Chapter 10
Variance Analysis—A Tool for Cost Control and Performance
Evaluation
Concept Questions
1. (LO1—Ideal versus practical standards)
Ideal standards assume that every area of the production process is at peak
efficiency. Although some managers believe that ideal standards are preferable
2. (LO2—Static versus flexible budgets)
A static budget is prepared for only one level of activity. A flexible budget is
adjusted for changes in the level of output or activity.
3. (LO2—Flexible budgets)
The value of the flexible budget is to allow management to analyze results at
4. (LO3—Responsibility for sales price variance)
The marketing and sales department would most likely be responsible for sales
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5. (LO5—The standard quantity allowed)
The standard quantity allowed is the amount of direct material that should have
6. (LO5, 6, and 7—Usage variances)
Usage variances focus on the difference between the amount of material, labor,
7. (LO6—Causes of direct labor efficiency variances)
Potential causes of an unfavorable direct labor efficiency variance include a low
8. (LO7—Variable overhead efficiency variance)
9. (LO8—Fixed overhead volume variance)
If the number of standard hours allowed is equal to the number of budgeted
hours, there will be no volume variance.
10. (LO9—Management by exception)
Management by exception is the process of taking action only when actual
results deviate significantly from planned results. It is neither necessary nor
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Brief Exercises
1. (LO1—Standard costing)
a. practical standard
b. standard cost
c. variance analysis
d. standard price
e. Management by exception
2. (LO4, 5, and 6—Variable manufacturing cost variances)
a. False
3. (LO7, 8—Overhead variances)
a. False
4. (LO9—Using variance analysis)
a. drawbacks
b. cost control
c. not
d. Resentment
e. underlying cause
Exercises
5. (LO2—Flexible budget)
Sales revenue (125 caps × $10) $1,250.00
Solutions Manual
6. (LO2—Flexible budget preparation)
Revenue $277,500 (1,850 @ $150)
Variable expenses:
7. (LO3—Flexible budget variance)
Flexible Flexible Budget Actual
Budget Variance Results
Sales revenue $277,500 $5,550 Under $271,950
Variable expenses:
8. (LO3—Sales price variance)
The actual sales price was $7 per unit.
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9. (LO5—Direct materials price and usage variances)
A. DM price variance = AQpurchased(AP – SP)
10. (LO6—Direct labor rate and efficiency variances)
A. DL rate variance = AH(AR – SR)
DL rate variance = 1,950($15.25 – $15)
11. (LO5—Direct materials price and usage variances)
A. DM price variance = AQpurchased(AP – SP)
DM price variance = 990 feet($1.45 – $1.50)
12. (LO6—Labor rate and efficiency variances)
A. DL rate variance = AH(AR – SR)
DL rate variance = 2,420($12.05 – $12.00)
Solutions Manual
13. (LO5, 6—Materials and labor variances)
A. Direct material price variance = AQpurchased × (AP – SP)
= 80,000 × ($2.52 – $2.50) = $1,600 U
14. (LO7—Variable overhead spending and efficiency variances)
A. VOHSV = Actual variable overhead expense – (AH × SVR)
15. (LO7—Variable overhead spending and efficiency variances)
A. VOHSV = Actual variable overhead – (AH × SVR),
where variable overhead rate = $30,000 ÷ 40,000 hrs = $0.75 per DL hour
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16. (LO8—Fixed overhead volume and spending variances)
A. FOHVV = Budgeted fixed overhead – Applied fixed overhead,
17. (LO7—Variable overhead spending and efficiency variances)
A. VOHEV = SVR(AH – SH)
18. (LO8—Fixed overhead volume and spending variances)
A. FOHVV = Budgeted fixed overhead – Applied fixed overhead,
where budgeted fixed overhead = $20,650
19. (LO9—Drawbacks of variance analysis)
There are several potential drawbacks to variance analysis:
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by product lines or batches and labor variances need to be broken down by
work cells or small areas of the facility.
Problems
20. (LO1—Standard costing)
A. Number of lb purchased: DM price variance = AQpurchased(AP – SP)
84,000 = AQpurchased(0.40)
84,000 ÷ 0.40 = AQpurchased
AQpurchased = 210,000 lbs
B. Number of lb purchased: DM price variance = AQpurchased(AP – SP)
50,000 = AQpurchased(0.20)
Total standard material cost: 220,000 lb × $2.00 = $440,000
C. Number of lb purchased: DM price variance = AQpurchased(AP – SP)
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21. (LO2—Flexible budget variance)
Fort Worth Company
Static Budget Difference Actual Results
Units sold & produced 10,000 12,000
Sales price per unit $10 $9.50
22. (LO2, 3—Comprehensive variance analysis)
A. Byrd Company
Static Budget to Actual Results
for the quarter ended December 31, 2012
Static Budget Difference Actual Results
Units sold 375,000 units 400,000 units
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B. Byrd Company
Flexible Budget to Actual Results
for the quarter ended December 31, 2012
Flexible Budget
Flexible Budget
Variance Actual Results
Units sold 400,000 400,000
Sales price $ 6 $ 6.10
23. (LO3, 4, 5, and 6—Comprehensive variance analysis)
A. The budgeted contribution margin is $4.72 per unit ($32.00 sales price –
$2.28 direct material – $25.00 direct labor).
