C1_Cost and Variance Measure

C1 Cost and Variance Measure
C1 Cost and Variance Measure Wiley Question Bank
Question 1:
1C1-LS96
A company has a fixed overhead volume variance that is $10,000

unfavorable. The most likely cause for this variance is that:
* Source: Retired ICMA CMA Exam Questions.
a. The production supervisory salaries were less than planned.

b. Less was produced than planned.
c. The production supervisory salaries were greater than planned.
d. More was produced than planned.
When there is a fixed overhead volume variance that is unfavorable, it is
assumed that the volume was lower than what was budgeted. Therefore, less
was produced than planned.
Question 2:
1C1-LS83
The monthly sales volume of Shugart Corporation varies from 7,000 units to
9,800 units over the course of a year. Management is currently studying
anticipated selling expenses along with the related cash resources that will be
needed. Which of the following types of budgets (1) should be used by
Shugart in planning, and (2) will provide Shugart the best feedback in
performance reports for comparing planned expenditures with actual
amounts?
a. Static Flexible.
b. Flexible Flexible.
c. Static Static.
d. Flexible Static.
The best methodology to use when planning is a static budget and when
reporting on performance is a flexible budgeting methodology.
Question 3:
1C1-LS94
Richter Company has an unfavorable materials efficiency (usage) variance for

a particular month. Which one of the following is least likely to be the cause of
this variance?
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a. Inadequate training of the direct labor employees.

b. Poor quality of the raw materials.
c. Poor performance of the shipping employees.
d. Poor design of the production process or product.
A materials efficiency usage variance would be affected by a poor quality of
raw materials, poor design of the product process or product, or lack of skilled
direct labor. A materials efficiency variance would not be affected by those
employees, or indirect labor, associated with the production and shipping of
the end product.
Question 4:
1C1-AT41
The JoyT Company manufactures Maxi Dolls for sale in toy stores. In planning
for this year, JoyT estimated variable factory overhead of $600,000 and fixed
factory overhead of $400,000. JoyT uses a standard costing system, and
factory overhead is allocated to units produced on the basis of standard direct
labor hours. The denominator level of activity budgeted for this year was
10,000 direct labor hours, and JoyT used 10,300 actual direct labor hours.
Based on the output accomplished during the year, 9,900 standard direct
labor hours should have been used. Actual variable factory overhead was
$596,000, and actual fixed factory overhead was $410,000 for the year.
Based on this information, the volume variance for JoyT for this year is:
a. $10,000 unfavorable.
b. $4,000 unfavorable.
c. $6,000 unfavorable.
d. $16,000 unfavorable.
To calculate the volume variance, take the fixed overhead rate and multiply it
by the difference between the denominator (or normal-level) hours and the
standard number of hours.
Fixed overhead rate (normal level hours − standard level hours).
Fixed overhead rate = $400,000 budgeted fixed overhead/10,000 budgeted

direct labor hours = $40/direct labor hour
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Volume variance = $40 rate (10,000 normal-level direct labor hours − 9,900
standard-level direct labor hours) = $4,000 unfavorable.
The variance is unfavorable since the normal-level hours came in higher than
the standard-level hours.
Question 5:
1C1-LS90
For a given time period, a company had a favorable material quantity

variance, a favorable direct labor efficiency variance, and a favorable fixed
overhead volume variance. Of the following, the one factor that could not have
caused all three variances is:
a. The purchase of higher quality materials.

b. The use of lower-skilled workers.
c. The purchase of more efficient machinery.
d. An increase in production supervision.
If all variances in an analysis are favorable, the items that would not cause
these favorable variances would be any situation that would cause the
variances to be unfavorable. Out of the choices, the one that would cause an
unfavorable variance would be the use of lower-skilled workers.
Question 6:
1C1-LS76
The static budget fixed costs are $60,000 for static budget output of 24,000
units. Actual fixed costs are $50,000 for 25,000 actual units. What is the
flexible budget fixed costs?
a. $57,600.
b. $60,000.
c. $62,500.
d. $48,000.
Fixed costs do not change as the volume of activity changes.
Question 7:
1C1-LS68
If the standard for direct materials (DM) is $70 per unit and each unit requires
10 lbs. at $7 per pound and the flexible budget at actual unit production calls
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for 200,000 lbs. of material but 190,000 lbs. were actually purchased and
used at a price of $9 per pound, what is the price variance for DM?
The price variance is the difference between the actual input and the standard
input prices times the actual quantity of input units (pounds): ($9/lb. − $7/lb.) ×
190,000 lbs. = $380,000.
Question 8:
1C1-CQ18
Christopher Akers is the chief executive officer of SBL Inc., a masonry

contractor. The financial statements have just arrived showing a $3,000 loss
on the new stadium job that was budgeted to show a $6,000 profit. Actual and
budget information relating to the materials for the job are as follows:
Which one of the following is a correct statement regarding the stadium job for
SBL?
a. The flexible budget variance was unfavorable by $900.

b. The price variance was favorable by $285.
c. The price variance was favorable by $300.
d. The efficiency variance was unfavorable by $1,185.
The material price variance is calculated as follows:
Material price variance = (actual quantity purchased)(actual price - standard

price)
Material price variance = (3,000)($7.90 - $8.00) = $(300) favorable.
The other available answer choices are incorrect. Note that the flexible budget
variance includes all variable cost variances (material, direct labor, and
variable overhead) as well as the fixed overhead budget variance.
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Question 9:
1C1-LS78
The difference between applied fixed overhead of $45,000 and budgeted fixed
overhead of $40,000 is known as:
a. $5,000 favorable production volume variance.

