BSAELE04 OpErAtiOnS Auditing And FS Auditing

CHAptEr 2 StAndArd COStS And OpErAting pErFOrMAnCE MEASurES

prOBLEM diSCuSSiOn

Learning objectives

 Perform the basic standard costs and operating performance measures

 Learn to analyze problems.
 Applying the methods of accounting for analysis and use.

True/False Questions
1. A company has a standard cost system in which fixed and variable
manufacturing overhead costs are applied to products on the basis of
direct labor-hours. The company's choice of the denominator level of
activity affects the fixed overhead volume variance.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thin

king AICPA FN: Reporting LO: 5; 6 Level: Medium

2. The higher the denominator activity level used to compute the

predetermined overhead rate, the higher the predetermined overhead rate.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AI

CPA FN: Reporting LO: 5 Level: Easy

3. In a standard costing system, if the actual fixed manufacturing overhead

cost exceeds the budgeted fixed manufacturing overhead cost for the
period, then fixed manufacturing overhead cost would be underapplied for
the period.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AI

CPA FN: Reporting LO: 5 Level: Hard

4. When fixed manufacturing overhead cost is applied to work in process, it is

treated as if it were a variable cost.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AI

CPA FN: Reporting LO: 5 Level: Medium
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5. A company has a standard cost system in which fixed and variable

manufacturing overhead costs are applied to products on the basis of
direct labor-hours. The company's choice of the denominator level of
activity has no effect on the variable portion of the predetermined
overhead rate.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AI

CPA FN: Reporting LO: 5 Level: Medium

Multiple Choice Questions

1. The manufacturing overhead variance that is a measure of capacity

utilization is:
A) the overhead spending variance.
B) the overhead efficiency variance.
C) the overhead budget variance.
D) the overhead volume variance.

Ans: D AACSB: Reflective Thinking

AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6
Level: Medium

2. Which of the following standard cost variances would usually be least

controllable by a production supervisor?
A) Fixed overhead volume variance.
B) Variable overhead efficiency variance.
C) Direct labor efficiency variance.
D) Materials usage (quantity) variance.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 6 Level: Hard
Source: CPA; adapted

3. The volume variance is nonzero whenever:

A) standard hours allowed for the output of a period differ from the
denominator level of activity.
B) actual hours differ from the denominator level of activity.
C) standard hours allowed for the output of a period differ from the actual
hours during the period.
D) actual fixed overhead costs incurred during a period differ from
budgeted fixed overhead costs as contained in the flexible budget.

Ans: A AACSB: Reflective Thinking

AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6
Level: Medium

4. A volume variance is computed for:

A) both variable and fixed overhead.
B) variable overhead only.
C) fixed overhead only.
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D) direct labor costs as well as overhead costs.

Ans: C AACSB: Reflective Thinking

AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6
Level: Easy

5. Riggs Enterprise's flexible budget cost formula for indirect materials, a

variable cost, is $0.45 per unit of output. If the company's performance report
for last month shows a $90 favorable variance for indirect materials and if
8,700 units of output were produced last month, then the actual costs incurred
for indirect materials for the month must have been:
A) $4,005
B) $3,915
C) $3,825
D) $3,735

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium

Solution:

Variable overhead spending variance = AH × (AR − SR) = 90 F

8,700 × (AR − 0.45) = -90
(8,700 × AR) − 3,915 = -90
(8,700 × AR) = 3,825
AR = 3,825 ÷ 8,700 = $0.4396
Actual indirect labor costs = 8,700 × $0.4396 = $3,825

6. Ocker Corporation's flexible budget performance report for last month

shows that actual indirect materials cost, a variable overhead cost, was
$28,420 and that the variance for indirect materials cost was $3,828
unfavorable. During that month, the company worked 11,600 machine-hours.
Budgeted activity for the month had been 11,300 machine-hours. The cost
formula per machine-hour for indirect materials cost must have been closest
to:
A) $2.85
B) $2.18
C) $2.78
D) $2.12

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Budgeted number of machine-hours: 11,300

Actual number of machine-hours: 11,600

Cost Actual Budget Varianc

Formul Costs Based e
BSAELE04 OpErAtiOnS Auditing And FS Auditing

a (per Incurre on
MH) d for 11,600
11,600 machin
machin e-hours
e-hours
Variable overhead costs $3,828
(Indirect materials) Y $28,420 X U

