COST ACCOUNTING 2

STANDARD COSTING AND VARIANCE ANALYSIS

I. True or False.

1. A variable cost system is an accounting system where standards are set for each manufacturing
cost element. F
2. Cost systems using detailed estimates of each element of manufacturing cost entering into the
finished product are called standard cost systems. T
3. Standards are performance goals used to evaluate and control operations. T
4. Standards are set for only direct labor and direct materials. F
5. Standards are designed to evaluate price and quantity variances separately. T
6. Ideal standards are developed under conditions that assume no idle time, no machine
breakdowns, no materials spoilage. T
7. Currently attainable standards do not allow for reasonable production difficulties. F
8. In most businesses, cost standards are established principally by accountants. F
9. It is correct to rely exclusively on past cost data when establishing standards. F
10. Standard costs are a useful management tool that can be used solely as a statistical device apart
from the ledger or they can be incorporated in the accounts. T
11. Standard costs serve as a device for measuring efficiency. T
12. The standard cost is how much a product should cost to manufacture. T
13. Standard costs are determined by multiplying expected price by expected quantity. T
14. Standard costs can be used with both the process cost and job order cost systems. T
15. The direct labor time variance measures the efficiency of the direct labor force. T
16. The difference between the standard cost of a product and its actual cost is called a variance. T
17. Variances from standard rarely conflict with nonfinancial performance measures, such as
employee satisfaction. F
18. An unfavorable volume variance may be due to a failure of supervisors to maintain an even flow
of work. T
19. Favorable volume variances are never harmful, since achieving them encourages managers to
run the factory above normal capacity. F
20. Volume variance measures fixed factory overhead. T
21. Though favorable volume variances are usually good news, if inventory levels are too high,
additional production could be harmful. T
22. The fact that workers are unable to meet a properly determined direct labor standard is
sufficient cause to change the standard. F
23. Principle of exception allows managers to focus on correcting variances between standard costs
and actual costs. T
24. A favorable cost variance occurs when actual cost is less than budgeted cost at actual volumes. T
25. An unfavorable cost variance occurs when budgeted cost at actual volumes exceeds actual cost.
F
26. The variance from standard for factory overhead cost resulting from operating at a level above
or below 100% of normal capacity is termed volume variance. T
27. The variance from standard for factory overhead resulting from incurring a total amount of
factory overhead cost that is greater or less than the amount budgeted for the level of
operations achieved is termed controllable variance. T
28. The most effective means of presenting standard factory overhead cost variance data is through
a factory overhead cost variance report. T
29. Since the controllable variance measure the efficiency of using variable overhead resources, if
budgeted variable overhead exceeds actual results, the variance is favorable. T
30. Standard costs should always be revised when they differ from actual costs. F
II. Multiple Choice.

