Farmer CA1e TB Ch10 3PP Accepted

CHAPTER 10
VARIANCE ANALYSIS AND STANDARD COSTING

CHAPTER LEARNING OBJECTIVES
1. Explain how organizational objectives are furthered with the combination of budgeting
and variance analysis.
2. Demonstrate the purpose of flexible budgets.
3. Discuss the purpose of standard costing and its relationship with variance analysis.
4. Calculate the direct materials and direct labor production variances with accompanying
journal entries.
5. Calculate the variable-MOH and fixed-MOH production variances with accompanying
journal entries.
6. Interpret sales results by calculating sales variances.
Current count is:

Knowledge: 69
Comprehension: 21
Application: 54
Analysis: 0
Evaluation: 0
Synthesis: 0
Total: 144
Number and percentage of questions:

Easy: 34 questions, 24 percent (target of 25%)
Medium: 96 questions, 66 percent (target of 65%)
Hard: 14 questions, 10 percent (target of 10%)
Question types:
Multiple Choice: 95
Brief Exercises: 27
Exercises: 3
Problems: 0
Short Answer: 19
FOR INSTRUCTOR USE ONLY

10-2 Test Bank for Cost Accounting, First Edition
MULTIPLE CHOICE QUESTIONS

1. Which of the following spotlights which factors contribute to differences between budgeted and
actual outcomes?
a. Breakeven analysis
b. Cost behavior analysis
c. Variance analysis
d. Benchmarking analysis
Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Business Acumen & Operations: Operational Knowledge.
Solution: Variance analysis spotlights which factors contribute to differences between budgeted and actual outcomes.
2. An organization uses a combination of budgeting and variance analysis as effective tools for
a. planning and control.
b. performance evaluation and troubleshooting.
c. motivation and benchmarking.
d. motivation and benchmarking, planning and control, and performance evaluation and
control.
Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Solution: An organization uses a combination of budgeting and variance analysis as effective tools for motivation and
benchmarking, planning and control, and performance evaluation and troubleshooting.
3. Once set, ____________ numbers become the benchmark for comparison purposes.
a. actual
b. budgeted
c. industry
d. prior year
Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Analytic, AICPA: AC: Measurement Analysis and Interpretation, IMA: Business
Acumen & Operations: Operational Knowledge.
Solution: Once set, budgeted numbers become the benchmark for comparison purposes.
4. Long-range planning happens _____________ the current year’s budget is set.

a. before
b. after
c. at the same time as
d. every time that
Ans: A, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC: Measurement, Analysis, and Interpretation, IMA: IMA:
Solution: Long-range planning happens before the current year’s budget is set.
5. To ensure that operational plans are enacted, _____________ are put into place to prevent
deviations from budgeted numbers and to detect when spending goes off course.
a. high standards
b. benchmarking activities
c. variance projections
d. control activities
Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Solution: To ensure that operational plans are enacted, control activities are put into place to prevent deviations from budgeted
numbers and to detect when spending goes off course.

6. Approved budgets become ___________.

a. uncontrollable.
b. standards.
c. benchmarks.
d. control activities.
Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation, IMA:
Solution: Approved budgets become benchmarks.
7. The logical, systematic identification of the source of problems to fix them and avoid their
recurrence is called
a. benchmarking.
b. targeting.
c. troubleshooting.
d. budgeting.
Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation, IMA:
Business Acumen & Operations: Operational Knowledge, Strategy, Planning & Performance: Strategic Cost Management.
Solution: The logical, systematic identification of the source of problems to fix them and avoid their recurrence.is called
troubleshooting.
8. In budgeting, when realities change, old assumptions and their benchmarks

a. are never adjusted, since the budget was created based on these assumptions.
b. must be adjusted to reflect better information, so that actual performance is more on target.
c. can be changed to reflect better information, but the changes are not required.
d. may or may not be changed, based on the discretion of management.
Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Solution: In budgeting, when realities change, old assumptions and their benchmarks must be adjusted to reflect better information,
so that actual performance is more on target.
9. When an employee overspends on a business expense where a specific guideline has been
set, the spending above the guideline is called a
a. cost override.
b. corrective-action activity.
c. ethical violation.
d. variance.
Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC: Measurement Analysis and Interpretation, IMA: Business
Solution: When an employee overspends on a business expense where a specific guideline has been set, the spending above the
guideline is called a variance.
10. Which of the following depicts how organizations use budgets and variance analysis to attain
their goals?
a. Troubleshoot and Plan → Benchmark and Control → Evaluate Performance and Motivate
b. Motivate and Benchmark → Plan and Control → Evaluate Performance and Troubleshoot
c. Plan and Control → Evaluate Performance and Benchmark → Motivate and Troubleshoot
d. Plan and Control → Evaluate Performance and Troubleshoot → Motivate and Benchmark
Ans: B, LO 1, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Solution: The following depicts how organizations use budgets and variance analysis to attain their goals: Motivate and Benchmark
→ Plan and Control → Evaluate Performance and Troubleshoot.

11. When management sets expectations that are high, achievable, and clearly communicated
a. unfavorable variances will always result.
b. employees will normally work to reach the high standards if they feel the company is
committed to their success.
c. poor employee performance evaluations will happen, and workers miss out on expected
incentives.
d. flexibility and creativity for employees is stifled.
Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: When management sets expectations that are high, achievable, and clearly communicated, employees will normally work
to reach the high standards if they feel the company is committed to their success.
12. Which of the following statements is true regarding budgets?

a. Actual numbers should never be compared to budgets, since budgets are simply estimates.
b. Variances resulting from comparison of actual and budgeted amounts will always require
management to take corrective action.
c. Management should set expectations high and unattainable so that employees will be
motivated to reach the goals set.
d. Managers use variance analysis to compare actual outcomes to the budget to evaluate
performance and solve issues that caused the variances.
Ans: D, LO 1, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: The statement which is true is that “Managers use variance analysis to compare actual outcomes to the budget to
evaluate performance and solve issues that caused the variances.
13. How does a company track its progress toward reaching its goals as created in a budget?
a. Sensitivity analysis
b. Variance analysis
c. Regression analysis
d. Breakeven analysis
Business Acumen & Operations: Operational Knowledge, Strategy, Planning & Performance – Strategic Cost Management.
Solution: A company tracks it progress towards reaching its goals as created in a budget by using variance analysis.
14. Which of the following is performed once the current budget is created?
a. Variance analysis
b. Troubleshooting
c. Operational plans
d. Performance evaluation
Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: Once the current budget is created, operational plans are begun.
15. In order to achieve its goals, a company should

a. set its goals at the highest level in order to motivate employees to reach the goals
b. enact its budgeted plan and set regular evaluations of actual versus budgeted numbers to
track its progress towards these goals.
c. evaluate only the accuracy of the budget assumptions used to create the budget.
d. constantly change assumptions used in creating the budget when actual events occur
contrary to the budget assumptions.
Ans B: LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC: Measurement, Analysis, and Interpretation, IMA: Business

Solution: In order to achieve its goals, a company should enact a budgeted plan and set regular evaluations of actual versus
budgeted numbers to track its progress towards these goals.
16. A comprehensive, organization-wide budget that requires inputs from many sources
throughout the company is a(n)
a. cash budget.
b. operational budget.
c. master budget.
d. financial budget.
Strategy, Planning & Performance: Decision Analysis.
Solution: A comprehensive, organization-wide budget that requires inputs from many sources throughout the company is a master
budget.
17. Which of the following is used to coordinate a company’s plans and to allocate resources
accordingly?
a. Master budget
b. Variance analysis
c. Operational plans
d. Troubleshooting
Ans: A, LO 2, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: A master budget is used to coordinate a company’s plans and to allocate resources accordingly.
18. The correct equation for a Master Budget Variance is

a. (Budgeted volume x Actual price) – (Actual volume x Budgeted price).
b. (Budgeted volume x Actual price) + (Actual volume x Budgeted price).
c. (Budgeted volume x Budgeted price) – (Actual volume x Actual price).
d. (Budgeted volume x Budgeted price) + (Actual volume x Actual price).
Solution: The correct equation for a Master Budget Variance is (Budgeted volume x Budgeted price) – (Actual volume x Actual
price).
19. Corner Cupcakes has the following budgeted amounts for the current month: budgeted sales
in units of 3,500 at a budgeted unit selling price of $5. Actual amounts for the month were as
follows: 4,000 units at a unit selling price of $4.80. What is the sales activity variance for
Corner Cupcakes for the current month?
a. $2,400 unfavorable
b. $2,400 favorable
c. $2,500 unfavorable
d. $2,500 favorable
Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: Sales Activity Variance = (Budgeted volume x Budgeted price) – (Actual volume x Budgeted price) = (3,500 x $5) – (4,000
x $5) = $2,500 favorable
20. When should a flexible budget be used instead of the master budget?
a. When actual sales volume equals the master budget sales volume
b. When actual sales volume approximates the master budget sales volume
c. When actual sales volume differs from the master budget sales volume
d. When the actual sales revenue differs from the master budget sales revenue

Ans C: LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Solution: A flexible budget should be used instead of the master budget when the actual sales volume differs from the master
budget sales volume.
21. When computing variances related to a flexible budget, a favorable (F) variance causes a(n)
a. decrease in operating income compared to the master budget.
b. increase in operating income compared to the master budget.
c. decrease in sales revenue compared to the master budget.
d. increase in sales revenue compared to the master budget.
Ans: B, LO 2, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: When computing variances related to a flexible budget, a favorable (F) variance causes an increase in operating income
compared to the master budget.
22.The variance that highlights the difference between actual sales volume and the master budget
sales volume is the
a. MOH volume variance.
b. Master budget variance.
c. Flexible budget variance.
d. Sales activity variance.
Ans: D, LO 2, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: The variance that highlights the difference between actual sales volume and the master budget sales volume is the sales
activity variance.
23. Which of the following costs will transfer from the master budget to the flexible budget
unchanged assuming an operating capacity within the relevant range?
a. Fixed costs
b. Direct labor
c. Direct materials
d. Variable manufacturing overhead (MOH)
Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.
Solution: Fixed costs will transfer from the master budget to the flexible budget unchanged assuming an operating capacity within
the relevant range.
24. Fern’s Florist has a Flexible Budget Variance of $15, favorable and a Sales Activity Variance of
$25, unfavorable. What is Fern’s Florist’s Master Budget Variance?
a. $10 favorable
b. $10 unfavorable
c. $40 unfavorable
d. Cannot be determined; not enough information given.
Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: Master Budget Variance = Flexible Budget Variance, $15, favorable - Sales Activity Variance, $25, unfavorable = $10
unfavorable.
25. Which of the following variances holds the volume constant between actual and flexible
budget, and highlights the price difference between actual and budget?
a. Flexible budget variance
b. Master budget variance
c. Sales activity variance
d. Manufacturing overhead (MOH) efficiency variance

Ans: A, LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: The Flexible Budget Variance holds the volume constant between actual and flexible budget and highlights the price
difference between actual and budget.
26. Cubana Candles produces and sells custom candles. Last month it had the following product
sales volume and pricing data:
Unit selling price Sales volume

Actual $10 20
Budgeted $9 15
What is the flexible budget variance for Cubana Candles?

a. $10 favorable
b. $10 unfavorable
c. $20 favorable
d. $20 unfavorable
Ans: C, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: Flexible budget variance = (Actual volume x Budgeted price) – (Actual volume x Actual price) = (20 x $9) – (20 x $10) =
$20 favorable.
27. Cubana Candles produces and sells custom candles. Last month it had the following product

Actual $10 20
Budgeted $9 15
What is the master budget variance for Cubana Candles?

a. $30 favorable
b. $30 unfavorable
c. $65 favorable
d. $65 unfavorable
Ans: C, LO 2, Bloom: AP Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement Analysis and Interpretation, IMA: Strategy,
Planning & Performance: Decision Analysis.
Solution: Master budget variance = (Budgeted volume x Budgeted price) – (Actual volume x Actual price) = (15 x $9) – (20 x $10) =
$65 favorable.
28.Cubana Candles produces and sells custom candles. Last month it had the following product

Actual $10 20
Budgeted $9 15
What is the sales activity variance for Cubana Candles?

a. $45 favorable
b. $45 unfavorable
c. $60 favorable
d. $60 unfavorable
Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: Sales activity variance = (Budgeted volume x Budgeted price) – (Actual volume x Budgeted price) = (15 x $9) – (20 x $9) =
$45 favorable.