Actual costs − Budgeted costs = Indirect materials variance

$28,420 − X = $3,828
X = $24,592

Y = Per machine-hour cost =

Per machine-hour cost = Actual cost ÷ Machine-hours =
Per machine-hour cost = $24,592 ÷ 11,600 = $2.12

9. Viger Corporation has a standard cost system in which it applies

manufacturing overhead to products on the basis of standard machine-hours
(MHs). The company has provided the following data for the most recent
month:

Budgeted level of activity 9,700 MHs

Actual level of activity 9,900 MHs
Cost formula for variable manufacturing overhead per
cost $6.30 MH
$49,00
Budgeted fixed manufacturing overhead cost 0
$60,39
Actual total variable manufacturing overhead 0
$47,00
Actual total fixed manufacturing overhead 0

What was the variable overhead spending variance for the month?
A) $2,000 favorable
B) $720 favorable
C) $1,260 unfavorable
D) $1,980 favorable

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium

Solution:
Actual rate = Actual total variable manufacturing overhead ÷
Actual machine-hours
Actual rate = $60,390 ÷ 9,900 = $6.10
Variable overhead spending variance = AH × (AR − SR)
9,900 × ($6.10 − $6.30) = 9,900 × (-$0.20) = $1,980 F

10. Amirault Manufacturing Corporation has a standard cost system in which it

applies manufacturing overhead to products on the basis of standard
BSAELE04 OpErAtiOnS Auditing And FS Auditing

machine-hours (MHs). The company's cost formula for variable manufacturing

overhead is $4.00 per MH. During the month, the actual total variable
manufacturing overhead was $18,040 and the actual level of activity for the
period was 4,100 MHs. What was the variable overhead spending variance for
the month?
A) $410 favorable
B) $1,640 unfavorable
C) $1,640 favorable
D) $410 unfavorable

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Easy

Solution:
Actual rate = Actual variable manufacturing overhead ÷ Actual
machine-hours
= $18,040 ÷ 4,100 = $4.40
Variable overhead spending variance = AH × (AR − SR)
= 4,100 × ($4.40 − $4.00) = 4,100 × $0.40 = $1,640 U

11. Blue Company's standards call for 2,500 direct labor-hours to produce
1,000 units. During May only 900 units were produced and the company
worked 2,400 direct labor-hours. The standard hours allowed for May
production would be:
A) 2,500 hours
B) 2,400 hours
C) 2,250 hours
D) 1,800 hours

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 5 Level: Easy

Solution:
Standard direct labor-hours per unit = 2,500 direct labor-hours ÷
1,000 units
= 2.5 direct labor-hours per unit
Standard hours allowed = 2.5 direct labor hours per unit × 900 units
= 2,250 hours

12. The Marlow Company uses a standard cost system and applies
manufacturing overhead to products on the basis of standard direct
labor-hours. The denominator activity is set at 40,000 direct labor-hours per
year. Budgeted fixed manufacturing overhead cost is $40,000 per year, and
0.5 direct labor-hours are required to manufacture one unit. The standard cost
card would indicate fixed manufacturing overhead cost per unit to be:
A) $1.00
B) $2.00
C) $1.50
D) $0.50
BSAELE04 OpErAtiOnS Auditing And FS Auditing

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 5 Level: Medium

Solution:
Actual units produced = Total direct labor-hours ÷ Standard direct
labor-hours per unit = 40,000 ÷ 0.5 = 80,000 units
Fixed manufacturing overhead cost per unit = $40,000 ÷ 80,000
units = $0.50 per unit

13. At the beginning of last year, Monze Corporation budgeted $600,000 of

fixed manufacturing overhead and chose a denominator level of activity of
100,000 direct labor-hours. At the end of the year, Monze's fixed overhead
budget variance was $8,000 unfavorable. Its fixed overhead volume variance
was $21,000 favorable. Actual direct labor-hours for the year were 96,000.
What was Monze's actual fixed overhead for last year?
A) $563,000
B) $579,000
C) $608,000
D) $592,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 6 Level: Hard

Solution:
Fixed overhead budget variance
= Actual fixed overhead cost − Budgeted fixed overhead cost
= Actual fixed overhead cost − $600,000 = $8,000 U
Actual fixed overhead = $8,000 + $600,000 = $608,000

