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# Ch07 MC Questions.doc

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Commerce

COMMERCE 2AB3

Aadil Merali Juma

Winter

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CHAPTER 7
FLEXIBLE BUDGETS, DIRECT-COST VARIANCES,
AND MANAGEMENT CONTROL
TRUE/FALSE
1. The master budget is one type of flexible budget.
Answer: False Difficulty: 1 Objective: 1
Terms to Learn: flexible budget
The master budget is a static budget.
2. A flexible budget is calculated at the start of the budget period.
Answer: False Difficulty: 1 Objective: 1
Terms to Learn: flexible budget
A flexible budget is calculated at the end of the budget period when actual output is known.
3. Information regarding the causes of variances is provided when the master budget is
compared with actual results.
Answer: False Difficulty: 2 Objective: 1
Terms to Learn: variance
Little information regarding the causes of variances is provided when the master budget is
compared with actual results because you are comparing a budget for one level of activity
with actual costs for a different level of activity.
4. A favorable variance results when budgeted revenues exceed actual revenues.
Answer: False Difficulty: 2 Objective: 1
Terms to Learn: favorable variance
An unfavorable variance results when budgeted revenues exceed actual revenues.
5. Management by exception is the practice of concentrating on areas not operating as
anticipated (such as a cost overrun) and placing less attention on areas operating as
anticipated.
Answer: True Difficulty: 1 Objective: 1
Terms to Learn: management by exception
6. The essence of variance analysis is to capture a departure from what was expected.
Answer: True Difficulty: 1 Objective: 1
Terms to Learn: variance
7-1 7. A favorable variance should be ignored by management.
Answer: False Difficulty: 1 Objective: 1
Terms to Learn: favorable variance
Favorable variance investigation may lead to improved production methods, other
discoveries for future opportunities, or not be good news at all and adversely affect other
variances.
8. An unfavorable variance may be due to poor planning rather than due to
inefficiency.
Answer: True Difficulty: 2 Objective: 1
Terms to Learn: unfavorable variance
9. The only difference between the static budget and flexible budget is that the static
budget is prepared using planned output.
Answer: True Difficulty: 2 Objective: 2
Terms to Learn: static budget, flexible budget
10. The static-budget variance can be subdivided into the flexible-budget variance and
the sales-volume variance.
Answer: True Difficulty: 2 Objective: 2
Terms to Learn: static-budget variance, sales-volume variance, flexible-budget
variance
11. The flexible-budget variance may be the result of inaccurate forecasting of units
sold.
Answer: False Difficulty: 3 Objective: 2
Terms to Learn: flexible-budget variance
The sales-volume variance is the result of inaccurate forecasting of units sold.
12. Decreasing demand for a product may create a favorable sales-volume variance.
Answer: False Difficulty: 2 Objective: 2
Terms to Learn: sales-volume variance
Decreasing demand for a product may create an unfavorable sales-volume variance.
13. An unfavorable variance is conclusive evidence of poor performance.
Answer: False Difficulty: 2 Objective: 2
Terms to Learn: unfavorable variance
An unfavorable variance suggests further investigation, not conclusive evidence of
poor performance.
7-2 14. A company would not need to use a flexible budget if it had perfect foresight about
actual output units.
Answer: True Difficulty: 2 Objective: 2
Terms to Learn: flexible budget
15. The flexible-budget variance pertaining to revenues is often called a selling-price
variance.
Answer: True Difficulty: 1 Objective: 2
Terms to Learn: flexible-budget variance
16. Cost control is the focus of the sales-volume variance.
Answer: False Difficulty: 2 Objective: 2
Terms to Learn: sales-volume variance
The sales-volume variance is not a measure of cost, but rather a measure of actual
output units differing from budgeted output units.
17. Managers generally have more control over efficiency variances than price
variances.
Answer: True Difficulty: 3 Objective: 3
Terms to Learn: efficiency variance, price variance
Efficiency variances are primarily affected by internal factors, whereas price
changes may be influenced by market factors.
18. To prepare budgets based on actual data from past periods is preferred since past
inefficiencies are excluded.
