Control and Performance Evaluation

PART 3C
CONTROL AND PERFORMANCE

EVALUATION
291 Questions
[5] Source: CIA 1184 III-12

Which of the following observations concerning quality
control is more accurate?
A. Process quality control is used when examining the
quality of goods or services which already exist.
[1] Source: CMA 0691 3-21

The four categories of cost associated with product quality
costs are
A. External failure, internal failure, prevention, and
carrying.
B. External failure, internal failure, prevention, and
appraisal.
C. Warranty, product liability, training, and appraisal.
D. Warranty, product liability, prevention, and
appraisal.
[2] Source: CMA 0691 3-23
The cost of scrap, rework, and tooling changes in a
product quality cost system are categorized as a(n)
A. External failure cost.
B. Internal failure cost.
B. Process quality control is used to prevent defects,

whereas product quality control is used primarily to
identify defects after the fact.
C. Product quality control is designed to balance the
marketability of higher quality against the cost of
attaining higher quality.
D. Product quality control is more important than
process quality control.
Which statement best describes Total Quality Management
(TQM)?
A. TQM emphasizes reducing the cost of inspection.
B. TQM emphasizes participation by all employees in
the decision-making process.
C. TQM emphasizes encouraging cross-functional
teamwork.
C. Training cost.
D. Prevention cost.
[3] Source: CMA 1292 3-27
Charter Stores is opening a department store in a new
suburban mall and plans to hire many new sales clerks. The
average sales per clerk at Charter's other stores is $32,000
per month, and the company is investigating ways to
increase this average at the new store. Currently, Charter
pays a beginning sales clerk $1,500 per month with a 10%
increase after 6 months if sales equal or exceed the
average. Which one of the following compensation plans is
most likely to encourage new sales clerks to increase their
average monthly sales to $35,000 or greater?
A. $1,500 per month with a 15% increase after 6
months if sales equal or exceed the average.
B. A 6.5% commission on all sales with no base
salary.
D. TQM emphasizes doing each job right the first

time.
Preventive internal control is afforded when small tools and
equipment are
A. Secured in a small-tool-and-equipment crib area.
B. Requisitioned by the user personnel.
C. Recorded individually on receiving reports.
D. Used by one department at a time.
Which of the following is not implied by the definition of
control?
A. Uncovering of deviations from plans.
C. $1,200 per month plus a 3% commission on all

sales.
D. $1,750 per month with a 10% increase after 6
months if sales equal or exceed the average.
B. Assignment of responsibility for deviations.

C. Indication of the need for corrective action.
D. Help prevent loss.

Which of the following statements best describes the
relationship between planning and controlling?
A. Planning looks to the future; controlling is
concerned with the past.

The use of financial statement analysis, quality control
procedures, and employee performance evaluations are all
examples of
A. Concurrent controls.
B. Planning and controlling are completely

independent of each other.
C. Planning prevents problems; controlling is initiated
by problems which have occurred.
B. Feedback controls.
C. Feedforward controls.
D. Preventive controls.
D. Controlling cannot operate effectively without the

tools provided by planning.

Of the following, the type of controls that are often difficult
to audit because of the lack of criteria or standards are
A. Preventive controls.
entry supervisor.
C. All employees receive a bonus of 2% of their
annual salary if reworked production is reduced at
least 5% company-wide from the previous calendar
year.
B. Financial controls.
C. Corrective controls.
D. Operating controls.
In a diamond-cutting operation, the most cost-effective
controls would be
A. Preventive control (establishing specific standards
for raw materials).
B. Corrective control (replacing or repairing defective
items prior to shipment).
C. Detective control (increasing the level of
inspection).
D. Records of returned merchandise will be recorded

by each store manager on a form. This form cites the
reason for the return, the dollar amount of the sale,
the type of merchandise returned, the date of
purchase, and the condition of returned merchandise.
One copy of this form is sent to the regional and
home offices each month.
Because of vulnerability to fraud, the trust department of a
bank required that an officer other than the trust officer
verify income distribution orders and sign disbursement
checks. Which type of control is typified by such
segregation of duties?
A. Input.
B. Auditing.
D. Feedback control (monitoring final results and

reporting deviations).
C. Operating.
D. Output.

Certain types of control are better suited to specific levels
in the organization. A company has a weekly control report
that details material wastage. This type of control is best
suited to which organizational level?
A. Top management.
B. Middle management.

A new auditor is being briefed on various types of audits by
the audit supervisor. The supervisor states that some areas
within the organization are more difficult to audit because
the controls ordinarily are not as clearly defined as in other
departments. Select the type of control that is usually most
difficult to assess.
C. First-line management.
A. Operational.
D. Non-managerial employees.
B. Accounting.
C. Physical security.

Budgetary control sets a numerical standard of results to be
achieved within an organization. Budgetary control is
classified as
A. An operating control.
B. A process control.
C. An adaptive control.
D. Input.
A company is experiencing a high level of customer returns
for a particular product because it does not meet the rigid
dimensions required. Each return is reworked on a milling
machine and sent back through all of the subsequent
finishing steps. This is a costly process. Identify the best
method for reducing the quality failure costs.
D. A feedforward control.
A. Customer surveys.
Which of the following situations contains the three basic
elements of control?
A. Plant managers must set annual goals for reducing
scrap loss. They issue monthly scrap loss reports to
the vice president of manufacturing, who monitors
losses and follows up to ensure that each plant
manager is taking appropriate action to meet his/her
goals. Plant managers receive a bonus if they reduce
losses below the established goal.
B. Data entry operators must key data at the rate of
five documents per minute after they have completed
training. The input rate of each operator is
automatically monitored by the computer system.
Operators who fall below the standard may be
retrained or terminated at the discretion of the data
B. Increased finished goods inspections.

C. Defect prevention.
D. Increased work-in-process inspections.
What is the ultimate objective of managerial control?
A. To forestall management fraud.
B. To protect assets.
C. To promote organizational effectiveness.
D. To implement plans.

Managerial control can be divided into feedforward and
feedback controls. Which of the following is an example of
a feedback control?
A. Quality control training.

To be successful, large companies must develop means to
keep the organization focused in the proper direction.
Organizational control systems help keep companies
focused. These control systems consist of which three basic
components?
B. Forecasting inventory needs.

C. Variance analysis.
A. Budgeting, financial ratio analysis, and cash

management.
D. Restricting access to computer data by assigning

passwords.
B. Objectives, standards, and an evaluation-reward

system.
C. Role analysis, team building, and survey feedback.

Feedforward controls are very important to management
because they
A. Suggest corrective actions needed when
deviations occur.
B. Assist management in anticipating problems.
C. Are the most economical form of control.
D. Allow management to evaluate production as it
progresses.
D. Setting goals, empowering employees, and job

enrichment.
A production line worker randomly selects 10 items,
measures their length, computes the sample average, then
plots the result on a control chart that includes upper and
lower control limits. This activity is performed hourly
throughout the day for a report prepared at the end of the
month. A flaw in this control process is
A. The sample size is too small.

When a large rush order for one of a company's products
has been made, the purchasing and production managers
are immediately notified of the sale and its terms. What
type of control is exhibited in this scenario?
B. There is no control standard.

C. There is no provision for timely corrective action.
D. The worker should not be the one to make the
measurements.
A. Feedback.
B. Strategic.
C. Quality.
D. Feedforward.

The standards used by shoe manufacturers to determine
size categories are best classified as
A. External standards.
B. Engineered standards.

The operations manager of a company notified the
treasurer of that organization 60 days in advance that a
new, expensive piece of machinery was going to be
purchased. This notification allowed the treasurer to make
an orderly liquidation of some of the company's investment
portfolio on favorable terms. What type of control was
involved?
C. Productivity standards.
D. Efficiency standards.
Which one of the following is the best objective
performance criterion for an electrical engineer?
A. Feedback.
A. Exhibition of creative talents on company projects.
B. Strategic.
B. Project completion within budget constraints.
C. Budgetary.
D. Feedforward.
C. Ability to work well with fellow engineers on

projects.
D. All answers are correct.

As part of a Total Quality Control program, a firm not only
inspects finished goods but also monitors product returns
and customer complaints. Which type of control best
describes these efforts?
A. Feedback control.

Performance appraisal systems might use any of three
different approaches: (1) who did the job, (2) how the job
was done, or (3) what was accomplished. Which approach
is used by a system that places the focus on how the job
was done?
B. Feedforward control.
A. Behavior-oriented.
C. Production control.
B. Goal-oriented.
D. Inventory control.
C. Trait-oriented.
B. Days' sales in accounts receivable.
D. Employee-oriented.
C. Inventory turnover.
Identify the management technique in which employees
assist in setting goals, making decisions, solving problems,
and designing and implementing organizational changes.
A. Total quality control.
D. Residual income.
[35] Source: CMA 1292 3-25
Performance reports should be formatted and designed to
meet organizational needs. In this regard, performance
reports normally include all of the following except
B. Job enlargement.
A. A relationship to the organizational structure.
C. Kanban.
B. Exceptional items that are controllable.
D. Participative management.
C. Specific time horizons.
[30] Source: CMA 0694 3-17
An example of an internal failure cost is
A. Maintenance.
B. Inspection.
C. Rework.
D. Product recalls.
[31] Source: CMA 1295 3-13
product quality cost system are categorized as a(n)
A. External failure cost.
B. Internal failure cost.
D. Strategic plans.
[36] Source: CMA 1292 3-28
Maplewood Industries wants its division managers to
concentrate on improving profitability. The performance
evaluation measures that are most likely to encourage this
behavior are
A. Dividends per share, return on equity, and times
interest earned.
B. Turnover of operating assets, gross profit margin,
and return on equity.
C. Return on operating assets, the current ratio, and
the debt-to-equity ratio.
D. Turnover of operating assets, dividends per share,
and times interest earned.
C. Prevention cost.
D. Appraisal cost.
[32] Source: CIA 0592 IV-11
Costs that can be definitely influenced by a given manager
within a given time span are best defined as
A. Controllable costs.
B. Period costs.
[37] Source: CMA 1292 3-29

Star Manufacturing wants its treasurer to focus on
improving the company's liquidity position. The
performance evaluation measures that are most likely to
encourage this behavior are
A. Accounts receivable turnover, return on assets,
and the current ratio.
B. Times interest earned, return on assets, and
inventory turnover.
C. Variable costs.
D. Committed costs.
[33] Source: CMA 0692 3-22
Segmented income statements are most meaningful to
managers when they are prepared
A. On an absorption cost basis.
B. On a cost behavior basis.
C. Inventory turnover in days, the current ratio, and

return on equity.
D. Accounts receivable turnover, inventory turnover
in days, and the current ratio.
[38] Source: CMA 0693 3-13
Product-quality-related costs are part of a total quality
control program. A product-quality-related cost incurred in
detecting individual products that do not conform to
specifications is an example of a(n)
C. On a cash basis.
A. Prevention cost.
D. In a single-step format.
B. Appraisal cost.
[34] Source: CMA 0692 3-24
Micro Manufacturers uses a performance reporting system
that combines both financial and nonfinancial measures to
evaluate division performance. All of the following measure
operational efficiency except
A. Operating leverage.
C. External failure cost.

D. Opportunity cost.
[Fact Pattern #1]
Wolk Corporation is a highly automated manufacturing
firm. The vice president of finance has decided that

traditional standards are inappropriate for performance
measures in an automated environment. Labor is
insignificant in terms of the total cost of production and
tends to be fixed, material quality is considered more
important than minimizing material cost, and customer
satisfaction is the number one priority. As a result, delivery
performance measures have been chosen to evaluate
performance. The following information is considered
typical of the time involved to complete orders:
Wait time:
- From order being placed to
start of production
10.0 days
- From start of production to
completion
5.0 days
Inspection time
1.5 days
Process time
3.0 days
Move time
2.5 days
[39] Source: CMA 0693 3-17
(Refers to Fact Pattern #1)
What is the manufacturing cycle efficiency for this order?
A. 25.0%.
B. 13.6%.
C. 37.5%.
D. 69.2%.
[40] Source: CMA 0693 3-18
What is the delivery cycle time for this order?
A. 7 days.
B. 12 days.
C. 15 days.
D. 22 days.
[41] Source: CMA 0693 3-21
Which one of the following organizational policies is most
likely to result in undesirable managerial behavior?
A. Patel Chemicals sponsors television coverage of
cricket matches between national teams representing
India and Pakistan. The expenses of such media
sponsorship are not allocated to its various divisions.
B. Joe Walk, the chief executive officer of Eagle
Rock Brewery, wrote a memorandum to his
executives stating, "Operating plans are contracts and
they should be met without fail."
C. The budgeting process at Madsen Manufacturing
starts with operating managers providing goals for
their respective departments.
D. Fullbright Lighting holds quarterly meetings of
departmental managers to consider possible changes
in the budgeted targets due to changing conditions.
[42] Source: CMA 0693 3-28
Which one of the following will not occur in an organization
that gives managers throughout the organization maximum
freedom to make decisions?
A. Cause individual managers to regard the managers
of other segments as they do external parties.
B. Encourage more effective solutions to operational

problems.
C. Eliminate having two divisions of the organization
with competing models.
D. Reduce the delays in securing approval for the
introduction of new products.
[43] Source: CMA 0693 3-30
Which one of the following statements pertaining to
performance measurement and behavior is incorrect?
A. The use of residual income to measure divisional
performance can cause goal congruence problems for
corporations with divisions that have unequal
operating asset bases.
B. The lack of commitment on the part of top
management can turn budgets into ritualistic exercises
without significance.
C. An organization using measures such as growth in
market share, increases in productivity, and
throughput time, in addition to various financial ratios,
is relying on a more balanced approach to
performance evaluation.
D. The development of information technology in the
1990s can permit organizations to do away with
feedback in the design of management control
systems.
[44] Source: CMA 0694 3-16
In year 2, a manufacturing company instituted a total quality
management (TQM) program producing the following
report:
Summary Cost of Quality Report
(in thousands)
Year 1 Year 2 % Change
------ ------ -------Prevention costs
$ 200 $ 300
+50
Appraisal costs
210
315
+50
Internal failure costs 190
114
-40
External failure costs 1,200 $ 621
-48
------ ------ -------Total quality costs $1,800 $1,350
-25
====== ======
On the basis of this report, which one of the following
statements is most likely correct?
A. An increase in conformance costs resulted in a
higher quality product and therefore resulted in a
decrease in non-conformance costs.
B. An increase in inspection costs was solely
responsible for the decrease in quality costs.
C. Quality costs such as scrap and rework decreased
by 48%.
D. Quality costs such as returns and repairs under
warranty decreased by 40%.
[45] Source: CMA 1295 3-12
The four categories of costs associated with product quality
costs are
A. External failure, internal failure, prevention, and
carrying.
B. External failure, internal failure, prevention, and
appraisal.
Yes
Yes
Yes
No
No
Yes
No
No
B.
C. External failure, internal failure, training, and
appraisal.
C.
D. Warranty, product liability, training, and appraisal.
D.
[46] Source: CMA 0696 3-5
The process of developing plans for a company's expected
operations and controlling the operations to help carry out
those plans is
A. Preparing a period budget.
[51] Source: Publisher

Which of the following statements regarding effective
control systems is false?
B. Preparing a master budget.

A. Excessive controls are costly in time and money.
C. Budgetary control.
B. Outdated information is inappropriate.
D. Participative budgeting.
C. Controls should measure the performance of all
areas.
[47] Source: CMA 1296 3-22
product quality cost system is categorized as a(n)
A. Training cost.
D. Controls should be simple.

Is PERT analysis a control tool or a planning tool?
B. External failure cost.

C. Internal failure cost.
Planning Control
-------- ------A.
D. Prevention cost.
The steps in a typical control process include
B.
1. Selecting strategic control points at which to

gather information about activities being performed
2. Accumulating, classifying, and recording data samples
3. Observing the work or collecting samples of data
4. Determining whether performance is satisfactory
5. Reviewing and revising standards
6. Reporting significant deviations to managers
concerned
What is the correct order of these steps?
C.
A. 1, 3, 2, 4, 6, 5.
B. 1, 2, 3, 4, 5, 6.
Yes
No
Yes
Yes
No
Yes
No
No
D.

Benefits of employee participation in the design of control
systems include all of the following except
A. Development of a perception by those being
evaluated that the process is fair.
C. 1, 3, 4, 2, 6, 5.
D. 1, 3, 4, 2, 5, 6.
Which of the following is an example of a feedback
control?
B. Communication to everyone involved of the need

for control.
C. Enhanced acceptance of the need for control
standards.
D. Easier implementation of the standards being used
in other divisions.
A. Preventive maintenance.
B. Inspection of completed goods.
C. Close supervision of production-line workers.
D. Measuring performance against a standard.

Budgets are a necessary component of financial decision
making because they help provide a(n)
A. Efficient allocation of resources.
B. Means to use all the firm's resources.

Control devices may be
Quantitative Qualitative
------------ ----------A.
C. Automatic corrective mechanism for errors.

D. Means to check managerial discretion.
Which of the following is the principal advantage of

budgeting?
A. Employee motivation.
B. Performance evaluation.
C. Forced planning.
D. Communication.
A bank has changed from a system in which lines are
formed in front of each teller to a one-line, multiple-server
system. When a teller is free, the person at the head of the
line goes to that teller. Implementing the new system will
A. Decrease the bank's wage expenses because the
new system uses fewer tellers.
D. Constraints.
[60] Source: CMA 0697 3-28
Listed below are selected line items from the Cost of
Quality Report for Watson Products for last month.
Category
Amount
-------------------------Rework
$ 725
Equipment maintenance
1,154
Product testing
786
Product repair
695
What is Watson's total prevention and appraisal cost for
last month?
A. $786
B. $1,154
C. $1,940
B. Decrease time customers spend in the line.

D. $2,665
C. Increase accuracy in teller reconciliations at the
end of the day because fewer customers are served
by each teller.
D. Improve on-the-job training for bank employees
because each teller will perform different duties.
[61] Source: CMA 0697 3-27

All of the following would generally be included in a
cost-of-quality report except
A. Warranty claims.

Which of the following is the best example of why an
employee would resist modifying his/her performance for a
control system?
B. Design engineering.
C. Supplier evaluations.
D. Lost contribution margin.
A. The control system highlights the things that the

employee does well.
B. The employee believes that the control system sets
the standard of performance too high.
[62] Source: CMA 1295 3-14

The cost of statistical quality control in a product quality
cost system is categorized as a(n)
C. People tend to avoid pleasant situations.
A. Internal failure cost.
D. The control system establishes a standard of

performance that the employee considers relevant to
what (s)he regards as their primary job objective.
B. Training cost.
C. External failure cost.
D. Appraisal cost.

Which of the following statements regarding human
reactions to feedback is false?
A. Feedback should motivate employees to improve
their performance.
[63] Source: CMA 0693 4-28

When evaluating projects, breakeven time is best described
as
A. Annual fixed costs monthly contribution margin.
B. The timing and content of feedback should be

considered.
B. Project investment annual net cash inflows.
C. The nature of feedback should be to intimidate,

rather than to offend employees.
C. The point at which cumulative cash inflows on a

project equal total cash outflows.
D. Human reactions to feedback should be

considered in designing control systems.
D. The point at which discounted cumulative cash

inflows on a project equal discounted total cash
outflows.
[59] Source: CMA 1288 5-4

Variables that are important to the decision-making
process but are out of the control of the decision maker,
e.g., economic conditions, are considered to be
A. Exogenous variables.

ISO 9000 standards for ring networks include fault
management, configuration management, accounting
management, security management, and performance
monitoring. Which of the following controls is included in
the performance-monitoring standards?
B. Decision variables.
A. Reporting the failure of network fiber-optic lines.
C. Performance criteria.
B. Recording unauthorized access violations.
C. Compiling statistics on the number of times that

application software is used.
B. Prevention costs.
C. Internal failure costs.
D. Allocating network costs to system users of the

network.
An example of an internal nonfinancial benchmark is
A. The labor rate of comparably skilled employees at
a major competitor's plant.
D. External failure costs.