b. $5,000 overapplied overhead.
c. $5,000 unfavorable production volume variance.
d. $5,000 underapplied overhead.
Production volume variance is defined as budgeted fixed overhead less
applied fixed overhead, where budgeted fixed overhead = standard quantity
times x fixed overhead rate and applied fixed overhead = actual quantity x
standard fixed overhead rate. Production volume variance is favorable in this
example because overhead is a cost and this cost was less than expected
due to a lower than expected actual quantity of the cost driver.
Question 10:
1C1-LS93
Randall Company uses standard costing and flexible budgeting and is

evaluating its direct labor. The total direct labor budget variance can usually
be broken down into two other variances identified as the:
a. Direct labor cost variance and the direct labor volume variance.
b. Direct labor rate variance and direct labor volume variance.
c. Direct labor cost variance and direct labor efficiency variance.
d. Direct labor rate variance and direct labor efficiency variance.
The labor rate variance and labor efficiency variances are two components of
the total direct labor budget variance which must be analyzed to better
understand the true cause of the overall direct labor variance.
See Wiley CMALS Part 1 SSG pages 127 − 128 for the key formulas for the
DL Rate Variance and DL Efficiency Variance and see pages 142 − 143 for a
discussion of component DL variance analysis.
Question 11:
1C1-LS87
A company applies variable overhead based upon direct labor hours and has
a variable overhead efficiency variance that is $25,000 favorable. A possible
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cause of this variance is that:

a. Less units of finished goods were produced.

b. Electricity rates were lower than expected.
c. Higher skilled labor was used.
d. Less supplies were used than anticipated.
In this case, variable overhead is based upon direct labor hours. Given that
the variable overhead efficiency variance was $25,000 favorable, we can
assume that the labor force was higher skilled and, though the learning curve,
became more efficient in the production process.
Question 12:
1C1-LS79
A major disadvantage of a static budget is that:

a. Variances tend to be smaller than when flexible budgeting is used.

b. It is more difficult to develop than a flexible budget.
c. It is made for only one level of activity.
d. Variances are more difficult to compute than when flexible budgeting is used.
A major disadvantage of a static budget is that it is developed using only one
level of activity, whereas a flexible budget uses multiple levels of activity in its
preparation.
Question 13:
1C1-LS73
A paint manufacturing plant has two white pigments that are substitutable for
the same product. Natural pigment costs $3/gallon, and artificial pigment costs
$1/gallon. Standards call for 60% natural and 40% synthetic, but the actual
ratio used was 50% of each. The actual total quantity of both ingredients was
30,000 gallons while the budgeted total quantity was 32,000 gallons. What is
the mix variance for these ingredients?
a. $6,000 favorable.
b. $17,400 favorable.
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The mix variance is calculated in five steps.
1. Multiply the budgeted cost per unit times the actual total quantity times the
actual mix ratio for each item:
natural = $3/gallon × 30,000 gallons × 0.5 = $45,000
artificial = $1/gallon × 30,000 gallons × 0.5 = $15,000
2. Add these two amounts: $45,000 + $15,000 = $60,000
3. Multiply the budgeted cost/unit times the actual total quantity used times the
budgeted mix ratio for each item:
natural = $3/gallon × 30,000 gallons × 0.6 = $54,000
artificial = $1/gallon × 30,000 gallons × 0.4 = $12,000
4. Add these two amounts: $54,000 + $12,000 = $66,000
5. The first sum less the second sum equals the mix variance: $60,000 −
$66,000 = $6,000 favorable
Question 14:
1C1-LS66
If direct materials (DM) purchased were 180,000 pounds at an actual cost of

$95,000 compared to the budgeted amount of 200,000 pounds at a standard
cost of $100,000, what is the DM price variance?
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d. $5,000 favorable.
The material price variance is the difference between the actual and budgeted
input price multiplied by the actual input volume. The standard cost divided by
the budgeted amount equates to the budgeted input price of $0.50 per pound.
Actual cost is given as $95,000, which equals the actual unit price times the
actual quantity purchased. Therefore $95,000 − ($0.50/lb. × 180,000 lbs.) =
$5,000 unfavorable.
Question 15:
1C1-CQ21
Cordell Company uses a standard cost system. On January 1 of the current

year, Cordell budgeted fixed manufacturing overhead cost of $600,000 and
production at 200,000 units. During the year, the firm produced 190,000 units
and incurred fixed manufacturing overhead of $595,000. The production
volume variance for the year was:
The fixed overhead volume variance (FOVV) is calculated as:
FOVV = (fixed overhead rate)(normal base level of production − actual

production level)
Fixed overhead rate = SRF
FOVV = (SRF)(200,000 units − 190,000 units)

FOVV = 10,000 SRF
The fixed overhead rate (SRF) is equal to the budgeted fixed overhead of
$600,000, divided by the normal (budgeted) base of 200,000 units, which
comes to $3.00 per unit.
Therefore, the FOVV = (10,000)($3) = $30,000 unfavorable.
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Question 16:
1C1-LS61
After taking into account an operation's flexible budget results, a manager is

concerned because although the operation was efficient, it was not effective.
Assume a standard static budget of 10,000 units to sell, $300,000 variable
costs, and $100,000 in operating income (OI). Which of the following actual
results matches this scenario?
a. 12,000 units sold; $370,000 variable costs; $120,000 OI.

b. 12,000 units sold; $355,000 variable costs; $90,000 OI.
c. 9,000 units sold; $290,000 variable costs; $90,000 OI.
d. 8,000 units sold; $280,000 variable costs; $120,000 OI.
An efficient operation would have costs per unit that are lower than the
standard cost and an effective operation would exceed the expected operating
income for the same level of sales. The standard budget for variable costs of
$30/unit ($300,000/10,000 units) multiplied by the actual units sold is
$360,000, so actual variable costs of $355,000 are efficient. However, the
operation was not effective because it did not meet or exceed the operating
income goal of $100,000.
Question 17:
1C1-LS89
The following information is from the accounting records of St. Charles

Enterprises.
A staff assistant performed a comparison of budget and actual data, and

calculated an unfavorable operating income variance of $65,750. The
assistant concluded that performance did not meet expectations because
there was an unfavorable variance in operating income. Which one of the
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following is the best evaluation of this preliminary conclusion?

a. The conclusion is incorrect, but the variance calculation is informative.