Answer: False Difficulty: 2 Objective: 3
Terms to Learn: static budget
A deficiency of using budgeted input quantity information based on actual quantity
data from past periods is that past inefficiencies are included.
19. All budgets are based on standard costs.
Answer: False Difficulty: 2 Objective: 3
Terms to Learn: standard cost
Budgets may be based on standard costs, actual amounts from last year, or data
from other companies.
7-3 20. A standard is attainable through efficient operations but allows for normal
disruptions such as machine breakdowns and defective production.
Answer: True Difficulty: 3 Objective: 3
Terms to Learn: standard cost
21. The presumed cause of a material price variance will determine how a company
responds.
Answer: True Difficulty: 1 Objective: 4
Terms to Learn: price variance
22. The use of high-quality raw materials is likely to result in a favorable efficiency
variance and an unfavorable price variance.
Answer: True Difficulty: 2 Objective: 4
Terms to Learn: efficiency variance, price variance
23. The direct manufacturing labor price variance is likely to be favorable if higher-
skilled workers are put on a job.
Answer: False Difficulty: 2 Objective: 4
Terms to Learn: price variance
The direct manufacturing labor variance is likely to be unfavorable if higher-skilled
workers are put on a job since they are usually also higher paid.
24. Although computed separately, price variances and efficiency variances should not
be analyzed separately from each other.
Answer: True Difficulty: 2 Objective: 4
Terms to Learn: price variance, efficiency variance
25. A favorable variance can be automatically interpreted as “good news.”
Answer: False Difficulty: 1 Objective: 5
Terms to Learn: favorable variance
A favorable variance may not be good news at all because it adversely affects other
variances that increase total costs.
26. Variances often affect each other.
Answer: True Difficulty: 1 Objective: 5
Terms to Learn: variance
7-4 27. If variance analysis is used for performance evaluation, managers are encouraged to
meet targets using creativity and resourcefulness.
Answer: False Difficulty: 2 Objective: 5
Terms to Learn: variance
The most common outcome when variance analysis is used for performance
evaluation is that managers seek targets that are easily attainable and avoid targets
that require creativity and resourcefulness.
28. For critical items such as product defects, a small variance may prompt
investigation.
Answer: True Difficulty: 2 Objective: 5
Terms to Learn: variance
29. A particular variance generally signals one particular problem.
Answer: False Difficulty: 1 Objective: 5
Terms to Learn: variance
There are many potential causes of a single variance.
30. If budgets contain slack, cost variances will tend to be favorable.
Answer: True Difficulty: 2 Objective: 5
Terms to Learn: favorable variance
31. Continuous improvement budgeted costs target price reductions and efficiency
improvements.
Answer: True Difficulty: 1 Objective: 5
Terms to Learn: standard cost
32. Improvement opportunities are easier to identify when products have been on the
market for a considerable period of time.
Answer: False Difficulty: 2 Objective: 5
Terms to Learn: variance
Improvement opportunities are easier to identify when products are first produced.
33. It is best to rely totally on financial performance measures rather than using a
combination of financial and nonfinancial performance measures.
Answer: False Difficulty: 2 Objective: 5
Terms to Learn: variance
It is best to rely on a combination of financial and nonfinancial performance
measures.
7-5 34. From the perspective of control, the direct materials price variance should be
isolated at the time the direct materials are requisitioned for use.
Answer: False Difficulty: 2 Objective: 5
Terms to Learn: price variance
From the perspective of control, the direct materials price variance should be
isolated at the earliest possible time, which is at the time of purchase, not of use.
35. Employees logging in to production floor terminals and other modern technologies
greatly facilitate the use of a standard costing system.
Answer: True Difficulty: 1 Objective: 5
Terms to Learn: standard cost
36. Performance variance analysis can be used in activity-based costing systems.
Answer: True Difficulty: 1 Objective: 6
Terms to Learn: variance
37. Price variances can be calculated for batch-level costs as well as for output unit-
level costs.
Answer: True Difficulty: 1 Objective: 6
Terms to Learn: price variance
38. Benchmarking is the continuous process of measuring products, services, and
activities against the best possible levels of performance, either inside or outside the
organization.