A traditional quality control process in manufacturing
consists of mass inspection of goods only at the end of a
production process. A major deficiency of the traditional
control process is that
B. The average actual cost per pound of a specific

product at the company's most efficient plant
becoming the benchmark for the company's other
plants.
A. It is expensive to do the inspections at the end of

the process.
C. The company setting a benchmark of $50,000 for

employee training programs at each of the company's
plants.
C. It is not 100% effective.
D. The percentage of customer orders delivered on

time at the company's most efficient plant becoming
the benchmark for the company's other plants.
Which of the following statements regarding benchmarking
is false?
A. Benchmarking involves continuously evaluating the
practices of best-in-class organization and adapting
company processes to incorporate the best of these
practices.
B. It is not possible to rework defective items.
D. It does not focus on improving the entire

production process.
Management of a company is attempting to build a
reputation as a world-class manufacturer of quality
products. Which of the following measures would not be
used by the firm to measure quality?
A. The percentage of shipments returned by
customers because of poor quality.
B. The number of parts shipped per day.
C. The number of defective parts per million.
B. Benchmarking, in practice, usually involves a

company forming benchmarking teams.
C. Benchmarking is an ongoing process that entails
quantitative and qualitative measurement of the
difference between the company's performance of an
activity and the performance by the best in the world
or the best in the industry.
D. The benchmarking organization against which a
firm is comparing itself must be a direct competitor.
[Fact Pattern #2]
The management and employees of a large household
goods moving company decided to adopt total quality
management (TQM) and continuous improvement (CI).
They believed that, if their company became nationally
known as adhering to TQM and CI, one result would be
an increase in the company's profits and market share.
The primary reason for adopting TQM was to achieve
D. The percentage of products passing quality tests

the first time.
Quality cost indices are often used to measure and analyze
the cost of maintaining a given level of quality. One example
of a quality cost index, which uses a direct labor base, is
computed as
Total quality costs
Quality cost index = ------------------- x 100
Direct labor costs
The following quality cost data were collected for May and
June:
May
June
------- -------Prevention costs
$4,000 $5,000
Appraisal costs
$6,000 $5,000
Internal failure costs
$12,000 $15,000
External failure costs
$14,000 $11,000
Direct labor costs
$90,000 $100,000
Based upon these cost data, the quality cost index
A. Greater customer satisfaction.

A. Decreased 4 points from May to June.
B. Reduced delivery time.
B. Was unchanged from May to June.
C. Reduced delivery charges.
C. Increased 10 points from May to June.
D. Greater employee participation.
D. Decreased 10 points from May to June.
Quality is achieved more economically if the company
focuses on
A. Appraisal costs.

Under a total quality management (TQM) approach
A. Measurement occurs throughout the process, and
errors are caught and corrected at the source.
B. Quality control is performed by highly trained

inspectors at the end of the production process.
C. Upper management assumes the primary
responsibility for the quality of the products and
services.
D. A large number of suppliers are used in order to
obtain the lowest possible prices.
Which of the following is a characteristic of total quality
management (TQM)?
A. Management by objectives.
B. On-the-job training by other workers.
C. Quality by final inspection.
D. Education and self-improvement.
In which of the following organizational structures does
total quality management (TQM) work best?
A. Hierarchal.
B. Teams of people from the same specialty.
C. Teams of people from different specialties.
D. Specialists working individually.
C. Emphasis on existing products.

D. Improved customer satisfaction through product
quality.
[78] Source: CIA 1195 I-66
Monitoring is an important component of internal control.
Which of the following items would not be an example of
monitoring?
A. Management regularly compares divisional
performance with budgets for the division.
B. Data processing management regularly generates
exception reports for unusual transactions or volumes
of transactions and follows up with investigation as to
causes.
C. Data processing management regularly reconciles
batch control totals for items processed with batch
controls for items submitted.
D. Management has asked internal auditing to
perform regular audits of the controls over cash
processing.
Which of the following statements regarding comparison of
performance with standards is false?
A. One of the major advantages of trait-type
performance appraisals is their ability to measure
performance accurately, which makes corrective
action easier.

If a company is customer-centered, its customers are
defined as
B. Any alteration in the production process may

make previously used or company-wide standards
inapplicable to the case at hand.
A. Only people external to the company who have

purchased something from the company.
C. One of the major advantages of management by

objectives is that it closely ties job performance to a
standard that can be used as a guide to corrective
action.
B. Only people internal to the company who directly

use its product.
C. Anyone external to the company and those
internal who rely on its product to get their job done.
D. Everybody external to the company who is
currently doing, or may in the future do, business with
the company.
The most important component of quality control is
D. Participation by affected employees in control

systems permits all concerned to understand both the
performance levels desired and the measurement
criteria being applied.
[Fact Pattern #3]
The PERT network diagram and corresponding activity
cost chart for a manufacturing project at Networks, Inc. is
presented below. The numbers in the diagram are the
expected times (in days) to perform each activity in the
project.
A. Ensuring goods and services conform to the

design specifications.
B. Satisfying upper management.
C. Conforming with ISO-9000 specifications.
D. Determining the appropriate timing of inspections.
Which one of the following is not a characteristic of an
innovative manufacturing company?
A. Emphasis on continuous improvement.
B. Responsiveness to the changing manufacturing
environment.
Activity Normal Cost Crash Time Crash Cost

-------- ----------- ---------- ---------AB
$3,000
3.50 days
$4,000
AC
5,000
4.50
5,250
AD
4,000
4.00
4,750
BE
6,000
5.00
7,000
CE
8,000
5.00
9,200
DE
6,000
6.50
6,750
BC
2,500
.50
3,500
BD
2,000
.25
2,500
[80] Source: CMA 1290 4-7
(Refer to Figure 1.) The expected time of the critical path is
A. 12.0 days.
B. 13.0 days.
C. 11.5 days.
D. 11.0 days.
[81] Source: CMA 1290 4-8
(Refer to Figure 1.) To keep costs at a minimum and
decrease the completion time by 1 days, Networks, Inc.
should crash activity(ies)
Unit price
$15 $18 $20 $25
Variable cost $7 $11 $10 $16
Units Produced per Machine Hour
------------------------------A
B
C
D
--- --- --- --3
4
2
3
The product that is the most profitable for the manufacturer
in this situation is
A. Product A.
B. Product B.
A. AD and AB.
C. Product C.
B. DE.
D. Product D.
C. AD.
D. AB and CE.

(Refer to Figure 2.) The Gantt chart above shows that the
project is
A. Complete.
B. Ahead of schedule.
C. On schedule.
D. Behind schedule.
[83] Source: CMA 1289 4-3
A fixed overhead volume variance based on standard
direct labor hours measures
A. Deviation from standard direct labor hour
capacity.
B. Deviation from the normal, or denominator, level
of direct labor hours.
C. Fixed overhead efficiency.
D. Fixed overhead use.
[84] Source: CMA 1289 4-6
If overhead is applied on the basis of units of output, the
variable overhead efficiency variance will be
[Fact Pattern #4]

Nanjones Company manufactures a line of products
distributed nationally through wholesalers. Presented below
are planned manufacturing data for the year and actual data
for November of the current year. The company applies
overhead based on planned machine hours using a
predetermined annual rate.
Planning Data
--------------------Annual November
---------- --------Fixed manufacturing
overhead
$1,200,000 $100,000
Variable manufacturing
overhead
2,400,000 220,000
Direct labor hours
48,000
4,000
Machine hours
240,000 22,000
Data for
November
------------Direct labor hours (actual)
4,200
Direct labor hours (plan
based on output)
4,000
Machine hours (actual)
21,600
Machine hours (plan
based on output)
21,000
Fixed manufacturing overhead
$101,200
Variable manufacturing overhead
$214,000
[86] Source: CMA 1292 3-15
The predetermined overhead application rate for Nanjones
Company is
A. $5.00.
A. Zero.
B. $25.00.
B. Favorable, if output exceeds the budgeted level.
C. $10.00.
C. Unfavorable, if output is less than the budgeted

level.
D. $15.00.
D. A function of the direct labor efficiency variance.

Data regarding four different products manufactured by an
organization are presented as follows. Direct material and
direct labor are readily available from the respective
resource markets. However, the manufacturer is limited to
a maximum of 3,000 machine hours per month.
[87] Source: CMA 1292 3-16

The total amount of overhead applied to production for
November was
A. $316,200.
B. $315,000.
C. $320,000.
Products
-------------------------A
B
C
D
--- --- --- ---
D. $300,000.
[88] Source: CMA 1292 3-17

The amount of over- or underapplied variable
manufacturing overhead for November was
A. $6,000 overapplied.
B. $4,000 underapplied.
C. $20,000 overapplied.
D. $6,000 underapplied.
[89] Source: CMA 1292 3-18
The variable overhead spending variance for November
was
A. $2,000 favorable.
B. $6,000 favorable.
C. $14,000 unfavorable.
[Fact Pattern #5]

Tiny Tykes Corporation had the following activity relating
to its fixed and variable overhead for the month of July.
Actual costs
Fixed overhead
$120,000
Variable overhead
80,000
Flexible budget
(Standard input allowed for actual output
achieved x the budgeted rate)
Variable overhead
90,000
Applied
(Standard input allowed for actual output
achieved x the budgeted rate)
Fixed overhead
125,000
Variable overhead spending variance
2,000F
Production volume variance
5,000U
[93] Source: CMA 0693 3-19
If the budgeted rate for applying variable manufacturing
overhead was $20 per direct labor hour, how efficient or
inefficient was Tiny Tykes Corporation in terms of using
direct labor hours as an activity base?
D. $6,000 unfavorable.
A. 100 direct labor hours inefficient.
[90] Source: CMA 1292 3-19
The fixed overhead volume variance for November was
A. $1,200 unfavorable.
B. 100 direct labor hours efficient.

C. 400 direct labor hours inefficient.
D. 400 direct labor hours efficient.
B. $5,000 unfavorable.
C. $10,000 favorable.
[94] Source: CMA 0693 3-20

The fixed overhead efficiency variance is
D. $5,000 favorable.
[91] Source: CMA 0693 3-15
The flexible budget for the month of May was for 9,000
units with direct material at $15 per unit. Direct labor was
budgeted at 45 minutes per unit for a total of $81,000.
Actual output for the month was 8,500 units with $127,500
in direct material and $77,775 in direct labor expense. The
direct labor standard of 45 minutes was maintained
throughout the month. Variance analysis of the performance
for the month of May would show a(n)
D. Never a meaningful variance.
[95] Source: CMA 0693 3-26
Which one of the following variances is of least significance
from a behavioral control perspective?
A. Favorable material usage variance of $7,500.

B. Favorable direct labor efficiency variance of
$1,275.
C. Unfavorable direct labor efficiency variance of
$1,275.
A. Unfavorable material quantity variance amounting

to 20% of the quantity allowed for the output
attained.
B. Unfavorable labor efficiency variance amounting to
10% more than the budgeted hours for the output
attained.
D. Unfavorable direct labor price variance of $1,275.

[92] Source: CMA 0693 3-16
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 flexible budget variance.
B. The total sales volume variance.
C. The total static budget variance.
D. Changes in unit selling prices.
C. Favorable labor rate variance resulting from an

inability to hire experienced workers to replace
retiring workers.
D. Fixed overhead volume variance resulting from
management's decision midway through the fiscal
year to reduce its budgeted output by 20%.
[Fact Pattern #6]
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.
[96] Source: CMA 1293 3-22
ChemKing's standard price for one unit of material is
the division?
A. $100 favorable.
A. $2.00.
B. $2.50.
C. $3.00.
D. $5.00.
[97] Source: CMA 1293 3-23
The units of material used to produce November output
totaled
[101] Source: CIA 0593 IV-14

For a single-product company, the sales volume variance is
A. The difference between actual and master budget
sales volume, times actual unit contribution margin.
B. The difference between flexible budget and actual
sales volume, times master budget unit contribution
margin.
A. 12,000 units.
B. 12,500 units.
C. The difference between flexible budget and master

budget sales volume, times actual budget unit
contribution margin.
C. 23,000 units.
D. 25,000 units.
[98] Source: CMA 1293 3-24
The materials price variance for the units used in November
was
D. The difference between flexible budget and master

budget sales volume, times master budget unit

What is the materials yield variance for this operation?
A. $294.50 favorable.
B. $388.50 favorable.
C. $94.50 unfavorable.
D. $219.50 favorable.
[99] Source: CMA 1293 3-25

A manufacturing firm planned to manufacture and sell
100,000 units of product during the year at a variable cost
per unit of $4.00 and a fixed cost per unit of $2.00. The
firm fell short of its goal and only manufactured 80,000
units at a total incurred cost of $515,000. The firm's
manufacturing cost variance was

The sales quantity variance equals
A. Actual units x (budgeted weighted-average UCM
for planned mix - budgeted weighted-average UCM
for actual mix).
[100] Source: CIA 0592 IV-18
The following is a standard cost variance analysis report on
direct labor cost for a division of a manufacturing company.
Actual Hours Actual Hours Standard Hours
at
at
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
B. (Actual units - master budget units) x budgeted

weighted-average UCM for the planned mix.
C. Budgeted market share percentage x (actual
market size in units - budgeted market size in units) x
budgeted weighted-average UCM.
D. (Actual market share percentage-budgeted
market share percentage) x actual market size in units
x budgeted weighted-average UCM.
The sales mix variance equals
for actual mix).
weighted-average UCM for planned mix.
D. (Actual market share percentage - budgeted

If a project required 50 hours to complete at a cost of $10

per hour but should have taken only 45 hours at a cost of
$12 per hour, what is the proper entry to record the costs?
A.

The market size variance equals
for actual mix).
Work-in-process
DL efficiency variance
DL price variance
Accrued payroll
$540
60
Wage expense
Accrued payroll
$440
60
$500
$100
500
B.

C.
Work-in-process
$460
DL price variance
100
$ 60
Accrued payroll
500
D.
Work-in-process
Accrued payroll
$500
$500

The market share variance equals
for actual mix).

Assume price variances are recorded at the time of
purchase. What is the journal entry to record a direct
materials price variance if materials are purchased at $5 per
unit for $650 and their standard price is $4 per unit?
A.
Inventory
$650
Accounts payable
$650
B.

Inventory
$520
DM price variance
130
Accounts payable
$650
C.

Company Z uses a standard cost system that carries
materials at actual price until they are transferred to the
WIP account. In project A, 500 units of X were used at a
cost of $10 per unit. Standards require 450 units to
complete this project. The standard price is established at
$9 per unit. What is the proper journal entry?
Inventory
Work-in-process
Cash
$520
130
$650
D.
Finished goods
DM price variance
Cash
$520
130
$650
A.
Work-in-process
$4,950
DM price variance
500
DM quantity variance
$ 450
Inventory
5,000
B.
Work-in-process
$5,950
DM price variance
$ 500
450
Inventory
5,000
C.

Alpha Company paid janitors $5 per hour to clean the
production area. What is the proper journal entry to
account for this expense for the month of June if 530 hours
were worked by the janitors?
A.
Salaries expense
Payroll
$2,650
$2,650
B.
Work-in-process
DM price variance
Inventory
$4,050
500
450
$5,000
Variable O/H control

$2,650
Variable O/H applied
$2,650
C.
D.
Work-in-process
Inventory
$5,000
$5,000

Payroll payable
$2,650
$2,650

Payroll payable
$2,650
$2,650
D.
C.
production area. It initially set the standard cost of janitorial
work at $4.50 per hour. What is the appropriate entry to
record the application of the 530 hours worked by the
janitors?
Work-in-process
O/H price variance
Fixed O/H applied
D.
$30,000
2,500
$32,500
Fixed O/H applied

$30,000
Production volume variance 2,500
Fixed O/H control
$32,500
A.
Work-in-process
$2,385
$2,385
B.
Work-in-process
$2,385
$2,385
C.
[115] Source: CMA 0694 3-19

Which one of the following is least likely to be involved in
establishing standard costs for evaluation purposes?
A. Budgetary accountants.

Work-in-process
$ 265
2,385
$2,650
Cost of goods sold

$2,385
$2,385
B. Industrial engineers.
C. Top management.
D.
D. Quality control personnel.

production area. It initially set the standard cost of janitorial
work at $4.50 per hour, and 530 hours were worked by
the janitors. What entry accounts for the recognition of the
variance that occurred? Assume that this was the only
variable O/H variance.
A.
[116] Source: CMA 0694 3-21

Under a standard cost system, the materials efficiency
variances are the responsibility of
A. Production and industrial engineering.
B. Purchasing and industrial engineering.
C. Purchasing and sales.
D. Sales and industrial engineering.

Variance summary
$2,650
$ 265
2,385
B.
$2,385
Variable O/H spending
variance
265
$2,650
[117] Source: CMA 0694 3-22

Under a standard cost system, labor price variances are
usually not attributable to
A. Union contracts approved before the budgeting
cycle.
B. Labor rate predictions.
C.
C. The use of a single average standard rate.
$2,385
Variable O/H efficiency
variance
265
$2,650
D. The assignment of different skill levels of workers

than planned.
D.
$2,385
Variable spending variance
265
$2,650
[118] Source: CMA 0694 3-23

A favorable materials price variance coupled with an
unfavorable materials usage variance would most likely
result from
A. Machine efficiency problems.

Omega Company would have applied $32,500 of fixed
factory O/H if capacity usage had equaled the master
budget. Given that amount, 2,000 standard hours (the
normal volume) were allowed for the actual output, that
actual fixed factory O/H equaled the budgeted amount, and
that O/H was applied at a rate of $15 per hour, what is the
entry to close the fixed factory O/H accounts?
B. Product mix production changes.

C. The purchase and use of higher than standard
quality materials.
D. The purchase of lower than standard quality
materials.
A.
Fixed O/H control
$30,000
Production volume variance 2,500
Fixed O/H applied
$32,500
B.
Cost of goods sold
Fixed O/H control
$32,500
$32,500
[119] Source: CMA 1294 3-24

Tower Company planned to produce 3,000 units of its
single product, Titactium, during November. The standard
specifications for one unit of Titactium include 6 pounds of
materials at $.30 per pound. Actual production in
November was 3,100 units of Titactium. 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. More materials were used than were purchased.
C. The actual cost of materials was less than the
standard cost.
D. The actual usage of materials was less than the
standard allowed.
[123] Source: CMA 1294 3-28

The variable overhead efficiency variance for November
was
[120] Source: CMA 1294 3-25

An unfavorable direct labor efficiency variance could be
caused by a(n)
A. Unfavorable variable overhead spending variance.
[124] Source: CMA 1294 3-29
The direct labor price variance for November was
B. Unfavorable materials usage variance.

C. Unfavorable fixed overhead volume variance.
D. Favorable variable overhead spending variance.
[Fact Pattern #8]
Water Control Inc. manufactures water pumps and uses a
standard cost system. The standard factory overhead costs
per water pump are based on direct labor hours and are as
follows:
Variable overhead (4 hours at $8/hour) $32
Fixed overhead (4 hours at $5*/hour) 20
--Total overhead cost per unit
$52
===
* Based on a capacity of 100,000 direct labor hours per
month.
The following additional information is available for the
month of November:
22,000 pumps were produced although 25,000 had been
scheduled for
production.
94,000 direct labor hours were worked at a total cost of
$940,000.
[125] Source: CMA 1294 3-30
The direct labor efficiency variance for November was
[126] Source: CMA 0695 3-10
A standard costing system is most often used by a firm in
conjunction with
The standard direct labor rate is $9 per hour.

The standard direct labor time per unit is four hours.
Variable overhead costs were $740,000.
Fixed overhead costs were $540,000.
[121] Source: CMA 1294 3-26

The fixed overhead spending variance for November was
B. Target (hurdle) rates of return.

C. Participative management programs.
D. Flexible budgets.
[Fact Pattern #9]
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
-----[122] Source: CMA 1294 3-27
The variable overhead spending variance for November
was
Purchases ($18,000)
Consumed in manufacturing
Radios manufactured
12,000
10,000
3,000
[127] Source: CMA 0695 3-23

During May, Blaster Inc. incurred a purchase price
variance of
A. $450 unfavorable.
B. $450 favorable.
C. $500 favorable.
D. $600 unfavorable.
[128] Source: CMA 0695 3-24
During May, Blaster Inc. incurred a materials efficiency
variance of
[133] Source: CMA 1295 3-4

Variable overhead is applied on the basis of standard direct
labor hours. If, for a given period, the direct labor
efficiency variance is unfavorable, the variable overhead
efficiency variance will be
A. Favorable.
B. Unfavorable.
C. Zero.
D. The same amount as the labor efficiency variance.
[129] Source: CMA 0695 3-25
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
[134] Source: CMA 1295 3-7

The variance in an absorption costing system that measures
the departure from the denominator level of activity that
was used to set the fixed overhead rate is the
A. Spending variance.
B. Efficiency variance.
A. Performance of the workers using the material.

