CHAPTER 11: CONTROL AND EVALUATION OF COST CENTERS Multiple Choice c The two general types of variable cost variances are the a rate variance and spending variance b price variance and budget variance c price variance and quantity variance d quantity variance and efficiency variance d A major advantage of using standard costs is that a they are easier to compute than actual costs b they are lower than actual costs c products with standard costs can be sold at lower prices d they provide information for control purposes a Setting standards a has important behavioral implications b is largely a matter of calculating rates and quantities c should be done to make them as tight as possible d is done only for manufacturing activities d Which of the following is NOT a quantity variance? a Material use variance b Labor efficiency variance c Variable overhead efficiency variance d Fixed overhead budget variance a A major drawback to setting standards based on historical results is that such standards a can perpetuate inefficiencies b are harder to compute than are engineered standards c are usually too hard to meet because of inflation d are usually not well received by workers b Cascade Company, which has a $3 standard cost per unit and budgeted production at 1,000 units, actually produced 1,200 units Total standard cost for the period is a $3,000 b $3,600 c an amount that cannot be determined without knowing the variances for the period d none of the above c Which variance is LEAST likely to be affected by hiring workers with less skill than those already working? a Material use variance b Labor rate variance c Material price variance 148 d Variable overhead efficiency variance 149 c Which variance is MOST likely to be affected by buying a more expensive material that produces less waste and is easier to handle? a Labor rate variance b Variable overhead spending variance c Direct labor efficiency variance d Fixed overhead budget variance b Filter Company's budget for overhead costs is: total overhead cost = $50,000 + ($4 x direct labor hours) Standard direct labor time is 1.5 hours per unit of product The standard wage rate is $6 per hour Standard variable overhead cost for a unit of product is a $4.00 b $6.00 c $9.00 d $10.00 b 10 The major variance used in controlling fixed costs is the a efficiency variance b budget variance c use variance d none of the above d 11 If the variable overhead standard is based on direct labor hours and actual hours worked exceed standard hours allowed, the result is a a favorable labor efficiency variance b an unfavorable variable overhead spending variance c a favorable variable overhead spending variance d an unfavorable variable overhead efficiency variance a 12 Control charts are used a to decide whether to investigate variances b to develop standard costs c to calculate variances d for all of the above purposes c 13 An unfavorable labor efficiency variance a means that workers were inefficient and their supervisor did a poor job b causes a favorable variable overhead efficiency variance c can result from an action taken by a manager other than the supervisor of the workers d should always be investigated and corrected d 14 The sum of the material price variance and material use variance always equals the difference between a actual and standard material purchases b actual material purchases and standard material use c standard material purchases and standard material use d none of the above pairs of amounts 150 c 15 Which set of terms describes the same type of variance? a Price variance, rate variance, use variance b Price variance, rate variance, efficiency variance c Use variance, efficiency variance, quantity variance d Use variance, efficiency variance, spending variance d 16 A product requires 0.60 standard labor hours, the standard labor rate is $10 per hour, and production was 300 units Actual labor cost was $1,862 at $9.80 per hour Which of the following is true? a The labor rate variance was $98 favorable b The labor rate variance was $62 unfavorable c The labor efficiency variance was $62 unfavorable d The labor efficiency variance was $100 unfavorable d 17 Cascade Company bought 10,000 pounds of material and used 9,500 The material price variance was $300 unfavorable and the standard price per pound is $3 The cost of materials purchased was a $28,200 b $28,800 c $29,700 d $30,300 c 18 The standard price of a material is $2 per pound The company bought 2,000 pounds at $1.90 per pound and used 1,700 pounds Standard use was 1,800 pounds The material price variance was a $170 favorable b $180 favorable c $200 favorable d $400 