CH 07 Tif
CH 07 Tif
CH 07 Tif
CONTROL: I
TRUE/FALSE (1 pt each)
3. Information regarding the causes of variances is provided when the master budget is
compared with actual results.
6. The essence of variance analysis is to capture a departure from what was expected.
8. An unfavorable variance may be due to poor planning rather than due to inefficiency.
Chapter 7 Page 1
9. If budgets contain slack, cost variances will tend to be favorable.
10. The only difference between the static budget and flexible budget is that the static
budget is prepared using planned output.
11. The static-budget variance can be subdivided into the flexible-budget variance and the
sales-volume variance.
12. The flexible-budget variance may be the result of inaccurate forecasting of units sold.
13. Decreasing demand for a product may create a favorable sales-volume variance.
15. A company would not need to use a flexible budget if it had perfect foresight about
actual output units.
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18. Managers generally have more control over efficiency variances than price variances.
19. To prepare budgets based on actual data from past periods is preferred since past
inefficiencies are excluded.
21. A standard is attainable through efficient operations but allows for normal disruptions
such as machine breakdowns and defective production.
22. The presumed cause of a material price variance will determine how a company
responds.
23. The use of high-quality raw materials is likely to result in a favorable efficiency
variance and an unfavorable price variance.
24. The direct manufacturing labor price variance is likely to be favorable if higher-skilled
workers are put on a job.
25. Although computed separately, price variances and efficiency variances should not be
analyzed separately from each other.
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26. A favorable variance can be automatically interpreted as good news.
28. If variance analysis is used for performance evaluation, managers are encouraged to
meet targets using creativity and resourcefulness.
29. For critical items such as product defects, a small variance may prompt investigation.
31. Continuous improvement budgeted costs target price reductions and efficiency
improvements.
32. Improvement opportunities are easier to identify when products have been on the
market for a considerable period of time.
33. It is best to rely totally on financial performance measures rather than using a
combination of financial and nonfinancial performance measures.
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34. From the perspective of control, the direct materials price variance should be isolated at
the time the direct materials are requisitioned for use.
35. Employees logging in to production floor terminals and other modern technologies
greatly facilitate the use of a standard costing system.
37. Price variances can be calculated for batch-level costs as well as for output unit-level
costs.
38. Benchmarking is the continuous process of measuring products, services, and activities
against the best possible levels of performance, either inside or outside the organization.
39. When benchmarking, the best levels of performance are typically found in companies
that are totally different.
40. One problem with benchmarking is ensuring that numbers are comparable.
41. When benchmarking it is best when management accountants simply analyze the costs
and allow management to provide the insight as to why the revenues and costs differ
between companies.
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MULTIPLE CHOICE
45. A variance is
a. the gap between an actual result and a benchmark amount.
b. the required number of inputs for one standard output.
c. the difference between an actual result and a budgeted amount.
d. the difference between a budgeted amount and a standard amount.
Answer: c Difficulty: 1 Objective: 1
Chapter 7 Page 6
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 48 THROUGH 50.
Abernathy Corporation used the following data to evaluate their current operating system.
The company sells items for $10 each and used a budgeted selling price of $10 per unit.
Actual Budgeted
Units sold 92,000 units 90,000 units
Variable costs $450,800 $432,000
Fixed costs $ 95,000 $100,000
Chapter 7 Page 7
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 51 THROUGH 53.
Bates Corporation used the following data to evaluate their current operating system. The
company sells items for $10 each and used a budgeted selling price of $10 per unit.
Actual Budgeted
Units sold 495,000 units 500,000 units
Variable costs $1,250,000 $1,500,000
Fixed costs $ 925,000 $ 900,000
Chapter 7 Page 8
54. Regier Company had planned for operating income of $10 million in the master budget
but actually achieved operating income of only $7 million.
a. The static-budget variance for operating income is $3 million favorable.
b. The static-budget variance for operating income is $3 million unfavorable.
c. The flexible-budget variance for operating income is $3 million favorable.
d. The flexible-budget variance for operating income is $3 million unfavorable.
