Overhead Variances Flashcards

1
Q

1A manufacturer has an estimated practical capacity of 90,000 machine hours, and each unit requires
two machine hours. The following data apply to a recent accounting period:
Actual variable overhead $240,000
Actual fixed overhead $442,000
Actual machine hours worked 88,000
Actual finished units produced 42,000
Budgeted variable overhead at 90,000 machine hours $200,000
Budgeted fixed overhead $450,000
Of the following factors, the manufacturer’s production volume variance is most likely to have been caused by
A. A wage hike granted to a production supervisor.
B. A newly imposed initiative to reduce finished goods inventory levels.
C. Acceptance of an unexpected sales order.
D. Temporary employment of workers with lower skill levels than originally anticipated.

A

Answer (B) is correct.
Fixed overhead was budgeted based on a practical capacity of 90,000 machine hours. Because the
standard hours allowed for actual output was 84,000 hours (42,000 units × 2 hours per unit), fixed
overhead was underapplied, and an unfavorable production-volume variance resulted. The only one of
the four actions that would result in fewer machine hours than were budgeted being consumed is the
initiative to reduce finished goods inventory levels.

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2
Q

2Which one of the following variances is of least significance from a behavioral control perspective?
A. Unfavorable direct materials quantity variance amounting to 20% of the quantity allowed for the output
attained.
B. Unfavorable direct labor efficiency variance amounting to 10% more than the budgeted hours for the
output attained.
C. Favorable direct labor rate variance resulting from an inability to hire experienced workers to replace
retiring workers.
D. Fixed overhead volume variance resulting from management’s decision midway through the fiscal year to
reduce its budgeted output by 20%.

A

Answer (D) is correct.
Most variances are of significance to someone who is responsible for that variance. However, a fixed
overhead volume variance is often not the responsibility of anyone other than top management. The
fixed overhead volume variance equals the difference between budgeted fixed overhead and the
amount applied (Standard input allowed for the actual output × Standard rate). It can be caused by
economic downturns, labor strife, bad weather, or a change in planned output. Thus, a fixed overhead
volume variance resulting from a top management decision to reduce output has fewer behavioral
implications than other variances.

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3
Q

3Variable overhead is applied on the basis of standard direct labor hours. If, for a given period, the
direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be
A. Favorable.
B. Unfavorable.
C. Zero.
D. The same amount as the direct labor efficiency variance.

A

Answer (B) is correct.
If variable overhead is applied to production on the basis of direct labor hours, both the variable
overhead efficiency variance and the direct labor efficiency variance will be calculated on the basis of
the same number of hours. If the direct labor efficiency variance is unfavorable, the overhead
efficiency variance will also be unfavorable because both variances are based on the difference
between standard and actual direct labor hours worked.

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4
Q

4A manufacturer uses a standard cost system with overhead applied based upon direct labor hours.
The manufacturing budget for the production of 5,000 units for the month of May included the following
information:
Direct labor
10,000 hours at $15 per hour $150,000
Variable overhead 30,000
Fixed overhead 80,000
During May, 6,000 units were produced and the fixed overhead budget variance was $2,000 favorable. Fixed
overhead during May was
A. Underapplied by $2,000.
B. Underapplied by $16,000.
C. Overapplied by $16,000.
D. Overapplied by $18,000.

A

Answer (D) is correct.
First, the actual production level for the month was 6,000 units of output. Second, the standard number
of labor hours consumed per unit of output is 2 (10,000 budgeted direct labor hours ÷ 5,000 budgeted
units output). Third, since fixed overhead for the month was budgeted at $80,000 and it is to be applied
in proportion to 10,000 budgeted direct labor hours, the application rate is $8 per direct labor hour ($80,000 ÷ 10,000). Thus, the amount of fixed overhead applied for the month was $96,000 = (6,000 ×
$8 × 2). The fixed overhead budget variance was $2,000 favorable, which means the actual fixed
overhead incurred for the month was $78,000 ($80,000 – $2,000). Thus, fixed overhead was
overapplied by $18,000 ($96,000 – $78,000).

