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Homework # 8 : CMA P1- Performance Management II

1.MinnOil performs oil changes and other minor maintenance services (e.g., tire pressure
checks) for cars. The company advertises that all services are completed within 15 minutes for
each service. On a recent Saturday, 160 cars were serviced resulting in the following labor
variances: rate, $19 unfavorable; efficiency, $14 favorable. If MinnOil’s standard labor rate is $7
per hour, determine the actual wage rate per hour and the actual hours worked.

Wage Rate Hours Worked

a. $6.55 42.00.
b. $6.67 42.71.
c. $7.45 42.00.
d. $7.50 38.00.

You have answered D which is Correct!

Correct answer d. The actual wage rate per hour is $7.50 and the actual hours worked equals 38 as
shown below.

Actual hours: (X – 40) x $7 = -14

X – 40 = -2
X = 38 hours
Wage rate: (X - $7) x 38 = 19
X - $7 = .50
X = $7.50
2. A company applies variable overhead based upon direct labor hours and has a variable
overhead efficiency variance that is $25,000 favorable. A possible cause of this variance is that

a. higher skilled labor was used.

b. electricity rates were lower than expected.
c. less supplies were used than anticipated.
d. less units of finished goods were produced.

You have answered A which is Correct!

Correct answer a. If variable overhead is applied on the basis of direct labor hours and overhead
spending is $25,000 less than expected, it means that labor was very efficient, e.g., highly skilled
labor.

3. A company has a raw material price variance that is unfavorable. An analysis of this variance
indicates that the company’s only available supplier of one of its raw materials unexpectedly
raised the price of the material. The action management should take regarding this situation
should be to

a. negatively evaluate the performance of the purchasing manager.

b. negatively evaluate the performance of the production manager.
c. change the raw material price standard.
d. ask the production manager to lower the material usage standard to compensate for higher
material costs.

You have answered C which is Correct!

Correct answer c. With a single supplier, the purchasing manager should not be held responsible for
the price variance. The standard material price should be increased.

4. For a given time period, a company had a favorable material quantity variance, a favorable
direct labor efficiency variance, and a favorable fixed overhead volume variance. Of the
following, the one factor that could not have caused all three variances is
a. the purchase of higher quality materials.
b. the use of lower-skilled workers.
c. the purchase of more efficient machinery.
d. an increase in production supervision.

You have answered B which is Correct!

Correct answer b. The use of lower-skilled labor is not likely to lead to a favorable direct labor
efficiency variance but is more likely to cause this variance to be unfavorable. Lower-skilled labor
could also affect the material quantity variance negatively.

5. A company has a direct labor price variance that is favorable. Of the following, the most
serious concern the company may have about this variance is that

a. the circumstances giving rise to the favorable variance will not continue in the future.
b. the production manager may not be using human resources as efficiently as possible.
c. the cause of the favorable variance may result in other larger unfavorable variances in the
value-chain.
d. actual production is less than budgeted production.

You have answered C which is Correct!

Correct answer c. A favorable direct labor price variance could indicate that lower-skilled labor is
being used that what was planned. This could lead to unfavorable labor use and material usage
variances that more than offset the favorable price variance.

6. Frisco Company recently purchased 108,000 units of raw material for $583,200. Three units
of raw materials are budgeted for use in each finished good manufactured, with the raw material
standard set at $16.50 for each completed product. Frisco manufactured 32,700 finished units
during the period just ended and used 99,200 units of raw material. If management is concerned
about the timely reporting of variances in an effort to improve cost control and bottom-line
performance, the materials purchase price variance should be reported as

a. $6,050 unfavorable.
b. $9,920 favorable.
c. $10,800 unfavorable.
d. $10,800 favorable.
You have answered D which is Correct!

Correct answer d. Frisco’s purchase price variance is $10,800 F calculated as follows.

Price per unit purchased: $583,200 ÷ 108,000 = $5.40
Standard price per unit: $16.50 ÷ 3 = $5.50
Purchase price variance ($5.50 - $5.40) x 108,000 = $10,800 F

7. Christopher Akers is the chief executive officer of SBL Inc., a masonry contractor. The
financial statements have just arrived showing a $3,000 loss on the new stadium job that was
budgeted to show a $6,000 profit. Actual and budget information relating to the materials for the
job are as follows.

Actual Budget
Bricks - number of bundles 3,000 2,850
Bricks - cost per bundle $7.90 $8.00

Which one of the following is a correct statement regarding the stadium job for SBL?

a. The price variance was favorable by $285.

b. The price variance was favorable by $300.
c. The efficiency variance was unfavorable by $1,185.
d. The flexible budget variance was unfavorable by $900.

You have answered B which is Correct!

Correct answer b. SBL’s material price variance is $300 F as shown below.

Price variance = (Actual price – Standard price) x Actual quantity
= ($7.90 - $8.00) x 3,000
= $300 F

8. A company isolates its raw material price variance in order to provide the earliest possible
information to the manager responsible for the variance. The budgeted amount of material
usage for the year was computed as follows.

150,000 units of finished goods x 3 pounds/unit x $2.00/pound = $900,000.

Actual results for the year were the following.

Finished goods produced 160,000 units

Raw materials purchased 500,000 pounds
Raw materials used 490,000 pounds
Cost per pound $2.02

The raw material price variance for the year was

a. $9,600 unfavorable.
b. $9,800 unfavorable.
c. $10,000 unfavorable.
d. $20,000 unfavorable.

You have answered C which is Correct!

Correct answer c. The raw material price variance (purchase price variance) is $10,000 U as shown
below.
Price variance = (Actual price – Standard price) x Actual quantity
= ($2.02 - $2.00) x 500,000
= $10,000 U

9. Lee Manufacturing uses a standard cost system with overhead applied based on direct labor
hours. The manufacturing budget for the production of 5,000 units for the month of May included
the following information.

Direct labor (10,000 hours at $15 per hour) $150,000

Variable overhead 30,000
Fixed overhead 80,000

During May, 6,000 units were produced and the direct labor efficiency variance was $1,500
unfavorable. Based on this information, the actual number of direct labor hours used in May was

a. 9,900 hours.
b. 10,100 hours.
c. 11,900 hours.
d. 12,100 hours.

You have answered B which is Wrong

Correct answer d. The actual direct labor hours used by Lee Manufacturing is 12,100 calculated as
follows.

Efficiency variance: (Actual quantity – Standard quantity) x Standard price

Standard quantity = 6,000 units x 2 hours per unit
= 12,000 hours
Actual hours: (X-12,000) x $15 = $1,500
X – 12,000 = 100
X = 12,100

10. Randall Company uses standard costing and flexible budgeting and is evaluating its direct
labor. The total budget variance can usually be broken down into two other variances identified
as the

a. direct labor rate variance and direct labor efficiency variance.

b. direct labor cost variance and the direct labor volume variance.
c. direct labor rate variance and direct labor volume variance.
d. direct labor cost variance and direct labor efficiency variance.

You have answered A which is Correct!

Correct answer a. The rate variance will show how the price paid for direct labor varies from the
standard price. The efficiency variance shows how the number of direct labor hours used varies from
the standard number of direct labor hours.

Summary of Performance in this Homework

Percentage score: 90
Remarks :Excellent, Keep this up.

I congratulate you for the patience demonstrated by being with me for nearly 20 days. We are about to finish 90% of
the syllabus this week. Hold your breath and escalate your commitment for next 15 days. Take any pending
assignment. Revise the Whiteboard/Excel and solved assignment/mocks in quick succession. You will do wonders
in the examination.

Happy New Year to you and family!

Regards,

Sushanta Bala