Answer: True Difficulty: 1 Objective: 7
Terms to Learn: benchmarking
39. When benchmarking, the best levels of performance are typically found in
companies that are totally different.
Answer: False Difficulty: 1 Objective: 7
Terms to Learn: benchmarking
When benchmarking, the best levels of performance are typically found in competing
companies or in companies having similar processes
40. One problem with benchmarking is ensuring that numbers are comparable.
Answer: True Difficulty: 1 Objective: 7
Terms to Learn: benchmarking
7-6 41. When benchmarking it is best when management accountants simply analyze the
costs and allow management to provide the insight as to why the revenues and costs
differ between companies.
Answer: False Difficulty: 1 Objective: 7
Terms to Learn: benchmarking
When benchmarking, management accountants are more valuable when they
analyze the costs and also provide management with insight as to why the revenues
and costs differ between companies.
MULTIPLE CHOICE
42. The master budget is:
a. a flexible budget
b. a static budget
c. developed at the end of the period
d. based on the actual level of output
Answer: b Difficulty: 1 Objective: 1
Terms to Learn: static budget
43. A flexible budget:
a. is another name for management by exception
b. is developed at the end of the period
c. is based on the budgeted level of output
d. provides favorable operating results
Answer: b Difficulty: 1 Objective: 1
Terms to Learn: flexible budget
44. Management by exception is the practice of concentrating on:
a. the master budget
b. areas not operating as anticipated
c. favorable variances
d. unfavorable variances
Answer: b Difficulty: 1 Objective: 1
Terms to Learn: management by exception
45. A variance is:
a. the gap between an actual result and a benchmark amount
b. the required number of inputs for one standard output
c. the difference between an actual result and a budgeted amount
d. the difference between a budgeted amount and a standard amount
Answer: c Difficulty: 1 Objective: 1
Terms to Learn: variance
7-7 46. An unfavorable variance indicates that:
a. actual costs are less than budgeted costs
b. actual revenues exceed budgeted revenues
c. the actual amount decreased operating income relative to the budgeted amount
d. All of these answers are correct.
Answer: c Difficulty: 2 Objective: 1
Terms to Learn: unfavorable variance
47. A favorable variance indicates that:
a. budgeted costs are less than actual costs
b. actual revenues exceed budgeted revenues
c. the actual amount decreased operating income relative to the budgeted amount
d. All of these answers are correct.
Answer: b Difficulty: 2 Objective: 1
Terms to Learn: favorable variance
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 48 THROUGH 50:
Abernathy Corporation used the following data to evaluate their current operating system.
The company sells items for $10 each and used a budgeted selling price of $10 per unit.
Actual Budgeted
Units sold 92,000 units 90,000 units
Variable costs $450,800 $432,000
Fixed costs $ 95,000 $100,000
48. What is the static-budget variance of revenues?
a. $20,000 favorable
b. $20,000 unfavorable
c. $2,000 favorable
d. $2,000 unfavorable
Answer: a Difficulty: 2 Objective: 1
Terms to Learn: static-budget variance
(92,000 units x $10) – (90,000 units x $10) = $20,000 F
49. What is the static-budget variance of variable costs?
a. $1,200 favorable
b. $18,800 unfavorable
c. $20,000 favorable
d. $1,200 unfavorable
Answer: b Difficulty: 2 Objective: 1
Terms to Learn: static-budget variance
$450,800 – $432,000 = $18,800 U
7-8 50. What is the static-budget variance of operating income?
a. $3,800 favorable
b. $3,800 unfavorable
c. $6,200 favorable
d. $6,200 unfavorable
Answer: c Difficulty: 2 Objective: 1
Terms to Learn: static-budget variance
Actual Static Static-budget
Results Budget Variance
Units sold 92,000 90,000
Revenues $920,000 $900,000 $20,000 F
Variable costs 450,800 432,000 18,800 U
Contribution margin $469,200 $468,000 1,200 F
Fixed costs 95,000 100,000 (5,000) F
Operating income $374,200 $368,000 $6,200 F
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 51 THROUGH 53:
Bates Corporation used the following data to evaluate their current operating system.
The company sells items for $10 each and used a budgeted selling price of $10 per unit.
