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Question 1 - CMA 1291 3-17 - Variance Analysis Concepts

Folsom Fashions sells a line of women's dresses. Folsom's performance report for November follows.

Actual Budget
Dresses sold 5,000 6,000
Sales $ 235,000 $ 300,000
Variable costs (145,000) (180,000)
Contribution margin 90,000 120,000
Fixed costs (84,000) (80,000)
Operating income $ 6,000 $ 40,000

The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the
various factors affecting the difference between budgeted and actual operating income.

The fixed cost variance for November is

A. $4,000 unfavorable.
B. $5,000 unfavorable.
C. $5,000 favorable.
D. $4,000 favorable.

A. In this question we are asked to calculate the fixed cost variance. It is simply the difference between the
budgeted fixed costs and the actual fixed costs. For Folsom, the fixed cost variance is $4,000 unfavorable
($80,000 − $84,000). The actual fixed cost was greater than the budgeted fixed cost, which means that the
variance is unfavorable.

B. This answer is incorrect. See the correct answer for a complete explanation.

C. This is the variable cost variance, not the fixed cost variance. See the correct answer for a complete explanation.

D. The budgeted amount of fixed cost was less than actual amount of fixed cost incurred. This means that the variance
is unfavorable. See the correct answer for a complete explanation.

Question 2 - CMA 1293 3-22 - Manufacturing Input Variances - Materials and Labor

ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of raw material in
inventory were purchased for $105,000, and two units of raw material are required to produce one unit of final product.
In November, the company produced 12,000 units of product. The standard allowed for material was $60,000, and there
was an unfavorable quantity variance of $2,500.

ChemKing's standard price for one unit of material is

A. $2.00.
B. $2.50.
C. $3.00.
D. $5.00.

A. This answer is incorrect. See the correct answer for a complete explanation.

B. The standard price is calculated using budgeted amounts. ChemKing expected to make 12,000 units, which
would require 24,000 units of raw material. Since the budgeted cost of these raw material units was $60,000, the

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standard cost per unit is $2.50 ($60,000 ÷ 24,000).

C. This is the actual price of raw materials ($105,000 ÷ 35,000 = $3), not the standard price. See the correct answer for
a complete explanation.

D. This is the standard direct materials cost per unit of product. However, the question asks for the standard cost per unit
of direct material. See the correct answer for a complete explanation.

Question 3 - CMA 692 3-21 - Manufacturing Input Variances - Materials and Labor

Jackson Industries employs a standard cost system in which direct materials inventory is carried at standard cost.
Jackson has established the following standards for the prime costs of one unit of product.

Standard Standard Standard

Quantity Price Cost
Direct materials 5 pounds $3.60/pound $18.00
Direct labor 1.25 hours $12.00/hour 15.00
$33.00

During May, Jackson purchased 125,000 pounds of direct materials at a total cost of $475,000. The total factory wages
for May were $364,000, 90% of which were for direct labor. Jackson manufactured 22,000 units of product during May
using 108,000 pounds of direct materials and 28,000 direct labor hours.

The direct labor usage (efficiency) variance for May is

A. $6,000 unfavorable.
B. $6,000 favorable.
C. $5,850 unfavorable.
D. $5,850 favorable.

A. The direct labor efficiency variance is calculated as: (Actual Hours − Standard Hours for Actual Output) ×
Standard Rate. Actual hours is 28,000. The standard hours allowed for the actual level of output is 27,500 hours
(1.25 hours per unit × 22,000 units produced). The standard labor rate is $12. Therefore, the direct labor
efficiency variance is (28,000 − 27,500) × $12 = $6,000 unfavorable. The variance is unfavorable because the
actual hours exceed the standard hours, and this is a cost variance.

B. The actual hours exceed the standard amount, which means the variance is unfavorable. See the correct answer for
a complete explanation.

C. The labor efficiency variance is calculated as: (Actual Hours − Standard Hours for Actual Output) × Standard Rate.
This answer results from multiplying by the actual rate ($11.70) instead of the standard rate.

D. The actual hours exceed the standard amount, which means the variance is unfavorable. See the correct answer for
a complete explanation.

Question 4 - CMA 692 3-20 - Manufacturing Input Variances - Materials and Labor

Jackson Industries employs a standard cost system in which direct materials inventory is carried at standard cost.
Jackson has established the following standards for the prime costs of one unit of product.

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Standard Standard Standard

Quantity Price Cost
Direct materials 5 pounds $3.60/pound $18.00
Direct labor 1.25 hours $12.00/hour 15.00
$33.00

During May, Jackson purchased 125,000 pounds of direct materials at a total cost of $475,000. The total factory wages
for May were $364,000, 90% of which were for direct labor. Jackson manufactured 22,000 units of product during May
using 108,000 pounds of direct materials and 28,000 direct labor hours.The direct labor price (rate) variance for May is

A. $7,200 unfavorable.
B. $8,400 unfavorable.
C. $6,000 unfavorable.
D. $8,400 favorable.

A. Since the actual labor rate of $11.70 is lower than the standard labor rate of $12, the variance is favorable. See the
correct answer for a complete explanation.

B. Since the actual labor rate of $11.70 is lower than the standard labor rate of $12, the variance is favorable. See the
correct answer for a complete explanation.

C. This result is the direct labor efficiency variance, but this question asks for the direct labor rate variance. See the
correct answer for a complete explanation.

D. The labor price/rate variance is calculated as: (Actual Rate − Standard Rate) × Actual Hours. The actual total
direct labor cost is $327,600 ($364,000 × 90%), and the actual labor rate is $11.70 ($327,600 ÷ 28,000 hours
used). The standard labor rate is $12. The actual hours used is 28,000. Therefore, the labor rate variance is
($11.70 − $12.00) × 28,000 = ($8,400) favorable. Since the actual labor rate of $11.70 is lower than the standard
labor rate of $12, the variance is favorable.

Question 5 - CMA Sample Q3-11 - Manufacturing Input Variances - Materials and Labor

Garland Company uses a standard cost system. The standard for each finished unit of product allows for 3 pounds of
plastic at $0.72 per pound. During December, Garland bought 4,500 pounds of plastic at $0.75 per pound and used
4,100 pounds in the production of 1,300 finished units of product. What is the materials purchase price variance for the
month of December?

A. $135 unfavorable.
B. $150 unfavorable.
C. $123 unfavorable.
D. $117 unfavorable.

A. The price variance is calculated as follows: (Actual Price − Standard Price) × Actual Quantity. The purchase
price variance is calculated using all of the units purchased, not just the units that are put into production. The
purchase price variance is $135 unfavorable [($0.75 − $0.72) × 4,500]. The actual price exceeds the standard,
thus, the variance is unfavorable.