C. Production volume variance.
B. Actions of the purchasing department.
D. Flexible budget variance.
C. Design of the product.

D. Sales volume of the product.
[130] Source: CMA 0695 3-29
For a company that produces more than one product, the
sales volume variance can be divided into which two of the
following additional variances?
[135] Source: CMA 1295 3-8

The efficiency variance for either labor or materials can be
divided into
A. Spending variance and yield variance.
B. Yield variance and price variance.
C. Volume variance and mix variance.
A. Sales price variance and flexible budget variance.

D. Yield variance and mix variance.
B. Sales mix variance and sales price variance.
C. Sales quantity variance and sales mix variance.
[136] Source: CMA 1295 3-11
D. Sales mix variance and production volume

variance.
In a standard cost system, the investigation of an

unfavorable material usage variance should begin with the
A. Production manager only.
[131] Source: CMA 0695 3-30

The production volume variance is due to
B. Plant controller only.
A. Inefficient or efficient use of direct labor hours.
C. Purchasing manager only.
B. Efficient or inefficient use of variable overhead.
D. Production manager or the purchasing manager.
C. Difference from the planned level of the base used

for overhead allocation and the actual level achieved.
D. Excessive application of direct labor hours over
the standard amounts for the output level actually
achieved.
[137] Source: CMA 1295 3-25

Which one of the following variances is most controllable
by the production control supervisor?
A. Material price variance.
B. Material usage variance.
[132] Source: CMA 1295 3-3

The variance that arises solely because the quantity actually
sold differs from the quantity budgeted to be sold is
C. Variable overhead spending variance.

D. Fixed overhead budget variance.
A. Static budget variance.

B. Master budget increment.
C. Sales mix variance.
D. Sales volume variance.
[138] Source: CMA 1289 4-2

An unfavorable direct labor efficiency variance could be
caused by a(n)
A. Unfavorable variable overhead spending variance.
B. Favorable variable overhead spending variance.
C. Unfavorable material usage variance.
D. Favorable fixed overhead volume variance.

[Fact Pattern #10]
An organization that specializes in reviewing and editing
technical magazine articles. It set the following standards
for evaluating the performance of the professional staff:
[144] Source: CMA 0692 3-20

The direct labor price (rate) variance for May is
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
[139] Source: CMA 0692 3-15
Using a flexible budget, the total cost planned for the
review and editing of 9,500 articles should be
A. $9,500,000.
[145] Source: CMA 0692 3-21
The direct labor usage (efficiency) variance for May is
[146] Source: CMA 1279 4-10
The fixed overhead volume variance is the
B. $10,070,000.
C. $10,100,000.
D. $10,570,000.
[140] Source: CMA 0692 3-16
The fixed cost spending variance for the year is
A. Measure of the lost profits from the lack of sales

volume.
B. Amount of the underapplied or overapplied fixed
overhead costs.
C. Potential cost reduction that can be achieved from
better cost control.
D. Measure of production inefficiency.
[141] Source: CMA 0692 3-17
The labor efficiency variance for the year is
[147] Source: CMA 1279 4-11

The best basis upon which cost standards should be set to
measure controllable production inefficiencies is
A. Engineering standards based on ideal
performance.
B. Normal capacity.
C. Recent average historical performance.
D. Engineering standards based on attainable
performance.
[143] Source: CMA 0692 3-19

The direct materials usage (quantity) variance for May is
[148] Source: CMA 0684 4-26

Each unit of Product XK-46 requires three direct labor
hours. Employee benefit costs are treated as direct labor
costs. Data on direct labor are
Number of direct employees
25
Weekly productive hours per employee
35
Estimated weekly wages per employee
$245
Employee benefits (related to weekly wages) 25%
The standard direct labor cost per unit of Product XK-46
is
A. $21.00.
B. $26.25.
C. $29.40.
D. $36.75.
[149] Source: CMA 0687 4-16
The following information is available for the Mitchelville
Products Company for the month of July.
Master Budget
Actual
------------- ------Units
4,000
3,800
Sales revenue
$60,000
$53,200
Variable manufacturing
costs
16,000
19,000
Fixed manufacturing costs 15,000
16,000
Variable selling and
administrative expense
8,000
7,600
Fixed selling and
administrative expense
9,000
10,000
The contribution margin volume variance for the month of
July would be
C. $200 favorable.
[150] Source: CMA 1287 4-30
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
B. The purchase and use of higher than standard

quality material.
C. The purchase and use of lower than standard
quality material.
D. Labor mix problems.
[153] Source: CMA 1289 4-5
Which one of the following variances is most controllable
by the production control supervisor?
A. Material price variance.
B. Material usage variance.
C. Variable overhead spending variance.
D. Fixed overhead budget variance.
[Fact Pattern #12]
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
Actual direct labor hours
Actual variable overhead
Actual fixed overhead
198,000
440,000
$352,000
$575,000
[154] Source: CMA 1290 3-5

The standard hours allowed for actual production for the
year ended November 30 total
A. 247,500.
A. More materials were purchased than were used.

B. 396,000.
B. More materials were used than were purchased.
C. 400,000.
C. The actual cost of materials was less than the
standard cost.
D. The actual usage of materials was less than the
standard allowed.
[151] Source: CMA 1289 4-1
Variable overhead is applied on the basis of standard direct
labor hours. If, for a given period, the direct labor
efficiency variance is unfavorable, the variable overhead
efficiency variance will be
D. 495,000.
[155] Source: CMA 1290 3-6
Franklin's variable overhead efficiency variance for the year
is
A. Favorable.
B. Unfavorable.
C. The same amount as the labor efficiency variance.

D. Indeterminable because it is not related to the
labor efficiency variance.
[152] Source: CMA 1289 4-4
A favorable material price variance coupled with an
unfavorable material usage variance would most likely
result from
[156] Source: CMA 1290 3-7

Franklin's variable overhead spending variance for the year
is
A. Labor efficiency problems.
[157] Source: CMA 1290 3-8
Franklin's fixed overhead spending variance for the year is
[161] Source: CMA 1291 3-2

The direct materials usage (quantity) variance for
November is
[158] Source: CMA 1290 3-9
The fixed overhead applied to Franklin's production for the
year is
[162] Source: CMA 1291 3-3

The direct labor price (rate) variance for November is
A. $484,200.
B. $575,000.
C. $594,000.
D. $600,000.
[163] Source: CMA 1291 3-4
[159] Source: CMA 1290 3-10
Franklin's fixed overhead volume variance for the year is

The direct labor usage (efficiency) variance for November
is
[Fact Pattern #13]

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.
[Fact Pattern #14]

Folsom Fashions sells a line of women's dresses. Folsom's
performance report for November follows.
Actual
--------
Standard Standard
Standard
Quantity
Price
Cost
-------- --------------- -------Direct materials 8 pounds $1.80 per pound $14.40
Direct labor
.25 hour 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.
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.
[160] Source: CMA 1291 3-1

The direct materials purchase price variance for November
is
[164] Source: CMA 1291 3-14

The effect of the sales volume variance on the contribution
margin for November is
[165] Source: CMA 1291 3-15

The sales price variance for November is

The direct materials price variance for the current period is
[166] Source: CMA 1291 3-16
The variable cost flexible budget variance for November is
[170] Source: CIA 1192 IV-21

The materials efficiency variance for the current period is
B. $800 unfavorable.
[167] Source: CMA 1291 3-17
The fixed cost variance for November is
[168] Source: CMA 1291 3-18
What additional information is needed for Folsom to
calculate the dollar impact of a change in market share on
operating income for November?
A. Folsom's budgeted market share and the
budgeted total market size.
[Fact Pattern #16]

A company manufactures one product and has a standard
cost system. In April the company had the following
experience:
Direct Direct
Materials 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 materials price variance for April is
B. Folsom's budgeted market share, the budgeted

total market size, and average market selling price.
C. Folsom's budgeted market share and the actual
total market size.
D. Folsom's actual market share and the actual total
market size.
The direct materials efficiency variance for April is
[Fact Pattern #15]

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 to production 23,000 pounds
The direct labor rate variance for April is
[169] Source: CIA 1192 IV-20
B. Overtime premiums.
C. Prime costs.
[Fact Pattern #17]

One of the items produced by a manufacturer of lawn and
garden tools is a chain saw. The direct labor standard for
assembling and testing a chain saw is 2.5 hours at $8 per
hour. Budgeted production for October was 1,200 units.
Actual production during the month was 1,000 units, and
direct labor cost was $27,840 for 3,200 hours.
[174] Source: CIA 1189 IV-17
Using a two-variance system, what was the direct labor
price (rate) variance for October?
D. Materials price variances.

[179] Source: CIA 1191 IV-15
The total budgeted direct labor cost of a company for the
month was set at $75,000 when 5,000 units were planned
to be produced. The following standard cost, stated in
terms of direct labor hours (DLH), was used to develop
the budget for direct labor cost:
1.25 DLH x $12.00/DLH = $15.00/unit produced
The actual operating results for the month were as follows:
Actual units produced
5,200
Actual direct labor hours worked
6,600
Actual direct labor cost
$77,220
The direct labor efficiency variance for the month would be
[175] Source: CIA 1189 IV-18
Using a two-variance system, what is the direct labor
efficiency variance?
[180] Source: CIA 1191 IV-16
A company producing a single product employs the
following direct material cost standard for each unit of
output:
[176] Source: CIA 0590 IV-15
A manager prepared the following table by which to
analyze labor costs for the month:
Actual Hours Actual Hours Standard Hours
at
at
at
Actual Rate Standard Rate Standard Rate
----------- ------------- -------------$10,000
$9,800
$8,820
What variance was $980?
A. Labor efficiency variance.
3 pounds of material x $4/pound = $12/output unit

Data regarding the operations for the current month are as
follows:
Planned production
26,000 units
Actual production
23,000 units
Actual purchases of direct
materials (75,000 pounds)
$297,000
Direct materials used in
production
70,000 pounds
What would be the amount of the direct materials purchase
price variance and direct materials quantity variance that
the company would recognize for the month?
Purchase Price
Variance
Quantity Variance
---------------------------------A.
B. Labor rate variance.

C. Volume variance.
D. Labor spending variance.
In a traditional manufacturing operation, direct costs would
normally include
$3,120 favorable
B.
$32,000 favorable
$3,000 favorable
C.
$24,000 unfavorable
$3,000 favorable
D.
$4,000 unfavorable
$2,800 favorable
$4,000 unfavorable
A. Machine repairs in an automobile factory.

B. Electricity in an electronics plant.
C. Wood in a furniture factory.
D. Commissions paid to sales personnel.
Overhead costs usually include
A. Abnormal spoilage.
[181] Source: CMA 0683 4-5

A difference between standard costs used for cost control
and the budgeted costs of the same manufacturing effort
A. Can exist because standard costs represent what
costs should be, whereas budgeted costs are
expected actual costs.
B. Can exist because budgeted costs are historical
costs, whereas standard costs are based on
engineering studies.
C. Can exist because budgeted costs include some

slack, whereas standard costs do not.
D. Can exist because standard costs include some
slack, whereas budgeted costs do not.
B. (inputs allowed - inputs used) x (budgeted

specific labor rate - budgeted weighted-average
labor rate).
C. (Inputs allowed - inputs used) x budgeted
weighted-average labor rate.

Which of the following factors should not be considered
when deciding whether to investigate a variance?
D. (inputs allowed - inputs used) x (budgeted

specific materials prices - budgeted
weighted-average materials price).
A. Magnitude of the variance.

B. Trend of the variances over time.
C. Likelihood that an investigation will eliminate future
occurrences of the variance.

The labor yield variance equals
A. (Inputs allowed - inputs used) x budgeted
weighted-average materials price.
D. Whether the variance is favorable or unfavorable.

[183] Source: CIA 1187 II-10
When items are transferred from stores to production, an
accountant debits work-in-process and credits materials
accounts. During production, a materials quantity variance
may occur. The materials quantity variance is debited for an
unfavorable variance and credited for a favorable variance.
The intent of variance entries is to provide

labor rate).
D. (inputs allowed - inputs used) x (budgeted
A. Accountability for materials lost during production.

B. A means of safeguarding assets in the custody of
the system.
C. Compliance with GAAP.
D. Information for use in controlling the cost of
production.
[184] Source: CIA 0582 IV-22
Which of the following is least likely to cause an
unfavorable materials quantity (usage) variance?
A. Materials that do not meet specifications.

The labor mix variance equals
labor rate).
D. (inputs allowed - inputs used) x (actual specific
labor rate - budgeted weighted-average labor rate).
B. Machinery that has not been maintained properly.

C. Labor that possesses skills equal to those required
by the standards.
D. Scheduling of substantial overtime.
The materials mix variance equals
B. (Inputs allowed - inputs used) x budgeted
C. (inputs allowed - inputs used) x (budgeted
D. (inputs allowed - inputs used) x (actual specific
materials prices - budgeted weighted-average
materials price).
The materials yield variance equals
A. (Inputs allowed - inputs used) x budgeted average
materials price.
[Fact Pattern #18]

Landeau Manufacturing Company has a process cost
accounting system. A monthly analysis compares actual
results with both a monthly plan and a flexible budget.
Standard direct labor rates used in the flexible budget are
established at the time the annual plan is formulated and
held constant for the entire year. Standard direct labor
rates in effect for the fiscal year ending June 30 and
standard hours allowed for the output in April are
Standard DL
Standard DLH
Rate per Hour Allowed for Output
------------- -----------------Labor class III
$8.00
500
Labor class II
7.00
500
Labor class I
5.00
500
The wage rates for each labor class increased on January 1
under the terms of a new union contract negotiated in
December of the previous fiscal year. The standard wage
rates were not revised to reflect the new contract.
The actual direct labor hours (DLH) worked and the actual
direct labor rates per hour experienced for the month of
April were as follows:
Actual Direct
Actual Direct
Labor Rate per Hour Labor Hours
------------------- ------------Labor class III
$8.50
550
Labor class II
Labor class I
7.50
5.40
650
375

What is the labor yield variance for Landeau in April
(rounded)?
standard allowed direct labor hours differs from

actual fixed factory O/H.
D. The fixed factory O/H applied on the basis of
standard allowed direct labor hours differs from the
budgeted fixed factory O/H.
[194] Source: CMA 1284 4-4
The amount of fixed factory O/H that Dori will apply to
finished production is the
C. $825 favorable.
What is the labor mix variance for Landeau in April?
A. $325.00 unfavorable.
A. Actual direct labor hours times the standard fixed

factory O/H rate per direct labor hour.
B. Standard allowed direct labor hours for the actual
units of finished output times the standard fixed
factory O/H rate per direct labor hour.
C. Standard units of output for the actual direct labor
hours worked times the standard fixed factory O/H
rate per unit of output.
B. $66.67 unfavorable.
C. $180.00 favorable.
D. Actual fixed factory O/H cost per direct labor

hour times the standard allowed direct labor hours.
D. $50.00 favorable.
The labor mix and labor yield variances together equal the
[195] Source: CMA 1273 4-13

Which of these variances is least significant for cost
control?
A. Labor price variance.
A. Total labor variance.

B. Materials quantity variance.
B. Labor rate variance.
C. Fixed O/H volume variance.
C. Labor efficiency variance.
D. Variable O/H spending variance.
D. Sum of the labor efficiency and overhead
efficiency variances.
[Fact Pattern #19]
Dori Castings, a job-order shop, uses a full-absorption,
standard-cost system to account for its production costs.
The O/H costs are applied on a direct-labor-hour basis.
[192] Source: CMA 1284 4-1
Dori's choice of a production volume as a denominator for
calculating its factory O/H rate has
A. An effect on the variable factory O/H rate for
applying costs to production.
[196] Source: J.B. Romal

Margolos, Inc. ends the month with a volume variance of
$6,360 unfavorable. If budgeted fixed O/H was $480,000,
O/H was applied on the basis of 32,000 budgeted machine
hours, and budgeted variable O/H was $170,000, what
were the actual number of machine hours (AH) for the
month?
A. 32,425
B. 32,318
C. 32,000
D. 31,576
B. No effect on the fixed factory O/H budget

variance.
C. No effect on the fixed factory O/H production
volume variance.
D. No effect on the overall (net) fixed factory O/H
variance.
[193] Source: CMA 1284 4-2
A production volume variance will exist for Dori in a month
when
[197] Source: CMA 0687 4-17

Selo Imports uses flexible budgeting for the control of
costs. The company's annual master budget includes
$324,000 for fixed production supervisory salaries at a
volume of 180,000 units. Supervisory salaries are expected
to be incurred uniformly through the year. During
September, 15,750 units were produced and production
supervisory salaries incurred were $28,000. A
performance report for September should reflect a budget
variance of
A. $350 F.
A. Production volume differs from sales volume.
B. $350 U.
B. Actual direct labor hours differ from standard

allowed direct labor hours.
C. $1,000 U.
D. $1,000 F.
C. The fixed factory O/H applied on the basis of
[Fact Pattern #20]

Patie Company uses a standard FIFO, process-cost
system to account for its only product, Mituea. Patie has
found that direct machine hours (DMH) provide the best
estimate of the application of O/H. Four (4) standard direct
machine hours are allowed for each unit.
Using simple linear regression analysis in the form y = a +
b(DMH), given that (A) equals fixed costs and (B) equals
variable costs, Patie has developed the following O/H
budget for a normal activity level of 100,000 direct
machine hours:
ITEM (y)
a
b
---------------------------- -------- -------Supplies
$ 0.50
Indirect Labor
$ 54,750 6.50
Depreciation -- Plant and
Equipment
27,000
Property Taxes and Insurance 32,300
Repairs and Maintenance
14,550 1.25
Utilities
3,400 4.75
-------- ------Total O/H
$132,000 $13.00
======== =======
Actual fixed O/H incurred was $133,250, and actual
variable O/H was $1,225,000. Patie produced 23,500
equivalent units during the year using 98,700 direct machine
hours.
B. Will be favorable when a company sells fewer

products bearing unit contribution margins higher than
average.
C. Measures the effect of the deviation from the
budgeted weighted-average contribution margin per
unit associated with a change in the quantities of
products in the mix.
D. Equals the difference between the budgeted
weighted-average materials unit costs for the actual
and planned mixes, times the actual materials input.
[202] Source: CIA 1185 IV-12
Actual and budgeted information about the sales of a
product are presented for June as follows.
Actual
Budget
-------------Units
8,000
10,000
Sales Revenue
$92,000
$105,000
The sales price variance for June was
[198] Source: L.J. McCarthy

What is the standard O/H rate?
A. $13.00 per DMH.
[203] Source: CIA 1190 IV-18

The following exhibit reflects a summary of performance for
a single item of a retail store's inventory for April.
B. $1.32 per DMH

C. $14.32 per DMH.
D. $13.76 per DMH.
How much O/H should be applied to production?
A. $1,413,384
B. $1,432,000
C. $1,358,250
D. $1,346,080
What is the total O/H variance?
Flexible
Static
Actual Budget Flexible (Master)
Results Variances Budget Budget
-------- --------- -------- -------Sales (units) 11,000
-11,000 12,000
--------------- -------Revenue (sales) $208,000 $12,000 U $220,000
$240,000
Variable costs 121,000 11,000 U 110,000 120,000
--------------- -------Contribution
margin
$87,000 $23,000 U $110,000 $120,000
Fixed costs
72,000
-72,000 72,000
--------------- -------Operating
income
$15,000 $23,000 U $38,000 $48,000
======== ========= ======== ========
The sales volume variance is
A. $1,000 F.
B. $10,000 U.
C. $11,000 F.
D. $12,000 U.
[201] Source: CIA 1186 IV-12

The sales mix variance
A. Will be an unfavorable 5% whenever a 5%
decrease occurs in a company's overall sales volume.
[204] Source: CIA 0589 IV-14

The following data are available for July:
Budget
Actual
-------------- -------------Sales
40,000 units 42,000 units
Selling price
$6 per unit
$5.70 per unit
Variable cost
3.50 per unit 3.40 per unit
What is the sales quantity variance for July?
Income summary
D. Variable O/H
efficiency variance
Variable O/H
spending variance
Income summary
Assume materials are purchased at $5 per unit for $650
and their standard price is $4 per unit and that price
variances are recorded at the time of purchase. What is the
journal entry if all materials purchased were used to
complete a project that should normally require 100 units?
A.
1,335
$1,600
265
$1,865

Direct labor costs are wages paid to
Machine
Factory
Corporate
Operators Supervisors Vice-President
--------- ----------- -------------A.
Work-in-process
DM price variance
Inventory
$650
$130
520
Yes
Yes
Yes
Yes
No
No
No
Yes
Yes
No
No
Yes
B.
B.
C.
Work-in-process
DM price variance
Inventory
$520
130
$650
Work-in-process
Inventory
$400
120
$520
D.
C.
D.
Work-in-process
$520
$120
Inventory
400
To adjust finished goods inventory for external reporting
purposes to reflect the difference between direct costing
and absorption costing, which of the following journal
entries may be made?

