The direct labor rate variance was
a. $2,050 favorable
b. $3,800 favorable
c. $6,300 unfavorable
d. some other number
153
a 43. Genco paid $78,800 to direct labor for the production of 1,500 units.
Standards allow 2 labor hours per unit at a rate of $25.00 per hour.
Actual hours totaled 2,900. The direct labor efficiency variance was
a. $2,500 favorable
b. $3,800 favorable
c. $6,300 unfavorable
d. some other number
c 44. Danner had a $550 favorable direct labor rate variance and a $720
unfavorable efficiency variance. Danner paid $6,650 for 800 hours of
labor. What was the standard direct labor wage rate?
a. $8.10
b. $8.31
c. $9.00
d. some other number
c 45. Jeter's Company had a $510 unfavorable direct labor rate variance and a
$1,000 favorable efficiency variance. Jeter's standard payroll was
$11,200 at a standard wage of $10 per hour. What was the actual direct
labor wage rate?
a. $9.56
b. $10.00
c. $10.50
d. some other number
a 46. Chippewa paid $32,225 to direct labor for the production of 1,700 units.
Standards allow 3 labor hours per unit at a rate of $6.50 per hour.
Actual hours totaled 5,150. The direct labor rate variance was
a. $1,250 favorable
b. $925 favorable
c. $325 favorable
d. $325 unfavorable
d 47. Chippewa paid $32,225 to direct labor for the production of 1,700 units.
Standards allow 3 labor hours per unit at a rate of $6.50 per hour.
Actual hours totaled 5,150. The direct labor efficiency variance was
a. $1,250 favorable
b. $925 favorable
c. $325 favorable
d. $325 unfavorable
a 48. Chetek Company has standard variable costs as follows:
Materials, 3 pounds at $4.00 per pound
$12.00
Labor, 2 hours at $10.00 per hour
20.00
Variable overhead, $7.50 per labor hour
15.00
$47.00
During September, Chetek produced 5,000 units, using 9,640 labor hours
at a total wage of $94,670 and incurring $78,600 in variable overhead.
The variable overhead budget variance is
a. $6,300 unfavorable
b. $3,600 unfavorable
c. $2,700 favorable
d. some other number
154
c 49. Barron Company has standard variable costs as follows:
Materials, 3 pounds at $4.00 per pound
$12.00
Labor, 2 hours at $10.00 per hour
20.00
Variable overhead, $7.50 per labor hour
15.00
$47.00
During September, Barron produced 5,000 units, using 9,640 labor hours
at a total wage of $94,670 and incurring $78,600 in variable overhead.
The variable overhead efficiency variance is
a. $6,300 unfavorable
b. $3,600 unfavorable
c. $2,700 favorable
d. $3,300 favorable
c 50. Silver Bow manufactured the first batch of product in 100 hours. The
second batch took an additional 60 hours. What percent learning
occurred?
a. 100%
b. 90%
c. 80%
d. Cannot be determined with the information given.
True-False
T
1. Standard costs are per-unit expressions of flexible budget allowances
based on output.
F
2. The value of b, the exponent in the learning curve formula, is the
learning rate.
T
3. The use of ideal standards could have undesirable effects on output.
F
4. Learning curves can only be used for a one-of-a-kind special order
product.
F
5. So long as total actual costs approximate total budgeted costs there is
no need for managerial concern or action.
T
6. It is not always possible to separate the variable and fixed components
of actual overhead cost.
F
7. When an unfavorable variance occurs, there is some action that some
manager can take to correct the event or circumstance that gave rise to
the variance.
8. Standard costs are devices for measuring effectiveness but not
efficiency.
F
F
9. "Ideal standards" are those most likely to be met under most conditions.
T 10. The labor efficiency variance excludes the effects of laborers being
paid more or than the standard labor rate.
155
Problem
1. The data below relate to a product of Salois Company.
Standard costs:
Materials, 2 pounds at $6 per pound
Labor, 3 hours at $15 per hour
Variable overhead at $8 per labor hour
Budgeted fixed production costs
Budgeted production for the year
$12
$45
$24
$140,000
4,000
Actual results were:
Production
Material purchases, 8,000 pounds
Labor, 10,360 hours
Variable overhead incurred
Fixed overhead incurred
Material used in production
3,700 units
$ 46,400
$160,580
$ 84,700
$137,500
7,300 pounds
per unit
per unit
per unit
per year
units
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
a.
Material price variance.
F
U
b.
Material use variance.
F
U
c.
Direct labor rate variance.
F
U
d.
Direct labor efficiency variance.
F
U
e.
Variable overhead budget variance.
F
U
f.
