Chapter 7 Revision 3

Summary for Ch.7

FLEXIBLE-BUDGET AND SALES-VOLUME VARIANCE ANALYSIS

Actual Results: Flexible Budget: Static Budget:

Actual Units Sold Actual Units Sold Budgeted Units Sold
Actual Sales Mix Actual Sales Mix Budgeted Sales Mix
Actual CM/unit Budgeted CM/unit Budgeted CM/unit
| - - - - Flexible budget variance - - - - | - - - - Sales-volume variance - - - - |
| - - - - - - - - - - - - - - - - - - - Static budget variance - - - - - -- - - - - - - - - - |

INPUT PRICE AND EFFICIENCY VARIANCES

Actual Costs: Flexible Budget:

Actual Input Actual Input Budgeted Input (for
actual output)
Actual Price Budgeted Price Budgeted Price
| - - - - - - - Price variance - - - - - - - | - - - - - - - Efficiency variance - - - - - - - |
| - - - - - - - - - - - - - - - - - - - Flexible budget variance - - - - - -- - - - - - ----- - - - |

OR

Price
Variance = { Actual Price
Of Input - Budgeted Price
Of Input } X Actual Quantity
Of Input

Efficiency
Variance = { Actual Quantity
Of Input Used - Budgeted Quantity of Input
Allowed for Actual Output }X Budgeted Price
Of Input

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Multiple Choice Questions
1. The master budget is:
a. a flexible budget
b. a static budget
c. developed at the end of the period
d. based on the actual level of output
2. A flexible budget:
a. is another name for management by exception
b. is developed at the end of the period
c. is based on the budgeted level of output
d. provides favorable operating results
3. Management by exception is the practice of concentrating on:
a. the master budget
b. areas not operating as anticipated
c. favorable variances
d. unfavorable variances
4. A variance is:
a. the gap between an actual result and a benchmark amount
b. the required number of inputs for one standard output
c. the difference between an actual result and a budgeted amount
d. the difference between a budgeted amount and a standard amount
5. An unfavorable variance indicates that:
a. actual costs are less than budgeted costs
b. actual revenues exceed budgeted revenues
c. the actual amount decreased operating income relative to the budgeted
amount
d. All of these answers are correct.
6. A favorable variance indicates that:
a. budgeted costs are less than actual costs
b. actual revenues exceed budgeted revenues
c. the actual amount decreased operating income relative to the budgeted
amount
d. All of these answers are correct.
7. The flexible budget contains:
a. budgeted amounts for actual output
b. budgeted amounts for planned output
c. actual costs for actual output
d. actual costs for planned output
8. The following items are the same for the flexible budget and the master budget
EXCEPT the same:
a. variable cost per unit
b. total fixed costs
c. units sold
d. sales price per unit

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9. The sales-volume variance is due to:
a. using a different selling price from that budgeted
b. inaccurate forecasting of units sold
c. poor production performance
d. Both a and b are correct.
10. An unfavorable sales-volume variance could result from:
a. decreased demand for the product
b. competitors taking market share
c. customer dissatisfaction with the product
d. All of these answers are correct.
11. If a sales-volume variance was caused by poor-quality products, then the
___________ would be in the best position to explain the variance.
a. production manager
b. sales manager
c. purchasing manager
d. management accountant
12. The variance that is BEST for measuring operating performance is the:
a. static-budget variance
b. flexible-budget variance
c. sales-volume variance
d. selling-price variance
13. An unfavorable flexible-budget variance for variable costs may be the result of:
a. using more input quantities than were budgeted
b. paying higher prices for inputs than were budgeted
c. selling output at a higher selling price than budgeted
d. Both a and b are correct.
14. An unfavorable variance:
a. may suggest investigation is needed
b. is conclusive evidence of poor performance
c. demands that standards be recomputed
d. indicates continuous improvement is needed
15. All of the following are needed to prepare a flexible budget EXCEPT
determining the:
a. budgeted variable cost per output unit
b. budgeted fixed costs
c. actual selling price per unit
d. actual quantity of output units

16. The variance that LEAST affects cost control is the;

a. flexible-budget variance
b. direct-material-price variance
c. sales-volume variance
d. direct manufacturing labor efficiency variance

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17. A flexible-budget variance is $800 favorable for unit-related costs. This indicates
that costs were:
a. $800 more than the master budget
b. $800 less than for the planned level of activity
c. $800 more than standard for the achieved level of activity
d. $800 less than standard for the achieved level of activity

18. The flexible-budget variance for direct cost inputs can be further subdivided into
a:
a. static-budget variance and a sales-volume variance
b. sales-volume variance and an efficiency variance
c. price variance and an efficiency variance
d. static-budget variance and a price variance

19. Budgeted input quantity information may be obtained from:

a. actual input quantities used last period
b. standards developed by your company
c. data from other companies that have similar processes
d. All of these answers are correct.

