102. Answer the following questions:
A.
How do ideal and practical standards differ?
B.
As an employee who is evaluated based upon standards, which would you prefer and why?
103. What is the difference between a static and a flexible budget? Which one is most often used in variance
analysis and why?
104. True or False: Indicate whether each of the following statements is true (T) or false (F).
1.
The computation for the sales volume variance can be thought of as
taking the difference between operating income on the static budget
and operating income on the flexible budget.
2.
The computation for the flexible budget variance can be thought of as
taking the difference between operating income on the static budget
and actual operating income.
3.
Any differences in sales revenue between the flexible budget and actual
results must be attributable to differences in the budgeted sales volume
and actual sales volume.
4.
When the quantity of direct materials purchased and used are not the
same, the direct materials price variance can not be computed.
5.
The direct labor rate variance measures how well employees made
efficient use of their production time.
105. At the end of the current year, Bowman Products has the following information available comparing the
cost of direct materials on its flexible budget with the actual cost of direct materials:
Flexible budget
Actual results
Difference
Direct materials
$24,000
$30,000
(6,000)
Sally Vincent, the company’s controller, has requested a meeting with Hank Rowland, the operations manager, asking him to explain why direct
materials costs were more than what had been budgeted.
What two kinds of variance analysis should Hank do before his meeting with Sally? What would each of these variances measure?
1.
T
2.
F
F
4.
F
5.
F
106. GEO Inc. has an unfavorable direct materials price variance.
A.
Give two possible reasons for this variance.
B.
Using one of the above reasons, how could this particular variance affect one of the other variances (ex. direct materials usage, direct
labor rate, direct labor efficiency)?
107. At the end of the year, your company had the following variances:
Direct material price variance
$3,000 F
Direct material usage variance
$3,500 U
Direct labor rate variance
$5,200 U
Direct labor efficiency variance
$7,000 U
Give at least one possible cause for each of the variances and discuss the possible relationships between them.
Possible causes:
Direct material usage
variance (U):
Direct labor rate
variance (U):
Direct labor
efficiency variance
(U):
A.
B.
a favorable direct materials usage variance and/or a favorable direct labor efficiency variance.
108. Harkin Ltd. has a $5,000 unfavorable variable overhead spending variance. Give two possible reasons for
this variance.
109. Drummel Ltd. has a $7,000 unfavorable variable overhead efficiency variance. Give one possible reason
for this variance.
110. How does the adoption of an activity-based costing (ABC) system for overhead allocation affect variance
analysis for overhead costs?
111. What is “management by exception”? Do you think it represents an efficient use of management time?
Why or why not?
112. Jackie makes and sells handmade beaded jewelry. She anticipates selling 100 necklaces in March and
prepared the following static budget as a result:
at 100 units
Sales
revenue
$3,500
Variabl
e costs:
Direct materials
500
Direct labor
800
Overhead
300
Fixed
costs
400
Net
income
$1,500
During March, Jackie actually produced and sold 120 necklaces.
Required: Prepare a flexible budget for the month of March.
at 120 units
Sales
$4,200
[($3,500/100) ´ 120
Variable
costs:
Direct materials
600
[($500/100) ´ 120 units]
Direct labor
960
[($800/100) ´ 120 units]
Overhead
360
[($300/100) ´ 120 units]
Fixed
costs
400
113. Unified Products Inc. makes and sells a unique product. At the beginning of the current year, the company
had anticipated selling 10,000 of these units; however, 11,000 units were actually produced and sold. Below is
the company’s static budget as well as actual results for the year:
(static budget)
(act
ual
resu
lts)
at 10,000 units
at
11,0
00
unit
s
Sales
revenue
$800,000
$90
2,00
0
Variable
costs:
Direct materials
90,000
103,400
Direct labor
100,000
121,000
Overhead
50,000
60,500
Contribu
tion
margin
560,000
617,
100
Fixed
costs
200,000
21
0,00
0
Net
income
$360,000
$40
7,10
0
Required:
A.
