Standard Costing and Variance Analysis

Question 1

Which of the following would not be used to estimate standard material prices?

A - The availability of bulk purchase discounts
B - Purchase contracts already agreed
C - The forecast movement of prices in the market
D - Performance standards in operation

Answer 1

D - Performance standards in operation

Performance standards would be taken into account when estimating material usage, they would not have a direct effect on material price.
All of the other factors would be used to estimate standard material prices for a forthcoming period

Question 2

Which of the following statements about budgets and standards is/are correct?
1) Budgets can be used in situations where output cannot be measured but standards cannot be used in such situations.
2) Budgets can include allowances for inefficiencies in operations but standards use performance targets which are attainable under the most favourable conditions
3) Budgets are used for planning purposes, standards are used only for control purposes

A - 1, 2 and 3
B - 1 and 2 only
C - 1 only
D - 2 and 3 only

Answer 2

C - 1 only

1) Budgets can be used in situations where output cannot be measured but standards cannot be used in such situations.

Statement 1 is correct. The use of standards is limited to situations where output can be measured.
Statement 2 is not correct. Standards can include allowances for inefficiencies in operations, through the use of attainable standards.
Statement 3 is not correct. Standards and budgets are both used for planning and control purposes.

Question 3

Which of the following is not a cause of variances?
A - Actual prices are different from budgeted prices
B - Actual resource usage is different from planned resource usage
C - Actual production volume is different from budgeted production volume
D - Actual prices are different from forecast prices

Answer 3

D - Actual prices are different from forecast prices

All of the other options given will give rise to a variance

Question 4

Telgar plc uses a standard costing system, with its material inventory account being maintained at standard cost. The following details have been extracted from the standard cost card in respect of materials.

8 kg @ £0.80/kg = £6.40 per unit
Budgeted production in April was 850 units
.
The following details relate to actual materials purchased and issued to production during April when actual production was 870 units

Materials purchased 8,200 kg costing = £6,888
Materials issued to production = 7,150 kg

The material price variance for April was:
A - £286 adverse
B - £286 favourable
C - £328 adverse
D - £328 favourable

The material usage variance for April was
A - £152.00 favourable
B - £152.00 adverse
C - £159.60 adverse
D - £280.00 adverse

Answer 4

C - £328 adverse

8,200 kg did cost 6,888
But should have cost (×£0.80) 6,560
——
328 (A)

However, the material inventory account is maintained at standard cost, therefore the material price variance is calculated when the materials are purchased. Adverse as they cost more than they should have.

B - £152.00 adverse

870 units did use 7,150 kg
But should have used (×8 kg) 6,960 kg
—-
Usage variance in kg 190 (A)
Usage variance in £ = (190 kg ×standard price per kg £0.80) £152 A

Question 5

Extracts from Verona Ltd’s records for June are as follows

Budget vs actual:
Production = 520 units vs 560 units
Variable production overhead cost = £3,120 vs £4,032
Labour hours worked = 1,560 vs 2,240

The variable production overhead total variance for June is
A - £240 adverse
B - £672 adverse
C - £672 favourable
D - £912 adverse

Answer 5

B - £672 adverse
Standard variable overhead cost per unit = £3,120/520 units = £6 per unit

Standard variable overhead cost for 560 units (×£6) = 3,360
Actual variable overhead cost = 4,032
——
672 adverse

Question 6

Extracts from Verona Ltd’s records for June are as follows

Budget vs actual:
Production = 520 units vs 560 units
Variable production overhead cost = £3,120 vs £4,032
Labour hours worked = 1,560 vs 2,240

The variable production overhead expenditure variance for June is
A - £448 favourable
B - £448 adverse
C - £672 adverse
D - £912 adverse

Answer 6

A - £448 favourable

Standard variable production overhead cost per hour = £3,120/1,560 = £2 per hour

2,240 hours of variable production overhead should cost (×£2) = 4,480
But did cost = 4,032
——
448 (F)

Question 7

Extracts from Verona Ltd’s records for June are as follows

Budget vs actual:
Production = 520 units vs 560 units
Variable production overhead cost = £3,120 vs £4,032
Labour hours worked = 1,560 vs 2,240

What is the efficiency variance?