Bright Co. manufactures light bulbs. The following salaries
were included in Bright's manufacturing costs for the year:
Machine operators
$145,000
Factory supervisors
60,000
Machinery mechanics
25,000
What is the amount of Bright's direct labor for the year?
A. $230,000
B. $205,000
C. $170,000
A. Finished goods inventory

D. $145,000
adjustment account
Fixed O/H
B. Fixed O/H XX
XX
Work-in-process
C. Finished goods XX
Fixed O/H
D. Finished goods XX
Work-in-process
XX
Butler Co.'s production costs for July are
XX
XX
XX
Direct materials
$120,000
Direct labor
108,000
Factory overhead
6,000
What is the amount of costs traceable to specific products?
A. $234,000
B. $228,000

Alpha Company had a favorable variable O/H efficiency
variance of $1,600 and an unfavorable spending variance
of $265. What entry closes these accounts?
C. $120,000
D. $108,000
A. Income summary $1,335

Variable O/H
spending variance
265
Variable O/H
efficiency variance
$1,600
B. Variance summary $1,865

Atlantic Co. used $200,000 of direct materials during June.
At June 30, Atlantic's direct materials inventory was
$30,000 more than it was at June 1. What were Atlantic's
direct materials purchases during June?
A. $30,000
Cost of goods sold

C. Variable O/H
$1,865
efficiency variance
$1,600
Variable O/H
spending variance
$ 265
B. $170,000
C. $200,000
D. $230,000
labor efficiency variance?

Rose Co.'s fixed manufacturing overhead costs totaled
$150,000 and variable selling costs totaled $75,000. How
should these costs be classified under variable costing?
A. $2,050
B. $2,000
C. $1,250
A. $0 period costs; $225,000 product costs.

D. $1,200
B. $75,000 period costs; $150,000 product costs.
C. $150,000 period costs; $75,000 product costs.
D. $225,000 period costs; $0 product costs.
A possible short-term problem in controlling overhead
costs would be detected by which of the following
variances?
A. Both the fixed overhead spending variance and the
volume variance.

The following data relate to Tray Co.'s manufacturing
operations:
Standard direct labor hours per unit
3
24,500
Number of units produced
8,000
Standard variable overhead per standard
direct labor hour
$2
Actual variable overhead
$46,000
Tray's variable overhead efficiency variance is
A. $0
B. Both the variable overhead spending variance and

the volume variance.
C. The spending variance but not the volume
variance.
B. $1,000 U.
C. $2,000 F.
D. $3,000 F.
D. The volume variance but not the fixed overhead

spending variance.
A standard-cost system may be used in
Which of the following standard costing variances is the
most controllable by a production manager?
A. Overhead efficiency.
Job-Order
Activity-Based
Costing Process Costing
Costing
--------- --------------- -------------A.
B. Labor efficiency.
Yes
Yes
Yes
Yes
No
Yes
No
Yes
No
No
No
No
B.
C. Materials usage.
D. Overhead volume.
Cara Williams, a supervisor, controls her department's
costs. The following data relate to her department for the
month of June:
Variable factory overhead
------------------------Budgeted based on actual input
$100,000
Actual
106,250
Fixed factory overhead
---------------------Budgeted
31,250
Actual
33,750
What was the department's total spending variance for
June?
C.
D.

To monitor total cost, total revenue, and net profit based
upon production levels, a manager should use
A. Both flexible budgeting and standard costing.
B. Static budgeting but not standard costing.
C. Standard costing but not flexible budgeting.
D. Static budgeting and standard costing.
A. $8,750 U.
B. $6,250 U.
C. $3,750 F.

When calculating variances from standard costs, the
difference between budgeted fixed overhead and the
amount applied yields a
D. $2,500 U.
A. Price variance.
Bell Co. manufactures a single product with a standard
direct labor cost of 2 hours at $10.00 per hour. During
November, 1,500 units were produced requiring 3,200
hours at $10.25 per hour. What was the unfavorable direct
B. Combined price-quantity variance.

C. Volume variance.
D. Mix variance.
B. Overhead.
Which department is typically responsible for a materials
price variance?
C. Labor efficiency.
D. Yield.
A. Engineering.
B. Production.
C. Purchasing.
D. Sales.
In which of the following variances is the standard unit cost
used in the calculations?

Pane Company's direct labor costs for April are as follows:
Standard direct labor hours
42,000
41,200
Total direct labor payroll
$247,200
Direct labor efficiency variance -- favorable $3,840
What is Pane's direct labor rate variance?
A. Both the direct materials usage variance and the

direct materials price variance.
B. The direct materials usage variance but not the
C. The direct labor price variance but not the direct
D. The direct labor efficiency variance but not the
direct labor rate variance.
Data regarding Mill Company's direct materials costs is as
follows:
Lake's direct labor costs for the month of May are as
follows:
Standard direct labor hours allowed
12,500
Actual direct labor rate
$8.25
10,000
Direct labor rate variance -- favorable
$5,600
What was Lake's standard direct labor rate in May?
A. $7.69
Actual unit cost

$2.00
Standard unit cost
2.20
Actual quantity purchased and used 28,000 units
Standard units of materials per unit
of finished goods
3 units
Actual output of finished goods
9,000 units
What is the direct materials price variance?
Fleece Company uses a standard-costing system in relation
to its manufacture of scarves. Each finished scarf contains
1.5 yards of direct materials. However, a 25% direct
materials spoilage, which is calculated based on input
quantities, occurs during the manufacturing process. The
cost of the direct materials is $2.00 per yard. The standard
direct materials cost per unit of finished product is
B. $7.80
C. $8.25
D. $8.81
Bolt Co. uses a standard-cost system. Bolt's direct labor
information for July is as follows:
Standard hours allowed for actual
production
3,000
Actual rate paid per hour
$9.35
Standard rate per hour
$8.50
Labor efficiency variance
$1,870 U
The actual hours worked equaled
A. 2,780
B. 2,800
C. 3,200
D. 3,220
A. $2.25
B. $3.00
C. $3.75
D. $4.00
Which type of variance will reflect overtime premiums
when the overall volume of work is greater than expected?
A. Materials quantity.

Daniel Corporation's direct labor costs for June were as
follows:
32,000
Standard direct labor hours
33,600
Direct labor rate variance -- favorable
$6,720
Standard direct labor rate per hour
$5.04
Compute Daniel's total direct labor payroll for the month of
June.
A. $154,560
B. $154,880
Factory
Based on
Based on
Overhead Actual Input Standard Input
-------- ------------ -------------A.
C. $167,680
D. $168,000
Yes
Yes
Yes
Yes
Yes
No
No
Yes
Yes
No
No
No
B.
Media Co. manufactures televisions. The following direct
labor information relates to the manufacture of televisions.
Number of workers
60
Number of product hours per week, per
worker
40
Hours required to make 1 unit
3
Weekly wages per worker
$600
Employee benefits treated as direct
labor costs
20% of wages
What is the standard direct labor cost per unit?
A. $54
C.
D.

River Company uses a standard-cost accounting system. It
applies overhead based on direct labor hours. The
following overhead costs and production data are available
for March:
B. $36
C. $30
D. $18
Using the two-variance method for analyzing overhead,
which of the following variances contains both variable and
fixed overhead elements?
Controllable
(Budget)
Volume Efficiency
Variance Variance Variance
------------ -------- ---------A.
Yes
Yes
Standard fixed overhead rate per DLH

$1.50
Standard variable overhead rate per DLH
$5.00
Budgeted monthly DLH
30,000
Actual DLH worked
28,000
Standard DLH allowed for actual
production
27,500
Overall overhead variance -- favorable
$2,500
What is the applied factory overhead for March?
A. $137,500
B. $176,250
C. $178,750
D. $182,000
Yes
B.
Yes
Yes
No
Yes
No
No
No
No
No
C.
D.

Watson Company uses a predetermined factory overhead
application rate based on direct labor cost. Watson's
budgeted factory overhead was $756,000 based on a
budgeted volume of 60,000 direct labor hours, at a
standard direct labor rate of $7.20 per hour. Actual factory
overhead amounted to $775,000 with actual direct labor
cost of $450,000 for the year ended December 31. How
much was Watson's overapplied factory overhead?
A. $12,500

Using the two-variance method for analyzing factory
overhead, which of the following is used to compute the
controllable (budget) variance?
A. Both a budget allowance based on actual input
and a budget allowance based on standard input.
B. A budget allowance based on actual input but not
a budget allowance based on standard input.
C. A budget allowance based on standard input but
not a budget allowance based on actual input.
D. A budget allowance based on standard input and
a budget allowance based on applied fixed overhead.
Using the three-variance method for analyzing factory
overhead, which of the following is used to compute the
spending variance?
Actual
Budget
Budget
Allowance
Allowance
B. $18,000
C. $19,000
D. $37,000
Anderson Company prepared the following information
using a flexible budget system.
Percentage of total capacity
---------------------------75%
90%
-------- -------Direct labor hours
30,000
36,000
$52,500
$63,000
$144,000 $144,000
Total factory overhead rate
per DLH
$6.55
$5.75
Anderson operated at 75% of capacity during the year.
However, Anderson applied factory overhead based on
90% of capacity. If actual factory overhead was equal to
the factory overhead budgeted for 75% of capacity, what
is the amount of overhead variance for the year?

A. $28,500 underabsorbed.

Franklin Company's gross profit for year 2 and year 1 was
as follows:
B. $28,500 overabsorbed.
C. $24,000 underabsorbed.
D. $24,000 overabsorbed.
Wheeler Company uses a standard-cost system. Wheeler
prepared the following budget using normal capacity for the
month of May:
Direct labor hours
36,000
$72,000
$162,000
Actual results were as follows:
Direct labor hours worked
33,000
Total factory overhead
$220,500
Standard DLH allowed for capacity
attained
31,500
What is the budget (controllable) variance for May using
the two-way analysis of overhead variances?
Year 2
Year 1
--------------Sales
$950,400
$960,000
Cost of goods sold
(556,800)
(576,000)
--------------Gross profit
$393,600
$384,000
========
========
Assuming that year 2 selling prices were 15% lower than
year 1 selling prices, what was the decrease in gross profit
caused by the selling price change?
A. $134,400
B. $142,560
C. $144,000
D. $167,718
[241] Source: CMA 0694 3-20

Under a standard cost system, the materials price variances
are usually the responsibility of the
A. Production manager.
B. Cost accounting manager.
C. Sales manager.
Coleman Company compiled the following information:
Actual factory overhead
$22,500
Fixed overhead expenses, actual
$10,800
Fixed overhead expenses, budgeted
$10,500
Actual hours
5,250
Standard hours
5,700
Variable overhead rate per DLH
$3.80
What is the spending variance assuming Coleman uses a
three-way analysis of overhead?
D. Purchasing manager.
[243] Source: CMA 0695 3-27

Which one of the following statements concerning Clear
Plus, Inc.'s actual results for May is correct?
A. The flexible budget variance is $8,000 favorable.
B. The sales price variance is $32,000 favorable.
C. The sales volume variance is $8,000 favorable.
Samuel Company provided the following data for June
production activity. Samuel uses a two-way analysis of
overhead variances.
D. The flexible budget variable cost variance is

$10,800 unfavorable.
The product cost which is established by a conventional
standard cost accounting system is a(n)
A. Variable cost.
Actual variable factory overhead incurred $294,000

Variable factory overhead rate per DLH
$6.00
Standard DLH allowed
49,500
Actual DLH
48,000
The budget (controllable) variance for June, assuming that
budgeted fixed overhead costs equal actual fixed costs, is
B. Fixed cost.
C. Expected cost.
D. Joint cost.

In a responsibility accounting system, a feedback report
that focuses on the difference between budgeted amounts
and actual amounts is an example of
A. Management by exception.
B. Assessing blame.
The difference between the actual amounts and the flexible

budget amounts for the actual output achieved is the
C. Granting rewards to successful managers.

A. Production volume variance.
D. Ignoring other variables for which the budgeted
goals were met.
B. Flexible budget variance.

C. Sales volume variance.
[246] Source: CMA 1291 3-11

A difference between standard costs used for cost control
and budgeted costs
A. Can exist because standard costs must be
determined after the budget is completed.
B. Can exist because standard costs represent what
costs should be, whereas budgeted costs represent
expected actual costs.
C. Can exist because budgeted costs are historical
costs, whereas standard costs are based on
engineering studies.
D. Cannot exist because they should be the same
amounts.
[247] Source: CMA 0693 3-24
Which one of the following statements pertaining to
practical standards is incorrect?
A. Practical standards can be used for product
costing and cash budgeting.
B. The use of practical standards usually encourages
desirable employee behavior.
C. A firm using practical standards has no reason to
make any midyear adjustments to the production
standards if an old machine is replaced by a newer,
faster machine.
D. Standard cost variance.

[Fact Pattern #22]
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
=======
[251] Source: CMA 0696 3-22
The total materials quantity variance for May is
D. Under practical standards, exceptions from

standards are less likely; consequently, managers will
be better able to practice management by exception.
[248] Source: CMA 1294 3-23

The best basis upon which cost standards should be set to
measure controllable production inefficiencies is
A. Engineering standards based on ideal
performance.
[252] Source: CMA 0696 3-23
The materials price variance for May is
B. Normal capacity.
C. Recent average historical performance.
D. Engineering standards based on attainable

performance.

Which of the following management practices involves
concentrating on areas that deserve attention and placing
less attention on areas operating as expected?
[253] Source: CMA 0696 3-1

The labor rate variance for May is
B. Responsibility accounting.
B. $0
C. Benchmarking.
D. Management by exception.
[250] Source: CMA 1295 3-6
[254] Source: CMA 0696 3-25

The flexible budget overhead variance for May is
A. Sales manager.
B. Inventory supervisor.
C. Production manager.
D. Vice president of production.
[255] Source: CMA 1296 3-21
David Rogers, purchasing manager at Fairway
Manufacturing Corporation, was able to acquire a large
quantity of raw material from a new supplier at a
discounted price. Marion Conner, inventory supervisor, is
concerned because the warehouse has become crowded
and some things had to be rearranged. Brian Jones, vice
president of production, is concerned about the quality of
the discounted material. However, the Engineering
Department tested the new raw material and indicated that
it is of acceptable quality. At the end of the month, Fairway
experienced a favorable materials usage variance, a
favorable labor usage variance, and a favorable materials
price variance. The usage variances were solely the result
of a higher yield from the new raw material. The favorable
materials price variance would be considered the
responsibility of the
[Fact Pattern #23]

The controller for Durham Skates is reviewing the
production cost report for July. An analysis of direct
materials costs reflects an unfavorable flexible budget
variance of $25. The plant manager believes this is
excellent performance on a flexible budget for 5,000 units
of direct materials. However, the production supervisor is
not pleased with this result because he claims to have
saved
$1,200 in materials cost on actual production using 4,900
units of direct materials. The standard materials cost is $12
per unit. Actual materials used for the month amounted to
$60,025.
[258] Source: CMA 0697 3-22
The actual average cost per unit for materials was
A. $12.00
B. $12.01
A. Purchasing manager.
C. $12.24
B. Inventory supervisor.
D. $12.25
C. Vice president of production.
D. Engineering manager.
[256] Source: CMA 1296 3-23
The purpose of identifying manufacturing variances and
assigning their responsibility to a person/department should
be to
[259] Source: CMA 0697 3-23

If the direct materials variance is investigated further, it will
reflect a price variance of
A. Zero.
A. Use the knowledge about the variances to

promote learning and continuous improvement in the
manufacturing operations.
B. Trace the variances to finished goods so that the

inventory can be properly valued at year-end.
C. Determine the proper cost of the products
produced so that selling prices can be adjusted
accordingly.
D. Pinpoint fault for operating problems in the
organization.
[257] Source: CMA 1296 3-24
The inventory control supervisor at Wilson Manufacturing
Corporation reported that a large quantity of a part
purchased for a special order that was never completed
remains in stock. The order was not completed because
the customer defaulted on the order. The part is not used in
any of Wilson's regular products. After consulting with
Wilson's engineers, the vice president of production
approved the substitution of the purchased part for a
regular part in a new product. Wilson's engineers indicated
that the purchased part could be substituted providing it
was modified. The units manufactured using the substituted
part required additional direct labor hours resulting in an
unfavorable direct labor efficiency variance in the
Production Department. The unfavorable direct labor
efficiency variance resulting from the substitution of the
purchased part in inventory would best be assigned to the
[Fact Pattern #24]

Fabro Inc. produced 1,500 units of Product RX-6 last
week. The inputs to the production process for Product
RX-6 were as follows:
450 pounds of Material A at a cost of $1.50 per pound
300 pounds of Material Z at a cost of $2.75 per pound
300 labor hours at a cost of $15.00 per hour
[260] Source: CMA 0697 3-25
What is the total factor productivity for Product RX-6?
A. 2.00 units per pound.
B. 5.00 units per hour.
C. 0.25 units per dollar input.
D. 0.33 units per dollar input.
[261] Source: CMA 0697 3-26
What is the best productivity measure for the first-line
supervisor in Fabro Inc.'s production plant?
A. 5.00 units per labor hour.
A. $0
B. $2.00 per pound.
B. $6,540 Favorable.
C. 0.33 units per dollar input.
C. $3,840 Unfavorable.
D. $15.00 per labor hour.
D. $3,840 Favorable.
[Fact Pattern #25]

London Enterprises uses a standard cost system in its
appliance division. The standard cost of manufacturing one
unit of Gimmicks is as follows:
Materials - 120 pounds at $1.50 per pound $180
Labor - 3 hours at $15 per hour
45
Factory overhead - $16 per labor hour
48
$273
====
The budgeted variable factory overhead rate is $6 per
labor hour, and the budgeted fixed factory overhead is
$54,000 per month. During June, London Enterprises
produced 1,650 units of Gimmicks compared with a
normal capacity of 1,800 units. The actual cost per unit was
Materials (purchased and used) 116 pounds at $1.65 per pound
$191.40
Labor - 3.1 hours at $15 per hour
46.50
Factory overhead ($79,860 for 1,650 units)
48.40
------Total actual cost per unit
$286.30
=======
[Fact Pattern #26]

A manufacturer of radios purchases components from
subcontractors for assembly into complete radios. Each
radio requires three units each of Part X, which has a
standard cost of $2.90 per unit. During June, the company
had the following experience with respect to Part X:
Units
-----Purchases ($36,000)
12,000
Consumed in manufacturing
10,000
Radios manufactured
3,000
During June, the company incurred a materials
purchase-price variance of
B. $900 favorable.

The total materials quantity variance for June is
A. $9,900 Favorable.

