C.1. Cost and Variance Measures

Question 1

What is the purpose of variance analysis?

Answer 1

To show management where the differences are between actual and budgeted amounts so they can focus their investigation on areas that need attention.

Question 2

What is management by exception?

Answer 2

A system whereby only significant variances are brought to the attention of management.

Question 3

What are the benefits of management by exception?

Answer 3

• Management can focus on problem areas.
• Favorable variances might be beneficial for other departments.
• Future performance forecasts may be improved.

Question 4

What are the limitations of management by exception?

Answer 4

• Negative trends may be overlooked in the early stages.
• Too many deviations from the budget can create problems because of managers trying to fix all the problems at once.
• Favorable variances may be overlooked causing management to miss an opportunity to implement positive changes throughout the company.

Question 5

What are standard costs?

Answer 5

The estimated manufacturing costs for direct materials, direct labor, and manufacturing overhead as they would occur under budget conditions.

Question 6

What is the difference between a standard cost and a standard cost system?

Answer 6

• A standard cost prescribes expected performance in terms of an expected cost.
• A standard cost system is an accounting system that uses standard costs and standard cost variances in the formal accounting and reporting system.

Question 7

What are the reasons for adopting a standard cost system?

Answer 7

• It is simpler to allocate costs.
• It simplifies recordkeeping.

Question 8

What is a flexible budget?

Answer 8

It is prepared using standard or budgeted costs per unit and the actual level of activity (units sold or produced, as appropriate).

Question 9

What are cost drivers?

Answer 9

Activities that cause costs that are undertaken to create products or services.

Question 10

What is the practical level of output used when setting standard costs and allocating production costs to units produced?

Answer 10

The theoretical level reduced by normal downtime, absences, and a normal learning curve for employees, attainable but difficult to achieve, to motivate workers while requiring them to work diligently.

Question 11

What is the purpose of reviewing standard costs regularly?

Answer 11

To ensure standard costs remain reasonable as prices, material requirements, or production processes change.

Question 12

What capacity level is required by the FASB for allocating fixed production overhead costs to production?

Answer 12

The FASB’s Accounting Standards Codification® calls for fixed production overheads to be allocated based on normal capacity. Normal capacity utilization is the level of activity that will satisfy average customer demand over a long-term period (such as 2 to 3 years).

Question 13

How is activity analysis used as a source for determining standard costs?

Answer 13

• It involves identifying and evaluating all activities necessary to complete a job.
• It involves personnel from various areas.

Question 14

What are the benefits of using historical data to set standards?

Answer 14

• It is a less costly way of developing standards
• It is based on the way the company has operated in the past

Question 15

What are the limitations of using historical data to set standards?

Answer 15

• Basing a standard on the past can perpetuate past inefficiencies.
• The use of historical standards is not consistent with a philosophy of continuous improvement.

Question 16

What is variance analysis?

Answer 16

The process of comparing actual financial results for a period with the budgeted amounts for the period and calculating the differences, then investigating the variances.

Question 17

What is target costing?

Answer 17

It focuses on the market price a product can be sold for and determining the target cost required to achieve the desired profit margin.

Management then needs to figure out how to produce the product at that cost because if the standards that are set are unachievable, the resulting variances will be unacceptably high.

Question 18

What is the difference between static and flexible budget variances?

Answer 18

Static budget variances compare actual results to a fixed (static) budget, while flexible budget variances compare actual results to a flexible budget in which budgeted variable revenues and costs are adjusted to the revenue or cost that would be anticipated for the actual level of activity that has occurred.

Question 19

What is the purpose of flexible budget variances?

Answer 19

Flexible budget variances indicate how much of the static budget variances were caused by factors other than the difference between the actual volume and the static budget volume.

Flexible budgets provide a more accurate comparison of actual to budgeted performance because the budget is adjusted for changes in activity levels.

Question 20

How are fixed costs treated in a flexible budget?

Answer 20

Exactly the same as they are in the static budget as long as the budgeted activity level remains within the relevant range.

The relevant range is the range of activity over which fixed costs remain the same.

Question 21

Why are flexible budget variances considered better indicators of operating performance than static budget variances?

Answer 21

They compare actual results to the budgeted results adjusted for the actual volume.

Flexible budget variances provide more useful information for management decision-making because they indicate how much of the static budget variance was caused by factors other than the difference between the actual results and the static budget amounts..

Question 22

What are Level 1 variances?

Answer 22

Static budget variances.

Level 1 variances compare actual results with the static (master) budget, focusing on revenue and cost of sales for units actually compared with revenue and cost of sales in the static budget.