Answer: b Difficulty: 2 Objective: 1
56. The following items are the same for the flexible budget and the master budget
EXCEPT
a. the same variable cost per unit.
b. the same total fixed costs.
c. the same units sold.
d. the same sales price per unit.
Answer: c Difficulty: 2 Objective: 2
59. If a sales-volume variance was caused by poor-quality products, then the ___________
would be in the best position to explain the variance.
a. production manager
b. sales manager
c. purchasing manager
d. management accountant
Answer: a Difficulty: 2 Objective: 2
Chapter 7 Page 9
60. The variance that is BEST for measuring operating performance is the
a. static-budget variance.
b. flexible-budget variance.
c. sales-volume variance.
d. selling-price variance.
61. An unfavorable flexible-budget variance for variable costs may be the result of
a. using more input quantities than were budgeted.
b. paying higher prices for inputs than were budgeted.
c. selling output at a higher selling price than budgeted.
d. both (a) and (b).
63. All of the following are needed to prepare a flexible budget EXCEPT
a. determining the budgeted variable cost per output unit.
b. determining the budgeted fixed costs.
c. determining the actual selling price per unit.
d. determining the actual quantity of output units.
65. A flexible-budget variance is $800 favorable for unit-related costs. This indicates that
a. costs were $800 more than the master budget.
b. costs were $800 less than for the planned level of activity.
c. costs were $800 more than standard for the achieved level of activity.
d. costs were $800 less than standard for the achieved level of activity.
Chapter 7 Page 10
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 66 THROUGH 68.
JJ White planned to use $82 of material per unit but actually used $80 of material per unit,
and planned to make 1,200 units but actually made 1,000 units.
Chapter 7 Page 11
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 70 THROUGH 72.
McKenna Incorporated planned to use $24 of material per unit but actually used $25 of
material per unit, and planned to make 1,000 units but actually made 1,200 units.
Chapter 7 Page 12
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 74 THROUGH 77.
The actual information pertains to the month of August. As part of the budgeting process
Alloways Fencing Company developed the following static budget for August. Alloway is in
the process of preparing the flexible budget and understanding the results.
74. The flexible budget will report __________ for variable costs.
a. $512,000
b. $600,000
c. $480,000
d. $640,000
75. The flexible budget will report __________ for the fixed costs.
a. $458,000
b. $450,000
c. $360,000
d. $572,500
78. What amounts are reported for revenues in the flexible-budget (A) and the static-budget
(B), respectively?
a. $82,160; $79,360
b. $82,160; $84,960
c. $84,960; $88,960
d. $84,960; $83,360
Answer: b Difficulty: 2 Objective: 2
Chapter 7 Page 14
82. What is the total static-budget variance?
a. $5,200 favorable
b. $3,320 favorable
c. $1,880 unfavorable
d. $1,880 favorable
83. The flexible-budget variance for direct cost inputs can be further subdivided into
a. a static-budget variance and a sales-volume variance.
b. a sales-volume variance and an efficiency variance.
c. a price variance and an efficiency variance.
d. a static-budget variance and a price variance.
85. When actual input data from past periods is used to develop a budget
a. past inefficiencies are excluded.
b. expected future changes are incorporated.
c. information is available at a low cost.
d. audited financial information must be used.
Chapter 7 Page 15
88. A standard input
a. is a carefully determined price, cost, or quantity.
b. is usually expressed on a per unit basis.
c. may be developed using engineering studies.
d. is all of the above.
Answer: d Difficulty: 1 Objective: 3
91. A favorable efficiency variance for direct manufacturing labor indicates that
a. a lower wage rate than planned was paid for direct labor.
b. a higher wage rate than planned was paid for direct labor.
c. less direct manufacturing labor-hours were used during production than planned
for actual output.
d. more direct manufacturing labor-hours were used during production than planned
for actual output.