Variable overhead efficiency variance.
F
U
g.
Fixed overhead budget variance.
F
U
SOLUTION:
a.
MPV
$1,600 F
$46,400 - ($6 x 8,000)
b.
MUV
$600 F
c.
DLRV
$5,180 U
d.
DLEV
$11,100 F
e.
VOHBV
$1,820 U
$84,700 - ($8 x 10,360)
f.
VOHEV
$5,920 F
($8 x 10,360) - ($24 x 3,700)
g.
FOHBV
$2,500 F
$137,500 - $140,000
($6 x 7,300) - ($12 x 3,700)
$160,580 - ($15 x 10,360)
($15 x 10,360) - ($45 x 3,700)
156
2. The data below relate to a product of Conroy Company.
Standard costs:
Materials, 3 pounds at $4 per pound
Labor, 5 hours at $12 per hour
Variable overhead at $7 per labor hour
Budgeted fixed production costs
Budgeted production for the year
Actual results were:
Production
Material purchases, 15,000 pounds
Labor, 24,860 hours
Variable overhead incurred
Fixed overhead incurred
Material used in production
$12
$60
$35
$150,000
5,000
per unit
per unit
per unit
per year
units
5,200 units
$ 63,220
$301,620
$ 168,600
$152,760
15,300 pounds
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
a.
Material price variance.
F
U
b.
Material use variance.
F
U
c.
Direct labor rate variance.
F
U
d.
Direct labor efficiency variance.
F
U
e.
Variable overhead budget variance.
F
U
f.
Variable overhead efficiency variance.
F
U
g.
Fixed overhead budget variance.
F
U
SOLUTION:
a.
MPV
$3,220 U
$63,220 - ($4 x 15,000)
b.
MUV
$1,200 F
($4 x 15,300) - ($12 x 5,200)
c.
DLRV
$3,300 U
$301,620 - ($12 x 24,860)
d.
DLEV
$13,680 F
e.
VOHBV
$5,420 F
$168,600 - ($7 x 24,860)
f.
VOHEV
$7,980 F
($7 x 24,860) - ($35 x 5,200)
g.
FOHBV
$2,760 U
$152,760 - $150,000
($12 x 24,860) - ($60 x 5,200)
157
3. Anne's Arbors has the following budget and actual results for May:
Budget
-----9,000
11,250
15,750
Unit production
Direct labor hours
Materials used, feet
Actual
-----9,600
11,550
16,100
Standard labor rate is $12 per hour; standard material price is $4.50 per
foot. Actual wages were $140,250; actual material purchases were 17,500
pounds for $77,160.
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
a.
Material price variance.
F
U
b.
Material use variance.
F
U
c.
Direct labor rate variance.
F
U
d.
Direct labor efficiency variance.
F
U
SOLUTION:
a.
MPV:
$1,590 F
$77,160 - ($4.50 x 17,500)
b.
MUV:
$3,150 F
$4.50 x (16,100 - [1.75 x 9,600])
c.
DLRV: $1,650 U
$140,250 - ($12 x 11,550)
d.
DLEV: $5,400 F
$12 x (11,550 - [1.25 x 9,600])
4.
North Company has the following budget and actual results for July:
Budget
-----10,000
12,000
16,000
Unit production
Direct labor hours
Materials used, feet
Actual
-----8,400
11,860
16,750
Standard labor rate is $14 per hour; standard material price is $7.50 per
foot. Actual wages were $168,750; actual material purchases were 18,800
pounds for $149,825.
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
a.
Material price variance.
F
U
b.
Material use variance.
F
U
c.
Direct labor rate variance.
F
U
158
d.
Direct labor efficiency variance.
F
U
SOLUTION:
a.
MPV:
$ 8,825 U
$149,825 - ($7.50 x 18,800)
b.
MUV:
$24,825 U
$7.50 x (16,750 - [1.6 x 8,400])
c.
DLRV: $ 2,710 U
$168,750 - ($14 x 11,860)
d.
DLEV: $24,920 U
$14 x (11,860 - [1.2 x 8,400])
5. The data below relate to a product of Acme Company.
Standard costs:
Materials, 5 yards at $3 per pound
$15 per unit
Labor, 3 hours at $14 per hour
$42 per unit
Variable overhead at $10 per labor hour
$30 per unit
Budgeted fixed production costs
$175,000 per year
Budgeted production for the year
7,700 units
Actual results were:
Production
Material purchases, 31,700 yards
Labor, 17,660 hours
Variable overhead incurred
Fixed overhead incurred
Material used in production
6,300 units
$ 80,890
$252,330
$ 178,300
$172,200
31,600 yards
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
a.
