MULTIPLE CHOICE QUESTIONS

1. A standard cost:
A. is the "true" cost of a unit of production.
B. is a budget for the production of one unit of a product or service.
C. can be useful in calculating equivalent units.
D. is normally the average cost within an industry.
E. is almost always the actual cost from previous years.

Answer: B LO: 1 Type: RC

2. Which of the following is a predetermined estimated cost that can be used in the
calculation of a variance?
A. Product cost.
B. Actual cost.
C. Standard cost.
D. Differential cost.
E. Marginal cost.

Answer: C LO: 1 Type: RC

3. Variances are computed by taking the difference between which of the following?
A. Product cost and period cost.
B. Actual cost and differential cost.
C. Price factors and rate factors.
D. Actual cost and standard cost.
E. Product cost and standard cost.

Answer: D LO: 1 Type: RC

4. The term "management by exception" is best defined as:

A. choosing exceptional managers.
B. controlling actions of subordinates through acceptance of management techniques.
C. investigating unfavorable variances.
D. devoting management time to investigate significant variances.
E. controlling costs so that non-zero variances are treated as "exceptional."

Answer: D LO: 1 Type: RC, N

5. Which of the following are methods for setting standards?
A. Analysis of historical data.
B. Task analysis.
C. Task analysis and the analysis of historical data.
D. Matrix application forms.
E. Goal congruence.

Answer: C LO: 2 Type: RC

6. Which of the following individuals is least likely to become involved in the setting of
either direct material standards or direct labor standards?
A. The purchasing manager.
B. A production supervisor.
C. An engineer.
D. A machine operator.
E. A company's president.

Answer: E LO: 2 Type: N

7. A perfection standard:
A. tends to motivate employees over a long period of time.
B. is attainable in an ideal operating environment.
C. would make allowances for normal amounts of scrap and waste.
D. is generally preferred by behavioral scientists.
E. will result in a number of favorable variances on a performance report.

Answer: B LO: 2 Type: RC, N

8. Consider the following statements:

1. Behavioral scientists find that perfection standards often discourage employees and
result in low worker morale.
2. Practical standards are also known as attainable standards.
3. Practical standards incorporate a certain amount of inefficiency such as that caused
by an occasional machine breakdown.

Which of the above statements is (are) true?

A. I only.
B. II only.
C. III only.
D. II and III.
E. I, II, and III.

Answer: E LO: 2 Type: RC

 9. Which of the following would be considered if a company desires to establish a series of
practical manufacturing standards?
A. The productivity loss associated with a short-term worker slowdown.
B. Normal defect rates in an assembly process.
C. Highly unusual spoilage rates with direct materials.
D. Quantity discounts associated with purchases of direct materials.
E. Both "B" and "D"

Answer: E LO: 2 Type: RC, N

10. Which of the following would not be considered if a company desires to establish a series
of practical manufacturing standards?
A. Production time lost during unusual machinery breakdowns.
B. Normal worker fatigue.
C. Freight charges on incoming raw materials.
D. Production time lost during setup procedures for new manufacturing runs.
E. The historical 2% defect rate associated with raw material inputs.

Answer: A LO: 2 Type: RC, N

11. Which of the following choices correctly notes a characteristic associated with perfection
standards and one associated with practical standards?
Perfection Standards Practical Standards
A. Attainable in an ideal environment Incorporate abnormal occurrences when
setting quantity and efficiency targets
B. Result in many unfavorable variances Are often attainable by workers
C. Tend to boost worker morale Generally preferred by behavioral
scientists
D. Generally, are easily achieved by Result in both favorable and unfavorable
workers variances
E. Generally preferred by behavioral Are easier to achieve than perfection
scientists standards

Answer: B LO: 2 Type: RC, N

12. Consider the following statements:

4. The standard cost per unit of materials is used to calculate a materials price
variance.
5. The standard cost per unit of materials is used to calculate a materials quantity
variance.
6. The standard cost per unit of materials cannot be determined until the end of the
period.

Which of the above statements is (are) true?

A. I only.
B. II only.
C. III only.
D. I and II.
E. I, II, and III.

Answer: D LO: 3 Type: RC

13. Which of the following choices correctly notes the use of the standard price per unit of
direct material when calculating the materials price variance and the materials quantity
variance?
Price Variance Quantity Variance
A. Used Always used
B. Used Occasionally used
C. Used Not used
D. Not used Always used
E. Not used Not used

Answer: A LO: 3 Type: RC

14. Most companies base the calculation of the materials price variance on the:
A. number of units purchased.
B. number of units spoiled.
C. number of units that should have been used.
D. number of units actually used.
E. number of units to be purchased during the next accounting period.

Answer: A LO: 3 Type: RC

15. Which of the following correctly lists all the information needed to calculate a labor rate
variance?
A. Standard labor rate and actual hours worked.
B. Actual hours worked and actual units produced.
C. Standard labor rate, actual labor rate, and actual units produced.
D. Actual labor rate and actual hours worked.
E. Actual labor rate, standard labor rate, and actual hours worked.

Answer: E LO: 3 Type: RC

16. Which of the following variances are most similar with respect to the manner in which
they are calculated?
A. Labor rate variance and labor efficiency variance.
B. Materials price variance and materials quantity variance.
C. Materials price variance, materials quantity variance, and total materials variance.
D. Materials price variance and labor efficiency variance.
E. Materials quantity variance and labor efficiency variance.

Answer: E LO: 3 Type: N

17. Which of the following variances cannot occur together during the same accounting
period?
A. Unfavorable labor rate variance and favorable labor efficiency variance.
B. Unfavorable labor efficiency variance and favorable materials quantity variance.
C. Favorable labor rate variance and unfavorable total labor variance.
D. Favorable labor efficiency variance and favorable materials quantity variance.
E. None of the above, as all of these variance combinations are possible.

Answer: E LO: 3 Type: N

 18. If a company has an unfavorable direct-material quantity variance, then:
A. the direct-material price variance is favorable.
B. the total direct-material variance is unfavorable.
C. the total direct-material variance is favorable.
D. the direct-labor efficiency variance is unfavorable.
E. any of the above variances can occur.

Answer: E LO: 3 Type: N

19. A favorable labor efficiency variance is created when:

A. actual labor hours worked exceed standard hours allowed.
B. actual hours worked are less than the standard hours allowed.
C. actual wages paid are less than amounts that should have been paid.
D. actual units produced exceed budgeted production levels.
E. actual units produced exceed standard hours allowed.