29. Texas Tad’s T-shirt Warehouse has a Flexible Budget Variance of $175, favorable and a
Sales Activity Variance of $75, favorable. What is Texas Tad’s Master Budget Variance?
a. $100 favorable
b. $250 favorable
c. $250 unfavorable
d. Cannot be determined; not enough information given.
Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning &
Performance: Decision Analysis.
Solution: Master Budget Variance = Flexible Budget Variance, $150, favorable + Sales Activity Variance, $75, favorable = $250
favorable.
30. Cosmo Cookie Creations had the following variable cost data for the past month:
Actual $4,600
Flexible Budget 5,200
Master Budget 5,500
What is Cosmo Cookie’s Flexible Budget Variance and Sales Activity Variance?
a. $600, unfavorable and $300, favorable
b. $600, unfavorable and $300, unfavorable
c. $600, favorable and $300, favorable
d. $600, favorable and $300, unfavorable
Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis
Solution: Flexible Budget Variance = Actual – Flexible Budget = $4,600 - $5,200 = $600, favorable and Sales Activity Variance =
Flexible Budget – Master Budget = $5,200 - $5,500 = $300, favorable.
31. Standard costing uses _________ costs set at the _________ level as product costs in the
general ledger.
a. actual; unit
b. budgeted; unit
c. actual; total
d. budgeted; total
Business Acumen & Knowledge: Operational Knowledge.
Solution: Standard costing uses budgeted costs set at the unit level as product costs in the general ledger.
32. Companies using standard costing have ________ controls over production costs.
a. tight
b. flexible
c. weak
d. variable
Solution: Companies using standard costing have tight controls over production costs.

33. Which of the following shows the required quantities and current prices of manufacturing costs
for each input: direct materials, direct labor, variable manufacturing overhead and fixed
manufacturing overhead?
a. Bill of materials
b. Standard cost card
c. Variance analysis
d. Job cost sheet
Solution: A standard cost card shows the required quantities and current prices of manufacturing costs for each input: direct
materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead
34. Which of the following standards are firm, yet attainable unit benchmarks that allow for the
realities of life?
a. Ideal
b. Theoretical
c. Practical
d. Idyllic
Solution: Practical standards are firm, yet attainable unit benchmarks that allow for the realities of life.
35. Roja Winery has the standard cost data for the production of each bottle of red wine below.
Input Standard Quantity of Input per Bottle (SQ) Standard Input Price Per Unit of Input (SP)
Direct Materials
Grapes (Red or Black) .42 kg $6 per kg
Distilled Water .21 liters $40 per liter
Sugar .21 kg $.44 per kg
Baker’s Yeast .04 of packet $2 per packet
Glass Bottle 1 .25 per bottle
Corks 1 .05 per bottle
Direct Labor .25 hours $9 per hour
Variable MOH .25 hours $4 per hour
Fixed MOH .25 hours $3 per hour
What is the standard cost per unit for one bottle of red wind for Roja Winery?
a. $11.39
b. $13.64
c. $14.64
d. $15.39
Solution: (Direct Materials + Direct Labor + Variable MOH + Fixed MOH = Standard Cost per Unit) = [(.42 kg x $6.00) = (21 ltr x
$40) + (.21 kg x $.44) + (.04 kg x $2) + (1 x $.25) + (1 x $.05) + (.25 x $9) + (.25 x $4) + (.25 x $3)] = $15.39
36. When assigning costs for direct materials, direct labor, and manufacturing overhead to
production, the costs should be recorded as
a. actual costs incurred.
b. standard costs.
c. estimated costs.
d. total budgeted costs.
Ans: B, LO 3, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:

Solution: When assigning costs for direct materials, direct labor, and manufacturing overhead to production, the costs should be
recorded as standard costs.
37. When a unit of product is completed, the correct accounting entry to record this is to
a. debit Work In Process (WIP) Inventory and credit Finished Goods (FG) Inventory
b. debit Finished Goods (FG) Inventory and credit Work In Process (WIP) Inventory
c. debit Work In Process (WIP) Inventory and credit Raw Materials Inventory
d. debit Finished Goods (FG) Inventory and credit Raw Materials Inventory
Ans: B, LO 3, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: CC, Measurement, Analysis, and Interpretation, IMA:
Solution: When a unit of good is completed, the correct accounting entry to record this is to debit Finished Goods (FG) Inventory
and credit Work In Process (WIP) Inventory.
38. Which of the following would not appear as a debit entry in the Work In Process (WIP)
Inventory account when manufacturing a unit of product?
a. Cost of goods manufactured (COGM)
b. Direct materials (DM) used
c. Direct labor (DL) used
d. Variable manufacturing overhead (MOH) assigned
Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy,
Solution: The only item that will not appear as a debit entry in the Work In Process (WIP) Inventory account is the Cost of Goods
Manufactured (COGM).
39. Which of the following standards have no tolerance for machine breakdowns or employee
breaks?
a. Practical standards
b. Realistic standards
c. Ideal standards
d. Firm, yet attainable standards
Solution: Ideal standards have no tolerance for machine breakdowns or employee breaks.
40. Which of the following standards would be best suited to a futuristic production facility
comprised of robots and drones, but lacking people?
a. Firm, yet attainable standards
b. Ideal standards
c. Realistic standards
d. Practical standards
Solution: Ideal standards would be best suited to a futuristic production facility comprised of robots and drones, but lacking people.
41. Standards should be reviewed and updated

a. throughout the year, every time conditions and assumptions change.
b. only if variances are significant and indicate a change is required.
c. at the end of each period, once variances are known.
d. at the beginning of each year, in anticipation of what the variances will be for the year.
Solution: Standards should be reviewed and updated at the end of each period, once variances are known.

42. Which of the following statements regarding standard costing is not correct?
a. Establishing and maintaining standard costs and the efficient process to sustain cost
stability requires great attention to detail.
b. A key benefit of standard costing is that using variance analysis one year helps inform
planning and budgeting for the next year.
c. At the beginning of the period, before variances are known, management reviews
standards that are in place for that period and considers updating them.
d. Setting standards for direct materials, direct labor and manufacturing overhead is an
iterative process.
Ans: C, LO 3, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: The statement that is not correct is, “At the beginning of the period, before variances are known, management reviews
standards that are in place for that period and considers updating them.
43. When goods are completed and transferred from Work In Process Inventory (WIP) to Finished
Goods (FG) Inventory, the costs in the transfer accounting entry are
a. incurred costs.
b. standard costs.
c. assigned costs.
d. actual costs.
Strategy, Planning & Performance: Decision Analysis
Solution: When goods are completed and transferred from Work In Process (WIP) Inventory to Finished Goods (FG) Inventory, the
costs in the transfer accounting entry are standard costs.
44. Which of the following factors would not be considered when setting a direct labor standard?
a. Mix of skilled and unskilled workers
b. Observation of production workers in action
c. Setting up approved suppliers
d. Timing of production workers to manufacture a unit of product
Solution: All of the responses given are factors considered when setting a direct labor standard except setting up approved
suppliers.
45. Cost accountants work with which of the following to determine the types and quantities of
direct materials inputs that will work best when setting the direct materials standard?
a. Only engineers
b. Only purchasing managers
c. Only manufacturing experts
d. Engineers, purchasing managers, and manufacturing experts.
Solution: Cost accountants work with engineers, purchasing managers, and manufacturing experts to determine the types and the
quantities of direct materials inputs that will work best when setting the direct materials standard.

46. Given that standard costs are like budgets or benchmarks at the unit-level, it is imperative to
a. follow up with variance analysis to plan for unit costs only.
b. control the unit costs only.
c. evaluate performance once the units are produced and troubleshoot why variances
occurred only.
d. follow up with variance analysis to plan for unit costs, control them, and evaluate
performance once the units are produced, and then, troubleshoot why variances occurred.
Solution: Given that standard costs are like budgets or benchmarks at the unit-level, it is imperative to follow up with variance
analysis to plan for unit costs, control them, and evaluate performance once the units are produced, and then, troubleshoot why
variance occurred.
47. A price variance compares the

a. actual cost incurred for the input (DM, DL, or variable-MOH) to the standard cost allowed
for the actual input quantity.
b. actual cost incurred for the input (DM, DL, or variable-MOH) to the standard cost allowed
for the standard input quantity.
c. actual quantity used of each input (DM, DL, or variable-MOH) to the standard quantity
allowed for each input, at its standard cost.
d. actual quantity used of each input (DM, DL, or variable MOH) to the standard quantity
allowed for each input, at its actual cost.
Ans: A, LO 4, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation, IMA:
Solution: Price variances compare the actual cost incurred for the input (DM, DL, or variable MOH) to the standard cost allowed for
the actual input quantity.
48. An efficiency variance compares the

a. actual quantity used of each input (DM, DL, or variable MOH) to the standard quantity
allowed for each input, at its actual cost.
b. actual cost incurred for the input (DM, DL, or variable-MOH) to the standard cost allowed
for the actual input quantity.
c. actual quantity used of each input (DM, DL, or variable-MOH) to the standard quantity
d. actual cost incurred for the input (DM, DL, or variable-MOH) to the standard cost allowed
for the standard input quantity.
Ans: C, LO 4, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: An efficiency variance compares the actual quantity used of each input (DM, DL, or variable-MOH) to the standard quantity
49. Which variance helps management address what quantity of direct material (DM) inputs
should have been used in making the actual volume of units?
a. Direct material (DM) price variance
b. Direct material (DM) efficiency variance
c. Direct labor (DL) price variance
d. Direct labor (DL) efficiency variance
Ans: B, LO 4 Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy,
Solution: The direct material (DM) efficiency variance helps management address what quantity of direct material (DM) inputs
should have been used in making the actual volume of units.