favorable c 19 A company made 1,200 units with a $550 favorable labor use variance There was no labor rate variance and actual labor cost was $19,250 The actual wage rate was $11 Standard labor time per unit is a 0.5 hours b 1.0 hour c 1.5 hours d 2.0 hours a 20 Which formula calculates a price or rate variance? (AQ = actual quantity of the factor, AP = actual price of the factor, SQ = standard price of the factor, SQ = standard quantity of the factor) a (AQ x AP) - (AQ x SP) b (AQ x AP) - (SQ x AP) c (AQ x SP) - (SQ x SP) d (AQ x SP) - (SQ x AP) b 21 Which formula calculates a use or efficiency variance? (AQ = actual quantity of the factor, AP = actual price of the factor, SQ = standard price of the factor, SQ = standard quantity of the factor) a (AQ x AP) - (SQ x SP) b (AQ x SP) - (SQ x SP) c (AQ x AP) - (AQ x SP) d (SQ x SP) - (SQ x AP) 151 b 22 Using variances to evaluate performance a is especially useful to JIT companies b can be misleading because of interdependence among variances c cannot be used with activity-based overhead standards d all of the above b 23 Using activity-based costing in setting standards a is most valuable for direct labor standards b should provide better variable overhead standards c is unnecessary d gives the same standards that traditional methods c 24 A purchasing manager bought cheaper-than-normal materials that are difficult to handle Which combination of variances is LEAST likely to be affected by this decision? a Material use and direct labor use b Material use, direct labor use, and variable overhead efficiency c Direct labor rate and variable overhead budget d Direct labor use and variable overhead efficiency d 25 Standard costs are useful for a planning b control c performance evaluation d all of the above b 26 Which kinds of variances should be investigated? a Those that are large and unfavorable b Those that are large and either favorable or unfavorable c All variances, despite their size d Only use variances b 27 The material price variance is calculated a the same as the labor rate variance b on the quantity of materials bought, not the quantity used c on the quantity of materials used, not the quantity bought d by multiplying the difference between the actual and standard price of materials times the quantity of materials used b 28 Probably the best level at which to set standards is a historical performance b currently attainable performance c ideal performance d any of the above d 29 The use of ideal standards a motivates workers to perform well b results in mostly favorable variances c is preferred by most managers d can cause performance to suffer 152 d 30 An 80% learning curve means that a the incremental time for each unit is 80% of the time of the unit before it b the cumulative average time is 80% of the cumulative average time at the previous unit c as production doubles, the incremental time for a unit is 80% of the time at the previous doubling point d as production doubles, the cumulative average time is 80% of the time at the previous doubling point b 31 In a b c d which company is the learning effect probably most important? A canner of orange juice A manufacturer of airplanes A highly automated chemical manufacturer A manufacturer of nails a 32 Which of the following is NOT a reason why some JIT operations not use standards? a Standards are often set too tight for JIT operations b Using standards can stifle continuous improvement c Standards focus on cost centers, not on the entire manufacturing operation d All of the above are reasons d 33 The role of activity-based costing in standard costs is to a determine the standard material content of products b find value-adding activities c determine the variable overhead rate per direct labor hour d identify drivers of overhead costs a 34 A company that uses activity-based costing to develop standard costs a will usually have more than one variable overhead component in its standard costs b cannot compute variable overhead efficiency variances c will have less information about the profitability of individual products d all of the above d 35 Advanced manufacturers a are especially concerned with material price variances b almost always seek out the least expensive vendors c use more materials than conventional manufacturers d are generally more concerned with quality and delivery than with price b 36 For a company whose variable overhead relates to direct labor, the variable overhead efficiency variance a results from efficient or inefficient use of variable overhead elements b results from efficient or inefficient use of direct labor c is always the same as the direct