Horngren Ima16 Tif 08 GE

April 2, 2018 | Author: asem shaban | Category: Budget, Labour Economics, Interpretation (Logic), Efficiency, Variance
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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 $32 Fixed manufacturing costs per unit $20 Selling price per unit $70 Expected production level 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 $32 Fixed manufacturing costs per unit $20 Selling price per unit $70 Expected production level 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 _____ _____ $25,000 Administrative $12,500 _____ _____ 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 $12.00 per unit Variable costs: Manufacturing $6.00 per unit Administrative $1.50 per unit Selling $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 $900,000 Budgeted cost of direct materials at 820,000 units $820,000 Actual cost of direct materials at 820,000 units $840,000 Actual level of output(units) 820,000 Planned level of output(units) 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 $900,000 Budgeted cost of direct materials at 820,000 units $820,000 Actual cost of direct materials at 820,000 units $840,000 Actual level of output(units) 820,000 Planned level of output(units) 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 $(11,000) Budgeted operating income at 5,000 units $5,000 Budgeted operating income at 10,000 units $12,000 Planned level of operations 10,000 units Actual level of operations 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 $(11,000) Budgeted operating income at 5,000 units $5,000 Budgeted operating income at 10,000 units $12,000 Planned level of operations 10,000 units Actual level of operations 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: Flexible Budget for Actual Static Budget Actual Sales Activity Units 18,000 16,000 18,000 Sales $360,000 $320,000 $360,000 Variable costs 234,000 192,000 216,000 Contribution margin $126,000 $128,000 $144,000 Fixed costs 76,000 80,000 80,000 Operating income $50,000 $48,000 $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: Flexible Budget for Actual Static Budget Actual Sales Activity Units 18,000 16,000 18,000 Sales $360,000 $320,000 $360,000 Variable costs 234,000 192,000 216,000 Contribution margin $126,000 $128,000 $144,000 Fixed costs 76,000 80,000 80,000 Operating income $50,000 $48,000 $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: Flexible Budget for Actual Static Budget Actual Sales Activity Units 18,000 16,000 18,000 Sales $360,000 $320,000 $360,000 Variable costs 234,000 192,000 216,000 Contribution margin $126,000 $128,000 $144,000 Fixed costs 76,000 80,000 80,000 Operating income $50,000 $48,000 $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 Static Budget Sales $835,200 $864,000 $810,000 Variable costs 691,200 662,400 621,000 Fixed costs 109,200 108,000 108,000 Operating income $34,800 $93,600 $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. Static Cost Driver(Machine Hours) Actual Budget Variable Overhead Costs: 38,000 35,000 Variances Utilities $15,700 $14,000 $1,700 U Indirect Labor 86,500 80,500 6,000 U Supplies 26,000 21,000 5,000 U Maintenance 44,900 42,000 2,900 U Total Variable Overhead Costs $173,100 $157,500 $15,600 U The cost formulas used for the variable overhead costs are: Variable Overhead Costs Cost Formula Utilities $0.40 per machine hour Indirect Labor $2.30 per machine hour Supplies $0.60 per machine hour Maintenance $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: Flexible Activity Budget Flexible Level Static Actual Variances Budget Variances Budget Utilities $15,700 $500 U $15,200 $1,200 U $14,000 Indirect Labor 86,500 900 F 87,400 6,900 U 80,500 Supplies 26,000 3,200 U 22,800 1,800 U 21,000 Maintenance 44,900 700 F 45,600 3,600 U 42,000 Total $173,100 $2,100 U $171,000 $13,500 U $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 $25 Actual price per pound of input $24 Standard inputs per unit of output 3 pounds Actual units of output 2,770 Direct Materials Quantity Variance $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 $27 Standard inputs per unit of output 3 pounds Actual units of output 3,000 Direct Materials Price Variance $18,000 F Actual pounds of input used 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 $20 Actual price per unit of input $18 Standard inputs per unit of output 3 pounds Actual units of input 8,300 pounds Actual units of output 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: Standard Inputs Expected Standard Price Expected For Each Unit of Output Per Unit of Input Direct Materials 10 pounds $4 per pound Direct Labor 3 hours $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: Standard Inputs Expected Standard Price Expected For Each Unit of Output Per Unit of Input Direct Materials 10 pounds $4 per pound Direct Labor 3 hours $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: Standard Inputs Expected Standard Price Expected For Each Unit of Output Per Unit of Input Direct Materials 17 pounds $5.20 per pound Direct Labor 3 hours $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: Standard Inputs Expected Standard Price Expected For Each Unit of Output Per Unit of Input Direct Materials 10 pounds $4 per pound Direct Labor 3 hours $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: Standard Inputs Expected Standard Price Expected For Each Unit of Output Per Unit of Input Direct Materials 5 ounces $2 per ounce Direct Labor 1.5 hours $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: Standard Inputs Expected Standard Price Expected For Each Unit of Output Per Unit of Input Direct Materials 5 ounces $2 per ounce Direct Labor 1.5 hours $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: Standard Inputs Expected Standard Price Expected For Each Unit of Output Per Unit of Input Direct Materials 5 ounces $2 per ounce Direct Labor 2.5 hours $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: Standard Inputs Expected Standard Price Expected For Each Unit of Output Per Unit of Input Direct Materials 5 ounces $2 per ounce Direct Labor 1.5 hours $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) Direct Material Direct Labor Std. price per unit of input $12 per foot $14 per hour Actual price per unit of input $14 per foot $13 per hour Std. inputs allowed per unit of output 5 feet 3 hours Actual units of input 2,500 feet 1,550 hours Actual units of output 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: Standard Inputs Expected Standard Price For Each Unit of Output Per Unit of Input Direct material 5 pounds $12 per pound Direct labor 1.5 hours $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 $4,700 Standard variable overhead costs $1.20 per hour Actual direct labor hours 3,750 hours Standard direct labor hours per unit 5 hours Units produced 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 $4,700 Standard variable overhead costs $1.20 per hour Actual direct labor hours 3,750 hours Standard direct labor hours per unit 5 hours Units produced 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 $5,120 Standard variable overhead costs $3.00 per hour Actual direct labor hours 2,000 hours Standard direct labor hours per unit 3 hours Units produced 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 $5,120 Standard variable overhead costs $3.00 per hour Actual direct labor hours 2,000 hours Standard direct labor hours per unit 3 hours Units produced 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 42,000 Actual machine hours 64,000 Actual variable overhead costs $185,600 Actual fixed overhead costs $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 42,000 Actual machine hours 64,000 Actual variable overhead costs $185,600 Actual fixed overhead costs $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) $77,000 Budgeted fixed overhead costs(10,000 units) 80,000 Planned level of operations(in units) 10,000 Actual level of operations(in units) 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
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