Chapter 23 – Standard Costing and Variance Analysis
TRUE/FALSE
1. Standard costs are based solely on expected future costs and conditions.
2. A variance is the difference between a standard cost and a budgeted cost.
3. Service organizations use direct materials, direct labor, and overhead standard costs.
4. The importance of direct labor standards and variances has been reduced.
5. When a manufacturing company employs standard costs, all costs affecting the three inventory
accounts and the Cost of Goods Sold account are stated in terms of standard or predetermined costs
rather than in terms of actual costs incurred.
6. Standard costs are realistically predetermined costs of direct materials, direct labor, and overhead that
usually are expressed as a cost per unit.
7. Predetermined overhead costs are the same as standard costs.
8. Standard costing is typically a sophisticated and inexpensive component to add to a company’s existing
cost accounting system.
9. If standard costing is not economically feasible for a company, predetermined overhead rates should
not be used.
10. Although expensive to install and maintain, a standard cost accounting system can save a company
considerable amounts of money by reducing resource waste.
11. The direct materials price standard is a carefully derived estimate or projected amount of what a
particular type of direct material will cost when purchased during the next accounting period.
12. Direct labor time standards express the hourly labor cost per function or job classification that exists
during the current accounting period.
13. The direct materials price standard is determined by averaging costs of current purchases.
14. The purchasing agent is responsible for developing the direct materials quantity standard.
15. The direct labor rate standard is either set by a labor contract or defined by the company.
16. The standard overhead cost is the sum of the estimates of variable and fixed overhead costs in the next
accounting period.
17. The standard fixed overhead rate is usually based on the expected number of standard machine hours.
18. Once standard costs for direct materials, direct labor, and variable and fixed overhead have been
developed, a total standard unit cost can be determined at any time.
19. Variance analysis involves computing the difference between standard and actual costs.
20. Even if a variance is insignificant, corrective action should be taken.
21. The final step in variance analysis is determining the cause of the variance.
22. The flexible budget formula is an equation that determines unexpected costs at any level of output.
23. The “flex” in the flexible budget formula occurs in the variable cost segment.
24. Another name for a flexible budget is a variable budget.
25. The direct materials price variance is the difference between the actual price and the standard price,
multiplied by the standard quantity.
26. The direct materials quantity variance is the difference between the actual quantity used and the
standard quantity times the standard price.
27. The direct labor rate variance is the difference between actual hours worked and standard hours
allowed for good units produced, multiplied by the standard labor rate.
28. The direct labor efficiency variance is the difference between the standard hours allowed and the
actual hours multiplied by the actual labor rate.
29. A flexible budget is a summary of expected costs for a range of activity levels and is geared to changes
in the level of productive output.
30. Comparing “what did happen” with “what should have happened” aids in the performance evaluation
of a company.
31. The static budget can be adjusted automatically for changes in the level of output.
32. The total overhead variance is the difference between standard variable overhead costs and standard
fixed overhead costs.
33. The variable overhead spending variance is also called the variable overhead efficiency variance.
34. The variable overhead efficiency variance is the difference between actual total overhead costs
incurred and the total overhead costs applied using the standard overhead rates.
35. The fixed overhead volume variance measures the use of existing facilities and capacity.
36. If actual capacity used exceeds expected capacity, the fixed overhead volume variance is favorable.
37. A performance report should contain cost or revenue items that the manager receiving the report can
control.
38. A production manager usually is responsible for direct materials used and direct labor hours used.
39. It is not necessary to provide an area on the performance report for a manager’s reasons for variances.
MULTIPLE CHOICE
1. In a standard costing system, standard costs eventually flow into the
a.
Cost of Goods Sold account.
b.
Standard Cost account.
c.
Selling and Administrative Expenses account.
d.
Sales account.
2. Service organizations do not develop standards for
a.
any service costs.
b.
overhead.
c.
direct materials.
d.
labor.