During June, the company incurred a materials efficiency
variance of
B. $9,900 Unfavorable.
C. $28,710 Favorable.
D. $28,710 Unfavorable.
The materials price variance for June is
A. $28,710 Unfavorable.
B. $29,700 Unfavorable.
The amount that will be shown on a flexible budget for Part
X usage during the month of June is
C. $28,710 Favorable.
A. $26,100
D. $29,700 Favorable.
B. $27,000
C. $29,000

The labor rate variance for June is
A. $2,700 Unfavorable.
B. $2,700 Favorable.
D. $36,000
[Fact Pattern #27]
The following are the relevant data for calculating sales
variances for Fortuna Co., which sells its sole product in
two countries:
C. $2,475 Unfavorable.
D. $0
The flexible budget overhead variance for June is
Gallia
Helvetica
Total
-------------- ----Budgeted selling price per unit
$6.00
$10.00
NA
Budgeted variable cost per unit
3.00
7.50
NA
------------
Budgeted contribution margin per unit $3.00

$ 2.50
NA
=====
======
Budgeted unit sales
300
200
500
Budgeted mix percentage
60%
40%
100%
Actual units sold
260
260
520
Actual selling price per unit
$6.00
$ 9.50
NA
The sales volume variance for the two countries is
A. $130 U.
B. $120 U.
The wage rates for each labor class increased on January 1

under the terms of a new union contract. The standard
wage rates were not revised. The actual direct labor hours
(DLH) and the actual direct labor rates for April were as
follows:
Actual Rate Actual DLH
----------- ---------Labor class III $8.50
550
Labor class II
7.50
650
Labor class I
5.40
375
What is the labor yield variance (rounded)?
C. $30 F.
A. $500
D. $150 U.
B. $320
C. $820

The sales quantity variance for the two countries is
A. $156 U.
B. $30 F.
D. $515
What is the labor mix variance (rounded)?
C. $56 F.
A. $50.00
D. $100 F.
B. $320.00
C. $66.67

The sales mix variance for the two countries is
A. $156 U.
B. $26 U.
C. $56 F.
D. $150 F.
D. $500.00
[275] Source: CMA Samp Q3-11
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?
[272] Source: CMA 0693 3-23

Which one of the following statements about ideal
standards is incorrect?
C. $135 unfavorable.
A. Ideal standards are also called theoretical or

maximum-efficiency standards.
B. Ideal standards do not make provisions for
workers with different degrees of experience and skill
levels.
C. Ideal standards make no allowance for waste,
spoilage, and machine breakdowns.
D. Ideal standards can be used for cash budgeting or
product costing.
[Fact Pattern #28]
A company's standard direct labor rates in effect for the
fiscal year ending June 30 and standard hours allowed for
the output in April are
Standard DL
Standard DLH
Rate per Hour Allowed for Output
------------- -----------------Labor class III $8.00
500
Labor class II
7.00
500
Labor class I
5.00
500
D. $150 unfavorable.
[Fact Pattern #29]
Funtime, Inc. manufactures video game machines. Market
saturation and technological innovations have caused
pricing pressures which have resulted in declining profits.
To stem the slide in profits until new products can be
introduced, an incentive program has been developed to
reward production managers who contribute to an increase
in the number of units produced and effect cost reductions.
The managers have responded to the pressure of improving
manufacturing in several ways. The video game machines
are put together by the Assembly Group which requires
parts from both the Printed Circuit Boards (PCB) and the
Reading Heads (RH) groups. To attain increased
production levels, the PCB and RH groups commenced
rejecting parts that previously would have been tested and
modified to meet manufacturing standards. Preventive
maintenance on machines used in the production of these
parts has been postponed with only emergency repair work
being performed to keep production lines moving.
The more aggressive Assembly Group production

supervisors have pressured maintenance personnel to
attend to their machines at the expense of other groups.
This has resulted in machine downtime in the PCB and RH
groups which, when coupled with demands for accelerated
parts delivery by the Assembly Group, has led to more
frequent parts rejections and increased friction among
departments.
the use of overtime to keep up with the accelerated

demand for parts. The idle time was charged to direct
labor. Rath also reported that the production managers of
these two groups resorted to parts rejections, as opposed
to testing and modification procedures formerly applied.
Rath determined that the Assembly Group met
management's objectives by increasing production while
using lower than standard hours.
Funtime operates under a standard cost system. The

standard costs for video game machines are as follows.

What is the total materials price variance?
Standard Cost per Unit

------------------------Cost Item
Quantity Cost Total
------------------------- -------- ---- ----Direct Materials
Housing unit
1
$20 $ 20
Printed circuit boards 2
15 30
Reading heads
4
10 40
Direct labor
Assembly group
2 hours
8 16
PCB group
1 hour
9
9
RH group
1.5 hours 10 15
Variable overhead
4.5 hours 2
9
$139
====
Funtime prepares monthly performance reports based on
standard costs. Presented below is the contribution report
for May, when production and sales both reached 2,200
units.
What is the total materials quantity variance?
Funtime Inc.
Contribution Report
For the Month of May
Budget Actual Variance
-------- ------- -------Units
2,000 2,200
200F
Revenue
$400,000 $440,000 $40,000F
Variable costs
Direct material
180,000 220,400 40,400U
Direct labor
80,000 93,460 13,460U
Variable overhead
18,000 18,800
800U
-------- ------- -------Total variable costs 278,000 332,660 54,660U
-------- ------- -------Contribution margin
$122,000 $107,340 $14,660U
======== ======== ========
Funtime's top management was surprised by the
unfavorable contribution to overall corporate profits in spite
of the increased sales in May. Jack Rath, cost accountant,
was assigned to identify the reasons for the unfavorable
contribution results as well as the individuals or groups
responsible. After review, Rath prepared the Usage Report
presented below.
Funtime Inc.
Usage Report
For the Month of May
Cost Item
Quantity Actual Cost
------------------------- ----------- ----------Direct material
Housing units
2,200 units $ 44,000
Printed circuit boards 4,700 units 75,200
Reading heads
9,200 units 101,200
Direct labor
Assembly
3,900 hours 31,200
Printed circuit boards 2,400 hours 23,760
Reading heads
3,500 hours 38,500
Variable overhead
9,900 hours 18,800
-------Total variable cost
$332,660
========
Rath reported that the PCB and RH groups supported the
increased production levels but experienced abnormal
machine downtime, causing idle manpower which required

What is the variable overhead efficiency variance?
A. $0
What is the variable overhead spending variance?
What is the contribution margin volume variance?
Coach Corporation is considering which capacity measure
is appropriate to use as the denominator level of activity
when applying fixed factory overhead to units produced.
Assume that Coach selects direct labor hours as the cost
driver and the following additional data are available from

the prior year:
Hours
------Standard direct labor hours for
normal capacity
200,000
Standard direct labor hours allowed
for units produced in the prior year 210,000
Standard direct labor hours for the
master budget capacity
220,000
Which of the following capacity measures for the
denominator-level of activity would have resulted in an
unfavorable volume variance?
A. Both normal capacity and master budget capacity.
B. Neither normal capacity nor master budget
capacity.
C. Normal capacity only.
D. Master budget capacity only.
[Fact Pattern #30]
PortCo Products is a divisionalized furniture manufacturer.
The divisions are autonomous segments, with each division
being responsible for its own sales, costs of operations,
working capital management, and equipment acquisition.
Each division serves a different market in the furniture
industry. Because the markets and products of the divisions
are so different, there have never been any transfers
between divisions.
The Commercial Division manufactures equipment and
furniture that is purchased by the restaurant industry. The
division plans to introduce a new line of counter and chair
units that feature a cushioned seat for the counter chairs.
John Kline, the division manager, has discussed the
manufacturing of the cushioned seat with Russ Fiegel of the
Office Division. They both believe a cushioned seat
currently made by the Office Division for use on its deluxe
office stool could be modified for use on the new counter
chair. Consequently, Kline has asked Russ Fiegel for a
price for 100-unit lots of the cushioned seat. The following
conversation took place about the price to be charged for
the cushioned seats:
Fiegel: "John, we can make the necessary modifications to
the cushioned seat easily. The raw materials used in your
seat are slightly different and should cost about 10% more
than those used in our deluxe office stool. However, the
labor time should be the same because the seat fabrication
operation basically is the same. I would price the seat at
our regular rate--full cost plus 30% markup."
Kline: "That's higher than I expected, Russ. I was thinking
that a good price would be your variable manufacturing
costs. After all, your capacity costs will be incurred
regardless of this job."
Fiegel: "John, I'm at capacity. By making the cushion seats
for you, I'll have to cut my production of deluxe office
stools. Of course, I can increase my production of
economy office stools. The labor time freed by not having
to fabricate the frame or assemble the deluxe stool can be
shifted to the frame fabrication and assembly of the
economy office stool. Fortunately, I can switch my labor
force between these two models of stools without any loss
of efficiency. As you know, overtime is not a feasible
alternative in our community. I'd like to sell it to you at
variable cost, but I have excess demand for both products.
I don't mind changing my product mix to the economy
model if I get a good return on the seats I make for you.
Here are my standard costs for the two stools and a
schedule of my manufacturing overhead."

Kline: "I guess I see your point, Russ, but I don't want to
price myself out of the market. Maybe we should talk to
Corporate to see if they can give us any guidance."
Office Division
Standard Costs and Prices
Deluxe
Economy
Office
Office
Stool
Stool
------------Raw materials
Framing
$ 8.15
$ 9.76
Cushioned seat
Padding
2.40
-Vinyl
4.00
-Molded seat
(purchased)
-6.00
Direct labor
Frame fabrication
(.5 x $7.50/DLH)
3.75 (.5 x $7.50/DLH)
3.75
Cushion fabrication
(.5 x $7.50/DLH)
3.75
-Assembly* (.5 x $7.50/DLH)
3.75 (.3 x $7.50/DLH)
2.25
Manufacturing
Overhead (1.5DLH x $12.80/DLH) 19.20 (.8DLH x
$12.80/DLH) 10.24
----------Total standard cost
$45.00
$32.00
======
======
Selling price (30% markup) $58.50
$41.60
======
======
*Attaching seats to frames and attaching rubber feet.
Office Division
Manufacturing Overhead Budget
Overhead
Item
Nature
Amount
----------------- ------------------------ ---------Supplies
Variable--at current
market prices
$ 420,000
Indirect labor
Variable
375,000
Supervision
Nonvariable
250,000
Power
Use varies with activity;
rates are fixed
180,000
Heat and light
Nonvariable--light is
fixed regardless of
production while heat/
air conditioning varies
with fuel charges
140,000
Property taxes and Nonvariable--any
insurance taxes change in amounts/
rates is independent
of production
200,000
Depreciation
Fixed dollar total
1,700,000
Employee benefits 20% of supervision,
direct and indirect
labor
575,000
---------Total overhead
$3,840,000
==========
Capacity in DLH
300,000
==========
Overhead rate/DLH
$12.80
==========
What amount of employee benefits is associated with direct
labor costs?
A. $675,000
B. $75,000
C. $450,000
deluxe stools?
D. $500,000
A. $789
What is the variable manufacturing overhead rate?
A. $7.80/hr.
B. $1,869
C. $1,329
D. $540
B. $11.25/hr.
C. $5.17/hr.
D. $5.00/hr.
What is the transfer price per 100-unit lot based on
variable manufacturing costs to produce the modified
cushioned seat?
A. $1,329
B. $1,869
C. $789
D. $1,986
What is the fixed manufacturing overhead rate?
A. $7.80/hr.
B. $11.25/hr.
C. $5.17/hr.
D. $5.00/hr.
How many economy office stools can be produced with
the labor hours currently used to make 100 deluxe stools?
[Fact Pattern #31]

Mountain View Hospital (MVH) has adopted a standard
cost accounting system for evaluation and control of nursing
labor. Diagnosis Related Groups (DRGs), instituted by the
U.S. government for health insurance reimbursement, are
used as the output measure in the standard cost system. A
DRG is a patient classification scheme in which hospitals
are regarded as multiproduct firms with inpatient treatment
procedures related to the numbers and types of patient
ailments treated. MVH has developed standard nursing
times for the treatment of each DRG classification, and
nursing labor hours are assumed to vary with the number of
DRGs treated within a time period.
The nursing unit on the fourth floor treats patients with four
DRG classifications. The unit is staffed with registered
nurses (RNs), licensed practical nurses (LPNs), and aides.
The standard nursing hours and salary rates and actual
numbers of patients for the month of May were as follows.
Standard
Actual Hours per DRG Total Standard Hours
DRG
No. of ------------- -------------------Classification Patients RN LPN Aide RN LPN Aide
-------------- -------- -- --- ---- ----- ----- ----1
250
6 4 5 1,500 1,000 1,250
2
90 26 16 10 2,340 1,440 900
3
240 10 5 4 2,400 1,200 960
4
140 12 7 10 1,680 980 1,400
----- ----- ----7,920 4,620 4,510
===== ===== =====
Standard Hourly Rates
--------------------RN
$12.00
LPN
8.00
Aide
6.00
The results of operations during May for the fourth floor
nursing unit are presented below:
A. 80.
B. 125.
C. 100.
D. 150.
When computing the opportunity cost for the deluxe office
stool, what is the contribution margin per unit produced?
RN
LPN
Aide
-------- ------- ------Actual hours
8,150 4,300 4,400
Actual salary
$100,245 $35,260 $25,300
Actual hourly rate $12.30 $8.20 $5.75
Because MVH does not have data to calculate variances
by DRG, it uses a flexible budgeting approach to calculate
labor variances for each reporting period by labor
classification (RN, LPN, Aide). Labor mix and labor yield
variances are also calculated because one labor input can
be substituted for another. The variances are used by
nursing supervisors and hospital administration to evaluate
the performance of nurses.
A. $25.20
B. $15.84

What is the total flexible budget variance?
C. $13.56
D. $33.30
What is the opportunity cost of the Office Division if 125
economy stools can be made in the time required for 100
What is the labor mix variance?

What is the labor yield variance?
$1,725.
Answer (B) is correct. Assuming that employees
prefer more money to less, a 6.5% commission on all
sales with no base salary is most likely to have the
desired motivational effect. This plan will result in
compensation of $2,275 per month based on sales of
$35,000. This amount is greater than that for any of
the other choices.
Answer (C) is incorrect because a $1,200 base
salary plus 3% of sales result in compensation of only
$2,250 on sales of $35,000.
Answer (D) is incorrect because an initial $1,750 per
month with a possible later increase to $1,925 is not
as desirable as $2,275 per month.
D. $460 favorable.
PART 3C
CONTROL AND PERFORMANCE
EVALUATION
ANSWERS
[1] Source: CMA 0691 3-21
Answer (A) is incorrect because carrying cost is an
inventory cost.
Answer (B) is correct. Costs of external failure, such
as warranty, product liability, and customer ill will
costs, arise when problems occur after shipment.
Internal failure costs are incurred when detection of
defective products occurs before shipment. Examples
include scrap, rework, tooling changes, and
downtime. Prevention attempts to avoid defective
output. These costs include preventive maintenance,
employee training, review of equipment design, and
evaluation of suppliers. Appraisal embraces such
activities as statistical quality control programs,
inspection, and testing.
Answer (C) is incorrect because all training costs are
not quality control related. Also, internal failure costs
should be included.
Answer (D) is incorrect because internal failure costs
should be included.
Answer (A) is incorrect because a control system

looks to the future when it provides for corrective
action and review and revision of standards.
Answer (B) is incorrect because planning and
controlling overlap.
Answer (C) is incorrect because comprehensive
planning includes creation of controls.
Answer (D) is correct. Control is the process of
making certain that plans are achieving the desired
objectives. A control system operates through
establishing standards of performance, measuring
actual performance, analyzing and comparing of
performance with standards, taking corrective action,
and reviewing and revising standards. Planning
provides needed tools for the control process by
establishing standards, e.g., budgets.
Answer (A) is incorrect because it describes product
(not process) quality control.
Answer (B) is correct. Process analysis studies the
means of producing a product with a view to
lowering costs and increasing efficiency while
producing items of appropriate quality. The effect of
process analysis is to act as a pre-control to prevent
defects. Product quality control involves inspection
during production to eliminate defective items.
[2] Source: CMA 0691 3-23

Answer (A) is incorrect because external failure costs
arise when problems occur after shipment. The cost
of scrap, rework, and tooling changes occurs before
shipment.
Answer (B) is correct. Internal failure costs are
incurred when detection of defective products occurs
before shipment. Examples include scrap, rework,
tooling changes, and downtime.
Answer (C) is incorrect because training costs are
classified as preventive costs.
Answer (D) is incorrect because prevention costs
attempt to avoid defective output.
[3] Source: CMA 1292 3-27
Answer (A) is incorrect because employees would
initially earn only $1,500 per month, and later
Answer (C) is incorrect because it is applicable to

process (not product) quality control.
Answer (D) is incorrect because process quality
control and product quality control are both
important elements in a quality control program.
Answer (A) is incorrect because TQM has a broader
emphasis. It focuses on improving quality, reducing
cycle time, providing increased customer satisfaction,
and achieving the lowest overall business cost.
Reducing the cost of inspection and encouraging
cross-functional teamwork help achieve the lowest
overall business cost.
Answer (B) is incorrect because this statement
describes participative management.
Answer (C) is incorrect because TQM has a broader
emphasis. It focuses on improving quality, reducing

cycle time, providing increased customer satisfaction,
and achieving the lowest overall business cost.
Reducing the cost of inspection and encouraging
cross-functional teamwork help achieve the lowest
overall business cost.
Answer (D) is correct. TQM establishes quality as an
organizational objective and views it as a major
component of the organization's service to its
customers. It emphasizes employee training and
commitment, product/service design and production,
and customer service. Ordinarily, the quality of a
product or service is as important to customers as
cost and timeliness. Superior product quality is not
attained merely through more inspection, better
statistical quality control, and cross-functional
teamwork. Manufacturers must make fundamental
changes in the way they produce products and do
each job right the first time.
Answer (A) is correct. Controls can be precontrol
(preventive), concurrent (applied in midstream), or
postcontrol (after the fact). Preventive controls are
designed to foresee and avert problems. Securing
small tools and equipment in a crib area with limited
access and specific accountability separates custody
of these assets from other functions and serves as a
preventive control to avoid waste and theft.
Answer (B) is incorrect because requisitioning is a
concurrent control over usage.
Answer (C) is incorrect because receiving reports are
a concurrent control over the purchasing process.
Answer (D) is incorrect because restricted use is a
concurrent control over usage.
Answer (A) is incorrect because it is implied by the
definition of control.
Answer (B) is correct. The basic process of control
for managers consists of establishing standards,
measuring performance against standards, and
correcting for deviations to ensure accomplishment of
enterprise goals. Thus, assigning responsibility for
deviations found is not a part of the controlling
function.
Answer (C) is incorrect because it is implied by the
Answer (D) is incorrect because it is implied by the
Answer (A) is incorrect because concurrent controls
are applied midstream, e.g., inspection on an
assembly line.
Answer (B) is correct. A feedback control operates
to provide information about processes that have
already occurred. The listed controls are post-action
or feedback controls.
Answer (C) is incorrect because feedforward and
preventive controls anticipate and avoid future
performance problems, e.g., budgeting.

Answer (D) is incorrect because feedforward and
preventive controls anticipate and avoid future
performance problems, e.g., budgeting.
Answer (A) is incorrect because preventive controls
keep loss exposures from occurring. They include not
only operating controls but also those for which
quantifiable standards are readily determined.
Answer (B) is incorrect because financial controls,
e.g., a budget, are subject to standards that are
relatively easy to measure since they are quantifiable.
Answer (C) is incorrect because corrective controls
are post-detection or remedial controls. They may
include controls for which standards are easily
defined, such as financial controls.
Answer (D) is correct. Operating controls are those
used in the management processes of directing and
controlling and are based on comparison of results
with standards. As an activity becomes less
mechanical, however, standards become more
difficult to determine. Control standards for security,
for example, are less easily developed than for the
output per hour of a machine since the degree of
security achieved is not readily measurable.
Answer (A) is correct. Preventive controls keep loss
exposures from occurring. When the material being
used is as scarce and valuable as a diamond,
processing is costly and time-consuming, and the cost
of a deviation from standards is high relative to the
cost of control, preventive controls are needed.
Answer (B) is incorrect because the raw material
involved is expensive, so replacement may not be
cost effective. Moreover, defects in diamonds may
not be repairable.
Answer (C) is incorrect because detection is less cost
effective given the nature of the raw material and
processing required.
Answer (D) is incorrect because feedback is less
cost effective given the nature of the raw material and
processing required.
Answer (A) is incorrect because top managers
essentially direct other managers and are not
immediately concerned with operating details.
Answer (B) is incorrect because middle managers
essentially direct other managers and are not
immediately concerned with operating details.
Answer (C) is correct. A first-line manager, such as a
production supervisor, is concerned with day-to-day
operating details. (S)he is the manager who is closest
to the point at which inputs are converted into the
goods or services produced by the organization.
Thus, the first-line manager should receive the report
because (s)he is most directly responsible for material
usage.
Answer (D) is incorrect because nonmanagers have
no ultimate responsibility for controlling operations.