A - £1,008 adverse
B - £1,120 adverse
C - £1,120 favourable
D - £1,360 adverse

Answer 7

B - £1,120 adverse

Standard time allowed for one unit = 1,560 hours/520 units
= 3 hours/unit
Standard variable production overhead cost per
hour = £3,120/1,560
= £2/hour

560 units should take (×3 hours) = 1,680 hrs
But did take = 2,240 hrs
—–
Efficiency variance in hours 560 hrs (A)

Efficiency variance in £ = (Efficiency variance in hours × standard variable
production overhead per hour £2) = £1,120 (A)

Question 8

The following information is available for Mentamint Ltd, which makes one product

Budgeted fixed overhead per unit = £10
Budgeted output = 1,000 units
Actual output = 1,200 units
Actual fixed overheads = £11,200

What is the fixed overhead expenditure variance?
A - £1,200 adverse
B - £800 favourable
C - £1,200 favourable
D - £800 adverse

Answer 8

A - £1,200 adverse

Budgeted fixed overhead cost £10 ×1,000 = 10,000
Actual fixed overhead cost = 11,200
Fixed overhead expenditure variance = 1,200 (A)

Question 9

To reconcile the budgeted contribution to the actual contribution, which of the following must be accounted for?
A - All sales variances and all marginal cost variances
B - All sales variances
C - All marginal cost variances
D - Neither sales nor marginal cost variances

Answer 9

A - All sales variances and all marginal cost variances

Budgeted contribution is different from actual contribution because of all of the sales and marginal
cost variances which have arisen.

Question 10

A company budgets to make and sell 83,000 units of its product each period. The standard contribution per unit is £8.

The following variances (A = adverse; F = favourable) were reported for the latest period

Variances:
Sales volume contribution 42,400 (A)
Sales price 7,310 (F)
Material total 7,720 (F)
Material price 10,840 (F)
Labour total 6,450 (A)
Variable overhead total 4,250 (A)
Fixed overhead expenditure 8,880 (F)

The budgeted fixed overhead expenditure for the period was £210,000

The actual profit for the period was:
A - £424,810
B - £435,650
C - £482,190
D - £634,810

Answer 10

A - £424,810

Budgeted contribution 83,000 ×£8 = 664,000

Variances:
Sales volume = 42,400 (A)
Sales price = 7,310 (F)
Material total = 7,720 (F)
Labour total = 6,450 (A)
Variable overhead total = 4,250 (A)

Favourable = 7,310 + 7,720 = 15,030
Adverse = 42,400 + 6,450 + 4,250 = 53,100
—-
Total = 38,070 adverse

664,000 - 38,070 = 625,390 actual contribution

Budgeted fixed overhead = 210,000
Fixed overhead expenditure variance = 8,880 (F)
—
201,120

Actual profit = actual contribution - fixed overhead expenditure
625,930 - 201,120 = 424,810

Question 11

During a period, 17,500 labour hours were worked at a standard cost of £6.50 per hour. The labour efficiency variance was £7,800 favourable.

Requirement
How many standard hours should have been worked?
A - 1,200
B - 16,200
C - 17,500
D - 18,700

Answer 11

D - 18,700

Production should have taken = X hours
But did take = 17,500 hours
Variance in hours = X – 17,500 hours (F)
× standard rate per hour = × £6.50
Variance in £ = £7,800 (F)
∴ 6.5 (X – 17,500) = 7,800
X – 17,500 = 1,200
X = 18,700

1,200 hours is the efficiency variance in terms of hours, and 17,500 is the actual number of hours worked

Question 12

The following information relates to material costs for the latest period.

Actual material purchased and used 210,000 kg
Standard material for actual output 175,000 kg
Total actual materials cost £336,000
Materials price variance £21,000 adverse

What was the standard materials price per kg?
A - £1.50
B - £1.70
C - £1.80
D - £2.04

Answer 12

A - £1.50

Materials price variance per kg purchased and used = (£21,000/210,000)
= £0.10 (A) per kg
Actual price per kg = £336,000/210,000 = £1.60
Standard price per kg = £1.50

Question 13

Consider the following statements:
1) Favourable variances are always good for an organisation
2) Variance reporting is the comparison of the actual results with the original budget

Which of the following is correct with regards to the statements above?
A - Both statements are correct
B - Both statements are incorrect
C - Statement 1 is correct but statement 2 is incorrect
D - Statement 1 is incorrect but statement 2 is correct

Answer 13

B - Both statements are incorrect

Favourable variances may not always be good. For example, a favourable materials variance might be achieved by buying poorer quality material which means that the labour force have to spend much longer working on the material leading to an adverse labour variance.