Answer: B LO: 3 Type: N

20. Victoria, Inc., recently completed 52,000 units of a product that was expected to consume
five pounds of direct material per finished unit. The standard price of the direct material
was $9 per pound. If the firm purchased and consumed 268,000 pounds in manufacturing
(cost = $2,304,800), the direct-materials quantity variance would be figured as:
A. $72,000F.
B. $72,000U.
C. $107,200F.
D. $107,200U.
E. none of the above.

Answer: B LO: 3 Type: A

21. Solo Corporation recently purchased 25,000 gallons of direct material at $5.60 per gallon.
Usage by the end of the period amounted to 23,000 gallons. If the standard cost is $6.00
per gallon and the company believes in computing variances at the earliest point possible,
the direct-material price variance would be calculated as:
A. $800F.
B. $9,200F.
C. $9,200U.
D. $10,000F.
E. $10,000U.

Answer: D LO: 3 Type: A

Use the following to answer questions 22-23:

The following data relate to product no. 89 of Des Moines Corporation:

Direct material standard: 3 square feet at $2.50 per square foot

Direct material purchases: 30,000 square feet at $2.60 per square foot
Direct material consumed: 29,200 square feet
Manufacturing activity, product no. 89: 9,600 units completed
22. The direct-material quantity variance is:
A. $1,000F.
B. $1,000U.
C. $1,040F.
D. $1,040U.
E. $2,000F.

Answer: B LO: 3 Type: A

23. The direct-material price variance is:

A. $2,880U.
B. $2,920F.
C. $2,920U.
D. $3,000F.
E. $3,000U.

Answer: E LO: 3 Type: A

24. Consider the following information:

Direct material purchased and used, 80,000 gallons

Standard quantity of direct material allowed for May production, 76,000 gallons
Actual cost of direct materials purchased and used, $176,000
Unfavorable direct-material quantity variance, $9,400

The direct-material price variance is:

A. $11,400F.
B. $11,400U.
C. $12,000F.
D. $12,000U.
E. none of the above.

Answer: C LO: 3 Type: A, N

25. Courtney purchased and consumed 50,000 gallons of direct material that was used in the
production of 11,000 finished units of product. According to engineering specifications,
each finished unit had a manufacturing standard of five gallons. If a review of Courtney's
accounting records at the end of the period disclosed a material price variance of $5,000U
and a material quantity variance of $3,000F, determine the actual price paid for a gallon
of direct material.
A. $0.50.
B. $0.60.
C. $0.70.
D. An amount other than those shown above.
E. Not enough information to judge.

Answer: C LO: 3 Type: A, N

 26. Holland Enterprises recently used 20,000 labor hours to produce 8,300 completed units.
According to manufacturing specifications, each unit is anticipated to take 2.5 hours to
complete. The company's actual payroll cost amounted to $370,000. If the standard
labor cost per hour is $18, Holland's labor rate variance is:
A. $10,000F.
B. $10,000U.
C. $10,375F.
D. $10,375U.
E. none of the above.

Answer: B LO: 3 Type: A

27. Denver Enterprises recently used 14,000 labor hours to produce 7,500 completed units.
According to manufacturing specifications, each unit is anticipated to take two hours to
complete. The company's actual payroll cost amounted to $158,200. If the standard
labor cost per hour is $11, Denver's labor efficiency variance is:
A. $11,000U.
B. $11,000F.
C. $11,300U.
D. $11,300F.
E. none of the above.

Answer: B LO: 3 Type: A

7. Alex Company recently completed 10,600 units of its single product, consuming 32,000
labor hours that cost the firm $480,000. According to manufacturing specifications, each
unit should have required 3 hours of labor time at $15.40 per hour. On the basis of this
information, determine Alex’s labor rate variance and labor efficiency variance.
Rate Efficiency
A. $12,720F $3,000F
B. $12,720F $3,000U
C. $12,800F $3,080F
D. $12,800F $3,080U
E. $12,800U $3,080U

Answer: D LO: 3 Type: A

Use the following to answer questions 29-30:

The following data relate to product no. 33 of La Quinta Corporation:

Direct labor standard: 5 hours at $14 per hour

Direct labor used in production: 45,000 hours at a cost of $639,000
Manufacturing activity, product no. 33: 8,900 units completed
29. The direct-labor rate variance is:
A. $8,900F.
B. $8,900U.
C. $9,000F.
D. $9,000U.
E. none of the above.

Answer: D LO: 3 Type: A

30. The direct-labor efficiency variance is:

A. $7,000F.
B. $7,000U.
C. $7,100F.
D. $7,100U.
E. none of the above.

Answer: B LO: 3 Type: A

31. Consider the following information:

Actual direct labor hours 34,500

Standard direct labor hours 35,000
Total actual direct labor cost $241,500
Direct-labor efficiency variance, favorable $3,200

The direct-labor rate variance is:

A. $17,250U.
B. $20,700U.
C. $20,700F.
D. $21,000F.
E. none of the above.

Answer: B LO: 3 Type: A, N

32. Simms Corporation had a favorable direct-labor efficiency variance of $6,000 for the
period just ended. The actual wage rate was $0.50 more than the standard rate of $12.00.
If the company's standard hours allowed for actual production totaled 9,500, how many
hours did the firm actually work?
A. 9,000.
B. 9,020.
C. 9,980.
D. 10,000.
E. None of the above.

Answer: A LO: 3 Type: A , N

Use the following to answer questions 33-37:

Cost standards for product no. C77:

Direct material 3 pounds at $2.50 per pound $ 7.50
Direct labor 5 hours at $7.50 per hour 37.50

Actual results:
Units produced 7,800 units
Direct material purchased 26,000 pounds at $2.70 $ 70,200
Direct material used 23,100 pounds at $2.70 62,370
Direct labor 40,100 hours at $7.30 292,730

33. The direct-material quantity variance is:

A. $750F.
B. $750U.
C. $6,500U.
D. $7,250U.
E. none of the above.

Answer: A LO: 3 Type: A

34. The direct-material price variance is:

A. $4,620F.
B. $4,620U.
C. $5,200F.
D. $5,200U.
E. none of the above.

Answer: D LO: 3 Type: A

35. The direct-labor rate variance is:

A. $7,800F.
B. $7,950F.
C. $8,020F.
D. $8,000U.
E. none of the above.

Answer: C LO: 3 Type: A

36. The direct-labor efficiency variance is:

A. $8,000F.
B. $8,000U.
C. $8,250F.
D. $8,250U.
E. none of the above.

Answer: D LO: 3 Type: A

37. The standard hours allowed for the work performed are:
A. 5.
B. 5.14.
C. 39,000.
D. 40,100.
E. none of the above.

Answer: C LO: 3 Type: A

38. When considering whether to investigate a variance, managers should consider all of the
following except the variance's:
A. size.
B. pattern of recurrence.
C. trends over time.
D. nature, namely, whether it is favorable or unfavorable.
E. controllability.

