CHAPTER 12 – STANDARD COSTING – MATERIAL, LABOR & FACTORY OVERHEAD VARIANCES

MULTIPLE CHOICE – THEORIES (Write letter choice only in upper case. Erasures, in any form, are not allowed. 2 points each)

1. When evaluating the operating performance management sometimes uses the difference between expected and actual performance. This refers to:
A. Management by Deviation C. Management by Objective
B. Management by Control D. Management by Exception
2. The best basis upon which cost standards should be set to measure controllable production inefficiencies is
A. Engineering standards based on ideal performance
B. Normal capacity
C. Engineering standards based on attainable performance
D. Practical capacity
3. A difference between standard costs used for cost control and the budgeted costs representing the same manufacturing effort can exist because
A. standard costs must be determined after the budget is completed
B. standard costs represent what costs should be while budgeted costs represent expected actual costs
C. budgeted costs are historical costs while standard costs are based on engineering studies
D. budgeted costs include some “slack” or “padding” while standard costs do not
4. The fixed overhead application rate is a function of a predetermined “normal” activity level. If standard hours allowed for good output equal this predetermined activity level for a given
period, the volume variance will be
A. Zero
B. Favorable
C. Unfavorable
D. Either favorable or unfavorable, depending on the budgeted overhead.
5. Standards, which are difficult to achieve due to reasons beyond the individual performing the task, are the result of firm using which of the following methods to establish standards?
A. Ideal Standards C. Practical Standards
B. Lax Standards D. Employee Standards
6. A company uses a two-way analysis for overhead variances: budget (controllable) and volume. The volume variance is based on the
A. Total overhead application rate
B. Volume of total expenses at various activity levels
C. Variable overhead application rate
D. Fixed overhead application rate
7. In analyzing manufacturing overhead variances, the volume variance is the difference between the:
A. Amount shown in the flexible budget and the amount shown in the debit side of the overhead control account
B. Predetermined overhead application rate and the flexible budget application rate times actual hours worked
C. Budget allowance based on standard hours allowed for actual production for the period and the amount budgeted to be applied during the period
D. Actual amount spent for overhead items during the period and the overhead amount applied to production during the period
8. If the total materials variance (actual cost of materials used compared with the standard cost of the standard amount of materials required) for a given operation is favorable, why must
this variance be further evaluated as to price and usage?
A. There is no need to further evaluate the total materials variance if it is favorable
B. Generally accepted accounting principles require that all variances be analyzed in three stages
C. All variances must appear in the annual report to equity owners for proper disclosure
D. To allow management to evaluate the efficiency of the purchasing and production functions
9. Favorable fixed overhead volume variance occurs if:
A. There is a favorable labor efficiency variance
B. There is a favorable labor rate variance
C. Production is less than planned
D. Production is greater than planned
10. The unfavorable volume variance may be due to all but which of the following factors?
A. Failure to maintain an even flow of work
B. Machine breakdowns
C. Unexpected increases in the cost of utilities
D. Failure to obtain enough sales orders

MULTIPLE CHOICE – PROBLEMS (Show all supporting computation in good form. No computation, no points. Write opposite each item the letter which corresponds to your
choice and it should have no erasure. Boxed your final answer as it appears on your solution.)

Materials variance
i. Under a standard cost system, the materials quantity variance was recorded at P1,970 unfavorable, the materials price variance was recorded at P3,740 favorable, and the Goods
in Process was debited for P51,690. Ninety-six thousand units were completed. What was the per unit price of the actual materials used?
A. P0.52 each C. P0.54 eac
B. P0.53 each D. P0.51 each
ii. Blake Company has a standard price of P5.50 per pound for materials. July’s results showed an unfavorable material price variance of P44 and a favorable quantity variance of
P209. If 1,066 pounds were used in production, what was the standard quantity allowed for materials?
A. 1,104 C. 1,066
B. 1,074 D. 1,100
iii. Elite Company uses a standard costing system in the manufacture of its single product. The 35,000 units of raw material in inventory were purchased for P105,000, and two units
of raw material are required to produce one unit of final product. In November, the company produced 12,000 units of product. The standard allowed for material was P60,000,
and there was an unfavorable quantity variance of P2,500. The materials price variance for the units used in November was
A. P 2,500 U C. P12,500 U
B. P11,000 U D. P 3,500 F
iv. Sheridan Company has a standard of 15 parts of component BB costing P1.50 each. Sheridan purchased 14,910 units of component BB for P22,145. Sheridan generated a P220
favorable price variance and a P3,735 favorable quantity variance. If there were no changes in the component inventory, how many units of finished product were produced?
A. 994 units. C. 1,000 units
B. 1,090 units. D. 1,160 units
v. The standard usage for raw materials is 5 pounds at P40.00 per pound. Cave Company spent P131,200 in purchasing 3,200 pounds. Cave used 3,150 pounds to produce 600
units of finished product. The material quantity variance is:
A. P6,000 unfavorable C. P3,200 unfavorable
B. P5,200 unfavorable D. P2,000 unfavorable