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5
Q

5The fixed overhead volume variance is the
A. Measure of the lost profits from the lack of sales volume.
B. Amount of the underapplied or overapplied fixed overhead costs.
C. Potential cost reduction that can be achieved from better cost control.
D. Measure of production inefficiency.

A

Answer (B) is correct.
The fixed overhead volume variance is the difference between budgeted fixed costs and actual
overhead applied, which equals the budgeted fixed overhead rate times the standard input allowed for
the actual output. It is solely a measure of capacity usage and does not signify that fixed costs were
more or less than budgeted.

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6
Q

6Which of these variances is least significant for cost control?
A. Labor price variance.
B. Materials quantity variance.
C. Fixed O/H volume variance.
D. Variable O/H spending variance.

A

Answer (C) is correct.
The fixed O/H volume variance occurs when actual activity levels differ from anticipated levels. It is
an excellent example of cost allocation as opposed to cost control. Unlike other variances, the volume
variance does not directly reflect a difference between actual and budgeted expenditures. The
economic substance of this variance lies in the costs or benefits of capacity usage or nonusage. For
example, idle capacity results in the loss of the contribution margin from units not produced and sold.

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7
Q

Tiny Tykes Corporation had the following activity relating to its fixed and
variable overhead for the month of July:
Actual costs
Fixed overhead $120,000
Variable overhead 80,000
Flexible budget
(Standard input allowed for actual
output achieved × budgeted rate)
Variable overhead 90,000
Applied
(Standard input allowed for actual
output achieved × budgeted rate)
Fixed overhead 125,000
Variable overhead spending variance 2,000 F
Production volume variance 5,000 U
Question: 7If the budgeted rate for applying variable overhead was $20 per direct labor hour, how efficient or
inefficient was Tiny Tykes Corporation in terms of using direct labor hours as an activity base?
A. 100 direct labor hours inefficient.
B. 100 direct labor hours efficient.
C. 400 direct labor hours inefficient.
D. 400 direct labor hours efficient.

A

Answer (D) is correct.
The variable overhead spending and efficiency variances are the components of the total variable
overhead variance. Given that actual variable overhead was $80,000 and the variable overhead based
on the budgeted rate was $90,000, the total variance is $10,000 favorable. If the overhead spending
variance is $2,000 favorable, the efficiency variance must be $8,000 favorable ($10,000 total – $2,000
spending). At a rate of $20 per hour, this variance is equivalent to 400 direct labor hours ($8,000 ÷
$20).

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8
Q

Tiny Tykes Corporation had the following activity relating to its fixed and
variable overhead for the month of July:
Actual costs
Fixed overhead $120,000
Variable overhead 80,000
Flexible budget
(Standard input allowed for actual
output achieved × budgeted rate)
Variable overhead 90,000
Applied
(Standard input allowed for actual
output achieved × budgeted rate)
Fixed overhead 125,000
Variable overhead spending variance 2,000 F
Production volume variance 5,000 U
Question: 8Tiny Tykes’ fixed overhead efficiency variance is
A. $3,000 favorable.
B. $3,000 unfavorable.
C. $5,000 favorable.
D. Never a meaningful variance.

A

Answer (D) is correct.
Variable overhead variances can be subdivided into spending and efficiency components. However,
fixed overhead variances do not have an efficiency component because fixed costs, by definition, are
not related to changing levels of output. Fixed overhead variances are typically subdivided into a
budget (or fixed overhead spending) variance and a volume variance.

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9
Q

9The variance in an absorption costing system that measures the departure from the denominator level
of activity that was used to set the fixed overhead rate is the
A. Spending variance.
B. Efficiency variance.
C. Production volume variance.
D. Flexible budget variance.

A

Answer (C) is correct.
A denominator level of activity must be used to establish the standard cost (application rate) for fixed
overhead. The production volume variance is the difference between budgeted fixed costs and the
standard cost per unit of input times the standard units of input allowed for the actual production.