B. The price variance is calculated as follows: (Actual Price − Standard Price) × Actual Quantity. The purchase price
variance is calculated using all of the units purchased, not just the units that are put into production. See the correct
answer for a complete explanation.

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C. The price variance is calculated as follows: (Actual Price − Standard Price) × Actual Quantity. The purchase price
variance is calculated using all of the units purchased (4,500), not just the units that are put into production (4,100). See
the correct answer for a complete explanation.

D. The price variance is calculated as follows: (Actual Price − Standard Price) × Actual Quantity. The purchase price
variance is calculated using all of the units purchased, not just the units that are put into production. See the correct
answer for a complete explanation.

Question 6 - CMA 695 3-24 - Manufacturing Input Variances - Materials and Labor

Blaster Inc., a manufacturer of portable radios, purchases the components from subcontractors to use to assemble into
a complete radio. Each radio requires three units each of Part XBEZ52, which has a standard cost of $1.45 per unit.
During May, Blaster experienced the following with respect to Part XBEZ52.

Units
Purchases ($18,000) 12,000
Consumed in manufacturing 10,000
Radios manufactured 3,000

During May, Blaster Inc. incurred a materials efficiency variance of

A. $1,450 favorable.
B. $1,450 unfavorable.
C. $4,350 unfavorable.
D. $4,350 favorable.

A. The materials efficiency variance is unfavorable because the amount of XBEZ52 actually consumed in manufacturing
was greater than the standard quantity.

B. The efficiency variance is calculated as (AQ − SQ) × SP. The actual quantity is 10,000. The standard quantity
is 9,000 (3 units of part XBEZ52 to produce one radio multiplied by 3,000 radios that were manufactured). The
standard price is $1.45 per part XBEZ52. Therefore, the materials efficiency variance is (10,000 − 9,000) × $1.45 =
$1,450 unfavorable.

C.

The materials efficiency variance is calculated as (AQ − SQ) × SP. This answer results from using the quantity of units
purchased in the formula instead of the quantity consumed in manufacturing.

D. The materials efficiency variance is unfavorable because the amount of XBEZ52 actually consumed in manufacturing
was greater than the standard quantity. This answer is also incorrect because the quantity of units purchased was used
in the formula instead of the quantity consumed in manufacturing.

Question 7 - CIA 597 3-18 - Manufacturing Input Variances - Materials and Labor

A company reported a significant material efficiency variance for the month of January. All of the following are possible
explanations for this variance except:

A. An inadequately trained and supervised labor force.

B. Producing more units than planned for in the master budget.

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C. Processing a large number of rush orders.

D. Cutbacks in preventive maintenance.

A. An inadequately trained and supervised labor force will have more material waste and spoilage than an adequately
trained and supervised labor force.

B. Producing more units than planned in the master budget will not affect the efficiency of the materials used
for each unit.

C. Rush orders disrupt the manufacturing process by interfer­ing with normal work routines, practices, and procedures.
These disruptions will adversely affect each of the manufacturing process­es, including the efficient use of material,
labor, and overhead.

D. Poorly functioning machines will have more material waste and spoilage.

Question 8 - CMA 695 3-25 - Manufacturing Input Variances - Materials and Labor

Price variances and efficiency variances can be key to the performance measurement within a company. In evaluating
the performance within a company, a materials efficiency variance can be caused by all of the following except the

A. Actions of the purchasing department.

B. Performance of the workers using the material.
C. Design of the product.
D. Sales volume of the product.

A.

The materials efficiency variance could be caused by a number of reasons, one of which is poor quality of the materials,
which would be caused by actions of the purchasing department. For example, the purchasing department might
purchase inferior materials in an effort to save money. Instead of saving money, the result might be that too many items
purchased would be defective and unusable. This could result in additional costs to make them usable. Or, if the
defective items could not be made usable, they would have to be thrown away, causing excess materials usage.

B. The materials efficiency variance could be caused by a number of reasons, one of which is poor worker performance.
If workers assembling the products are not performing their work properly, raw materials could be wasted or ruined.

C. The materials efficiency variance could be caused by a number of reasons, one of which is poor design of the
product. Poor design could make it impossible for the standards to be met if, for instance, two parts did not fit together
the way they were supposed to, and in working with them to make them fit, some were broken and became unusable.
That would cause excess usage of the materials and unplanned costs.

D. The materials efficiency variance is the difference between the actual material usage and the standard
material usage for the actual level of output, multiplied by the standard price. There is no connection between
the sales volume of the product and the materials efficiency variance.

Question 9 - CMA 1295 3-25 - Manufacturing Input Variances - Materials and Labor

Which one of the following variances is most controllable by the production control supervisor?

A. Material price variance.

B. Fixed overhead budget variance.
C. Variable overhead spending variance.

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D. Material usage variance.

A. The purchasing department is the most responsible for the material price variance, not the production control
supervisor.

B. The fixed overhead budget variance cannot be controlled by the production control supervisor.

C.

The variable overhead spending variance is related to the difference between the actual variable overhead cost per unit
(this is calculated as the actual overhead costs divided by the actual usage of the allocation base) and the standard
application rate. It is the difference between the actual amount of variable overhead incurred and the standard amount of
variable overhead allowed for the actual quantity of the variable overhead allocation base used for the actual output
produced. The production control supervisor does not control this.

D. The material usage variance is the difference between the actual material usage and the standard usage for
this level of output, multiplied by the standard material price. This variance occurs during the production
process and is therefore most controllable by the production control supervisor. There are a number of reasons
that could cause this variance: poor production employees' performance, product design, waste, theft, and
poor material quality, etc.

Question 10 - CMA 1290 3-5 - Manufacturing Input Variances - Materials and Labor

Franklin Glass Works' production budget for the year ended November 30 was based on 200,000 units. Each unit
requires two standard hours of labor for completion. Total overhead was budgeted at $900,000 for the year, and the
fixed overhead rate was estimated to be $3.00 per unit. Both fixed and variable overhead are assigned to the product on
the basis of direct labor hours. The actual data for the year ended November 30 are presented as follows.

Actual production in units 198,000

Actual direct labor hours 440,000
Actual variable overhead $352,000
Actual fixed overhead $575,000

The standard hours allowed for actual production for the year ended November 30 total

A. 495,000.
B. 247,500.
C. 400,000.
D. 396,000.

A. This answer is incorrect. See the correct answer for a complete explanation.

B. This answer is incorrect. See the correct answer for a complete explanation.

C. Each unit requires two standard hours of labor for completion. The actual production in units is 198,000. In the
calculation we have to use the actual number of units (198,000), not the budgeted (200,000) number of units.

D. Each unit requires two standard hours of labor for completion. The actual production in units is 198,000.
Thus, the standard hours allowed for actual production for the year ended November 30 totals 396,000 (198,000
units × 2 hours per unit).