Labor variance
vi. The flexible budget for the month of May 2007 was for 9,000 units with direct material at P15 per unit. Direct labor was budgeted at 45 minutes per unit for a total of P81,000.
Actual output for the month was 8,500 units with P127,500 in direct material and P77,775 in direct labor expense. Direct labor hours of 6,375 were actually worked during the
month. Variance analysis of the performance for the month of May would show a(n):
A. Favorable material quantity variance of P7,500.
B. Unfavorable direct labor efficiency variance of P1,275.
C. Unfavorable material quantity variance of P7,500.
D. Unfavorable direct labor rate variance of P1,275.
vii. The standard hourly rate was P4.10. Standard hours for the level of production are 4,000. The actual rate was P4.27. The labor rate variance was P654.50, unfavorable. What were
the actual labor hours?
A. 3,700 C. 3,850
B. 4,150 D. 4,000
viii. Powerless Company’s operations for April disclosed the following data relating to direct labor:
Actual cost P10,000
Rate variance 1,000 favorable
Efficiency variance 1,500 unfavorable
 Standard cost P 9,500
Actual direct labor hours for April amounted to 2,000. Powerless’ standard direct labor rate per hour in April was:
A. P5.50 C. P5.00
B. P4.75 D. P4.50
ix. Lion Company’s direct labor costs for the month of January were as follows:
Actual direct labor hours 20,000
Standard direct labor hours 21,000
Direct labor rate variance – Unfav. P 3,000
Total payroll P126,000
What was Lion’s direct labor efficiency variance?
A. P6,000 favorable C. P6,150 favorable
B. P6,300 favorable D. P6,450 favorable
x. Using the information given below, determine the labor efficiency variance:
Labor price per hour P 20
Standard labor price per gallon of output at 20 gal./hr P 1
Standard labor cost of 8,440 gallons of actual output P8,440
Actual total inputs(410 hours at P21/hr) P8,610
A. P 410 unfavorable C. P 240 favorable
B. P 170 unfavorable D. P 410 favorable

Two-way overhead variance

xi. The overhead variances for Big Company were:
Variable overhead spending variance: P3600 favorable.
Variable overhead efficiency variance: P6,000 unfavorable.
Fixed overhead spending variance: P10,000 favorable.
Fixed overhead volume variance: P24,000 favorable.
What was the overhead controllable variance?
A. P31,600 favorable C. P24,000 favorable
B. P13,600 favorable D. P 7,600 favorable

Three-way overhead variance

xii. The following data are the actual results for Wow Company for the month of May:
Actual output 4,500 units
Actual variable overhead P360,000
Actual fixed overhead P108,000
Actual machine time 14,000 MH
Standard cost and budget information for Wow Company follows:
Standard variable overhead rate P6.00 per MH
Standard quantity of machine hours 3 hours per unit
Budgeted fixed overhead P777,600 per year
Budgeted output 4,800 units per month
The overhead efficiency variance is
A. P3,000 Favorable C. P3,000 Unfavorable
B. P5,400 Favorable D. P5,400 Unfavorable
xiii. The Libiran Company produces its only product, Menthol Chewing Gum. The standard overhead cost for one pack of the product follows:
Fixed overhead (1.50 hours at P18.00) P27.00
Variable overhead (1.50 hours at P10.00) 15.00
Total application rate P42.00
Libiran uses expected volume of 20,000 units. During the year, Libiran used 31,500 direct labor hours for the production of 20,000 units. Actual overhead costs were P545,000
fixed and P308,700 variable.
The overhead efficiency variance is
A. P22,500 Favorable C. P15,000 Favorable
B. P22,500 Unfavorable D. P15,000 Unfavorable