Prepare a flexible budget for the year.
B.
Calculate the flexible budget variance for the year. Indicate whether it is favorable or unfavorable.
C.
Calculate the sales volume variance for the year. Indicate whether it is favorable or unfavorable.
D.
Calculate the sales price variance for the year. Indicate whether it is favorable or unfavorable.
114. In early 2009, Duncan Manufacturing Inc. had budgeted for the production and sale of 12,000 units at a
sales price of $20 per unit. The following information is available regarding the standard cost for each unit:
Direct materials:
$4.00 (4 pounds at $1.00 per lb)
Direct labor:
$2.50 (10 minutes of assembly at $.25 per minute)
Actual results for 2009 were determined to be as follows:
Number of units produced
and sold:
11,200 units
Sales revenue:
$235,200 ($21 per unit)
Direct materials cost:
$47,840 (46,000 lbs purchased and used at $1.04 per lb)
Direct labor cost:
$22,000 (110,000 minutes at $.20 per minute)
Required: Compute each of the following variances. Indicate whether the variance is favorable (F) or unfavorable (U).
A.
Sales volume variance
B.
Sales price variance
C.
Direct materials price variance
D.
Direct materials usage variance
E.
Direct labor rate variance
F.
Direct labor efficiency variance
Sales volume variance = (11,200 – 12,000) ´ $13.50* = $10,800 U
* budgeted contribution margin per unit = budgeted sales price per unit – budgeted variable costs per unit
budgeted contribution margin per unit = $20 – $4 – $2.5 = $13.5
B.
Sales price variance = (Actual – Expected sales price) ´ Actual volume
Sales price variance = ($21 – $20) ´ 11,200 = $11,200 F
C.
Direct materials price variance = AQ (AP – SP)
Direct materials price variance = 46,000 ($1.04 – $1.00) = $1,840 U
D.
Direct materials usage variance = SP (AQ – SQ) where SQ = 11,200 ´ 4 lbs = 44,800 lbs
Direct materials usage variance = $1.00 (46,000 – 44,800) = $1,200 U
E.
Direct labor rate variance = AH (AR – SR)
Direct labor efficiency variance = SR (AH – SH) where SH = 11,200 ´ 10 min = 112,000 min
Direct labor efficiency variance = $.25 (110,000 – 112,000) = $500 F
115. Kincaid Ltd. produces and sells leather wallets. In the current year, the company budgeted for the
production and sale of 18,000 wallets; however, 21,000 wallets were actually produced and sold. Each wallet
has a standard requiring eight square inches of material at a cost of .20 per inch and ten minutes of assembly
time at a cost of $.15 per minute. Actual costs for the production of 21,000 wallets were $36,080 for materials
(164,000 inches purchased and used @ $.22 per inch) and $36,000 for labor (225,000 minutes @ $.16 per
minute).
Required: Compute each of the following variances. Indicate whether the variance is favorable (F) or
unfavorable (U).
A.
Direct materials price variance
B.
Direct materials usage variance
C.
Direct labor rate variance
D.
Direct labor efficiency variance
A.
Direct materials price variance = AQ (AP – SP)
Direct materials price variance = 164,000 ($.22 – $.20) = $3,280 U
B.
Direct materials usage variance = SP (AQ – SQ) where SQ = 21,000 ´ 8 in. = 168,000 in.
Direct materials usage variance = $.20 (164,000 – 168,000) = $800 F
C.
Direct labor rate variance = AH (AR – SR)
Direct labor rate variance = 225,000 ($.16 – $.15) = $2,250 U
D.
Direct labor efficiency variance = SR (AH – SH) where SH = 21,000 ´ 10 min = 210,000 min
Direct labor efficiency variance = $.15 (225,000 – 210,000) = $2,250 U
116. Gemma Products produces and sells a variety of domestic goods including sheets. In the current year, the
company budgeted for the production and sale of 10,000 sets; however, 12,000 sets were actually produced and
sold. Each set has a standard requiring 10 yards of material at a cost of $1.10 per yard and 20 minutes of direct
labor (for sewing, assembly, and inspection) at a cost of $.20 per minute. Actual costs for the production of
12,000 sets were $138,240 for materials (128,000 yards purchased and used @ $1.08 per yard) and $55,200 for
labor (230,000 minutes @ $.24 per minute).