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Question 11 - CMA 694 3-22 - Manufacturing Input Variances - Materials and Labor

Under a standard cost system, labor price variances are usually not attributable to

A. The assignment of different skill levels of workers than planned.

B. The use of a single average standard rate.
C. Labor rate predictions.
D. Union contracts approved before the budgeting cycle.

A. The assignment of different skill levels of workers than was planned in most cases will cause a labor price variances.
The labor rate variance is calculated as: (Actual Rate − Standard Rate) × Actual Hours. When there is a difference
between the rates of assigned (with lower or higher working skills) and planned workers, a labor rate variance will most
likely occur.

B. If the standard labor rate was set using a single average standard rate, it may cause a labor rate variance. If the rate
doesn't reflect the proportion of hours worked of each wage rate group of workers, a variance will result.

C. As with all future predictions, labor rate predictions can have inaccuracies. If the standard labor rate was set using
these predicted numbers, it may cause a labor rate variance.

D. The labor price or rate variance is calculated as: (Actual Rate − Standard Rate) × Actual Hours. The only
figure union contracts can influence is the actual labor rate. The standard rate is set by the budget at the
beginning of the year. As union contracts are approved before the budgeting cycle begins, the information
about potential changes in wages and salaries is already included in the budget and standards. Therefore, a
union contract approved before the budgeting cycle cannot be the cause of a labor rate variance.

Question 12 - CMA 1291 3-1 - Manufacturing Input Variances - Materials and Labor

Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow
has established the following standards for the prime costs of one unit of product.

Standard Standard Standard

Quantity Price Cost
Direct materials 8 pounds $1.80 per pound $14.40
Direct labor .25 hours $8.00 per hour 2.00
$16.40

During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory
wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product
during November using 142,500 pounds of direct materials and 5,000 direct labor hours.

The direct materials purchase price variance for November is

A. $16,000 favorable.
B. $14,250 favorable.
C. $14,250 unfavorable.
D. $16,000 unfavorable.

A. The variance is unfavorable because the actual price is higher than the standard price. See the correct answer for a
complete explanation.

B.

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The price variance is calculated as follows: (AP − SP) * AQ. This answer is incorrect for two reasons. (1) In the
calculation of the materials purchase price variance, we use the amount of materials purchased, not consumed by
production. This answer uses the amount consumed. (2) The actual price is greater than the standard price, so the
variance is unfavorable. See the correct answer for a complete explanation.

C. In the calculation of the materials purchase price variance we use the amount of materials purchased (160,000), not
the amount consumed by production (142,500). See the correct answer for a complete explanation.

D.

The price variance is calculated as follows: (AP − SP) × AQ. The actual price is $1.90 per pound ($304,000 ÷
160,000). The standard price is $1.80 per pound. Since the question asks for the direct materials purchase price
variance, we use the amount of materials actually purchased (160,000 pounds) instead of the amount actually
consumed by production (142,500 pounds) as the actual quantity. Thus, the purchase price variance is ($1.90 −
$1.80) × 160,000 = $16,000 unfavorable. The variance is unfavorable because the actual price was greater than
the standard price.

Question 13 - CMA 1287 4-30 - Manufacturing Input Variances - Materials and Labor

Todco planned to produce 3,000 units of its single product, Teragram, during November. The standard specifications for
one unit of Teragram include six pounds of materials at $.30 per pound. Actual production in November was 3,100 units
of Teragram. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable
materials quantity variance of $120. Based on these variances, one could conclude that

A. More materials were purchased than were used.

B. The actual usage of materials was less than the standard allowed.
C. The actual cost of materials was less than the standard cost.
D. More materials were used than were purchased.

A. A favorable materials purchase price variance and an unfavorable materials quantity variance do not relate to the
quantity of materials purchased and used in production.

B. An unfavorable materials quantity variance means that more materials were used in production than budgeted
(standard), not less.

C. A favorable materials purchase price variance means the actual purchase price was less than was budgeted
(the standard).

D. A favorable materials purchase price variance and an unfavorable materials quantity variance do not relate to the
quantity of materials purchased and used in production.

Question 14 - CMA 695 3-23 - Manufacturing Input Variances - Materials and Labor

Blaster Inc., a manufacturer of portable radios, purchases the components from subcontractors to use to assemble into
a complete radio. Each radio requires three units each of Part XBEZ52, which has a standard cost of $1.45 per unit.
During May, Blaster experienced the following with respect to Part XBEZ52.

Units
Purchases ($18,000) 12,000
Consumed in manufacturing 10,000

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Radios manufactured 3,000

During May, Blaster Inc. incurred a purchase price variance of

A. $500 favorable.
B. $450 favorable.
C. $450 unfavorable.
D. $600 unfavorable.

A. This answer is incorrect. See the correct answer for a complete explanation.

B. This answer is incorrect. See the correct answer for a complete explanation.

C. The price variance is calculated as follows: (AP − SP) × AQ. This answer results from using the standard quantity
allowed for the actual output (9,000 units) instead of the actual quantity purchased (12,000). See the correct answer for
a complete explanation.

D. The price variance is calculated as follows: (AP − SP) × AQ. The actual price is $1.50 per unit ($18,000 ÷
12,000). The standard price is $1.45 per unit, and the actual quantity purchased was 12,000 units. Note that we
use the actual quantity purchased in the formula because we need to determine the purchase price variance.
The price variance is $600 unfavorable [($1.50 − $1.45) × 12,000]. The variance is positive because the actual
price was greater than the standard price, so the variance is unfavorable.

Question 15 - IMA 08-P2-233 - Manufacturing Input Variances - Materials and Labor

MinnOil performs oil changes and other minor maintenance seervices (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.

A. Wage Rate $6.55/hour; Hours Worked 42.00

B. Wage Rate $6.67/hour, Hours Worked 42.71
C. Wage Rate $7.45/hour, Hours Worked 42.00
D. Wage Rate $7.50/hour; Hours Worked 38.00

A. This answer results from two errors: (1) Solving the Quantity Variance formula for the variable AQ using a positive
Quantity Variance in the formula instead of a negative one. The Quantity (Efficiency) Variance is favorable. Since it is a
cost, a favorable variance is represented by a negative amount. Therefore, the Quantity Variance used in the formula
should be negative. And (2) Solving the Price Variance formula for the variable AP using a negative Price Variance in the
formula instead of a positive one. The Price (Rate) Variance is unfavorable. Since it is a cost, an unfavorable variance is
represented by a positive amount. Therefore, the Price Variance used in the formula should be positive. See the correct
answer for a complete explanation.

