Chapter 18

STANDARD COSTING: SETTING

STANDARDS AND ANALYZING VARIANCES

MULTIPLE CHOICE

Question Nos. 11-16, 18, 19, 21, 22, 26-28, 31, 35, and 36 are AICPA adapted.
Question Nos. 23-25 and 30 are ICMA adapted.
Question Nos. 17, 20, 29, 32-34, and 37 are CIA adapted.

D 1. The type of standard that is intended to represent challenging yet attainable results is:
A. theoretical standard
B. flexible budget standard
C. controllable cost standard
D. normal standard
E. expected actual standard

A 2. Standard costs are used for all of the following except:

A. income determination
B. controlling costs
C. measuring efficiencies
D. forming a basis for price setting
E. establishing budgets

C 3. Of the following variances, the one that is most useful in assessing the performance of the
Purchasing Department is the:
A. idle capacity variance
 B. overhead price variance
C. materials purchase price variance
D. labor rate variance
E. materials price usage variance

B 4. The labor efficiency variance is computed as:

A. the difference between standard and actual rates, multiplied by standard hours
B. the difference between standard and actual hours, multiplied by standard rate
C. the difference between standard and actual rates, multiplied by actual hours
D. the difference between standard and actual hours, multiplied by the difference between
standard and actual rates
E. a percentage of the labor time variance
B 5. The method used to assure fairness in the rates paid for each operation performed by an
employee is:
A. job costing
B. job rating
C. union contracting
D. the agreed-upon wages at the time of employment
E. labor rate variance analysis

D 6. Materials and labor cost standards are generally based on:

A. expected actual conditions, anticipated prices, and desired efficiency levels
B. theoretical conditions, present price levels, and desired efficiency levels
C. capacity conditions, anticipated prices, and desired efficiency levels
D. normal conditions, present price levels, and desired efficiency levels
E. theoretical conditions, anticipated prices, and theoretically attainable efficiency levels

D 7. The most effective standards are set following a careful study of products and operating
conditions by the:
A. Accounting Department, central management, and the Industrial Engineering Department
B. central management and the employees whose performance is being evaluated
C. Accounting Department and engineering staff
D. Industrial Engineering Department and the employees whose performance is being
evaluated
E. central management and the Industrial Engineering Department

E 8. In analyzing factory overhead variances, the volume variance is the difference between the:
A. actual amount spent for overhead items during the period and the amount applied during
the period
B. variable efficiency variance and fixed efficiency variance
C. amount shown in the flexible budget and the amount shown in the master budget
D. master budget application rate and the flexible budget application rate, multiplied by actual
hours worked
E. budget allowance based on standard hours allowed for actual production for the period
and the amount of applied factory overhead during the period

D 9. The variance resulting from obtaining an output different from the one expected on the basis of
 input is the:
A. mix variance
B. output variance
C. usage variance
D. yield variance
E. efficiency variance

A 10. In its reports to management, a company disclosed the presence of a fixed efficiency variance.
The procedure used to analyze variances was the:
A. four-variance method
B. mix and yield variances method
C. two-variance method
D. alternative three-variance method
E. three-variance method
D 11. A purpose of standard costing is to:
A. allocate cost with more accuracy
B. eliminate the need for subjective decisions by management
C. determine the "break-even" production level
D. control costs
E. all of the above

A 12. Which one of the following is true concerning standard costs?

A. If properly used, standards can help motivate employees.
B. Unfavorable variances, material in amount, should be investigated, but large favorable
variances need not be investigated.
C. Standard costs are difficult to use with a process costing system.
D. Standard costs are estimates of costs attainable only under the most ideal conditions, but
rarely practicable.
E. All of the above

A 13. When computing variances from standard costs, the difference between actual and standard
price multiplied by actual quantity yields a:
A. price variance
B. volume variance
C. mix variance
D. yield variance
E. combined price-quantity variance

E 14. A company controls its production costs by comparing its actual monthly production costs with
the expected levels. Any significant deviations from expected levels are investigated and
evaluated as a basis for corrective actions. The quantitative technique that is most probably
being used is:
A. time-series or trend regression analysis
B. correlation analysis
C. differential calculus
D. risk analysis
E. standard cost variance analysis

C 15. What type of direct material variances for price and usage will arise if the actual number of
 pounds of materials used was less than standard pounds allowed but actual cost exceeds
standard cost?