Required: Compute each of the following variances. Indicate whether the variance is favorable (F) or
unfavorable (U).
A.
Direct materials price variance
B.
Direct materials usage variance
C.
Direct labor rate variance
D.
Direct labor efficiency variance
117. Bayou Barbecue Inc. bottles and sells barbecue sauce. In the current year, the company had expected to
sell 500,000 bottles but actually bottled and sold 600,000 bottles. The standard direct materials cost for each
bottle is $.36 comprised of 12 ounces of material at a cost of $.03 per ounce. During the year, 7,800,000 ounces
of material was purchased out of which 7,350,000 ounces were used at a cost of $.035 per ounce.
Required: Compute each of the following variances. Indicate whether the variance is favorable (F) or
unfavorable (U).
A.
Direct materials price variance
B.
Direct materials usage variance
A.
Direct materials price variance = 7,800,000 ($.035 – $.03) = $39,000 U
A.
Direct materials price variance = AQ (AP – SP)
Direct materials price variance = 128,000 ($1.08 – $1.10) = $2,560 F
B.
Direct materials usage variance = SP (AQ – SQ) where SQ = 12,000 ´ 10 yards = 120,000 yards
Direct materials usage variance = $1.10 (128,000 – 120,000) = $8,800 U
C.
Direct labor rate variance = AH (AR – SR)
Direct labor rate variance = 230,000 ($.24 – $.20) = $9,200 U
D.
Direct labor efficiency variance = SR (AH – SH) where SH = 12,000 ´ 20 min = 240,000 min
Direct labor efficiency variance = $.20 (230,000 – 240,000) = $2,000 F
118. Carolina Tile Company manufactures and installs industrial tile flooring. In the current year, the company
had anticipated producing and installing 80,000 tiles but actually produced installed 90,000 tiles. The standard
direct materials cost for each square foot of tile is $6.30 comprised of 3 pounds of material at a cost of $2.10 per
pound. During the year, 300,000 pounds of material were purchased out of which 280,000 pounds were used at
a cost of $1.90 per pound.
Required: Compute each of the following variances. Indicate whether the variance is favorable (F) or
unfavorable (U).
A.
Direct materials price variance
B.
Direct materials usage variance
A.
Direct materials price variance = 300,000 ($1.90 – $2.10) = $60,000 F
Direct materials usage variance = $2.10 (280,000 – 270,000) = $21,000 U
119. Henninger’s Nursery sells a variety of plants. Henninger sells most of its plants to local landscapers in the
community. These plants come in “flats” containing 12 plants each. In May of the current year, Henninger had
expected to sell 900 flats of petunias but produced and sold 940 flats instead. The company expects each flat to
require 25 minutes of labor at a cost of $.15 per minute. In addition, variable overhead is applied at a rate of
$.05 per minute.
Actual costs incurred during May for the production and sale of 940 flats was as follows:
Direct labor
$3,416 (24,400 minutes at $.14 per minute)
Variable overhead
1,200
Required: Compute each of the following variances. Indicate whether the variance is favorable (F) or unfavorable (U).
A.
Direct labor rate variance
B.
Direct labor efficiency variance
C.
Variable overhead spending variance
D.
Variable overhead efficiency variance
A.
Direct labor rate variance = AH (AR – SR)
Direct labor rate variance = 24,400 ($.14 – $.15) = $244 F
Direct labor efficiency variance = SR (AH – SH) where SH = 940 ´ 25 min = 23,500 min
Direct labor efficiency variance = $.15 (24,400 – 23,500) = $135 U
C.
Variable overhead spending variance = Actual variable overhead – (AH ´ SVR)
Variable overhead spending variance = $1,200 (24,400 ´ $.05) = $20 F
D.