1. 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.
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
3. The variances that should be investigated by management include
a. only unfavorable variances.
b. only favorable variances.
c. all variances, both favorable and unfavorable.
d. both favorable and unfavorable variances considered significant in amount for the company.
4. The most appropriate time from a control standpoint to record any variance of actual materials
prices from standard is:
a. at the time of materials usage
b. as needed to evaluate the performance of the purchasing manager
c. at the time the materials are issued by the storeroom
d. at year end, when all variances will be known
e. at the time of purchase
5. The purchasing agent of the Clampett Company ordered materials of lower quality in an effort to
economize on price and in response to the demands of the production manager due to a mistake in
production scheduling. The materials were shipped by airfreight at a rate higher than ordinarily
charged for shipment by truck, resulting in an unfavorable materials price variance. The lower
quality material proved to be unsuitable on the production line and resulted in excessive waste. In
this situation, who should be held responsible for the materials price and quantity variances?
Materials Price Variance Materials Quantity Variance
a. Purchasing Agent Purchasing Agent
b. Production Manager Production Manager
c. Production Manager Purchasing Agent
d. Purchasing Agent Production Manager
6. The inventory control supervisor at Wilson Manufacturing Corporation reported that a large
quantity of a part purchased for a special order that was never completed remains in stock. The
order was not completed because the customer defaulted on the order. The part is not used in any
of Wilson’s regular products. After consulting with Wilson’s engineers, the vice president of
production approved the substitution of the purchased part for a regular part in a new product.
Wilson’s engineers indicated that the purchased part could be substituted providing it was modified.
The units manufactured using the substituted part required additional direct labor hours resulting in
an unfavorable direct labor efficiency variance in the Production Department. The unfavorable
direct labor efficiency variance resulting from the substitution of the purchased part in inventory
would best be assigned to the
a. Sales manager.
b. Inventory supervisor.
c. Production supervisor.
d. Vice-president of production
7. 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.
d. Variable overhead efficiency variance.
8. An unfavorable efficiency variance for direct manufacturing labor might indicate that
a. work was efficiently scheduled.
b. machines were not properly maintained.
c. budgeted time standards are too lax.
d. higher-skilled workers were scheduled than planned.
9. 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
10. Which of the following is the most probable reason a company would experience an unfavorable
labor rate variance and a favorable efficiency variance?
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 to product a standard unit.
11. 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
12. When machine-hours are used as an overhead cost-allocation base, the MOST likely cause of a
favorable variable overhead spending variance is
a. excessive machine breakdowns.
b. the production scheduler efficiently scheduled jobs.
c. a decline in the cost of energy.
d. strengthened demand for the product.
13. Which of the following standard costing variances would be least controllable by a production
supervisor?
a. Overhead volume.
b. Overhead efficiency.
c. Labor efficiency.
d. Materials usage.
14. The MAJOR challenge when planning fixed overhead
a. is calculating total costs.
 b. is calculating the cost-allocation rate.
c. is choosing the appropriate level of capacity.
d. is choosing the appropriate planning period.
15. A company may set predetermined overhead rates based on normal, expected annual, or
theoretical capacity. At the end of a period, the fixed overhead spending variance would
a. be the same regardless of the capacity level selected.
b. be the largest if theoretical capacity had been selected.
c. be the smallest if theoretical capacity had been selected.
d. not occur if actual capacity were the same as the capacity level selected.
16. Which of the following is not correct?
a. If the denominator level of activity and the standard hours allowed for the output of the period
are the same, then there is no volume variance.
b. If the denominator level of activity is greater than the standard hours allowed for the output of
the period, then the volume variance is unfavorable.
c. If the denominator level of activity is greater than the standard hours allowed for the output of
the period, then the volume variance is favorable.
d. The volume variance is the most appropriate measure of the utilization of plant facilities.
17. Which of the following is a sign of poor cost control?
a. A high unfavorable budget variance.
b. A high unfavorable volume variance.
c. High under-applied overhead.
d. High over-applied overhead.
18. 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
19. Which of the following variances would be useful in calling attention to possible problems in the
control of spending on overhead item?
A. B. C. D.
Variable Overhead Spending Variance No No Yes Yes
Fixed Overhead Spending Variance No Yes No Yes
20. 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
21. The direct materials mix variance will be favorable when
a. the flexible-budget contribution margin is greater than the actual contribution margin.
b. the actual direct materials input mix is less expensive than the budgeted direct materials input
mix.
c. the actual quantity of total inputs used is greater than the flexible budget for total inputs.
d. actual unit sales are less than budgeted unit sales.
22. The sum of the material mix and material yield variances equals
a. the material purchase price variance.
b. the material quantity variance.
c. the total material variance.
 d. none of the above.
23. Dolittle Company purchased materials on account. The entry to record the purchase of materials
having a standard cost of $0.50 per pound from a supplier at $0.60 per pound would include a:
a. credit to Raw Materials Inventory.
b. debit to Work in Process.
c. credit to Materials Price Variance.
d. debit to Materials Price Variance.
24. Which of the following entries would correctly record the charging of direct labor costs to Work in
Process given an unfavorable labor efficiency variance and a favorable labor rate variance?
a. Work in Process
Labor Efficiency Variance
Labor Rate Variance
Wages Payable
b. Work in Process
Wages Payable
c. Work in Process
Labor Efficiency Variance
Labor Rate Variance
Wages Payable
d. Work in Process
Labor Rate Variance
Labor Efficiency Variance
Wages Payable
25. If P29,000 of factory overhead costs have been incurred and P25,000 of factory overhead has been
applied, which of the following entries will close the overhead accounts and prorate the under-
applied overhead among the relevant accounts? (Of the P25,000 applied, P2,500 is still in EWIP, and
P5,000 is still in finished goods as part of unsold inventory.)
a. Cost of goods sold P 1,333
Finished goods 1,333
Work-in-process 1,334
Overhead control 25,000
Overhead applied P 29,000
b. Cost of goods sold P 2,800
Finished goods 800
Work-in-process 400
Overhead applied 25,000
Overhead control P 29,000
c. Cost of goods sold P 2,000
Finished goods 1,500
Work-in-process 500
Factory overhead applied 25,000
Overhead summary P 29,000
d. Overhead applied P 29,000
Overhead control P 25,000
Cost of goods sold 2,000
Finished goods 1,500
Work-in-process 500