20. When actual input data from past periods is used to develop a budget:
a. past inefficiencies are excluded
b. expected future changes are incorporated
c. information is available at a low cost
d. audited financial information must be used

21. When standards are used to develop a budget:

a. past inefficiencies are excluded
b. benchmarking must also be used
c. information is available at a low cost
d. flexible-budget amounts are difficult to determine

22. The term budget indicates:

a. that standards have been used to develop the budget
b. that actual input data from past periods have been used to develop the
budget
c. that engineering studies have been used to develop the budget
d. planned amounts for a future accounting period

23. A standard input:

a. is a carefully determined price, cost, or quantity
b. is usually expressed on a per unit basis
c. may be developed using engineering studies
d. All of these answers are correct.

24. Ideal standards:

a. assume peak operating conditions
b. allow for normal machine breakdowns
c. greatly improve employee motivation and performance
d. All of these answers are correct.

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25. A favorable price variance for direct materials indicates that:
a. a lower price than planned was paid for materials
b. a higher price than planned was paid for materials
c. less material was used during production than planned for actual output
d. more material was used during production than planned for actual output

26. A favorable efficiency variance for direct manufacturing labor indicates that:
a. a lower wage rate than planned was paid for direct labor
b. a higher wage rate than planned was paid for direct labor
c. less direct manufacturing labor-hours were used during production than
planned for actual output
d. more direct manufacturing labor-hours were used during production than
planned for actual output

27. An unfavorable price variance for direct materials might indicate:

a. that the purchasing manager purchased in smaller quantities due to a
change to just-in-time inventory methods
b. congestion due to scheduling problems
c. that the purchasing manager skillfully negotiated a better purchase price
d. that the market had an unexpected oversupply of those materials

28. A favorable efficiency variance for direct materials might indicate:

a. that lower-quality materials were purchased
b. an overskilled workforce
c. poor design of products or processes
d. a lower-priced supplier was used

29. A favorable price variance for direct manufacturing labor might indicate that:
a. employees were paid more than planned
b. budgeted price standards are too tight
c. underskilled employees are being hired
d. an efficient labor force

30. An unfavorable efficiency variance for direct manufacturing labor might

indicate that:
a. work was efficiently scheduled
b. machines were not properly maintained
c. budgeted time standards are too lax
d. more higher-skilled workers were scheduled than planned

31. The best label for the formula (AQ BQ) BP is the:
a. efficiency variance
b. price variance
c. total flexible-budget variance
d. spending variance

32. The best label for the formula (AP BP) AQ is the:
a. efficiency variance
b. price variance
c. total flexible-budget variance
d. spending variance

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33. The best label for the formula [(AP)(AQ) (BP)(AQ)] is the:
a. efficiency variance
b. price variance
c. total flexible-budget variance
d. spending variance

34. The best label for the formula [(AP)(AQ) (BP)(BQ allowed)] is the:
a. efficiency variance.
b. price variance
c. total flexible-budget variance
d. spending variance

35. A favorable cost variance of significant magnitude:

a. is the result of good planning
b. if investigated, may lead to improved production methods
c. indicates management does not need to be concerned about lax standards
d. does not need to be investigated

36. The variances that should be investigated by management include:

a. only unfavorable variances
b. only favorable variances
c. all variances, both favorable and unfavorable
d. both favorable and unfavorable variances considered significant in amount
for the company

37. Typically, managers have the LEAST control over:

a. the direct material price variance
b. the direct material efficiency variance
c. machine maintenance
d. the scheduling of production

38. If manufacturing machines are breaking down more than expected, this will
contribute to a(n):
a. favorable direct manufacturing labor price variance
b. unfavorable direct manufacturing labor price variance
c. favorable direct manufacturing labor efficiency variance
d. unfavorable direct manufacturing labor efficiency variance

39. A single variance:

a. signals the cause of a problem
b. should be evaluated in isolation from other variances
c. may be the result of many different problems
d. should be used for performance evaluation

40. Variance analysis should be used:

a. to understand why variances arise
b. as the sole source of information for performance evaluation
c. to punish employees that do not meet standards
d. to encourage employees to focus on meeting standards

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41. Variances should be investigated:
a. when they are kept below a certain amount
b. when there is a small variance for critical items such as product defects
c. even though the cost of investigation exceeds the benefit
d. when there is an in-control occurrence

42. When continuous improvement budgeted costing is implemented, cost

reductions can result from:
a. price reductions
b. reducing materials waste
c. producing products faster and more efficiently
d. All of these answers are correct.