Answer: D LO: 4 Type: RC

39. Which of the following combinations of direct-material variances might prompt

management to undertake a detailed variance investigation?
A. Price, unfavorable; quantity, unfavorable.
B. Price, unfavorable; quantity, favorable.
C. Price, favorable; quantity, unfavorable.
D. Price favorable; quantity, favorable.
E. All of the above.

Answer: E LO: 4 Type: N

40. Consider the following statements about variance investigation:

8. Variance investigation involves a look at only unfavorable variances.

9. Variance investigation is typically based on a cost-benefit analysis.
10. Variance investigation is often performed by establishing guidelines similar to the
following: Investigate variances that are greater than $X or greater than Y% of
standard cost.

Which of the above statements is (are) true?

A. I only.
B. II only.
C. III only.
D. II and III.
E. I, II, and III.

Answer: D LO: 4 Type: RC

41. A statistical control chart is best used for determining:
A. direct-material price variances.
B. direct-labor variances.
C. whether a variance is favorable or unfavorable.
D. who should be held accountable for specific variances.
E. whether a particular variance should be investigated.

Answer: E LO: 4 Type: RC

42. The individual generally responsible for the direct-material price variance is the:
A. sales manager.
B. production supervisor.
C. purchasing manager.
D. finance manager.
E. head of the human resources department.

Answer: C LO: 5 Type: RC

43. A production supervisor generally has little influence over the:

A. direct-material quantity variance.
B. direct-labor rate variance.
C. direct-labor efficiency variance.
D. direct-material price variance.
E. number of units produced.

Answer: D LO: 5 Type: N

44. In which department would an investigation normally begin regarding an unfavorable

materials quantity variance?
A. Quality control.
B. Purchasing.
C. Engineering.
D. Production.
E. Receiving.

Answer: D LO: 5 Type: RC

45. Cohen Corporation has a favorable materials quantity variance. Which department would
likely be asked to explain the cause of this variance?
A. Engineering.
B. Purchasing.
C. Production.
D. Marketing.
E. None, because the variance is favorable.

Answer: C LO: 5 Type: N

46. Rogers, Inc., had an unfavorable labor efficiency variance and an unfavorable materials
quantity variance. Which department might be held accountable for these variances?
A. Purchasing, because bad materials can harm labor efficiency.
B. Production, because inefficient workers may use more materials than allowed.
C. Purchasing and/or production.
D. Marketing.
E. Shipping.

Answer: C LO: 5 Type: N

47. A direct-material quantity variance can be caused by all of the following except:
A. improper employee training.
B. changes in sales volume.
C. acquisition of materials at a very attractive price.
D. adjustment problems with machines.
E. disgruntled workers.

Answer: B LO: 5 Type: N

48. A direct-labor efficiency variance cannot be caused by:

A. inexperienced employees.
B. poor quality raw materials.
C. employee inefficiency.
D. an out-of-date labor time standard.
E. producing fewer finished units than originally planned.

Answer: E LO: 5 Type: N

49. Justin Company recently purchased materials from a new supplier at a very attractive
price. The materials were found to be of poor quality, and the company's laborers
struggled significantly as they shaped the materials into finished product. In a
desperation move to make up for some of the time lost, the manufacturing supervisor
brought in more-senior employees from another part of the plant. Which of the following
variances would have a high probability of arising from this situation?
A. Material price variance, favorable.
B. Material quantity variance, unfavorable.
C. Labor rate variance, unfavorable.
D. Labor efficiency variance, unfavorable.
E. All of the above.

Answer: E LO: 5 Type: N

11. Listed below are five variances (and possible causes) that are under review by
management of Knox Company. Which of the following is least likely to cause the
variance indicated?
A. The need to ship goods acquired from a distant supplier via FedEx rather than via
truck; material price variance.
B. The need to complete goods on a timely basis during a period of high absenteeism;
labor rate variance.
C. A work-team that is very unhappy with its supervisor; labor efficiency variance.
D. The need to close a plant for two days because of blizzard conditions; material
quantity variance, part no. 542.
E. A malfunctioning piece of manufacturing equipment; labor efficiency variance.

Answer: D LO: 5 Type: N

51. Lucky Corporation's purchasing manager obtained a special price on an aluminum alloy
from a new supplier, resulting in a direct-material price variance of $9,500F. The alloy
produced more waste than normal, as evidenced by a direct-material quantity variance of
$2,000U, and was also difficult to use. This slowed worker efficiency, generating a
$2,500U labor efficiency variance. To help remedy the situation, the production manager
used senior line employees, which gave rise to a $900U labor rate variance. If overall
product quality did not suffer, what variance amount is best used in judging the
appropriateness of the purchasing manager's decision to acquire substandard material?
A. $4,100F.
B. $5,000F.
C. $7,000F.
D. $7,500F.
E. $9,500F.

Answer: A LO: 5 Type: A, N

52. Standard costs:

A. allow a manager to assess the efficiency of operations.
B. allow a company to practice management by exception.
C. provide management with a basis for performance evaluations.
D. if set correctly, can provide a motivational tool for employees.
E. will provide all of the above benefits for a company.

Answer: E LO: 7 Type: RC, N

53. Which of the following is a criticism of standard costing, as applied to today's
manufacturing environment?
A. Automated manufacturing processes are very consistent in meeting production
specifications, making variances very small and relatively unimportant.
B. Variance information is usually aggregated (i.e., combined) rather than associated
with a particular batch of goods or a specific product line.
C. Traditional standard costing fails to focus on key business issues such as customer
service and bringing products to market faster than the competition.
D. Standard costing pays considerable attention to labor cost and labor efficiency, which
are becoming a relatively unimportant factor of production.
E. All of the above are valid criticisms.