3. A standard costing system
a.
is not typically used by management for cost planning and cost control purposes.
b.
is a system in which all costs affecting the three inventory accounts and the Cost of Goods
Sold account are stated in terms of actual costs incurred.
c.
depends on actual costs rather than planned costs.
d.
is employed with an existing job order costing or process costing system and is not a full
cost accounting system in itself.
4. Standard costs are useful for all but which of the following?
a.
Determining actual costs
b.
Preparing budgets and forecasts
c.
Evaluating the performance of workers and management
d.
Helping to develop appropriate selling prices
5. A standard cost accounting system can be used for
a.
direct materials.
b.
overhead.
c.
direct labor.
d.
all of these.
6. A purpose of standard costing is to
a.
control costs.
b.
allocate costs more accurately.
c.
replace subjective decision making.
d.
compute the breakeven point.
7. One drawback of using standard costing is that it is
a.
expensive to use.
b.
difficult to implement.
c.
often inaccurate.
d.
not applicable to most manufacturing systems.
8. In standard costing,
a.
the standards are developed only for overhead costs.
b.
the standards are developed primarily from past costs.
c.
comparisons with actual costs usually are not performed.
d.
debit and credit entries to inventory accounts are made at standard costs.
9. The use of realistic predetermined unit costs to facilitate product costing, cost control, cost flow, and
inventory valuation is a description of the
a.
flexible budget concept.
b.
budgetary control concept.
c.
capacity level concept.
d.
standard cost accounting concept.
10. Standard costs for company products are typically used for all except which of the following?
a.
Variance analysis and cost control
b.
Computing production costs in operating budgets
c.
Determining actual costs per unit
d.
Determining the cost of goods completed and transferred to finished goods inventory
11. A(n) ________ cost is synonymous with the product cost calculated in a conventional standard cost
accounting system.
a.
fixed
b.
direct
c.
joint
d.
expected
12. An expression of the hourly labor pay cost per function or job classification that is expected to exist
during the next accounting period is the definition of a
a.
direct labor time standard.
b.
direct materials quantity standard.
c.
direct labor rate standard.
d.
variable overhead rate.
13. Multiplying the standard price of direct materials by the standard quantity for direct materials yields
a.
the direct materials price variance.
b.
the direct materials quantity variance.
c.
the standard direct materials cost.
d.
nothing; the two components should be added together.
14. Under which of the following circumstances would the base used to calculate the variable overhead
rate be the same as that used for the fixed overhead rate?
a.
When actual labor hours are the same as budgeted labor hours
b.
When standard indirect labor hours agree with standard direct labor hours
c.
In most circumstances; the base used for each calculation is normally the same.
d.
When the number of labor hours expected to be incurred for the period is the same as
normal capacity direct labor hours
15. Which of the following provides an explanation of why the variable overhead rate is separated from
the fixed overhead rate in standard costing?
a.
There is no justifiable reason; their separation is merely to simplify entries.
b.
Both calculations divide by the same direct labor hours, but the numerator is different for
each calculation.
c.
The variable overhead rate is calculated using actual direct labor hours, whereas the fixed
overhead rate is calculated using normal capacity direct labor hours.
d.
Different application bases are generally appropriate.
16. Standard unit costs generally do not include which of the following?
a.
Direct materials costs
b.
Indirect materials costs
c.
President’s salary
d.
Depreciation on machinery
17. Using the following information, compute the standard unit cost of a 20 pound bag of dog food:
Direct materials quantity standard
20 pounds per unit
Direct materials price standard
$0.02 per pound
Direct labor time standard
0.1 hour per unit
Direct labor rate standard
$11.60 per hour
Variable overhead rate standard
$2.50 per machine hour
Fixed overhead rate standard
$1.50 per machine hour
Machine hour standard
0.25 hours per unit
a.
$2.56
b.
$2.22
c.
$2.16
d.
$2.81
18. Ewing Corporation’s controller has developed the cost and usage data listed below in preparation of
standard unit cost information for the coming year.
Direct materials quantity standard
3 pounds per product
Direct labor time standard
5 hours per product
Direct materials price standard
$10 per pound
Direct labor rate standard
$ 9 per hour
Standard variable overhead rate
$ 5 per labor hour
Standard fixed overhead rate
$10 per labor hour
The standard unit cost for direct materials is
a.