50. The direct labor (DL) price variance for Vellux Manufacturers is $15,600 unfavorable. The
standard number of hours worked was 10,000 and the standard rate per hour for direct labor
was $14. If the actual direct labor hours were 12,000, what was the actual rate per direct labor
hour?
a. $7.80
b. $12.70
c. $15.30
d. $17.50
Solution: DM Price Variance, $15,600 U = (AQ x AP) – (AQ x SP) = (12,000 x AP) – (12,000 x $14); AP = $15.30
51. Venda Company purchased and used 40,000 pound of materials in production. It paid $6.00
per pound for these materials. If the direct materials (DM) price variance was $50,000
favorable, what was the standard price per pound?
a. $4.25
b. $5.75
c. $7.25
d. $9.30
Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IIMA:
Solution: Direct Materials (DM) Price Variance, $50,000 F = (AQ x AP) – (AQ x SP) = (40,000 x $6) – (40,000 x SP); SP = $7.25
52. Kidzlane has direct materials (DL) standards of 2 pounds per unit at $4 per pound for its most
popular toy. Last month, 5,600 pounds of direct materials that actually cost $28,000 were used
to produce 3,000 toy units. The direct materials (DM) efficiency variance for last month was
a. $1,600 unfavorable.
b. $1,600 favorable.
c. $5,600 unfavorable.
d. $5,600 favorable.
Solution: DM Efficiency Variance = (AQ x SP) – (SQ x SP) = (5,600 x $4) – [(3,000 x 2) x $4] = $1,600 Favorable
53. Kingston Company produces a hover board, which has standard requirements of two hours
per board at a direct labor rate per hour of $18. In the last quarter, 2,000 hover boards were
produced using 4,200 direct labor hours at rate of $19.00 per hour. The direct labor (DL)
efficiency variance for last quarter was
a. $7,200 unfavorable.
b. $7,200 favorable.
c. $3,600 unfavorable.
d. $3,600 favorable.
Solution: Direct Labor (DL) Efficiency Variance = (AQ x SP) – (SQ x SP); SP = (2 hrs. x $18) = $36 and SQ = 2,000 x 2 hrs. = 4,000
hrs.; DL Efficiency Variance = (4,200 x $36) – (4,000 x $36) = $7,200 Unfavorable

54. In a standard costing system, direct material (DM) price variances are recorded when goods
are
a. purchased.
b. placed into production.
c. completed and transferred to finished goods inventory.
d. sold.
Reporting and Control: Cost Accounting.
Solution: Direct materials (DM) price variances are recorded in a standard costing system when goods are purchased.
55. For standard costing journal entries,

a. standard cost is used to record the method of payment and the actual amount is used to
record the DM inventory, WIP Inventory, and FG Inventory, with the difference recognized
in the variance accounts.
b. standard cost is recorded in both DM Inventory, WIP Inventory, FG Inventory, and the Cash
or Accounts Receivable depending on the method of payment.
c. standard cost is recorded in both DM Inventory, WIP Inventory, FG Inventory, and the Cash
or Accounts Receivable depending on the method of payment.
d. standard cost is used to record the DM inventory, WIP Inventory, and FG Inventory, actual
cost is used to record the method of payment, Cash or Accounts Receivable, and the
difference is recognized in the variance accounts.
Ans: D, LO 4, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Strategy, Planning & Performance: Strategic Cost Management, Reporting and Control: Cost Accounting.
Solution: For standard costing journal entries, standard cost is used to record the DM inventory, WIP Inventory, and FG Inventory,
actual cost is used to record the method of payment, Cash or Accounts Receivable, and the difference is recognized in the variance
accounts.
56. Direct materials (DM) efficiency variances are recorded

a. when materials are purchased.
b. during production.
c. when units are sold.
d. at the same time as direct materials (DM) price variances.
Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Reporting
and Control: Cost Accounting.
Solution: Direct materials (DM) efficiency variances are recorded during production.
57. The direct labor (DL) price variance reflects the difference between the
a. standard direct labor cost for the actual direct labor hours used and the direct labor hours
that were expected to use for the actual production.
b. actual direct labor rate and the standard direct labor rate for all of the direct labor hours
used.
c. actual direct labor rate applied to the actual labor hours and the standard direct labor rate
applied to the standard direct labor hours.
d. standard direct labor rate applied to the actual labor hours and the actual direct labor rate
applied to the standard direct labor hours.
Ans: B, LO 3, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation, IMA:
Solution: The direct labor (DL) price variance reflects the difference between the actual direct labor rate and the standard direct
labor rate for all of the direct labor hours used.

58. A company’s direct labor (DL) efficiency variance is computed as

a. (AQ x SP) + (SQ x SP).
b. (AQ x AP) – (SQ x SP).
c. (AQ x AP) – (AQ x SP).
d. (AQ x SP) – (SQ x SP).
Solution: A company’s direct labor (DL) variance is computed as (AQ x SP) – (SQ – SP).
59. The formula for the direct labor (DL) price variance is
a. (AQ x AP) – (AQ x SP).
b. (AQ x AP) + (AQ x SP).
c. (AQ x SP) – (SQ x SP).
d. (AQ x AP) – (SQ x SP).
Strategy, Planning & Performance: Cost Management and Decision Analysis.
Solution: The formula for the direct labor (DL) price variance is (AQ x AP) – (AQ – SP)
60. The formula for the direct materials (DM) price variance is
a. (AQpurch x AP) - (AQpurch x SP).
b. (SQpurch x AP) - (SQpurch x SP).
c. (AQpurch x AP) + (AQpurch x SP).
d. (AQpurch x AP) - (SQpurch x SP).
Ans: A, LO 4, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy,
Planning & Performance: Strategic Cost Management and Decision Analysis.
Solution: The formula for the direct materials (DM) price variance is (AQ purch x AP) - (AQpurch x SP)
61. The formula for the direct materials (DM) efficiency variance is
a. (AQused x AP) - (SQ x SP).
b. (AQused x SP) - (SQ x SP).
c. (AQused x SP) + (SQ x SP).
d. (AQused x AP) - (AQused x SP).
Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy,
Planning & Performance: Stragtegic Cost Management Decision Analysis.
Solution: The formula for the direct materials (DM) efficiency variance is (AQ used x SP) - (SQ x SP).
62. The standard price (SP) in the variable-MOH price variance is computed by total
a. actual variable-MOH divided by the actual use of the cost driver.
b. actual variable-MOH divided by the budgeted use of the cost driver.
c. budgeted variable-MOH divided by the budgeted use of the cost driver.
d. budgeted variable-MOH divided by the actual use of the cost driver.
Solution: The standard price (SP) in the variable-MOH price variance is computed by total budgeted variable-MOH divided by the
budgeted use of the cost driver.
63. The correct equation for the variable-MOH price variance is

a. actual variable-MOH incurred – (SQ x SP).
b. budgeted variable-MOH – (SQ x AP).
c. budgeted variable-MOH – (AQ x SP).
d. actual variable-MOH incurred – (AQ x SP).

Ans: D, LO 3, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation, IMA:
Solution: The correct equation for the variable-MOH price variance is actual variable-MOH incurred – (AQ x SP).
64. Which of the following would not be a key transaction-related standard costing journal entry for
variable-MOH costs?
a. Actual Variable-MOH costs are recorded as debits to Variable-MOH Control account.
b. As units are completed, the applied cost is debited to WIP Inventory account and credited
to Variable-MOH Control account.
c. As units are completed, the applied cost is credited to the WIP Inventory account and
debited to the Variable-MOH Control account.
d. Specific variable-MOH price variances and/or efficiency variances are recognized as the
Variable-MOH Control account is closed out.
Ans: C, LO 5, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution: The entry which is not a transaction-related standard costing journal entry for variable-MOH costs is, “As units are
completed the applied cost is credited to WIP Inventory account and debited to the Variable-MOH Control account.
65. Which variance captures the difference in the standard variable-MOH cost for the actual
quantity of the cost driver used, compared to the cost driver quantity expected for actual units
produced?
a. Variable-MOH Efficiency Variance
b. Fixed-MOH Price Variance
c. Variable-MOH Price Variance
d. Fixed-MOH Volume Variance
Solution: The Variable-MOH Efficiency Variance captures the difference in the standard variable-MOH cost for the actual quantity of
the cost driver used, compared to the cost driver quantity expected for the actual units produced.
66. A favorable Variable-MOH Price Variance means that

a. less was paid than expected for variable-MOH resources.
b. more was paid than expected for variable-MOH resources.
c. less of the cost driver related to the variable-MOH resources was used than expected.
d. more of the cost driver related to the variable-MOH resources was used than expected.
Ans: A, LO 5, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement Analysis and Interpretation, IMA:
Solution: A favorable Variable-MOH Price Variance means that less was paid than expected for variable-MOH resources.
67. Variances with overall favorable effects will carry

a. debit balances which increase operating income.
b. credit balances which decrease operating income.
c. credit balances which increase operating income.
d. debit balances which decrease operating income.
Ans: C, LO 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Knowledge, AC: Measurement, Analysis, and Interpretation, IMA:
Strategy, Planning & Performance: Strategic Cost Management.
Solution: Variances with overall favorable effects will carry credit balances which increase operating income.