labor efficiency variance d is more like a budget variance than a use variance 153 b 37 Acme Company produced 500 units with a $50 unfavorable labor rate variance The labor use variance was $180 favorable Actual labor cost was $17,870 The standard wage rate was $9 Actual hours were a 1,520 b 1,980 c 2,000 d 2,020 a 38 Crunch Company expects a 90% learning curve The first batch of a new product required 1,000 hours The total time for the first four batches should be a 3,240 hours b 3,600 hours c 4,000 hours d some other number of hours c 39 Crunch Company expects a 90% learning curve The first batch of a new product required 10 hours The first four batches should take an average of a 10 hours b hours c 8.1 hours d some other number of hours c 40 Acme has a standard of 15 parts of component X costing $1.50 each Acme purchased 14,910 units of X for $21,950 Acme generated a $415 favorable price variance and a $3,735 favorable quantity variance If there were no changes in the component inventory, how many units of finished product were produced? a 994 units b 1,000 units c 1,160 units d some other number b 41 Acme has a standard price of $6 per pound for materials July's results showed an unfavorable material price variance of $44 and a favorable quantity variance of $228 If 1,066 pounds were used in production, what was the standard quantity allowed for materials? a 1,066 b 1,104 c 1,294 d some other number c 42 Genco paid $78,800 to direct labor for the production of 1,500 units Standards allow labor hours per unit at a rate of $25.00 per hour Actual hours totaled 2,900 The direct labor rate variance was a $2,050 favorable b $3,800 favorable c $6,300 unfavorable d some other number 154 a 43 Genco paid $78,800 to direct labor for the production of 1,500 units Standards allow labor hours per unit at a rate of $25.00 per hour Actual hours totaled 2,900 The direct labor efficiency variance was a $2,500 favorable b $3,800 favorable c $6,300 unfavorable d some other number c 44 Danner had a $550 favorable direct labor rate variance and a $720 unfavorable efficiency variance Danner paid $6,650 for 800 hours of labor What was the standard direct labor wage rate? a $8.10 b $8.31 c $9.00 d some other number c 45 Jeter's Company had a $510 unfavorable direct labor rate variance and a $1,000 favorable efficiency variance Jeter's standard payroll was $11,200 at a standard wage of $10 per hour What was the actual direct labor wage rate? a $9.56 b $10.00 c $10.50 d some other number a 46 Chippewa paid $32,225 to direct labor for the production of 1,700 units Standards allow labor hours per unit at a rate of $6.50 per hour Actual hours totaled 5,150 The direct labor rate variance was a $1,250 favorable b $925 favorable c $325 favorable d $325 unfavorable d 47 Chippewa paid $32,225 to direct labor for the production of 1,700 units Standards allow labor hours per unit at a rate of $6.50 per hour Actual hours totaled 5,150 The direct labor efficiency variance was a $1,250 favorable b $925 favorable c $325 favorable d $325 unfavorable a 48 Chetek Company has standard variable costs as follows: Materials, pounds at $4.00 per pound $12.00 Labor, hours at $10.00 per hour 20.00 Variable overhead, $7.50 per labor hour 15.00 $47.00 During September, Chetek produced 5,000 units, using 9,640 labor hours at a total wage of $94,670 and incurring $78,600 in variable overhead The variable overhead budget variance is a $6,300 unfavorable b $3,600 unfavorable c $2,700 favorable d some other number 155 156 c 49 Barron Company has standard variable costs as follows: Materials, pounds at $4.00 per pound $12.00 Labor, hours at $10.00 per hour 20.00 Variable overhead, $7.50 per labor hour 15.00 $47.00 During September, Barron produced 5,000 units, using 9,640 labor hours at a total wage of $94,670 and incurring $78,600 in variable overhead The variable overhead efficiency variance is a $6,300 unfavorable b $3,600 unfavorable c $2,700 favorable d $3,300 favorable c 50 Silver Bow manufactured the first batch of product in 100 hours The second batch took an additional 60 hours What percent learning occurred? a 100% b 90% c 80% d Cannot be determined with the information given True-False T Standard costs are per-unit expressions of flexible budget allowances based on output F The value of b, the exponent in the learning curve formula, is the learning rate T The use of ideal standards could have undesirable effects on output F Learning curves can only be used for a one-of-a-kind special order product F So long as total actual costs approximate total budgeted costs there is no need for managerial concern or action T