Fundamentals of Cost Accounting, 6e (Lanen)
Chapter 16 Fundamentals of Variance Analysis
1) In essence, the terms “master budget” and “operating budget” mean the same thing and can be
used interchangeably.
2) Variances are the difference between actual results and budgeted results.
3) In general, and holding all other things constant, an unfavorable variance decreases operating
profits.
4) A favorable variance is not necessarily good, and an unfavorable variance is not necessarily
bad.
5) The terms “master budget” and “flexible budget” mean the same thing and can be used
interchangeably.
6) A flexible budget adjusts the static budget to reflect the actual activity level achieved during
the period.
7) If the budgeted activity level is greater than the actual activity level, then the total budgeted
costs of the master budget will be greater than the total budgeted costs of the flexible budget.
8) The difference between operating profits in the master budget and operating profits in the
flexible budget is called a sales price variance.
9) The sales activity variance is the result of a difference between budgeted units sold and actual
units sold.
10) The sales price variance is the actual selling price per unit times the difference between
budgeted number of units and the actual number of units sold.
11) Production cost variances are input variances, while sales activity variances are output
variances.
12) The flexible and master budget amounts are the same for fixed marketing and administrative
costs.
13) The standard cost for a unit of output is the standard price per unit of input times the standard
number of inputs per one unit of output.
14) Both the actual material used and the standard quantity allowed for material are based on the
actual output attained.
15) It is possible to have a favorable direct material price variance and an unfavorable direct
material efficiency variance.
16) The materials price variance is computed by multiplying the difference between the actual
price and the standard price by the actual quantity of materials used in production.
17) An unfavorable direct labor efficiency variance could be the result of poor supervision or
poor scheduling by divisional managers.
18) Variance analysis for fixed production costs is virtually the same as for variable production
costs.
19) The budget (or spending) variance for fixed production costs is the difference between the
actual fixed costs and the budgeted fixed costs.
20) The production volume variance is the difference between fixed costs on the flexible budget
and the fixed costs on the master budget.
21) When using standard costing, costs are transferred through the production process at their
standard costs.
22) Standards and budgets are the same thing.
23) A standard cost system may be used in: (CPA adapted)
A) job-order costing but not process costing.
B) either job-order costing or process costing.
C) process costing but not job-order costing.
D) neither process costing nor job-order costing.
24) Which of the following statements is(are) true?
(A) A favorable variance is not necessarily good, and an unfavorable variance is not necessarily
bad.
(B) The master budget includes operating budgets (e.g., production budget) and financial budgets
(e.g., cash budget).
A) Only A is true.
B) Only B is true.
C) Both of these are true.
D) Neither of these is true.
25) An operating budget would not include a:
A) cash budget.
B) sales budget.
C) labor budget.
D) production budget.
26) A variance can best be described as:
A) benchmarks common to other firms in the same industry.
B) differences between planned results and actual results.
C) useful for performance evaluations but not making decisions.
D) generally accepted accounting principles when standards are used.
27) The simplest measure of performance is the variance that compares:
A) standard material prices with actual material prices.
B) standard direct labor rates with actual direct labor rates.
C) budgeted sales revenue with actual sales revenue.
D) budgeted operating income with actual operating income.
28) In general, the terms favorable and unfavorable are used to describe the effect of a variance
on:
A) operating profits.
B) sales revenue.
C) production costs.
D) operating expenses.
29) Which of the following statements regarding variances is(are) false?
(A) In general and holding all other things constant, an unfavorable variance decreases operating
profits.
(B) A favorable variance is not always good, and an unfavorable variance is not always bad.
A) Only A is false.
B) Only B is false.
C) Both of these are false.
D) Neither of these is false.
30) Which of the following variances will always be favorable when actual sales exceed
budgeted sales?
A) Variable cost
B) Fixed cost
C) Sales activity
D) Operating profit
31) Which of the following organizational policies is most likely to result in undesirable
managerial behavior? (CMA adapted)
A) Raj Chemicals sponsors television coverage of cricket matches between national teams
representing India and Pakistan. The expenses of such media sponsorship are not allocated to its
various divisions.
B) Felix Eagle, the chief executive officer of Eagle Rock Brewery, wrote a memorandum to his
executives stating, “Operating plans are contracts and they should be met without fail.”
C) The budgeting process at Lawrence Manufacturing starts with operating managers providing
goals for their respective departments.