Variance reporting is the reporting of differences between the actual results and the flexed budget not the original budget.

Question 14

Variances which are simply random deviations can be described as which of the following?
A - Controllable
B - Uncontrollable
C - Either controllable or uncontrollable
D - Marginal costs

Answer 14

B - Uncontrollable

Uncontrollable variances are variances which have arisen by chance. They are random deviations.
Controllable variances result from a manager’s actions and decisions

Question 15

Consider the following factors for investigating a variance

1) Controllability of variance
2) Cost of investigation
3) Personnel involved
4) Trend of variance

Which of these would be a factor that would affect a decision as to whether to investigate the variance?

A - 2 and 4 only
B - 2, 3 and 4 only
C - 1, 2 and 3 only
D - 1, 2, and 4 only

Answer 15

D - 1, 2, and 4 only

All of these apart from personnel would influence the decision to investigate a variance as they include cost/benefit considerations, whether the variance can be controlled and what the movement of the variance suggests is a trend

Question 16

Which of the following would not help to explain a favourable materials usage variance?
A - Using a higher quality of materials than specified in the standard
B - Achieving a lower output volume than budgeted
C - A reduction in quality control checking standards
D - A reduction in materials wastage rates

Answer 16

B - Achieving a lower output volume than budgeted

Variations in output volume should not affect usage of materials per unit produced. The calculation of the usage variance is based on a flexed budget allowance for the actual volume achieved

Question 17

Select the likely impact of the following actual events on the materials price variance

The standard material price was set too low
A - Adverse
B - Favourable
C - No impact

Discounts were taken from suppliers for early settlement of invoices
D - Adverse
E - Favourable
F - No impact

The material purchased was of a higher quality than standard
G - Adverse
H - Favourable
I - No impact

Answer 17

The standard material price was set too low
A - Adverse

If the standard material price was set too low then an adverse material price variance is likely to arise.

Discounts were taken from suppliers for early settlement of invoices
F - No impact

Early settlement discounts are a financial management matter and do not affect the actual price paid
for material purchases

The material purchased was of a higher quality than standard
G - Adverse
Material of a higher quality is likely to have a higher price, leading to an adverse material price
variance

Question 18

Which of the following could cause a favourable variable overhead efficiency variance?
A - Using less material than the flexed materials usage budget predicts
B - Working fewer hours than the flexed labour hours budget predicts
C - Variable overhead cost per hour being less than the standard variable overhead cost per hour
D - Fixed overhead expenditure being less than budgeted

Answer 18

B - Working fewer hours than the flexed labour hours budget predicts

Variable overhead efficiency variance = (standard hours for actual output – actual hours) × standard variable overhead rate per hour.

Of the options available, only working fewer hours than standard will result in a favourable variance.
Material usage and fixed overhead will have no impact on the efficiency variance. Since the variance is evaluated at the standard rate per hour it will not be affected by the actual variable overhead cost per hour.

Question 19

The labour total variance for the latest period was favourable

Which of the following are, together, certain to have caused this variance?
A - Lower hourly rates than standard and higher than budgeted labour hours
B - Lower hourly rates than standard and lower than budgeted labour hours
C - Lower hourly rates than standard and lower than standard labour hours for the actual production
D - Lower hourly rates than standard and higher than standard labour hours for the actual production

Answer 19

C - Lower hourly rates than standard and lower than standard labour hours for the actual production

To be certain of a favourable labour total variance it would be necessary for both the labour rate variance and the labour efficiency variance to be favourable.

If labour hours are lower than budgeted it is possible that the labour efficiency variance will be favourable, but not certain.

Question 20

A business has a budgeted materials cost of £7 per kg. During the month of June 2,500 kg of the material was purchased and used at a cost of £18,750 in order to produce 1,250 units of the product.
The budgeted materials cost of £14,000 had been based upon budgeted production of 1,000 units of the product.