Answer: E LO: 8 Type: RC

54. Which of the following is not a valid way to adapt standard cost systems to today's
manufacturing environment?
A. Emphasize material and overhead costs.
B. Use more non-traditional cost drivers such as number of setups or number of
engineering change orders.
C. Update standards more frequently to adjust for the elimination of non-value-added
costs.
D. Use additional nonfinancial measures for performance evaluation and control.
E. Devote more resources to the tracking of direct labor cost.

Answer: E LO: 8 Type: RC

55. To assess how customers perceive a company's products, management may study:
A. the number of customer complaints.
B. the number of warranty claims.
C. the number of products returned.
D. the cost of repairing returned products.
E. all of the above measures.

Answer: E LO: 9 Type: RC

56. To improve its manufacturing efficiency, companies should strive toward increasing
__________ time as a percentage of processing time + inspection time + waiting time +
move time. The blank is:
A. processing time.
B. lead time.
C. waiting time.
D. move time.
E. inspection time.

Answer: A LO: 9 Type: RC

57. In the calculation of manufacturing cycle efficiency, which of the following activities
results in value-added time?
A. Moving.
B. Processing.
C. Inspection.
D. Waiting.
E. All of the above.

Answer: B LO: 9 Type: RC

58. The manufacturing cycle efficiency for PQR Company when the processing time is six
hours and inspection, waiting, and move time are one hour each is:
A. 0.67.
B. 0.75.
C. 0.78.
D. 0.88.
E. an amount other than those shown above.

Answer: A LO: 9 Type: A

59. Which of the following would not be a concern of a company that desires to compete in a
global manufacturing arena?
A. Number of new products introduced.
B. Manufacturing cycle efficiency.
C. Number of customer complaints.
D. Number of on-time deliveries.
E. All of the above would be concerns.

Answer: E LO: 9 Type: RC

60. An increasingly popular approach that integrates financial and customer performance
measures with measures in the areas of internal operations and learning and growth is
known as:
A. the integrated performance measurement tool (IPMT).
B. the balanced scorecard.
C. gain sharing.
D. cycle efficiency.
E. overall quality assessment (OQA).

Answer: B LO: 10 Type: RC

61. The typical balanced scorecard is best described as containing:

A. financial performance measures.
B. nonfinancial performance measures.
C. neither financial nor nonfinancial performance measures.
D. both financial and nonfinancial performance measures.
E. both financial and nonfinancial performance measures, the latter often covering a
broad range of perspectives such as customers, internal operations, and learning and
growth.
Answer: E LO: 10 Type: RC
62. Swedish Cruise Lines (SCL), which operates in a very competitive marketplace, is
considering four categories of performance measures: (1) profitability measures, (2)
customer-satisfaction measures, (3) efficiency and quality measures, and (4) learning and
growth measures. The company assigns one manger to each ship in its fleet to oversee
the ship's general operations. If SCL desired to adopt a balanced-scorecard approach,
which measures should the firm use in the evaluation of its managers?
A. 1.
B. 1, 2.
C. 2, 3.
D. 1, 2, 4.
E. 1, 2, 3, 4.

Answer: E LO: 10 Type: N

63. Lead indicators guide management to:

A. take actions now that will have positive effects on organizational performance now.
B. take actions now that will have positive effects on organizational performance in the
future.
C. take actions in the future that will have positive effects on organizational
performance now.
D. take actions in the past that will have positive effects on organizational performance
in the future.
E. pursue identical strategies as those implemented with lag indicators.

Answer: B LO: 10 Type: RC

64. When using a balanced scorecard, a company's market share is typically classified as an
element of the firm's:
A. financial performance measures.
B. customer performance measures.
C. learning and growth performance measures.
D. internal-operations performance measures.
E. interdisciplinary performance measures.

Answer: B LO: 10 Type: RC

65. When using a balanced scorecard, which of the following is typically classified as an
internal-operations performance measure?
A. Cash flow.
B. Number of customer complaints.
C. Employee training hours.
D. Number of employee suggestions.
E. Number of suppliers used.

Answer: E LO: 10 Type: RC

66. Which of the following perspectives is influenced by a company's vision and strategy?
A. Financial.
B. Customer.
C. Internal operations.
D. Learning and growth.
E. All of the above.

Answer: E LO: 10 Type: RC

67. Which of the following journal entries definitely contains an error?

A. Raw-Material Inventory 200,000
Direct-Material Price Variance 5,000
Accounts Payable 205,000
B. Raw-Material Inventory 38,000
Direct-Material Price Variance 2,000
Accounts Payable 36,000
C. Raw-Material Inventory 156,000
Direct-Material Price Variance 8,000
Work-in-Process Inventory 148,000
D. Work-in-Process Inventory 67,000
Direct-Material Quantity Variance 3,000
Raw-Material Inventory 70,000
E. Work-in-Process Inventory 79,000
Direct-Material Quantity Variance 4,000
Raw-Material Inventory 75,000

Answer: C LO: 11 Type: N

68. At the end of the accounting period, most companies close variance accounts to:
A. Raw-Material Inventory.
B. Work-in-Process Inventory.
C. Finished-Goods Inventory.
D. Cost of Goods Sold.
E. Income Summary.

Answer: D LO: 11 Type: RC

EXERCISES

Setting a Standard

69. Cloverleaf, Inc., produces glass shelves that are used in furniture. Each shelf requires 3.6
pounds of raw material at a cost of $2 per pound. Unfortunately, given the nature of the
manufacturing process, one out of every five shelves is chipped, scratched, or broken at
the beginning of production and has to be scrapped.

On average, 20 good shelves are completed during each hour. Laborers who work on
these units are paid $15 per hour.

Required:
12. Distinguish between perfection standards and practical standards.
13. Who within an organization would be in the best position to assist in setting:
14. the direct-material price standard?
15. the direct-material quantity standard?
16. the direct-labor efficiency standard?
17. Calculate a practical direct-material and direct-labor standard for each good shelf
produced.

LO: 2, 3, 5 Type: A, N

Answer:
A. Perfection standards, or those achieved under nearly perfect operating conditions,
assume peak efficiency at minimum cost. Employees are pushed to reach these ideal
measures, often becoming discouraged. Practical standards, on the other hand, are high
but attainable, thus presenting a realistic target for personnel. Such standards
incorporate allowances for normal downtime and other typical inefficiencies.