68. General ledger accounts for variances are classified as

a. permanent accounts.
b. temporary accounts.
c. real accounts.
d. retained earnings.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Knowledge, AICPA BB: Industry/Sector Perspective, AICPA FN:
Measurement, AICPA PC: Problem Solving; IMA: Strategy, Planning & Performance: Strategic Cost Management, Business
Solution: General ledger accounts for variances are classified as temporary accounts.
69. Because variance accounts are

a. temporary accounts, they must be closed at year-end.
b. temporary accounts, their balances will carry over from one period to the next.
c. permanent accounts, they must be closed at year-end.
d. permanent accounts, their balances will carry over from one period to the next.
Ans: A, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AC: Measurement, Analysis, and Interpretation, IMA:
Strategy,
Planning & Performance: Strategic Cost Management
Solution: Because variance accounts are temporary accounts, they must be closed at year-end.
70. Variance accounts are closed or written off to

a. Retained Earnings.
b. Cost of Goods Sold.
c. Finished Goods (FG) Inventory.
d. Work In Process Inventory.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Knowledge, AICPA BB: Industry/Sector Perspective, AICPA FN:
Measurement, AICPA PC: Problem Solving, IMA: Strategy, Planning & Performance: Strategic Cost Management
Solution: Variance accounts are closed or written off to Cost of Goods Sold.
71. Which of the following account balances will reflect the actual cost of production at year-end in
a standard costing system?
a. Work In Process Inventory
b. Raw Materials Inventory
c. Finished Goods Inventory
d. Cost of Goods Sold
Ans: D, LO 5, Bloom: K, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy,
Planning & Performance: Strategic Cost Management and Decision Analysis.
Solution: The Cost of Goods Sold account balance will reflect the actual cost of production at year-end in a standard costing system.
72. Bonaventura Boots had the following variances at year-end:
Variances Amount
Unfavorable DM Price Variance $250 U
Unfavorable DM Efficiency Variance $125 U
Favorable DL Efficiency Variance $340 F
What is the effect of closing these variances on the Cost of Goods Sold account at year-end?
a. Increase by $35
b. Decrease by $35
c. Increase by $715
d. Decrease by $715

Solution: Unfavorable DM Price Variance + Unfavorable DM Efficiency Variance) – Favorable DL Efficiency Variance = Change to
Cost of Goods Sold; ($250 U + $125 U) - $340 F = $35 increase (debit) to Cost of Goods Sold.
73. Bonaventura Boots had the following variances at year-end:
Variances Amount
Unfavorable DM Price Variance $250 U
Unfavorable DM Efficiency Variance $125 U
Favorable DL Efficiency Variance $340 F
What is the journal entry to close these variances?

a. DM Price Variance.....……………….. 250
DM Efficiency Variance……………….. 125
DL Efficiency Variance……… 340
COGS………………….…….. 35
b. COGS………………………………….. 35
DL Efficiency Variance……………….. 340
DM Price Variance………….. 250
DM Efficiency Variance…….. 125
c. COGS………………………………….. 215
DM Price Variance……..…………….. 250
DL Efficiency Variance……... 340
d. COGS………………………………….. 465
DM Efficiency Variance……………….. 125
Solution: The journal entry to close the variances for Bonaventura Boots is as follows:
COGS………………………………….. 35
DL Efficiency Variance……………….. 340
74. Dairy Delites had the following projected and incurred the following production and cost data
shown below:
Actual Variable MOH Incurred $2,328

Actual Quantity of the Cost Driver (AQ) 850 hours
Standard Quantity of the Cost Driver (SQ) 780 hours
Standard Price per usage of cost driver (SP) $2.30/hr.
What is the Variable-MOH Price Variance?

a. $161 unfavorable
b. $161 favorable
c. $373 unfavorable
d. $373 favorable
Ans: C, LO 5, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement Analysis and Interpretation, IMA:
Solution: Actual Cost (AQ x AP) – (AQ x SP) = $2,328 – (850 hrs. x $2.30 hr.) = $2,328 - $1,955 = $373 Unfavorable.

shown below:
Actual Variable MOH Incurred $2,328

What is the Variable-MOH Efficiency Variance?

a. $161 unfavorable
b. $161 favorable
c. $373 unfavorable
d. $373 favorable
Strategya, Planning & Performance: Strategic Cost Management and Decision Analysis.
Solution: Variable-MOH Efficiency Variance = (AQ x SP) – (SQ x SP) = (850 x $2.30) – (780 x $2.30) = $161 unfavorable
shown below:
Actual Fixed-MOH Incurred $2,572

Master Budget Quantity of the Cost Driver (MBQ) 820 hours
What is the Fixed-MOH Price Variance?

a. $136 favorable
b. $136 unfavorable
c. $216 favorable
d. $216 unfavorable
Solution: Actual Fixed-MOH Incurred – Master Budget Fixed-MOH = $2,572 – (MBQ x SP) = $2,572 – (820 hrs. x $3.40/hr.) =
$2,572 - $2,788 = $216 favorable.
shown below:
Actual Fixed-MOH Incurred $2,572

Master Budget Quantity of the Cost Driver (MBQ) 820 hours
What is the Fixed-MOH Volume Variance?

a. $136 favorable
b. $136 unfavorable
c. $216 favorable
d. $216 unfavorable

Solution: Fixed-MOH Volume Variance = Master Budget Fixed-MOH Cost – Fixed-MOH Applied = (MBQ x SP) – (SQ x SP) = (820
hrs. x $3.40/hr.) – (780 hrs. x $3.40/hr.) = $2,788 - $2,652 = $136 unfavorable
78. Which variance isolates and quantifies the change in sales prices?
a. Simplified Sales Activity Variance
b. Master Budget Sales Variance
c. Sales Price Variance
d. Sales Mix Variance
Solution: The Sales Price Variance isolates and quantifies the change in sales prices.
79. Which of the following spotlights the change in volume between the flexible budget sales level
and the master budget sales level?
a. Sales Mix Variance
b. Sales Price Variance
c. Master Budget Sales Variance
d. Simplified Sales Activity Variance
Solution: Tbe simplified sales activity variance spotlights the change in volume between the flexible budget sales and the master
budget sales level.
80. The master budget sales variance captures

a. only the difference between actual results and master budget values for sales price.
b. only the difference between actual results and master budget values for sales volume.
c. the difference between actual results and master budget values for both sales price and
volume.
d. the difference between actual results and the flexible budget for sales.
Solution: The master budget sales variance captures the difference between actual results and master budget values for both sales
price and volume.
81. The total sales variance is also known as the

a. sales price variance.
b. simplified sales activity variance
c. sales mix variance.
d. master budget sales variance.
Solution: The total sales variance is also known as the master budget sales variance.
82. The sales price variance is computed as the

a. (Actual sales price per unit – Budgeted sales price per unit) x Actual volume sold.
b. (Actual volume – Budgeted volume) x Budgeted sales price.
c. (Actual sales price per unit – Budgeted sales price per unit) x Budgeted volume sold.
d. (Actual volume – Budgeted volume) x Actual sales price.

Solution: The sales price variance is computed as the (Actual sales price per unit – Budgeted sales price per unit) x Actual volume
sold.
83. The equation for the simplified sales activity variance is

a. (Actual volume – Budgeted volume) x Actual sales price.
b. (Actual volume – Budgeted volume) x Budgeted sales price.
c. (Actual sales price per unit – Budgeted sales price per unit) x Actual volume sold.
d. (Actual sales price per unit – Budgeted sales price per unit) x Budgeted volume sold.
Solution: The equation for the simplified sales activity variance is (Actual volume – Budgeted volume) x Budgeted sales price.
84. Quest Electronics has the following sales data for the last quarter:
Sales Volume in Units Unit Sales Price

Actual 2,000 $13
Budgeted 1,800 $15
What is the Master Budget Variance for Quest Electronics for the quarter?
a. $1,000 favorable
b. $1,000 unfavorable
c. $6,600 favorable
d. $6,600 unfavorable
Solution: Master Budget Variance = Total Actual Sales – Total Budgeted Sales = (Actual Volume x Actual Price) – (Budgeted
Volume x Budgeted Price) = (2,000 x $13) – (1,800 x $15) = $26,000, Actual Sales - $27,000, Budgeted Sales = $1,000
Unfavorable.

Actual 2,000 $13
Budgeted 1,800 $15
What is the Sales Price Variance for Quest Electronics for the quarter?
a. $3,600 favorable
c. $4,000 favorable
Solution: The Sales Price Variance = (Actual sales price per unit – Budgeted sales price per unit) x Actual volume sold = ($13 - $15)
x 2,000 = $4,000 unfavorable.

Actual 2,000 $13
Budgeted 1,800 $15
What is the Simplified Sales Activity Variance for Quest Electronics for the quarter?
a. $3,000 favorable

c. $4,000 favorable
Solution: Simplified Sales Activity Variance = (Actual volume – Budgeted volume) x Budgeted sales price = (2,000 – 1,800) x $15 =
$3,000 favorable.
87. Santini Shoe Company had the following data for its Women’s shoes and Men’s shoes for the
last quarter:
Actual Results Master Budget

Women’s Men’s Women’s Men’s
Volume in units 1,800 1,400 1,500 1,200
Unit Sales Price (SP) $90 $110 $80 $120
Unit Variable Costs (VC) $50 $50 $50 $50
Unit Contribution Margin (CM) $40 $60 $30 $70
What is the Total Sales Mix Variance for Santini Shoe Company for last quarter?
a. $ 884 favorable
b. $ 884 unfavorable
c. $2,208 favorable
d. $ 2,208 unfavorable
Ans: B, LO 6, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy,
Solution: Total Sales Mix Variance = Sales Mix Variance of Women’s Shoes + Sales Mix Variance of Men’s Shoes = [(Actual Sales
Mix of Women’s Shoes – Budgeted Sales Mix of Women’s Shoes) x Actual Volume of all products sold x Budgeted Unit CM
Women’s] + [(Actual Sales Mix of Men’s Shoes – Budgeted Sales Mix of Men’s Shoes) x Actual Volume of all products sold x
Budgeted Unit CM Men’s]; [{1,800/ (1,800 + 1,400) – 1,500 / (1,500 + 1,200)} x 3,200 x $30] + [{1,400/ (1,800 + 1,400) – 1,200 /
(1,500 + 1,200)} x 3,200 x $70] = [(.5625 - .5556) x 3,200 x $30] + [(.4375 - .4444) x 3,200 x $70] = $662 + (-1,546) = $884
unfavorable
88. Santini Shoe Company had the following data for its Women’s shoes and Men’s shoes for the
last quarter:

Women’s Men’s Women’s Men’s
Volume in units 1,800 1,400 1,500 1,200
Unit Sales Price (SP) $90 $110 $80 $120
Unit Variable Costs (VC) $50 $50 $50 $50
What is the Total Sales Quantity Variance for Santini Shoe Company for last quarter?
a. $884 favorable
b. $884 unfavorable
c. $23,888 favorable
Ans: C, LO 6, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy,
Solution: Total Sales Quantity Variance = Sales Quantity Variance of Women’s Shoes + Sales Quantity Variance of Men’s Shoes =
[(Actual volume of all products sold – Budgeted volume of all products sold) x Budgeted sales mix of Women’s shoes x Budgeted
Unit CM Women’s] + [(Actual volume of all products sold – Budgeted volume of all products sold) x Budgeted sales mix of Men’s
shoes x Budgeted Unit CM Men’s]; [{(1,800 + 1,400) – (1,500 + 1,200)} x {1,500/ (1,500 + 1,200)} x $30] + [{(1,800 + 1,400) – (1,500
+ 1,200)} x {1,200/ (1,500 + 1,200)} x $70] = $8,334 + $15,554 = $23,888 favorable

89. Century Company has the following information for the past month:
Actual Results Flexible Budget Master Budget

Sales $51,000 $54,000 $50,000
Variable Costs 23,000 23,000 21,000
Century’s Comprehensive Sales Activity Variance is

a. $2,000 favorable.
b. $2,000 unfavorable.
c. $1,000 favorable.
d. $1,000 unfavorable.
Solution: Comprehensive Sales Activity Variance = Flexible Budget Contribution Margin – Master Budget Contribution Margin =
[($54,000 - $23,000) – ($50,000 - $21,000)] = $31,000 - $29,000 = 2,000, favorable
90. Which of the following variances would not be inspected when determining the cause for the
comprehensive sales activity variance?
a. Sales mix variance
b. Sales quantity variance
c. Market size variance
d. Sales price variance
Solution: The sales price variance would not be inspected when determining the cause for the comprehensive sales activity
variance.
91. Which of the following variances focuses on using the contribution margin as the basis for
measuring the full impact of sales activity changes?
a. Sales price variance
b. Market share variance
c. Comprehensive sales activity variance
d. Market size variance
Solution: The comprehensive sales activity variance focuses on using the contribution margin as the basis for measuring the full
impact of sales activity changes.
92. Which variance explains whether actual sales meant a larger or smaller portion of the total
market than the plan?
a. Market size variance
b. Market share variance
c. Sales quantity variance
d. Sales mix variance
Solution: The market share variance explains whether actual sales meant a larger or smaller portion of the total market than the
plan.