b. The conclusion is correct, but the variance calculation could be more
informative.
c. The conclusion is incorrect and the variance calculation is correct.
d. Both the conclusion and the variance calculation are incorrect.
In this problem, there is an unfavorable variance in the sales volume versus
the actual, therefore, it would cause an unfavorable variance in operating
income. Given that a static budget was used, the staff assistance should have
provided additional information to state why the variances have occurred, and
suggest that a flexible budget be used.
Question 18:
1C1-LS72
The direct material (DM) price variance is $2,650 favorable and the DM usage
variance is $3,000 unfavorable. The budgeted amount of DM for each unit of
product is 2 lbs. to be purchased at the standard price of $10 per pound.
2,000 units were budgeted to be manufactured but the actual output was
2,500 units. (Assume material purchased equaled material used.) What was
the total cost of material purchased?
a. $53,500.
b. $50,000.
c. $47,500.
d. $50,350.
The standard amount of material to be used to produce 2,500 units was 5,000
lbs.
The actual amount of material used is found by solving for the unknown
variable in the DM usage variance formula:
DM usage variance = (actual quantity − budgeted quantity) × budgeted price
$3,000 = (Y − 5,000 lbs.) × $10/lb.
300 lbs. = Y − 5,000 lbs.
5,300 lbs. = Y
The cost of material purchased is found by solving the DM usage variance

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formula:
DM price variance = (actual price − budgeted price) × actual quantity
DM price variance = (actual price × actual quantity) − (budgeted price × actual
quantity)
−$2,650 = (actual price × actual quantity) − ($10/lb × 5,300 lbs.)
− $2,650 = (actual price × actual quantity) − $53,000
−$2,650 + $53,000 = (actual price × actual quantity)
$50,350 = (actual price × actual quantity), which is the cost of material
purchased.
Question 19:
1C1-LS85
An advantage of using a flexible budget compared to a static budget is that in

a flexible budget:
a. Standards can easily be changed to adjust to changing circumstances.

b. Fixed cost variances are more clearly presented.
c. Budgeted costs for a given output level can be compared with actual costs for
that same level of output.
d. Shortfalls in planned production are clearly presented.
When using a flexible budgeting system, the activity levels for all costs are
adjusted according to that activity level. Unlike a static budget, in a flexible
budget, fixed cost variances are more clearly presented as those fixed costs
are related directly to the activity level of the given period.
Question 20:
1C1-LS74
If the budgeted fixed overhead costs are $400,000 for 50,000 budgeted direct
labor hours (DLH), and the actual direct labor standard or earned hours was
48,000 DLH, what was the actual fixed overhead cost if the underapplied
overhead was $8,000?
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a. $384,000.
b. $408,000.
c. $392,000.
d. $376,000.
Overhead (OH) application rate is $8/DLH, applied OH = $8/DLH × 48,000
DLH or $384,000. Actual OH is ($384,000 + $8,000) = $392,000.
Question 21:
1C1-AT42
Garland Company uses a standard cost system. The standard for each
finished unit of product allows for three pounds of plastic at $0.72 per pound.
During December, Garland bought 4,500 pounds of plastic at $0.75 per pound
and used 4,100 pounds in the production of 1,300 finished units of product.
What is the material purchase price variance for the month of December?
a. $135 unfavorable.
b. $150 unfavorable.
c. $117 unfavorable.
d. $123 unfavorable.
To calculate the direct materials price variance, the quantity used in the
calculation should always be the amount of material purchased, not the
amount of material used in production.
(Actual price − standard price) × number of pounds purchased

($0.72 − $0.75) × 4,500 pounds = $135 unfavorable
Question 22:
1C1-LS95
Highlight Inc. uses a standard cost system and applies factory overhead to
products on the basis of direct labor hours. If the firm recently reported a
favorable direct labor efficiency variance, then the:
a. Variable overhead efficiency variance must be favorable.

b. Fixed overhead volume variance must be unfavorable.
c. Direct labor rate variance must be unfavorable.
d. Variable overhead spending variance must be favorable.
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In the use of a standard cost system, and applying factory overhead on the
basis of direct labor hours, if a firm reports a favorable direct labor efficiency
variance, then the variable overhead efficiency variance must also always be
favorable.
Question 23:
1C1-LS59
Which of the following variances plus the flexible budget variance equals the
total static budget variance?
a. Efficiency variance.
b. Price variance.
c. Sales mix variance.
d. Sales volume variance.
The sales volume variance is the flexible budget amount adjusted for actual
output minus the static budget amount.
Question 24:
1C1-LS67
If direct materials (DM) used were 180,000 pounds at an actual cost of

$95,000 compared to the flexible budget amount of 200,000 pounds at a
standard cost of $100,000, what is the DM efficiency variance?
The efficiency variance is the difference between the actual and budgeted
input quantities multiplied by the budgeted input price. The standard cost
divided by the budgeted amount equates to the budgeted input price of $0.50
per pound. Therefore, (180,000 pounds − 200,000 pounds) × $0.50/pound =
$10,000 favorable.
Question 25:
1C1-CQ23
The JoyT Company manufactures Maxi Dolls for sale in toy stores. In planning
for this year, JoyT estimated variable factory overhead of $600,000 and fixed
factory overhead of $400,000. JoyT uses a standard costing system, and
factory overhead is allocated to units produced on the basis of standard direct
labor hours. The denominator level of activity budgeted for this year was
10,000 direct labor hours, and JoyT used 10,300 actual direct labor
Page | 13
hours. Based on the output accomplished during this year, 9,900 standard
direct labor hours should have been used. Actual variable factory overhead
was $596,000, and actual fixed factory overhead was $410,000 for the year.
Based on this information, the variable overhead spending variance (VOSV)
for JoyT for this year was:
The variable overhead spending variance is calculated as follows:
VOSV = (actual variable overhead) − (budgeted variable overhead at the

actual level of direct labor hours used)
VOSV = ($596,000) − (budgeted variable overhead at the actual level of direct
labor hours used)
The budgeted variable overhead at the actual level of direct labor hours used
is calculated as follows:
Budgeted variable overhead at the actual level of direct labor hours used =
(variable overhead rate, or SRV)(actual direct labor hours used)
Budgeted variable overhead at the actual level of direct labor hours used =
(SRV)(10,300 direct labor hours)
SRV = (estimated variable overhead) / (budgeted direct labor hours)

SRV = ($600,000)(10,000 budgeted direct labor hours) = $60 per direct labor
hour
Budgeted variable overhead at the actual level of direct labor hours =

$60(10,300 hours)
Budgeted variable overhead at the actual level of direct labor hours =
$618,000
VOSV = $596,000 − $618,000 = -$22,000, or, $22,000 favorable.
Question 26:
1C1-LS91
Marten Company has a cost-benefit policy to investigate any variance that is

greater than $1,000 or 10% of budget, whichever is larger. Actual results for
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the previous month indicate the following:
The company should investigate:

a. Neither the material variance nor the labor variance.