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10
Q

10The production volume variance is due to
A. Inefficient or efficient use of direct labor hours.
B. Efficient or inefficient use of variable overhead.
C. Difference from the planned level of the base used for overhead allocation and the actual level achieved.
D. Excessive application of direct labor hours over the standard amounts for the output level actually
achieved.

A

Answer (C) is correct.
The production volume variance (also called an idle capacity variance) is a component of the total
overhead variance. It is the difference between budgeted fixed costs and the product of the standard
fixed cost per unit of input times the standard units of input allowed for the actual output. Thus, the
production volume variance equals under- or overapplied fixed overhead. This variance results when
actual activity differs from the activity base used to calculate the fixed overhead application rate.

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11
Q

11If overhead is applied on the basis of units of output, the variable overhead efficiency variance will
be
A. Zero.
B. Favorable, if output exceeds the budgeted level.
C. Unfavorable, if output is less than the budgeted level.
D. A function of the direct labor efficiency variance.

A

Answer (A) is correct.
The variable overhead efficiency variance equals the product of the variable overhead application rate
and the difference between the standard input for the actual output and the actual input. Hence, the
variance will be zero if variable overhead is applied on the basis of units of output because the
difference between actual and standard input cannot be recognized.

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12
Q

12A corporation is considering which capacity measure is appropriate to use as the denominator level
of activity when applying fixed overhead to units produced. Assume that the corporation selects direct labor hours as
the cost driver and the following additional data are available from the prior year:
Hours
Standard direct labor hours for normal capacity 200,000
Standard direct labor hours allowed for units produced in the prior year 210,000
Standard direct labor hours for the master budget capacity 220,000
Which of the following capacity measures for the denominator-level of activity would have resulted in an
unfavorable volume variance?
A. Both normal capacity and master budget capacity.
B. Neither normal capacity nor master budget capacity.
C. Normal capacity only.
D. Master budget capacity only.

A

Answer (D) is correct.
The volume (production volume or idle capacity) variance is the amount of under- or overapplied fixed
overhead. It is the difference between budgeted fixed overhead and the amount applied based on a
predetermined rate and the standard input allowed for actual output. It measures the use of capacity
rather than specific cost outlays. The predetermined rate equals the budgeted overhead divided by a
measure of capacity. Consequently, when the standard input allowed for actual output exceeds the
budgeted capacity, fixed overhead is overapplied, and the volume variance is favorable. If the master
budget capacity is the denominator value, the volume variance is unfavorable. Conversely, when the
standard input allowed for actual output is less than the budgeted capacity, fixed overhead is
underapplied, and the volume variance is unfavorable. If the normal capacity is the denominator value,
the volume variance is favorable.

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13
Q

18A fixed overhead volume variance based on standard direct labor hours measures
A. Deviation from standard direct labor hour capacity.
B. Deviation from the normal, or denominator, level of direct labor hours.
C. Fixed overhead efficiency.
D. Fixed overhead use.

A

Answer (B) is correct.
The fixed overhead volume variance measures the effect of not operating at the budgeted
(denominator) activity level. It is the difference between budgeted fixed costs and the product of the
standard fixed overhead application rate and the standard activity level for the actual output. A
favorable variance means that activity was greater than expected and that fixed overhead was
overapplied. It might be caused by, for example, hiring more workers to provide an extra shift. An
unfavorable volume variance means that activity was less than budgeted (overhead was underapplied),
for example, because of insufficient sales or a labor strike. Accordingly, the volume variance is usually
outside the control of production management. Moreover, unlike other variances, it does not directly
reflect a difference between actual and budgeted expenditure of resources.

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14
Q

32A possible short-term problem in controlling overhead costs would be detected by which of the
following variances?
A. Both the fixed overhead spending variance and the volume variance.
B. Both the variable overhead spending variance and the volume variance.
C. The spending variance but not the volume variance.
D. The volume variance but not the fixed overhead spending variance.

A

Answer (C) is correct.
The volume variance is the difference between total budgeted fixed overhead and total fixed overhead
absorbed (applied). It is a measure of the use of capacity, not of the difference between budgeted and
actual costs. However, the spending variance is the difference between actual overhead incurred and
the flexible budget amount for the actual input. In four-way analysis of overhead variances, the
spending variance is divided into fixed and variable components. Consequently, the components of the
spending variance, not the volume variance, are useful in detecting short-term problems in the control
of overhead costs.