Question 23

What is a limitation of using static budget variances for performance measurement?

Answer 23

• They do not segregate variances caused by differences in volume from those caused by other factors.
• Static budget variances focus on short-term performance and may not reflect long-term success.
• Managers should be evaluated on performance measures other than whether they have met short-term financial targets

Question 24

What is a favorable variance?

Answer 24

A variance that causes actual net operating income to be higher than the budgeted amount.

Favorable variances occur when actual revenues are higher than budgeted or actual costs are lower than budgeted.

Question 25

In general, a variance is calculated by subtracting which amount from which amount?

Answer 25

The **budgeted** amount from the **actual** amount. ## Footnote The **sign** of the variance and whether the item is a revenue or income item, or a cost or expense item determines whether it is favorable or unfavorable. For a revenue or income item, a positive variance is favorable and a negative variance is unfavorable. For a cost or expense item, a negative variance is favorable and a positive variance is unfavorable.

Question 26

What variances are reported in a **Level 2** variance report?

Answer 26

**Flexible** budget variances and **sales volume** variances, in addition to **static budget** variances. ## Footnote The flexible budget and sales volume variances provide some detail about the static budget variances.

Question 27

What do the flexible budget variances on a sales variance report indicate?

Answer 27

How much of the static budget variances were caused by factors **other than** the difference between the actual sales volume and the static budget sales volume.

Question 28

What does the sales volume variance on a Level 2 variance report represent?

Answer 28

How much of the static budget variance was caused by actual sales volume differing from budgeted sales volume.

Question 29

What are Level 3 variances?

Answer 29

Manufacturing input variances and sales quantity and sales mix variances (sub-variances of the sales volume variance for a multiple-product company) are Level 3 variances. ## Footnote These variances provide the most detailed information for management to analyze.

Question 30

What are the two **main types** of manufacturing input variances?

Answer 30

* Price or rate variances * Quantity or efficiency variances

Question 31

What do manufacturing input **price/rate** variances represent?

Answer 31

The portion of the total input variance (DM or DL) that was caused by a difference between the actual price/unit or rate/hour of inputs actually used and the budgeted, or standard, price/unit or rate/hour of inputs actually used.

Question 32

What do manufacturing input **quantity/efficiency** variances represent?

Answer 32

The portion of the total input variance (DM or DL) that was caused by a difference between the actual quantity of the inputs actually used, at the standard price/unit or rate/hour and the standard quantity allowed for the actual output, at the standard price/unit or rate/hour.

Question 33

What is the formula for calculating the **price/rate variance** for manufacturing inputs (DM or DL)?

Answer 33

(AP – SP) × AQ ## Footnote Where: * AP = Actual price per unit of direct materials used or rate per hour of direct labor used * SP = Standard price per unit of direct materials used or rate per hour of direct labor used * AQ = Actual Quantity of direct materials used or hours of direct labor used

Question 34

What is the formula for calculating the **efficiency (quantity) variance** for manufacturing inputs (DM or DL)?

Answer 34

**(AQ – SQ) × SP** ## Footnote Where: * AQ = Actual Quantity (units of direct materials or hours of direct labor) used for the actual production * SQ = Standard Quantity (units of direct materials or hours of direct labor) *allowed* for the actual production * SP = Standard Price per unit of direct materials or rate per hour of direct labor

Question 35

In manufacturing input variances, what are the two components of the total direct materials variance?

Answer 35

* Price variance * Quantity variance ## Footnote The total direct materials variance is the sum of the price variance and the quantity variance.

Question 36

What is the purpose of variance analysis of manufacturing costs?

Answer 36

To investigate the reasons for differences between actual and budgeted costs and usage, enabling management to focus on variances in areas causing the most impact on the business.

Question 37

What are potential causes of an unfavorable direct materials quantity variance?

Answer 37

* Low quality materials * Poor machinery maintenance * Poor product design * Abnormal spoilage * Theft * Inadequate training * Scheduling issues ## Footnote These factors can lead to higher than expected material usage, contributing to an unfavorable variance.

Question 38

What is a favorable direct materials quantity variance?

Answer 38

A variance where the actual material usage (Actual Quantity-AQ) is **less than** the budgeted, or standard, usage (Standard Quantity-SQ) allowed for the actual production, resulting in lower costs than expected for the actual production.

Question 39

What is the difference between income statement variances and production variances?

Answer 39

Income statement variances are between actual and budgeted revenues and expenses for units **sold**, whereas production variances are between actual and budgeted costs for units **produced**.

Question 40

In manufacturing input variances, what is the flexible budget variance (total input variance) for direct materials?