It is not always possible to separate the variable and fixed components of actual overhead cost F When an unfavorable variance occurs, there is some action that some manager can take to correct the event or circumstance that gave rise to the variance Standard costs are devices for measuring effectiveness but not efficiency F F "Ideal standards" are those most likely to be met under most conditions T 10 The labor efficiency variance excludes the effects of laborers being paid more or than the standard labor rate 157 Problem The data below relate to a product of Salois Company Standard costs: Materials, pounds at $6 per pound Labor, hours at $15 per hour Variable overhead at $8 per labor hour Budgeted fixed production costs Budgeted production for the year $12 $45 $24 $140,000 4,000 Actual results were: Production Material purchases, 8,000 pounds Labor, 10,360 hours Variable overhead incurred Fixed overhead incurred Material used in production 3,700 units $ 46,400 $160,580 $ 84,700 $137,500 7,300 pounds per unit per unit per unit per year units For each variance, determine the amount and circle the correct direction, F = favorable, U = unfavorable a Material price variance F U b Material use variance F U c Direct labor rate variance F U d Direct labor efficiency variance F U e Variable overhead budget variance F U f Variable overhead efficiency variance F U g Fixed overhead budget variance F U SOLUTION: a MPV $1,600 F $46,400 - ($6 x 8,000) b MUV $600 F c DLRV $5,180 U d DLEV $11,100 F e VOHBV $1,820 U $84,700 - ($8 x 10,360) f VOHEV $5,920 F ($8 x 10,360) - ($24 x 3,700) g FOHBV $2,500 F $137,500 - $140,000 ($6 x 7,300) - ($12 x 3,700) $160,580 - ($15 x 10,360) ($15 x 10,360) - ($45 x 3,700) 158 159 The data below relate to a product of Conroy Company Standard costs: Materials, pounds at $4 per pound Labor, hours at $12 per hour Variable overhead at $7 per labor hour Budgeted fixed production costs Budgeted production for the year Actual results were: Production Material purchases, 15,000 pounds Labor, 24,860 hours Variable overhead incurred Fixed overhead incurred Material used in production $12 $60 $35 $150,000 5,000 per unit per unit per unit per year units 5,200 units $ 63,220 $301,620 $ 168,600 $152,760 15,300 pounds For each variance, determine the amount and circle the correct direction, F = favorable, U = unfavorable a Material price variance F U b Material use variance F U c Direct labor rate variance F U d Direct labor efficiency variance F U e Variable overhead budget variance F U f Variable overhead efficiency variance F U g Fixed overhead budget variance F U SOLUTION: a MPV $3,220 U $63,220 - ($4 x 15,000) b MUV $1,200 F ($4 x 15,300) - ($12 x 5,200) c DLRV $3,300 U $301,620 - ($12 x 24,860) d DLEV $13,680 F e VOHBV $5,420 F $168,600 - ($7 x 24,860) f VOHEV $7,980 F ($7 x 24,860) - ($35 x 5,200) g FOHBV $2,760 U $152,760 - $150,000 ($12 x 24,860) - ($60 x 5,200) 160 Anne's Arbors has the following budget and actual results for May: Budget -9,000 11,250 15,750 Unit production Direct labor hours Materials used, feet Actual -9,600 11,550 16,100 Standard labor rate is $12 per hour; standard material price is $4.50 per foot Actual wages were $140,250; actual material purchases were 17,500 pounds for $77,160 For each variance, determine the amount and circle the correct direction, F = favorable, U = unfavorable a Material price variance F U b Material use variance F U c Direct labor rate variance F U d Direct labor efficiency variance F U SOLUTION: a MPV: $1,590 F $77,160 - ($4.50 x 17,500) b MUV: $3,150 F $4.50 x (16,100 - [1.75 x 9,600]) c DLRV: $1,650 U $140,250 - ($12 x 11,550) d DLEV: $5,400 F $12 x (11,550 - [1.25 x 9,600]) North Company has the following budget and actual results for July: Budget -10,000 12,000 16,000 Unit production Direct labor hours Materials used, feet Actual -8,400 11,860 16,750 Standard labor rate is $14 per hour; standard material price is $7.50 per foot Actual wages were $168,750; actual material purchases were 18,800 pounds for $149,825 For each variance, determine the amount and circle the correct direction, F = favorable, U = unfavorable a Material price variance F 161 U b Material use variance F U c Direct labor rate variance F U d Direct labor efficiency variance F U SOLUTION: a MPV: $ 8,825 U $149,825 - ($7.50 x 18,800) b MUV: $24,825 U $7.50 x (16,750 - [1.6 x 8,400]) c DLRV: $ 2,710 U $168,750 - ($14 x 11,860) d DLEV: $24,920 U $14 x (11,860 - [1.2 x 8,400]) The data below relate to a product of Acme Company Standard costs: Materials, yards at $3 per pound $15 per unit Labor, hours at $14 per hour $42 per unit Variable