B. 1. The purchasing manager.

2. The production supervisor as well as production engineers.
3. The production supervisor as well as industrial engineers.

C. Direct materials: 4.5 pounds* x $2 per pound $9.00

Direct labor: 0.05 hours* x $15 0.75
Total $9.75

*Direct materials: (3.6 x 5) ÷ 4 = 4.5; direct labor: 1 ÷ 20 = 0.05

Direct-Material Standards, Variance Data

70. Diamond Corporation manufactures a variety of liquid lawn fertilizers, including a very
popular product called Lush 'N Green. Data about Lush 'N Green and Proctol, a major
ingredient, follow.

Expected operations:
· Proctol is purchased in 55-gallon drums at a cost of $45 per drum. A 2% cash
discount is offered for prompt payment of invoices, and Diamond takes advantage of
all discounts offered.
· Diamond normally purchases 200 drums of Proctol at a time, paying shipping fees of
$420 per shipment.
· Each gallon of Lush 'N Green requires three quarts of Proctol; however, because of
evaporation and spills, Diamond loses 4% of all Proctol that enters production.
(Recall that there are four quarts in a gallon.)

Actual operations:
· For the period just ended, Diamond purchased 1,200 drums of Proctol at a total cost
of $54,960. There was no beginning inventory, but an end-of-period inventory
revealed that 15 drums were still on hand.
· Manufacturing activity output totaled 82,000 gallons of Lush 'N Green.

Required:
A. Compute the standard purchase price for one gallon of Proctol.
B. Compute the standard quantity of Proctol to be used in producing one gallon of Lush
'N Green. Express your answer in quarts.
C. Compute the direct-material price variance for Proctol.
D. How much Proctol was used in manufacturing activity and how much should have
been used? Express your answer in quarts.

LO: 2, 3 Type: A, N
 Answer:
A. Purchase price per drum $45.00
Less: 2% discount (0.90)
$44.10
Shipping fee per drum ($420 ÷ 200 drums) 2.10
Total $46.20

Total purchase price ($46.20) ÷ 55 gallons = $0.84 per gallon

B. Three quarts of Proctol are required for each gallon of Lush 'N Green; however, 4%
of Proctol input is lost through evaporation and spills. Thus, the standard input is
3.125 quarts (3 ÷ 0.96).

C. Standard cost of purchases (1,200 drums x $46.20) $55,440

Actual cost of purchases 54,960
Direct-material price variance $ 480F

D. Actual usage: (1,200 - 15) = 1,185 drums; 1,185 drums x 55 gallons x 4 quarts =
260,700 quarts
Standard usage: 82,000 gallons x 3.125 = 256,250 quarts

Straightforward Calculation of Variances

71. Quicksand Company has set the following standards for one unit of product:

Direct material
Quantity: 6.2 pounds per unit
Price per pound: $11 per pound
Direct labor
Quantity: 6 hours per unit
Rate per hour: $23 per hour

Actual costs incurred in the production of 2,800 units were as follows:

Direct material: $194,350 ($11.50 per pound)

Direct labor: $393,750 ($22.50 per hour)

All materials purchased were consumed during the period.

Required:
Calculate the direct-material price and quantity variances and the direct-labor rate and
efficiency variances. Indicate whether each variance is favorable or unfavorable.

LO: 3 Type: A
 Answer:

Actual Material Cost Standard Material Cost

Actual Actual Actual Standard Standard Standard
x x x
Quantity Price Quantity Price Quantity Price
16,900 x $11.50 16,900 x $11.00 17,360* x $11.00
$194,350 $185,900 $190,960
$8,450U $5,060F
Direct-material Direct-material
price variance quantity variance
*2,800 units x 6.2 pounds

Actual Labor Cost Standard Labor Cost

Actual Actual Standard Standard Standard
Actual Hours x x x
Rate Hours Rate Hours Rate
17,500 x $22.50 17,500 x $23.00 16,800# x $23.00
$393,750 $402,500 $386,400
$8,750F $16,100U
Direct-labor Direct-labor
rate variance efficiency variance
#2,800 units x 6 hours

Straightforward Calculation of Variances

72. Upstate manufactures a product that has the following standard costs:

Direct materials: 40 yards at $2.70 per yard $108

Direct labor: 8 hours at $18.00 per hour 144
Total $252

The following information pertains to July:

Direct material purchased: 42,500 yards at $2.78 per yard, or $118,150

Direct material used: 36,000 yards
Direct labor: 7,500 hours at $18.30 per hour, or $137,250
Actual completed production: 1,050 units

Required:
Calculate the direct-material price and quantity variances and the direct-labor rate and
efficiency variances. Indicate whether each variance is favorable or unfavorable.

LO: 3 Type: A
 Answer:

Actual Material Cost

Actual Actual Actual Standard
x x
Quantity Price Quantity Price
42,500 x $2.78 42,500 x $2.70
$118,150 $114,750
$3,400U
Direct-material
price variance

Standard Material Cost

Actual Standard Standard Standard
x x
Quantity Price Quantity Price
36,000 x $2.70 42,000* x $2.70
$97,200 $113,400
$16,200F
Direct-material
quantity variance
*1,050 units x 40 yards

Actual Labor Cost Standard Labor Cost

Actual Actual Actual Standard Standard Standard
x x x
Hours Rate Hours Rate Hours Rate
7,500 x $18.30 7,500 x $18.00 8,400# x $18.00
$137,250 $135,000 $151,200
$2,250U $16,200F
Direct-labor Direct-labor
rate variance efficiency variance
#1,050 units x 8 hours
 Variance Calculation and Interpretation

73. Richie Ventura operates a commercial painting business in Sacramento, which has a very
tight labor market. Much of his work focuses on newly constructed apartments and
townhouses.

The following data relate to crew no. 5 for a recently concluded period when 85
apartment units were painted:
· Three new employees were assigned to crew no. 5. Wages averaged $18.80 per hour
for each employee; the crew took 2,550 hours to complete the work.
· Based on his knowledge of the operation, articles in trade journals, and conversations
with other painters, Ventura established the following standards:
Typical hourly wage rate of crew personnel: $15
Anticipated crew time for each unit: 34 hours
· The paint quantity variance was $6,070F.
· The operation did not go as smoothly as planned, with customer complaints and
problems being much higher than expected.