Actual Budgeted
Units sold 495,000 units 500,000 units
Variable costs $1,250,000 $1,500,000
Fixed costs $ 925,000 $ 900,000
51. What is the static-budget variance of revenues?
a. $50,000 favorable
b. $50,000 unfavorable
c. $5,000 favorable
d. $5,000 unfavorable
Answer: b Difficulty: 2 Objective: 1
Terms to Learn: static-budget variance
(495,000 units x $10) – (500,000 units x $10) = $50,000 U
52. What is the static-budget variance of variable costs?
a. $200,000 favorable
b. $50,000 unfavorable
c. $250,000 favorable
d. $250,000 unfavorable
Answer: c Difficulty: 2 Objective: 1
Terms to Learn: static-budget variance
$1,250,000 – $1,500,000= $250,000 F
7-9 53. What is the static-budget variance of operating income?
a. $175,000 favorable
b. $195,000 unfavorable
c. $225,000 favorable
d. $325,000 unfavorable
Answer: a Difficulty: 2 Objective: 1
Terms to Learn: static-budget variance
Actual Static Static-budget
Results Budget Variance
Units sold 495,000 500,000
Revenues $4,950,000 $5,000,000 $(50,000) U
Variable costs 1,250,000 1,500,000 (250,000) F
Contribution margin $3,700,000 $3,500,000 200,000 F
Fixed costs 925,000 900,000 25,000 U
Operating income $2,775,000 $2,600,000 $175,000 F
54. Regier Company had planned for operating income of $10 million in the master
budget but actually achieved operating income of only $7 million.
a. The static-budget variance for operating income is $3 million favorable.
b. The static-budget variance for operating income is $3 million unfavorable.
c. The flexible-budget variance for operating income is $3 million favorable.
d. The flexible-budget variance for operating income is $3 million unfavorable.
Answer: b Difficulty: 2 Objective: 1
Terms to Learn: static-budget variance, flexible-budget variance
55. The flexible budget contains:
a. budgeted amounts for actual output
b. budgeted amounts for planned output
c. actual costs for actual output
d. actual costs for planned output
Answer: a Difficulty: 1 Objective: 2
Terms to Learn: flexible budget
56. The following items are the same for the flexible budget and the master budget
EXCEPT the same:
a. variable cost per unit
b. total fixed costs
c. units sold
d. sales price per unit
Answer: c Difficulty: 2 Objective: 2
Terms to Learn: flexible-budget
7-10 57. The sales-volume variance is due to:
a. using a different selling price from that budgeted
b. inaccurate forecasting of units sold
c. poor production performance
d. Both a and b are correct.
Answer: b Difficulty: 2 Objective: 2
Terms to Learn: sales-volume variance
58. An unfavorable sales-volume variance could result from:
a. decreased demand for the product
b. competitors taking market share
c. customer dissatisfaction with the product
d. All of these answers are correct.
Answer: d Difficulty: 2 Objective: 2
Terms to Learn: sales-volume variance
59. If a sales-volume variance was caused by poor-quality products, then the
___________ would be in the best position to explain the variance.
a. production manager
b. sales manager
c. purchasing manager
d. management accountant
Answer: a Difficulty: 2 Objective: 2
Terms to Learn: sales-volume variance
60. The variance that is BEST for measuring operating performance is the:
a. static-budget variance
b. flexible-budget variance
c. sales-volume variance
d. selling-price variance
Answer: b Difficulty: 2 Objective: 2
Terms to Learn: flexible-budget variance
61. An unfavorable flexible-budget variance for variable costs may be the result of:
a. using more input quantities than were budgeted
b. paying higher prices for inputs than were budgeted
c. selling output at a higher selling price than budgeted
d. Both a and b are correct.