B. This answer is incorrect. Please see the correct answer for an explanation.

C. This answer results from solving the Quantity Variance formula for the variable AQ using a positive Quantity Variance
in the formula instead of a negative one. The Quantity (Efficiency) Variance is favorable. Since it is a cost, a favorable
variance is represented by a negative amount. Therefore, the Quantity Variance used in the formula should be negative.
See the correct answer for a complete explanation.

D.

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This is an example of price and quantity variances applied to a service business. To answer this question, we
must work out both the price (rate) variance and the quantity (efficiency) variance. The price variance formula is
(AP − SP) × AQ = Price Variance. The quantity variance formula is (AQ − SQ) × SP = Quantity Variance. Since
these are cost items, a negative variance is a favorable variance (actual is lower than standard) and a positive
variance is an unfavorable one (actual is higher than standard).

The Standard Quantity (SQ) is the standard for the number of hours to service 160 cars. The standard is .25
hours per car multiplied by 160 cars, which is 40 hours.

The Actual Price (AP) is given as $7 per hour.

The Price Variance is $19 unfavorable.

The Quantity Variance is ($14) favorable.

Whenever we have all of the values we need except one, we can set up a simple equation and solve for the
missing variable. We have all of the values for the Quantity Variance formula except for AQ. So the first equation
will be:

(AQ − 40) × 7 = (14)

7 AQ − 280 = (14)
7 AQ = 266
AQ = 38, and this is the actual hours worked.

Now, we can take that value for AQ and use it in the Price Variance formula to solve for AP:

(AP − 7) × 38 = 19
28AP − 266 = 19
38AP = 285
AP = 7.50, and this is the actual wage rate.

Question 16 - CMA 1294 3-25 - Manufacturing Input Variances - Materials and Labor

An unfavorable direct labor efficiency variance could be caused by a(n)

A. Unfavorable materials usage variance.

B. Favorable variable overhead spending variance.
C. Unfavorable variable overhead spending variance.
D. Unfavorable fixed overhead volume variance.

A.

The labor efficiency variance is calculated as follows: (Actual Hours − Standard Hours for Actual Output) ×
Standard Rate. An unfavorable direct labor efficiency variance means that more hours were actually spent than
the standard allowed for the actual output. This could happen due to an inefficiency on the part of employees,
downtime, or poor quality of raw materials that required excessive rework.

The materials efficiency or usage variance is calculated as follows: (Actual Quantity − Standard Quantity for
Actual Output) × Standard Price. An unfavorable materials usage variance indicates that more materials were
used than allowed for the actual level of output.

These two variances may be interrelated, as working on more materials than they were supposed to caused the
workers to spend more time than they should have according to the standard for actual output.

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B. The variable overhead spending variance is calculated as follows: (Actual Application Rate − Standard Application
Rate) × Actual Quantity. There is no connection between the variable overhead spending variance and the direct labor
efficiency variance.

C. The variable overhead spending variance is calculated as follows: (Standard Application Rate − Actual Application
Rate) × Actual Quantity. There is no connection between the variable overhead spending variance and the direct labor
efficiency variance.

D. The fixed overhead volume variance is the difference between the budgeted amount of fixed overhead and the
amount of fixed overhead applied (standard rate × standard input for the actual level of output). There is no connection
between the fixed overhead volume variance and the direct labor efficiency variance.

Question 17 - IMA 08-P2-228 - Variance Analysis Concepts

The following performance report was prepared for Dale Manufacturing for the month of April.
Actual Static
Results Budget Variance
Sales units 100,000 80,000 20,000 F

Sales dollars $190,000 $160,000 $30,000 F

Variable costs 125,000 96,000 29,000 U
Fixed costs 45,000 40,000 5,000 U
-------------- ------------- ------------
Operating income $20,000 $24,000 $4,000 U

Using a flexible budget, Dale's total sales-volume variance is

A. $6,000 favorable.
B. $16,000 favorable.
C. $4,000 unfavorable.
D. $20,000 unfavorable.

A. This answer results from adjusting the fixed costs in the static budget to a flexible budget amount that reflects the
difference between the static budget sales units and the actual sales units. However, fixed costs do not change with
changes in sales or manufacturing volume, and so the fixed costs in the flexible budget should be the same as the fixed
costs in the static budget.

B. The sales volume variance is the flexible budget amount minus the static budget amount. A sales volume
variance can be calculated for every line on an income statement. The total sales volume variance is the flexible
budget operating income minus the static budget operating income. In this problem, the flexible budget
amounts are not given and must be calculated. The flexible budget for sales dollars is the static budget amount
of $160,000 divided by the static budget sales units of 80,000 and multiplied by the actual sales units of 100,000,
which is $200,000. The flexible budget for variable costs is calculated the same way and is $120,000. The fixed
cost in the flexible budget is the same as the fixed cost in the static budget: $40,000. The flexible budget
operating income is therefore $200,000 − $120,000 − $40,000, which equals $40,000. The sales volume variance
is the flexible budget operating income of $40,000 minus the static budget operating income of $24,000, which
is $16,000. Because the variance is positive on a net income line, it is a favorable variance.

C. This is the total static budget variance.

D. This is the total flexible budget variance, or actual operating income minus flexible budget operating income.

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Question 18 - CMA 1279 4-11 - Introduction to Variance Analysis and Standard Costs

The best basis upon which cost standards should be set to measure controllable production inefficiencies is

A. Recent average historical performance.

B. Engineering standards based on ideal performance.
C. Normal capacity.
D. Engineering standards based on attainable performance.

A. Standards set on the basis of recent average historical performance don't reflect possible changes in technology and
other changes that might take place. This is not the best basis for measuring controllable production inefficiencies.

B. The ideal, perfect or theoretical level of output assumes that there are no breakdowns, no waste and no time lost to
illness, and that the workers are already working at maximum efficiency. If standards are set using this capacity they will
be unattainable. This is not the best basis for measuring controllable production inefficiencies. Furthermore, if ideal
performance standards are used, overhead costs will be underapplied.

C. Normal level of capacity is an average expected level of production within the time frame of several years given the
reasonable expectations of effective and efficient production as well as customer demand. This is not the best basis for
measuring controllable production inefficiencies.

D. The key in this question is in the words "to measure controllable production inefficiencies." Engineering
standards based on attainable performance should be used in standard setting, because attainable
performance takes into consideration a normal amount of time lost, normal amounts of waste, and a normal
learning curve. Comparing actual output to this level will bring out variances from these normal amounts of
losses. Production inefficiencies above and beyond the normal will be recognized. It is these production
inefficiencies that are controllable. The other, normal losses are not controllable. Once the controllable
inefficiencies are recognized, they can be dealt with.

Question 19 - CMA 692 3-18 - Manufacturing Input Variances - Materials and Labor

Jackson Industries employs a standard cost system in which direct materials inventory is carried at standard cost.
Jackson has established the following standards for the prime costs of one unit of product.