93. A company’s sales quantity variance is further broken into the

a. market size variance and sales price variance.
b. market size variance and market share variance.
c. sales price variance and market share variance.
d. sales price variance and sales mix variance.
Solution: A company’s sales quantity variance is further broken into the market size variance and market share variance.
94. A sales mix variance for a given product is computed as

a. (actual sales mix of the product – budgeted sales mix of the product) x actual volume of all
products sold x budgeted unit contribution margin of the product.
b. (actual sales mix of the product – budgeted sales mix of the product) x budgeted volume of
all products sold x budgeted unit contribution margin of the product.
c. (actual sales mix of the product – budgeted sales mix of the product) x actual volume of all
products sold x actual unit contribution margin of the product.
d. (actual sales mix of the product – budgeted sales mix of the product) x budgeted volume of
all products sold x actual unit contribution margin of the product.
Solution: A sales mix variance for a given product is computed as (actual sales mix of the product – budgeted sales mix of the
product) x actual volume of all products sold x budgeted unit contribution margin of the product
95. A sales quantity variance for a given product is computed as

a. (actual volume of all products sold – budgeted volume of all products sold) x actual sales
mix of the product x budgeted unit contribution margin of the product.
b. (actual volume of all products sold – budgeted volume of all products sold) x budgeted
sales mix of the product x actual unit contribution margin of the product.
c. (actual volume of all products sold – budgeted volume of all products sold) x actual sales
mix of the product x actual unit contribution margin of the product.
d. (actual volume of all products sold – budgeted volume of all products sold) x budgeted
sales mix of the product x budgeted unit contribution margin of the product.
Solution: A sales quantity variance for a given product is computed as (actual volume of all products sold – budgeted volume of all
products sold) x budgeted sales mix of the product x budgeted unit contribution margin of the product.
BRIEF EXERCISES
96. Place the following activities related to budgets and variance analysis that help
organizations to attain their goals in order from 1 to 7.
a. ______ Control
b. ______ Benchmark
c. ______ Evaluate Performance
d. ______ Motivate
e. ______ Variance Analysis
f. ______ Benchmark
g. ______ Plan

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA:
Solution:
a. ___5__ Control
b. ___3__ Benchmark
c. ___6__ Evaluate Performance
d. ___2__ Motivate
e. ___1__ Variance Analysis
f. ___7__ Troubleshoot
g. ___4__ Plan
97. Match the following term with its appropriate definition by including the correct letter in the
blank next to the term.
1. ______ Control a. schedule for production, labor purchases and

2. ______ Benchmark manufacturing overhead
3. ______ Evaluate Performance b. differences between actual and budgeted
4. ______ Motivate outcomes
5. ______ Variance Analysis c. approved budgeted numbers
6. ______ Troubleshoot d. logical, systematic identification of sources of
7. ______ Plan problems to fix them and avoid recurrence
e. assess work effort to achieve benchmarks
f. activities to prevent deviations from budget
g. inspire employees to unleash their potential
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA, FN:
Measurement, AICPA PC: Problem Solving, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision
Analysis.
Solution:
1. ___f___ Control
2. ___c___ Benchmark
3. ___e__ Evaluate Performance
4. ___g__ Motivate
5. ___b__ Variance Analysis
6. ___d__ Troubleshoot
7. ___a__ Plan
98. The manager of Power Industries reviewed the financial information for the year just
completed. Sales volume came in lower than expected at 5,000 units, while it budgeted for
sales of 5,500 units. Power’s variable cost per unit (comprised of DM, DL, and variable-
MOH) was $20, the unit sales price expected was $45, and fixed-MOH costs totaled
$110,000. Prepare a flexible budget to determine Power’s budgeted operating profit.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Solution: Flexible Budget

Sales (5,000 units x $45) $225,000
Variable Costs (5,000 units x $20) 100,000
Contribution Margin 125,000
Fixed Costs 110,000

Operating Profit $15,000

99.Treasured Trinkets Company has the following information:
Flexible Sales
Actual Budget F/U Flexible Activity F/U Master
Variances Budget Variances Budget
Sales Volume 3,000 3,000 3,200
Sales $14,850 $15,000 $16,000
Variable
Costs 10,500 10,290 10,976
Contribution
Margin 4,350 4,710 5,024
Fixed Costs 3,400 3,700 3,700
Operating
Income $950 $1,010 $1,324
Complete the table by computing the Flexible Budget Variances and Sales Activity
Variances, indicating whether the variance is either favorable (F) or unfavorable (U).
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis .
Solution:
Flexible Sales
Actual Budget F/U Flexible Activity F/U Master
Variances Budget Variances Budget
Sales Volume 3,000 3,000 3,200
Sales $14,850 150 U $15,000 1,000 U $16,000
Variable
Costs 10,500 210 U 10,290 686 F 10,976
Contribution
Margin 4,350 360 U 4,710 314 U 5,024
Fixed Costs 3,400 300 F 3,700 0 NA 3,700
Operating
Income $950 $60 U $1,010 $314 U $1,324
100. Ember Industries incurs an actual unit sales price of $6 and a budgeted unit sales price of
$5 for a butane fireplace lighter. Last week, the company actually sold 45 lighters when it
budgeted to sell 50 lighters. Compute Ember’s Master Budget Variance, Flexible Budget
Variance, and Sales Activity Variance. Show all computations.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Solution
Actual Flexible Budget Master Budget
(Actual volume x Actual price) (Actual volume x Budgeted price) (Budgeted volume x Budgeted price)
Sales (45 x $6) = $270 (45 x $5) = $225 (50 x $5) = $250
Master Budget Variance =
$270 - $250 = $20 F
Flexible Budget Variance Sales Activity Variance
$270 - $225 = $45 F $250 - $225 = $25 U

101. Compute the indicated amount in each of the following independent scenarios:
a. Flameco, Inc. has a Master Budget Variance of $100, unfavorable and a Flexible
Budget Variance of $150, favorable. What is the Sales Activity Variance for Flameco,
Inc.?
b. Genero Company has a Master Budget Variance of $200, favorable and a Sales
Activity Variance of $130, favorable. What is the Flexible Budget Variance for Genero
Company?
c. Tenet Industries has a Flexible Budget Variance of $450, favorable and a Sales
Activity Variance of $250, unfavorable. What is Master Budget Variance for Tenet
Industries?
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Solution:
a. Sales Activity Variance = Master Budget Variance +/– Flexible Budget Variance = $100,
unfavorable + $150, favorable = $250, unfavorable
b. Flexible Budget Variance = Master Budget Variance +/- Sales Activity Variance = $200,
favorable - $130, favorable = $70, favorable
c. Master Budget Variance = Flexible Budget Variance +/- Sales Activity Variance = $450,
favorable - $250, unfavorable = $200, favorable
102. Tiny Tots Toys has the following actual and master budget information for the past month:

Sales Volume 2,800 ? 3,000
Sales 19,600 ? $18,000
Variable Costs 14,000 ? 12,000
Contribution Margin 5,600 ? 6,000
Fixed Costs 3,000 ? 3,200
Operating Income 2,600 ? $2,800
Compute the Flexible Budget Amounts to complete the table.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC: Measurement, Analysis, and Interpretation,
IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis
Solution:
(Actual Volume x (Actual Volume x (Budgeted Volume x
Actual Price) Budgeted Price) Budgeted Price)
Sales Volume 2,800 3,000
a
Sales 19,600 16,800 $18,000
Variable Costs 14,000 11,200b 12,000
Contribution Margin 5,600 5,600 6,000
Fixed Costs 3,000 3,200 3,200
Operating Income $2,600 $2,400 $2,800
a b
2,800 x ($18,000/3,000) 2,800 x ($12,000/3,000)

103. Pancho’s Taco Stand has the following costs related to the production of each taco.
Standard Cost Card for Taco

Standard quantity of input per taco Standard input price per taco
Direct Materials .25 lbs. $3.00
Direct Labor .10 hrs. $10.00
Variable-MOH .10 hrs. $3.00
Fixed-MOH .10 hrs. $4.00
Compute the standard cost to make one taco.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution:
Standard Cost Card for Taco
Standard quantity of Standard input price Standard Cost
input per taco per taco per taco
Direct Materials .25 lbs. $3.00 $0.75
Direct Labor .10 hrs. $10.00 $1.00
Variable-MOH .10 hrs. $3.00 $0.30
Fixed-MOH .10 hrs. $4.00 $0.40
Total Production Cost $2.45
104. Philly Rug Company produces designer rugs for clients. The standard size rug will require 3
yards of direct materials (DM), 1 hours of direct labor (DL) time, and 2 hours of machine
time. MOH costs are applied based on machine hours. DM is expected to cost $8.00 per
yard, DL is budgeted at $12 per hour, and cost of machine time is estimated at $3/machine
hour for variable-MOH and $2/machine hour for fixed-MOH. Create a standard cost card for
a standard size rug for Philly Rug Company to compute the standard cost for one unit of
product.
Solution:
Standard Cost Card for Philly Rug
input per rug per rug per rug
Direct Materials 3 yds. $8.00 $24.00
Direct Labor 1 hrs. $12.00 $12.00
Variable-MOH 2 hrs. $3.00 $6.00
Fixed-MOH 2 hrs. $2.00 $4.00

