Labor and Material Variance Analysis
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Zic ZacLabor and Material Variance Analysis
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Zic ZacRevised Spring 2018 Chapter 11 Review Questions
Multiple Choice Questions
1. The difference between the actual price and the standard price, multiplied by
the actual quantity of materials purchased is the
a) direct labor price variance
b) direct labor quantity variance
c) direct materials price variance
d) direct materials quantity variance
2. J Company has a material standard of 1 pound per unit of output. Each pound
has a standard price of $25 per pound. During July, J Company paid $127,250
for 4,950 pounds, which they used to produce 4,700 units. What is the direct
material price variance?
a) $3,500 unfavorable
b) $2,600 favorable
c) $12,600 unfavorable
d) $10,000 unfavorable
3. G Company has a material standard of 1.1 pound per unit of output. Each
pound has a standard price of $25 per pound. During July, G Company paid
$118,800 for 5,100 pounds, which they used to produce 4,900 units. What is
the direct materials quantity variance?
a) $7,250 favorable
b) $5,000 favorable
c) $7,250 unfavorable
d) $5,000 unfavorable
The next 3 questions refer to the following information.
A Company has a standard of 1 direct labor hour per unit at $12 per hour.
3,850 labor hours costing $46,970 were used to produce 4,000 units.
4. Company’s labor price variance is
a) $770 F
b) $770 U
c) $1,030 F
d) $1,030 U
5. Company’s labor quantity variance is
a) $1,830 U
b) $1,830 F
c) $1,800 F
d) $1,800 U
Revised Spring 2018 Chapter 11 Review Questions
6. Company’s total labor variance is
a) $770 U
b) $800 U
c) $1,030 F
d) $1,930 F
The next 2 questions refer to the following information.
The actual and standard direct labor rates were $8.50 and $8.00, respectively.
5,500 direct labor-hours were normal capacity. The standard quantity of hours
allowed for units produced was 5,000. The standard variable overhead per
direct labor-hour is $5.00 and the fixed overhead rate is $6.00.
7. What is the controllable overhead variance if the variable manufacturing
overhead costs were $24,750?
a) $2,250 U
b) $250 F
c) $4,750 F
d) $1,350 F
8. What is the overhead volume variance if the variable manufacturing overhead
costs were $24,750?
a) $2,000 U
b) $2,500 F
c) $3,000 U
d) $3,500 F
9. Which of the following is not a benefit of using a balanced scorecard
a) It creates linkages from high-level goals to lower level employees
b) It provides measurable objectives that are not financial
c) It integrates all of the company’s goals
d) It can easily access individual performance
10. Which of the following is not a benefit of using standard costing
a) Useful in setting selling prices
b)Used as a way to place blame on managers or employees
c)Simplifies costing of inventory
d)Contributes to management control
Revised Spring 2018 Chapter 11 Review Questions
Practice Problem #1
C Company manufactures a number of consumer items for general household use.
During the recent month, the company manufactured 5,000 units using 12,000 pounds
of material. The 14,000 pounds purchased cost the company $21,000. According to the
standard cost card, each unit requires 2.2 pounds, at a cost of $1.40 per pound.
Required: Compute the material price variance and material quantity
variance.
Practice Problem #2
N Company makes premium chocolate in Chicago. One of the company’s products is
the Bango Mint. Bango Mints are packed 24 per box. During June, 4,000 boxes were
produced. The company paid its direct labor workers a total of $14,280 for their work or
$11.90 per hour. According to the standard cost card for Bango Mints, each box should
require 0.3 direct labor hours at a cost of $12.00 per hour.
Required: Compute the labor price variance and a labor quantity variance.
Practice Problem #3
ABC Company’s overhead rate was based on estimates of $400,000 for overhead costs
and 40,000 direct labor hours. ABC standards allow for 2 hours of direct labor per unit
produced. Production in January was 1,800 units and actual overhead incurred in
January was $39,000. The overhead budgeted for 3,600 standard direct labor hours is
$35,200, of which $10,000 was fixed.
Required: a) Compute variable overhead controllable spending variance.
b) Compute the fixed overhead volume variance.
Revised Spring 2018 Chapter 11 Review Questions
Solutions
1. C
2. A
3. A
4. B
5. C
6. C
7. B
8. C
9. D
10. B
Practice Problem #1
AQ 14,000 AQ 12,000 SQ 5,000 x 2.2
X X X
AP $1.50 SP $1.40 SP $1.40
= $21,000 = $16,800 = $15,400
$1,400 U
Quantity Variance
SP (AQ - SQ)
$1.40(12,000-11,000)
AQ 14,000
X
SP $1.40
= $19,600
$1,400 U
Price Variance
AQ (AP – SP)
14,000($1.50-$1.40)
Practice Problem #2
Revised Spring 2018 Chapter 11 Review Questions
AH 1,200 AH 1,200 SH 4,000 x .30
X X X
AR $11.90 SR $12.00 SR $12.00
= $14,280 = $14,400 = $14,400
$120 F $0
Rate Variance Efficiency Variance
AH (AR – SR) SR (AH - SH)
1,200($11.90-$12.00) $12.00(1,200-1,200)
Practice Problem #3
ABC Company’s overhead rate was based on estimates of $400,000 for overhead costs
and 40,000 direct labor hours. ABC standards allow for 2 hours of direct labor per unit
produced. Production in January was 1,800 units and actual overhead incurred in
January was $39,000. The overhead budgeted for 3,600 standard direct labor hours is
$35,200, of which $10,000 was fixed.
