Favorable and Unfavorable Cost Variances

Chapter 9 Which of the following statements is correct? | | Unfavorable cost variances always indicate bad performance. | | Favorable cost variances always indicate good performance. | | Both of the above statements are correct. | | Neither of the above statements are correct. | Managers should not assume that unfavorable cost variances always indicate bad performance and that favorable cost variances always indicate good performance. Unfavorable cost variances may result from an increase in revenues (e. g. , ingredient costs may be higher than expected because more meals were served in a restaurant than anticipated).

And, favorable cost variances may result from a decrease in revenues (e. g. , ingredient costs may be lower than expected because less meals were served in a restaurant than anticipated). | A company’s static budget estimate of total overhead costs was $805,000 based on the assumption that 23,000 units would be produced and sold. The company estimates that 20% of its overhead is variable and the remainder is fixed. The total overhead cost according to the flexible budget if 27,000 units were produced and sold is (Do not round intermediate calculations.

):| | $837,000| | $805,000| >| $833,000| $913,500| First, determine the budgeted variable overhead as follows. Budgeted variable overhead = Budgeted overhead cost of $805,000 ? 20% (variable portion) = $161,000 Next, determine the budgeted variable overhead per unit as follows. Budgeted variable overhead of $161,000 ? 23,000 units produced and sold = $7. 0 per unit Then, determine the budgeted fixed overhead as follows. Budgeted fixed overhead = Budgeted overhead cost of $805,000 ? 80% (fixed portion) = $644,000. Finally, the flexible budget at 27,000 units is determined as follows. Budgeted variable overhead of (27,000 units ? $7. 00 er unit variable overhead) + budgeted fixed overhead of $644,000 = $833,000| An activity variance is the difference between:| >| a revenue or cost item in the static planning budget and the same item in the flexible budget.

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| | how much the revenue should have been, given the actual level of activity, and the actual revenue for the period. | | how much a cost should have been, given the actual level of activity, and the actual amount of the cost. | | None of these. | An activity variance is the difference between a revenue or cost item in the static planning budget and the same item in the flexible budget.

A revenue (rather than activity) variance is the difference between how much the revenue should have been, given the actual level of activity, and the actual revenue for the period. A spending (rather than activity) variance is the difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost. | A restaurant has a cost with the following cost formula: $2,100 + $5. 7q, where q is the number of meals served. The restaurant’s planning budget is based on 2,100 meals. Its actual level of activity was 2,000 meals and the actual amount of the cost at that level of activity was $13,600.

The activity variance for this cost is:| | $100 U| >| $570 F| | $100 F| | $570 U| Activity variance = Planning budget ? Flexible budget Activity variance = ($2,100 + $5. 7 ? 2,100) ? ($2,100 + $5. 7 ? 2,000) = $14,070 ? $13,500 = $570 F| If the average selling price is greater than expected, the revenue variance is:| | labeled as unfavorable. | >| labeled as favorable. | | an activity variance. | | cannot be labeled as favorable or unfavorable without obtaining an explanation. | If the average selling price is greater than expected, the revenue variance is favorable|