Standard Standard Standard

Quantity Price Cost
Direct materials 5 pounds $3.60/pound $18.00
Direct labor 1.25 hours 12.00/hour 15.00
$33.00

During May, Jackson purchased 125,000 pounds of direct materials at a total cost of $475,000. The total factory wages
for May were $364,000, 90% of which were for direct labor. Jackson manufactured 22,000 units of product during May
using 108,000 pounds of direct materials and 28,000 direct labor hours.

The purchase price variance for the direct materials acquired by Jackson Industries during May is

A. $21,600 unfavorable.
B. $21,600 favorable.
C. $25,000 unfavorable.
D. $28,000 favorable.

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A. The formula for the price variance is (AP − SP) × AQ. The actual price is $3.80 per pound. ($475,000 ÷ 125,000). The
standard price is $3.60 per pound. This answer results from using the quantity consumed by production (108,000 lb.) as
the Actual Quantity (AQ) in the formula. However, the question asks for the purchase price variance. Therefore, we
need to use the actual quantity purchased in the formula (125,000 lb.), not the quantity consumed by production.

B. The formula for the price variance is (AP − SP) × AQ. The actual price is $3.80 per pound. ($475,000 ÷ 125,000). The
standard price is $3.60 per pound. This answer results from using the quantity consumed by production (108,000 lb.) as
the Actual Quantity (AQ) in the formula. However, the question asks for the purchase price variance. Therefore, we
need to use the actual quantity purchased in the formula (125,000 lb.), not the quantity consumed by production.
Furthermore, the variance is positive. A positive variance is unfavorable for a cost item because it means the actual cost
was greater than the planned cost.

C. The price variance is (AP − SP) × AQ. The actual price is $3.80 per pound ($475,000 ÷ 125,000). The standard
price is $3.60 per pound. The actual quantity purchased is 125,000 pounds. Note that we use the actual quantity
purchased in the formula because we need to determine the purchase price variance. The purchase price
variance is ($3.80 − $3.60) × 125,000 = $25,000 unfavorable. Since the actual purchase price was higher than the
standard price, the variance is positive. A positive variance is unfavorable for a cost item because it means the
actual cost was greater than the planned cost.

D.

The variance is unfavorable because the actual price – $3.80 per pound ($475,000 ÷ 125,000) – was greater than the
standard price of $3.60 per pound.

Question 20 - CMA 1291 3-4 - Manufacturing Input Variances - Materials and Labor

Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow
has established the following standards for the prime costs of one unit of product.

Standard Standard Standard

Quantity Price Cost
Direct materials 8 pounds $1.80 per pound $14.40
Direct labor .25 hours $8.00 per hour 2.00
$16.40

During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory
wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product
during November using 142,500 pounds of direct materials and 5,000 direct labor hours.

The direct labor usage (efficiency) variance for November is

A. $2,200 favorable.
B. $1,800 unfavorable.
C. $2,000 favorable.
D. $2,000 unfavorable.

A. The labor efficiency variance is unfavorable as the actual hours used were greater than the hours allowed for the
actual production. See the correct answer for a complete explanation.

B. The labor efficiency variance is (Actual Hours − Standard Hours for the Actual Output) × Standard Rate. See the
correct answer for a complete explanation.

C. The labor efficiency variance is unfavorable as the actual hours used were greater than the hours allowed for the

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actual production. See the correct answer for a complete explanation.

D. The labor efficiency variance is a quantity variance, calculated as follows: (Actual Hours − Standard Hours
for Actual Output) × Standard Rate. A total of 5,000 direct labor hours were actually used in production. We
know that 19,000 units of product were manufactured during the period. The standard direct labor hours
allowed for production of one unit is .25 hours. Therefore, the standard direct labor hours allowed for the
production of the period is 19,000 × .25 = 4,750 hours. The standard rate is $8. Therefore, the direct labor
efficiency variance is (5,000 − 4,750) × $8 = $2,000 unfavorable. Because the actual hours used were greater
than the standard hours allowed for the actual output, the variance is positive and unfavorable.

Question 21 - CMA 696 3-22 - Manufacturing Input Variances - Materials and Labor

Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of manufacturing
one unit of Zeb is as follows:

Materials - 60 pounds at $1.50 per pound $ 90

Labor - 3 hours at $12 per hour 36
Factory overhead - 3 hours at $8 per hour 24
Total standard cost per unit $150

The budgeted variable factory overhead rate is $3 per labor hour, and the budgeted fixed factory overhead is $27,000
per month. During May, Ardmore produced 1,650 units of Zeb compared with a normal capacity of 1,800 units. The
actual cost per unit was as follows:

Materials (purchased and used) - 58 pounds at $1.65 per pound $ 95.70

Labor - 3.1 hours at $12 per hour 37.20
Factory overhead - $39,930 per 1,650 units 24.20
Total actual cost per unit $157.10

The total materials quantity variance for May is

A. $4,950 favorable.
B. $14,355 unfavorable.
C. $14,355 favorable.
D. $4,950 unfavorable.

A. The quantity variance (also called the efficiency or usage variance) is calculated as: (Actual Quantity −
Standard Quantity for Actual Output) × Standard Price. The actual quantity of material used was 58 lb. per unit
of finished product or 95,700 units in total (1,650 × 58 lb.). The standard quantity to produce 1,650 units equals
99,000 units (1,650 × 60 lb.). The standard price is $1.50. Therefore, the quantity variance is (95,700 − 99,000) ×
$1.50 = $(4,950) favorable. The actual quantity used was less than the standard quantity for the actual output,
which means that the variance is favorable.

B. This is the material price variance. See the correct answer for a complete explanation.

C. The actual quantity of material used (95,700) was less than the standard quantity (99,000). This means that variance
is favorable. See the correct answer for a complete explanation.

D. The quantity variance is favorable because the quantity of material actually used was less than the standard quantity
for the actual output. See the correct answer for a complete explanation.

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Question 22 - CMA 1291 3-3 - Manufacturing Input Variances - Materials and Labor

Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow
has established the following standards for the prime costs of one unit of product.

Standard Standard Standard

Quantity Price Cost
Direct materials 8 pounds $1.80 per pound $14.40
Direct labor .25 hours $8.00 per hour 2.00
$16.40

During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory
wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product
during November using 142,500 pounds of direct materials and 5,000 direct labor hours.

The direct labor price (rate) variance for November is

A. $2,090 favorable.
B. $2,000 unfavorable.
C. $2,200 favorable.
D. $1,900 unfavorable.

A. The labor rate/price variance is calculated as: (Actual Rate − Actual Rate) × Actual Hours. This answer results from
using the hours allowed for the actual output (19,000 × .25) instead of the actual hours. See the correct answer for a
complete explanation.