Overhead Controllable Variance:
Actual - Overhead = Total Controllable Variance
Overhead Budgeted 3,800 unfavorable
39,000 35,200
Overhead Volume Variance:
Budgeted Fixed / Standard hours at = Fixed Overhead Rate
Overhead normal capacity
(10,000*12)= 40,000 $3
120,000
Fixed Overhead Rate X (Normal Capacity = Overhead Volume
Deliveries- Standard Variance
$3 Hours Allowed) 800 F
(40,000/12)-3,600)
Total Overhead Variance=
Actual 39,000 – Applied (3,600 * 10) = $3,000 Unfavorable
Common questions
Powered by AIA balanced scorecard offers a comprehensive view of organizational performance by integrating financial metrics with non-financial strategic objectives, such as customer satisfaction, internal processes, and learning and growth. While standard costing focuses heavily on cost measures, potentially overlooking broader strategic goals, a balanced scorecard ensures that all aspects of the business are aligned with strategic objectives. It encourages a forward-looking approach, mitigates the risk of misplacing emphasis solely on cost management, and promotes a balance between short-term operational objectives and long-term strategic goals, fostering a holistic management strategy .
Variance analysis acts as a critical tool for identifying discrepancies between expected (standard) and actual performance, prompting managerial attention to areas needing improvement. By dissecting variances – price, efficiency, and volume – managers can pinpoint the root causes of financial deviations, allowing for targeted strategic decisions. This process enhances resource allocation, optimizes cost control, and informs pricing strategies. Furthermore, it provides performance feedback, establishing accountability and encouraging efficiency across departments, making it indispensable for comprehensive performance evaluation and continuous improvement .
The balanced scorecard offers benefits such as creating linkages from high-level goals to lower-level employees, providing measurable objectives that are not solely financial, and integrating all of the company’s goals in one platform. In contrast, standard costing is beneficial for setting selling prices, simplifying inventory costing, and contributing to management control. However, a key difference is that standard costing can inadvertently be used to place blame on managers or employees, which is considered a drawback, whereas the balanced scorecard is designed to avoid such accountability issues .
Using standard costs for inventory valuation simplifies the process by assigning a consistent cost per unit, facilitating easier accounting and reducing the complexity of inventory management. It aids in producing timely and consistent financial reports, as standard costs do not fluctuate like actual costs, offering predictability in cost records. However, it can obscure actual cost trends and inefficiencies if variances are not regularly analyzed. Regular variance analysis ensures that managerial decisions are based on accurate data, aligning financial reporting with true economic performance .
ABC Company's fixed overhead volume variance analysis highlights the company's actual production relative to its planned capacity utilization. The variance was calculated as 800 favorable, shown by the actual hours exceeding the normal capacity. This indicates effective use of production capacity, as the company was able to spread fixed overhead costs over a greater number of units than anticipated. Strategic capacity planning and efficient production management would have contributed to this favorable variance, reflecting effective use of production capabilities to reduce fixed cost per unit .
Controllable overhead variance measures how well a company manages its variable overhead costs against budgeted expectations. For ABC Company, the actual overhead incurred was $39,000 compared to the budgeted $35,200, resulting in a $3,800 unfavorable variance. This indicates overspending on variable overhead . Fixed overhead volume variance, on the other hand, analyzes the impact of production volume on fixed overhead allocation. ABC Company had a budgeted fixed overhead rate of $3 per DLH. The variance was calculated as 800 favorable, demonstrating that the actual production volume provided a beneficial allocation of fixed costs, considering the capacity utilization .
Calculating both price and quantity variances allows a company to isolate cost discrepancies and identify efficiencies or inefficiencies. For C Company, the price variance was $1,400 unfavorable, indicating that materials were more expensive than standard. Conversely, the quantity variance was also $1,400 unfavorable, suggesting materials were either underutilized or there was wastage. Both variances highlight different dimensions of cost control: price variance pinpoints areas needing negotiation with suppliers, while quantity variance focuses on improving operational efficiency and reducing material waste during production – crucial for comprehensive cost management .
The direct material price variance for J Company is calculated by taking the difference between the actual price per unit and the standard price per unit, then multiplying by the actual quantity of materials purchased. For J Company, the standard price is $25 per pound, and they paid $127,250 for 4,950 pounds used to produce 4,700 units. The actual price per pound is $127,250 / 4,950 = $25.70. The variance is (Actual Price - Standard Price) * Actual Quantity = ($25.70 - $25) * 4,950 = $0.70 * 4,950 = $3,460 unfavorable. However, given the options, this value might have been approximated or rounded as $3,500 unfavorable .
Labor quantity variance indicates efficiency in using labor hours during production. For N Company, the standard allowed hours for 4,000 boxes of Bango Mints was 1,200 (4,000 boxes * 0.3 hours/box), matching exactly the actual hours worked. Therefore, the labor quantity variance is $0, displaying optimal labor efficiency. This reflects well on material efficiency as it suggests the materials were adequately prepared and there were no delays or additional work needed due to material issues .
The labor price variance is calculated by taking the difference between the actual hourly rate and the standard hourly rate, then multiplying by the actual hours worked. A Company's actual labor cost was $46,970 for 3,850 hours, making the actual rate $12.20 per hour. The standard rate is $12 per hour. Thus, the variance is (Actual Rate - Standard Rate) * Actual Hours = ($12.20 - $12) * 3,850 = $0.20 * 3,850 = $770 unfavorable .