Answer 40

The difference between the actual direct materials costs incurred for the period and the flexible budget amount. The flexible budget amount for direct materials is the standard price per unit × the standard quantity of materials *allowed for the actual output*,

Question 41

What is the direct materials price variance?

Answer 41

The difference between the cost of the actual quantity (number of units) of direct materials used during the period at the **actual** price per unit and what the cost of the actual quantity of direct materials used during the period would have been at the **standard** price per unit.

Question 42

How should a positive materials price variance be interpreted?

Answer 42

If it was calculated by putting the actual amount before the standard amount, it is an *unfavorable variance* because it indicates the actual price per unit was higher than the standard price per unit, leading to higher actual costs than expected.

Question 43

What is the formula for calculating the direct materials price variance?

Answer 43

**(AP – SP) × AQ** ## Footnote Where: * AP = Actual Price per unit of direct materials used * SP = Standard Price per unit of direct materials used * AQ = Actual Quantity (units) of direct materials used

Question 44

How should the materials **purchase** price variance be calculated?

Answer 44

**(AP – SP) × AQ** The formula is the same as the formula for the price variance, but it is based on the price and quantity of materials **purchased** during the period, not the materials **used**. ## Footnote Where: * AP = Actual Price per unit of direct materials **purchased** during the period * SP = Standard Price per unit of direct materials **purchased** during the period * AQ = Actual Quantity of direct materials **purchased** during the period

Question 45

What is the main advantage of calculating materials price variances based on the time of purchase?

Answer 45

Better control ## Footnote Recognizing variances in materials when purchased allows for quicker corrective action than would be possible if they were not recognized until the materials were used in production.

Question 46

# True or False: The materials price variance is always calculated using the price and quantity of materials purchased.

Answer 46

False ## Footnote The materials price variance is calculated using the prices and quantity of materials used. Only the materials **purchase** price variance uses the prices and quantity of materials purchased.

Question 47

What are potential causes of an unfavorable direct materials price variance?

Answer 47

* Unavoidable increases in market prices. * Poor purchasing decisions due to inexperienced purchasing employees.

Question 48

What are potential causes of a favorable direct materials price variance?

Answer 48

* Decreases in market prices * Better purchasing research

Question 49

In manufacturing input variances, what does the total variance for either direct materials or direct labor consist of?

Answer 49

The sum of the efficiency (quantity) variance and the price variance.

Question 50

What is the direct labor rate variance?

Answer 50

The difference between the cost of the actual number of direct labor hours used during the period at the **actual** hourly wage rate and the cost of the actual number of direct labor hours used during the period at the **standard** hourly wage rate.

Question 51

What are potential causes of an unfavorable direct labor rate variance?

Answer 51

* Renegotiated union contract * Inaccurate labor rate projections * Use of a single average standard wage rate that does not reflect the proportion of hours worked by each wage rate group of workers * Higher-skilled employees who were paid higher wage rates than what was anticipated

Question 52

What is the direct labor efficiency variance?

Answer 52

The difference between the cost of the **actual** quantity of direct labor hours **used** during the period if those hours had been paid at the standard hourly wage rate and the cost of the **standard** quantity of direct labor hours **allowed** for the actual level of output during the period if paid at the standard direct labor hourly wage rate.

Question 53

What are potential causes of an unfavorable direct labor efficiency variance?

Answer 53

* Inexperienced or inadequately trained employees * Poor material quality * Substitution of a non-standard component for a standard one * More equipment breakdowns than usual

Question 54

When multiple direct material or direct labor inputs are used in manufacturing—such as more than one type of direct material or more than one class of labor—what are the two sub-variances used to break down the direct material or direct labor quantity variance?

Answer 54

* Mix variance - caused by the actual mix used having differed from the standard mix * Yield variance - caused by the total actual amount of all inputs used having differed from the total standard amount

Question 55

How is the total variance of a weighted mix of manufacturing inputs--either materials or labor--calculated?

Answer 55

Actual total cost incurred minus Standard total quantity of the materials or labor **allowed** for the actual output at the standard rates or prices.

Question 56

What is the formula used to calculate the price/rate variance of a weighted mix of manufacturing inputs, either materials or labor?

Answer 56

**∑[(AP – SP] × AQ)** ## Footnote Where: * AP = Actual Price per unit of direct materials used or actual rate per hour of direct labor used * SP = Standard Price per unit of direct materials used or standard rate per hour of direct labor used * AQ = Actual Quantity of direct materials (units) or of direct labor (hours) used

Question 57

What is the formula for calculating the total materials quantity or labor efficiency variance of a weighted mix of manufacturing inputs, either materials or labor?

