Variable Cost Variance Analysis

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Introduction to Accounting

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Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. Standard costs are normally developed based on:

a. actual production costs
b. sales price
c. expected average production costs
d. management sales targets

Answer
C. A standard is an estimate or an expectation, it is not actual. (a.) Sales are not the same things as costs (a. & d.)
2. Activity used to develop manufacturing overhead standards may include:

a. machine hours
b. units produced
c. labor hours
d. all of the above

Answer
D. The activity that is chosen should be something that the company does/uses in the production process that causes them to spend overhead dollars. All of the above are appropriate things that can be quantified and used for activity.
3. Actual quantity purchased multiplied by the difference in the actual price and the standard price is:

a. materials quantity variance
b. labor price variance
c. variable overhead efficiency variance
d. all of the above

Answer
B. This is the difference in AQ x AP and AQ x SP, the quantity is the same and the price is different. a. and c. hold the SP constant and the quantity is what is or was supposed to be used.
4. Standard price multiplied by the difference in actual quantity and the standard quantity used is:

a. materials price variance
b. materials quantity variance
c. labor rate variance
d. variable overhead budget variance

Answer
B. This is the difference in material AQ x SP and SQ x SP. The quantity is different and the price is the same. a., c, d, keep the quantity the same and the price is different.
5. The labor rate variance occurs because of a difference in

a. actual hours worked and estimated hours worked
b. actual hours worked and estimated hours to make the actual products
c. actual cost per hour and estimated cost per hour
d. a supervisor’s rate of pay and a direct labor workers rate of pay

Answer
C. This is the difference in AQ x AP and AQ x SP, the quantity is the same and the cost per hour is different. a. and b. are not correct because the quantity can not be different. d. is not part of variance analysis.
6. The labor efficiency variance occurs because of a difference in

a. actual hours worked and estimated hours worked
b. actual hours worked and estimated hours to make the actual products
c. actual cost per hour and estimated cost per hour
d. a supervisor’s rate of pay and a direct labor workers rate of pay

Answer
B. This is the difference in material AQ x SP and SQ x SP. The quantity is different and the price is the same (c.). The SQ is estimated hours to make what was actually produced, not just estimated hours worked. (a.). The rate of pay is not different, it is the same for both, SP. (d.)
7. An unfavorable material quantity variance means that

a. material actually used was higher than the material expected to be used for production
b. the standard material used was lower than the actual material
c. the price paid for each was higher than expected
d. material used was higher than what was used in the prior year

Answer
A. Unfavorable means the company spent more, and the quantity variance means it is related to what is used. Using less would make it favorable (b.) The same SP is used for both sides, so it can not be related to price. Both sides use data from this year so it can not be (d.).
8. Which position in the company is typically responsible for a materials price variance?

a. production manager
b. research and development engineer
c. purchasing manager
d. sales manager

Answer
C. The materials price variance comes from the difference in AQ x AP and AQ x SP. Since quantity is the same, it has nothing to do with how much is used in production or how much is sold. The purchasing manager is responsible for purchasing the materials and getting the best price for the company.
9. Which of the following is not a quantity variance?

a. labor efficiency variance
b. overhead efficiency variance
c. overhead budget variance
d. material use variance

Answer
C. The overhead budget variance comes from a difference in what was spent and what was expected to be spent, quantities are constant, therefore, the difference is not due to quantity. a., b., and d, are all variances that occur because the quantity is different and the SP is the same.
10. James J. Company is a manufacturing company. The following data has been gathered:

 

Standard  
Materials 1 pound at $7 per pound
Labor 1.5 hours at $12 per hour
Variable Overhead $10 per labor hour
Fixed Overhead $3.50 per labor hour
Budgeted production for the year 6,000 units
   
Actual  
Materials Purchased 5,200 pounds for $36,720
Materials Used 5,100 pounds
Direct Labor 7,000 hours at $86,100
Variable Overhead $56,170
Fixed Overhead $19,680
Units Produced 5,200

 

Answer
Material:

	
AQ x AP               AQ      x  SP         AQ       x SP           	SQ  x SP
(purchased)	    Purchased            Used			      Used