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15
Q

37Which type of variance will reflect overtime premiums when the overall volume of work is greater
than expected?
A. Materials quantity.
B. Overhead.
C. Labor efficiency.
D. Yield.

A

Answer (B) is correct.
Overtime premiums arising from a heavy overall volume of work rather than from the requirements of
a specific job are deemed to apply to all production. Hence, they are treated as indirect costs and
assigned to overhead.

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16
Q

38Using the two-variance method for analyzing overhead, which of the following variances contains
both variable and fixed overhead elements?
Controllable
(Budget) Volume Efficiency
Variance Variance Variance
A. Yes Yes Yes
B. Yes Yes No
C. Yes No No
D. No No No

A

Answer (C) is correct.
In two-way analysis, the total overhead variance (fixed + variable) is composed of the volume variance
(total fixed overhead cost budgeted – fixed overhead applied based on standard input allowed for the
actual output) and the controllable (budget) variance (the difference between the total actual overhead
and the volume variance). Consequently, the controllable (budget) variance contains both fixed and
variable elements.

17
Q

39Using the two-variance method for analyzing factory overhead, which of the following is used to
compute the controllable (budget) variance?
A. Both a budget allowance based on actual input and a volume allowance based on standard input.
B. A budget allowance based on actual input but not a budget allowance based on standard input.
C. A budget allowance based on standard input but not a budget allowance based on actual input.
D. A budget allowance based on standard input and a budget allowance based on applied fixed overhead.

A

Answer (C) is correct.
In two-way analysis, the total overhead variance (fixed + variable) is composed of the volume variance
(total fixed overhead cost budgeted – fixed overhead applied based on standard input allowed for the
actual output) and the controllable (budget) variance (the difference between the total actual overhead
and the volume variance). Hence, the controllable (budget) variance is the sum of 1) the difference between actual and budgeted fixed overhead and 2) the difference between actual variable overhead
and the variable overhead budgeted based on the standard input allowed for the actual output.

18
Q

40Using the three-variance method for analyzing factory overhead, which of the following is used to
compute the spending variance?
Budget Budget
Actual Allowance Allowance
Factory Based on Based on
Overhead Actual Input Standard Input
A. Yes Yes No
B. Yes No Yes
C. No Yes Yes
D. No No No

A

Answer (A) is correct.
In three-way analysis, the spending variance is the difference between actual total overhead and the
sum of the budgeted (lump-sum) fixed overhead and the variable overhead budgeted for the actual
input at the standard rate. It combines the variable overhead spending and the fixed overhead budget
(spending) variances used in four-way analysis.

19
Q

46A company applies variable overhead based upon direct labor hours and has a variable overhead
efficiency variance that is $25,000 favorable. A possible cause of this variance is that
A. Higher skilled labor was used.
B. Electricity rates were lower than expected.
C. Fewer supplies were used than anticipated.
D. Fewer units of finished goods were produced.

A

Answer (A) is correct.
When direct labor hours are the allocation base for variable overhead, an efficiency in the use of direct labor hours will naturally result in a favorable variable overhead efficiency variance. Among the items
listed, highly skilled workers would be the most likely cause of a favorable direct labor efficiency
variance.

20
Q

47A firm uses a four-way allocation of overhead, machine hours to allocate overhead, and years of
experience as the main determinant for wage increases. The standards are set and revised on an annual basis. Due to
a surge in competitive pressures, the firm’s management decided to undertake downsizing. The firm offered
incentives that permitted a large number of senior employees to opt in the middle of the year for early retirement. As
a result, the firm had to bring in temporary replacements who were paid entry-level wages to see that work deadlines
were met. Which one of the following is most likely to result from this situation?
A. Unfavorable efficiency variances and favorable price variances.
B. Unfavorable efficiency variances and unfavorable price variances.
C. Favorable efficiency variances and unfavorable price variances.
D. Favorable efficiency variances and favorable price variances

A

Answer (A) is correct.
The use of less-skilled workers will generally result in unfavorable labor efficiency variances.
However, this is accompanied by favorable labor rate (or price) variances, which result from paying
lower wages.