Answer: d Difficulty: 3 Objective: 2
Terms to Learn: flexible-budget variance
7-11 62. An unfavorable variance:
a. may suggest investigation is needed
b. is conclusive evidence of poor performance
c. demands that standards be recomputed
d. indicates continuous improvement is needed
Answer: a Difficulty: 2 Objective: 2
Terms to Learn: unfavorable variance
63. All of the following are needed to prepare a flexible budget EXCEPT determining
the:
a. budgeted variable cost per output unit
b. budgeted fixed costs
c. actual selling price per unit
d. actual quantity of output units
Answer: c Difficulty: 3 Objective: 2
Terms to Learn: flexible budget
64. The variance that LEAST affects cost control is the;
a. flexible-budget variance
b. direct-material-price variance
c. sales-volume variance
d. direct manufacturing labor efficiency variance
Answer: c Difficulty: 2 Objective: 2
Terms to Learn: sales-volume variance
65. A flexible-budget variance is $800 favorable for unit-related costs. This indicates
that costs were:
a. $800 more than the master budget
b. $800 less than for the planned level of activity
c. $800 more than standard for the achieved level of activity
d. $800 less than standard for the achieved level of activity
Answer: d Difficulty: 2 Objective: 2
Terms to Learn: flexible-budget variance
7-12 THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 66 THROUGH 68:
JJ White planned to use $82 of material per unit but actually used $80 of material per
unit, and planned to make 1,200 units but actually made 1,000 units.
66. The flexible-budget amount is:
a. $80,000
b. $82,000
c. $96,000
d. $98,400
Answer: b Difficulty: 2 Objective: 2
Terms to Learn: flexible budget
1,000 units x $82 = $82,000
67. The flexible-budget variance is:
a. $2,000 favorable
b. $14,000 unfavorable
c. $16,400 unfavorable
d. $2,400 favorable
Answer: a Difficulty: 2 Objective: 2
Terms to Learn: flexible-budget variance
($80 – $82) x 1,000 = $2,000 F
68. The sales-volume variance is:
a. $2,000 favorable
b. $14,000 unfavorable
c. $16,400 unfavorable
d. $2,400 favorable
Answer: c Difficulty: 2 Objective: 2
Terms to Learn: sales-volume variance
(1,000 – 1,200) x $82 = $16,400 U
69. Aebi Corporation currently produces cardboard boxes in an automated process.
Expected production per month is 20,000 units, direct-material costs are $0.60 per
unit, and manufacturing overhead costs are $9,000 per month. Manufacturing
overhead is allocated based on units of production. What is the flexible budget for
10,000 and 20,000 units, respectively?
a. $10,500; $16,500
b. $10,500; $21,000
c. $15,000; $21,000
d. None of these answers are correct.
Answer: c Difficulty: 2 Objective: 2
Terms to Learn: flexible budget
7-13 10,000 units 20,000 units
Materials ($0.60) $ 6,000 $12,000
Machinery 9,000 9,000
$15,000 $21,000
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 70 THROUGH 72:
McKenna Incorporated planned to use $24 of material per unit but actually used $25 of
material per unit, and planned to make 1,000 units but actually made 1,200 units.
70. The flexible-budget amount is:
a. $24,000
b. $25,000
c. $28,800
d. $30,000
Answer: c Difficulty: 2 Objective: 2
Terms to Learn: flexible budget
1,200 units x $24 = $28,800
71. The flexible-budget variance is:
a. $4,800 favorable
b. $1,200 unfavorable
c. $5,000 unfavorable
d. $6,000 favorable
Answer: b Difficulty: 2 Objective: 2
Terms to Learn: flexible-budget variance
($25 – $24) x 1,200 = $1,200 U
72. The sales-volume variance is:
a. $4,800 favorable
b. $1,200 unfavorable
c. $5,000 unfavorable
d. $6,000 favorable
Answer: a Difficulty: 2 Objective: 2
Terms to Learn: sales-volume variance
(1,200 – 1,000) x $24 = $4,800 F
7-14 73. Hemberger Corporation currently produces baseball caps in an automated process.
Expected production per month is 20,000 units, direct material costs are $1.50 per
unit, and manufacturing overhead costs are $23,000 per month. Manufacturing
overhead is allocated based on units of production. What is the flexible budget for
10,000 and 20,000 units, respectively?
a. $26,500; $41,500
b. $26,500; $53,000
c. $38,000; $53,000
d. None of these answers are correct.