Controlling is a basic management function.
Answer (A) is correct. A budget is a formal
statement in quantitative terms of an organization's
goals and plans for a specified period. When the
budget is used to measure the deviation of actual
operating performance from the established standard,
it is also employed as an operating control.
Answer (B) is incorrect because a process control is
concerned with the physical control of a
manufacturing function.
Answer (C) is incorrect because an adaptive control
permits adaptation of plans to changing conditions.
Answer (D) is incorrect because budgetary control is
more of a feedback control because actual results are
compared with the plans for the period. Any
deviation provides feedback.
Answer (A) is correct. Control is the process of
making certain that plans achieve the desired
actual performance, analysis and comparison of
and reviewing and revising standards. The three basic
elements are thus objectives, standards, and
evaluation. The last element encompasses a reward
system based on equitable evaluation of performance.
procedural framework for operational controls such

as generally accepted accounting principles provide
for accounting controls.
Answer (B) is incorrect because these controls are
well defined by the framework of GAAP.
Answer (C) is incorrect because physical controls
and their objectives are apparent. They are not
subject to any significant degree of misinterpretation.
Answer (D) is incorrect because input controls are
easily assessed by studying computer program code
and entering test data into the system.
Answer (A) is incorrect because a customer survey is
a feedback (corrective) control. It is not as effective
as a feedforward (preventive) control.
Answer (B) is incorrect because increasing finished
goods inspections is a feedback (corrective) control.
It is not as effective as a feedforward (preventive)
control.
Answer (C) is correct. Feedforward control
anticipates and prevents problems before they occur.
In a quality control program, it may entail improved
purchasing procedures, and appropriate inspection of
raw materials and work-in-process. Prevention of a
defect through feedforward control results in reduced
costs throughout the entire manufacturing and quality
inspection cycle.
Answer (D) is incorrect because, although inspection
of work-in-process serves a feedforward purpose,
prevention rather than detection of defects in
work-in-process is preferable.
Answer (B) is incorrect because no reward structure

has been established.
Answer (C) is incorrect because no evaluation
system exists.
Answer (A) is incorrect because forestalling

management fraud is only one aspect of control.
Answer (D) is incorrect because none of the elements

are present.
Answer (B) is incorrect because the protection of

assets is only one aspect of control.

Answer (A) is incorrect because input controls are
intended to prevent entry of inaccurate or incomplete
data into the information system.
Answer (B) is incorrect because auditing controls are
the system of checks and balances in effect
throughout the bank.
Answer (C) is correct. Operating controls include all
those that promote safe, accurate and timely
processing of the bank's transactions, e.g., dual
control, joint custody, rotation of employees, and
segregation of duties.
Answer (D) is incorrect because output controls are
intended to ensure the accuracy and proper
distribution of output from the information system.
Answer (C) is correct. Organizational effectiveness is

the degree to which the organization achieves its
objectives and goals. According to SIAS 2, "A
control is any action taken by management to
enhance the likelihood that established objectives and
goals will be achieved. Management plans, organizes,
and directs the performance of sufficient actions to
provide reasonable assurance that objectives and
goals will be achieved."
Answer (D) is incorrect because controlling and
planning are linked, but implementation is not an
aspect of control.
Answer (A) is incorrect because quality control
training is a feedforward or future-directed control.
Answer (B) is incorrect because forecasting inventory
needs is a feedforward or future-directed control.

Answer (A) is correct. Operational controls over
nonfinancial activities frequently are not supported by
clear criteria or standards. There is no firm external
Answer (C) is correct. A feedback control measures

actual performance, something that has already
occurred, to ensure that a desired future state is
attained. It is used to evaluate past activity to improve
future performance. A variance is a deviation from a

standard. Hence, variance analysis is a feedback
control.
Answer (D) is incorrect because computer
passwords are a preventive control.
Answer (A) is incorrect because feedforward
controls are intended to prevent deviations, not
correct them after they occur.
Answer (B) is correct. Feedforward (preliminary)
controls anticipate and avoid future performance
problems. An example is the quality control
inspection of raw materials and work-in-process to
avoid defective finished goods.
Answer (C) is incorrect because feedback controls
may be more economical than feedforward controls.
For example, the latter may require more frequent
inspections.
actual performance, something that has already

occurred, to ensure that a desired future state is
attained. It is used to evaluate the past to improve
future performance. Inspecting finished goods,
monitoring product returns, and evaluating complaints
are post-action controls intended to eliminate
deviations in future cycles of the process under
control.
Answer (B) is incorrect because feedforward
controls anticipate problems before they occur.
Answer (C) is incorrect because customer complaints
are not part of production control.
Answer (D) is incorrect because TQC, which is often
associated with JIT systems but is applicable to other
environments, is a philosophy emphasizing that each
member of the organization is a quality control
inspector. It de-emphasizes the role of separate
quality control departments by making each
employee responsible for his/her work. Hence, TQC
is not limited to inventory control.
Answer (D) is incorrect because this would be a

benefit of concurrent (i.e., detective) controls.
Answer (A) is incorrect because budgeting, financial

ratio analysis, and cash management are means of
financial control.

Answer (A) is incorrect because feedback controls
review a completed transaction to improve future
activity.
Answer (B) is incorrect because strategic planning is
a general guide for the organization that is developed
by top management.
Answer (C) is incorrect because quality control is
concerned with the production function and typically
serves as a feedback control.
Answer (D) is correct. Feedforward control provides
for the active anticipation of problems so that they
can be avoided or resolved in a timely manner.
Another example is the quality control inspection of
raw materials and work-in-process to avoid defective
finished goods.
Answer (A) is incorrect because feedback controls
apply to decision making based on evaluations of
past performance.
Answer (B) is incorrect because strategic controls
are broad-based and affect an organization over a
long period. They apply to such long-term variables
as quality and R&D.
Answer (C) is incorrect because control of budgeted
expenditures is not mentioned in the example.
Answer (D) is correct. Feedforward control provides
for the active anticipation of problems so that they
can be avoided or resolved in a timely manner.
Another example is the quality control inspection of
raw materials and work-in-process to avoid defective
finished goods.
Answer (B) is correct. An organizational control

system must be based on a statement of what is to be
achieved and when (objectives). The accomplishment
of objectives depends on the establishment of
standards that serve as feedforward controls.
Adherence to performance standards signifies that an
organization is on course to attain its objectives. A
well-developed evaluation-reward system that is
clearly communicated to employees should motivate
them to improved performance.
Answer (C) is incorrect because role analysis, team
building, and survey feedback are used in
developmental efforts to correct organizational
deficiencies.
Answer (D) is incorrect because goal setting,
empowerment, and job enrichment are all
motivational strategies.
Answer (A) is incorrect because no basis is given for
the conclusion that the sample is too small.
Answer (B) is incorrect because upper and lower
limits (standards) are provided.
Answer (C) is correct. Control is the process of
actual performance, analysis and comparison of
and reviewing and revising standards.
Answer (D) is incorrect because the worker should
make the measurements. A TQC philosophy makes
each worker a quality control inspector.

Answer (A) is correct. A feedback control measures
Answer (A) is correct. External standards are

established outside the entity. Government regulations
and trade association standards are examples.

Standardization of shoe sizes is derived from external
factors and is of obvious benefit to consumers.
Answer (B) is incorrect because engineered
standards relate to machine capacities under perfect
conditions, e.g., no downtime, etc.
Answer (C) is incorrect because productivity
standards concern output per unit of time and are
based on an analysis of the task and the skills of the
worker(s).
Answer (D) is incorrect because efficiency standards
relate to producing a product at the lowest cost.
Answer (A) is incorrect because creativity is difficult
if not impossible to measure.
Answer (B) is correct. Quantifiable standards are the
most objective since measurement of performance is
readily accomplished. A budget is a quantitative
standard for controlling cost, output, or time spent on
a project.
organizational (e.g., job design and company culture),

and environmental (such as technological change and
competition) contingencies, workers who participate
in the aforementioned ways should experience greater
autonomy and find their tasks more meaningful. In
turn, this experience should lead to satisfaction,
challenge, security, and acceptance and commitment.
Ultimate results are innovation and improved
performance and productivity.
[30] Source: CMA 0694 3-17
Answer (A) is incorrect because a maintenance cost
is a prevention cost.
Answer (B) is incorrect because inspection is an
appraisal cost.
Answer (C) is correct. In a TQM system, one of the
costs of product non-conformance is internal failure
cost, which is the cost of discovering, after appraisal
but before shipment, that a completed product does
not meet quality standards. An example is the cost of
reworking the product.
Answer (D) is incorrect because product recalls are
external failure costs.
Answer (C) is incorrect because it requires subjective

judgment.
[31] Source: CMA 1295 3-13
Answer (D) is incorrect because project completion
within budget constraints is the only objective
evaluation in the list.
Answer (A) is correct. Behavior-oriented
performance evaluation rewards the behavior that is
desired by management. Behavior control involves
examining work processes rather than work output.
Answer (B) is incorrect because the goal-oriented
approach measures how well the employee attained
the objectives or goals set by management.
Answer (C) is incorrect because a trait-oriented
approach tends to reward what the supervisor thinks
of the employee rather than the job the employee did.
Answer (D) is incorrect because an
employee-oriented approach would focus on who
did the job.
Answer (A) is incorrect because external failure costs

are those incurred for quality reasons after the
product has reached the customer; for example,
warranty and product liability costs would be
classified as external failure costs.
Answer (B) is correct. SMA 4-R lists four categories
of quality costs: prevention, appraisal, internal failure,
and external failure (lost opportunity). Internal failure
costs are incurred when detection of defective
products occurs before shipment. Examples include
scrap, rework, tooling changes, and downtime.
Answer (C) is incorrect because scrap and rework
costs are incurred after a product has been
manufactured; they are not prevention costs.
Answer (D) is incorrect because appraisal costs are
those incurred to discover quality problems; scrap
and rework occur after the discovery of a quality
problem.

Answer (A) is incorrect because TQC is a quality
control program in which everyone sees quality
control as his/her job.
Answer (B) is incorrect because job enlargement
refers to increasing the number of tasks one must
perform.
Answer (C) is incorrect because kanban is a manual
inventory technique used in just-in-time inventory
control systems.
Answer (D) is correct. According to Marshall
Soshkin ["Participative Management is an Ethical
Imperative," Organizational Dynamics 12 (Spring
1984): 4-22] employees may participate in goal
setting, decision making, problem solving, and
designing and implementing change. Subject to
various individual (values and attitudes),
Answer (A) is correct. Controllable costs can be

changed by action taken at the appropriate
management (responsibility) level. All costs are
controllable, but they are controlled at different
management levels; e.g., the decision to build another
plant is made at a higher level of management than the
decision to buy office supplies.
Answer (B) is incorrect because period costs are
those deducted as expenses during the current period
without having been previously classified as costs of
inventory.
Answer (C) is incorrect because variable costs are
those that are uniform per unit produced but fluctuate
in total in direct proportion to changes in the related
total activity or volume.
Answer (D) is incorrect because committed costs are
those arising from maintaining an organization, e.g.,
depreciation, insurance, and property taxes. These

costs have a long planning horizon, and their
relationship to specific benefits is uncertain.
[33] Source: CMA 0692 3-22
Answer (A) is incorrect because absorption cost
statements can be manipulated by juggling production
levels. Higher production results in lower unit costs.
Answer (B) is correct. Segmented income statements
present separate revenues and costs for the subunits
of an organization. Statements prepared on the basis
of cost behavior are usually the most meaningful
because only then is it possible to evaluate how a
segment manager controlled the costs under his or
her control. Variable costs are more likely to be
controllable.
Answer (C) is incorrect because cash basis
statements rarely are useful in evaluating managers.
The collection of cash may not be the most significant
event in the earning process.
Answer (D) is incorrect because a single-step format
shows cost of goods sold as no more important than
any other type of cost. This treatment is not beneficial
when manufacturing costs are a high percentage of
total costs.
to provide feedback. The performance report should

have specific time horizons. All controllable items
should be included in the performance report, even
extraordinary items. Strategic plans, however, are not
included in a performance report because they are
long-range and concern the environment in which the
organization operates.
[36] Source: CMA 1292 3-28
Answer (A) is incorrect because a division manager
has no control over dividends or times interest
earned.
Answer (B) is correct. To improve profitability,
managers should concentrate on those activities over
which they have control. Thus, a division manager
should aim for increased turnover of operating assets,
higher gross profit margin, and greater return on
equity.
Answer (C) is incorrect because a division manager
has no control over the debt-to-equity ratio.
Answer (D) is incorrect because a division manager
has no control over dividends or times interest
earned.
[37] Source: CMA 1292 3-29
[34] Source: CMA 0692 3-24

Answer (A) is incorrect because operating leverage is
a measure of the change in operating income resulting
from a percentage change in sales.
Answer (B) is incorrect because days' sales in
accounts receivable is a measure of operational
efficiency.
Answer (C) is incorrect because inventory turnover is
a measure of operational efficiency.
Answer (D) is correct. Routine operational efficiency
is evaluated by ratios or nonfinancial measures.
Residual income measures overall management
performance. Residual income is the excess of the
return on an investment over a targeted amount equal
to an imputed interest charge on invested capital.
Some enterprises prefer to measure managerial
performance in terms of the amount of residual
income rather than the percentage return on
investment. The principle is that the enterprise is
expected to benefit from expansion as long as
residual income is earned. Using a percentage ROI
approach, expansion might be rejected if it lowered
ROI, even though residual income would increase.
[35] Source: CMA 1292 3-25
Answer (A) is incorrect because a good performance
report will be related to the organization's internal
structure.
Answer (B) is incorrect because all controllable items
should be shown on performance reports.
Answer (C) is incorrect because performance reports
should represent activities over a specified period of
time.
Answer (D) is correct. Performance reports should
be related to the organizational structure in some way
and should have a user focus because the objective is
Answer (A) is incorrect because return on assets is

not a measure of liquidity.
Answer (B) is incorrect because return on assets is
not a measure of liquidity.
Answer (C) is incorrect because return on equity is
not a liquidity measure.
Answer (D) is correct. To be effective, performance
measures must be within the control of the manager
and meaningful to the area in which performance is
desired. Such controls must fairly reflect the events
they are designed to measure. A company's liquidity
can be influenced by its accounts receivable turnover,
inventory turnover, and its current ratio. All of these
measures are within the control of the treasurer's
department.
[38] Source: CMA 0693 3-13
Answer (A) is incorrect because prevention costs are
incurred in an attempt to avoid defective output.
Answer (B) is correct. Quality-related costs can be
subdivided into four categories: external failure costs,
internal failure costs, prevention costs, and appraisal
costs. Appraisal costs embrace such activities as
statistical quality control programs, inspection, and
testing. Thus, the cost of detecting nonconforming
individual products is an appraisal cost.
Answer (C) is incorrect because external failure costs
arise when quality problems occur after shipment.
Answer (D) is incorrect because opportunity costs
are not specifically associated with product quality.
Opportunity cost is the maximum benefit forgone by
using a scarce resource for a given purpose; it is the
benefit provided by the next best use of that
resource.
[39] Source: CMA 0693 3-17

Answer (A) is correct. Manufacturing cycle efficiency
is defined as the quotient of the time required for
value-added production divided by total
manufacturing lead time. For this order, the total lead
time is 12 days (5.0 + 1.5 + 3.0 + 2.5), and the
manufacturing cycle efficiency is 25% (3 days of
processing 12).
Answer (B) is incorrect because 13.6% includes the
10 days prior to production in the denominator, a
period not included in the calculation of manufacturing
cycle efficiency.
Answer (C) is incorrect because inspection time and
move time should be included in the denominator.
Answer (D) is incorrect because the calculation
involves dividing the 3 days of processing time by the
total of 12 days to complete production.
Answer (C) is correct. Decentralization is beneficial

because it creates greater responsiveness to the
needs of local customers, suppliers, and employees.
Managers at lower levels are more knowledgeable
about local markets and the needs of customers, etc.
A decentralized organization is also more likely to
respond flexibly and quickly to changing conditions,
for example, by expediting the introduction of new
products. Furthermore, greater authority enhances
managerial morale and development. Disadvantages
of decentralization include duplication of effort and
lack of goal congruence. Therefore, decentralization
will increase the chance that two divisions of the same
organization will have competing models that both
aim for the same market segments.
Answer (D) is incorrect because a decentralized
organization is more likely to respond quickly to
changing conditions. Therefore, decentralization
should result in a reduction of the delays in securing
approval for the introduction of new products.
[40] Source: CMA 0693 3-18