21
Q

49A firm uses a standard cost system and applies factory overhead to products on the basis of direct
labor hours. If the firm recently reported a favorable direct labor efficiency variance, then the
A. Variable overhead spending variance must be favorable.
B. Variable overhead efficiency variance must be favorable.
C. Fixed overhead volume variance must be unfavorable.
D. Direct labor rate variance must be unfavorable.

A

Answer (B) is correct.
Highlight uses direct labor hours as the driver for variable overhead application. Thus, if the direct
labor efficiency variance was favorable, the variable overhead efficiency variance must be favorable as
well since the two variances are based on the same standard and actual hours.

22
Q

52A company has a fixed overhead volume variance that is $10,000 unfavorable. The most likely
cause for this variance is that
A. The production supervisory salaries were greater than planned.
B. The production supervisory salaries were less than planned.
C. More was produced than planned.
D. Less was produced than planned.

A

Answer (D) is correct.
When production is lower than planned, fixed overhead costs are spread among fewer units of output
than were planned for, generating an unfavorable volume variance.

23
Q

53When using a flexible budgeting system, the computation for the variable overhead spending
variance is the difference between
A. Actual variable overhead and the previously budgeted amount.
B. The previously budgeted amount and actual inputs times the budgeted rate.
C. The amount applied to work-in-process and actual variable overhead.
D. Actual variable overhead and actual inputs times the budgeted rate.

A

Answer (D) is correct.
The variable overhead spending variance can be derived by using the following formula:
(AQ × SP) – Actual costs incurred

24
Q

54A company produces and sells replacement parts for cotton processing equipment. Which one of
the following cost variances are least likely to be controllable by the production manager?
A. Variable overhead spending variance.
B. Labor efficiency variance.
C. Materials quantity variance.
D. Fixed overhead production volume variance.

A

Answer (D) is correct.
The fixed overhead production volume variance is the difference between the static/flexible budget for
fixed overhead and the amount allocated based on the budgeted allocation rate and the driver level
allowable for the actual production level achieved. None of these factors are under the control of the
production manager.

25
Q

59Which one of the following is a variance that could appear if a company uses a normal costing
system?
A. Direct material price variance.
B. Direct labor efficiency variance.
C. Variable overhead spending variance.
D. Variable overhead efficiency variance.

A

Answer (C) is correct.
Normal costing applies overhead on the basis of budgeted (normalized) rates. Thus, it is possible to
have a variable overhead spending variance when the budgeted rate is not the same as the actual rate.

26
Q

62Which of the following overhead variances would be helpful in bringing attention to a potential
short-term problem in the control of overhead costs?
Spending Variance
Volume Variance
A. Yes Yes
B. Yes No
C. No Yes
D. No No

A

Answer (B) is correct.
The variable overhead spending variance is favorable or unfavorable if production spending is less or
more, respectively, than the standard. The fixed overhead spending variance is attributable to more or
less spending by the production. The spending variances can alert the production team that this is a
problem with overhead costs. The production-volume variance is only for fixed overhead, and it results
from the difference between production capacity and capacity usage. It only uses standard cost as a
base and would not be a good indicator of a short-term spending problem. In the long term, both types
of variances would be necessary to resolve an overhead cost problem.

27
Q

65If a corporation used a normal cost system, applying overhead based on the number of units
produced, the variance that could arise that would not be present under an actual cost system is the
A. Direct material efficiency variance.
B. Direct labor efficiency variance
C. Variable overhead efficiency variance.
D. Fixed overhead production volume variance.

A

Answer (D) is correct.
Applying overhead based on the number of units produced would result in a fixed overhead production
volume variance. The fixed overhead production volume variance is the difference between the
static/flexible budget for fixed overhead and the amount allocated based on the budgeted allocation
rate and the driver level allowable for the actual production level achieved. The difference between
actual production and budgeted production will impact the production volume variance.