Answer: c Difficulty: 2 Objective: 4
Chapter 7 Page 16
94. A favorable price variance for direct manufacturing labor might indicate that
a. employees were paid more than planned.
b. budgeted price standards are too tight.
c. underskilled employees are being hired.
d. an efficient labor force.
95. An unfavorable efficiency variance for direct manufacturing labor might indicate that
a. work was efficiently scheduled.
b. machines were not properly maintained.
c. budgeted time standards are too lax.
d. higher-skilled workers were scheduled than planned.
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98. Junes direct material efficiency variance is
a. $980 unfavorable.
b. $300 favorable.
c. $680 favorable.
d. none of the above.
Answer: b Difficulty: 2 Objective: 4
$30 (490 500) = 300 F
During July SII produced and sold 10,000 containers using 2,200 pounds of direct materials
at an average cost per pound of $24 and 1,050 direct manufacturing labor hours at an average
wage of $14.75 per hour.
Chapter 7 Page 18
102. Julys direct material price variance is
a. $2,800 favorable.
b. $2,200 favorable.
c. $5,000 unfavorable.
d. none of the above.
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 107 THROUGH 110.
These questions refer to flexible-budget variance formulas with the following descriptions
for the variables: A = Actual; B = Budgeted; P = Price; Q = Quantity.
107. The best label for the formula (AQ BQ) BP is the
a. efficiency variance.
b. price variance.
c. total flexible-budget variance.
e. spending variance.
108. The best label for the formula (AP BP) AQ is the
a. efficiency variance.
b. price variance.
c. total flexible-budget variance.
d. spending variance.
109. The best label for the formula [(AP)(AQ) (BP)(AQ)] is the
a. efficiency variance.
b. price variance.
c. total flexible-budget variance.
d. spending variance.
110. The best label for the formula [(AP)(AQ) (BP)(BQ)] is the
a. efficiency variance.
b. price variance.
c. total flexible-budget variance.
d. spending variance.
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 111 THROUGH 113.
Rubens Camera Shop has prepared the following flexible budget for September and is in the
process of interpreting the variances. F denotes a favorable variance and U denotes an
unfavorable variance.
Flexible ------------Variances-------------
Budget Price Efficiency
Material A $20,000 $1,000F $3,000U
Material B 30,000 500U 1,500F
Direct manufacturing labor 40,000 500U 2,500F
111. The MOST likely explanation of the above variances for Material A is that
a. a lower price than expected was paid for Material A.
b. higher-quality raw materials were used than were planned.
d. the company used a higher-priced supplier.
d. Material A used during September was $2,000 less than expected.
113. The MOST likely explanation of the above direct manufacturing labor variances is that
a. the average wage rate paid to employees was less than expected.
b. employees did not work as efficiently as expected to accomplish the job.
c. the company may have assigned more experienced employees this month than
originally planned.
d. management may have a problem with budget slack and be using lax standards
for both labor-wage rates and expected efficiency.
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 114 THROUGH 116.
Hectors Camera Shop has prepared the following flexible budget for September and is in the
process of interpreting the variances. F denotes a favorable variance and U denotes an
unfavorable variance.
Flexible ------------Variances-------------
Budget Price Efficiency
Material A $20,000 $1,000U $1,200F
Material B 30,000 500F 800U
Material C 40,000 1,400U 1,000F
116. The explanation that lower-quality materials were purchased is MOST likely for
a. Material A.
b. Material B.
c. Material C.
d. both Material A and C.
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118. One of the primary reasons for using cost variances is
a. they diagnose the cause of a problem and what should be done to correct it.
b. for superiors to communicate expectations to lower-level employees.
c. to administer appropriate disciplinary action.
d. for financial control of operating activities and understanding why variances arise.