Answer 57

**∑([AQ – SQ] × SP)** ## Footnote Where: * AQ = Actual Quantity of direct materials (units) or of direct labor (hours) used for the actual production * SQ = Standard Quantity (units) of direct materials or standard number of hours of direct labor *allowed* for the actual production * SP = Standard Price per unit of direct materials or standard rate per hour of direct labor

Question 58

When there are multiple manufacturing inputs for either materials or labor, what does the mix variance indicate?

Answer 58

The portion of the quantity variance caused by the actual mix of materials or labor used having differed from the standard mix.

Question 59

When there are multiple materials inputs or multiple labor classes in manufacturing, how is the weighted average standard price of the actual mix (waspAM)—which is used in calculating the Mix Variance—calculated?

Answer 59

The actual quantity used for each input is multiplied by the input's standard price/unit, the products are summed, and the sum is divided by the total actual quantity of all the inputs used. **waspAM = ∑(AQ × SP) ÷ Total AQ** ## Footnote Where: * AQ = Actual Quantities of each input used * SP = Standard Prices of each input used * Total AQ = Total Actual Quantity of all inputs used

Question 60

What is the purpose of calculating the weighted average standard price of the standard mix (waspSM) when there are multiple manufacturing inputs, either for materials or labor?

Answer 60

To determine how much one standard unit of the mix should have cost, based on the standard mix allowed for the actual output. waspSM is used in calculating both the mix variance and the yield variance. ## Footnote This calculation can be done at the beginning of the period and remains constant regardless of the actual volumes used.

Question 61

What is the formula for calculating the Mix Variance for materials or labor when there are multiple manufacturing inputs?

Answer 61

**(waspAM – waspSM) × AQ** ## Footnote Where: * waspAM = Weighted Average Standard Price of the *Actual* Mix * waspSM = Weighted Average Standard Price of the *Standard* Mix * AQ = Actual total quantity used of all material or labor inputs

Question 62

What causes a favorable Mix Variance for materials or labor when there are multiple manufacturing inputs?

Answer 62

It occurs when the actual mix of inputs is **less costly** than the standard mix. ## Footnote This can happen if the proportion of less expensive inputs is higher in the actual mix compared to their proportion in the standard mix.

Question 63

When there are multiple manufacturing inputs for either materials or labor, what does the **yield variance** indicate?

Answer 63

The yield variance results from a difference between the total actual quantity of the inputs that were used to produce the actual output and the total standard quantity of inputs that should have been used to produce the actual output.

Question 64

What is the formula for calculating the Yield Variance for materials or labor when there are multiple manufacturing inputs?

Answer 64

**(AQ – SQ) × waspSM** ## Footnote Where: * AQ = Actual total quantity of *all* inputs used * SQ = Standard total quantity of *all* inputs allowed for the actual output * waspSM = Weighted Average Standard Price of the Standard Mix of all inputs allowed for the actual output

Question 65

When there are multiple manufacturing inputs, what does an **unfavorable Yield Variance** indicate?

Answer 65

That more inputs were used in total than the standard allowed for the actual output. ## Footnote This suggests inefficiency in the use of materials or labor.

Question 66

When there are multiple manufacturing inputs, how is the weighted average standard price of the standard mix (waspSM)—which is used in calculating both the mix and the yield variances— calculated for either materials or labor?

Answer 66

The standard quantity of each input allowed for the actual output is multiplied by the input's standard price per unit, the results are summed, and the sum is divided by the total quantity of all inputs allowed for the actual output. **waspSM = ∑(SQ × SP) ÷ Total SQ** ## Footnote Where: * SQ = Standard Quantities allowed of each input * SP = Standard Prices of each input * Total SQ = Total Standard Quantity of all inputs allowed for the actual output

Question 67

When there are multiple manufacturing inputs, what is the relationship among the Mix Variance, the Yield Variance, and the Quantity Variance for either direct materials or direct labor?

Answer 67

Mix Variance + Yield Variance = Quantity Variance ## Footnote The total materials quantity variance is broken down between the mix variance and the yield variance.

Question 68

# True or False: When there are multiple manufacturing inputs for either materials or labor, the actual prices or rates are used in calculating the Mix and Yield Variances.

Answer 68

False ## Footnote When there are multiple manufacturing inputs for either materials or labor, the actual prices or rates are not used in calculating the Mix and Yield Variances. * Mix Variance = (waspAM – waspSM) × AQ * Yield Variance = (AQ – SQ) × waspSM The Mix and Yield Variances are sub-variances of the Quantity Variance of a weighted mix.