overhead at $10 per labor hour $30 per unit Budgeted fixed production costs $175,000 per year Budgeted production for the year 7,700 units Actual results were: Production Material purchases, 31,700 yards Labor, 17,660 hours Variable overhead incurred Fixed overhead incurred Material used in production 6,300 units $ 80,890 $252,330 $ 178,300 $172,200 31,600 yards For each variance, determine the amount and circle the correct direction, F = favorable, U = unfavorable a Material price variance F U b Material use variance F U c Direct labor rate variance F U d Direct labor efficiency variance F U e Variable overhead budget variance F U f Variable overhead efficiency variance F U SOLUTION: 162 a MPV $14,210 F $80,890 - ($3 x 31,700) b MUV $ ($3 x 31,600) - ($15 x 6,300) c DLRV $ 5,090 U $252,330 - ($14 x 17,660) d DLEV $17,360 F ($14 x 17,660) - ($42 x 6,300) e VOHBV $ 1,700 U $178,300 - ($10 x 17,660) f VOHEV $11,160 U ($9 x 17,660) - ($27 x 6,300) 300 U Toimi Inc had the following variances for the most recent month: Materials Price Variance Materials Usage Variance Direct Labor Rate Variance Direct Labor Efficiency Variance $3,500 $ 720 $5,770 $6,980 U F F U Other information included: actual wages paid $72,310; materials purchased $130,760; standards per unit were labor hours at $5 per hour, pounds at $6 per pound There were no changes in materials inventories a Find the units produced b Find the standard labor hours c Find the actual labor hours d Find the standard quantity of materials allowed e Find the actual quantity of materials used SOLUTION: a 7,110 units ($72,310 + 5,770 - 6,980) / (2 x $5) b 14,220 SH $71,100 / $5 c 15,616 AH $78,080 / $5 d 21,330 lbs ($130,760 - 3,500 + 720) / $6 e 21,210 lbs $127,260 / $6 Ralph Inc had the following variances for the most recent month: Direct Labor Rate Variance Direct Labor Efficiency Variance Variable Overhead Spending Variance 163 $14,560 U $ 3,660 U $12,320 F Other information included: actual wages paid $105,560; materials purchased $124,860; standards per unit were labor hours at $5 per hour and variable overhead at $6 per hour a Find the units produced b Find the standard labor hours c Find the actual labor hours d Find the variable overhead efficiency variance e Find the actual variable overhead SOLUTION: a 8,734 units ($105,560 - 14,560 - 3,660) / (2 x $5) b 17,468 SH 8,734 x c 18,200 AH ($105,560 - 14,560) / $5 d $4,392 U (18,200 - 17,468) x e $96,880 (18,200 x $6) - $12,320 Gros Ventre Company expects a learning rate of 80% The first batch of a new product is expected to take 500 direct labor hours a Compute the cumulative average time for the first four batches b Compute the total time for the first four batches SOLUTION: a 320 [500 hours x 80% x 80%] b 1,280 Output (X) Average time (Y) 500 400 (500 x 80%) 320 (400 x 80%) Total time (XY) 500 800 (2 x 400) 1,280 (4 x 320) Benco Inc has the following results for December when production was 8,000 units: Materials purchased Materials used Direct labor 18,000 pounds 17,750 pounds 27,050 hours 164 $213,520 $436,544 Per unit standards are 2.5 pounds of materials at $12.00 per pound and 3.5 hours at $16 per hour For each variance, determine the amount and circle the correct direction, F = favorable, U = unfavorable a Material price variance F U b Material use variance F U c Direct labor rate variance F U d Direct labor efficiency variance F U SOLUTION: a MPV $ 2,480 F $213,520 - ($12 x 18,000) b MUV $27,000 F ($12 x 17,750) - ($12 x 2.5 x 8,000) c DLRV $ 3,744 U $436,544 - ($16 x 27,050) d DLEV $15,200 F ($16 x 27,050) - ($16 x 3.5 x 8,000) 10 Cascade Company expects a learning rate of 90% The first batch of a new product is expected to take 200 direct labor hours a Compute the cumulative average time for the first eight batches b Compute the total time for the first eight batches SOLUTION: a 145.8 (200 hours x 90% x 90% x 90%) b 1,166.4 Output (X) Average 200 180 162 145.8 time (Y) Total time (XY) 200 360 (2 x 180) 648 (4 x 162) 1,166.4 (8 x 145.8) (200 x 90%) (180 x 90%) (162 x 90%) 165 ...d Variable overhead efficiency variance 149 c Which variance is MOST likely to be affected by buying a more expensive material that produces less waste and is easier to handle? a Labor rate... job b causes a favorable variable overhead efficiency variance c can result from an action taken by a manager other than the supervisor of the workers d should always be investigated and corrected... materials that are difficult to handle Which combination of variances is LEAST likely to be affected by this decision? a Material use and direct labor use b Material use, direct labor use, and variable