B. This answer results from using the total factory wages of $42,000 to calculate the direct labor actual rate. However,
only 90% of the total factory wages were direct labor. See the correct answer for a complete explanation.

C. The labor rate/price variance is: (Actual Rate − Standard Rate) × Actual Hours. The actual direct labor cost
was $37,800 ($42,000 × 90%) for the month of November. The actual rate was $7.56 ($37,800 ÷ 5,000). The actual
number of hours was 5,000. The labor rate/price variance was ($7.56 − $8.00) × 5,000 = $(2,200) favorable. A
negative variance for a cost is a favorable variance.

D. The labor rate/price variance is favorable as the actual direct labor rate is lower than the standard. See the correct
answer for a complete explanation.

Question 23 - CIA 594 III-74 - Manufacturing Input Variances - Materials and Labor

A company manufactures one product and has a standard cost system. In April the company had the following
experience:

Direct Materials Direct Labor

Actual $/unit of input (lbs. & hrs.) $28 $18
Standard price/unit of input $24 $20
Standard inputs allowed per unit of output 10 4
Actual units of input 190,000 78,000
Actual units of output 20,000 20,000

The direct labor rate variance for April is

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A. $156,000 unfavorable.
B. $240,000 favorable.
C. $40,000 unfavorable.
D. $156,000 favorable.

A. The actual labor rate was less than the standard labor rate, which creates a favorable variance. See the correct
answer for a complete explanation.

B. This is the direct materials efficiency variance. However, the question asks for the direct labor rate variance. See the
correct answer for a complete explanation.

C.

The labor rate variance is calculated as follows: (Actual Rate − Standard Rate) × Actual Hours (i.e., actual units of
input). An answer of $40,000 results from using the formula (Standard Rate − Actual Rate) × Actual Units of Output.

D. The labor rate variance is calculated as follows: (Actual Rate − Standard Rate) × Actual Hours (i.e., actual
units of input). All the components of the formula are in the data given. The actual rate is $18, and the standard
rate is $20. The actual hours are 78,000. Thus, the variance is ($18 − $20) × 78,000 = $(156,000). The direct labor
rate variance for April is favorable because the actual labor rate was less than the standard labor rate.

Question 24 - CIA 592 IV-18 - Manufacturing Input Variances - Materials and Labor

The following is a standard cost variance analysis report on direct labor cost for a division of a manufacturing company.

Actual Hours at Actual Hours at Standard Hours at

Job Actual Wages Standard Wages Standard Wages
213 $3,243 $3,700 $3,100
215 15,345 15,675 15,000
217 6,754 7,000 6,600
219 19,788 18,755 19,250
221 3,370 3,470 2,650
Totals $48,500 $48,600 $46,600

What is the total flexible budget direct labor variance for the division?

A. $1,900 favorable.
B. $2,000 unfavorable.
C. $100 favorable.
D. $1,900 unfavorable.

A. The flexible budget variance is unfavorable, because the actual cost incurred is greater than the standard cost for the
actual level of output (the flexible budget).

B.

This is the difference between the Actual Hours at Standard Wages and Standard Hours at Standard Wages. This is the
direct labor efficiency variance. The formula for the direct labor efficiency variance is (AQ − SQ) × SP. That formula can
also be written as (AQ × SP) − (SQ × SP). (AQ × SP) is equal to "Actual Hours at Standard Wages," while (SP × AQ) is
equal to "Standard Hours at Standard Wages." The direct labor efficiency variance is one component of the total flexible
budget direct labor variance. The other component is the direct labor rate variance. However, the question asks for the
total flexible budget direct labor variance.

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C.

This is the difference between the Actual Hours at Actual Wages and Actual Hours at Standard Wages. This is the direct
labor rate variance. The formula for the direct labor rate variance is (AP − SP) × AQ. That formula can also be written as
(AP × AQ) − (SP × AQ). (AP × AQ) is equal to "Actual Hours at Actual Wages," while (SP × AQ) is equal to "Actual
Hours at Standard Wages." The direct labor rate variance is one component of the total flexible budget direct labor
variance. The other component is the direct labor efficiency variance. However, the question asks for the total flexible
budget direct labor variance.

D. The total labor variance (also called the flexible budget variance) is the difference between the actual costs
incurred by the company and the standard costs for the actual level of output (the flexible budget). The "Actual
Hours at Actual Wages" in the first column are the actual costs incurred. The "Standard Hours at Standard
Wages" in the third column are the standard costs for the actual level of output. Thus, the total labor variance
is $48,500 − $46,600 = $1,900 unfavorable.

Question 25 - CMA 1295 H5 - Variance Analysis Concepts

The difference between the actual amounts and the flexible budget amounts for the actual output achieved is the

A. Standard cost variance.

B. Sales volume variance.
C. Production volume variance.
D. Flexible budget variance.

A. The term "standard cost variance" is not a specific variance calculation. It may be used to refer to variance analysis in
general, for example "standard cost variance analysis."

B. The sales volume variance is the difference between the flexible budget amount and the static budget amount.

C.

The production volume variance is the difference between the budgeted fixed overhead and the fixed overhead applied,
based on the standard rate × the standard input of the fixed overhead allocation base allowed for the actual level of
output.

D. The flexible budget variance is the difference between the actual results and the flexible budget amount
based on the actual level of activity achieved in the budget period.

Question 26 - CMA 1291 3-2 - Manufacturing Input Variances - Materials and Labor

Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow
has established the following standards for the prime costs of one unit of product.

Standard Standard Standard

Quantity Price Cost
Direct materials 8 pounds $1.80 per pound $14.40
Direct labor .25 hours $8.00 per hour 2.00
$16.40

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During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory
wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product
during November using 142,500 pounds of direct materials and 5,000 direct labor hours.

The direct materials usage (quantity) variance for November is

A. $17,100 unfavorable.
B. $17,100 favorable.
C. $1,100 favorable.
D. $14,400 unfavorable.

A. The material quantity variance is favorable because the amount used in production was less than the standard
amount for the production. See the correct answer for a complete explanation.

B. The material quantity variance (also called the efficiency or usage variance) is the difference between the
actual material usage and the standard usage for this level of output, multiplied by the standard price; or (AQ −
SQ) × SP. The actual amount used was 142,500 pounds. The standard quantity is 8 pounds per unit, so the
standard quantity to produce 19,000 units is 19,000 × 8, or 152,000 pounds. The standard price is $1.80. So the
material quantity variance is (142,500 − 152,000) × $1.80 = $(17,100) favorable. The variance is negative, which is
favorable for a cost variance, because the actual quantity used was less than the standard quantity allowed for
the actual output.

C. This answer is incorrect. See the correct answer for a complete explanation.

D. This answer results from using the quantity of direct materials purchased instead of the quantity of direct materials
used in production. See the correct answer for a complete explanation.