Question 69

In manufacturing input variances, what is the **Total Direct Materials Variance**?

Answer 69

The difference between the actual direct materials cost incurred and the standard cost allowed for the actual output (the standard price per unit of direct materials × the standard quantity of materials allowed for the actual output). ## Footnote The Total Direct Materials Variance is broken down into the Price Variance and the Quantity Variance.

Question 70

What are **overhead costs**?

Answer 70

**Production** and **operation** costs that a company cannot trace to any specific product or unit of a product. ## Footnote Overhead costs for production are necessary for the production process and must be allocated to products to determine full production costs.

Question 71

Why is absorption costing required for external financial reporting?

Answer 71

1. Absorption costing is required for external financial reporting under GAAP, 2. Absorption costing is necessary because all overhead costs associated with manufacturing a product are included as part of the product’s cost and can be used for determining the selling price, so that the company does not sell the product at a loss.

Question 72

What are the two types of factory overhead costs?

Answer 72

* Variable overheads * Fixed overheads ## Footnote Variable overheads change with production levels, while fixed overheads do not change with production level changes, as long as production remains within the relevant range.

Question 73

In the context of allocating overhead costs, what is a **cost allocation base**?

Answer 73

A measure of activity used to assign costs to cost objects. ## Footnote Common bases include direct labor hours and machine hours.

Question 74

In manufacturing overhead variances, what is the total (fixed and variable) overhead variance?

Answer 74

The total overhead variance is the difference between actual total overhead incurred and total overhead applied to production. ## Footnote It is the same as the amount of over- or under-applied total factory overhead.

Question 75

What are the four individual factory overhead variances?

Answer 75

* Variable overhead spending variance * Variable overhead efficiency variance * Fixed overhead spending variance * Fixed overhead production-volume variance

Question 76

In manufacturing overhead variances, what is the total variable overhead variance?

Answer 76

The difference between the actual variable overhead incurred and the variable overhead applied to production. ## Footnote The total variable overhead variance is also called the variable overhead flexible budget variance.

Question 77

What causes a **positive variable overhead variance** in calculating manufacturing overhead variances?

Answer 77

The variable overhead variance is the difference between variable overhead incurred and variable overhead applied to production. Costs applied are the predetermined (standard) costs allowed for the actual output. A positive variable overhead variance is unfavorable and is caused by actual variable overhead costs that were greater than variable overhead costs applied. ## Footnote Because variable overhead is a cost, a positive variance is unfavorable because it means actual costs were greater than the cost allowed for the actual output.

Question 78

In manufacturing overhead variances, what is the variable overhead **spending variance**?

Answer 78

The difference between the actual amount of variable overhead incurred and the standard amount of variable overhead allowed for the actual quantity of the VOH allocation base used for the actual quantity produced.

Question 79

In manufacturing overhead variances, what is the variable overhead efficiency variance?

Answer 79

The variable overhead efficiency variance is the portion of the total variable overhead variance that was caused by a different usage of the allocation base than was expected. **Variable OH efficiency variance = (Predetermined VOH rate × actual quantity of VOH application base used) − Variable OH applied to production**

Question 80

When direct labor is used as the variable overhead allocation base in calculating manufacturing overhead variances, what is the relationship between the variable overhead efficiency variance and the direct labor efficiency variance?

Answer 80

The variable overhead efficiency variance will be **unfavorable** when the direct labor efficiency variance is unfavorable and favorable when the direct labor efficiency variance is favorable.

Question 81

In manufacturing overhead variances, what does a positive total fixed overhead variance indicate?

Answer 81

A positive total fixed overhead variance is an unfavorable variance because it means actual fixed overhead costs were greater than the fixed cost applied to production, and the fixed cost applied to production is the amount of fixed cost allowed for the actual output. **Total fixed overhead variance = actual fixed overhead incurred − fixed overhead applied** Fixed overhead applied is the predetermined FOH application rate × the standard quantity of the fixed OH allocation base allowed for the actual output.

Question 82

In manufacturing overhead variances, what are the **two sub-variances** of the total fixed overhead variance?

Answer 82

* Fixed overhead spending variance * Fixed overhead production-volume variance

Question 83

When calculating manufacturing overhead variances, how is the Fixed Overhead Production-Volume Variance calculated?

Answer 83

**Fixed OH Production-volume Variance = Budgeted fixed overheads − FOH Applied** ## Footnote Fixed Overhead Applied = Predetermined FOH application rate × standard quantity of FOH allocation base allowed for actual output

Question 84

What causes a favorable fixed overhead production-volume variance when calculating manufacturing overhead variances?