105. Philly Rug Company produces designer rugs for clients. The standard size rug will require 3
yards of direct materials (DM), 1 hour of direct labor (DL) time, and 2 hours of machine time.
MOH costs are applied based on machine hours. DM is expected to cost $8.00 per yard, DL
is budgeted at $12 per hour, and cost of machine time is estimated at $3/machine hour for
variable-MOH and $2/machine hour for fixed-MOH. The company purchased 30 yards of
materials on account for $255. Production was started on 5 rugs, using 15 yards of direct
materials, 6 direct labor hours at a total cost of $66, and 10 machine hours. Prepare the
journal entries for the purchase of the materials and the costs incurred in production of the 5
rugs assuming Philly Rug Company uses standard costing. (Credit MOH costs to Accounts
Payable)
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AC: Measurement, Analysis, and Interpretation, IMA:
Solution:
Debit Credit
Raw Materials Inventory 240
Accounts Payable 240
To record the purchase of raw materials cost at standard (30 yds. x
$8/yd.)
Debit Credit
Work In Process Inventory (5 rugs x $46) 230
Raw materials Inventory (5 rugs x $24) 120
Salaries and Wages Payable (5 rugs x 60
$12)
Accounts Payable (5 rugs x {$6 + $4}) 50
To record production costs for 5 rugs using standard costing.
Standard Cost Card for Philly Rug

Direct Materials 3 yds. $8.00 $24.00
Direct Labor 1 hrs. $12.00 $12.00
Variable-MOH 2 hrs. $3.00 $6.00
Fixed-MOH 2 hrs. $2.00 $4.00
106. Aurora Sports Company is a leading helmet manufacturer. It produces a variety of different
helmet styles, but its standard bike helmet requires 1.5 lb. of direct materials (DM), .5 hours
of direct labor (DL) time, and 2.5 hours of machine time. MOH costs are applied based on
machine hours. DM is expected to cost $14.00 per pound, DL is budgeted at $10 per hour,
and cost of machine time is estimated at $2/machine hour for variable-MOH and $4/machine
hour for fixed-MOH. Create a standard cost card for a standard bike helmet for Aurora
Sports Company to compute the standard cost for one unit of product.

Solution:
Standard Cost Card for Aurora Sports Bike Helmet

Direct Materials 1.5 lbs. $14.00 $21.00
Variable-MOH 2.5 hrs. $2.00 $5.00
Fixed-MOH 2.5 hrs. $4.00 $10.00
107.Aurora Sports Company is a leading helmet manufacturer. It produces a variety of different

helmet styles, but its standard bike helmet requires 1.5 lb. of direct materials (DM), .5 hours
of direct labor (DL) time, and 2.5 hours of machine time. MOH costs are applied based on
machine hours. DM is expected to cost $14.00 per pound, DL is budgeted at $10 per hour,
and cost of machine time is estimated at $2/machine hour for variable-MOH and $4/machine
hour for fixed-MOH. The company purchased 30 pounds of materials on account for $450.
Production was started on 15 helmets, using 24 pounds of direct materials, 9 direct labor
hours at a total cost of $99, and 38 machine hours. Prepare the journal entries for the
purchase of the materials and the costs incurred in production of the 15 bike helmets
assuming Aurora Sports Company uses standard costing. (Credit MOH costs to Accounts
Payable)
Solution:
Debit Credit
Raw Materials Inventory 420
Accounts Payable 420
To record the purchase of raw materials cost at standard (30 lbs. x
$14/yd.)
Debit Credit
Work In Process Inventory (15 helmets x $41) 615
Raw materials Inventory (15 helmets x $21) 315
Salaries and Wages Payable (15 helmets x $5) 75
Accounts Payable (15 helmets x {$5 + $10}) 225
To record production costs for 15 helmets using standard costing.
Standard Cost Card for Aurora Sports Bike Helmet

Direct Materials 1.5 lbs. $14.00 $21.00

Variable-MOH 2.5 hrs. $2.00 $5.00

Fixed-MOH 2.5 hrs. $4.00 $10.00
108. Memorable Moments manufactures a product that uses 2.5 standard labor hours per unit at
a standard hourly rate of $12.00 per hour. If 3,000 units required 7,400 actual hours at an
hourly rate of $12.40 per hour, what is the Direct Labor (DL) Price Variance and (DL)
Efficiency Variance?
Solution:
Direct Labor (DL) Price Variance = (AQ x AP) – (AQ x SP)
= (7,400 hrs. x $12.40) – (7,400 hrs. x $12.00)
= $91,760 - $88,800 = $2,960, unfavorable
Direct Labor (DL) Efficiency Variance = (AQ x SP) – (SQ x SP)
= (7,400 hrs. x $12.00) – (3,000 units x 2.5 hrs./unit x
$12.00)
= $88,800 - $90,000 = $1,200, favorable
109. Azure Company makes a product that requires a standard six yards of materials per unit.
The standard price per yard is $4.50. If 3,000 units required 18,500 yards of materials for
production, and were purchased at a cost of $4.30 per yard, what is the Direct Materials
(DM) Price Variance and (DM) Efficiency Variance?
Solution:
Direct Materials (DM) Price Variance = (AQ x AP) – (AQ x SP)
= (18,500 yds. x $4.30) – (18,500 yds. x $4.50)
= $79,550 - $83,250 = $3,700 favorable
Direct Materials (DM) Efficiency Variance = (AQ x SP) – (SQ x SP)
= (18,500 yds. x $4.50) – (3,000 units x 6 yds./unit x $4.50)
= $83,250 - $81,000 = $2,250 unfavorable
110. Mejor Medical Machines manufactures hospital equipment. The company recently
purchased materials for production, and was able to secure a bulk purchase discount with
an additional prompt payment cash discount. As a result, the original purchase on account
with all of the discounts was $3,900, which resulted in a Direct Materials (DM) Price
Variance of $900, favorable. Record the journal entry to recognize this raw materials
purchase for Mejor Medical assuming that the variance is recognized at the time of
purchase.
Solution:
Debit Credit
DM Inventory ($3,900 + $900) 4,800
Accounts Payable 3,900

DM Price Variance 900

To record the purchase of raw materials with a favorable DM Price
Variance.
111. Mejor Medical Machines manufactures hospital equipment. The company was recently able
to purchase materials for production and secure a bulk purchase discount with an additional
prompt payment cash discount. However, as the materials were transferred into production
of $3,900 from DM Inventory, due to the lower quality of materials, additional calibrations
were needed to achieve the original quality in the production of the equipment, and an
unfavorable Direct Materials (DM) Efficiency Variance of $500 resulted. Record the journal
entry to recognize this use of the direct materials into production for Mejor Medical assuming
that this unfavorable variance is recognized when materials are placed into production.
Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis and Interpretation, IMA:
Solution:
Debit Credit
WIP Inventory ($3,900 - $500) 3,400
DM Efficiency Variance 500
DM Inventory 3,900
To record the purchase of raw materials with a favorable DM Efficiency
Variance.
112. Bear Mountain Sporting Goods has the following actual and standard costs for producing a
specified quantity of camping kits:
Actual: 51,000 pounds at $5.05 = $257,550

Standard: 50,000 pounds at $5.00 = $250,000
Determine the Direct Materials (DM) Price Variance and DM Efficiency Variance for the
camping kits for Bear Mountain Sporting Goods.
Ans: N/A, LO 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis and Interpretation, IMA:
Solution:
Direct Materials (DM) Price Variance = (AQ x AP) – (AQ x SP)
= (51,000 lbs. x $5.05) – (51,000 lbs. x $5.00)
= $257,550 - $255,000 = $2,550 unfavorable
Direct Materials (DM) Efficiency Variance = (AQ x SP) – (SQ x SP)
= (51,000 lbs. x $5.00) – (50,000 lbs. x $5.00)
= $255,000 - $250,000 = $5,000 unfavorable
113. Midland Mountain Sporting Goods has the following actual and standard variable-MOH
costs for producing a specified quantity of camping kits:
Actual Variable-MOH: 2,000 units $5,700

Standard: 2,100 units at .8 hr./unit $3.80/hr.
Determine the Variable-MOH Price Variance and Variable-MOH Efficiency Variance for the
camping kits for Midland Mountain Sporting Goods.
Solution:
Variable-MOH Price Variance = Actual Variable-MOH Incurred – (AQ x SP)
= $5,700 – (2,000 units x $3.80/hr. x .8 hr./unit)
= $5,700 - $6,080 = $380 favorable
Variable-MOH Efficiency Variance = (AQ x SP) – (SQ x SP)
= (2,000 units x $3.80/hr. x .8 hr./unit) –
(2,100 units x $3.80/hr. x .8 hr./unit)
= $6,080 - $6,384 = $304 unfavorable
114. Synergix Technologies has been working on the company’s year-end variance analysis.
Budgeted fixed-MOH costs were $153,000 for the planned 12,000 tablets to be produced.
Per the standard cost sheets, fixed-MOH was applied based on DL hours and every unit
required 3 DL hours. Actual fixed-MOH costs totaled $158,000 for the year corresponding to
12,400 tablets being produced. Calculate the Fixed-MOH Price Variance and Fixed-MOH
Volume Variance for Synergix Technologies.
Solution:
Fixed-MOH Price Variance = Actual Fixed-MOH incurred – Master Budget (AQ x SP)
= $158,000 - $153,000 = $5,000 unfavorable
Fixed MOH Volume Variance = Master Budget – Fixed-MOH Applied (SQ x SP)
= $153,000 – (12,400 units x 3 DL hrs./unit x $4.25*/ DL hr.)
= $153,000 - $158,100 = $5,100 favorable
*$153,000 ÷ 12,000 tables = $12.75 ÷ 3 DL hrs. = $4.25 per DL hr.
115. Rockhill Designs has computed the following variances at year-end:
Variable-MOH Price Variance: $280 Unfavorable

Variable-MOH Efficiency Variance: $120 Unfavorable
Fixed-MOH Price Variance: $150 Favorable
Fixed MOH Volume Variance: $170 Unfavorable
Prepare the journal entry to close the Variable-MOH and Fixed-MOH Variances.
Solution:
Debit Credit

Cost of Goods Sold ($280 + $120 + $170 - $150) 420

Fixed-MOH Price Variance 150
Variable-MOH Price Variance 280
Variable-MOH Efficiency Variance 120
Fixed MOH Volume Variance 170
To close the Variable-MOH and Fixed-MOH Variances to Cost of Goods Sold.
116. Bear Mountain Sporting Goods has the following variances at year-end:
Direct Materials (DM) Price Variance: $350 Favorable
Direct Materials (DM) Efficiency Variance: $420 Unfavorable
Direct Labor (DL) Price Variance: $150 Favorable
Direct Labor (DL) Efficiency Variance: $280 Unfavorable
Prepare the journal entry to close the Direct Materials (DM) and Direct Labor (DL)
Variances at year-end.
Solution:
Debit Credit
Cost of Goods Sold ( $420 + $280 - $350 - $150) 200
Direct Materials (DM) Price Variance 350
Direct Labor (DL) Price Variance 150
Direct Materials (DM) Efficiency Variance 420
Direct Labor (DL) Efficiency Variance 280
To close the DM and DL Variances to Cost of Goods Sold.
117. Bear Mountain Sporting Goods has the following information from producing a specified
quantity of camping kits:
Actual fixed-MOH costs incurred on account $2,400