Answer: d Difficulty: 2 Objective: 5
122. If manufacturing machines are breaking down more than expected, this will contribute
to
a. a favorable direct manufacturing labor price variance.
b. an unfavorable direct manufacturing labor price variance.
c. a favorable direct manufacturing labor efficiency variance.
d. an unfavorable direct manufacturing labor efficiency variance.
Answer: d Difficulty: 2 Objective: 5
Chapter 7 Page 23
124. Variance analysis should be used
a. to understand why variances arise.
b. as the sole source of information for performance evaluation.
c. to punish employees that do not meet standards.
d. to encourage employees to focus on meeting standards.
126. When continuous improvement budgeted costing is implemented, cost reductions can
result from
a. price reductions.
b. reducing materials waste.
c. producing products faster and more efficiently.
d. all of the above.
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130. From the perspective of control, the direct materials efficiency variance should be
isolated at the time of
a. purchase.
b. use.
c. completion of the entire product.
d. sale of the product.
133. A favorable efficiency variance for material-handling labor-hours per batch could result
from
a. inefficient production-floor layouts compared to those expected when preparing
the budget.
b. materials-handling labor having to wait when picking up materials.
c. well-trained and experienced material-handling employees.
d. lower wages than planned for material-handling labor.
134. The process by which a company's products or services are measured relative to the
best possible levels of performance is known as
a. efficiency.
b. benchmarking.
c. a standard costing system.
d. variance analysis.
Chapter 7 Page 25
135. When benchmarking,
a. the best levels of performance are usually found in companies that are within
different industries.
b. finding appropriate benchmarks is a minor issue.
c. comparisons can highlight areas for better future cost management.
d. both (a) and (c) are true.
136. Ensuring benchmark numbers are comparable can be difficult because differences can
exist across companies with
a. overall company strategy.
b. depreciation methods.
c. inventory methods.
d. all of the above.
137. When benchmarking, management accountants are MOST valuable when they
a. present differences in the benchmarking data to management.
b. highlight differences in the benchmarking data to management.
c. provide insight into why costs or revenues differ across companies.
d. provide complex mathematical analysis.
Chapter 7 Page 26
EXERCISES AND PROBLEMS
138. The president of the company, Gregory Peters, has come to you for help. Use the
following data to prepare a flexible budget for possible sales/production levels of
10,000, 11,000, and 12,000 units. Show the contribution margin at each activity
level.
Answer:
Flexible Budget for Various Levels
of Sales/Production Activity
Variable costs:
Manufacturing 120,000 132,000 144,000
Administrative 30,000 33,000 36,000
Selling 10,000 11,000 12,000
Fixed costs:
Manufacturing 60,000 60,000 60,000
Administrative 20,000 20,000 20,000
Difficulty: 2 Objective: 2
Chapter 7 Page 27
139. Strauss Table Company manufactures tables for schools. The 20x4 operating budget
is based on sales of 20,000 units at $100 per table. Operating income is anticipated to
be $120,000. Budgeted variable costs are $64 per unit, while fixed costs total
$600,000.
Actual income for 20x4 was a surprising $354,000 on actual sales of 21,000 units at
$104 each. Actual variable costs were $60 per unit and fixed costs totaled $570,000.
Required:
Prepare a variance analysis report with both flexible-budget and sales-volume
variances.
Answer:
Strauss Table Company
Variance Analysis
Difficulty: 2 Objective: 2
Chapter 7 Page 28
140. Nicholas Company manufacturers TVs. Some of the company's data was misplaced.
Use the following information to replace the lost data:
Required:
: a. What are the respective flexible-budget revenues?
b. What are the static-budget revenues?
c. What are the actual variable costs?
d. What is the total flexible-budget variance?
e. What is the total sales-volume variance?
f. What is the total static-budget variance?
Answer:
Difficulty: 2 Objective: 2
Chapter 7 Page 29
141. Madzingas Draperies manufactures curtains. A certain window requires the
following:
During the second quarter, the company made 1,500 curtains and used 14,000 square
yards of fabric costing $68,600. Direct labor totaled 7,600 hours for $79,800.