Answer 84

A favorable FOH production-volume variance occurs when production is higher than planned due to such things as increased customer demand causing production to be increased. It is favorable because greater use is being made of the facilities than was planned. ## Footnote FOH production-volume variance = Budgeted fixed overhead − FOH applied to production. FOH applied is the predetermined FOH allocation rate × the standard quantity of the FOH allocation base allowed for the actual output.

Question 85

In manufacturing overhead variances, what is the fixed overhead spending variance?

Answer 85

The difference between the actual fixed overhead costs incurred and the budgeted fixed overhead amount. ## Footnote A positive variance is unfavorable, indicating higher actual costs than budgeted, while a negative variance is favorable, indicating lower actual costs than budgeted.

Question 86

When calculating manufacturing overhead variances, how is the total overhead flexible budget variance calculated?

Answer 86

**Total Overhead Flexible Budget Variance = Total overhead incurred − Total variable and fixed overhead applied to production using predetermined rates.** The Total Overhead Flexible Budget variance is also the sum of the variable overhead spending, variable overhead efficiency, and fixed overhead spending variances. ## Footnote It does not include the fixed overhead production-volume variance because that variance is not a comparison between actual and budgeted costs as the other three sub-variances are.

Question 87

Why is there no fixed overhead efficiency variance among the manufacturing overhead variances?

Answer 87

Fixed costs do not relate to levels of output and therefore cannot be used either efficiently or inefficiently.

Question 88

Which overhead variances are included in the total overhead flexible budget variance when calculating manufacturing overhead variances?

Answer 88

The total overhead flexible budget variance includes: 1. the variable overhead spending variance, 2. the variable overhead efficiency variance, and 3. the fixed overhead spending (flexible budget) variance. The fixed overhead production-volume variance is **omitted**. ## Footnote The fixed overhead production-volume variance is not included because it does not compare actual and budgeted costs.

Question 89

In manufacturing overhead variances, what are the three variances included in a **three-way analysis of overhead**?

Answer 89

1. Volume variance - the fixed overhead production-volume variance 2. Efficiency variance - the variable overhead efficiency variance 3. Spending variance - the variable overhead spending variance + the fixed overhead spending variance

Question 90

In manufacturing overhead variances, what are the two variances in a **two-way analysis of overhead**?

Answer 90

1. Volume variance - the fixed overhead production-volume variance 2. Controllable (or budget) variance - the sum of the three remaining OH variances: the VOH spending variance, the VOH efficiency variance, and the FOH spending variance

Question 91

When calculating manufacturing overhead variances, what is the formula for calculating the variable overhead efficiency variance?

Answer 91

(Predetermined VOH rate x actual quantity of VOH application base used) − Variable OH applied to production (Predetermined VOH appl. rate × std. qty. of VOH application base allowed for actual output) OR **(AQ − SQ) × SP** ## Footnote Where: * AQ = Actual quantity of VOH allocation base used * SQ = Standard quantity of VOH allocation base allowed for actual output * SP = Predetermined VOH allocation rate

Question 92

When calculating manufacturing overhead variances, what is the formula for calculating the fixed overhead spending variance?

Answer 92

**Fixed Overhead Spending Variance = Actual Fixed Overhead Incurred − Budgeted Fixed Overhead**

Question 93

What causes sales variances?

Answer 93

Differences between actual and budgeted: * Sales price charged * Volume of sales * Variable cost per unit * Mix of products sold ## Footnote Sales variances are based on an income statement prepared under variable costing.

Question 94

When calculating sales variances, what is the selling price variance?

Answer 94

The selling price variance, also called the sales price variance, is the flexible budget variance for the revenue line on a Level 2 sales variance report.

Question 95

How is the flexible budget variance for a single-product company's revenue, that is, the selling price variance, calculated?

Answer 95

**Actual Results − Flexible Budget Amount** Or **(AP – SP) × AQ** ## Footnote Where: * AP = actual average revenue (selling price) per unit sold * SP = static budget average revenue (selling price) per unit budgeted to be sold * AQ = actual number of units sold

Question 96

On a sales variance report, what is the **difference** between the way the static budget variances are calculated and the way the flexible budget variances are calculated?

Answer 96

* The **static budget** variances are the actual amounts minus the static budget amounts * The **flexible budget** variances are the actual amounts minus the flexible budget amounts.

Question 97

How are the flexible budget variance amounts calculated for every line on a sales variance report?

Answer 97

Actual results minus flexible budget amounts

Question 98

How are the sales volume variances calculated for every line on a sales variance report?