43. Nonfinancial performance measures:

a. are usually used in combination with financial measures for control
purposes
b. are used to evaluate overall cost efficiency
c. allow managers to make informed tradeoffs
d. are often the sole basis of a managers performance evaluations

44. Unfavorable direct material price variances are:

a. always credits
b. always debits
c. credited to the Materials Control account
d. credited to the Accounts Payable Control account

45. Favorable direct manufacturing labor efficiency variances are:

a. always credits
b. always debits
c. debited to the Work-in-Process Control account
d. debited to the Wages Payable Control account

46. From the perspective of control, the direct materials efficiency variance should
be isolated at the time of:
a. purchase
b. use
c. completion of the entire product
d. sale of the product

47. Standard costing systems are a useful tool when using:

a. just-in-time systems
b. total quality management
c. computer-integrated manufacturing systems
d. All of these answers are correct.

48. Performance variance analysis can be calculated for:

a. output unit-level costs
b. batch-level costs
c. product-sustaining costs
d. All of these answers are correct.

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49. A favorable efficiency variance for material-handling labor-hours per batch
could result from:
a. inefficient production-floor layouts compared to those expected when
preparing the budget
b. materials-handling labor waiting to pick up materials
c. well-trained and experienced material-handling employees
d. lower wages than planned for material-handling labor
50. The process by which a company's products or services are measured relative to
the best possible levels of performance is known as:
a. efficiency
b. benchmarking
c. a standard costing system
d. variance analysis
51. When benchmarking:
a. the best levels of performance are usually found in companies that are
within different industries
b. finding appropriate benchmarks is a minor issue
c. comparisons can highlight areas for better future cost management
d. Both a and c are correct.
52. Ensuring benchmark numbers are comparable can be difficult because
differences can exist across companies with:
a. overall company strategy
b. depreciation methods
c. inventory methods
d. All of these answers are correct.
53. When benchmarking, management accountants are MOST valuable when they:
a. present differences in the benchmarking data to management
b. highlight differences in the benchmarking data to management
c. provide insight into why costs or revenues differ across companies
d. provide complex mathematical analysis

Answer
Question Ans. Question Ans. Question Ans. Question Ans. Question Ans.
(1) B (2) B (3) B (4) C (5) C
(6) B (7) A (8) C (9) B (10) D
(11) A (12) B (13) D (14) A (15) C
(16) C (17) D (18) C (19) D (20) C
(21) A (22) D (23) D (24) A (25) A
(26) C (27) A (28) B (29) C (30) B
(31) A (32) B (33) B (34) C (35) B
(36) D (37) A (38) D (39) C (40) A
(41) B (42) D (43) A (44) B (45) A
(46) B (47) D (48) D (49) C (50) B
(51) C (52) D (53) C

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Try to solve
Actual Results Budgeted Results
Units Produced and Sold 12,000 ??
Selling price $80 ??
Variable cost (per unit)
(1) Direct material cost (2 Unit $15) ??
(2) Direct manufacturing labor cost. (0.5 DLH $20) ??
(3) Variable manufacturing overhead cost. $20 ??
Total fixed costs $120,000 $100,000
The following information is from the records of XYZ company that
manufacturing and sells:-
In addition, the company's costing system reported some valuable information and
variances as follow:-
1- Level 0 variance analysis = $80,000 U.
2- Revenue Variance analysis in Level 1 = $540,000 U.
3- Total Direct Material Variance = $120,000 U.
4- There is no efficiency variance for direct material cost.
5- The budgeted contribution margin per unit is $20.

Required:
1. Compute sales volume variance and flexible budget variance (level 2)
2. Compute DL price variance and Budget quantity allowed for actual output

MCQs
1. Flexible budgets
a. Accommodate changes in the inflation rate.
b. Accommodate changes in activity levels.
c. Are used to evaluate capacity utilization.
d. Are static budgets that have been revised for changes in price(s).