If the actual cost incurred is greater than what the cost should have been as set forth in the flexible budget, the variance is:| | an activity variance. | | cannot be labeled as favorable or unfavorable without obtaining an explanation. | >| labeled as unfavorable. | | labeled as favorable. | If the actual cost incurred is greater than what the cost should have been as set forth in the flexible budget, the variance is labeled as unfavorable. | All of the statements are correct except:| | A flexible budget performance report separates the effects of how well prices were controlled and operations were managed. | To generate a favorable variance for net operating income in a business that serves customers managers must take actions to increase client-visits. | | Flexible budget performance reports provide more useful information to managers than a simple comparison of budgeted to actual results. | >| To generate a favorable overall revenue and spending variance, managers must take actions to protest selling prices. | To generate a favorable overall revenue and spending variance, managers must take actions to protect selling prices, increase operating efficiency, and reduce the prices of inputs. The five columns on a “Performance Report Combining Activity Variances with Revenue and Spending Variances” should be ordered as follows:| >| Planning Budget, Activity Variances, Flexible Budget, Revenue and Spending Variances, and Actual Results. | | Flexible Budget, Activity Variances, Planning Budget, Revenue and Spending Variances, and Actual Results. | | Planning Budget, Revenue and Spending Variances, Flexible Budget, Activity Variances, and Actual Results. | | Actual Results, Activity Variances, Flexible Budget, Revenue and Spending Variances, and Planning Budget. The columns on a “Performance Report Combining Activity Variances with Revenue and Spending Variances” should be ordered as follows: Planning Budget, Activity Variances, Flexible Budget, Revenue and Spending Variances, and Actual Results. | All of the statements are correct except:| | more than one cost driver might be needed to adequately explain all of the costs in an organization. | | cost formulas based on more than one cost driver are more accurate than the cost formulas based on just one cost driver. | >| flexible budgets can be prepared with up to two cost drivers. | when cost formulas are based on more than one cost driver, the variances will also be more accurate. | Flexible budgets can be prepared with multiple cost drivers; they are not limited to two. Consider the electricity cost included in Rick’s Hairstyling example in the textbook. Some of the cost is fixed since electricity is used even at night when the salon is closed. Some of the cost depends on the number of client-visits. And the rest of the cost depends on the number of hours the salon is open. | Let q1 represents client visits and q2 represents hours of operations.

The electricity cost for Blissful Spa depends on both client-visits and the hours of operations and its cost formula is $960 + $0. 65q1 + 3. 10 q2. If the actual number of client visits is 1,920 and the salon was open for 450 hours during the month, the flexible budget amount for electricity is:| | $7,205| | $8,160| | $2,979| >| $3,603| Electricity cost = $960 + $0. 65q1 + $3. 10 q2 Electricity cost = $960 + ($0. 65 ? 1,920) + ($3. 10 ? 450) = $3,603| Which of the following statements is not correct? | | One of the common errors in preparing performance reports is to implicitly assume that all costs are fixed. | A flexible budget allows managers to isolate activity variances and revenue and spending variances. | >| Comparing static planning budget costs to actual costs only makes sense if the cost is variable. | | One of the common errors in preparing performance reports is to implicitly assume that all costs are variable. | Comparing static planning budget costs to actual costs only makes sense if the cost is fixed. If the cost isn’t fixed, it needs to be adjusted for any change in activity that occurs during the period. | Perhaps the most common errors in performance evaluation are implicitly assuming that:| all revenues and costs are fixed| | all revenues are fixed and that all costs are variable. | >| all revenues and costs are fixed or assuming that they are all strictly variable. | | all revenues are variable and that all costs are fixed. | Perhaps the most common errors in performance evaluation are implicitly assuming that all revenues and costs are fixed or assuming that they are all strictly variable. | Chapter 10 Fausto Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the materials costs of one unit of product:| Standard

Quantity|  Standard Price| Standard Cost| 5 pounds| $  7. 30/pound| $36. 50| | During June, the company purchased 165,700 pounds of direct material at a total cost of $1,292,460. The company manufactured 28,000 units of product during June using 141,700 pounds of direct materials. The price variance for the direct materials acquired by the company during June is (Do not round intermediate calculations. ):| | $70,850 favorable. | | $82,850 favorable. | >| $82,850 unfavorable. | | $70,850 unfavorable. | First, determine the actual price per unit of materials as follows. | Total cost of $1,292,460 ? total pounds of 165,700 = $7. 80 per pound. Then, the price variance for the direct material acquired by the company is determined as follows. | Materials price variance = AQ ? (AP ? SP). | Materials price variance = 165,700 ? ($7. 80 ? $7. 30) = $82,850 (U). | 2. award: 0 out of 10. 00 points Fausto Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the materials costs of one unit of product:| Standard Quantity| Standard Price| Standard Cost| 5 pounds| $  7. 4/pound| $37. 0| | During June, the company purchased 165,900 pounds of direct material at a total cost of $1,327,200.