Required:
A. Compute Ventura's direct-labor variances.
B. Is the direct-labor rate variance consistent with what you might expect in a tight labor
market? Explain.
C. Analyze the information given and that you calculated, and determine what likely
happened that would give rise to customer complaints?

LO: 3, 5 Type: A, N

Answer:
A.
Actual Labor Cost Standard Labor Cost
Actual Actual Actual Standard Standard Standard
x x X
Hours Rate Hours Rate Hours Rate
2,550 x $18.80 2,550 x $15.00 2,890* x $15.00
$47,940 $38,250 $43,350
$9,690U $5,100F
Direct-labor Direct-labor
rate variance efficiency variance
*85 units x 34 hours

B. Yes. A tight labor market often means that premium wages are needed to attract
qualified employees. These wages would give rise to an unfavorable rate variance.

C. Ventura has two favorable variances: labor efficiency and material (paint) quantity.
The favorable efficiency variance indicates that the crew is spending less time than
budgeted, perhaps rushing the jobs and being a bit sloppy. It is also possible that
employees are being somewhat skimpy in their use of paint, using less than expected
(e.g., applying one coat rather than two in certain applications).
 Variance Computation, Analysis of Performance

74. Diablo Products uses a standard costing system to assist in the evaluation of operations.
The company has had considerable employee difficulties in recent months, so much so
that management has hired a new production supervisor (Joe Simms). Simms has been
on the job for six months and has seemingly brought order to an otherwise chaotic
situation.

The vice-president of manufacturing recently commented that "… Simms has really done
the trick. Joe's team-building/morale-boosting exercises have truly brought things under
control." The vice-president's comments were based on both a plant tour, where he
observed a contented work force, and review of a performance report that showed a total
labor variance of $14,000F. This variance is truly outstanding, given that it is less than
2% of the company's budgeted labor cost. Additional data follow.
· Total completed production amounted to 20,000 units.
· A review of the firm's standard cost records found that each completed unit requires
2.75 hours of labor at $14 per hour. Diablo's production actually required 42,000
labor hours at a total cost of $756,000.

Required:
A. As judged by the information contained in the performance report, should the vice-
president be concerned about the company's labor variances? Why?
B. Calculate Diablo's direct-labor variances.
C. On the basis of your answers to requirement "B," should Diablo be concerned about
its labor situation? Why?
D. Briefly analyze and explain the direct-labor variances.

LO: 3, 4, 5 Type: A, N

Answer:
18. No. The variance is favorable and small, being less than 2% of the budgeted amount.

B.
Actual Labor Cost Standard Labor Cost
Actual Actual Actual Standard Standard Standard
x x x
Hours Rate Hours Rate Hours Rate
$18.00
42,000 x 42,000 x $14.00 55,000# x $14.00
*
$756,00 $588,00 $770,00
0 0 0
$168,000U $182,000F
Direct-labor Direct-labor
rate variance efficiency variance
*$756,000 ¸ 42,000 hours
#20,000 units x 2.75 hours

19. Yes. Although the combined variance of $14,000F is small, a more detailed analysis
reveals the presence of sizable, offsetting variances. Both the rate variance and the
efficiency variance are in excess of 21% of budgeted amounts ($770,000). A
variance investigation should be undertaken if benefits of the investigation exceed the
 costs. Put simply, things are not going as smoothly as the vice-president believes.

20. The favorable efficiency variance means that the company is producing units by
consuming fewer hours than expected. This may be the result of the team-
building/morale-boosting exercises, as a contented, well-trained work force tends to
be efficient in nature. However, another totally plausible explanation could be that
Diablo is paying premium wages (as indicated by the unfavorable rate variance) to
hire laborers with above-average skill levels.

Variance Analysis: Working Backward

75. A manufacturing company is expected to complete a task in 45 minutes. During a recent

accounting period, 3,200 completed units were produced, resulting in the following labor
variances:

Labor rate variance: $520 favorable

Labor efficiency variance: $2,800 unfavorable

The standard labor rate is $14 per hour.

Required:
Calculate (1) the standard hours allowed for the work performed, (2) the actual hours
worked, and (3) the actual wage rate.

LO: 3 Type: A

Answer:

Actual Labor Cost Standard Labor Cost

Actual Actual Actual Standard Standard Standard
x x x
Hours Rate Hours Rate Hours Rate
2,600 x $13.80 2,600 x $14.00 2,400* x $14.00
$35,850 $36,400 $33,600
$520F $2,800U
Direct-labor Direct-labor
rate variance efficiency variance
*3,200 units x 0.75 hours

21. Standard hours allowed: 2,400

22. Actual hours worked: 2,600
23. Actual wage rate: $13.80
Variance Analysis: Working Backward

76. Hermosa Enterprises recently experienced a fire, forcing the company to use incomplete
information to analyze operations. Consider the following data and assume that all
materials purchased during the period were used in production:

Direct materials:
Standard price per pound: $9
Actual price per pound: $8
Price variance: $20,000F
Total of direct-material variances: $2,000F

Direct labor:
Actual hours worked: 40,000
Actual rate per hour: $15
Efficiency variance: $28,000F
Total of direct-labor variances: $12,000U

Hermosa completed 12,000 units.

Required:
Determine the following: (1) actual materials used, (2) materials quantity variance, (3)
labor rate variance, (4) standard labor rate per hour, and (5) standard labor time per
finished unit.

LO: 3 Type: A
 Answer:

Actual Material Cost Standard Material Cost

Actual Actual Actual Standard Standard Standard
x x x
Quantity Price Quantity Price Quantity Price
20,000 x $8.00 20,000 x $9.00 18,000 x $9.00
$160,000 $180,000 $162,000
$20,000F $18,000U
Direct-material Direct-material
price variance quantity variance

Actual Labor Cost Standard Labor Cost

Actual Actual Standard Standard Standard
Actual Hours x x x
Rate Hours Rate Hours Rate
40,000 x $15.00 40,000 x $14.00 42,000 x $14.00
$600,000 $560,000 $588,000
$40,000U $28,000F
Direct-labor Direct-labor
rate variance efficiency variance

24. Actual materials used: 20,000 pounds

25. Materials quantity variance: $18,000U
26. Labor rate variance: $40,000U
27. Standard labor rate per hour: $14
28. Standard labor time per finished unit: 3.5 hours (42,000 hours ÷ 12,000 units)

Variance Interpretation: Restaurant

77. Nancy Simon is the long-time catering director of Naples-on-the-Beach, a hotel noted
throughout the industry for quality, profitability, and cost control. The hotel recently
catered a steak dinner for a 2,000-person convention. Strict standards were in place for
the dinner: 0.75 pounds of beef per plate at $9 per pound. A review of the accounting
records shortly after the convention showed that 1,680 pounds of beef were purchased
and consumed, costing the hotel $13,440.