Answer: c Difficulty: 2 Objective: 2
Terms to Learn: flexible budget
10,000 units 20,000 units
Materials ($1.50) $15,000 $30,000
Machinery 23,000 23,000
$38,000 $53,000
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 74 THROUGH 77:
The actual information pertains to the month of August. As part of the budgeting process,
Alloway’s Fencing Company developed the following static budget for August. Alloway
is in the process of preparing the flexible budget and understanding the results.
Actual Flexible Static
Results Budget Budget
Sales volume (in units) 20,000 25,000
========
Sales revenues $1,000,000 $ $1,250,000
Variable costs 512,000 $ _________ 600,000
Contribution margin 488,000 $ 650,000
Fixed costs 458,000 $ _________ 450,000
Operating profit $ 30,000 $ $ 200,000
74. The flexible budget will report __________ for variable costs.
a. $512,000
b. $600,000
c. $480,000
d. $640,000
Answer: c Difficulty: 2 Objective: 2
Terms to Learn: flexible budget
20,000 units x $600,000/25,000 = $480,000
7-15 75. The flexible budget will report __________ for the fixed costs.
a. $458,000
b. $450,000
c. $360,000
d. $572,500
Answer: b Difficulty: 2 Objective: 2
Terms to Learn: flexible budget
$450,000, given in the static budget
76. The flexible-budget variance for variable costs is:
a. $32,000 unfavorable
b. $120,000 unfavorable
c. $32,000 favorable
d. $120,000 favorable
Answer: a Difficulty: 2 Objective: 2
Terms to Learn: flexible-budget variance
$512,000 – (20,000 x $600,000/25,000) = $32,000 U
77. The PRIMARY reason for low operating profits was:
a. the variable-cost variance
b. increased fixed costs
c. a poor management accounting system
d. lower sales volume than planned
Answer: d Difficulty: 3 Objective: 2
Terms to Learn: sales-volume variance
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 78 THROUGH 82:
Peters’ Company manufactures tires. Some of the company's data was misplaced. Use
the following information to replace the lost data:
Actual Flexible-Budget Flexible Sales-Volume Static
Results Variances Budget Variances Budget
Units
sold 225,000 225,000 206,250
$84,160 $2,000 F (A) $2,800 U (B)
Revenues
Variable (C) $400 U $31,720 $4,680 F $36,400
costs
Fixed
costs $16,560 $1,720 F $18,280 0 $18,280
Operating $35,480 (D) $32,160 (E) $30,280
income
7-16 78. What amounts are reported for revenues in the flexible-budget (A) and the static-
budget (B), respectively?
a. $82,160; $79,360
b. $82,160; $84,960
c. $84,960; $88,960
d. $84,960; $83,360
Answer: b Difficulty: 2 Objective: 2
Terms to Learn: flexible budget
79. What are the actual variable costs (C)?
a. $36,400
b. $32,120
c. $31,320
d. $27,040
Answer: b Difficulty: 2 Objective: 2
Terms to Learn: flexible budget
80. What is the total flexible-budget variance (D)?
a. $120 unfavorable
b. $0
c. $680 favorable
d. $3,320 favorable
Answer: d Difficulty: 2 Objective: 2
Terms to Learn: flexible-budget variance
81. What is the total sales-volume variance (E)?
a. $7,480 unfavorable
b. $2,800 unfavorable
c. $1,880 favorable
d. $7,480 favorable
Answer: c Difficulty: 2 Objective: 2
Terms to Learn: sales-volume variance
82. What is the total static-budget variance?
a. $5,200 favorable
b. $3,320 favorable
c. $1,880 unfavorable
d. $1,880 favorable
Answer: a Difficulty: 2 Objective: 2
Terms to Learn: static-budget variance
7-17 83. The flexible-budget variance for direct cost inputs can be further subdivided into a:
a. static-budget variance and a sales-volume variance
b. sales-volume variance and an efficiency variance
c. price variance and an efficiency variance
d. static-budget variance and a price variance
Answer: c Difficulty: 1 Objective: 3
Terms to Learn: flexible-budget variance
84. Budgeted input quantity information may be obtained from:
a. actual input quantities used last period
b. standards developed by your company
c. data from other companies that have similar processes
d. All of these answers are correct.