The company manufactured 30,000 units of product during June using 151,900 pounds of direct materials. The direct material quantity variance for June is:| | $14,060 favorable. | >| $14,060 unfavorable. | | $15,200 unfavorable. | | $15,200 favorable. | First, determine the standard quantity allowed as follows. | Total units of 30,000 units ? standard quantity of 5 pounds per unit = 150,000 pounds. | Then, the direct material quantity variance is determined as follows. | Materials quantity variance = SP ? (AQ – SQ). | Materials quantity variance = $7. 40 ? (151,900 – 150,000) = $14,060 (U). | 3. award: 0 out of 10. 00 points

Mochel Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the direct labor costs of one unit of product:| Standard Hours| Standard Rate| Standard Cost| 1. 70 hours| $24. 00/hour| $40. 80| | The total factory wages for June were $1,100,000, 80 percent of which were for direct labor. The company manufactured 21,300 units of product during June using 35,200 direct labor hours. The direct labor rate variance for June is (Do not round intermediate calculations. ):| | $255,200 favorable. | >| $35,200 unfavorable. | | $255,200 unfavorable. | $35,200 favorable. | First, calculate the actual rate per hour of direct labor as follows. | Total factory wages of $880,000 (or $1,100,000 ? .80) ? total direct labor hours of 35,200 = $25. 00 per hour. | Then, the direct labor rate price variance is determined as follows. | Labor rate variance = AH ? (AR – SR). | Labor rate variance = 35,200 ? ($25. 00 – $24. 00) = $35,200 (U). | 4. award: 0 out of 10. 00 points Mochel Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the direct labor costs of one unit of product:|

Standard Hours| Standard Rate| Standard Cost| 2. 0 hours| 24. 3/hour| 48. 60| | The total factory wages for June were $1,160,000, 80 percent of which were for direct labor. The company manufactured 19,000 units of product during June using 37,120 direct labor hours. The direct labor efficiency variance for June is:| | $ 22,000 unfavorable. | | $ 21,384 unfavorable. | >| $ 21,384 favorable. | | $ 22,000 favorable. | First, calculate the standard hours allowed as follows. | 19,000 units ? 2. 0 hours per unit = 38,000 hours. | Then, the direct labor efficiency variance is determined as follows. | Direct labor efficiency variance = SR ? AH – SH). | Direct labor efficiency variance = $24. 3 ? (37,120 – 38,000) = $21,384 (F). | 5. award: 0 out of 10. 00 points Houghton Company maintains warehouses that stock items carried by its e-retailer clients. When one of Houghton’s clients receives an order from an online customer, the order is forwarded to Houghton. Houghton then pulls the item from the warehouse, packs it and ships it to the customer. Houghton uses a predetermined variable overhead rate based on direct labor-hours. According to the company’s records, . 09 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $6. 0 per direct-labor hour. During July, Houghton shipped 295,000 orders using 26,300 direct labor-hours. The company incurred a total of $168,320 in variable overhead costs. The variable overhead rate variance during July was (Do not round intermediate calculations. ):| | $2,630 unfavorable. | >| $2,630 favorable. | | $1,625 unfavorable. | | $1,625 favorable. | The variable overhead (VOH) rate variance during July is determined as follows. | VOH rate variance = AH (AR – SR). | VOH rate variance = 26,300 hours ($6. 40 per hour – $6. 50 per hour) = $2,630 (F). | 6. award: 0 out of 10. 00 points

Houghton Company maintains warehouses that stock items carried by its e-retailer clients. When one of Houghton’s clients receives an order from an online customer, the order is forwarded to Houghton. Houghton then pulls the item from the warehouse, packs it and ships it to the customer. Houghton uses a predetermined variable overhead rate based on direct labor-hours. According to the company’s records, . 08 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $6. 70 per direct-labor hour. During July, Houghton shipped 260,000 orders using 20,600 direct labor-hours.

The company incurred a total of $135,960 in variable overhead costs. The variable overhead efficiency variance during July was:| | $2,060 unfavorable. | | $2,060 favorable. | | $1,340 unfavorable. | >| $1,340 favorable. | The variable overhead (VOH) efficiency variance during July is determined as follows. | VOH efficiency variance = SR (AH – SH). | VOH efficiency variance = $6. 70 per hour (20,600 hours – 20,800 hours) = $1,340 (F). | 7. award: 0 out of 10. 00 points Mirenda Company applies manufacturing overhead costs to products on the basis of direct labor-hours. The standard cost card shows that 12. 0 direct labor-hours are required per unit of product. For August, the company budgeted to work 362,000 direct labor-hours and to incur the following total manufacturing overhead costs:| |  | Total fixed overhead costs| $492,320   | Total variable overhead costs| 401,000   | | During August, the company completed 28,100 units of product, worked 345,630 direct labor-hours, and incurred the following total manufacturing overhead costs:| |  | Total fixed overhead costs| $473,510   | Total variable overhead costs| 400,000   | | The denominator activity in the predetermined overhead rate is 362,000 direct labor-hours.