b. The labor variance only.
c. Both the material variance and the labor variance.
d. The material variance only
The material variance should be investigated since it is $11,000 which is
greater than 10% of the budget ($100,000 × 0.1). The direct labor variance is
$4,000 which is less than 10% of budget ($50,000 × 0.1) so it would not be
investigated under the company policy.
Question 27:
1C1-LS86
The benefits of management by exception reporting include all of the following

except a reduction in:
a. Information overload.
b. Reporting of production costs.
c. Unfocused management actions.
d. Reliance on advance planning.
Benefits of management by exception reporting include reduction of the
reporting of production costs, information overload, and unfocused
management actions.
Question 28:
1C1-LS77
Which of the following would lead to a favorable variable manufacturing

overhead spending variance?
Page | 15
a. Less maintenance was required than expected.

b. Too much indirect labor was used.
c. Employees used too much electricity during production.
d. Excess supplies were used.
All other answers will lead to unfavorable variances.
Question 29:
1C1-CQ24
Johnson Inc. has established per unit standards for material and labor for its
production department based on 900 units normal production capacity as
shown below:
During the year 1,000 units were produced. The accounting department has
charged the production department supervisor with the following unfavorable
variances:
Bob Sterling, the production supervisor, has received a memorandum from his
boss stating that he did not meet the established standards for material prices
and quantity and corrective action should be taken. Sterling is very unhappy
about the situation and is preparing to reply to the memorandum explaining
the reasons for his dissatisfaction.
All of the following are valid reasons for Sterling's dissatisfaction except that
the:
Page | 16
a. Material price variance is the responsibility of the purchasing department.

b. Cause of the unfavorable material usage variance was the acquisition of
substandard material.
c. Variance calculations fail to properly reflect that actual production exceeded
normal production capacity.
d. Standards have not been adjusted to the engineering changes.
Production variances (cost, spending, and efficiency variances) are based
upon actual production volumes. They are not based upon normal , capacity ,
budgeted , estimated, projected, or expected production, or any other
measure of production. Therefore, the difference between actual production
and any other measure of production is irrelevant. Standards do need to be
adjusted for the effect of engineering changes. Whether the material was
substandard needs to be investigated.
Question 30:
1C1-LS88
A company has a raw material price variance that is unfavorable. An analysis

of this variance indicates that the company's only available supplier of one of
its raw materials unexpectedly raised the price of the material. The action
management should take regarding this situation should be to:
a. Negatively evaluate the performance of the production manager.

b. Ask the production manager to lower the material usage standard to
compensate for higher material costs.
c. Change the raw material price standard.
d. Negatively evaluate the performance of the purchasing manager.
Any time it is found that a cost standard is changed either in a positive or
negative manner, the cost standard should be adjusted accordingly to allow
for variances to be more in-line with current market conditions. In this case,
the company's only supplier increased the price of the material, forcing an
unfavorable price variance. Therefore, management should change the raw
material price standard.
Question 31:
1C1-LS64
A sales-volume variance of $36,000 unfavorable and a flexible-budget

variance of $56,000 favorable equals:
Page | 17
a. An efficiency variance of $92,000 favorable.

b. A static-budget variance of $20,000 favorable.
c. A static-budget variance of $92,000 favorable.
d. An efficiency variance of $20,000 favorable.
Sales-volume variance plus flexible-budget variance equals the static budget
variance. A favorable and unfavorable variance will partially cancel each other
out.
Question 32:
1C1-CQ22
Harper Company's performance report indicated the following information for

the past month:
Harper's total overhead spending variance (OSV) for the month was:
c. $100,000 favorable.
The overhead spending variance is calculated as follows:
OSV = (actual overhead) − (budgeted overhead at actual direct labor hours

used)
OSV = ($1,600,000) − (budgeted overhead at actual direct labor hours used)
Budgeted overhead at the actual direct labor hours used = (fixed overhead) +
(actual direct labor hours)(rate of labor hours used to apply variable overhead)
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Budgeted overhead at the actual direct labor hours used = ($1,500,000) +

(430,000 hours)($0.50 per direct labor hour)
Budgeted overhead at the actual direct labor hours used = $1,500,000 +
$215,000 = $1,715,000
OSV = $1,600,000 − $1,715,000 = $(115,000) favorable.
Question 33:
1C1-AT29
The appropriate method for the disposition of underapplied or overapplied

factory overhead:
a. Depends on the significance of the amount.

b. Is to finished goods inventory only.
c. Is to cost of goods sold only.
d. Is apportioned to cost of goods sold and finished goods inventory.
The disposition of under-applied or over-applied factory overhead depends on

the significance of the amount. If the amount is considered to be immaterial
(small compared to the actual overhead) it is closed to cost of goods sold. If
the amount is considered to be material (large compared to the actual
overhead) it is allocated on a pro rata basis to the ending work in process
inventory, the ending finished goods inventory, and to cost of goods sold.
Question 34:
1C1-LS84
Of the following pairs of variances found in a flexible budget report, which pair
is most likely to be related?
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a. Material price variance and variable overhead efficiency variance.

b. Material usage variance and labor efficiency variance.
c. Labor rate variance and variable overhead efficiency variance.
d. Labor efficiency variance and fixed overhead volume variance.
When looking at variances on a flexible budget report, there are always
related pair of items on the reports. For instance, if there is an increase in
level of activity, it should be expected that there will be an increase in
materials usage and labor activity.
Question 35:
1C1-AT36
Which one of the following statements regarding the difference between a

flexible budget and a static budget is correct?
a. A flexible budget provides cost allowances for different levels of activity

whereas a static budget provides costs for one level of activity.
b. A flexible budget primarily is prepared for planning purposes while a static
budget is prepared for performance evaluation.
c. A flexible budget includes only variable costs whereas a static budget includes
only fixed costs.
d. A flexible budget is established by operating management while a static
budget is determined by top management.
Static budgets are established for one level of activity only. Flexible budgets
can be "flexed" or adjusted as the output level changes, in order to reflect
actual output levels.
Question 36:
1C1-LS99
During the month of May, Tyler Company experienced a significant

unfavorable material efficiency variance in the production of its single product
at one of Tyler's plants. Which one of the following reasons would be least
likely to explain why the unfavorable variance arose?
a. Replacement production equipment had just been installed.

b. Inferior materials were purchased.
c. Workers used were less-skilled than expected.
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d. Actual production was lower than planned production.