Required:
a. Compute the direct materials price and efficiency variances for the quarter.
b. Compute the direct manufacturing labor price and efficiency variances for the
quarter.
Answer:
Difficulty: 2 Objective: 4
Chapter 7 Page 30
142. The following data for the Alma Company pertain to the production of 1,000 urns
during August.
Required:
Answer:
Difficulty: 3 Objective: 4
Chapter 7 Page 31
143. The following data for the telephone company pertain to the production of 450 rolls
of telephone wire during June. Selected items are omitted because the costing records
were lost in a windstorm.
Required:
Compute the missing elements in the report represented by the lettered items.
Answer:
d. Total standard labor cost of actual hours = (450 x 3 x $8) + $400 = $11,200
Actual hours = $11,200/$8 = 1,400
Difficulty: 3 Objective: 4
Chapter 7 Page 32
144. Littrell Company produces chairs and has determined the following direct cost
categories and budgeted amounts:
Standard Inputs Standard Cost
Category for 1 output per input
Direct Materials 1.00 $7.50
Direct Labor 0.30 9.00
Direct Marketing 0.50 3.00
Actual performance for the company is shown below:
Actual output: (in units) 4,000
Direct Materials:
Materials costs $30,225
Input purchased and used 3,900
Actual price per input $7.75
Direct Manufacturing Labor:
Labor costs $11,470
Labor-hours of input 1,240
Actual price per hour $9.25
Direct Marketing Labor:
Labor costs $5,880
Labor-hours of input 2,100
Actual price per hour $2.80
Required:
a. What is the combined total of the flexible-budget variances?
b. What is the price variance of the direct materials?
c. What is the price variance of the direct manufacturing labor and the direct
marketing labor, respectively?
d. What is the efficiency variance for direct materials?
e. What are the efficiency variances for direct manufacturing labor and direct
marketing labor, respectively?
Answer:
a. Actual Results Flexible Budget Variances
Direct materials $30,225 $30,000 $225U
Direct manufacturing labor 11,470 10,800 670 U
Direct marketing labor 5,880 6,000 120 F
$47,575 $46,800 $775 U
b. ($7.75 - $7.50) x (3,900) = $975 unfavorable
c. Manufacturing Labor ($9.25 - $9.00) x 1,240 = $310 unfavorable
Marketing Labor ($2.80 - $3.00) x 2,100 = $420 favorable
d. [3,900 - (4,000 units x 1.00)] x $7.50 = $750 favorable
e. Manufacturing Labor = [1,240 hours - (4,000 x 0.30 hours)] x $9.00 = $360 unfavorable
Marketing Labor = [2,100 hours - (4,000 x 0.50 hours)] x $3.00 = $300.00 unfavorable
Difficulty: 3 Objective: 4
Chapter 7 Page 33
145. Coffey Company maintains a very large direct materials inventory because of critical
demands placed upon it for rush orders from large hospitals. Item A contains hard-to-
get material Y. Currently, the standard cost of material Y is $2.00 per gram. During
February, 22,000 grams were purchased for $2.10 per gram, while only 20,000 grams
were used in production. There was no beginning inventory of material Y.
Required:
a. Determine the direct materials price variance, assuming that all materials costs are
the responsibility of the materials purchasing manager.
b. Determine the direct materials price variance, assuming that all materials costs are
the responsibility of the production manager.
c. Discuss the issues involved in determining the price variance at the point of
purchase versus the point of consumption.
Answer:
Difficulty: 2 Objectives: 4, 5
Chapter 7 Page 34
146. During February the Lungren Manufacturing Company's costing system reported
several variances that the production manager was surprised to see. Most of the
company's monthly variances are under $125, even though they may be either
favorable or unfavorable. The following information is for the manufacture of garden
gates, its only product:
Required:
a. Provide the manager with some ideas as to what may have caused the price
variances.
b. What may have caused the efficiency variances?