The fixed overhead budget variance for August is:| | $26,085 F. | | $26,085 U. | | $18,810 U. | >| $18,810 F. | Compute the fixed overhead (FOH) budget variance as follows. | FOH budget variance = Actual fixed overhead – Budgeted fixed overhead. | FOH budget variance = $473,510 – $492,320 = $18,810 F. | Since actual fixed overhead was less than the amount budgeted for the period, the budget variance is favorable. | 8. award: 0 out of 10. 00 points Mirenda Company applies manufacturing overhead costs to products on the basis of direct labor-hours. The standard cost card shows that 12. 0 direct labor-hours are required per unit of product. For August, the company budgeted to work 372,000 direct labor-hours and to incur the following total manufacturing overhead costs:| |  | Total fixed overhead costs| $580,320   | Total variable overhead costs| 426,000   | | During August, the company completed 28,600 units of product, worked 357,500 direct labor-hours, and incurred the following total manufacturing overhead costs:| |  | Total fixed overhead costs| $561,280   | Total variable overhead costs| 422,000   | | The denominator activity in the predetermined overhead rate is 372,000 direct labor-hours.

The fixed overhead volume variance for August is (Do not round intermediate calculations. ):| | $12,605 U. | >| $27,082 U. | | $4,462 F. | | $22,620 U. | First, compute the fixed overhead (FOH) rate as follows. | FOH rate = Budgeted fixed overhead costs ? budgeted direct labor hours. | FOH rate = $580,320 ? 372,000 direct labor hours = $1. 56 per direct labor hour. | Then, compute the FOH volume variance as follows. | FOH volume variance = Budgeted fixed overhead – (Standard hours allowed ? FOH rate). | FOH volume variance = $580,320 – ((28,600 units ? 12. 40) ? $1. 56) = $27,082 U. Since budgeted fixed overhead was more than the amount applied to work in process during the period, the volume variance is unfavorable. | 9. award: 0 out of 10. 00 points Assuming that there is an unfavorable price variance, the entry to record the purchase of materials on account includes a:| | debit to Work in Process, a credit to Materials Quantity Variance, and a credit to Raw Materials. | >| debit to Raw Materials, a debit to Materials Price Variance, and a credit to Accounts Payable. | | debit to Work in Process, a debit to Materials Quantity Variance, and a credit to Raw Materials. | debit to Raw Materials, a credit to Materials Price Variance, and a credit to Accounts Payable. | Assuming that there is an unfavorable price variance, the entry to record an unfavorable material price variance upon purchase of materials on account includes a debit to Raw Materials, a debit to Materials Price Variance, and a credit to Accounts Payable. | 10. award: 0 out of 10. 00 points The entry to record an unfavorable labor efficiency and a favorable labor rate variance includes a:| | Debit to Wages Payable, a debit to Labor Rate Variance, a credit to Labor Efficiency Variance, and a credit to Work in Process. | Debit to Wages Payable, a debit to Labor Efficiency Variance, a credit to Labor Rate Variance, and a credit to Work in Process. | >| Debit to Work in Process, a debit to Labor Efficiency Variance, a credit to Labor Rate Variance, and a credit to Wages Payable. | | Debit to Work in Process, a debit to Labor Rate Variance, a credit to Labor Efficiency Variance, and a credit to Wages Payable. | The entry to record an unfavorable labor efficiency and a favorable labor rate variance includes a: debit to Work in Process, a debit to Labor Efficiency Variance, a credit to Labor Rate Variance, and a credit to Wages Payable. Chapter 11 1. award: 0 out of 10. 00 points A company reported the following results:| |  |  | Average operating assets| $| 56,000   | Sales|  | 290,000   | Contribution margin|  | 29,300   | Net operating income|  | 10,100   | | The company’s ROI is (Do not round your intermediate calculations. ):| | 52. 32%. | | 10. 10%. | >| 18. 04%. | | 36. 07%. | Return on investment = (Net operating income ? Sales) ? (Sales ? Average operating assets)| Return on investment = ($10,100 ? $290,000) ? ($290,000 ? $56,000) = 3. 48% ? 5. 18 = 18. 04%| 2. award: 0 out of 10. 00 points The Midwest Division of Transformers, Inc. ecorded operating data as follows for the past year:| |  |  | Sales| $| 1,155,000   | Average operating assets|  | 330,000   | Stockholders’ equity|  | 262,500   | Net operating income|  | 84,000   | Residual income|  | 42,000   | | The division’s turnover for the past year was:| | 0. 80. | | 4. 40. | >| 3. 50. | | 13. 75. | The division’s turnover for the past year is determined as follows. Turnover = Sales ? Average operating assets Turnover = $1,155,000 ? $330,000 = 3. 50| 3. award: 0 out of 10. 00 points A company reported the following results:| |  |  | Average operating assets| $| 410,000     |