Question 27 - CIA 1192 IV-20 - Manufacturing Input Variances - Materials and Labor

A manufacturer has the following direct materials standard for one of its products.

Direct materials: 3 pounds @ $1.60/pound = $4.80

The company records all inventory at standard cost. Data for the current period regarding the manufacturer's budgeted
and actual production for the product as well as direct materials purchases and issues to production for manufacture of
the product are presented as follows.

Budgeted production for the period: 8,000 units

Actual production for the period: 7,500 units

Direct materials purchases:

Pounds purchased: 25,000 pounds
Total cost: $38,750

Direct materials issued in production: 23,000 pounds

The direct materials purchase price variance for the current period is

A. $1,125 favorable.
B. $1,200 favorable.
C. $1,250 favorable.
D. $1,150 favorable.

A. This result is calculated using the quantity of materials allowed for the production, 22,500 pounds (3 lb. Per unit of
finished product × 7,500 units produced). However, to calculate the purchase price variance, we need to use the

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purchased quantity of material (25,000 pounds). See the correct answer for a complete explanation.

B. This result is calculated using the standard quantity of materials, 24,000 pounds (3 lb. per unit of finished product and
8,000 units budgeted for the production). However, to calculate the purchase price variance, we need to use the
purchased quantity of material (25,000 pounds). See the correct answer for a complete explanation.

C. The purchase price variance is calculated as follows: (AP − SP) × AQ, where AQ is the actual quantity
purchased. The actual price for the pound of material is $1.55 ($38,750 ÷ 25,000). The standard price is $1.60.
The quantity purchased is 25,000. The direct materials purchase price variance is ($1.55 − $1.60) × 25,000 =
$(1,250) favorable. The variance is favorable because the actual price the materials were purchased for is less
than the standard price.

D. This is the material price variance, not the purchase price variance. To calculate the purchase price variance we need
to use the purchased quantity of material (25,000), not the quantity consumed by production (23,000).

Question 28 - CMA 687 4-18 - Manufacturing Input Variances - Materials and Labor

Baxter Corporation's master budget calls for the production of 5,000 units of product monthly. The master budget
includes indirect labor of $144,000 annually; Baxter considers indirect labor to be a variable cost. During the month of
April, 4,500 units of product were produced, and indirect labor costs of $10,100 were incurred. A performance report
utilizing flexible budgeting would report a budget variance for indirect labor of

A. $1,900 unfavorable.
B. $700 favorable.
C. $700 unfavorable.
D. $1,900 favorable.

A. The variance is favorable as the actual amount of indirect labor is less than the flexible budget amount.

B. Since indirect labor is treated as a variable cost, the unit labor cost is $2.40 ($144,000 ÷ (5,000 × 12)). The
flexible budget amount of variable overhead (indirect labor) therefore equals $10,800 ($2.40 × 4,500). The
flexible budget variance is equal to the actual amount of variable overhead minus the flexible budget amount of
variable overhead. This gives us a favorable variance of $700 ($10,100 − $10,800).

C. The variance is favorable as the actual amount of indirect labor is less than flexible budget amount.

D. This is calculated using the budgeted amount of units of production (5,000) instead of the actual units production
(4,500).

Question 29 - CIA 590 IV-15 - Manufacturing Input Variances - Materials and Labor

A manager prepared the following table by which to analyze labor costs for the month:

Actual Hours at Actual Hours at Standard Hours at

Actual Rate Standard Rate Standard Rate
$10,000 $9,800 $8,820

What variance was $980?

A. Labor efficiency variance.

B. Labor rate variance.

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C. Volume variance.
D. Labor spending variance.

A.

To solve this question, we need to calculate all the suggested variances possible from this set of data. It's
better to start with most simple ones. The labor efficiency variance is: (Actual Hours − Standard Hours for
Actual Output) × Standard Rate, or (Actual Hours × Standard Rate) − (Standard Hours for Actual Output ×
Standard Rate).

The actual hours times the standard rate is $9,800. The standard hours times the standard rate is $8,820. The
difference is $980 unfavorable.

B.

To solve this question, we need to calculate all the suggested variances possible from this set of data. It's better to start
with most simple ones. The labor rate variance is: (Actual Rate − Standard Rate) × Actual Hours or (Actual Rate ×
Actual Hours) − (Standard Rate × Actual Hours).

The actual rate times the actual hours is $10,000. The standard rate times the actual hours is $9,800. The difference is
$200 unfavorable. This is not the result we are looking for.

C. The volume variance is related to the fixed overhead and is the difference between the budgeted amount of fixed
overhead and the amount of fixed overhead applied (standard rate × standard input for the actual level of output). The
volume variance cannot be determined using the given set of data.

D.

There is no such thing as a labor spending variance. Labor variances are either labor efficiency variances or labor rate
variances.

The variable overhead spending variance is related to variable overhead and is the difference between the actual
application rate and the standard application rate multiplied by the actual quantity of the application base (level of
activity). This can also be calculated as the actual variable overhead incurred − (the actual usage of the application base
× the standard variable overhead rate). This cannot be determined using the given set of data.

Question 30 - CMA 692 3-17 - Manufacturing Input Variances - Materials and Labor

An organization that specializes in reviewing and editing technical magazine articles sets the following standards for
evaluating the performance of the professional staff:
Annual budgeted fixed costs for normal capacity level of 10,000 articles reviewed and edited: $600,000
Standard professional hours per 10 articles: 200 hours
Flexible budget of standard labor costs to process 10,000 articles: $10,000,000

The following data apply to the 9,500 articles that were actually reviewed and edited during the current year:
Total hours used by professional staff: 192,000 hours
Flexible costs: $9,120,000
Total cost: 9,738,000

The labor efficiency variance for the year is

A. $500,000 favorable.
B. $238,000 unfavorable.

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C. $380,000 favorable.
D. $100,000 unfavorable.

A.

The labor efficiency variance is calculated as follows: (Actual Hours − Standard Hours for Actual Output) × Standard
Rate. There are two mistakes in this variance calculation.

One, the standard hours for the actual output was used in place of the actual hours. And two, the number of hours in the
fixed budget was used in place of the standard hours for the actual output. See the correct answer for a complete
explanation.

B. This is the difference between the standard labor costs and total actual costs, which does not mean anything.

C. This answer is incorrect. See the correct answer for a complete explanation.

D. The labor efficiency variance is calculated as follows: (Actual Hours − Standard Hours for Actual Output) ×
Standard Rate. Actual hours are given as 192,000. The standard hours for the actual output are 190,000 (20
hours per one article × 9,500 articles that were actually reviewed and edited). The standard rate is $1,000 per
article ($10,000,000 ÷ 10,000) and $50 per labor hour ($1,000 ÷ 20). Putting all of this into the formula, the labor
efficiency variance is (192,000 − 190,000) × $50 = $100,000 unfavorable.