2. The following information is available for the Gabriel Products Company

for the month of July:
Static Budget Actual
Units 5,000 5,100
Sales revenue $60,000 $58,650
Variable manufacturing costs $15,000 $16,320
Fixed manufacturing costs $18,000 $17,000
Variable marketing and administrative expense $10,000 $10,500
Fixed marketing and administrative expense $12,000 $11,000

The total sales-volume variance for the month of July would be

a. $2,550 unfavorable.
b. $1,350 unfavorable.
c. $700 favorable.
d. $100 favorable.

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3. Bartholomew Corporations master budget calls for the production of 6,000
units of product monthly. The master budget includes indirect labor of
$396,000 annually; Bartholomew considers indirect labor to be a variable
cost. During the month of September, 5,600 units of product were
produced, and indirect labor costs of $30,970 were incurred. A
performance report utilizing flexible budgeting would report a flexible
budget variance for indirect labor of
a. $170 unfavorable.
b. $170 favorable.
c. $2,030 unfavorable.
d. $2,030 favorable.

4. Which of the following is not an advantage for using standard costs for
variance analysis?
a. Standards simplify product costing.
b. Standards are developed using past costs and are available at a relatively low cost.
c. Standards are usually expressed on a per-unit basis.
d. Standards can take into account expected changes planned to occur in the budgeted
period.

5. Information on Pruitt Companys direct-material costs for the month of

July 2005 was as follows:
Actual quantity purchased 30,000 units
Actual unit purchase price $2.75
Materials purchase-price variance
unfavorable (based on purchases) $1,500
Standard quantity allowed for actual production 24,000 units
Actual quantity used 22,000 units
For July 2005 there was a favorable direct-materials efficiency variance of
a. $7,950.
b. $5,500.
c. $5,400.
d. $5,600.

6. Information for Garner Companys direct-labor costs for the month of

September 2005 was as follows:
Actual direct-labor hours 34,500 hours
Standard direct-labor hours 35,000 hours
Total direct-labor payroll $241,500
Direct-labor efficiency variancefavorable $ 3,200
What is Garners direct-labor price (or rate) variance?
a. $21,000 favorable
b. $21,000 unfavorable
c. $17,250 unfavorable
d. $20,700 unfavorable

7. Performance evaluation using variance analysis should guard against

a. Emphasis on a single performance measure.
b. Emphasis on total company objectives.
c. Basing effect of a managers action on total costs of the company as a whole.
d. Highlighting individual aspects of performance.

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8. The basic principles and concepts of variance analysis can be applied to
activity-based costing
a. By application as to the levels of cost hierarchy.
b. Through careful classification of costs as direct and indirect as applied to the product
or job.
c. With use of standard costing systems only.
d. Only through those activities related to individual units of product or service.

9. Benchmarking is
a. Relatively easy to do with the amount of available financial information about
companies.
b. Best done with the best in their field regardless of type of company.
c. Simply reporting the magnitude of differences in costs or revenues across companies.
d. Making comparisons to direct attention to why differences in costs exist across
companies.

Solutions

Flexible- Sales
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) (3) (3) (4) = (3) (5) (5)
Units sold 12,000 0 12,000 3,000 U 15,000
Revenue $960,000 240,000 U $1,200,000 300,000 U $1,500,000
Variable cost
DM. 360,000 120,000 U 240,000 60,000 F 300,000
DL. 120,000
V.OH 240,000
Variable costs 720,000 240,000 F 960,000 240,000 F 1,200,000
Contribution margin 240,000 240,000 300,000
Fixed costs (120,000) 20,000 U (100,000) 0 (100,000)
Operating income $ 120,000 20,000 U $140,000 60,000 U $ 200,000

AQ x AP AQ x BP BQ allowed x BP
24,000 x 15 24,000 x 10 24,000 x 10
360,000 240,000 240,000
$120,000 U 0

Price Variance Efficiency Variance

$120,000 U

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Answers
1. b
2. c
3. a
4. b
5. c
6. d
7. a
8. a
9. d

Quiz Question Calculations

2. 5,100 5,000 = 100 units $7* = $700F

Unit CM = 60,000 15,000 10,000/35,000 = $7

3. Actual DL $30,970
Flexible budget 5,600 $5.50 30,800
Flexible budget variance 170 U

5. Actual price 30,000 2.75 82,500

Minus unfavorable price variance 1,500
Materials at standard 81,000

81,000/30,000 = $2.70 standard price per unit

Actual quantity 22,000 units

Standard quantity 24,000 units
Efficiency variance 2,000 2.70 = $5,400 F

6. Actual direct labor cost $241,500

Standard 34,500 6.40 $220,800
Price variance 20.700 U

Standard rate = 3,200/(35,000 34,500) = $6.40

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