What was the materials total variance?
A - £1,250 adverse
B - £1,250 favourable
C - £4,750 adverse
D - £4,750 favourable

Answer 20

A - £1,250 adverse

Flexed budget £14,000 × 1,250/1,000 = £17,500
Actual cost = £18,750
Variance = £1,250 adverse

If you calculated the variance to be £4,750 you compared the actual material cost for 1,250 units with the budgeted cost for 1,000 units. This is not a valid comparison for control purposes.

Question 21

A business has a budgeted labour cost per unit of £15.50. During the month of December production details were as follows
Budget 12,600 units
Actual 12,000 units
The actual labour cost for the month was £199,400

What was the labour total variance as a percentage of the flexed budgeted figure?

A - 2.1% adverse
B - 2.1% favourable
C - 7.2% adverse
D - 7.2% favourable

Answer 21

C - 7.2% adverse

Flexed budget: 15.50 x 12,000 = 186,000
Actual: 199,400
Variance = £13,400 adverse

Percentage of flexed budget 13,400/186,000 x 100 = 7.2% adverse

Question 22

A company’s actual output for the period was 22,000 units and variable overhead costs were in line with budget. The budgeted variable overhead cost per unit was £3 and total overhead expenditure of £108,000 meant that fixed overheads were £8,000 under budget.

What was the budgeted level of fixed overheads for the period?
A - £34,000
B - £50,000
C - £66,000
D - £116,000

Answer 22

B - £50,000

Actual expenditure on overheads = 108,000
Fixed overheads under budget = 8,000
—–
Budgeted expenditure on overheads 116,000

Less budgeted variable overhead expenditure
= actual expenditure (£3 × 22,000) = 66,000
————–
Budgeted fixed overhead expenditure = 50,000

Question 23

When absorbing variable overheads on the basis of machine hours, the total variable overhead variance can be worked out by comparing actual variable overheads in a period with the product of the absorption rate and which of the following?

A - (Planned output) × (Standard machine hours per unit)
B - (Actual output) × (Actual machine hours per unit)
C - (Planned output) × (Actual machine hours per unit)
D - (Actual output) × (Standard machine hours per unit)

Answer 23

D - (Actual output) × (Standard machine hours per unit)

Absorption costing always uses the budgeted (or standard) production time, as flexed by the actual output in a period. This means that the actual output is multiplied by the standard machine hours per unit in order to establish a flexed budget of machine hours for the actual production. The value of overheads absorbed would therefore be the absorption rate multiplied by this flexed budget.

Question 24

A product requires raw material with a standard cost of 50p per kg. In February, 2,500 kg of raw material were purchased at a cost of £1,500 of which 2,300 kg of raw material were used in that month’s production

If raw material inventory is valued at standard cost and there was no opening inventory of raw material, which of the following represents the material price variance for February?

A - £250 adverse
B - £230 adverse
C - £230 favourable
D - £250 favourable

Answer 24

A - £250 adverse

The cost of material purchased was £1,500/2,500 per kg, or 60p per kg.

The standard cost is 50p per kg, an adverse variance of 10p per kg.

In February a total of 2,500 kg were purchased of which 2,300kg were used and as there was no opening inventory 200 kg was left in closing inventory.

If inventory were valued at actual cost then some of the adverse price variance would be carried forward in inventory.

However, we are told that inventory is valued at standard cost and therefore the closing inventory is valued at 50p per kg.

This means that the whole of the price variance (2,500 kg × 10p = £250) would be included in the February results. This variance is adverse as the price paid for the material was higher than the standard.

Question 25

The following is extracted from Proteus Ltd’s monthly management reporting:

Budgeted contribution (10,000 units) = 172,000
Variances:
Labour rate: 3,600 (adverse)
Labour efficiency: 8,000 (favourable)
Material price: 10,800 (adverse)
Material usage: 4,900 (favourable)

Total adverse: 14,400
Total favourable: 12,800
= (1,600)

Actual contribution: 172,00 - 1,600 = 170,400 (10,000 units)

The purchasing manager decided to buy a superior quality material that was more expensive than the standard material for use in October. This superior material causes less waste. Labour was able to convert this superior material into the final product in less than the standard time. A wage rise,agreed in July and implemented at the beginning of October, also impacted on the results.