Material price variance.
F
U
b.
Material use variance.
F
U
c.
Direct labor rate variance.
F
U
d.
Direct labor efficiency variance.
F
U
e.
Variable overhead budget variance.
F
U
f.
Variable overhead efficiency variance.
F
U
SOLUTION:
a.
MPV
$14,210 F
$80,890 - ($3 x 31,700)
b.
MUV
$
($3 x 31,600) - ($15 x 6,300)
c.
DLRV
$ 5,090 U
300 U
$252,330 - ($14 x 17,660)
159
d.
DLEV
$17,360 F
($14 x 17,660) - ($42 x 6,300)
e.
VOHBV $ 1,700 U
$178,300 - ($10 x 17,660)
f.
VOHEV $11,160 U
($9 x 17,660) - ($27 x 6,300)
6. Toimi Inc. had the following variances for the most recent month:
Materials Price Variance
Materials Usage Variance
Direct Labor Rate Variance
Direct Labor Efficiency Variance
$3,500
$ 720
$5,770
$6,980
U
F
F
U
Other information included: actual wages paid $72,310; materials purchased
$130,760; standards per unit were 2 labor hours at $5 per hour, 3 pounds at
$6 per pound. There were no changes in materials inventories.
a. Find the units produced.
b. Find the standard labor hours.
c. Find the actual labor hours.
d. Find the standard quantity of materials allowed.
e. Find the actual quantity of materials used.
SOLUTION:
a. 7,110 units
($72,310 + 5,770 - 6,980) / (2 x $5)
b. 14,220 SH
$71,100 / $5
c. 15,616 AH
$78,080 / $5
d. 21,330 lbs
($130,760 - 3,500 + 720) / $6
e. 21,210 lbs
$127,260 / $6
7. Ralph Inc. had the following variances for the most recent month:
Direct Labor Rate Variance
Direct Labor Efficiency Variance
Variable Overhead Spending Variance
$14,560 U
$ 3,660 U
$12,320 F
Other information included: actual wages paid $105,560; materials purchased
$124,860; standards per unit were 2 labor hours at $5 per hour and variable
overhead at $6 per hour.
a. Find the units produced.
b. Find the standard labor hours.
160
c. Find the actual labor hours.
d. Find the variable overhead efficiency variance.
e. Find the actual variable overhead.
SOLUTION:
a. 8,734 units
($105,560 - 14,560 - 3,660) / (2 x $5)
b. 17,468 SH
8,734 x 2
c. 18,200 AH
($105,560 - 14,560) / $5
d. $4,392 U
(18,200 - 17,468) x 6
e. $96,880
(18,200 x $6) - $12,320
8. Gros Ventre Company expects a learning rate of 80%. The first batch of a
new product is expected to take 500 direct labor hours.
a. Compute the cumulative average time for the first four batches.
b. Compute the total time for the first four batches.
SOLUTION:
a. 320 [500 hours x 80% x 80%]
b. 1,280
Output (X)
1
2
4
Average time (Y)
500
400 (500 x 80%)
320 (400 x 80%)
Total time (XY)
500
800 (2 x 400)
1,280 (4 x 320)
9. Benco Inc. has the following results for December when production was 8,000
units:
Materials purchased
Materials used
Direct labor
18,000 pounds
17,750 pounds
27,050 hours
$213,520
$436,544
Per unit standards are 2.5 pounds of materials at $12.00 per pound and 3.5
hours at $16 per hour.
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
a.
Material price variance.
F
U
b.
Material use variance.
F
U
161
c.
Direct labor rate variance.
F
U
d.
Direct labor efficiency variance.
F
U
SOLUTION:
a.
MPV
$ 2,480 F
$213,520 - ($12 x 18,000)
b.
MUV
$27,000 F
($12 x 17,750) - ($12 x 2.5 x 8,000)
c.
DLRV
$ 3,744 U
$436,544 - ($16 x 27,050)
d.
DLEV
$15,200 F
($16 x 27,050) - ($16 x 3.5 x 8,000)
10. Cascade Company expects a learning rate of 90%. The first batch of a new
product is expected to take 200 direct labor hours.
a. Compute the cumulative average time for the first eight batches.
b. Compute the total time for the first eight batches.
SOLUTION:
a. 145.8 (200 hours x 90% x 90% x 90%)
b. 1,166.4
Output (X)
1
2
4
8
Average
200
180
162
145.8
time (Y)
Total time (XY)
200
360 (2 x 180)
648 (4 x 162)
1,166.4 (8 x 145.8)
(200 x 90%)
(180 x 90%)
(162 x 90%)
162