D) Gallen Lighting holds quarterly meetings of departmental managers to consider possible
changes in the budgeted targets due to changing conditions.
32) When a manager is concerned with monitoring total cost, total revenue, and net profit
conditioned upon the level of productivity, an accountant should normally recommend: (CPA
adapted)
Flexible Budgeting Standard Costing
A. Yes No
B. Yes Yes
C. No Yes
D. No No
A) Option A
B) Option B
C) Option C
D) Option D
33) Based on past experience, Moss Company has developed the following budget formula for
estimating its shipping expenses:
Shipping costs = $16,000 + ($0.50 × lbs. shipped). The company’s shipments average 12 lbs. per
shipment.
The planned activity and actual activity regarding orders and shipments for the current month are
given in the following schedule:
Plan Actual
Sales orders 800 780
Shipments 800 820
Units shipped 8,000 9,000
Sales $ 120,000 $ 144,000
Total pounds shipped 9,600 12,300
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: (CMA
adapted)
A) $20,680.
B) $20,920.
C) $20,800.
D) $22,150.
34) The purpose of the flexible budget is to:
A) allow management some latitude in meeting goals.
B) eliminate cyclical fluctuations in production reports by ignoring variable costs.
C) compare actual and budgeted results at virtually any level of production.
D) reduce the total time in preparing the annual budget.
35) The basic difference between a master budget and a flexible budget is that a:
A) flexible budget considers only variable costs but a master budget considers all costs.
B) flexible budget allows management latitude in meeting goals whereas a master budget is
based upon a fixed standard.
C) master budget is for an entire production facility but a flexible budget is applicable to single
departments only.
D) master budget is based on one specific level of production and a flexible budget can be
prepared for any production level within a relevant range.
36) The slope of the flexible budget line is the:
A) selling price per unit.
B) variable cost per unit.
C) fixed cost per unit.
D) contribution margin per unit.
37) The intercept of the flexible budget line is:
A) sales.
B) variable costs.
C) fixed costs.
D) contribution margin.
38) When using a flexible budget, what will happen to variable costs on a per-unit basis as
production increases within the relevant range?
A) Decrease
B) Increase
C) Remain unchanged
D) Fixed costs are not considered in flexible budgeting
39) The Valenti Company uses flexible budgeting for cost control. Valenti produced 10,800 units
of product during October, incurring indirect material costs of $13,000. Valenti’s master budget
reflected indirect material costs of $180,000 at a production volume of 144,000 units. What was
the indirect material cost variance for October?
A) $1,100 favorable
B) $1,100 unfavorable
C) $2,000 favorable
D) $500 favorable
40) James Manufacturing has the following information available for July:
Actual Results Flexible Budget Variance Flexible Budget Sales Activity
Variance Master Budget
Units 13,000 ? 2,000 U ?
Sales revenue ? $ 13,000 F ? ? ?
Less:
Variable manufacturing costs $ 87,750 $ 91,000 ?
$ 105,000
Variable marketing and administrative ? $ 3,250 U ? $ 4,000
F $ 30,000
Contribution margin $ 52,000 ? ? $ 6,000 U
?
What was James’s actual sales revenue for July?
A) $156,000
B) $169,000
C) $180,000
D) $191,000
41) James Manufacturing has the following information available for July:
Actual Results Flexible Budget Variance Flexible Budget Sales Activity
Variance Master Budget
Units 13,000 ? 2,000 U ?
Sales revenue ? $ 13,000 F ? ? ?
Less:
Variable manufacturing costs $ 87,750 $ 91,000 ?
$ 105,000
Variable marketing and administrative ? $ 3,250 U ? $ 4,000
F $ 30,000
Contribution margin $ 52,000 ? ? $ 6,000 U
?
What was James’s flexible budget sales revenue for July?
A) $139,000.
B) $156,000.
C) $169,000.
D) $180,000.
42) James Manufacturing has the following information available for July:
Actual Results Flexible Budget Variance Flexible Budget Sales Activity
Variance Master Budget
Units 13,000 ? 2,000 U ?
Sales revenue ? $ 13,000 F ? ? ?
Less:
Variable manufacturing costs $ 87,750 $ 91,000 ?
$ 105,000
Variable marketing and administrative ? $ 3,250 U ? $ 4,000
F $ 30,000
Contribution margin $ 52,000 ? ? $ 6,000 U
?
What was James’s flexible budget contribution margin for July?
A) $39,000.
B) $45,000.
C) $52,000.
D) $58,000.