$30.
b.
$10.
c.
$50.
d.
$27.
19. Ewing Corporation’s controller has developed the cost and usage data listed below in preparation of
standard unit cost information for the coming year.
Direct materials quantity standard
3 pounds per product
Direct labor time standard
5 hours per product
Direct materials price standard
$10 per pound
Direct labor rate standard
$ 9 per hour
Standard variable overhead rate
$ 5 per labor hour
Standard fixed overhead rate
$10 per labor hour
The standard unit cost for direct labor is
a.
$45.
b.
$27.
c.
$135.
d.
$9.
20. Ewing Corporation’s controller has developed the cost and usage data listed below in preparation of
standard unit cost information for the coming year.
Direct materials quantity standard
3 pounds per product
Direct labor time standard
5 hours per product
Direct materials price standard
$10 per pound
Direct labor rate standard
$ 9 per hour
Standard variable overhead rate
$ 5 per labor hour
Standard fixed overhead rate
$10 per labor hour
The standard unit cost for overhead is
a.
$15.
b.
$25.
c.
$50.
d.
$75.
21. Ewing Corporation’s controller has developed the cost and usage data listed below in preparation of
standard unit cost information for the coming year.
Direct materials quantity standard
3 pounds per product
Direct labor time standard
5 hours per product
Direct materials price standard
$10 per pound
Direct labor rate standard
$ 9 per hour
Standard variable overhead rate
$ 5 per labor hour
Standard fixed overhead rate
$10 per labor hour
The total standard unit cost is
a.
$105.
b.
$150.
c.
$260.
d.
$34.
22. Variance analysis includes all of the following except
a.
taking corrective action.
b.
investigating all variances.
c.
developing performance measures to track activities causing the variance.
d.
identification of the cause.
23. A summary of expected costs for a range of activity levels that is geared to changes in the level of
productive output is the definition of a
a.
continuous budget.
b.
flexible budget.
c.
master budget.
d.
period budget.
24. The primary difference between a fixed (static) budget and a flexible budget is that a fixed budget
a.
cannot be changed after the period begins, whereas a flexible budget can be changed after
the period begins.
b.
is concerned only with future acquisitions of fixed assets, whereas a flexible budget is
concerned with expenses that vary with sales.
c.
is a plan for a single level of production, whereas a flexible budget is several plans (one
for each of several production levels).
d.
includes only fixed costs, whereas a flexible budget includes only variable costs.
25. Suppose the standard for a given cost during a period was $80,000. The actual cost for the period was
$72,000. Under what circumstances would you consider the variance from budget to be a positive
performance indication?
a.
The cost is fixed, and actual production was 90 percent of the standard level of budgeted
production.
b.
The cost is variable, and the standard cost noted above is the cost at a production level
lower than the actual production level.
c.
The cost is variable, and actual production was 90 percent of the standard level of
production.
d.
The cost is variable, and actual production was 75 percent of the standard level of
production.
26. A flexible budget is most useful
a.
for budgeting and planning purposes.
b.
when actual output equals budgeted output.
c.
as a cost control tool to help evaluate performance.
d.
when a product’s cost structure includes variable costs only.
27. If a company’s flexible budget formula is $9.50 per unit plus $69,800, what would be the total budget
for evaluating operating performance if 23,850 units were sold and 28,460 units were produced?
a.
$296,375
b.
$340,170
c.
$311,235
d.
$226,575
28. The formula used to compute budgeted total cost at any level of activity is presented in the
a.
flexible budget.
b.
performance report.
c.
static budget.
d.
cash flow forecast.
29. The difference between actual quantity used and standard quantity multiplied by standard price is the
equation for computing the
a.
direct labor efficiency variance.
b.
direct materials price variance.
c.
direct labor rate variance.
d.
direct materials quantity variance.
30. If the actual amount of direct materials used equals the standard amount of direct materials that should
have been used, the difference between the standard cost and actual cost of direct materials is called
the
a.
price variance.
b.
rate variance.
c.
quantity variance.
d.
efficiency variance.