[43] Source: CMA 0693 3-30
Answer (A) is incorrect because 7 days excludes the
wait time.
Answer (B) is incorrect because 12 days ignores the
10 days of the waiting period prior to the start of
production.
Answer (C) is incorrect because 15 days
incorporates the wait time but not the production
periods.
Answer (D) is correct. The delivery cycle time is
defined as the entire time from receipt of the order
until delivery of the order. This period equals 22 days
(10.0 + 5.0 + 1.5 + 3.0 + 2.5)
[41] Source: CMA 0693 3-21
Answer (A) is incorrect because, if the costs are not
allocated to individual managers, they have no reason
to object to the allocation.
Answer (B) is correct. Control is the process of
objectives. A budget is one of the most common
control devices. It is a plan for the future; it is not a
contract. To interpret a budget or other plan to be as
inflexible as a contract may encourage a manager to
act in ways contrary to the company's best interest in
a misguided effort to meet the criteria proposed.
Answer (C) is incorrect because participatory
budgeting obtains the support of those involved and is
likely to foster desirable behavior.
Answer (D) is incorrect because changing budget
targets as conditions change results in setting fairer
performance goals.
[42] Source: CMA 0693 3-28
Answer (A) is incorrect because, when segments are
autonomous, other segments are regarded as external
parties, e.g., as suppliers, customers, or competitors.
Answer (B) is incorrect because decentralizing
decision-making authority leads to more effective
solutions to operational problems. Solutions will
come from the individuals with the greatest
knowledge of the operations involved.
Answer (A) is incorrect because the use of the

residual income method can cause goal congruency
problems. Residual income equals income after
deduction of an imputed interest charge on the asset
base. A division with a large asset base would
normally have more residual income than a smaller
division when the two divisions are equally profitable
in percentage terms.
Answer (B) is incorrect because lower-level
managers will take a serious approach to budgeting if
they know that their superiors are strongly committed
to the process.
Answer (C) is incorrect because a company using a
balanced approach to performance evaluation will
have a variety of measurement devices.
Answer (D) is correct. Control is the process of
objectives. The essence of control is feedback on the
results of action. Thus, the development of
information technology in the 1990s will in no way
permit organizations to eliminate feedback in the
design of management control systems.
[44] Source: CMA 0694 3-16
Answer (A) is correct. TQM emphasizes the
supplier's relationship with the customer, and
recognizes that everyone in a process is at some time
a customer or supplier of someone else, either within
or outside the organization. The costs of quality
include costs of conformance and costs of
non-conformance. Costs of conformance include
prevention costs and appraisal (inspection) costs.
Non-conformance costs are composed of internal
failure costs and external failure costs, such as lost
opportunity. Conformance costs (prevention and
appraisal) increased substantially, whereas the
non-conformance costs (internal and external failure)
decreased. Hence, the increase in conformance costs
resulted in a higher quality product.
Answer (B) is incorrect because prevention costs
also increased substantially, which could also have
led to higher quality products.
Answer (C) is incorrect because scrap and rework
are internal failure costs, which decreased by 40%.
Answer (D) is incorrect because returns and repairs

are external failure costs, which decreased by 48%.
preventive maintenance, employee training, review of

equipment design, and evaluation of suppliers.
[45] Source: CMA 1295 3-12

Answer (A) is incorrect because carrying cost is not
one of the elements of quality costs.
Answer (B) is correct. SMA 4-R lists four categories
and external failure (lost opportunity). Costs of
prevention include attempts to avoid defective output,
including employee training, review of equipment
design, preventive maintenance, and evaluation of
suppliers. Appraisal costs include quality control
programs, inspection, and testing. Internal failure
costs are incurred when detection of defective
products occurs before shipment, including scrap,
rework, tooling changes, and downtime. External
failure costs are incurred after the product has been
shipped, including the costs associated with
warranties, product liability, and customer ill will.
Answer (C) is incorrect because training costs are
not a category of quality costs.
Answer (D) is incorrect because warranty, product
liability, and training are not cost categories identified
by SMA 4-R.
[46] Source: CMA 0696 3-5
Answer (A) is correct. The proper sequence of steps

in a typical control process is as follows:
1. Selecting strategic control points at which to gather
information about activities being performed
2. Observing the work or collecting samples of data
3. Accumulating, classifying, and recording data samples
4. Comparing samples with predetermined quality,
schedule,
and cost standards
5. Determining whether performance is satisfactory
6. Reporting significant deviations to managers concerned
7. Determining, by repeating the above steps, whether
action taken is effective in correcting reported
deviations (follow-up)
8. Reviewing and revising standards
Answer (B) is incorrect because observation must
occur before classifying and recording data samples.
Answer (C) is incorrect because data must be
recorded before comparisons can occur.
Answer (D) is incorrect because data must be
recorded before comparisons can occur.
Answer (A) is incorrect because the simple

preparation of a budget does not address the control
aspect of the process.
Answer (A) is incorrect because preventive

maintenance is a feedforward control because it
attempts to anticipate and prevent problems.
Answer (B) is incorrect because the simple

preparation of a budget does not address the control
aspect of the process.
Answer (B) is correct. Feedback controls obtain

information about completed activities. They permit
improvement in future performance by learning from
past mistakes. Thus, corrective action occurs after
the fact. Inspection of completed goods is an
example of a feedback control.
Answer (C) is correct. The budget has the same

structure as the organization itself. The complete
budget is made up of a hierarchy of smaller budgets,
each representing the plan of a division, department,
or other unit in the organizational structure. Successful
budgeting requires completion of a plan that states
organizational goals before the budgeting process.
Prevention and detection of deviations from the
budget are the control purposes of budgets.
Answer (D) is incorrect because participative
budgeting implies a budget that is prepared jointly by
management and lower-level employees; it is only
one of many processes of budget development.
[47] Source: CMA 1296 3-22
Answer (A) is incorrect because training costs are
prevention costs.
Answer (B) is incorrect because the costs of external
failure, such as warranty expense, product liability,
and customer ill will, arise when problems are
discovered after products have been shipped.
Answer (C) is correct. According to SMA 4-R,
internal failure costs are incurred when detection of
defective products occurs before shipment. Examples
of internal failure costs are scrap, rework, tooling
changes, and downtime.
Answer (D) is incorrect because prevention costs are
incurred to avoid defective output. Examples include
Answer (C) is incorrect because the close

supervision of production-line workers is a
concurrent control because it adjusts an ongoing
process.
Answer (D) is incorrect because measuring
performance against a standard is a general aspect of
control.
Answer (A) is correct. Control devices may be either
qualitative or quantitative. Budgets, schedules,
quotas, and charts are examples of quantitative
control devices. Job instructions, quality-control
standards, and employment criteria are qualitative
control devices.
Answer (B) is incorrect because control devices may
be either quantitative or qualitative.
Answer (C) is incorrect because control devices may
Answer (D) is incorrect because control devices may
Answer (A) is incorrect because effective controls

should be economical because excessive controls are
costly in time and money.
Answer (B) is incorrect because effective controls
need to be timely because outdated information may
be unreliable.
Answer (C) is correct. An effective control system
should be meaningful. Therefore, controls should be
in place to measure performance only in important
areas. Excessive controls in minor areas are not
economical because the added benefits do not
outweigh the loss of time and money.
Answer (D) is incorrect because effective controls
need to be simple enough that the people using the
control can understand it.
Answer (A) is incorrect because PERT is a control
tool as well as a planning tool.
Answer (B) is correct. PERT (Program Evaluation
Review Technique) is applied in the management of
complex projects. It analyzes the project in terms of
its component activities and determines their
sequencing and timing. Thus, it systematically
combines planning with control.
Answer (C) is incorrect because PERT is a planning
tool.
Answer (D) is incorrect because PERT is a planning
tool.
Answer (A) is incorrect because they are benefits of
employee participation in the standard-setting
process.
Answer (B) is incorrect because they are benefits of
process.
Answer (C) is incorrect because they are benefits of
process.
Answer (D) is correct. The ease of implementing
company-wide standards is not a benefit of employee
participation. Employees should be involved in the
establishment of their own standards, based on the
conditions in their own workplaces.
Answer (A) is correct. A budget is a quantitative
model of a plan of action developed by management.
A budget functions as an aid to planning,
coordination, and control. Thus, a budget helps
management to allocate resources efficiently.
Answer (B) is incorrect because budgets are
designed to use resources efficiently, not just use
them.
management tool and are not designed to thwart

managerial discretion.
Answer (A) is incorrect because employee
motivation is a significant but secondary purpose of
budgets. Planning is the foundation of other
managerial functions, such as employee motivation.
Answer (B) is incorrect because performance
evaluation is a significant but secondary purpose of
budgets. Planning is the foundation of other
managerial functions, such as performance
evaluations.
Answer (C) is correct. Managers in a formal budget
setting are compelled to examine the future and be
prepared to respond to future conditions. Without
budgets, many operations would fail because of
inadequate planning.
Answer (D) is incorrect because communication is a
significant but secondary purpose of budgets.
Planning is the foundation of other managerial
functions, such as communication.
Answer (A) is incorrect because it is unlikely that the
number of employees will change due to the new
system.
Answer (B) is correct. When all customers must wait
in a single queue, it is possible to decrease waiting
time given multiple servers. An added effect is to
increase customer satisfaction.
Answer (C) is incorrect because, assuming a Poisson
process, the number of customers per teller will not
change.
Answer (D) is incorrect because tellers' duties will
not change, so on-the-job training will not improve.
Answer (A) is incorrect because employee resistance
is most likely to occur when a control procedure
highlights the things an employee does poorly, thus
damaging his/her self-esteem.
Answer (B) is correct. The success of a control
system is determined by its effectiveness in getting
people to modify their performance. The goals of a
control system may be met with resistance if the goals
are not accepted as worthwhile by the employee. For
example, an employee may resist changing their
performance when (s)he believes that the stated
standard of performance is set too high.
Answer (C) is incorrect because people tend to
avoid unpleasant situations.
Answer (D) is incorrect because the goals of a
control system will most likely not be accepted as
worthwhile by an employee when the established
standards of performance are considered relevant to
the accomplishment of what an employee regards as
the primary job objective.
Answer (C) is incorrect because budgets per se

provide for no automatic corrections.
Answer (D) is incorrect because budgets are a
Answer (A) is incorrect because they are all true

statements regarding human reactions to feedback.
Answer (B) is incorrect because they are all true
Answer (C) is correct. Human reactions to feedback
should be considered in setting performance
standards and designing control systems. However,
the nature of feedback should motivate employees to
improve their performance and reach the planned
objectives, rather than to offend or to intimidate them.
Furthermore, the timing, form, and content of the
feedback on deviations should be considered in order
to obtain maximum compliance by the affected
employees.
Answer (D) is incorrect because they are all true
[59] Source: CMA 1288 5-4
Answer (A) is correct. Exogenous or input variables
are outside the control of the decision maker.
Exogenous means "originating externally." These
influence the decision model (system) but are not
influenced by it.
Answer (B) is incorrect because at least one of the
decision variables in a model must be under the
decision maker's control; that is, at least one variable
cannot be exogenous.
Answer (C) is incorrect because performance criteria
are the means of measuring the results of a decision
after the fact.
Answer (D) is incorrect because constraints are
limitations (constants, not variables) that must be
considered as part of the decision process.
[60] Source: CMA 0697 3-28
Answer (A) is incorrect because $786 is the
appraisal cost.
included in cost-of-quality reports.

Answer (C) is incorrect because the costs of supplier
evaluations are prevention costs that are usually
included in cost-of-quality reports.
Answer (D) is correct. A cost-of-quality report
includes most costs related to quality, including the
costs of external failure, internal failure, prevention,
and appraisal. Lost contribution margins from poor
product quality are external failure costs that normally
do not appear on a cost-of-quality report because
they are opportunity costs. Opportunity costs are not
usually recorded by the accounting system, thereby
understating the costs of poor quality. Lost
contribution margins from reduced sales, market
share, and sales prices are external failure costs that
are also not usually included in a cost-of-quality
report.
[62] Source: CMA 1295 3-14
Answer (A) is incorrect because internal failure costs
arise after poor quality has been found; statistical
quality control is designed to detect quality problems.
Answer (B) is incorrect because statistical quality
control is not a training cost.
Answer (C) is incorrect because external failure costs
are incurred after the product has been shipped,
including the costs associated with warranties,
product liability, and customer ill will.
Answer (D) is correct. SMA 4-R lists four categories
and external failure (lost opportunity). Appraisal costs
include quality control programs, inspection, and
testing. However, some authorities regard statistical
quality and process control as preventive activities
because they not only detect faulty work but also
allow for adjustment of processes to avoid future
defects.
[63] Source: CMA 0693 4-28
Answer (B) is incorrect because $1,154 is the

prevention cost.
Answer (A) is incorrect because it is related to

breakeven point, not breakeven time.
Answer (C) is correct. According to SMA 4-R, the

costs of prevention and appraisal are conformance
costs that serve as financial measures of internal
performance. Prevention costs are incurred to
prevent defective output. These costs include
preventive maintenance, employee training, review of
equipment design, and evaluation of suppliers.
Appraisal costs are incurred to detect nonconforming
output. They embrace such activities as statistical
quality control programs, inspection, and testing. The
equipment maintenance cost of $1,154 is a
prevention cost. The product testing cost of $786 is
an appraisal cost. Their sum is $1,940.
Answer (B) is incorrect because the payback period

equals investment divided by annual undiscounted net
cash inflows.
Answer (D) is incorrect because $2,665 includes

rework, an internal failure cost.
[61] Source: CMA 0697 3-27
Answer (A) is incorrect because the costs of
warranty claims are readily measurable external
failure costs captured by the accounting system.
Answer (B) is incorrect because the costs of design
engineering are prevention costs that are usually
Answer (C) is incorrect because the payback period

is the period required for total undiscounted cash
inflows to equal total undiscounted cash outflows.
Answer (D) is correct. Breakeven time evaluates the
rapidity of new product development. The usual
calculation determines the period beginning with
project approval that is required for the discounted
cumulative cash inflows to equal the discounted
cumulative cash outflows. However, it may also be
calculated as the point at which discounted
cumulative cash inflows on a project equal discounted
total cash outflows. The concept is similar to the
payback period, but it is more sophisticated because
it incorporates the time value of money. It also differs
from the payback method because the period
covered begins at the outset of a project, not when
the initial cash outflow occurs.
Answer (A) is incorrect because the failure of

network fiber-optic lines is a fault management
control.
Answer (B) is incorrect because recording
unauthorized access violations is a security
management control.
Answer (C) is correct. The ISO 9000
performance-monitoring standards pertain to
management's ongoing assessment of the quality of
performance over time. Recording software usage is
a performance-monitoring control concerned with the
extent and efficiency of network software use.
Answer (D) is incorrect because allocating network
costs to system users of the network is an accounting
management control.
Answer (A) is incorrect because the labor rate of a
competitor is a financial benchmark.
Answer (B) is incorrect because the cost per pound
of a product at the company's most efficient plant is a
financial benchmark.
Answer (C) is incorrect because the cost of a training
program is a financial benchmark.
Answer (D) is correct. Benchmarking "involves
continuously evaluating the principles of best-in-class
organizations and adapting company processes to
incorporate the best of these practices." It "analyzes
and measures the key outputs of a business process
or function against the best and also identifies the
underlying key actions and root causes that contribute
to the performance difference" (SMA 4V). The
percentage of orders delivered on time at the
company's most efficient plant is an example of an
internal nonfinancial benchmark.
Answer (A) is incorrect because they are true
statements about benchmarking.
Answer (B) is incorrect because they are true
Answer (C) is incorrect because they are true
Answer (D) is correct. Benchmarking is an ongoing
process that entails quantitative and qualitative
measurement of the difference between the
company's performance of an activity and the
performance by a best-in-class organization. The
benchmarking organization against which a firm is
comparing itself need not be a direct competitor. The
important consideration is that the benchmarking
organization be an outstanding performer in its
industry.
Answer (A) is correct. TQM is an integrated system
that anticipates, meets, and exceeds customers'
needs, wants, and expectations.
Answer (B) is incorrect because reduced delivery
time and reduced delivery charges are two of many
potential activities that need improvement.
Answer (C) is incorrect because reduced delivery

time and reduced delivery charges are two of many
potential activities that need improvement.
Answer (D) is incorrect because increased employee
participation is necessary to achieve TQM, but it is
not the primary purpose for establishing the program.
Answer (A) is incorrect because prevention is
ordinarily less costly than the combined costs of
appraisal, internal failure, and external failure.
Answer (B) is correct. Prevention attempts to avoid
defective output. Prevention costs include preventive
maintenance, employee training, review of equipment
design, and evaluation of suppliers. Prevention is less
costly than detection and correction of defective
output.
Answer (C) is incorrect because prevention is
Answer (D) is incorrect because prevention is
Answer (A) is incorrect because other quality control
processes can also be expensive.
Answer (B) is incorrect because reworking defective
items may be possible although costly.
Answer (C) is incorrect because no quality control
system will be 100% effective.
Answer (D) is correct. The process used to produce
the goods is not thoroughly reviewed and evaluated
for efficiency and effectiveness. Preventing defects
and increasing efficiency by improving the production
process raises quality standards and decreases costs.
Answer (A) is incorrect because the percentage of
shipments returned measures quality by the number of
defective units.
Answer (B) is correct. The number of parts shipped
per day would most likely be used as a measure of
the effectiveness and efficiency of shipping
procedures, not the quality of the product. This
measure does not consider how many of the parts are
defective.
Answer (C) is incorrect because the number of
defective parts per million measures quality by the
number of defective units.
Answer (D) is incorrect because the percentage of
products passing quality tests the first time measures
quality by the number of nondefective products.
Answer (A) is correct. The index for May was 40%
[($4,000 + $6,000 + $12,000 + $14,000)
$90,000], and the index for June was 36% [($5,000
+ $5,000 + $15,000 + $11,000) $100,000].

Answer (B) is incorrect because the index decreased.
skills, TQM theorists believe they will be more

effective than people performing their tasks
separately in a rigid structure.
Answer (C) is incorrect because the increase in

prevention costs was 10% of the increase in labor
Answer (D) is incorrect because teamwork is

essential for TQM.
costs.
Answer (D) is incorrect because the decrease in
appraisal costs was 10% of the increase in labor
costs.
Answer (A) is correct. Total quality management
emphasizes quality as a basic organizational function.
TQM is the continuous pursuit of quality in every
aspect of organizational activities. One of the basic
tenets of TQM is doing it right the first time. Thus,
errors should be caught and corrected at the source.
Answer (B) is incorrect because total quality
management emphasizes discovering errors
throughout the process, not inspection of finished
goods.
Answer (A) is incorrect because customers are

internal as well as external.
Answer (B) is incorrect because customers are
Answer (C) is correct. One of the tenets of TQM is
customer orientation, whether the customer is internal
or external. An internal customer is a member of the
organization who relies on another member's work to
accomplish his/her task.
Answer (D) is incorrect because customers are

Answer (C) is incorrect because all members of the
organization assume responsibility for quality of the
products and services.
Answer (D) is incorrect because the total quality
management philosophy recommends limiting the
number of suppliers to create a strong relationship.
Answer (A) is incorrect because one of the 14 points
recommends elimination of numerical quotas. MBO
causes aggressive pursuit of numerical quotas.
Answer (B) is incorrect because informal learning
from coworkers serves to entrench bad work habits.
One of the 14 points stresses proper training of
everyone.
Answer (C) is incorrect because another of the 14
points states that quality by final inspection is
unnecessary if quality is built in from the start.
Answer (A) is correct. The intent of quality control is

to ensure that goods and services conform to the
design specifications. Whether the focus is on
feedforward, feedback, or concurrent control, the
emphasis is on ensuring product or service
conformity.
Answer (B) is incorrect because quality control is
geared towards satisfying the customer, not upper
management.
Answer (C) is incorrect because ensuring the
conformance with ISO-9000 specifications is a
component of a compliance audit, not quality control.
Answer (D) is incorrect because determining the
appropriate timing of inspections is only one step
towards approaching quality control. Consequently, it
is not the primary component of the quality control
function.
Answer (D) is correct. According to management

theorist W. Edwards Deming's well-known 14
points, education and self-improvement are essential.
Knowledge is opportunity. Hence, continuous
improvement should be everyone's primary career
objective.
Answer (A) is incorrect because hierarchal
organization stifles TQM.
Answer (B) is incorrect because TQM works best
with teams of people from different specialties.
Answer (C) is correct. TQM advocates replacement
of the traditional hierarchal structure with teams of
people from different specialities. This change follows
from TQM's emphasis on empowering employees
and teamwork. Employees should have proper
training, necessary information, and the best tools; be
fully engaged in the decision process; and receive fair
compensation. If such empowered employees are
assembled in teams of individuals with the required
Answer (A) is incorrect because continuous

improvement is important for achieving and
maintaining high levels of performance.
Answer (B) is incorrect because more and more
manufacturers are automating to achieve high quality,
deliver customized products on time, minimize
inventory, and increase flexibility.
Answer (C) is correct. Innovative companies are
customer driven. Because customers demand ever
better quality and competitors are attempting to
provide that quality, continuous improvement (called
kaizen by the Japanese) is essential for such
companies. Thus, the flow of innovative products and
services must be continuous. Simply emphasizing
existing products is not an effective strategy for most
organizations.
Answer (D) is incorrect because customer
satisfaction is the highest priority according to modern
management practice.
[78] Source: CIA 1195 I-66

Answer (A) is incorrect because budgetary
comparison is a typical example of a monitoring
control.
Answer (B) is incorrect because investigation of
exceptions is a monitoring control used by
lower-level management to determine when their
operations may be out of control.
days is to crash activity AD (5.5 expected time - 4.0

crash time = 1.5 days). Crashing DE results in a
1.0-day saving (7.5 - 6.5) only. Crashing AB is the
efficient way to reduce both A-B-C-E and A-B-D-E
by the desired amount of time because it is part of
both paths. The incremental cost of crashing AB is
$1,000 ($4,000 crash cost - $3,000 normal cost) to
shorten the completion time by 1.0 day (4.5 - 3.5).
The alternatives for decreasing both A-B-C-E and
A-B- D-E are more costly.
Answer (C) is correct. Monitoring assesses the

quality of internal control over time. Management
considers whether internal control is properly
designed and operating as intended and modifies it to
reflect changing conditions. Monitoring may be in the
form of separate, periodic evaluations or of ongoing
monitoring. Ongoing monitoring occurs as part of
routine operations. It includes management and
supervisory review, comparisons, reconciliations, and
other actions by personnel as part of their regular
activities. However, reconciling batch control totals is
a processing control.
Answer (D) is incorrect because internal auditing is a
form of monitoring. It serves to evaluate
management's other controls.
Answer (B) is incorrect because crashing activity DE

saves only 1.0 day (7.5 - 6.5) on the critical path and
does not reduce the time needed for A-B-C-E.
Answer (C) is incorrect because crashing AD does
not reduce the time necessary to complete A-B-C-E
or A-B-D-E.
Answer (D) is incorrect because AB and CE are not
on the critical path.
Answer (A) is incorrect because the project is ahead
of schedule, but activity D has not yet been started,
much less completed.