Use the following to answer questions 14-16:

Moncrief Corporation bases its budgets on machine-hours. The company's

static budget for July appears below:

Budgeted number of machine-hours

1,000
Budgeted variable overhead costs:
Supplies (@ $8.60 per machine-hour) $ 8,60
0
8,80
Power (@ $8.80 per machine-hour) 0
17,40
Total variable overhead cost 0
Budgeted fixed overhead costs:
Salaries 11,300
9,90
Equipment depreciation 0
21,20
Total fixed overhead cost 0
Total budgeted overhead cost $38,60
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Actual results for the month were:

Actual number of machine-hours 1,200
$10,29
Supplies 0
$10,86
Power 0
$11,69
Salaries 0
Equipment depreciation $9,990

14. The variance for supplies costs in the flexible budget performance report
for the month should be:
A) $30 F
B) $1,690 F
C) $1,690 U
D) $30 U

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy

Solution:
Budgeted number of machine-hours: 1,000
Actual number of machine-hours: 1,200

Actual
Cost Costs Budget
Formula Incurred Based on
(per for 1,200 1,200
machine- machine-h machine-h
hour) ours ours Variance
Variable
overhead costs
(Supplies) $8.60 $10,290 $10,320 $30 F

15.The variance for power costs in the flexible budget performance report for
the month should be:
A) $2,060 F
B) $2,060 U
C) $300 F
D) $300 U

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy

Solution:
Budgeted number of machine-hours: 1,000
Actual number of machine-hours: 1,200
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Actual
Cost Costs Budget
Formula Incurred Based on
(per for 1,200 1,200
machine- machine-h machine-h
hour) ours ours Variance
Variable
overhead costs
(Power) $8.80 $10,860 $10,560 $300 U

16. The variance for equipment depreciation in the flexible budget

performance report for the month should be:
A) $1,890 U
B) $90 F
C) $90 U
D) $1,890 F

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Budgeted number of machine-hours: 1,000

Actual number of machine-hours: 1,200

Actual
Costs Budget
Incurred Based on
for 1,200 1,200
machine-h machine-h
ours ours Variance
Fixed overhead costs
(Equipment depreciation) $9,990 $9,900 $90 U

Use the following to answer questions 17-18:

Single Company has a standard cost system in which manufacturing overhead

is applied to units of product on the basis of standard direct labor-hours. The
company has provided the following data concerning its manufacturing
overhead costs for last year:

Standard direct labor-hours allowed for the output

32,000 hours
Actual direct labor-hours worked 33,000 hours
Denominator activity 30,000 hours
$166,00
Actual variable factory overhead cost 0
per
Variable overhead rate $5 hour
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17. Given these data, the variable overhead spending variance for the year
would be:
A) $1,000 U
B) $6,000 U
C) $1,000 F
D) $16,000 U

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3; 4 Level: Medium

Solution:

Budgeted direct-labor hours: 30,000

Actual direct-labor hours: 33,000
Standard direct-labor hours allowed: 32,000
Actual
Cost Costs Budget
Formula Incurred Based on
(per 33,000 33,000 Spending
DLH) DLHs DLHs Variance
Variable overhead
costs $5.00 $166,000 $165,000 $1,000 U

18. The variable overhead efficiency variance would be:

A) $10,000 U
B) $5,000 F
C) $15,000 U
D) $5,000 U

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3; 4 Level: Easy

Solution:

Budgeted direct-labor hours: 30,000

Actual direct-labor hours: 33,000
Standard direct-labor hours allowed: 32,000
Budget Budget Effici
Based on Based on ency
Cost Formula 33,000 32,000 Varia
(per DLH) DLHs DLHs nce
Variable
overhead costs $5,00
$5.00 $165,000 $160,000 0U

19. The following data for November have been provided by Hunn
Corporation, a producer of precision drills for oil exploration:
BSAELE04 OpErAtiOnS Auditing And FS Auditing

Budgeted production 3,700 drills

Standard machine-hours per
drill 9.0 machine-hours
per
Standard indirect labor $8.80 machine-hour
per
Standard power $2.40 machine-hour

Actual production 3,900 drills

Actual machine-hours 35,350 machine-hours
$313,92
Actual indirect labor 3
Actual power $83,310

Required:

Compute the variable overhead spending variances for indirect labor

and for power for November. Indicate whether each of the variances is
favorable (F) or unfavorable (U). Show your work!