Four-way overhead variance

xiv. Safin Corporation’s master budget calls for the production of 5,000 units of product monthly. The annual master budget includes indirect labor of P144,000 annually. Safin

considers indirect labor to be a variable cost. During the month of April, 4,500 units of product were produced, and indirect labor costs of P10,100 were incurred. A performance

report utilizing flexible budgeting would report a budget variance for indirect labor of:

A. P1,900 Unfavorable. C. P1,900 Favorable.

B. P 700 Unfavorable. D. P 700 Favorable.

xv. Wala Company applies overhead on a direct labor hour basis. Each unit of product requires 5 direct labor hours. Overhead is applied on a 30 percent variable and 70 percent
fixed basis; the overhead application rate is P16 per hour. Standards are based on a normal monthly capacity of 5,000 direct labor hours.
During September 2006, Wala produced 1,010 units of product and incurred 4,900 direct labor hours. Actual overhead cost for the month was P80,000.
What is total annual budgeted fixed overhead cost?
A. P 56,000 C. P672,000
B. P 56,560 D. P678,720
i
. Answer: A
Unit cost of materials: (Debit to Goods in Process + Debit to Materials Quantity Variance - Credit to Materials Price Variance)/Number of Units Completed
Total debits to work in process account P51,690
Debit to materials quantity variance 1,970
Credit to materials price variance ( 3,740)
Actual materials cost P49,920
Per unit cost: P49,920/96,000 P0.52
ii
. Answer: A
Actual quantity used 1,066
Add favorable quantity (209/5.5) 38
Standard quantity allowed 1,104
iii
. Answer: C
Actual materials price 105,000/35,000 3.00
Standard Quantity 12,000 x 2 24,000
Standard price 60,000/24,000 2.50
Actual Quantity used: 24,000 + (2,500/2.5) 25,000
Price variance based on usage: 25,000 x (3 – 2.50) 12,500
iv
. Answer: D
Actual Quantity used 14,910
Favorable Quantity 3,735/1.5 2,490
Standard Quantity allowed 17,400
Production in units 17,400/15 1,160
v
. Answer: A
AQ @ SP (3,150 x 40) P126,000
SQ @ SP (600 x 5 x 40) 120,000
Unfavorable Quantity Variance P 6,000
vi
. Answer: D
Materials
Actual cost 127,500
Budgeted cost (8,500 @ 15) 127,500
Materials cost variance 0
Labor
AH @ SR (6,375 @ 12) 76,500
SH @ SR (8,500 @ 0.75 @ 12) 76,500
Labor Efficiency Variance 0
Actual Payroll 77,775
AH @ SR (6,375 @ 12) 76,500
Labor Rate Variance 1,275
vii
. Answer: C
(AR - SR) x AH = rate variance
Therefore, the total variance (P654.50) when divided by the hourly difference (P4.27 - P4.10) will equal the actual hours.
Actual hours (P654.50/P.17) = 3,850.
Proof: (P4.27 - P4.10) x 3,850 = P654.50
viii
. Answer: A
Actual cost 10,000
Favorable Rate Variance 1,000
Actual hours @ standard rate 11,000
Standard Rate: 11,000 ÷ 2,000 5.50
Expected yield (400,000 units / 750 hrs) 7,500 = 40,000
ix
. Answer: C
LEV: (20,000 – 21,000)6.15 = (6,150)F
Standard Rate:
3,000 = 126,000 – 20,000SR
123,000 = 20,000SR
SR = 6.15
x
. Answer: C
LEV: (410 x 20) – 8,440 = (240)F

xi. Answer: D
The controllable variance is the sum of the spending variances plus the efficiency variance.
Variable overhead spending variance P( 3,600)
Fixed overhead spending variance P(10,000)
Variable overhead efficiency variance P 6,000
Total controllable variance P 7,600
The volume variance is not considered a controllable variance.

xii. Answer: C
Efficiency variance = (AH – SH) x SVOHR (14,000 – 13,500) 6 = 3,000 U
Standard hours: 4,500 x 3 13,500

xiii. Answer: D
Efficiency Variance = (31,500 – 30,000) 10 15,000 U
Standard hours: 20,000 units x 1.5 hours

xiv. Answer: D
Actual P10,100
Budget (4,500 x 2.40) 10,800
Favorable Budget variance P( 700)

xv. Answer: C
Fixed overhead per hour: 16 x 0.7 11.20
Annual fixed OH budget 5,000 x 12 x 11.20 672,000