Usage Price
A. unfavorable favorable
B. favorable favorable
C. favorable unfavorable
D. unfavorable unfavorable
E. none none

B 16. If a company follows a practice of isolating variances at the earliest time, the appropriate time to
isolate and recognize a direct materials price variance would be when:
A. the purchase order is originated
B. materials are purchased
C. materials are issued
D. the materials requisition is prepared
E. materials are used in production
A 17. Which of the following would least likely cause an unfavorable materials quantity (usage)
variance?
A. labor that possesses skills equal to those required by the standards
B. scheduling of substantial overtime
C. a mix of direct materials that does not conform to plan
D. materials that do not meet specifications
E. machinery that has not been maintained properly

D 18. Information about Sargent Company's direct material costs is as follows:

Standard unit price $3.60

Actual quantity purchased 1,600
Standard quantity allowed for actual production 1,450
Materials purchase price varianceCunfavorable $240

What was the actual purchase price per unit, rounded to the nearest penny?
A. $3.06
B. $3.11
C. $3.45
D. $3.75
E. $3.60

SUPPORTING CALCULATION:

$240 = 1,600 (x - $3.60)

1,600 x = $240 + $5,760
x = $3.75

C 19. Using the following symbols, which formula represents the calculation of the labor rate variance?

AH = Actual hours
SH = Standard hours allowed for actual production
AR = Actual rate
SR = Standard rate
 A. SR(AH - SH)
B. AR(AH - SH)
C. AH(AR - SR)
D. SH(AR - SR)
E. SH(SR - AR)

D 20. When a change in the manufacturing process reduces the number of direct labor hours and
standards are unchanged, the resulting variance will be:
A. an unfavorable labor usage variance
B. an unfavorable labor rate variance
C. a favorable labor rate variance
D. a favorable labor usage variance
E. both (C) and (D) above
B 21. The most probable reason a company would experience a favorable labor rate variance and an
unfavorable labor efficiency variance is that:
A. the mix of workers assigned to the particular job was heavily weighted toward the use of
higher paid, experienced individuals
B. the mix of workers assigned to the particular job was heavily weighted toward the use of
new, relatively low-paid, unskilled workers
C. because of the production schedule, workers from other production areas were assigned
to assist in this particular process
D. defective materials caused more labor to be used in order to produce a standard unit
E. the actual price paid for materials that went into production was less than the standard
price that was expected to be paid

C 22. Information on Orman Company's direct labor costs is as follows:

Standard direct labor rate....................................................................................... $3.75

Actual direct labor rate............................................................................................ $3.50
Standard direct labor hours..................................................................................... 10,000
Direct labor usage (efficiency) varianceCunfavorable............................................. $ 4,200

What were the actual hours worked, rounded to the nearest hour?
A. 11,914
B. 10,714
C. 11,120
D. 11,200
E. none of the above

SUPPORTING CALCULATION:

$4,200 = $3.75 (x - 10,000)

$3.75 x = $4,200 + $37,500
x = 11,120

D 23. Each unit of Product 8in1 requires two direct labor hours. Employee benefit costs are treated as
direct labor costs. Data on direct labor are as follows:
 Number of direct employees................................................................................... 25
Weekly productive hours per employee.................................................................. 30
Estimated weekly wages per employee.................................................................. $240
Employee benefits (related to weekly wages)........................................................ 25%

The standard direct labor cost per unit of Product 8in1 is:
A. $8.00
B. $10.00
C. $12.00
D. $20.00
E. none of the above

SUPPORTING CALCULATION:

$240 + . 25( 240 )

= $20 / unit
30 ÷ 2
B 24. J. R. Richard Company employs a standard absorption system for product costing. The
standard cost of its product is as follows:

Direct materials....................................................................................................... $14.50

Direct labor (2 direct labor hours x $8)................................................................. 16.00
Manufacturing overhead (2 direct labor hours x $11)............................................. 22.00
Total standard cost................................................................................................. $52.50

The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor
hours. Richard planned to produce 25,000 units each month during the year. The budgeted
annual manufacturing overhead is:

Variable................................................................................................................... $3,600,000
Fixed....................................................................................................................... 3,000,000
................................................................................................................................ $6,600,000

During November, Richard produced 26,000 units. Richard used 53,500 direct labor hours in
November at a cost of $433,350. Actual manufacturing overhead for the month was $250,000
fixed and $325,000 variable.