In the event that there is a significant unfavorable material efficiency variance
in the production of a single product, it could mean that inferior materials were
purchased, workers were less skilled than expected, or the replacement
production equipment had just been installed creating some downtime leading
to the unfavorable variance.
Question 37:
1C1-AT31
The purpose of identifying manufacturing variances and assigning their

responsibility to a person/department should be to:
a. Pinpoint fault for operating problems in the organization.

b. Determine the proper cost of the products produced so that selling prices can
be adjusted accordingly.
c. Use the knowledge about the variances to promote continuous improvement
in the manufacturing operations.
d. Trace the variances to finished goods so that the inventory can be properly
valued at year end.
The purpose of identifying manufacturing variances and assigning their

responsibility to a person/department is to promote continuous improvement
in the manufacturing operations.
Question 38:
1C1-LS62
The direct material (DM) price variance is $2,650 favorable and the DM usage
variance is $3,000 unfavorable. The budgeted amount of DM for each unit of
product is 2 lbs. to be purchased at the standard price of $10 per pound.
2,000 units were budgeted to be manufactured but the actual output was
2,500 units. (Assume material purchased equaled material used.) What was
the actual price paid to purchase DM?
a. $10.00 per pound.

b. $9.50 per pound.
c. $10.50 per pound.
d. $9.75 per pound.
The standard amount of material to be used to produce 2,500 units is 5,000

lbs. (2,500 units × 2 lbs./unit).
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The actual amount of material used is found by solving for the unknown
variable in the DM usage variance formula:
DM usage variance = (actual quantity − standard quantity) × budgeted price
$3,000 = (Y − 5,000 lbs.) × $10/lb.
300 lbs. = Y − 5,000 lbs.
5,300 lbs. = Y
The actual price paid to purchase the direct material is found by solving for the
unknown variable in the DM price variance formula:
DM price variance = (actual price − budgeted price) × actual quantity
−$2,650 = ($Y/lb. − $10/lb.) × 5,300 lbs.
−$2,650/5,300 lbs. = ($Y/lb. − $10/lb.)
−$0.50/lb. = ($Y/lb. − $10/lb.)
$9.50/lb = Y.
Question 39:
1C1-LS60
Which of the following results from substituting one direct material for
another?
a. Efficiency variance.
b. Yield variance.
c. Sales mix variance.
d. Mix variance.
When a product has two or more ingredients that can be substituted for one
another, the product can have a mix variance or a variance in the usage of the
substitutable materials.
Question 40:
1C1-AT38
Ardmore Enterprises uses a standard cost system in its small appliance

division. The standard cost of manufacturing one unit of Zeb is:
The budgeted variable factory overhead rate is $3 per labor hour, and the
budgeted fixed factory overhead is $27,000 per month. During May, Ardmore
produced 1,650 units of Zeb compared to a normal capacity of 1,800 units.
Page | 22
The actual cost per unit was:
The total material quantity variance for May is:
The material quantity variance is calculated as:
Material quantity variance = (standard price of the material) (the actual

quantity used − the standard quantity needed for the output)
Material quantity variance = $1.50[(58 pounds per unit)(1,650 units) − (60
pounds per unit)(1,650 units)]
Material quantity variance = $1.50(95,700 − 99,000) = $1.50(−3,300) = −
$4,950 or $4,950 favorable.
It is favorable because the actual quantity used exceeds the standard quantity
allowed for the output.
Question 41:
1C1-AT30
Franklin Products has an estimated practical capacity of 90,000 machine

hours, and each unit requires two machine hours. The following data apply to
a recent accounting period.
Of the following factors, Baltimore's production volume variance is most likely

to have been caused by:
Page | 23
a. Temporary employment of workers with lower skill levels than originally

anticipated.
b. A wage hike granted to a production supervisor.
c. A newly imposed initiative to reduce finished goods inventory levels.
d. Acceptance of an unexpected sales order.
Volume variances are caused by a difference in the budgeted fixed overhead

and the amount allocated on the basis of actual output. A newly imposed
initiative to reduce finished goods inventory levels is consistent with the
change in production compared to budget.
A wage hike would affect the spending variance, not the volume variance.
Since the volume variance in this case is unfavorable (amount allocated less
than budget), acceptance of an unexpected sales order would not be correct
because an unexpected sales order would increase the amount allocated.
Question 42:
1C1-LS69
If 200,000 machine-hours are budgeted for variable overhead at a standard

rate of $5 per machine-hour, but 220,000 machine-hours were actually used
at an actual rate of $6 per machine-hour, what is the variable overhead
spending variance?
The variable overhead spending variance is the difference between the actual
rate and the standard rate times the actual quantity. ($6/machine-hour −
$5/machine-hour) × 220,000 machine-hours = $220,000 unfavorable.
Question 43:
1C1-LS80
Arkin Co.'s controller has prepared a flexible budget for the year just ended,
adjusting the original static budget for the unexpected large increase in the
volume of sales. Arkin's costs are mostly variable. The controller is pleased to
note that both actual revenues and actual costs approximated amounts shown
on the flexible budget. If actual revenues and actual costs are compared with
amounts shown on the original (static) budget, what variances would arise?
Page | 24
a. Revenue variances would be unfavorable and cost variances would be

favorable.
b. Both revenue variances and cost variances would be favorable.
c. Revenue variances would be favorable and cost variances would be
unfavorable.
d. Both revenue variances and cost variances would be unfavorable.
When a static budget is developed, only one level of activity is used in its
preparation. Therefore, it would cause favorable revenue variances due to the
higher level of activity, and cost variances would be unfavorable because
costs associated with the new level of activity would not be considered in the
static budget.
Question 44:
1C1-LS81
Use of a standard cost system can include all of the following advantages
except that it:
a. Permits development of flexible budgeting.