Answer 98

Flexible budget amounts minus the static budget amounts. Or Static budget *variances* minus the flexible budget *variances*. ## Footnote Note that the flexible budget **amounts** come first, but the static budget **variances** come first.

Question 99

What do sales volume variances on a sales variance report measure?

Answer 99

The impact on the static budget variances of the differences between the actual and the static budget sales volumes.

Question 100

On a sales variance report, what are flexible budget variances and what do they indicate?

Answer 100

The difference between the actual results and the flexible budget amounts. They indicate how much of each static budget variance was caused by factors **other than** the difference between the actual sales volume and the static budget sales volume.

Question 101

When a company sells a single product, how is the flexible budget variance for revenue, variable cost, or the contribution margin line calculated?

Answer 101

(AP – SP) × AQ ## Footnote Where: * AP = Actual average revenue, variable cost, or contribution margin per unit sold * SP = Static budget average revenue, variable cost, or contribution margin per unit budgeted to be sold * AQ = Actual number of units sold

Question 102

For a cost item, what does a positive variance number indicate?

Answer 102

When the variance is calculated by subtracting the budget amount from the actual amount, a positive variance is unfavorable because it means the actual cost was greater than the budgeted cost.

Question 103

What is the sales volume variance for revenue on a sales variance report if the flexible budget amount is $2,400,000 and the static budget amount is $2,880,000?

Answer 103

$2,400,000 − 2,880,000 = $(480,000) Unfavorable. ## Footnote The variance is negative and unfavorable because the actual sales revenue was lower than the static budget sales revenue.

Question 104

What is the static budget variance for revenue on a sales variance report if the actual results are $2,500,000 and the static budget is $2,880,000?

Answer 104

$2,500,000 − $2,880,000 = $(380,000) Unfavorable. ## Footnote The variance is unfavorable because the actual revenue was lower than the static budget revenue.

Question 105

What is the sales volume variance for the contribution margin line on a sales variance report if the static budget variance is $(168,200) Unfavorable and the flexible budget variance is $(40,200) Unfavorable?

Answer 105

Static budget variance − flexible budget variance = Sales volume variance $(168,200) − $(40,200) = $(128,000) Unfavorable. ## Footnote The variance is negative and unfavorable because the variance is for the contribution margin, and the actual sales volume was lower than the static budget sales volume.

Question 106

What is the difference between a sales variance report for a single-product company and one for a multiple-product company?

Answer 106

A multiple-product company’s sales volume variance is subdivided into a sales mix variance and a sales quantity variance, whereas a single-product company's is not. ## Footnote This subdivision is necessary for a multiple-product company because each product may have different sales prices and variable costs.

Question 107

What is the **flexible budget variance for revenue** also known as?

Answer 107

Selling price (or sales price) variance.

Question 108

How is the flexible budget variance for revenue calculated for a multiple-product company?

Answer 108

Flexible budget variance for revenue = ∑([AP – SP] × AQ) ## Footnote Where: * AP = Actual selling price per unit of each product sold * SP = Static budget selling price per unit of each product budgeted to be sold * AQ = Actual number of units sold of each product

Question 109

What does a favorable selling price variance indicate?

Answer 109

* The company received more revenue per unit sold than expected. * The selling price was higher than planned.

Question 110

What are the sales volume variances for a multiple-product company?

Answer 110

The differences between the flexible budget amounts and the static budget amounts.

Question 111

What does the sales mix variance measure for a multiple-product company?

Answer 111

The sales mix variance represents the portion of the sales volume variance that occurred because the actual mix of products sold was different from the mix in the static budget.

Question 112

What are **waspAM** and **waspSM** used for in sales variances?

Answer 112

Calculating the sales mix variance and the sales quantity variance for a multiple-product company.

Question 113

# True or False: The flexible budget variance for revenue is related to sales volume.

Answer 113

False ## Footnote The flexible budget variance for revenue is strictly the portion of the total static budget variance for revenue that occurred because the sales price(s) received for the units sold were different from the static budget sales prices.

Question 114

For a multiple-product company, what is the impact on revenue of selling more of a higher-priced product than planned?

Answer 114

Total actual revenue will be greater than planned. ## Footnote Conversely, selling more of a lower-revenue product than planned will result in total actual revenue that is lower than planned.

Question 115

What are the **components** of the sales volume variance for a multiple-product company?

Answer 115

* Sales mix variance * Sales quantity variance ## Footnote The sales volume variance is the sum of the sales mix variance and the sales quantity variance.

Question 116

How is the sales volume variance calculated for a multiple-product company?