The manufacturing overhead controllable variance for November is:

A. $9,000 unfavorable
B. $13,000 unfavorable
C. $9,000 favorable
D. $4,000 favorable
E. none of the above

SUPPORTING CALCULATION:

Actual factory overhead.............................................. $ 575,000

Budget allowance:
Variable factory overhead (52,000 x $6)........... $312,000
Budgeted fixed overhead..................................... 250,000 562,000
Controllable variance.................................................. $ 13,000 unfavorable
B 25. J. R. Richard Company employs a standard absorption system for product costing. The
standard cost of its product is as follows:

Direct materials..................................................................................................... $14.50

Direct labor (2 direct labor hours x $8)............................................................... 16.00
Manufacturing overhead (2 direct labor hours x $11)........................................... 22.00
Total standard cost............................................................................................... $52.50

The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor
hours. Richard planned to produce 25,000 units each month during the year. The budgeted
annual manufacturing overhead is:

Variable................................................................................................................. $3,600,000
Fixed ................................................................................................................... 3,000,000
$6,600,000

During November, Richard produced 26,000 units. Richard used 53,500 direct labor hours in
November at a cost of $433,350. Actual manufacturing overhead for the month was $250,000
fixed and $325,000 variable.

The manufacturing overhead volume variance for November is:

A. $12,000 unfavorable
B. $10,000 unfavorable
C. $3,000 unfavorable
D. $9,000 unfavorable
E. $1,000 favorable

SUPPORTING CALCULATION:

Budget allowance based on standard hours allowed

[(52,000 x $6) + $250,000].................................................. $ 562,000
Factory overhead applied at standard............................................... 572,000
Volume variance................................................................................ $ (10,000) favorable
C 26. The following information relates to Department 1 of Ruiz Company for the fourth quarter. The
total overhead variance is divided into three variances: spending, variable efficiency, and
volume.

Actual total overhead (fixed plus variable)................................. $178,500

Budget formula........................................................................... $110,000 + $.50 per hour
Total overhead application rate................................................... $1.50 per hour
Actual hours worked................................................................... 121,000

What was the spending variance in this department during the quarter?
A. $8,000 favorable
B. $4,500 favorable
C. $8,000 unfavorable
D. $4,500 unfavorable
E. none of the above
 SUPPORTING CALCULATION:

Actual factory overhead............................................... $ 178,500

Budget allowance:
Variable for actual hours
(121,000 x $.50)........................................ $ 60,500
Fixed.................................................................... 110,000 170,500
Spending variance....................................................... $ 8,000 unfavorable

A 27. The following information relates to Department 1 of Ruiz Company for the fourth quarter. The
total overhead variance is divided into three variances: spending, variable efficiency, and
volume.

Actual total overhead (fixed plus variable)................................. $178,500

Budget formula........................................................................... $110,000 + $.50 per hour
Total overhead application rate................................................... $1.50 per hour
Actual hours worked................................................................... 121,000
Standard hours allowed for production....................................... 130,000

What was the variable efficiency variance in this department during the quarter?
A. $4,500 favorable
B. $8,000 favorable
C. $4,500 unfavorable
D. $8,000 unfavorable
E. none of the above

SUPPORTING CALCULATION:

Budget allowance for actual hours

[(121,000 x $.50) + $110,000].......................... $ 170,500
Budget allowance for standard hours:
Variable (130,000 x $.50).................................. $ 65,000
Fixed.................................................................... 110,000 175,000
Variable efficiency variance.......................................... $ (4,500) favorable
E 28. Under the two-variance method for analyzing factory overhead, the controllable (budget)
variance is the difference between the:
A. actual fixed factory overhead and the budgeted fixed overhead
B. budget allowance based on standard hours allowed and the factory overhead applied to
production
C. budget allowance based on standard hours allowed and the budget allowance based on
actual hours worked
D. actual factory overhead and the factory overhead applied to production
E. actual factory overhead and the budget allowance based on standard hours allowed

A 29. Materials usage variances are normally chargeable to the:

A. Production Department
B. Purchasing Department
C. Finished Goods Department
D. Materials Storage Department
E. Factory Storeroom Department
C 30. Todco planned to produce 3,000 units of its single product, Teragram, during November. The
standard specifications for one unit of Teragram include six pounds of material at $.30 per
pound. Actual production in November was 3,100 units of Teragram. The accountant
computed a favorable materials purchase price variance of $380 and an unfavorable materials
quantity variance of $120. Based on these variances, one could conclude that:
A. more materials were purchased than were used
B. more materials were used than were purchased
C. the actual cost of materials was less than the standard cost
D. the actual usage of materials was less than the standard allowed
E. actual cost and usage of materials were both less than standard

D 31. Information on Duke Co.'s direct material costs for May is as follows:

Actual quantity of direct materials purchased and used........................................ 30,000 lbs.