b. Allows employees to better understand what is expected of them.
c. Emphasizes qualitative characteristics.
d. Assists in performance evaluation.
Under a standard cost system, advantages include that it assists in
performance evaluations, permits development of flexible budgeting, and
allows employees to better understand what is expected of them.
Question 45:
1C1-CQ25
The standard cost sheet for King Industries show the following unit costs for
direct materials and direct labor for each package of wrapping paper made:
Page | 25
During the month of November, 150,000 square feet of paper was used to
produce 1,425 packages of wrapping paper, and the following actual costs
were incurred:
The standard selling price per package is $39. King expects to sell 1,100
packages during December. Actual revenue results from December are as
follows:
Actual revenue: 1,065 packages sold at $40 per package = $42,600
What are the materials price and quantity variances for King Industries?
a. $1,750 unfavorable and $375 unfavorable.

b. $1,500 unfavorable and $1,625 unfavorable.
c. $1,750 favorable and $375 favorable.
d. $1,500 favorable and $1,625 favorable.
Compute the materials price and quantity variances as follows:
The materials quantity variance is calculated as the Standard Cost × (Standard Quantity Allowed − Actual
Quantity Used ) = $0.05 × (7,500) = ($375) Unfavorable because the actual usage was greater than the
standard usage. Note that although this variance is concerned with the physical usage of materials, it is
generally stated in monetary ($) terms.
Page | 26
The material price variance is calculated as Quantity Purchased × (Actual Price − Standard Price) =
175,000 × ($.06 − $.05) = 175,000 × $.01 = $1,750 Unfavorable because the actual price was greater
than the standard price.
Question 46:
1C1-AT39
Based on past experience, a company has developed the following budget

formula for estimating its shipping expenses. The company's shipments
average 12 pounds per shipment.
The planned activity and actual activity regarding orders and shipments for the
current month are given in the following schedule.
The actual shipping costs for the month amounted to $21,000.
The appropriate monthly flexible budget allowance for shipping costs for the
purpose of performance evaluation would be:
a. $20,680.
b. $22,150.
c. $20,800.
d. $20,920.
The appropriate monthly flexible budget allowance for shipping costs for the
purpose of performance evaluation would be $22,150.
The $22,150 is calculated as:

$16,000 in fixed costs + [($0.50 per pound shipped)(12,300 pounds shipped)]
= $16,000 + $6,150 = $22,150.
Question 47:
1C1-CQ26
Page | 27
were incurred:
follows:
What are the labor rate and efficiency variances for King Industries?
a. $139 unfavorable and $280 favorable.

b. $142.50 unfavorable and $2,600 favorable.
c. $139 favorable and $280 favorable.
d. $142.50 favorable and $2,600 favorable.
Compute the labor rate and efficiency variances as follows:
Page | 28
Question 48:
1C1-AT28
Richmond Enterprises is reviewing its policies and procedures in an effort to

enhance goal congruence throughout the organization. The processes that
are most likely to encourage this behavior are:
a. Cost-based transfer pricing, imposed budgeting, and activity-based costing.

b. Participatory budgeting, reciprocal cost allocation, and management-by-
objective performance evaluation.
c. Management-by-objective performance (MBO) evaluation and participatory
budgeting.
d. Reciprocal cost allocation, zero-base budgeting, and standard costing.
Goal congruence is enhanced by lower management participation in

budgeting and by MBO. MBO identifies managers' areas of responsibility and
ties performance measurements to the areas. It pushes responsibilities for
meeting goals and objectives down to the lowest possible management levels
and encourages participation.
Question 49:
1C1-CQ16
The following performance report was prepared for Dale Manufacturing for the
month of April.
Page | 29
Using a flexible budget, Dale's total sales-volume variance is:
The sales-volume variance is the difference between the static budget profit of
$24,000 and the flexible budget profit at the actual volume of 100,000 sales
units.
The flexible budget profit at 100,000 units = budgeted sales − budgeted

variable costs − budgeted fixed costs all at 100,000 units.
Budgeted sales = (budgeted price)(actual sales in units)

Budgeted sales = ($160,000 / 80,000 units)(100,000 units)
Budgeted sales = $200,000
Budgeted variable costs = (unit variable cost)(actual sales in units)

Budgeted variable costs = ($96,000 / 80,000 units)(100,000 units)
Budgeted variable costs = $120,000
Budgeted fixed costs = $40,000 at any volume in the relevant range.
Flexible budget profit = $200,000 − $120,000 - $40,000 = $40,000
Page | 30
Total sales-volume variance = $24,000 − $40,000 = $(16,000), or $16,000

favorable
Question 50:
1C1-CQ19
A company isolates its raw material price variance in order to provide the
earliest possible information to the manager responsible for the variance. The
budgeted amount of material usage for the year was computed as follows:
150,000 units of finished goods × 3 pounds/unit × $2.00/pound = $900,000
Actual results for the year were the following:
The raw material price variance for the year was:
The raw material price variance is calculated as follows:
Raw material price variance = (actual quantity purchased)(actual price −

standard price)
Raw material price variance = (500,000)($2.02 − $2.00) = $10,000
unfavorable
Question 51:
1C1-AT34
The variance that arises solely because the quantity actually sold differs from
the quantity budgeted to be sold is:
a. Sales mix variance.

b. Sales volume variance.
Page | 31
c. Flexible budget variance.

d. Static budget variance.
The sales volume variance is the difference between the budgeted

contribution margin at the actual volume and the original (static budget)
budgeted contribution margin. It measures the change in profit that would be
expected from an actual volume that differs from the original budgeted
volume.
Question 52:
1C1-LS97
When using a flexible budgeting system, the computation for the variable
overhead spending variance is the difference between:
a. The amount applied to work-in-process and actual variable overhead.

b. Actual variable overhead and actual inputs times the budgeted rate.
c. Actual variable overhead and the previously budgeted amount.
d. The previously budgeted amount and actual inputs times the budgeted rate.
The computation for the variable overhead spending variance is the difference
between actual variable overhead and actual inputs times the budgeted rate.
Question 53:
1C1-LS63
If actual results for a period have $400,000 in direct materials (DM) costs and
$40,000 in operating income (OI) but the static budget was $500,000 in DM
costs and $50,000 in OI, which of the following is true?
a. $100,000 favorable DM; $10,000 unfavorable OI.