31. The direct materials price variance is best measured and reported to appropriate management
personnel at the time
a.
purchased quantities exceed standard order size.
b.
quarterly financial statements are prepared.
c.
shipments are received and recorded as purchases.
d.
direct materials are issued to production areas.
32. Using the standard costs of $5 per pound for a 10 pound bag of chocolate and the following actual cost
and usage data, compute the direct materials variance.
Direct materials purchased and used
99,000 pounds
Price paid for direct materials
$4.00 per pound
Number of good units produced
9,000 units
a.
$45,000 (F)
b.
$45,000 (U)
c.
$54,000 (F)
d.
$99,000 (F)
33. Using the standard costs of $5 per pound for a 10 pound bag of chocolate and the following actual cost
and usage data, compute the direct materials price variance.
Direct materials purchased and used
99,000 pounds
Price paid for direct materials
$4.00 per pound
Number of good units produced
9,000 units
a.
$45,000 (F)
b.
$45,000 (U)
c.
$54,000 (F)
d.
$99,000 (F)
34. Using the standard costs of $5 per pound for a 10 pound bag of chocolate and the following actual cost
and usage data, compute the direct materials quantity variance.
Direct materials purchased and used
99,000 pounds
Price paid for direct materials
$4.00 per pound
Number of good units produced
9,000 units
a.
$45,000 (F)
b.
$45,000 (U)
c.
$54,000 (F)
d.
$99,000 (F)
35. Lucas Company has set standards for the manufacturing of clay pots to be 2 pounds of direct materials,
per pot, at a cost of $3 per pound. During the current period, 600 pounds of direct materials were
purchased for $1842. All of the direct materials were used to manufacture 295 pots. Lucas’s direct
materials price variance was
a.
$72 (U).
b.
$42 (U).
c.
$72 (F).
d.
zero.
36. The direct materials standards for the main product of Duchess Company are 8 grams of direct
materials per product at a cost of $3 per gram. During April, 974 grams of direct materials were used
to produce 120 products at a direct materials cost of $2,900. The direct materials quantity variance for
April was
a.
$72 (U).
b.
$92 (U).
c.
$42 (U).
d.
$112 (F).
37. A direct labor rate variance would occur in which of the following situations?
a.
When a production employee takes an unplanned break
b.
When a production employee spends more time producing one product than was expected
c.
When a low-paid production employee performs a task higher than his or her assigned
level
d.
When a production employee incurs overtime hours at the same hourly rate as regular pay
38. “The difference between actual hours worked and standard hours allowed for the good units produced,
multiplied by the standard labor rate” is a description of the
a.
direct labor rate variance.
b.
direct labor efficiency variance.
c.
total direct labor cost variance.
d.
direct labor quantity variance.
39. During the current month, Ringo Company started 50,000 units of product and transferred 40,000 fully
completed units to finished goods. The final work in process inventory was 41 percent complete as to
labor operations. There was no initial work in process, and actual labor hours were 180,000 for the
period. Each unit should have required 4 direct labor hours to be produced at standard. The total
standard hours allowed for the period are
a.
180,400.
b.
176,400.
c.
171,400.
d.
186,400.
40. Using the labor time standard of 0.5 labor hour per unit and a labor cost standard of $10 per labor hour
for a 10 pound bag of chocolate and the following actual cost and usage data, compute the direct labor
rate variance.
Direct labor hours used
4,950 hours
Total cost of direct labor
$53,460
Number of good units produced
9,000 units
a.
$4,500 (U)
b.
$4,500 (F)
c.
$3,960 (F)
d.
$3,960 (U)
41. Using the labor time standard of 0.5 labor hour per unit and a labor cost standard of $10 per labor hour
for a 10 pound bag of chocolate and the following actual cost and usage data, compute the direct labor
variance.
Direct labor hours used
4,950 hours
Total cost of direct labor
$53,460
Number of good units produced
9,000 units
a.
$3,960 (F)
b.