Answer 116

∑([AQ – SQ] × SP) ## Footnote Where: * AQ = Actual quantity sold of each product * SQ = Static budget quantity budgeted to be sold of each product * SP = Static budget average revenue/selling price, variable cost, or contribution margin per unit budgeted to be sold of each product

Question 117

When calculating sales variances, how is the selling price variance related to the flexible budget variance?

Answer 117

The selling price variance **is** the flexible budget variance for revenue.

Question 118

# True or False: For a cost, a negative variance is favorable when the variance is calculated by subtracting the budgeted amount from the actual amount.

Answer 118

True ## Footnote When the cost variance is calculated by subtracting the budgeted amount from the actual amount, a negative variance is favorable because it means actual cost was lower than budgeted cost. . This interpretation is opposite to how negative and positive variances are interpreted for revenue and income items.

Question 119

What is the formula for calculating the flexible budget variance for the contribution margin for a multiple-product company?

Answer 119

∑([AP – SP] × AQ) ## Footnote Where: * AP = Actual contribution margin per unit of each product sold * SP = Static budget contribution margin per unit of each product sold * AQ = Actual number of units sold of each product

Question 120

What does a favorable flexible budget variance for a company's contribution margin indicate?

Answer 120

The company's actual contribution margin was greater than its flexible budget contribution margin. ## Footnote For a revenue or income item, a positive variance is a favorable variance when the budgeted amount is subtracted from the actual amount.

Question 121

How is the sales quantity sub-variance to the sales volume variance calculated for a multiple-product company?

Answer 121

**(AQ − SQ) × waspSM** ## Footnote Where: * AQ = Total actual quantity of all units sold * SQ = Total static budget quantity of all units budgeted to be sold * waspSM = Weighted average static budget price, variable cost, or contribution margin per unit for the static budget mix of units budgeted to be sold

Question 122

What is the formula for the sales mix sub-variance to the sales volume variance for a multiple-product company?

Answer 122

**(waspAM – waspSM) × AQ** ## Footnote Where: * waspAM = Weighted average static budget price, variable cost, or contribution margin per unit for the actual mix of products sold * waspSM = Weighted average static budget price, variable cost, or contribution margin per unit for the static budget mix of products budgeted to be sold * AQ = Total actual quantity of all units sold

Question 123

How is the weighted average static budget price, variable cost, or contribution margin per unit for the static budget mix of units budgeted to be sold (waspSM), which is used in calculating the Sales Quantity and the Sales Mix Variances, calculated?

Answer 123

**∑(SQ × SP) ÷ Total SQ** ## Footnote Where: * SQ = Static Budget Quantities of each product budgeted to be sold * SP = Static Budget Prices of each product budgeted to be sold * Total SQ = Total Static Budget Quantity of all products budgeted to be sold

Question 124

How is the weighted average static budget price, variable cost, or contribution margin per unit for the actual mix of products (waspAM) sold, which is used in calculating the Sales Mix Variance, calculated?

Answer 124

**∑(AQ × SP) ÷ Total AQ** ## Footnote Where: * AQ = Actual Quantities of each product sold * SP = Static Budget Prices of each product sold * Total AQ = Total Actual Quantity of all products sold

Question 125

For a multiple-product company, how can its sales quantity variance (a subvariance of its sales volume variance) for the contribution margin be broken down to discover the cause of the variance in terms of market forces?

Answer 125

The sales quantity variance for the contribution margin can be broken down into the: * Market size variance, to discover whether the market was bigger or smaller than expected; and * Market share variance, to discover whether its share of the market was bigger or smaller than expected.

Question 126

What is the formula for the market size variance for a multiple-product company?

Answer 126

[(Actual Market Size in Units − Expected Market Size in Units) × Expected Market Share %] × Weighted Average Static Budget Contribution Margin per Unit for the Static Budget Mix (waspSM) ## Footnote The same formula can be used for a single-product company by using the static budget contribution margin per unit instead of a weighted average.

Question 127

What is the formula for the market share variance for a multiple-product company?

Answer 127

[(Actual Market Share % − Expected Market Share %) × Actual Market Size in Units] × Weighted Average Static Budget Contribution Margin per Unit for the Static Budget Mix (waspSM) ## Footnote The same formula can be used for a single-product company by using the static budget contribution margin per unit instead of a weighted average.

Question 128

# True or False: A service company should segregate its sales revenue and expenses from its service revenue and expenses for variance analysis.

Answer 128

True ## Footnote Segregating these allows for separate analysis of variances for sales and services.

Question 129

What can fixed overhead variance reporting detect in a service company?

Answer 129

Impending financial trouble due to revenue decrease. ## Footnote This enables the company to make changes in its fixed cost structure to respond to decreased sales.