b. $100,000 unfavorable DM; $10,000 favorable OI.
c. $100,000 unfavorable DM; $10,000 unfavorable DM.
d. $100,000 favorable DM; $10,000 favorable OI.
Costs that are lower than expected are favorable, while revenues or income
that are lower than expected are unfavorable.
Question 54:
1C1-LS65
Page | 32
A manager receives automated notices of both favorable and unfavorable

variations from the budget. Which of the following methods is the manager
using?
a. Management by objective.
b. Balanced scorecard.
c. Total quality management.
d. Management by exception.
Management by exception flags exceptions for managers to concentrate on
with the goal of more efficient management.
Question 55:
1C1-LS71
A company has a fixed overhead spending variance of $5,000 favorable and a

fixed overhead production-volume variance of $80,000 unfavorable. Which of
the following is the most likely cause of these variances?
a. There were variances in worker skill level, scheduling, supervision, or setup

efficiency.
b. The company made fewer units in the period than expected.
c. The budget procedure missed or failed to predict changes in fixed costs.
d. Inadequate control was exercised over departmental spending due to
accidents or unexpected repairs.
The spending variance is very small and positive, while the production-volume
variance is relatively larger and unfavorable. Therefore, the problem lies with
the production-volume variance, which is often caused when the demand for a
product changes from what was expected.
Question 56:
1C1-AT35
The difference between the actual amounts and the flexible budget amounts
for the actual output achieved is the:
a. Budget variance.
b. Sales volume variance.
c. Standard cost variance.
d. Flexible budget variance.
Page | 33
The flexible budget variance measures the difference between the actual
amounts and the flexible budget amounts for the actual output.
Question 57:
1C1-AT37
Which one of the following variances is most controllable by the production

supervisor?
a. Fixed overhead budget variance.

b. Material usage variance.
c. Fixed overhead volume variance.
d. Material price variance.
The only items that a production supervisor can control are the usages of
materials, direct labor, supplies, and utilities. The supervisor has control over
usage of resources, but not the purchase prices of resources.
Question 58:
1C1-CQ27
were incurred:
follows:
Page | 34
What are the sales price and volume variances for King Industries? (The
volume variance in this context means the effect on revenue, not the effect on
contribution margin)
a. $1,065 favorable and $1,365 unfavorable.

b. $1,065 unfavorable and $1,365 favorable.
c. $1,100 favorable and $2,600 favorable.
d. $1,100 unfavorable and $1,365 favorable.
Compute the labor rate and efficiency variances as follows:
Question 59:
1C1-LS92
A company has a direct labor price variance that is favorable. Of the following,
the most serious concern the company may have about this variance is that:
a. The circumstances giving rise to the favorable variance will not continue in the
future.
b. The cause of the favorable variance may result in other larger unfavorable
variances in the value-chain.
c. The production manager may not be using human resources as efficiently as
possible.
d. Actual production is less than budgeted production.
Page | 35
In any situation, and in any organization, all variances in the value chain must
be analyzed to assure that any unfavorable variances are scrutinized and, if
possible, fixed to be more adaptable to changes in operating activities.
Question 60:
1C1-LS70
If 200,000 machine-hours are the flexible budget cost driver for variable
overhead at a standard rate of $5/machine-hour, but 220,000 machine-hours
were actually used at an actual rate of $6/machine-hour, what is the variable
overhead efficiency variance?
The variable overhead efficiency variance is the product of the actual quantity
of the cost driver times the standard variable overhead rate minus the product
of the standard quantity of the cost driver times the standard variable
overhead rate. (220,000 machine-hours × $5/machine-hour) − (200,000 ×
$5/machine-hour) = $100,000 unfavorable.
Question 61:
1C1-CQ20
At the beginning of the year, Douglas Company prepared the following

monthly budget for direct materials:
At the end of the month, the company's records showed that 12,000 units
were produced and sold and $20,000 was spent for direct materials. The
variance for direct materials is:
The variance for direct materials is calculated as:

Page | 36
Variance for direct materials = (actual direct material cost) − (budgeted direct
material cost at actual level of production)
Variance for direct materials = ($20,000) − (12,000 units)($15,000 / 10,000)

Variance for direct materials = $20,000 − $18,000 = $2,000 unfavorable
Question 62:
1C1-LS82
Which one of the following statements is correct concerning a flexible budget

cost formula? Variable costs are stated:
a. In total and fixed costs are stated in total.

b. Per unit and fixed costs are stated per unit.
c. Per unit and fixed costs are stated in total.
d. In total and fixed costs are stated per unit.
In the flexible budget cost formula, variable costs are stated per unit and fixed
costs are stated in total.
Page | 37
Question 63:
1C1-AT43
When there are multiple inputs of either labor or material, the efficiency
variance for either labor or material can be subdivided into:
a. Yield variance and mix variance.

b. Mix variance and price variance.
c. Yield variance and price variance.
d. Volume variance and mix variance.
When there are multiple inputs of either labor or material, the efficiency of
usage is affected by the mix of the inputs, creating a mix component in the
efficiency variance. The remainder of the efficiency variance is the yield
component.
Question 64:
1C1-AT32
The inventory control supervisor at Wilson Manufacturing Corporation

reported that a large quantity of a part purchased for a special order that was
never completed remains in stock. The order was not completed because the
customer defaulted on the order. The part is not used in any of Wilson's
regular products. After consulting with Wilson's engineers, the vice president
of production approved the substitution of the purchased part for a regular part
in a new product. Wilson's engineers indicated that the purchased part could
be substituted providing it was modified. The units manufactured using the
substituted part required additional direct labor hours resulting in an
unfavorable direct labor efficiency variance in the Production Department. The
unfavorable direct labor efficiency variance resulting from the substitution of
the purchased part in inventory would best be assigned to the:
a. Inventory supervisor.
b. Production manager.
c. Vice president of production.
d. Engineering manager.
The vice president of production approved the substitution of the purchased

part for a regular part in a new product. He/she has to assume the ultimate
responsibility. The responsibility cannot be delegated.
Question 65:
Page | 38
1C1-CQ17
MinnOil performs oil changes and other minor maintenance services (e.g., tire
pressure checks) for cars. The company advertises that all services are
completed within 15 minutes for each service. On a recent Saturday, 160 cars
were serviced resulting in the following labor variances: rate, $19 unfavorable;
efficiency, $14 favorable. If MinnOil's standard labor rate is $7 per hour,
determine the actual wage rate per hour and the actual hours (AHs) worked.
a. Wage Rate = $6.55, Hours Worked = 42.