5,200 x ?	         5,200 x $7	     5,100  x  $7		5,200 x 1 x $7		
=$36,720            = $36,400         = $35,700                   = $36,400

Variance     $320U			      $700 F
	          price			      quantity

 

Labor:

AQ x AP                 AQ  x SP           	SQ  x SP

7,000  x ?	      7,000 x $12	          5,200 x 1.5  x $12
  = $86,100           = $84,000		       = $ 93,600

Variance                   $2,100 U		   $9,600 F
		                rate		    efficiency

Variable Overhead:

AQ x AP                  AQ  x SP           	   SQ  x SP
	
$56,170	           7,000 x $10               5,200 x 1.5 x $10  	    
                                   = $70,000		  = $78,000

Variance               $ 13,830 F		     $8,000 F
                                spending                efficiency

 

Important to notice: 

Use labor hour information for the quantity for overhead because the overhead rates are based on labor hours.

The SQ “standard allowed” is the actual units made x the standard that each one takes.

The fixed overhead budget must be calculated since it is not given.

11. Jubilee Company uses a standard cost system for its product. The following data is available.

 

Actual for the current year:				
Purchases of raw materials               25,000 yards at $13yd    
Raw materials used	                  22,000 yards		       
Direct labor                                       12,000 hours at $10 		        
Variable O/H costs                            $68,150
Units produced:	                         8,000

Standards per unit of product:
Raw Materials:                                 1.8 yards at $14 per yard
Direct Labor:                                    0.90 hours at $11.50 per hour
Variable O/H:                                    $7 per direct labor hour
Answer
Compute all variable cost variances and state favorable or unfavorable

Material:

	
AQ x AP             AQ      x  SP         AQ       x SP           	SQ  x SP
Purchased	  Purchased            Used			Used

25,000 x $13	  25,000 x $14	   22,000 x $14		8,000 x 1.8 x $14
   = $325,000	     = $350,000	      = $308,000                   = $201,600

Variance     $25,000 F		    $106,400 U
	            price				 Quantity


Labor:

AQ x AP                 AQ  x SP           	    SQ  x SP

12,000 x $10	    12,000 x $11.50	8,000 x .9 x $11.50
  = $120,000     	      = $138,000	     = $82,800


Variance       $18,000 F		    $ 55,200 U
		     rate		    efficiency


Variable Overhead:

AQ x AP                 AQ  x SP           	SQ  x SP

$68,150	         12,000 x $7	    8,000 x .9 x $7	  	    
	                     = $84,000		    = $50,400

Variance    $15,850  F               $33,600 U


Important to notice:

Do not be concerned if the variances are big numbers, just work the calculation correctly.

Use labor hour information for variable overhead because the variable overhead rate is per labor hour.

The SQ is the actual units made x the standard that each one takes.

Material uses two different AQ x SP, one for used and one for purchased.

No fixed overhead information is provided so this variance is not done.

12. The following information is available for the company:

Standard Cost Card:
DM   	  6 feet at $2 per foot
DL	          5 hours at $3 per hour
VOH          $1 per hour

Information related to actual production:

Units Produced:		    20,000
Materials Purchased:	  130,000 feet at $2.10 per foot
Materials Used:		    110,000 feet
Direct Labor		        115,000 hours at $3.25 per hour
Variable OH		          $112,500
Answer

Material:

AQ x AP                  AQ   x   SP         AQ       x SP              SQ   x   SP
Purchased	     Purchased           Used		        Used

130,000 x $2.10      130,000 x $2          110,000 x $2	    20,000 x 6 x $2
  = $273,000	       = $260,000	         = $220,000               = $240,000

Variance     $13,000 U			  $20,000 F
	            price				      quantity

Labor:

AQ x AP                 AQ  x SP           	SQ  x SP

115,000 x $3.25        115,000 x $3              20,000 x 5 x $3
  = $ 373,750    	 = $345,000	            = $300,000

Variance        $28,750 U		   $45,000 U 
	             rate		          efficiency

 

Variable Overhead:

		
AQ x AP                 AQ  x SP           	SQ  x SP

$112,500	       115,000 x $1            20,000 x 5 x $1	    
                            = $115,000		    = $100,000

Variance               $ 2,500 F		     $15,000 U
		         spending		       efficiency