Answer:
a. Direct materials' unfavorable price variance may have been caused by: (1) paying
a higher price than the standard for the period, (2) changing to a new vendor, or
(3) buying higher-quality materials.
Direct manufacturing labor's favorable price variance may have been caused by:
(1) changing the work force by hiring lower-paid employees, (2) changing the mix
of skilled and unskilled workers, or (3) not giving pay raises as high as anticipated
when the standards were set for the year.
b. Direct materials' favorable efficiency variance may have been caused by: (1)
employees/machinery working more efficiency and having less scrap and waste
materials, (2) buying better-quality materials, or (3) changing the production
process.
Difficulty: 3 Objective: 5
Chapter 7 Page 35
147. Mayberry Company had the following journal entries recorded for the end of June.
Unfortunately, the company's only accountant quit on July 10 and the president is at a
loss as to the company's performance for the month of June.
Required:
a. What kind of performance did the company have for June? Explain each
variance.
b. Why is Direct Materials given in two entries?
Answer:
a. The first entry is for materials purchases. The credit entry indicates a favorable
variance. This could be an indicator that the purchasing agent did a good job or
he/she bought inferior goods.
Production was not as lucky in June. The debit entry for materials efficiency
indicates that more materials were used than should have been under the operating
plans for the month.
For labor, the price was unfavorable, while the efficiency was favorable. This
could have been caused by using higher-priced workers who were, in fact, better
workers. Of course, there are many other possible causes.
b. Recoding variances for direct materials is completed with two separate entries
since the price variance is isolated at the point of purchase, while the efficiency
variance is isolated at the point of use.
Difficulty: 2 Objectives: 5, 6
Chapter 7 Page 36
148. Waddell Productions makes separate journal entries for all cost accounting related
activities. It uses a standard cost system for all manufacturing items. For the month
of June, the following activities have taken place:
Required:
Record the necessary journal entries to close the accounts for the month.
Answer:
Difficulty: 3 Objective: 6
Chapter 7 Page 37
149. Tysons Hardware uses a flexible budget to develop planning information for its
warehouse operations. For 20x3, the company anticipated that it would have 96,000
sales units for 664 customer shipments. Average storage bin usage for various
inventories was estimated to be 200 per day. The costs and cost drivers were
determined to be as follows:
Item Fixed Variable Cost driver
Product handling $10,000 $1.25 per 100 units
Storage 3.00 per storage bin
Utilities 1,000 1.50 per 100 units
Shipping clerks 1,000 1.00 per shipment
Supplies 0.50 per shipment
During the year, the warehouse processed 90,000 units for 600 customer shipments.
The workers used 225 storage bins on average each day to sort, store, and process
goods for shipment. The actual costs for 20x3 were:
Item Actual costs
Product handling $10,900
Storage 465
Utilities 2,020
Shipping clerks 1,400
Supplies 340
Required:
a. Prepare a static budget for 20x3with static-budget variances.
b. Prepare a flexible budget for 20x3with flexible-budget variances.
Answer:
a. Tysons Hardware -- Static Budget with Variances -- 20x3
Static
Actual Budget Variances
Product handling $10,900 $11,200 $300 F
Storage 465 600 135 F
Utilities 2,020 2,440 420 F
Shipping clerks 1,400 1,664 264 F
Supplies 340 332 8U
Total $15,125 $16,236 $1,111 F
Difficulty: 2 Objective: 7
Chapter 7 Page 38
CRITICAL THINKING
Answer:
Variance analysis should help the company learn about what happened and how to
perform better and should not be a tool in playing the blame game.
Difficulty: 2 Objective: 5
151. Give at least three good reasons why a favorable price variance for direct materials
might be reported.
Difficulty: 3 Objective: 4
152. Give at least three good reasons why an unfavorable efficiency variance for direct
manufacturing labor might be reported.
Difficulty: 3 Objective: 4
Chapter 7 Page 39