Variable Cost Variance
Hard Practice Test
Hard Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. The company budgeted to produce 5,000 units. The standard cost card states that one unit takes 6 yards of material at $1 per pound. Actual production was 5,300 units. The accountant computed the materials purchase price variance to be $520 favorable and the materials quantity variance to be $230 unfavorable. One could conclude that:
a. more materials were purchased than used
b. more materials were used than purchased
c. the actual cost of materials was less than standard cost
d. the actual usage of materials was less than the standard
Answer
C. Approach this problem by first noting that a favorable price variance means that the materials cost less per unit than expected (c.) and an unfavorable quantity variance means more was used than should have been used for this level of production. Therefore, (d.) can not be correct, more was actually used. Materials purchased is never compared to materials used. These are kept separate because materials can be kept as inventory and not have an impact on cost of production.
2. A company with an unfavorable labor efficiency variance and a favorable rate variance most likely
a. have materials that were easy to work with
b. hired labor that was not up to quality standards
c. purchased and used material that was higher quality than standard
d. paid more per hour than was expected
Answer
B. An unfavorable labor efficiency variance means that more hours were used than expected and a favorable rate variance means the workers were paid less per hour than expected (not. d.). This would occur with b. Higher quality materials would be easier to work with and should cause the workers to be more efficient, which would be a favorable efficiency variance (a. & c. are opposite of this).
3. The variable overhead efficiency variance reflects that:
a. the difference between the budget allowed for the actual units made and the actual variable overhead costs incurred
b. unlimited usage of variable overhead materials
c. the difference in the budgeted amount of time that should have been spent to make the product and the budgeted hours expected to be used
d. the difference in actual hours used in production and the standard hours expected for what was actually produced.
Answer
D. A variable overhead efficiency is the difference in AQ x AP and SQ x SP. It uses the actual quantity of units made to determine how much of the activity should have occurred compared to what how much activity actually occurred. This is (d.). (c.) says the same thing, there is no difference. (a.) compares the left side to the far right side, which is the total variance. (b.) has nothing to do with this question.
4. When the purchasing manager buys cheap materials that are difficult to handle, the variances that are least likely to happen are
a. material quantity and labor efficiency
b. material quantity and labor rate
c. labor rate and overhead budget
d. labor efficiency and overhead efficiency
Answer
C. The rate and budget have to do with the cost per unit being different than expected. The situation is not applicable to how much is paid for labor or overhead. “Difficult to handle” implies that it will take longer to make the product and more waste may occur. This could easily happen with a., b, and d.
5. A company would usually have a favorable labor efficiency variance and an unfavorable labor rate variance when
a. workers were more experienced than planned for
b. workers were less experienced than planned for
c. the purchasing manager bought higher quality material than planned for
d. workers that were hired were under-qualified to perform the job
Answer
A. A favorable efficiency variance means that it took less hours to make the product and an unfavorable rate variance means it cost more per hour than expected. Hiring more experienced workers would cost more and they should be more efficient.
6. The company’s cost sheet shows the following:
Direct materials 10 yards ?? Direct labor 2 hours $12 per hour Variable Manuf. O/H 1.5 hours $ 8 per hour
The total cost for one is $55.50. What is the cost of material per yard?
a. $4.20
b. $1.35
c. $0.45
d. $1.95
Answer
D. You should first multiple the cost per unit for direct labor and variable overhead x the quantity and get a total cost. Subtract the two total amounts from the total product cost of $55.50. This will give you the total for materials, which you divide by the 10-yard quantity to get the cost per yard of $1.95.
7. Information related to direct labor is as follows:
Actual direct labor hours 9,000 hours Actual labor rate $8 per hour Standard labor hours allowed 8,000 hours Direct labor rate variance $6,750 unfavorable Direct labor efficiency variance $7,250 unfavorable
What is the standard rate per hour for labor?
a. $7.25
b. $6.95
c. $9.99
d. $8.59
Answer
A. Set up the format AQ x AP AQ x SP SQ x SP Put the things you are given in the problem where they go in the formula and do all the math. As you plug to get answers you will end up at $7.25.
8. Variances will be used primarily by management to:
a. make changes that hopefully will result in fixed costs being significantly lower
b. determine what can be done to reduce variable product costs
c. decide which manager should be fired
d. prepare a budgeted income statement
Answer
B. Fixed costs are usually very difficult to reduce unless the volume level of production drops below the relevant range. Management does not want volume to drop (a.) Variances are not used to prepare a budgeted income statement, budget accounts are used for this. (d.) Upper management uses considers many things when deciding if someone should be fired. The inability to manage may be a factor which increases costs, however, this is not the main goal of variance analysis.(c.) The variances should help management see what caused the costs to be higher and it is used as a decision tool to decide which changes could be made to reduce costs.
9. The following standards have been set for the product:
Standard Total Standard Cost Direct Materials 4 pounds $6.00 Direct Labor .5 hours $5.00 Variable O/H .5 hours $2.00 Fixed O/H .5 hours $8.00
During the year the company produced 3,000 units.