The decision to buy the superior quality materials caused the profit in October to change

Select which of the following best describes that change
A - Fall by £1,600
B - Rise by £4,800
C - Fall by £6,000
D - Rise by £2,000

Answer 25

D - Rise by £2,000

The first important consideration is to ignore the effect of the wage rise, because this did not arise because of the decision to procure the superior quality material. The adverse labour rate variance should therefore be discounted.

The favourable material usage variance arose because the superior material generated less waste.
However, the superior material was more expensive leading to the adverse material price variance, and also could be converted by the workforce more efficiently, leading to the favourable labour efficiency variance

The answer is therefore 8,000F + 4,800F – 10,800A = 2,000F. A favourable cost variance means that profits will rise

Question 26

The following data are available with regard to a product for a given period:

Actual vs budgeted
Sales (units): 10,100 vs 10,000
Sales value: 105,040 vs 102,000
Variable costs at standard: 86,860 vs 86,000
Contribution = 18,180 vs 16,000

The favourable sales volume variance was
A - £1,020
B - £1,040
C - £180
D - £160

Answer 26

D - £160

The sales volume variance is defined as variance in sales volume × the budgeted unit contribution.

The volume variance is 100 units favourable.

The budgeted contribution was:
£16,000/10,000 = £1.60 per unit

The favourable sales volume variance is therefore £1.60 × 100 = £160

Question 27

The following information relates to a firm’s labour costs for the year:

Standard rate per hour = £2.00
Actual rate per hour = £4.00
Actual hours worked = 130,000
Labour efficiency variance = £10,000 favourable

The standard number of labour hours for actual output were:
A - 125,000 hours
B - 127,500 hours
C - 132,500 hours
D - 135,000 hours

Answer 27

D - 135,000 hours

The labour efficiency variance (L) is defined as the variance in labour hours (V) × the standard rate
per hour (R), or
L = V × R
Or V = L/R
L = £10,000 (positive, as it is a favourable variance)
R = £2.00
Therefore V = £10,000/£2 = 5,000
The variance in labour hours is therefore 5,000 favourable meaning the actual hours taken were 5,000 lower than the standard. The actual hours were 130,000 therefore the standard hours were 130,000 + 5,000 = 135,000

Question 28

Would each of the following actual events during the year lead to a sales volume variance being adverse or favourable or have no impact on it?

Sales price increased:
A - Adverse
B - Favourable
C - No impact

Successful advertising campaign
D - Adverse
E - Favourable
F - No impact

Increased labour pay rates
G - Adverse
H - Favourable
I - No impact

Answer 28

Sales price increased:
A - Adverse
If sales prices were increased then market theory would predict a reduction in sales volumes as potential purchasers switch to less expensive alternative products.

Successful advertising campaign
E - Favourable
If an advertising campaign were successful then it would encourage potential purchasers to try the product and therefore an increase in sales volumes would be expected.

Increased labour pay rates
I - No impact
If labour pay rates increased then this would have no impact on sales volumes unless the increase in costs were passed on by an increase in the sales price, which is not the case here

Question 29

Which of the following could introduce bias in a business’s variance results?
A - A fair transfer pricing system
B - Monitoring variances with historic variances
C - Short-term bonus schemes
D - A focus on realistic budgets

Answer 29

C - Short-term bonus schemes

Short-term bonus schemes can put managers under pressure to avoid adverse variances. This may lead them to produce budgets that are not genuine forecasts ie, incorporating budget slack, in order to avoid adverse variances

Question 30

Diff Ltd has produced an operating statement showing last month’s variances, using its new software.
Some of the figures had to be manually entered as the system isn’t fully integrated. All of the variances are favourable. Industry standards have been added to the operating statement, taken from the internet.

Which of the following is/are cause for professional scepticism?
1) The fact that all of the variances are favourable
2) The source and validity of the industry standards
3) The data used to create the operating statement.

A - 2 only
B - 1 and 3 only
C - 2 and 3 only
D - 1, 2, and 3 only

Answer 30

D - 1, 2, and 3 only

There should be an equal chance of obtaining a favourable and adverse variance, so the fact that they are all favourable might suggest that budgets and standards have been manipulated (eg, budget slack).
Taking figures from the internet requires careful thought about its reliability.
The fact that some of the figures were manually entered, means that there is a possibility of human error when inputting.