Ans:
Flexible
Actual Budget
Cost Costs Based
Formula Incurred on
(per 35,350 35,350
machine-ho Machine- Machine- Spending
ur) Hours Hours Variance
Indirect
labor $8.80 $313,923 $311,080 $2,843 U
Power $2.40 $83,310 $84,840 $1,530 F

20. Hammond Corporation has provided the following data for October:

Budgeted production 2,100 units

Actual production 2,400 units
machine-hou
Standard machine-hours per unit 6.0 rs
Budgeted machine-hours (6.0 × 2,100) 12,60 machine-hou
0 rs
Standard machine-hours allowed for 14,40 machine-hou
the actual output (6.0 × 2,400) 0 rs
14,22 machine-hou
Actual machine-hours 0 rs

Budgeted variable overhead cost per machine-hour:

Lubricants $1.00 per machine-hour
Supplies $1.60 per machine-hour
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Actual total variable overhead costs:

$13,97
Lubricants 4
$23,55
Supplies 8

Required:

Compute the variable overhead spending variances for lubricants and

for supplies for October. Indicate whether each of the variances is favorable (F)
or unfavorable (U). Show your work!

Ans:
Flexible
Cost Actual Costs Budget
Formula Incurred Based on
(per 14,220 14,220
machine-ho Machine-Hou Machine-Hou Spending
ur) rs rs Variance
Lubricants $1.00 $13,974 $14,220 $246 F
Supplies $1.60 $23,558 $22,752 $806 U

21-26. Flick Company uses a standard cost system in which manufacturing

overhead is applied to units of product on the basis of standard direct
labor-hours. The company's total budgeted variable and fixed manufacturing
overhead costs at the denominator level of activity are $20,000 for variable
overhead and $30,000 for fixed overhead. The predetermined overhead rate,
including both fixed and variable components, is $2.50 per direct labor-hour.
The standards call for two direct labor-hours per unit of output produced. Last
year, the company produced 11,500 units of product and worked 22,000 direct
labor-hours. Actual costs were $22,500 for variable overhead and $31,000 for
fixed overhead.

Required:
a. What is the denominator level of activity?
b. What were the standard hours allowed for the output last year?
c. What was the variable overhead spending variance?
d. What was the variable overhead efficiency variance?
e. What was the fixed overhead budget variance?
f. What was the fixed overhead volume variance?

Ans:

a Total overhead at the denominator level of

. activity $50,000
÷ Predetermined overhead rate $2.50/DLH
= Denominator level of activity 20,000 DLHs
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b
. Actual output 11,500 units
× Standard DLH per unit 2 DLH per unit
= Standard DLHs allowed 23,000 DLHs

c. Computation of variable overhead spending variance:

Spending variance = (AH × AR) − (AH × SR)
= ($22,500) − (22,000 × $1.00*) = $500 U
*$20,000 ÷ 20,000 DLHs = $1.00

d. Computation of variable overhead efficiency variance:

Spending variance = (AH × SR) − (SH × SR)
= (22,000 × $1.00) − (23,000* × $1.00) = $1,000 F
* 2 DLHs per unit × 11,500 units = 23,000 DLHs

e. Computation of the fixed overhead budget variance:

Budget variance = Actual fixed overhead − Budgeted Fixed overhead
= $31,000 − $30,000 = $1,000 U

f. Computation of the fixed overhead volume variance:

Volume variance = Fixed portion of predetermined overhead rate ×
(Denominator hours − Standard hours allowed)
= $1.50* (20,000 − 23,000) = $4,500 F
*$30,000 ÷ 20,000 DLH = $1.50 per DLH

REFERENCE:

Lecture Notes Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC,
MBA, FRIAcc

For further discussion please refer to the link provided:

Chapter 2-Standard Costing and Variance Analysis (Materials and Labor)-

https://youtu.be/hb7_q-x0oE8
Chapter 2-Standard Costing and Variance Analysis (Factory Overhead)-
https://youtu.be/QdJ1Q92o9PA
Chapter 2-Budget Variances- https://youtu.be/3VnOhCr6FHE