Answer: d Difficulty: 1 Objective: 3
Terms to Learn: standard input
85. When actual input data from past periods is used to develop a budget:
a. past inefficiencies are excluded
b. expected future changes are incorporated
c. information is available at a low cost
d. audited financial information must be used
Answer: c Difficulty: 2 Objective: 3
Terms to Learn: standard cost
86. When standards are used to develop a budget:
a. past inefficiencies are excluded
b. benchmarking must also be used
c. information is available at a low cost
d. flexible-budget amounts are difficult to determine
Answer: a Difficulty: 2 Objective: 3
Terms to Learn: standard cost
87. The term budget indicates:
a. that standards have been used to develop the budget
b. that actual input data from past periods have been used to develop the budget
c. that engineering studies have been used to develop the budget
d. planned amounts for a future accounting period
Answer: d Difficulty: 1 Objective: 3
Terms to Learn: static budget
7-18 88. A standard input:
a. is a carefully determined price, cost, or quantity
b. is usually expressed on a per unit basis
c. may be developed using engineering studies
d. All of these answers are correct.
Answer: d Difficulty: 1 Objective: 3
Terms to Learn: standard input
89. Ideal standards:
a. assume peak operating conditions
b. allow for normal machine breakdowns
c. greatly improve employee motivation and performance
d. All of these answers are correct..
Answer: a Difficulty: 1 Objective: 3
Terms to Learn: standard cost
90. A favorable price variance for direct materials indicates that:
a. a lower price than planned was paid for materials
b. a higher price than planned was paid for materials
c. less material was used during production than planned for actual output
d. more material was used during production than planned for actual output
Answer: a Difficulty: 2 Objective: 4
Terms to Learn: price variance
91. A favorable efficiency variance for direct manufacturing labor indicates that:
a. a lower wage rate than planned was paid for direct labor
b. a higher wage rate than planned was paid for direct labor
c. less direct manufacturing labor-hours were used during production than
planned for actual output
d. more direct manufacturing labor-hours were used during production than
planned for actual output
Answer: c Difficulty: 2 Objective: 4
Terms to Learn: efficiency variance
92. An unfavorable price variance for direct materials might indicate:
a. that the purchasing manager purchased in smaller quantities due to a change to
just-in-time inventory methods
b. congestion due to scheduling problems
c. that the purchasing manager skillfully negotiated a better purchase price
d. that the market had an unexpected oversupply of those materials
Answer: a Difficulty: 3 Objective: 4
Terms to Learn: price variance
7-19 93. A favorable efficiency variance for direct materials might indicate:
a. that lower-quality materials were purchased
b. an overskilled workforce
c. poor design of products or processes
d. a lower-priced supplier was used
Answer: b Difficulty: 3 Objective: 4
Terms to Learn: efficiency variance
94. A favorable price variance for direct manufacturing labor might indicate that:
a. employees were paid more than planned
b. budgeted price standards are too tight
c. underskilled employees are being hired
d. an efficient labor force
Answer: c Difficulty: 3 Objective: 4
Terms to Learn: price variance
95. 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. more higher-skilled workers were scheduled than planned
Answer: b Difficulty: 3 Objective: 4
Terms to Learn: efficiency variance
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 96 THROUGH 100:
Robb Industries, Inc. (RII), developed standard costs for direct material and direct labor.
In 2004, RII estimated the following standard costs for one of their major products, the
10-gallon plastic container.
Budgeted quantity Budgeted price
Direct materials 0.10 pounds $30 per pound
Direct labor 0.05 hours $15 per hour
During June, RII produced and sold 5,000 containers using 490 pounds of direct
materials at an average cost per pound of $32 and 250 direct manufacturing labor-hours
at an average wage of $15.25 per hour.
7-20 96. June’s direct material flexible-budget variance is:
a. $980 unfavorable
b. $300 favorable
c. $680 unfavorable
d. None of these answers are correct.
Answer: c Difficulty: 2 Objective: 4
Terms to Learn: flexible-budget variance
(490 x $32) – (5,000 x 0.10 x $30) = $680 U
97. June’s direct material price variance is:
a. $980 unfavorable
b. $300 favorable
c. $680 favorable
d. None of these answers are correct.