Master Budget fixed-MOH costs $2,500
Applied fixed-MOH costs $2,400
Fixed-MOH Price Variance $100 Favorable
Fixed-MOH Volume Variance $100 Unfavorable
Prepare the journal entries to record the actual fixed-MOH costs incurred, application of
fixed-MOH to production, and to recognize the Fixed-MOH Variances.
Solution:
Debit Credit
Fixed-MOH Control 2,400

Accounts Payable 2,400

To record actual fixed-MOH costs incurred.
Debit Credit
WIP Inventory 2,400
To apply fixed-MOH costs to production.
Debit Credit
Fixed-MOH Volume Variance 100
Fixed-MOH Price Variance 100
To record fixed-MOH variances.
118. Aztec Company has actual sales of $53,000, flexible budget sales of $52,800, and master
budget sales of $51,000. Compute the Sales Price Variance and Sales Activity Variance
(simplified) for Aztec Company.
Solution:
Sales Price Variance = Actual Sales – Flexible Budget Sales
= $53,000 - $52,800 = $200 favorable
Sales Activity Variance = Flexible Budget Sales – Master Budget Sales
= $52,800 - $51,000 = $1,800 favorable
119. Maya Industries has the following actual and master budget information for its two product
lines:

Gadgets Gizmos Gadgets Gizmos
Volume in Units 1,100 1,900 1,300 1,800
Compute the Sales Mix Variances for the Gadgets, Gizmos, and in Total.
Ans: N/A, LO 6, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution:
Sales Mix VarianceGadgets = (Actual Sales MixGadgets – Budgeted Sales MixGadgets) x Actual
Volume of All Units Sold x Budgeted Unit CMGadgets
= (1,100/3,000 – 1,300/3,100) x 3,000 x $4 = (.3667 - .4194) x 3,000 x $4
= $632 Unfavorable
Sales Mix VarianceGizmos = (Actual Sales MixGizmos – Budgeted Sales MixGizmos) x Actual
Volume of Units Sold x Budgeted Unit CMGizmos
= (1,900/3,000 – 1,800/3,100) x 3,000 x $9 = (.6333 - .5806) x 3,000 x $9
= $1,423 favorable
Total Sales Mix Variance = Sales Mix VarianceGadgets +/- Sales Mix VarianceGizmos
$791 favorable = $632, Unfavorable - $1,432, favorable
120. Maya Industries has the following actual and master budget information for its two product
lines:


Gadgets Gizmos Gadgets Gizmos
Volume in Units 1,100 1,900 1,300 1,800
Unit Contribution Margin $5 $8 $4 $9
Compute the Sales Quantity Variances for the Gadgets, Gizmos, and in Total.
Solution:
Sales Quantity VarianceGadgets = (Actual Volume of all Products Sold – Budgeted Volume of
all Products Sold) x Budgeted Sales MixGadgets x Budgeted Unit CMGadgets
= (3,000 – 3,100) x (1,300/3,100) x $4 = 100 x .4194 x $4
= $168 Unfavorable
Sales Quantity VarianceGizmos = ((Actual Volume of all Products Sold – Budgeted Volume of
all Products Sold) x Budgeted Sales MixGadgets x Budgeted Unit CMGizmos
= (3,000 – 3,100) x (1,800/3,100) x $9 = 100 x .5806 x $9
= $523 unfavorable
Total Sales Quantity Variance = Sales Mix VarianceGadgets +/- Sales Mix VarianceGizmos
$691 unfavorable = $168, unfavorable + $523, unfavorable
121. Minza, Inc. has a favorable Total Sale Mix Variance of $1,245 and a favorable Total Sales
Quantity Variance of $915. What is Minza’s Sales Activity Variance? If the Total Sales
Quantity Variance of $915 was unfavorable, instead of favorable, what would the Sales
Activity Variance be?
Solution:
Sales Activity Variance = Total Sales Mix Variance +/- Total Sales Quantity Variance
$2,160 favorable = $1,245, favorable + $915, favorable
Sales Activity Variance = Total Sales Mix Variance +/- Total Sales Quantity Variance
$330 favorable = $1,245, favorable - $915, unfavorable
122. Great Plains Company has provided its financial manager the following information for the
past year:
Actual Results Flexible Budget Master Budget

Sales $58,000 $58,500 $58,250
Variable Costs 20,750 20,600 20,750
Contribution Margin (CM) $37,250 37,900 37,500
Determine the Simplified Sales Activity Variance and the Comprehensive Sales Activity
Variance for Great Plains Company.
Ans: N/A, LO 6, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation,
IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Solution:
Simplified Sales Activity Variance = Flexible Budget Sales – Master Budget Sales
$250, favorable = $58,500 -- $58,250
Comprehensive Sales Activity Variance = Flexible Budget CM – Master Budget CM
$400, favorable = $37,900 -- $37,500
EXERCISES
123.Vintendo was at year-end and was disappointed based on its preliminary results.
Management expected sales volume to be 25,000 handheld video gaming units instead of
the actual sales of 23,000 units. The company’s budgeted information was as shown
below:
Unit selling price $100
Unit DM cost $25
Unit DL cost $10
Unit Variable-MOH cost $5
Fixed-MOH costs $360,000
Fixed SG&A costs $280,000
a. Prepare a master budget and a flexible budget for Vintendo.

b. Compare the flexible budget to the master budget, determining the sales activity
variances for all budgeted income statement accounts, specifying amount, and whether
the variance is favorable (F) or unfavorable (U).
c. When Vintendo finalizes its final results, which of the budgets, master or flexible, should
it use to compare actual results to in order to determine variances?
Ans: N/A, LO 1 and 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC: Measurement, Analysis, and Interpretation, IMA:
Solution:
a.
Master Budget
Sales ($100 x 25,000) $2,500,000
Variable Costs ($25 + $10 + $5) x 25,000 1,000,000
Contribution Margin 1,500,000
Fixed Costs ($360,000 + $280,000) 640,000
Operating Income $860,000
Flexible Budget
Sales ($100 x 23,000) $2,300,000
Variable Costs ($25 + $10 + $5) x 23,000 920,000
Contribution Margin 1,380,000
Fixed Costs ($360,000 + $280,000) 640,000
Operating Income $740,000

b.
Variance Analysis
Flexible Budget Master Budget Sales Activity Variances
Sales $2,300,000 $2,500,000 $200,000 U
Variable Costs 920,000 1,000,000 $80,000 F
Contribution Margin 1,380,000 1,500,000 $120,000 U
Fixed Costs 640,000 640,000 $0
Operating Income $740,000 $860,000 $120,000 U
c. Vintendo should use the flexible budget for comparison with actual results to determine
variances.
124. Zapple Manufacturing has the following information on its standard cost card for one of its
current products based on expected activity of 17,000 hours:
Direct Materials (6 ft. x $5/ft) $30
Direct Labor (1.5 hrs. x $10/hr.) 15
Variable-MOH (1.5 hrs. x $4/hr.) 6
Fixed-MOH (1.5 hrs. x $2/hr.) 3
Standard cost per unit $54
In the past year, the following actual results were recorded:
Actual Fixed-MOH incurred…………………………………... $35,000
Actual Variable-MOH incurred……………………………….. $70,000
Actual Direct Materials (DM) Cost and used – 71,750 ft….. $365,925
Actual Direct Labor Cost and hours incurred – 17,900 hrs.. 184,370
Actual Units Produced………………………………………… 12,000
Compute the following variances for Zapple Manufacturing for the past year:
a. DM price and efficiency variances.
b. DL price and efficiency variances.
c. Variable-MOH price and efficiency variances.
d. Fixed-MOH price and volume variances
Ans: N/A, LO 4 and 5, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Solution:
a. DM Price Variance = (AQ x AP) – (AQ x SP) = (71,750 ft. x $5.10*) – (71,750 ft. x $5) =
$7,175, unfavorable
*($365,925 ÷ 71,750 ft.)
DM Efficiency Variance = (AQ x SP) – (SQ x SP) = (71,750 ft. x $5.00) – (12,000 units x
6 ft./unit x $5.00) = $1,250, favorable
b. DL Price Variance = (AQ x AP) – (AQ x SP) = (17,900 hrs. x $10.30/hr.**) – (17,900 hrs.
x $10/hr.) = $5,370, unfavorable
**($184,370 ÷ 17,900 hrs.)
DL Efficiency Variance = (AQ x SP) – (SQ x SP) = (17,900 hrs. x $10/hr.) – (12,000 x 1.5
hr./unit x $10/hr.) = $1,000, favorable
d. Variable-MOH Price Variance = Actual Variable-MOH Costs incurred – (AQ x SP) =
$70,000 – (17,900 hrs. x $4/hr.) = $1,600, favorable
Variable-MOH Efficiency Variance = (AQ x SP) – (SQ x SP) = (17,900 hrs. x $4/hr.) –
(12,000 units x 1.5 hrs. x $4) = $400, favorable

e. Fixed-MOH Price Variance = Actual Fixed-MOH incurred – Master Budget at 17,000 hrs.
= $35,000 – (17,000 hrs. x $2/hr.) = $1,000, unfavorable
Fixed-MOH Volume Variance = Master Budget at 17,000 hrs. – Fixed-MOH Applied (SQ
x SP) = (17,000 x $2/hr.) – (12,000 units x 1.5 hr./unit x $2) = $2,000, favorable
125. Penn Maid Dairy Company provided the following information for the past quarter:
Variable-MOH rate $12/DLH

Actual Variable-MOH costs $16,380
Actual DLH worked 1,300 DLHs
Gallons of milk produced 120,000
Hours allowed for actual production 1,200 DLHs
(Use for both Variable- and Fixed-MOH) (.01 DLH per gallon x 120,000 gallons)
Applied Variable-MOH $14,400 ($12 x 1,200 DLH)
Budgeted Fixed-MOH $40,000

Actual Fixed-MOH costs $45,500
Expected Production in gallons of milk 100,000
Expected Activity for production – Master 1,000 DLHs
Budget (.01 DLH per gallon x 100,000 gallons)
Standard Fixed-MOH rate $40/DLH ($40,000 ÷ 1,000 DHL)
a. Compute the Variable-MOH price and efficiency variances.

b. Compute the Fixed-MOH price and volume variances.
c. Prepare the journal entries to record the Variable-MOH and Fixed-MOH variances.
d. Prepare the journal entries to close the Variable-MOH and Fixed-MOH variances
Solution:
a. Variable-MOH Price Variance = Actual Variable-MOH Costs incurred – (AQ x SP) =
$16,380 – (1,300 hrs. x $12/hr.) = $780, unfavorable
Variable-MOH Efficiency Variance = (AQ x SP) – (SQ x SP) = (1,300 hrs. x $12/hr.) –
(1,200 x $12) = $1,200, unfavorable
b. Fixed-MOH Price Variance = Actual Fixed-MOH incurred – Master Budget at 1,000
DLHs = $45,500 – (1,000 DLHs x $40/DLH) = $5,500, unfavorable
Fixed-MOH Volume Variance = Master Budget at 1,000 DLHs – Fixed-MOH Applied (SQ
x SP) = (1,000 DLHs x $40/DLH) – (1,200 DLHs x $40) = $8,000, favorable
c.
Debit Credit
Variable-MOH Efficiency Variance 1,200
Variable-MOH Control 1,980