$8,460 (U)
c.
$3,960 (U)
d.
$8,460 (F)
42. Using the labor time standard of 0.5 labor hour per unit and a labor cost standard of $10 per labor hour
for a 10 pound bag of chocolate and the following actual cost and usage data, compute the direct labor
efficiency variance.
Direct labor hours used
4,950 hours
Total cost of direct labor
$53,460
Number of good units produced
9,000 units
a.
$3,960 (F)
b.
$3,960 (U)
c.
$4,500 (U)
d.
$4,500 (F)
43. The Lennon Company uses a standard costing system and a flexible budget. At a normal level of
activity of 15,000 units and 45,000 standard direct labor hours, the standard direct labor cost would be
$270,000. During June, 44,050 hours were worked to produce 14,000 units at an actual direct labor
cost of $352,000. The direct labor efficiency variance in June was
a.
$20,300 (U).
b.
$12,300 (U).
c.
$12,300 (F).
d.
$15,300 (U).
44. Harrison, Inc., has computed direct labor standards for the manufacture of its product to be 4 hours of
labor per product at a cost of $15 per hour. During March, Harrison produced 45 products in 190 hours
and incurred direct labor costs of $2,720. Harrison‘s direct labor efficiency variance was
a.
$20 (U).
b.
$130 (U).
c.
$150 (U).
d.
$130 (F).
45. The overhead variance is equal to the difference between
a.
fixed overhead costs and flexible overhead costs.
b.
estimated overhead rate and applied overhead rate.
c.
actual overhead costs and variable overhead costs.
d.
actual overhead costs and standard overhead costs.
46. The total variable overhead variance is comprised of the
a.
variable overhead efficiency and fixed variances.
b.
fixed overhead budget and volume variances.
c.
variable overhead spending and efficiency variances.
d.
labor efficiency and rate variances.
47. When actual capacity exceeds expected capacity, the result is a(n)
a.
favorable fixed overhead volume variance.
b.
favorable materials quantity variance.
c.
unfavorable overhead variance.
d.
unfavorable materials quantity variance.
48. A favorable fixed overhead volume variance for a manufacturing company could indicate
a.
the creation of excess inventory.
b.
the actual overhead exceeded the budgeted overhead.
c.
sales exceeded production.
d.
variable overhead costs were less than fixed overhead costs.
49. The total fixed overhead variance is comprised of the
a.
variable overhead efficiency and fixed variances.
b.
fixed overhead budget and volume variances.
c.
labor efficiency and rate variances.
d.
variable overhead spending and efficiency variances.
50. Sweet Dreams manufactures candy. Its records revealed the following data:
Number of units produced
4,000
Standard direct labor hours per unit
2
Standard variable overhead rate
$2.50 per hour
Standard fixed overhead rate
$5.00 per hour
Budgeted fixed overhead costs
$40,800
Actual variable overhead costs
$16,800
Actual fixed overhead costs
$40,400
Actual labor hours
8,000 direct labor hours
Total actual overhead
$57,200
The total overhead variance is
a.
$800 (F).
b.
$800 (U).
c.
$2,800 (F).
d.
$300 (F).
51. Sweet Dreams manufactures candy. Its records revealed the following data:
Number of units produced
4,000
Standard direct labor hours per unit
2
Standard variable overhead rate
$2.50 per hour
Standard fixed overhead rate
$5.00 per hour
Budgeted fixed overhead costs
$40,800
Actual variable overhead costs
$16,800
Actual fixed overhead costs
$40,400
Actual labor hours
8,000 direct labor hours
Total actual overhead
$57,200
The total fixed overhead variance is
a.
$800 (F).
b.
$800 (U).
c.
$400 (U).
d.
$400 (F).
52. Sweet Dreams manufactures candy. Its records revealed the following data:
Number of units produced
4,000
Standard direct labor hours per unit
2
Standard variable overhead rate
$2.50 per hour
Standard fixed overhead rate
$5.00 per hour
Budgeted fixed overhead costs
$40,800
Actual variable overhead costs
$16,800
Actual fixed overhead costs
$40,400
Actual labor hours
8,000 direct labor hours
Total actual overhead
$57,200
The total variable overhead variance is
a.