Stockholders’ equity| $| 360,000     | Sales| $| 1,340,000     | Net operating income| $| 85,700     | Minimum required rate of return|  | 17%  | | The company’s residual income is:| >| $16,000| | $484,300| | $274,300| | $24,500| |  |  | Average operating assets| $| 410,000  | | | | Net operating income  | $| 85,700  | Minimum required return (17% ? $410,000)|  |  69,700  |   | | | Residual income   | $| 16,000  | | | | 4. award: 0 out of 10. 00 points The Northwest Division of Huron Company recorded operating data as follows for the past year. | |  |  | Sales| $| 625,000    | Average operating assets|  | 275,000    |

Stockholders’ equity|  | 205,000    | Net operating income|  | 65,000    | Residual income|  | 35,000    | | What was the division’s minimum required rate of return for the past year? | | 12. 91%. | >| 10. 91%. | | 11. 91%. | | 9. 91%. | First, calculate the minimum required return as follow. Minimum required return = Net operating income – Residual income Minimum required return = $65,000 – $35,000 = $30,000 Then, the minimum required rate of return is determined as follows. Minimum required rate of return = Minimum required return ? Average operating assets Minimum required rate of return = $30,000 ? $275,000 = 10. 1%| 5. award: 0 out of 10. 00 points The following data are average times per order over the last month. | |  |  | Wait time to start production| 16. 0|  days| Inspection time| 1. 6|  days| Process time| 2. 9|  days| Move time| 2. 4|  days| Queue time| 8. 0|  days| | The manufacturing cycle efficiency (MCE) would be (Do not round intermediate calculations. ):| | 30%. | >| 19%. | | 81%. | | 46%. | Throughput time = Process time + Inspection time + Move time + Queue time| Throughput time = 2. 9 days + 1. 6 days + 2. 4 days + 8. 0 days = 14. 9 days| MCE = Value-added time (or process time) ? Throughput time| MCE = 2. days ? 14. 9 days = 19%| 6. award: 0 out of 10. 00 points The following data are average times per order over the last month. | |  |  | Wait time to start production| 15. 1|  days| Inspection time| . 7|  days| Process time| 3. 2|  days| Move time| 1. 5|  days| Queue time| 7. 1|  days| | The throughput time would be:| >| 12. 50 days| | 20. 50 days| | 7. 10 days| | 5. 40 days| Throughput time = Process time + Inspection time + Move time + Queue time Throughput time = 3. 2 days + . 7 days + 1. 5 days + 7. 1 days = 12. 50 days| 7. award: 0 out of 10. 00 points All of the following statements are correct except:| | incentive compensation for employees, such as bonuses, should not be tied to balanced scorecard performance measures. | | top managers who translate strategy into performance measures that employees can understand and influence are following a balanced scorecard approach. | | financial measures such as residual income may be included in a balanced scorecard. | | operating measures such as delivery cycle time may be included in a balanced scorecard. | Incentive compensation for employees, such as bonuses, can, and probably should, be tied to balanced scorecard performance measures. 8. award: 0 out of 10. 00 points All of the following statements are correct except:| | under the balanced scorecard approach, top management translates its strategy into performance measures that employees can understand and influence. | >| although ROI is widely used in evaluating performance, it should not be included in a balanced scorecard. | | Performance measures used in the balanced scorecard approach tend to fall into four groups: financial, customer, internal business processes, and learning and growth. | | a balanced scorecard consists of an integrated set of performance easures that are derived from and support a company’s strategy. | ROI is best used as part of a balanced scorecard, which can provide concrete guidance to managers, making it more likely that their actions are consistent with the company’s strategy and reducing the likelihood that they will boost short-run performance at the expense of long-term performance. | 9. award: 0 out of 10. 00 points Division A produces a part that it sells to outside customers. Data concerning this part appear below:| |  |  | Selling price to outside customers| $| 60. 3   | Variable cost per unit| $| 40. 1   |