Required:
A. Calculate the cost of beef budgeted for the dinner and the total beef variance (i.e., the
difference between budgeted and actual cost). Should this variance be of concern to
the hotel? Why?
B. Assess the job that Simon did in "managing" the beef purchase by performing a
variance analysis. Comment on your findings.
C. Assume that the hotel received a number of complaints shortly after the dinner
concluded. Explain a possible reason behind the conventioneers' unhappiness.

LO: 3, 4, 5 Type: A, N
 Answer:
A. Budget: 2,000 plates x 0.75 x $9 $13,5
Actual 13,4
Total variance, unfavorable $

The variance should not be a concern to the hotel because it is less than 1% of the budget.

B. Simon did a marginal job in managing the purchase. Although the total variance is only $60U, it i
composed of two sizable, offsetting amounts. She saved the hotel a considerable amount of money
the acquisition but the savings were more than consumed in excess usage.

Actual Material Cost Standard Material Cost

Actual Actual Actual Standard Standard Standar
x x x
Quantity Price Quantity Price Quantity Price
1,680 x $8.00 1,680 x $9.00 1,500* x $9.00
$13,440 $15,120 $13,500
$1,680F $1,620U
Direct-material Direct-material
price variance quantity variance
*2,000 plates x 0.75 pounds

C. It is possible that Simon bought a marginal product. The price variance and quantity variance may
indicate that she purchased cheap beef, which turned out to be of poor quality, resulting in greater
waste (trimming) than normal by the kitchen staff. The beef's overall quality (perhaps, toughness) m
be the underlying reason behind the conventioneers' complaints.
Events' Impact on Variances

29. The following events occurred at Crescent Manufacturing (CM), an assembler of engine
parts, during May:

30. Because of a stock shortage at its regular supplier, CM had to rely on a new
vendor for two purchases of raw material parts. The vendor required CM to pay
air-freight charges; however, upon arrival, the company found the goods to be
above-average in quality.
31. The local municipality raised its property tax rates by 2%.
32. A flu outbreak on the assembly line forced management to use more experienced,
senior personnel to complete production orders on a timely basis. These workers
more than made up for lost time.
33. A shoddy maintenance program resulted in an abnormally high number of
breakdowns on machine no. 76 and slowed production.
34. The implementation of a new program had positive effects for the company with
respect to material usage and worker productivity.

Required:
Create a table with the following headings: materials price variance, materials quantity
variance, labor rate variance, and labor efficiency variance. Determine which of these
variances would be affected by the individual events and whether the variance would be
favorable or unfavorable.

LO: 5 Type: N

Answer:

Materials Price Materials Quantity Labor Rate Labor Efficiency

Variance Variance Variance
Variance
1. U F
2.
3. U F
4. U
5. F F
Efficiency Measures

79. The following information for a recent project was taken from the records of Argon
Company:

Processing time 15.0 days

Inspection time 0.5 days
Waiting time:
From order receipt until start of production 6.0 days
From start of production through project completion 3.0 days
Move time 1.5 days

Required:
35. How long did it take to complete the project once production commenced?
36. Compute the manufacturing cycle efficiency.
37. As judged by the cycle efficiency, what percentage of the overall production time was
spent on (1) value-adding activities and (2) non-value adding activities?
38. Compute the company's delivery cycle time.

LO: 9 Type: A, N

Answer:
A. Processing time 15.0
Inspection time 0.5
Waiting time in production 3.0
Move time 1.5
Total 20.0

B. Processing time (15.0) ÷ [Processing time (15.0) + inspection time (0.5) + waiting
time in production (3.0) + move time (1.5)] = 0.75

C. 1. 75% (cycle efficiency)

2. 25% (100% - 75%)

D. Waiting time until start of project 6.0

Manufacturing cycle time 20.0
Total 26.0
Elements of a Balanced Scorecard

39. Balanced scorecards contain a number of factors that are important to the success of a
business. These factors are often divided into four categories: financial, customer,
learning and growth, and internal operations.

Consider the twelve factors that follow.

1. Market share
2. Earnings per share
3. Manufacturing cycle efficiency
4. Machine downtime
5. Number of patents held
6. Employee suggestions
7. Number of repeat sales
8. Levels of inventories held
9. Number of vendors used
10. Cash flow from operations
11. Employee training hours
12. Gross margin

Required:
Determine the proper classification (financial, customer, learning and growth, or internal
operations) for each of the twelve factors listed.

LO: 10 Type: RC, N

Answer:
1. Customer 7. Customer
2. Financial 8. Internal operations
3. Internal operations 9. Internal operations
4. Internal operations 10. Financial
5. Learning and growth 11. Learning and growth
6. Learning and growth 12. Financial
Balanced Scorecard

40. Bob's Burgers and Such, a national fast-food chain, has experienced a number of
problems in the past few years, and management is considering the adoption of a
balanced scorecard as part of a turnaround effort.

Required:
A. Briefly explain the concept of a balanced scorecard. What general factors are
included in a typical balanced scorecard?
B. Independent of your answer in requirement "A," assume that Bob's is very concerned
about customer satisfaction. List four different (and specific) customer-satisfaction
measures that may be appropriate for the firm (and for other fast-food providers).
C. Independent of requirement "A," assume that Bob's wants to return to former levels
of profitability. List several financial measures that would allow management to
assess success or failure with respect to the following goals: (1) pay creditors on a
timely basis, (2) keep shareholders happy, and (3) improve profitability over time at
stores that have been open at least one year.

LO: 10 Type: RC, N

Answer:
A. A balanced scorecard is a tool that incorporates a variety of different measures, both
financial and non-financial, in the performance-evaluation process. The measures are
critical to a firm's success and are tied to organizational strategy. The goal of a
balanced scorecard is to allow improvement in a number of broad-reaching areas
rather than permit a manager to improve only a small facet of the business at the
expense of others. Typical factors are often divided into four categories: financial,
customer, learning and growth, and internal operations.