Answer: a Difficulty: 2 Objective: 4
Terms to Learn: price variance
490 x ($32 – $30) = $980 U
98. June’s direct material efficiency variance is:
a. $980 unfavorable
b. $300 favorable
c. $680 favorable
d. None of these answers are correct.
Answer: b Difficulty: 2 Objective: 4
Terms to Learn: efficiency variance
$30 x (490 – 500) = $300 F
99. June’s direct manufacturing labor price variance is:
a. $62.50 unfavorable
b. $62.50 favorable
c. $3,811.75 unfavorable
d. None of these answers are correct.
Answer: a Difficulty: 2 Objective: 4
Terms to Learn: price variance
250 dlh x ($15.25 – $15.00) = $62.50 U
7-21 100. June’s direct manufacturing labor efficiency variance is:
a. $62.50 unfavorable
b. $62.50 favorable
c. $3,811.75 unfavorable
d. None of these answers are correct.
Answer: d Difficulty: 2 Objective: 4
Terms to Learn: efficiency variance
[250 dlh – (5,000 x 0.05)] x $15 = Zero
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 101 THROUGH 106:
Sawyer Industries, Inc. (SII), developed standard costs for direct material and direct
labor. In 2004, SII estimated the following standard costs for one of their major products,
the 30-gallon heavy-duty plastic container.
Budgeted quantity Budgeted price
Direct materials 0.20 pounds $25 per pound
Direct labor 0.10 hours $15 per hour
During July, SII produced and sold 10,000 containers using 2,200 pounds of direct
materials at an average cost per pound of $24 and 1,050 direct manufacturing labor hours
at an average wage of $14.75 per hour.
101. July’s direct material flexible-budget variance is:
a. $2,800 unfavorable
b. $2,200 favorable
c. $5,000 unfavorable
d. None of these answers are correct.
Answer: a Difficulty: 2 Objective: 4
Terms to Learn: flexible-budget variance
(2,200 x $24) – (10,000 x 0.20 x $25) = $2,800 U
102. July’s direct material price variance is:
a. $2,800 favorable
b. $2,200 favorable
c. $5,000 unfavorable
d. None of these answers are correct.
Answer: b Difficulty: 2 Objective: 4
Terms to Learn: price variance
2,200 x ($24 – $25) = $2,200 F
7-22 103. July’s direct material efficiency variance is:
a. $2,800 unfavorable
b. $2,200 favorable
c. $5,000 unfavorable
d. None of these answers are correct.
Answer: c Difficulty: 2 Objective: 4
Terms to Learn: efficiency variance
$25 x [2,200 – (10,000 x 0.20)] = $5,000 U
104. July’s direct manufacturing labor flexible-budget variance is:
a. $750.00 unfavorable
b. $262.50 favorable
c. $487.50 unfavorable
d. None of these answers are correct.
Answer: c Difficulty: 2 Objective: 4
Terms to Learn: flexible-budget variance
(1,050 x $14.75) – (10,000 x 0.10 x $15) = $487.50 U
105. July’s direct manufacturing labor price variance is:
a. $750.00 unfavorable
b. $262.50 favorable
c. $487.50 favorable
d. None of these answers are correct.
Answer: b Difficulty: 2 Objective: 4
Terms to Learn: price variance
1,050 dlh x ($14.75 – $15.00) = $262.50 F
106. July’s direct manufacturing labor efficiency variance is:
a. $750.00 unfavorable
b. $262.50 favorable
c. $487.50 favorable
d. None of these answers are correct.
Answer: a Difficulty: 2 Objective: 4
Terms to Learn: efficiency variance
[1,050 dlh – (10,000 x 0.10)] x $15 = $750 U
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 107 THROUGH 110:
These questions refer to flexible-budget variance formulas with the following
descriptions for the variables: A = Actual; B = Budgeted; P = Price; Q = Quantity.
7-23 107. The best label for the formula (AQ – BQ) BP is the:
a. efficiency variance
b. price variance
c. total flexible-budget variance
e. spending variance
Answer: a Difficulty: 2 Objective: 4
Terms to Learn: efficiency variance
108. The best label for the formula (AP –

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