$3,200 (U).
b.
$3,200 (F).
c.
$3,600 (F).
d.
$0.
53. Underfoot Products uses standard costing. The following information about overhead was generated
during May:
Standard variable overhead rate
$2 per machine hour
Standard fixed overhead rate
$1 per machine hour
Actual variable overhead costs
$361,000
Actual fixed overhead costs
$175,000
Budgeted fixed overhead costs
$190,000
Standard machine hours per unit produced
10
Good units produced
18,000
Actual machine hours
200,000
Compute the variable overhead variance.
a.
$21,000 (F)
b.
$21,000 (U)
c.
$1,000 (U)
d.
$11,000 (F)
54. Underfoot Products uses standard costing. The following information about overhead was generated
during May:
Standard variable overhead rate
$2 per machine hour
Standard fixed overhead rate
$1 per machine hour
Actual variable overhead costs
$389,000
Actual fixed overhead costs
$175,000
Budgeted fixed overhead costs
$190,000
Standard machine hours per unit produced
10
Good units produced
18,000
Actual machine hours
200,000
Compute the variable overhead spending variance.
a.
$11,000 (F)
b.
$11,000 (U)
c.
$31,000 (F)
d.
$41,000 (F)
55. Underfoot Products uses standard costing. The following information about overhead was generated
during May:
Standard variable overhead rate
$2 per machine hour
Standard fixed overhead rate
$1 per machine hour
Actual variable overhead costs
$390,000
Actual fixed overhead costs
$175,000
Budgeted fixed overhead costs
$190,000
Standard machine hours per unit produced
10
Good units produced
18,000
Actual machine hours
195000
Compute the variable overhead efficiency variance.
a.
$50000 (F)
b.
$50000 (U)
c.
$40000 (F)
d.
$30000 (U)
56. Underfoot Products uses standard costing. The following information about overhead was generated
during May:
Standard variable overhead rate
$2 per machine hour
Standard fixed overhead rate
$1 per machine hour
Actual variable overhead costs
$390,000
Actual fixed overhead costs
$175,000
Budgeted fixed overhead costs
$190,000
Standard machine hours per unit produced
10
Good units produced
18,000
Actual machine hours
200,000
Compute the fixed overhead variance.
a.
$5,000 (F)
b.
$5,000 (U)
c.
$10,000 (U)
d.
$10,000 (F)
57. Underfoot Products uses standard costing. The following information about overhead was generated
during May:
Standard variable overhead rate
$2 per machine hour
Standard fixed overhead rate
$1 per machine hour
Actual variable overhead costs
$390,000
Actual fixed overhead costs
$175,000
Budgeted fixed overhead costs
$190,000
Standard machine hours per unit produced
10
Good units produced
18,000
Actual machine hours
200,000
Compute the fixed overhead budget variance.
a.
$5,000 (F)
b.
$5,000 (U)
c.
$10,000 (F)
d.
$15,000 (F)
58. Underfoot Products uses standard costing. The following information about overhead was generated
during May:
Standard variable overhead rate
$2 per machine hour
Standard fixed overhead rate
$1 per machine hour
Actual variable overhead costs
$390,000
Actual fixed overhead costs
$175,000
Budgeted fixed overhead costs
$190,000
Standard machine hours per unit produced
10
Good units produced
18,000
Actual machine hours
200,000
Compute the fixed overhead volume variance.
a.
$5,000 (U)
b.
$10,000 (U)
c.
$10,000 (F)
d.
$15,000 (F)
59. Point Company uses the standard costing method. The company’s main product is a fine-quality audio
speaker that normally takes 0.25 hour to produce. Normal annual capacity is 3,000 direct labor hours,
and budgeted fixed overhead costs for the year were $6,750. During the year, the company produced
and sold 8,000 units. Actual fixed overhead costs were $4,800. Compute the fixed overhead budget
variance.
a.
$300 (F)