15.7 Comprehensive Example

Question 1

AP > SP

Favorable/Unfavorable

Answer 1

Unfavorable

Question 2

AP<SP

Favorable/Unfavorable

Answer 2

Favorable

Question 3

Price variance equation

Answer 3

AQ (AP-SP)

Question 4

Of the following pairs of variances found in a flexible budget report, which pair is most likely to be related?

A. Labor efficiency variance and fixed overhead volume variance.
B. Material usage variance and labor efficiency variance.
C. Labor rate variance and variable overhead efficiency variance.
D. Material price variance and variable overhead efficiency variance.

Answer 4

B. Material usage variance and labor efficiency variance.

Material usage and labor efficiency variances both result from a deviation in the quantity of input from what was budgeted. They can be either directly or indirectly related. For instance, a reduction in the amount of material used may be compensated for by an increase in the amount of labor. By the same token, a reduction in overall activity on the production line may result in a decrease in both factors.

Question 5

For a given time period, a company had a favorable material quantity variance, a favorable direct labor efficiency variance, and a favorable fixed overhead volume variance. Of the following, the one factor that could not have caused all three variances is

A. The purchase of higher quality materials.
B. The purchase of more efficient machinery.
C. An increase in production supervision.
D. The use of lower-skilled workers.

Answer 5

D. The use of lower-skilled workers.

Lower-skilled workers tend to be less efficient, which would give rise to an unfavorable labor efficiency variance and possibly an unfavorable materials quantity variance.

Question 6

Water Control Systems manufactures water pumps and uses a standard cost system. The standard overhead costs per water pump are based on direct labor hours and are as follows:

Variable overhead (4 hours at $8 per hour): $32
Fixed overhead (4 hours at $5* per hour): 20
Total overhead cost per unit: $52
* Based on a capacity of 100,000 direct labor hours per month.

The following information is available for the month of November:
* 22,000 pumps were produced although 25,000 had been scheduled for production.
* 94,000 direct labor hours were worked at a total cost of $940,000.
* The standard direct labor rate is $9 per hour.
* The standard direct labor time per unit is four hours.
* Variable overhead costs were $740,000.
* Fixed overhead costs were $540,000.

Water Control’s fixed overhead spending variance for November was

A. $60,000 unfavorable
B. $240,000 unfavorable
C. $70,000 unfavorable
D. $40,000 unfavorable

Answer 6

D. $40,000 unfavorable

The fixed overhead spending (budget) variance is the difference between budgeted and actual fixed overhead.

Actual fixed overhead was $540,000. Budgeted fixed overhead was $5 per hour based on a capacity of 100,000 direct labor hours per month, or $500,000. Because these costs are fixed, the budgeted fixed overhead is the same at any level of production. Hence the variance is $40,000 unfavorable. ($500,000 - $540,000).