D. DM price variance = AQpurchased(AP – SP)
DM price variance = 8,600 ounces($1.50 – $1.52) = $172 F
E. DM usage variance = SP(AQused – SQ)
DM usage variance = $1.52(8,600 – 9,000) = $608 F
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I. The data do not conclusively suggest one answer. There appears to be
sufficient demand for the product. In fact, actual sales exceeded budgeted
sales by 1,000 carabiners. However, the company’s production process
* Note: The unfavorable flexible budget variance of $10,920 is the sum of
the following:
24. (LO3, 5, and 6—Comprehensive variance analysis)
A. The budgeted contribution margin is $1.50 per unit ($8.00 sales price –
$1.50 direct material – $5.00 direct labor).
D. Direct material price variance = AQpurchased(AP – SP)
DMPV = 11,100 pounds ($1.54 – $1.50) = $444 U
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G. Direct labor efficiency variance = SR(AH – SH)
DLEV = $0.25 (242,000 minutes – 220,000 minutes) = $5,500 U.
25. (LO5, 6—Material and labor variances: Solve for missing data)
A. To compute the number of units produced during the quarter, the total
variance for either Material A or B can be used.
D. DM usage variance = SP(AQused – SQ)
900 = 3(AQused – 9,600)
900 = 3AQused – 28,800
29,700 = 3AQused
9,900 gal = AQused
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F. DL efficiency variance = SR(SH – AH)
160 = 3.20(12,800 – AH)
160 = 40,960 – 3.20AH
–40,800 = –3.20AH
AH = 12,750 hours
26. (LO5, 6, 7, and 8—Comprehensive variance analysis: Decision focus)
A. Plastic:
DM price variance = AQpurchased(AP – SP)
DM price variance = 185,000($4.45 – $4.50)
DM price variance = $823,250 – $832,500
Molding
DM price variance = 50,000($3.10 – $3.00)
DM price variance = $155,000 – $150,000
DM price variance = $5,000 U
DM usage variance = $3.00(50,000 – 54,000)
DM usage variance = $150,000 – $162,000
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DL efficiency variance = $435,000 – $432,000
DL efficiency variance = $3,000 U
FOHSV = Actual fixed overhead – Budgeted fixed overhead
FOHSV = $53,875 – $55,000
FOHSV = $1,125 F
FOHVV = $0
* The predetermined overhead rate for fixed overhead is equal to the
estimated fixed overhead of $55,000 divided by the estimated direct labor
hours of 72,000 (18,000 chairs × 4 hours per chair).
D. Management might consider establishing a contract price for materials,
recalculating material price and usage standards, using different suppliers
if quality is a problem, and examining purchasing and scheduling
procedures to ensure that quality products are received in a timely
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27. (LO7, 8—Variable and fixed overhead variances)
A. VOHSV = Actual variable overhead – (AH × SVR)
VOHSV = $66,810 – (13,000 × $5)
VOHSV = $66,810 – $65,000
C. FOHSV = Actual fixed overhead – Budgeted fixed overhead
FOHSV = $10,500 – $11,000
FOHSV = $500 F
28. (LO1, 7, and 8—Variable and fixed overhead variances)
B. VOHEV = SVR(AH – SH)
VOHEV = 0.75 (440,000 – 396,000)
VOHEV = $330,000 – $297,000
VOHEV = $33,000 U
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D. FOHSV = Actual fixed overhead – Budgeted fixed overhead
575,000 – $600,000* = $25,000 F
*200,000 units × $3/unit
Cases
29. (LO1, 5, 6, 7, 8, and 9—Comprehensive variance analysis with behavioral
issues)
A. The major advantages of a standard cost system are the following:
1. Gives employees and management a basis for determining and
analyzing the company’s product and period costs for an
accounting period.
2. Lays the foundation for management by exception or
management’s focus on problem areas that significantly deviate
from standard.
B. Disadvantages of a standard costing system are the following:
1. Standards may be impractical.
2. May result in finger-pointing or focusing on who is to blame.
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5. Traditional variance analysis focuses on cost control rather than
product quality, customer service, delivery time, and other
nonfinancial measures of performance.
C. Top management should participate in setting standards because
managers have more experience in budget and product costing,
much more likely to accept the standards as an evaluation criterion.
D. Participation in the standard-setting process is perhaps the most important
feature affecting the effectiveness of standard costing as a cost control
tool. The use of standards promotes control by providing benchmarks with
which to compare actual results in variance analysis.
E. Consequences of having the standards set by an outside firm include the
F. A variance is a difference between actual results and budgeted or planned
results. Variance analysis is the process of identifying the differences,
G. Material variances occur when the actual price and/or quantity of material
deviates from standard. Price variances may occur when discounts are
H. Overhead variances determine whether indirect costs, such as rent,
insurance, depreciation, fringe benefits, utilities, and taxes, have been
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