Variable overhead efficiency variance = SVR (AH – SH) where SH = 940 ´ 25 min = 23,500 min
Variable overhead efficiency variance = $.05 (24,400 – 23,500) = $45 U
120. Gantt Textiles Inc. incurred actual variable overhead expenses of $50,000 in the current year for the
production of 6,000 units. Variable overhead was applied at a rate of $3.25 per direct labor hour and 2 direct
labor hours were budgeted for each unit. The company used 16,000 direct labor hours for production.
Required: Compute each of the following variances. Indicate whether the variance is favorable (F) or
unfavorable (U).
A.
Variable overhead spending variance
B.
Variable overhead efficiency variance
121. Lancaster Ltd. produces a unique item. Lancaster’s management team wishes to perform a variance
analysis on its fixed overhead. Fixed overhead is applied to units produced using direct labor hours as its cost
driver. The company’s managerial accountant has compiled the following information:
Projected data:
Estimated direct labor hours
40,000 hours
Estimated fixed overhead
$90,000
Actual data:
Actual production
300,000 units
Actual direct labor hours used
50,000 hours
Actual fixed overhead
$100,000
Required:
A.
Compute the fixed overhead spending variance
B.
Compute the fixed overhead volume variance.
A.
Fixed overhead spending variance = Actual fixed overhead – Budgeted fixed overhead
Fixed overhead spending variance = $100,000 – $90,000 = $10,000 U
B.
Fixed overhead volume variance = Budgeted fixed overhead – Applied fixed overhead
Fixed overhead volume variance = $90,000 – $112,500 = $22,500
A.
Variable overhead spending variance = Actual – (AH ´ SVR)
Variable overhead spending variance = $50,000 – (16,000 ´ $3.25) = $2,000 F
B.
Variable overhead efficiency variance = SVR (AH – SH) where SH = 6,000 ´ 2 hrs = 12,000 hrs
Variable overhead efficiency variance = $3.25 (16,000 – 12,000) = $13,000 U
122. Gorham Manufacturing uses flexible budgeting. The company’s budget for variable and fixed overhead is
$60,000 and $20,000, respectively. The company uses activity-based costing (ABC) and has traced the
budgeted overhead of $80,000 to three activities: material handling, assembly, and inspections. The costs
associated with each activity and their respective cost drivers are as follows:
Flexible
Budgeted
Activity
Budget
Cost Driver
Volume
Material handling
$20,000
Number of moves
500
Assembly
40,000
Number of labor hours
4,000
Inspections
20,000
Number of inspections
1,000
The actual cost and total volume for each activity during the current year are as follows:
Activity
Cost
Volume
Material handling
$23,000
550 moves
Assembly
42,000
3,500 labor hours
Inspections
14,000
800 inspections
Required:
A.
Compute the overhead application rate for each activity.
B.
Compute the spending variance for each activity.
C.
Compute the efficiency variance for each activity.
A.
Material handling:
$20,000 ¸ 500 = $40 per move
Assembly:
$40,000 ¸ 4,000 = $10 per labor hour
Inspections:
$20,000 ¸ 1,000 = $20 per inspection
B.
Spending variance =
Actual cost – (Actual Base ´ Standard rate)
Material handling:
Spending variance = $23,000 – (550 ´ $40) = $1,000 U
Assembly:
Spending variance = $42,000 – (3,500 ´ $10) = $7,000 U
Inspections:
Spending variance = $14,000 – (800 ´ $20) = $2,000 F
C.
Efficiency variance =
(Actual Base ´ Standard rate) – (Standard base ´ Standard rate)
Material handling:
Efficiency variance = (550 ´ $40) – (500 ´ $40) = $2,000 U
Assembly:
Efficiency variance = (3,500 ´ $10) – (4,000 ´ $10) = $5,000 F
Inspections:
Efficiency variance = (800 ´ $20) – (1,000 ´ $20) = $4,000 F