Fixed-MOH Price Variance 5,500

Fixed-MOH Volume Variance 8,000
To record Variable and Fixed-MOH variances.
Fixed-MOH Volume Variance 8,000

Cost of Goods Sold 520
Variable-MOH Efficiency Variance 1,200
Fixed-MOH Price Variance 5,500
To close Variable and Fixed-MOH variances.
SHORT ANSWER
126. How do organizations use budgets to attain goals?
Solution: Organizations use the combination of budgeting and variance analysis as effective
tools for motivation and benchmarking, planning and control, and performance evaluation and
troubleshooting. Variance analysis is used to identify and calculate the differences between
actual and budgeted outcomes, which spotlights the factors which contribute to the variances,
and then lead to corrective action being taken.
Ans: N/A, LO 1, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations:
Operational Knowledge.
127. What is troubleshooting?
Solution: Troubleshooting involves the logical, systematic identification of the source of

problems to fix them and avoid their recurrence. For variances, managers use variance
analysis to identify problems, and then troubleshooting to solve the issues that caused the
variances.
Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:
128. How do managers use benchmarking to plan and control in order to achieve company
objectives?
Solution: Once set, budgeted numbers – whether sales, expenses or balance sheet items-
become the benchmark, and actual performance will be compared to the benchmark. Once
the budget is created, then detailed operational plans begin, which include planning and
scheduling of production, labor, purchases, manufacturing overhead expenditures, and
selling and administrative expenditures. To ensure that the operational plans are enacted,
control activities are put in place to prevent deviations from the budgeted numbers and to
detect overspending.
129. What is a master budget, its purpose, and its three outputs?

Solution: The master budget is a comprehensive, organization-wide budget that requires

inputs from many sources in the company. It is used to coordinate a company’s plans and to
allocate resources accordingly. The three outputs of the master budget are the budgeted
income statement, balance sheet and statement of cash flows.
130. What is a flexible budget, and which variance relates to the flexible budget?
Solution: The flexible budget adapts the master budget data for a change in sales volume
(actual vs. budgeted). It answers the question, “if actual sales volume differs from the
master budget sales volume, what would the new costs and budgeted operating income look
like?” The two variances that relate to the use of a flexible budget are the sales activity
variance and the flexible budget variance.
Ans: N/A, LO 2, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation,
IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis, Business Acumen & Operations:
131. Explain why a change in sales volume warrants the use of a flexible budget.
Solution: Whenever actual sales volume differs from the master budget sales volume, it’s not
productive to compare actual results to the master budget. Since the master budget process
is started with the sales forecast, once the sales volume changes from the original budgeted
amount, it will cause a cascading effect not only on the revenues, but also on all variable
costs.
132. What is the key benefit of standard costing?

Solution: The key benefit of standard costing is that using variance analysis one year helps
inform planning and budgeting for the next. Since management control is a process,
evaluating performance and tweaking future plans keeps the cycle moving forward.
133. Companies establish standards and control them with different levels of rigor. Identify the
two levels of standards and differentiate them.
Solution: The two levels of standards are ideal standards and practical standards. Ideal
standards are those that do not allow for machine breakdowns or employee breaks. Ideal
standards are typically best suited for a futuristic production facility with only robots and
drones with no human labor. Practical standards involve firm, yet attainable benchmarks
that allow for realistic situations such as machine breakdowns, worker mistakes, and
downtime. Practical standards are generally more motivating since they are attainable.

134. Describe how and when standard costs should be updated.

Solution: At the end of each period, once variance analysis has been performed and
variances are known, management reviews the standards in place for the duration of that
period. It is then discussed whether the same resource quantities and prices are appropriate
standards to use for the next period, or if adjustments are needed. Variance analysis points
management in the direction of the cause of the variances, and after identifying the causes,
management looks for workable solutions using trouble shooting.
135. Describe production variances and identify three specific production variances.
Solution: Production variances entirely revolve around costs incurred in production. It is
imperative that management follow up with variance analysis to plan for unit costs, control
them, and then evaluate performance once units have been produced and troubleshoot why
variances occurred. Production variances include (1) DM Price Variance, (2) DM Efficiency
Variance, (3) DL Price Variance, (4) DL Efficiency Variance, (5) Variable-MOH Price
Variance, (6) Variable-MOH Efficiency Variance, (7) Fixed-MOH Price Variance, and (8)
Fixed-MOH Production Volume Variance.
136. Identify what the DM Price Variance and DM Efficiency Variance reflect and what questions
each should address.
Solution: The DM Price Variance reflects the difference in the actual price and the standard
price of the DM quantity purchased, and helps to answer the question, “What should we have
paid for DM inputs according to standard prices, when making the actual volume of units?”
The DM efficiency variance reflects the difference in the actual volume and standard volume
given the standard price. It helps to answer the question, “What quantity of DM inputs should
we have used in making the actual volume of units?”
137. Describe what the DL Price Variance and DL Efficiency Variance reflect and what questions
each should address.
Solution: The DL Price Variance reflects the difference between the actual DL rate and the
standard labor rate for all DL hours used, and helps to answer the question, “What should
have been paid for the DL cost to make the actual volume of units?” The DL Efficiency
Variance captures the difference in the standard DL cost for the actual DL hours used and
the DL hours that were expected to be used for actual production and helps to answer the
question, “How much DL time should have been used in making the actual volume of units?”

138. Describe the three standard costing journal entries for variable-MOH costs.
Solution:
a. Actual Variable-MOH costs are recorded as debits to Variable-MOH Control, and the
sources of these costs are credited (payables)
b. As units are completed, the applied cost is debited to WIP Inventory and credited to
Variable-MOH Control.
c. The specific Variable-MOH price variance and/or efficiency variances are recognized as
the Variable-MOH Control account is closed.
139. Identify at least two causes of variable-MOH variances.

Solution: Some of the causes of Variable-MOH variances are (1) change quality of DM
input, (2) change suppliers, (3) substitute a comparable DM for the standard, (4) alter
product formula, and (5) using more/less experienced workers than planned.
140. Identify at least two causes for fixed-MOH variances.

Solution: Some of the causes for fixed-MOH variances are (1) rent or buy a larger facility
and/or factory equipment, (2) increase or decrease in actual production compared to plan,
and (3) adjustment in actual fixed-MOH costs such as factory insurance premiums, property
taxes, and fixed portion of utility costs.
141. Explain how standard costs and variances are reported.

Solution: The general ledger accounts DM Inventory, WIP Inventory, FG Inventory and Cost
of Goods Sold are recorded with standard costs throughout the year. Each variance
calculated is also recorded in the general ledger with its own temporary general ledger
account, tracking differences between standard and actual costs. Because the variances are
temporary accounts, they must be closed at year-end.
142. Describe the Master Budget Sales Variance and what factors affect this variance.
Solution: Revenues are always the product of two factors: Sales price and volume (or sales
activity, and either element can cause a variance from the master budget. The Master
Budget Sales Variance captures the entire difference between actual results and master
budget values, which includes both sales price and volume variations between actual sales

and master budget sales. It is calculated as follows: Total actual sales – Total budgeted
sales.
143. What is the difference between the Sales Price Variance and the Sales Activity Variance?
Solution: The Sales Price Variance isolates and quantifies the result of changes in the sales
price ({Actual sales price per unit – Budgeted sales price per unit} x Actual volume sold)
whereas, the Sales Activity Variance reflects the difference between the actual volume and
the budgeted volume at the budgeted sales price ({Actual volume – Budgeted volume} x
Budgeted sales price).
144. What four variances must be inspected to determine the causes for a Comprehensive Sales
Activity Variance?
Solution: The four variances to be inspected are:

a. Sales Mix Variance
b. Sales Quantity Variance
c. Market Share Variance
d. Market Size Variance

Farmer CA1e TB Ch10 3PP Accepted

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Farmer CA1e TB Ch10 3PP Accepted

Uploaded by

Copyright:

Available Formats

CHAPTER 10

VARIANCE ANALYSIS AND STANDARD COSTING

Current count is:

Number and percentage of questions:

FOR INSTRUCTOR USE ONLY

MULTIPLE CHOICE QUESTIONS

4. Long-range planning happens _____________ the current year’s budget is set.

FOR INSTRUCTOR USE ONLY

6. Approved budgets become ___________.

8. In budgeting, when realities change, old assumptions and their benchmarks

FOR INSTRUCTOR USE ONLY

12. Which of the following statements is true regarding budgets?

15. In order to achieve its goals, a company should

FOR INSTRUCTOR USE ONLY

18. The correct equation for a Master Budget Variance is

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

Unit selling price Sales volume

What is the flexible budget variance for Cubana Candles?

Unit selling price Sales volume

What is the master budget variance for Cubana Candles?

Unit selling price Sales volume

What is the sales activity variance for Cubana Candles?

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

41. Standards should be reviewed and updated

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

47. A price variance compares the

48. An efficiency variance compares the

FOR INSTRUCTOR USE ONLY

FOR INSTRUCTOR USE ONLY

55. For standard costing journal entries,

56. Direct materials (DM) efficiency variances are recorded

FOR INSTRUCTOR USE ONLY

58. A company’s direct labor (DL) efficiency variance is computed as

63. The correct equation for the variable-MOH price variance is

FOR INSTRUCTOR USE ONLY

66. A favorable Variable-MOH Price Variance means that

67. Variances with overall favorable effects will carry

FOR INSTRUCTOR USE ONLY

68. General ledger accounts for variances are classified as

69. Because variance accounts are

70. Variance accounts are closed or written off to

72. Bonaventura Boots had the following variances at year-end:

FOR INSTRUCTOR USE ONLY

73. Bonaventura Boots had the following variances at year-end:

What is the journal entry to close these variances?

Actual Variable MOH Incurred $2,328

What is the Variable-MOH Price Variance?

FOR INSTRUCTOR USE ONLY

Actual Variable MOH Incurred $2,328

What is the Variable-MOH Efficiency Variance?

Actual Fixed-MOH Incurred $2,572

What is the Fixed-MOH Price Variance?

Actual Fixed-MOH Incurred $2,572

What is the Fixed-MOH Volume Variance?

FOR INSTRUCTOR USE ONLY

80. The master budget sales variance captures

81. The total sales variance is also known as the

82. The sales price variance is computed as the

FOR INSTRUCTOR USE ONLY