Question 31 - CMA 696 3-23 - Manufacturing Input Variances - Materials and Labor

Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of manufacturing
one unit of Zeb is as follows:

Materials - 60 pounds at $1.50 per pound $ 90

Labor - 3 hours at $12 per hour 36
Factory overhead - 3 hours at $8 per hour 24
Total standard cost per unit $150

The budgeted variable factory overhead rate is $3 per labor hour, and the budgeted fixed factory overhead is $27,000
per month. During May, Ardmore produced 1,650 units of Zeb compared with a normal capacity of 1,800 units. The
actual cost per unit was as follows:

Materials (purchased and used) - 58 pounds at $1.65 per pound $ 95.70

Labor - 3.1 hours at $12 per hour 37.20
Factory overhead - $39,930 per 1,650 units 24.20
Total actual cost per unit $157.10

The materials price variance for May is

A. $14,850 favorable.
B. $14,850 unfavorable.
C. $14,355 favorable.
D. $14,355 unfavorable.

A. The variance is unfavorable as the actual price per pound of material was greater than the standard price. In addition,
this answer is incorrect because the standard quantity was used in the variance formula instead of the actual quantity.
See the correct answer for a complete explanation.

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B. The price variance is calculated as follows: (Actual Price − Standard Price) × Actual Quantity. This incorrect answer
results from using the standard quantity instead of the actual quantity. See the correct answer for a complete explanation.

C. The variance is unfavorable, as the actual price per pound of material was greater than the standard price. See the
correct answer for a complete explanation.

D. The price variance is calculated as follows: (Actual Price − Standard Price) × Actual Quantity. The actual price
was $1.65 per pound and the standard price was $1.50 per pound. The actual quantity used was 95,700 pounds
(1,650 units produced × 58 pounds per unit). Putting these numbers into the formula, we get ($1.65 − $1.50) ×
95,700 = $14,355 unfavorable.

Question 32 - CMA 695 3-10 - Introduction to Variance Analysis and Standard Costs

A standard costing system is most often used by a firm in conjunction with

A. Participative management programs.

B. Management by objectives.
C. Flexible budgets.
D. Target (hurdle) rates of return.

A. Participative management lies in the area of communications and does not relate to standard costs.

B. MBO can be used in conjunction with a standard costing system, but they are not necessarily related. The primary
focus of MBO is goal congruence; it is a behavioral, communication-oriented, responsibility approach system.

C. A standard cost is an estimate of the cost the company expects to incur in the production process. Without a
standard cost, the analysis of actual activities and results is very difficult because there is no standard to
measure the performance against. Standard costs are best used with a flexible budgeting system in order to
provide the most useful variance analysis.

D. The target (hurdle) rate of return is a capital budgeting function. It is not concerned with standard costs.

Question 33 - CIA 595 III-24 - Introduction to Variance Analysis and Standard Costs

Which of the following management practices involves concentrating on areas that deserve attention and placing less
attention on areas operating as expected?

A. Responsibility accounting.
B. Management by objectives.
C. Management by exception.
D. Benchmarking.

A. Responsibility accounting is an accounting system that measures accounting results of each responsibility center
separately; it also measures consolidated results.

B. The primary area of concentration in MBO is goal congruence; it is behavioral, communication-oriented, and a
responsibility approach system.

C. Management by exception means that management focuses on areas where there are problems, as identified
by the fact that there is a variance from the standard. In order for a company to use management by exception,
standards must be set and there must be a system whereby variances are identified and reported to the
appropriate level of the company.

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D. Benchmarking is the process of a company using the standards set by other companies as a target or model for its
own operations. This is also called best practices. It is the process of continuously trying to emulate (imitate) the best
companies in the world.

Question 34 - CMA 693 3-16 - Variance Analysis Concepts

In analyzing company operations, the controller of the Jason Corporation found a $250,000 favorable flexible-budget
revenue variance. The variance was calculated by comparing the actual results with the flexible budget. This variance
can be wholly explained by

A. The total static budget variance.

B. Changes in unit selling prices.
C. The total flexible budget variance.
D. The total sales volume variance.

A. This answer is incorrect. See the correct answer for a complete explanation.

B. The simple formula to calculate revenue is Revenue = Quantity × Price. Variances in revenue come from
either variances in quantity of product sold or variances in selling price. Since the actual results are being
compared with the flexible budget, there will be no difference between the numbers of actual sales volume and
budgeted sales volume. The difference between the actual revenue and the flexible budget revenue can be
caused only by a difference between the actual and budgeted selling prices.

C. This answer is incorrect. See the correct answer for a complete explanation.

D. The sales volume variance measures the impact of difference between actual and budgeted sales volume. Since the
actual results are being compared with the flexible budget, there will be no difference between numbers of actual sales
volume and budgeted sales volume. The total sales volume variance is zero.

Question 35 - CMA 692 3-19 - Manufacturing Input Variances - Materials and Labor

Jackson Industries employs a standard cost system in which direct materials inventory is carried at standard cost.
Jackson has established the following standards for the prime costs of one unit of product.

Standard Standard Standard

Quantity Price Cost
Direct materials 5 pounds $3.60/pound $18.00
Direct labor 1.25 hours $12.00/hour 15.00
$33.00

During May, Jackson purchased 125,000 pounds of direct materials at a total cost of $475,000. The total factory wages
for May were $364,000, 90% of which were for direct labor. Jackson manufactured 22,000 units of product during May
using 108,000 pounds of direct materials and 28,000 direct labor hours.

The direct materials usage (quantity) variance for May is

A. $7,200 favorable.
B. $7,600 favorable.
C. $7,200 unfavorable.

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D. $5,850 unfavorable.

A. The material usage variance is calculated as: (Actual Quantity − Standard Quantity for Actual Output) ×
Standard Price. The actual quantity is 108,000 pounds. The standard quantity allowed for the actual output is
110,000 pounds (5 pounds of direct materials per unit of product times 22,000 units produced). The standard
price is $3.60 per pound. The material usage variance is (108,000 − 110,000) × $3,60 = $(7,200) favorable. The
variance is favorable because the actual quantity used is less than the standard quantity for the actual output,
and this is a cost variance.

B. The material usage variance is calculated as: (Actual Quantity − Standard Quantity for Actual Output) × Standard
Price. This answer results from using the actual price paid for the materials during the period, not the standard price.

C. Since the actual quantity used is less than the standard quantity budgeted for the current level of production, the
variance is favorable. See the correct answer for a complete explanation.

D. Since the actual quantity used is less than the standard quantity budgeted for the current level of production, the
variance is favorable. See the correct answer for a complete explanation.

(c) HOCK international, page 24