Total fixed cost| $| 101,000   | Capacity in units|  | 20,200   | | Division B of the same company now purchases 5,100 units of a similar part from an outside supplier at a price of $58. 2 per unit. Division B wants to purchase these 5,100 units from Division A instead, but Division A has no idle capacity. Division A should insist on a transfer price of at least:| >| $60. 3| | $58. 2| | $40. 1| | $45. 1| Transfer price ? Variable cost per unit + (Total contribution margin on lost sales / Number of units transferred)| Transfer price ? $40. 1 + ($103,020 / $5,100)| Transfer price ? $60. 3| 10. award: 0 out of 10. 0 points Division A produces a part that it sells to outside customers. Data concerning this part appear below:| |  |  | Selling price to outside customers| $| 64. 5   | Variable cost per unit| $| 41. 5   | Total fixed cost| $| 115,000   | Capacity in units|  | 23,000   | | Division B of the same company now purchases 6,500 units of a similar part from an outside supplier at a price of $61. 0 per unit. Division B wants to purchase these 6,500 units from Division A instead, but Division A has no idle capacity. If Division A has idle capacity, the manager of Division A should insist that the transfer price be:| at least $64. 5| >| at least $41. 5| | at least $46. 5| | at least $61. 0| Transfer price ? Variable cost per unit + (Total contribution margin on lost sales / Number of units transferred)| Transfer price ? $41. 5 + $0| Transfer price ? $41. 5| 11. award: 0 out of 10. 00 points Data for Wasatch Company’s two operating departments follow:| | Budgeted Machine Hours| Peak Period Requirement|  | Operating Department #1| 15,800| 40 %          |  |   Operating Department #2| 26,200| 60 %          |  |   Total machine-hours| 42,000| 100 %          |  | |

The Wasatch Company has a Repair Department that serves these two operating departments. The variable repair costs are budgeted at $0. 30 per machine-hour. Fixed costs are budgeted at $13,000 per year. Fixed Repair Department costs are charged to operating departments on the basis of peak period requirements. At the end of the year, the actual machine-hours worked by the operating departments were 16,600 hours for Department #1 and 25,400 hours for Department #2. The actual Repair Department costs were $13,100 variable and $13,900 fixed.

The amount of variable repair cost charged to Department #1 at the end of the year should be:| >| $4,980. | | $7,800. | | $7,620. | | $5,560. | 16,600 hours ? $. 30 per hour = $4,980| 12. award: 0 out of 10. 00 points Data for Wasatch Company’s two operating departments follow:| | Budgeted Machine Hours| Peak Period Requirement|  | Operating Department #1| 19,800| 30 %          |  |   Operating Department #2| 32,200| 70 %          |  |   Total machine-hours| 52,000| 100 %          |  | | The Wasatch Company has a Repair Department that serves these two operating departments.

The variable repair costs are budgeted at $0. 25 per machine-hour. Fixed costs are budgeted at $18,000 per year. Fixed Repair Department costs are charged to operating departments on the basis of peak period requirements. At the end of the year, the actual machine-hours worked by the operating departments were 20,600 hours for Department #1 and 31,400 hours for Department #2. The actual Repair Department costs were $13,500 variable and $18,900 fixed. The amount of fixed repair cost charged to Department #2 at the end of the year should be:| >| $12,600. | | $5,150. | | $13,230. | | $7,850. | $18,000 ? 70% = $12,600|