41. Answers will vary but often include market share, queue time, results of a customer
quality survey, number of customer complaints, number of order errors, and number
of repeat customers.

42. Pay creditors on a timely basis: stipulated end-of-period cash balance and current
ratio
Shareholder satisfaction: growth in earnings per share, increases in per-share market
price of Bob's stock, price-earnings ratio
Profitability improvement: gross margin growth rates, earnings growth rates
Standard Costs and Journal Entries

82. Howell Company has established the following standards:

Direct materials: 2.0 pounds at $4.10

Direct labor: 1.5 hours at $7 per hour

Additional information was extracted from the accounting records:

Actual production: 32,000 completed units

Direct materials purchased: 70,000 pounds at $3.82, or $267,400
Direct materials consumed: 65,000 pounds
Actual labor incurred: 51,000 hours at $6.30, or $321,300
Direct-labor rate variance: $37,200 favorable
Direct-labor efficiency variance: $22,500 unfavorable

Required:
Prepare journal entries to record the:
43. Purchase of direct materials.
44. Usage of direct materials.
45. Incurrence of direct labor costs.

LO: 11 Type: A

Answer:
A. Raw-Material Inventory (70,000 x $4.10) 287,000
Direct-Material Price Variance (70,000 x $0.28) 19,600
Accounts Payable (70,000 x $3.82) 267,400

B. Work-in-Process Inventory (32,000 x 2 x $4.10) 262,400

Direct-Material Quantity Variance (1,000 x $4.10) 4,100
Raw-Material Inventory (65,000 x $4.10) 266,500

C. Work-in-Process Inventory (32,000 x 1.5 x $7.00) 336,000

Direct-Labor Efficiency Variance 22,500
Wages Payable (51,000 x $6.30) 321,300
Direct-Labor Rate Variance 37,200
DISCUSSION QUESTIONS

Usefulness of Standard Costs in Performance Evaluations

83. Standard costs are said to be useful in performance evaluation. Assume that the standard
direct materials cost per unit of finished product is $6 (three pounds at $2 per pound).

Required:
46. Explain how such a standard can be used to evaluate performance.
47. Why is the degree of controllability important when utilizing standard costs to
evaluate performance?

LO: 1, 5 Type: RC

Answer:
48. The standard provides a measure of how much material should be used for a unit of
product and how much each pound of raw material should cost. This standard serves
as a basis for evaluating performance by allowing a comparison to be made of
standard cost/usage against actual cost/usage.

49. The degree of controllability is important because not all factors are subject to the
same amount of control. For example, the market for the raw material may be a
seller's market in which case management would have very little control over the
material price variance. On the other hand, management generally has more control
over the usage of materials because of the ability to influence the amount of scrap
and rejected units produced.

Interaction of Material and Labor Variances

84. For the quarter just ended, BoSan, Inc., reported the following variances in one of its
manufacturing departments:

Material price variance, U

Material quantity variance, F
Labor efficiency variance, F
Labor rate variance, negligible
Machine hours efficiency, F

The sum of the favorable variances exceeded the unfavorable materials price variance by
a considerable amount. The quality of the output from the department was the same as
usual. BoSan operates very close to a JIT system for materials purchases, with virtually
all material acquired during the quarter being used in manufacturing activities.

Required:
Is there any connection among these variances? If so, explain.

LO: 3, 5 Type: N
 Answer:
While a connection between these variances cannot be guaranteed, the following scenario
is plausible. Better-than-standard quality materials were purchased, leading to an
unfavorable materials price variance. When these materials were used during the period
(JIT basis for raw materials purchases), favorable efficiency variances arose because the
material was easier for labor and machines to process.

Motivational Effects of Standard Cost Systems

85. Standard cost systems can have motivational effects; some are desirable, some are not.
Consider the following situation:

The materials purchasing manager is paid a salary plus a bonus based on the net
favorable materials price variance. Generally, this bonus amounts to 30 - 40% of the
manager's total compensation. Due to the bankruptcy of a company in a related field,
there is an opportunity to buy a key raw material. The standards for this material call for
grade 2A, usually purchased for $56 per ton. Because of the bankruptcy, the company
can obtain a higher grade, 4A, for $62 per ton. While the quality of the final product will
be the same regardless of the grade of material used, there will be substantial savings in
material yield and labor productivity if 4A is used. These savings are expected to be two
to three times the additional cost of $6 per ton.

Required:
50. How would an unfavorable price variance on a particular purchase affect the overall
price variance for the year?
51. Would the use of the materials price variance as a basis for the manager's bonus lead
to a desirable or undesirable behavioral outcome? Explain, being sure to note
whether the manager would likely pursue acquisition of the grade 4A material.

LO: 5 Type: N

Answer:
52. An unfavorable price variance reduces any net favorable variance that may have
arisen during the year. A sufficient number of such events could cause the net
materials price variance to be unfavorable and would eliminate the bonus to the
materials purchasing manager.

53. The use of the variance in this way would lead to an undesirable behavioral outcome.
The materials purchasing manager is a gatekeeper; that is, this manager observes the
purchasing opportunities available and determines whether or not the firm will follow
them. In this case, the manager would be unlikely to pursue the grade 4A material
because of the negative effect on the bonus calculation. As a result, the overall
possibility of offsetting higher purchase costs with savings in yield and productivity
would not materialize.
Manufacturing Cycle Time

86. Manufacturing cycle time is a popular nonfinancial measure used to evaluate

performance.

Required:
54. Define manufacturing cycle time and indicate the optimal value (i.e., number) for this
measure.
55. Provide examples of two changes in a manufacturing process that would help
improve a company's cycle time.

LO: 9 Type: N

Answer:
56. Cycle time is defined as processing time divided by the sum of processing, moving,
waiting, and inspection time. The optimal value for this measure is one, that is, a
situation where there is no waiting, moving, or inspection time.

57. There are many such examples:

· Inspection time can be reduced by eliminating the need to inspect materials from
suppliers. This could occur by dealing with better suppliers and placing a greater
reliance on the suppliers' control process.
· Waiting time can be reduced through better scheduling of bottleneck machinery.
· Moving time can be reduced through improvements in plant layout.