b. Wage Rate = $7.50, Hours Worked = 38.
c. Wage Rate = $7.45, Hours Worked = 42.
d. Wage Rate = $6.67, Hours Worked = 42.71.
The labor efficiency variance of $(14), or $14 favorable, is used in the

following formula to determine the AH:
Labor efficiency variance = (standard rate)(actual hours − standard hours)

−$14 = ($7)[AH − (160 units)(1/4 hour per unit)]
−$14 = $7(AH − 40)
−$14 = $7AH − $280
−$14 = $7AH − $280
$266 = $7AH
AH = 38
The labor rate variance of $19, or $19 unfavorable, is used in the following
formula to determine the actual wage rate (AR):
Labor rate variance = (actual hours)(actual wage rate − standard wage rate)
$19 = (38 hours)(AR − $7)
$19 = (38 hours)(AR − $7)
$19 = 38AR − $266
$285 = 38AR
AR = $7.50
Question 66:
1C1-LS75
If the budgeted fixed overhead (OH) costs are $177,000 applied at the rate of
$3 per direct labor hour (DLH), and the actual DLH standard or earned hours
was 56,000 DLH, what was the actual fixed OH cost if the overapplied OH
was $12,000?
Page | 39
a. $180,000.
b. $177,000.
c. $168,000.
d. $156,000.
OH application rate is $3/DLH, applied OH = $3/DLH × 56,000 DLH =
$168,000. Actual OH is $168,000 − $12,000 = $156,000.
Question 67:
1C1-AT33
Comparing actual results with a budget based on achieved volume is possible

with the use of a:
a. Master budget.
b. Monthly budget.
c. Rolling budget.
d. Flexible budget.
A flexible budget shows the expected revenue and costs for the levels of
activity (output) over a relevant range. A flexible budget can be "flexed" or
adjusted to the actual level of activity for the period, so that actual results can
be compared to budget expectations at the same level of output.
Question 68:
1C1-LS98
Fortune Corporation's Marketing Department recently accepted a rush order

for a nonstock item from a valued customer. The Marketing Department filed
the necessary paperwork with the Production Department, which complained
greatly about the lack of time to do the job the right way. Nevertheless, the
Production Department accepted the manufacturing commitment and filed the
required paperwork with the Purchasing Department for the needed raw
materials. A purchasing clerk temporarily misplaced the paperwork. By the
time the paperwork was found, it was too late to order from the company's
regular supplier. A new supplier was located, and that vendor quoted a very
attractive price. The materials arrived and were rushed into production,
bypassing the normal inspection processes (as directed by the Production
Department supervisor) to make up for lost time. Unfortunately, the goods
were of low quality and created considerable difficulty for Fortune's assembly-
line personnel. Which of the following best indicates the responsibility for the
materials usage variance in this situation?
Page | 40
a. Purchasing, Marketing, and Production.

b. Purchasing and Marketing.
c. Marketing and Production.
d. Purchasing.
In this situation, Purchasing had ultimate responsibility of the quality of the
materials included in this order. However, given that all departments had a
hand in pushing this order through the system quickly, each department has
the responsibility to ensure the quality.
Page | 41

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C1 Cost and Variance Measure

C1 Cost and Variance Measure Wiley Question Bank

A company has a fixed overhead volume variance that is $10,000

a. The production supervisory salaries were less than planned.

Richter Company has an unfavorable materials efficiency (usage) variance for

a. Inadequate training of the direct labor employees.

Fixed overhead rate (normal level hours − standard level hours).

Fixed overhead rate = $400,000 budgeted fixed overhead/10,000 budgeted

For a given time period, a company had a favorable material quantity

a. The purchase of higher quality materials.

Christopher Akers is the chief executive officer of SBL Inc., a masonry

a. The flexible budget variance was unfavorable by $900.

The material price variance is calculated as follows:

Material price variance = (actual quantity purchased)(actual price - standard

a. $5,000 favorable production volume variance.

Randall Company uses standard costing and flexible budgeting and is

cause of this variance is that:

a. Less units of finished goods were produced.

A major disadvantage of a static budget is that:

a. Variances tend to be smaller than when flexible budgeting is used.

The mix variance is calculated in five steps.

2. Add these two amounts: $45,000 + $15,000 = $60,000

4. Add these two amounts: $54,000 + $12,000 = $66,000

If direct materials (DM) purchased were 180,000 pounds at an actual cost of

Cordell Company uses a standard cost system. On January 1 of the current

The fixed overhead volume variance (FOVV) is calculated as:

FOVV = (fixed overhead rate)(normal base level of production − actual

Fixed overhead rate = SRF

FOVV = (SRF)(200,000 units − 190,000 units)

Therefore, the FOVV = (10,000)($3) = $30,000 unfavorable.

After taking into account an operation's flexible budget results, a manager is

a. 12,000 units sold; $370,000 variable costs; $120,000 OI.

The following information is from the accounting records of St. Charles

A staff assistant performed a comparison of budget and actual data, and

following is the best evaluation of this preliminary conclusion?

a. The conclusion is incorrect, but the variance calculation is informative.

The cost of material purchased is found by solving the DM usage variance

An advantage of using a flexible budget compared to a static budget is that in

a. Standards can easily be changed to adjust to changing circumstances.

(Actual price − standard price) × number of pounds purchased

a. Variable overhead efficiency variance must be favorable.

If direct materials (DM) used were 180,000 pounds at an actual cost of

The variable overhead spending variance is calculated as follows:

VOSV = (actual variable overhead) − (budgeted variable overhead at the

SRV = (estimated variable overhead) / (budgeted direct labor hours)

Budgeted variable overhead at the actual level of direct labor hours =

VOSV = $596,000 − $618,000 = -$22,000, or, $22,000 favorable.

Marten Company has a cost-benefit policy to investigate any variance that is

the previous month indicate the following:

The company should investigate:

a. Neither the material variance nor the labor variance.

The benefits of management by exception reporting include all of the following

Which of the following would lead to a favorable variable manufacturing

a. Less maintenance was required than expected.

a. Material price variance is the responsibility of the purchasing department.

A company has a raw material price variance that is unfavorable. An analysis

a. Negatively evaluate the performance of the production manager.

A sales-volume variance of $36,000 unfavorable and a flexible-budget

a. An efficiency variance of $92,000 favorable.

Harper Company's performance report indicated the following information for