8,900 pounds were purchased at a cost of $13,729
Inventory increased by 360 pounds this year
1,265 direct labor hours were worked at a cost of $11,467
Actual variable manufacturing overhead incurred was $4,157
Actual fixed manufacturing overhead incurred was $18,702
Budgeted production was 3,200 units
Compute all of the following and write the amount as favorable or unfavorable
Answer
Material:
AQ x AP AQ x SP AQ x SP SQ x SP
Purchased Purchased Used Used
$13,729 8,900 x $1.50 8,540 x $1.50 3,000 x 4 x $1.50
= $13,350 = $12,810 = $18,000
Variance $379 U $5,190 F
price quantity
Labor:
AQ x AP AQ x SP SQ x SP
$11,467 1,265 x $10 3,000 x 0.5 x $10
= $12,650 = $15,000
Variance $1,183 F $2,350 F
rate efficiency
Variable Overhead:
AQ x AP AQ x SP SQ x SP
$4,157 1,265 x $4 3,000 x .5 x $4
= $5,060 = $6,000
Variance $903 F $940 F
spending efficiency
Important to notice:
The rate/ cost per is not given and is calculated by dividing the total standard cost by the standard quantity.
Material used was calculated by material purchased less inventory increase.
When inventory increases, not as much is used.
10. The following data is available for the month:
Actual cost of direct materials purchased and used $75,492 Total materials variance $12,817 Unfavorable Total materials price variance $6,325 unfavorable Standard cost per yard of materials $5 Standard cost per labor hour $8 Actual direct labor hours worked 7,600 Labor efficiency variance $5,600 unfavorable Standard direct labor hours per unit 1.5 Total labor variance $1,000 favorable
What were the total units produced during the month?
What is the standard yards for material?
What is the actual material cost per yard?
What is the actual direct labor cost per hour?
What is the labor rate variance?
Answer
What were the total units produced during the month? 4,600
What is the standard yards for material? 3
What is the actual material cost per yard? $5.457 rounded
What is the actual direct labor cost per hour? $7.1316 rounded
What is the labor rate variance? $6,600 F
Material:
AQ x AP AQ x SP AQ x SP SQ x SP Purchased Purchased Used Used ? plug ? plug ? plug 13,833.4 x $5.457 13,833.4 x $5 4,600 x 3 x $5 = $75,492 = $69,167 plug = $75,492 = $69,000 plug Variance $6,325 U $6,492 U price quantity Total Variance $12,817 U
Labor:
AQ x AP AQ x SP SQ x SP plug 7,600 x $7.1316 7,600 x $8 4,600 x 1.5 x $8 = $ 54,200 plug = $ 60,800 calc = $ 55,200 plug Variance $6,600 F $5,600 U rate efficiency
Total Variance $1,000 F
Important to notice:
Put the problem information in the formula first.
Notice that you have more info for labor, so plug and calculate what you were not given.
Doing the labor will give you units made, use this in the material SQ.
Work backwards, calculating and plugging until you have the entire equation worked.
11. More Manufacturing accumulated the following data related to production:
|
Actual
|
Standard
|
|
| Raw materials purchased, 10,500 each |
$23,100
|
$21,000
|
| Raw materials used |
10,900
|
10,000
|
| Direct labor payroll |
$122,100
|
$120,000
|
| Direct labor hours worked |
14,800
|
15,000
|
| Total Manufacturing overhead incurred/applied |
$182,500
|
$184,500
|
| Budgeted fixed overhead |
|
$46,750
|
| Variable overhead actual $ and stnd. rate per hour |
$127,500
|
$3.00
|
Manufacturing overhead is applied based on 42,500 annual machine hours.
Three hours of machine time is required for each direct labor hour.
Compute all variable cost variances and state favorable or unfavorable
Answer
Material:
AQ x AP AQ x SP AQ x SP SQ x SP Purchased Purchased Used (used) 10,500 x $ 2 10,900 x $ 2 10,000 x $2 = $23,100 = $21,000 = $21,800 = $20,000 Variance $2,100 U $1,800 U price quantity
Labor:
AQ x AP AQ x SP SQ x SP 14,800 x $8 15,000 x $8 = $122,100 = $118,400 = $120,000 Variance $3,700 U $1,600 F rate efficiency
Variable Overhead:
AQ x AP AQ x SP SQ x SP $ 127,500 14,800 x 3x $3 15,000 x 3 x $3 = $133,200 = $135,000 Variance $5,700 F $1,800 F spending efficiency
Important to notice:
Overhead is applied based on machine hours and it takes 3 machine hours for 1 direct
labor hour.
So, to get the standard machine hours you must always multiply the direct labor hours by 3.
If overhead was based on direct labor hours you would not multiply by 3, and you would use the direct labor hour standard.
The standard represents the SQ, the standard allowed to produce actual units.