variances analysis Flashcards
1The purpose of identifying manufacturing variances and assigning their responsibility to a
person/department should be to
A. Use the knowledge about the variances to promote learning and continuous improvement in the
manufacturing operations.
B. Trace the variances to finished goods so that the inventory can be properly valued at year-end.
C. Determine the proper cost of the products produced so that selling prices can be adjusted accordingly.
D. Pinpoint fault for operating problems in the organization.
Answer (A) is correct.
The purpose of identifying and assigning responsibility for variances is to determine who is likely to
have information that will enable management to find solutions. The constructive approach is to
promote learning and continuous improvement in manufacturing operations, not to assign blame.
However, information about variances may be useful in evaluating managers’ performance
2A difference between standard costs used for cost control and the budgeted costs of the same
manufacturing effort can exist because
A. Standard costs represent what costs should be, whereas budgeted costs are expected actual costs.
B. Budgeted costs are historical costs, whereas standard costs are based on engineering studies.
C. Budgeted costs include some slack, whereas standard costs do not.
D. Standard costs include some slack, whereas budgeted costs do not.
Answer (A) is correct.
In the long run, these costs should be the same. In the short run, however, they may differ because
standard costs represent what costs should be, whereas budgeted costs are expected actual costs.
Budgeted costs may vary widely from standard costs in certain months, but, for an annual budget
period, the amounts should be similar.
3In a responsibility accounting system, a feedback report that focuses on the difference between
budgeted amounts and actual amounts is an example of
A. Management by exception
B. Assessing blame.
C. Granting rewards to successful managers.
D. Ignoring other variables for which the budgeted goals were met.
Answer (A) is correct.
A responsibility accounting system should have certain controls that provide for feedback reports
indicating deviations from expectations. Management may then focus on those deviations (exceptions)
for either reinforcement or correction.
4Which of the following factors should not be considered when deciding whether to investigate a
variance?
A. Magnitude of the variance.
B. Trend of the variances over time.
C. Likelihood that an investigation will eliminate future occurrences of the variance.
D. Whether the variance is favorable or unfavorable
Answer (D) is correct.
A variance shows a deviation of actual results from the expected or budgeted results. All significant
variances should be investigated, whether favorable or unfavorable.
5Which of the following management practices involves concentrating on areas that deserve attention
and placing less attention on areas operating as expected?
A. Management by objectives.
B. Responsibility accounting.
C. Benchmarking.
D. Management by exception
Answer (D) is correct.
Management by exception gives significant attention only to those areas in which material deviations
from expectations occur. Consequently, management focuses resources where the greatest returns from
supervisory effort may be achieved
6The controller of a company holds a monthly meeting where any department that has a 10%
unfavorable variance to budget must explain the variance and develop a plan to remedy the situation. This is an
example of
A. Activity-based management.
B. Cost management.
C. Continuous improvement.
D. Management by exception.
Answer (D) is correct.
Variance analysis is an important tool for the management accountant. It enables management by
exception, which is the practice of giving attention primarily to significant deviations from
expectations. Managers must use their judgment to determine the most efficient use of their limited
time. Concentrating on operations that are not performing within expected limits is likely to yield the
best ratio of benefits to costs
7The benefits of management by exception reporting include all of the following except a reduction in
A. Reports/production costs.
B. Information overload.
C. Reliance on advance planning.
D. Unfocused management actions
Answer (C) is correct.
Management by exception, the practice of giving attention primarily to significant deviations from
expectations, is dependent upon careful formulation of standards and sound projection of output and
cost levels. Advance planning will be just as important as ever. There will be no less reliance than in
the past.
8Within a performance monitoring system, which of the following is the least valid reason for
calculating variances between actual performance and budgeted performance?
A. Allowing managers to take early corrective action.
B. Identifying the manager who is responsible for not achieving desired results
C. Identifying efficient practices that can be transferred to other areas of the company.
D. Improving future performance forecasts
Answer (B) is correct.
Not all variances are directly caused by the managers. Some of these variances can be beyond the
control of the manager. Thus, identifying the manager who is responsible for not achieving desired
results should not be the main reason for why variances are calculated. If responsibility for certain
costs exceeds the extent to which a manager can influence or control that activity, the result may be
reduced morale, a decline in managerial effort, and poor performance. This is known as the concept of
controllability.
9A company uses a standard cost system. During the past year, the variances from standard were
significant. The company is considering whether to allocate the variances among the appropriate inventory accounts
and cost of goods sold or to allocate all of the variances directly to cost of goods sold. Under which one of the
following situations would reported net income be largest?
A. All of the variances are favorable and are written off directly to cost of goods sold.
B. All of the variances are unfavorable and are written off directly to cost of goods sold.
C. All of the variances are favorable and are allocated among cost of goods sold and ending inventory
accounts.
D. All of the variances are unfavorable and are allocated among cost of goods sold and ending inventory
accounts.
Answer (A) is correct.
When favorable variances are written off directly to cost of goods sold, cost of goods sold decreases,
which in turn increases net income in full by the entire variance amount.
10Which one of the following is the least likely reason that variances are computed within a
performance monitoring system?
A. To trigger organization learning.
B. To make continuous improvements.
C. To verify the accuracy of standards
D. To alert management to existing problems.
Answer (C) is correct.
Computing variances does not verify the accuracy of standards. The standards may be in fact correct,
while the actual number could include unusual events that require further investigation.
11Which one of the following statements about management by exception is least likely to be
correct?
A. Managers can focus efforts on the most critical areas.
B. It is especially useful when directed at controllable items.
C. It could result in changing a process altogether.
D. Positive variances need not be investigated
Answer (D) is correct.
Positive variances still need to be investigated. If the cause of the positive variance can be found, it can
be applied to other areas to decrease the number of negative variances.
12A standard cost system is often used in variance analysis because standard costs
A. Include past inefficiencies and take into account expected future changes.
B. Exclude past inefficiencies and take into account expected future changes
C. Include past inefficiencies and exclude expected future changes.
D. Exclude past inefficiencies and exclude expected future changes.
Answer (B) is correct.
Standard costs exclude past inefficiencies to focus on current performance and potential improvement,
taking into account expected future changes.
13Use of a standard cost system can include all of the following advantages except that it
A. Assists in performance evaluation.
B. Emphasizes qualitative characteristics.
C. Permits development of flexible budgeting.
D. Allows employees to better understand what is expected of them.
Answer (B) is correct.
A standard cost system is fully focused on quantitative factors, not qualitative characteristics
14When comparing performance report information for top management with that for lower-level
management,
A. Top management reports are more detailed.
B. Lower-level management reports are typically for longer time periods.
C. Top management reports show control over fewer costs.
D. Lower-level management reports are likely to contain more quantitative data and less financial data
Answer (D) is correct.
Information sent to top management is ordinarily more highly aggregated and less timely than that
communicated to managers at operational levels. Top managers are concerned with the organization’s
overall financial results and long-term prospects and are responsible for the strategic planning function.
Lower-level reports contain more quantitative information of an operational nature, e.g., production
data.
15Which one of the following statements is correct concerning a flexible budget cost formula?
Variable costs are stated
A. Per unit and fixed costs are stated in total
B. In total and fixed costs are stated per unit.
C. In total and fixed costs are stated in total.
D. Per unit and fixed costs are stated per unit.
Answer (A) is correct.
Variable costs by their nature are directly related to the level of activity. Thus, a flexible budget
formula must use per-unit variable costs to be useful. At the same time, all fixed costs must be covered
regardless of the level of output. They are most meaningful when stated in total.