Actual cost of direct materials............................................................................... $84,000
Unfavorable direct materials usage variance......................................................... 3,000
Standard quantity of direct materials allowed for May production......................... 29,000 lbs.

For the month of May, Duke's direct materials price variance was:
A. $2,800 favorable
B. $2,800 unfavorable
C. $6,000 unfavorable
D. $6,000 favorable
E. none of the above

SUPPORTING CALCULATION:

$3,000 = x (30,000 - 29,000)

1,000 x = $3,000
x = $3
y = $2.80 - $3.00(30,000)
y = ($6,000) favorable

A 32. A company uses a standard cost system to account for its only product. The materials standard
per unit was 4 lbs. at $5.10 per lb. Operating data for April were as follows:

Material used........................................................................................................ 7,800 lbs.

Cost of material used............................................................................................ $40,950
Number of finished units produced....................................................................... 2,000

The material usage variance for April was:

A. $1,020 favorable
B. $1,050 favorable
C. $1,170 unfavorable
D. $1,200 unfavorable
E. none of the above
 SUPPORTING CALCULATION:

x = $5.10 [7,800 - (2,000 x 4)]

x = ($1,020) favorable

D 33. During the last three months, a manufacturer incurred an unfavorable labor efficiency variance.
The least likely cause of this variance is:
A. substantial materials were purchased at a discount at a previously unused supplier's
liquidation
B. for one week, only half of the workforce, those with the highest seniority, were called in
to work
C. a second production line with all new personnel was started
D. the cost-of-living adjustment for the three-month period was $.10 more per hour than
expected
E. none of the above

D 34. The direct labor standards for producing a unit of a product are two hours at $10 per hour.
Budgeted production was 1,000 units. Actual production was 900 units, and direct labor cost
was $19,000 for 2,000 direct labor hours. The direct labor efficiency variance was:
A. $1,000 favorable
B. $1,000 unfavorable
C. $2,000 favorable
D. $2,000 unfavorable
E. none of the above

SUPPORTING CALCULATION:

x = $10 [2,000 - (900 x 2)]

x = $2,000 unfavorable

C 35. Under the two-variance method for analyzing factory overhead, the factory overhead applied to
production is used in the computation of the:

Controllable Volume
 (Budget) Variance Variance
A. yes no
B. yes yes
C. no yes
D. no no

D 36. Under the three-variance method for analyzing factory overhead, which of the following is used
in computation of the spending variance?

Actual Factory Budget Allowance

Overhead Based on Actual Hours
A. no yes
B. no no
C. yes no
D. yes yes
D 37. Compute the variable efficiency variance, using the following data:

Standard labor hours per good unit produced............................................................. 2

Good units produced................................................................................................... 1,000
Actual labor hours used............................................................................................... 2,100
Standard variable overhead per standard labor hour................................................... $3
Actual variable overhead............................................................................................. $ 6,500

A. $200 favorable
B. $200 unfavorable
C. $300 favorable
D. $300 unfavorable
E. none of the above

SUPPORTING CALCULATION:

Variable budget allowance for actual hours (2,100 x $3)....................... $ 6,300

Variable budget allowance for standard hours
($3 x 1,000 x 2)............................................................................. 6,000
......................................................................................................... $ 300
.......................................................................................unfavorable

The following questions are based on materials in the Appendix to the chapter.

A 38. In the alternate three-variance method, the efficiency variance is:

A. Standard factory overhead rate x (Actual units of allocation base - Standard units of
allocation base allowed)
B. Actual factory overhead incurred - Budget allowance based on actual hours
C. Budget allowance based on actual hours - (Actual hours x Factory overhead rate)
D. Budgeted fixed factory overhead - (Actual hours x Fixed overhead rate)
E. none of the above

D 39. The four-variance method reconciles to the two-variance method by combining which of the
 following to get the controllable variance?
A. fixed efficiency variance and idle capacity variance
B. spending variance and fixed efficiency variance
C. spending variance and idle capacity variance
D. spending variance and variable efficiency variance
E. none of the above

B 40. The four-variance method reconciles to the two-variance method by combining which of the
following to get the volume variance?
A. spending variance and variable efficiency variance
B. fixed efficiency variance and idle capacity variance
C. variable efficiency variance and fixed efficiency variance
D. spending variance and idle capacity variance
E. none of the above