Answer (A) is correct. One of the major
disadvantages of trait-type performance appraisals
(subjective appraisals, or ones that rely on a number
of less precise measures) is their inability to measure
performance accurately. Corrective action is
therefore difficult. If subjective factors are important,
correction may need to be more gradual.
Answer (B) is correct. Assuming that each of the

bars represents the expected time necessary to
complete an activity and that the shaded regions
represent the portions completed, it can be seen that
activity A has been completed as scheduled and
activities B and C are ahead of schedule. Therefore,
the project is ahead of schedule.
Answer (C) is incorrect because the project is ahead
Answer (B) is incorrect because they are true

statements.
Answer (C) is incorrect because they are true
statements.
Answer (D) is incorrect because they are true
statements.

Answer (D) is incorrect because the project is ahead
[83] Source: CMA 1289 4-3
[80] Source: CMA 1290 4-7

Answer (A) is incorrect because the expected time of
the critical path is 13.0 days.
Answer (B) is correct. The critical path is the longest
path. The longest path in the diagram is A-D-E,
which requires 13 days (5.5 + 7.5) based on
expected times.
Answer (C) is incorrect because the expected time of
Answer (D) is incorrect because the expected time of
[81] Source: CMA 1290 4-8
Answer (A) is correct. The critical (longest) path is
A-D-E, which has an expected time of 13 days (see
preceding question). However, to decrease the
project's completion time by 1.5 days, paths
A-B-C-E (4.5 + 1.0 + 6.5 = 12 days) and A-B-D-E
(4.5 + .5 + 7.5 = 12.5 days) as well as A-D-E must
also be shortened. Hence, A-D-E must be reduced
by 1.5 days, A-B-C-E by .5 day, and A-B-D-E by
1.0 day. The only way to decrease A-D-E by 1.5
Answer (A) is incorrect because the volume variance

is not related to direct labor.
Answer (B) is correct. The fixed overhead volume
variance measures the effect of not operating at the
budgeted (denominator) activity level. It is the
difference between budgeted fixed costs and the
product of the standard fixed overhead application
rate and the standard activity level for the actual
output. A favorable variance means that activity was
greater than expected and that fixed overhead was
overapplied. It might be caused by, for example,
hiring more workers to provide an extra shift. An
unfavorable volume variance means that activity was
less than budgeted (overhead was underapplied), for
example, because of insufficient sales or a labor
strike. Accordingly, the volume variance is usually
outside the control of production management.
Moreover, unlike other variances, it does not directly
reflect a difference between actual and budgeted
expenditure of resources.
Answer (C) is incorrect because the volume variance
is not related to overhead efficiency.
Answer (D) is incorrect because the volume variance
is not related to overhead use.
Thus, total overhead applied was $315,000 ($15 x

21,000 planned machine hours based on output).
[84] Source: CMA 1289 4-6
Answer (A) is correct. The variable overhead
efficiency variance equals the product of the variable
overhead application rate and the difference between
the standard input for the actual output and the actual
input. Hence, the variance will be zero if variable
overhead is applied on the basis of units of output
because the difference between actual and standard
input cannot be recognized.
Answer (C) is incorrect because the total overhead

applied was $315,000 based on 21,000 hours at
$15 per hour.
Answer (D) is incorrect because $300,000 is based
on planned direct labor hours at $75 per hour.
[88] Source: CMA 1292 3-17
Answer (B) is incorrect because the variance would

be zero.
Answer (A) is incorrect because the overhead was

underapplied.
Answer (C) is incorrect because the variance would

be zero.
Answer (B) is correct. Variable overhead applied in

November was $210,000 [21,000 planned machine
hours based on output x ($2,400,000 planned annual
VOH 240,000 planned machine hours)]. Because
the applied overhead was less than actual
($214,000), underapplied variable overhead equaled
$4,000.
Answer (D) is incorrect because the correlation

between the variable overhead and direct labor
efficiency variances occurs only when overhead is
applied on the basis of direct labor.
Answer (A) is incorrect because Product A has the
greatest contribution margin ratio (53%), but a lower
CM per hour than B.
Answer (B) is correct. When resources are limited,
maximum profits are achieved by maximizing the
dollar contribution margin per limited or constraining
factor. In this situation, machine hours are the
constraining factor. Product B has a contribution
margin per machine hour of $28 [4 x ($18 - $11)],
which is greater than that of Product A [3 x ($15 $7) = $24], Product C [2 x ($20 - $10) = $20], or
Product D [3 x ($25 - $16) = $27].
Answer (C) is incorrect because Product C has a
greater dollar unit contribution margin ($10), but a
lower CM per hour than B.
Answer (D) is incorrect because Product D has the
greatest selling price per unit ($25), but a lower CM
per hour than B.
[86] Source: CMA 1292 3-15
Answer (A) is incorrect because $5 is the fixed
overhead application rate.
Answer (C) is incorrect because the overhead was

underapplied.
Answer (D) is incorrect because $6,000 is based on
the 22,000 machine hours planned for November
rather than the planned hours for actual output.
[89] Source: CMA 1292 3-18
spending variance equals the difference between
actual variable overhead and the product of the actual
input and the budgeted application rate. At a variable
overhead application rate (standard cost) of $10 per
machine hour ($2,400,000 240,000 hours), the
total standard cost for the 21,600 actual hours was
$216,000. Given actual costs of $214,000, the
favorable variance is $2,000.
Answer (B) is incorrect because $6,000 is based on
planned machine hours of 22,000.
Answer (C) is incorrect because the variance is
favorable.
Answer (D) is incorrect because the variance is
favorable.
[90] Source: CMA 1292 3-19
Answer (B) is incorrect because $25 is the fixed

overhead per labor hour.
Answer (A) is incorrect because the variance was

favorable.
Answer (C) is incorrect because $10 is the variable

portion of the overhead application rate.
Answer (B) is incorrect because the variance was

favorable.
Answer (D) is correct. The predetermined overhead

application rate is $15 [($1,200,000 FOH +
$2,400,000 VOH) 240,000 machine hours].
Answer (C) is incorrect because $10,000 is based

on 22,000 planned machine hours.
[87] Source: CMA 1292 3-16

Answer (A) is incorrect because the total overhead
applied was $315,000 based on 21,000 hours at
$15 per hour.
Answer (B) is correct. Overhead is applied on the
basis of planned machine hours. The predetermined
overhead application rate is $15 [($1,200,000 FOH
+ $2,400,000 VOH) 240,000 machine hours].
Answer (D) is correct. The fixed overhead volume

(idle capacity) variance is the difference between
budgeted fixed costs and the product of the standard
fixed overhead cost per unit of input and the standard
units of input allowed for the actual output. Budgeted
fixed costs for the month were $100,000. The
standard cost of actual output was $105,000
[21,000 machine hours planned for actual output x
($1,200,000 planned annual FOH 240,000
planned annual machine hours) FOH application
rate]. Hence, the fixed overhead volume variance
was $5,000 favorable. It was favorable because the
budget for fixed overhead was less than the amount

applied to jobs. An overapplication of fixed overhead
suggests that output exceeded expectations.
[91] Source: CMA 0693 3-15
Answer (A) is incorrect because there is no materials
variance; the actual cost was equal to the budgeted
cost for materials.
Answer (B) is incorrect because no labor efficiency
variance occurred. Budgeted hours were identical to
actual hours for 8,500 units.
Answer (C) is incorrect because no labor efficiency
variance occurred. Budgeted hours were identical to
actual hours for 8,500 units.
Answer (D) is correct. The standard cost of materials
for 8,500 units is $127,500 (8,500 x $15). Thus, no
variance arose with respect to materials. Because
labor for 9,000 units was budgeted at $81,000, the
unit labor cost is $9. Thus, the labor budget for 8,500
units is $76,500, and the total labor variance is
$1,275 ($77,775 - $76,500). Because the actual
cost is greater than the budgeted amounts, the
$1,275 variance is unfavorable. Given that the actual
time per unit (45 minutes) was the same as that
budgeted, no labor efficiency variance was incurred.
Hence, the entire $1,275 unfavorable variance must
be attributable to the labor rate (or price) variance.
Answer (D) is correct. The variable overhead

spending and efficiency variances are the components
of the total variable overhead variance. Given that
actual variable overhead was $80,000 and the
flexible budget amount was $90,000, the total
variance is $10,000 favorable. If the overhead
spending variance is $2,000 favorable the efficiency
variance must be $8,000 favorable ($10,000 total $2,000 spending). At a rate of $20 per hour, this
variance is equivalent to 400 direct labor hours
($8,000 $20).
[94] Source: CMA 0693 3-20
Answer (A) is incorrect because efficiency variances
are applicable to variable costs.
Answer (B) is incorrect because efficiency variances
Answer (C) is incorrect because efficiency variances
Answer (D) is correct. Variable overhead variances
can be subdivided into spending and efficiency
components. However, fixed overhead variances do
not have an efficiency component because fixed
costs, by definition, are not related to changing levels
of output. Consequently, there is no concept of
efficiency with respect to the incurrence of fixed
costs. Fixed overhead variances are typically
subdivided into a budget (or fixed overhead
spending) variance and a volume variance.
[92] Source: CMA 0693 3-16

Answer (A) is incorrect because the total flexible
budget variance includes items other than revenue.
Answer (B) is incorrect because the sales volume
variance represents the change in contribution margin
caused by a difference between actual and budgeted
units sold. However, given a flexible budget, there is
no difference between budgeted and actual units sold.
By definition, a flexible budget's volume is identical to
actual volume.
Answer (C) is incorrect because the total static
budget variance includes many items other than
revenue.
Answer (D) is correct. Variance analysis can be used
to judge the effectiveness of selling departments. If a
firm's sales differ from the amount budgeted, the
difference may be attributable to either the sales price
variance or the sales volume (quantity) variance.
Changes in unit selling prices may account for the
entire variance if the actual quantity sold is equal to
the quantity budgeted. None of the revenue variance
is attributed to the sales volume variance because no
such variance exists when a flexible budget is used.
The flexible budget is based on the level of sales at
actual volume.
[93] Source: CMA 0693 3-19
Answer (A) is incorrect because the variances are
favorable.
Answer (B) is incorrect because 100 direct labor
hours are equivalent to the spending variance ($20 x
100 hours = $2,000).
Answer (C) is incorrect because the variances are
favorable.
[95] Source: CMA 0693 3-26

Answer (A) is incorrect because an unfavorable
materials quantity variance affects production
management and possibly the purchasing function. It
may indicate an inefficient use of materials or the use
of poor quality materials.
Answer (B) is incorrect because an unfavorable labor
efficiency variance reflects upon production workers
who have used too many hours.
Answer (C) is incorrect because a favorable labor
rate variance related to hiring is a concern of the
personnel function. The favorable rate variance might
be more than offset by an unfavorable labor efficiency
variance or a materials quantity variance (if waste
occurred).
Answer (D) is correct. Most variances are of
significance to someone who is responsible for that
variance. However, a fixed overhead volume
variance is often not the responsibility of anyone other
than top management. The fixed overhead volume
variance equals the difference between budgeted
fixed overhead and the amount applied (standard rate
x standard input allowed for the actual output). It can
be caused by economic downturns, labor strife, bad
weather, or a change in planned output. Thus, a fixed
overhead volume variance resulting from a top
management decision to reduce output has fewer
behavioral implications than other variances.
[96] Source: CMA 1293 3-22
Answer (A) is incorrect because the unit standard
cost is $2.50.
Answer (B) is correct. Given that the company
produced 12,000 units with a total standard cost for
materials of $60,000, the standard cost must be

$5.00 ($60,000 12,000 units) per unit of finished
product. Because each unit of finished product
requires two units of raw materials, the standard unit
cost for raw materials must be $2.50.
costs of $320,000 ($4 x 80,000 units). Fixed costs

would remain at $200,000. Thus, the total flexible
budget costs are $520,000. Given that actual costs
were only $515,000, the variance is $5,000
favorable.
Answer (C) is incorrect because $3 is the actual cost

per unit of raw materials.

favorable.
Answer (D) is incorrect because $5 is the total

standard cost of raw materials for each unit of
finished product.
[100] Source: CIA 0592 IV-18

Answer (A) is incorrect because the direct labor rate
variance is $100 F ($48,500 - $48,600).
[97] Source: CMA 1293 3-23

Answer (A) is incorrect because 12,000 units is the
number of units of finished product.
Answer (B) is incorrect because 12,500 units
assumes that each unit of finished product includes
only one unit of raw materials.
Answer (C) is incorrect because 23,000 units
assumes a favorable quantity variance.
Answer (D) is correct. The company produced
12,000 units of output, each of which required two
units of raw materials. Thus, the standard input
allowed for raw materials was 24,000 units at a
standard cost of $2.50 each. An unfavorable quantity
variance signifies that the actual quantity used was
greater than the standard input allowed. The materials
quantity variance equals the difference between actual
and standard quantities, times the standard price per
unit. Consequently, since 1,000 ($2,500U $2.50)
additional units were used, the actual total quantity
must have been 25,000 units (24,000 standard +
1,000).
[98] Source: CMA 1293 3-24
Answer (A) is incorrect because $2,500 unfavorable
is the materials quantity variance.
Answer (B) is incorrect because the price variance is
$12,500, or $.50 per unit.
Answer (C) is correct. The price variance equals
actual quantity times the difference between the actual
and standard prices. Actual usage and the standard
price were 25,000 units and $2.50, respectively.
Actual price was $3.00 ($105,000 total cost
35,000 units purchased). Consequently, the materials
price variance is $12,500 unfavorable [($3.00 $2.50) x 25,000 units].
Answer (D) is incorrect because the price variance is
$12,500, or $.50 per unit.
[99] Source: CMA 1293 3-25
Answer (A) is incorrect because $85,000 favorable
is based on a production level of 100,000 units.
Answer (B) is incorrect because the variance is
favorable.
Answer (C) is correct. The company planned to
produce 100,000 units at $6 each ($4 variable + $2
fixed cost), or a total of $600,000, consisting of
$400,000 of variable costs and $200,000 of fixed
costs. Total production was only 80,000 units at a
total cost of $515,000. The flexible budget for a
production level of 80,000 units includes variable
Answer (B) is correct. The total flexible budget direct

labor variance equals the difference between total
actual direct labor cost and standard direct labor cost
(standard rate x standard hours) allowed for the
actual output. It combines the direct labor rate and
efficiency variances. For this company, the variance is
$1,900 U ($48,500 actual wages at actual hours $46,600 standard wages at standard hours).
Answer (C) is incorrect because the total labor
variance is unfavorable.
Answer (D) is incorrect because the direct labor
efficiency variance is $2,000 U.
[101] Source: CIA 0593 IV-14
Answer (A) is incorrect because budgeted, not
actual, UCM is used to calculate this variance.
Answer (B) is incorrect because the flexible budget
volume is the actual volume, resulting in a zero
variance.
Answer (C) is incorrect because budgeted, not
actual, UCM is used to calculate this variance.
Answer (D) is correct. For a single-product
company, the sales volume variance is the difference
between the actual and budgeted sales quantities
times the budgeted UCM. If the company sells two
or more products, the difference between the actual
and budgeted product mixes must be considered. In
that case, the sales volume variance equals the
difference between (1) actual total unit sales times the
budgeted weighted-average UCM for the actual mix
and (2) budgeted total unit sales times the budgeted
Answer (A) is incorrect because $294 favorable is
the materials quantity variance.
Answer (B) is correct. The materials mix variance
equals the actual total quantity used times the
difference between the budgeted weighted-average
standard unit cost for the budgeted mix and the
budgeted weighted-average standard unit cost for the
actual mix. This variance is favorable if the standard
weighted-average cost for the actual mix is less than
the standard weighted-average cost for the budgeted
mix. The standard mix weighted-average standard
unit cost is $.225 per liter ($135 standard total cost
600 liters). The standard cost of the actual quantity
used was $18,606 (see below). Thus, the actual mix
weighted-average standard unit cost was $.220398
($18,606 84,420 liters used), and the mix variance
was $388.50 favorable [($.220398 - $.225) x
84,420 liters].
$.200 x 26,600 = $ 5,320.00

.425 x 12,880 = 5,474.00
.150 x 37,800 = 5,670.00
.300 x 7,140 = 2,142.00
---------$18,606.00
==========
Answer (C) is incorrect because $94.50 unfavorable
is the materials yield variance.
Answer (D) is incorrect because $219.50 favorable
is based on the actual mix of purchases.
Answer (A) is incorrect because $294.50 favorable
is the materials quantity variance.
Answer (B) is incorrect because $388.50 favorable
is the materials mix variance.
Answer (C) is correct. The materials yield variance
equals the difference between the actual input and the
standard input allowed for the actual output, times the
budgeted weighted-average standard cost per input
unit at the standard mix. The standard input for the
actual output was 84,000 liters (140 batches x 600
liters per batch). The standard mix budgeted
weighted-average standard unit cost is $.225 per liter
($135 total cost 600 liters). Thus, the yield
variance is $94.50 unfavorable [(84,420 liters used 84,000 liters allowed) x $.225].
Answer (B) is incorrect because this equation defines

the sales quantity variance.
Answer (C) is incorrect because this equation defines
the market size variance.
Answer (D) is incorrect because this equation defines
the market share variance.
Answer (A) is incorrect because this equation defines
the sales mix variance.
Answer (C) is correct. The components of the sales
quantity variance are the market size variance and the
market share variance. The market size variance
gives an indication of the change in contribution
margin caused by a change in the market size. The
market size and market share variances are relevant
to industries in which total level of sales and market
share are known, e.g., the automobile industry. The
market size variance measures the effect of changes
in an industry's sales on an individual company, and
the market share variance analyzes the impact of a
change in market share.
Answer (D) is incorrect because $219.50 favorable

is based on the actual mix of purchases.
Answer (B) is correct. The sales volume variance
equals the difference between the flexible budget
contribution margin for the actual volume and that
included in the master budget. Its components are the
sales quantity and sales mix variances. The sales
quantity variance focuses on the firm's aggregate
results. It assumes a constant product mix and an
average contribution margin for the composite unit. It
equals the difference between actual and budgeted
unit total sales, times the budgeted weighted-average
UCM for the planned mix.

Answer (D) is correct. The market share variance
gives an indication of the amount of contribution
margin gained (forgone) because of a change in the
market share.
Answer (A) is incorrect because the unfavorable DM
quantity variance should be a debit.

Answer (B) is incorrect because the unfavorable DM

price and quantity variances should be debits.

Answer (C) is correct. The entry to record direct

materials used is to debit WIP at standard prices and
standard quantities (450 units x $9 = $4,050). In this
question, all direct materials variances are recorded
at the time WIP is charged. The materials price
variance and the materials quantity variance must be
calculated. The project used more units at a higher
price than estimated, so both variances will be
unfavorable (debits). The materials quantity variance
is $450 U [(500 - 450) x $9]. The materials price
variance is $500 U [500 units x ($10 - $9)].
Inventory is credited for the actual prices and actual
quantities (500 x $10 = $5,000).

Answer (A) is correct. The sales mix variance may
be viewed as a sum of variances. For each product in
the mix, the difference between actual units sold and
its budgeted percentage of the actual total unit sales is
multiplied by the budgeted UCM for the product.
The results are added to determine the mix variance.
An alternative is to multiply total actual units sold by
the difference between the budgeted
weighted-average UCM for the planned mix and that
for the actual mix.
Answer (D) is incorrect because this entry fails to

record the variances.

Answer (A) is correct. The entry to record accrued
payroll is to charge WIP at the standard wage rate
times the standard number of hours and to credit
accrued payroll for the actual payroll dollar amount.
The project required more hours but a lower wage
rate than estimated. Hence, the labor efficiency
variance will be unfavorable (a debit); the labor price
variance will be favorable (a credit).
account and enter a corresponding credit to the

variable O/H applied account for the amount of O/H
computed using the predetermined O/H rate (530 x
$4.50 = $2,385).
Answer (B) is incorrect because O/H control is
debited for O/H incurred.
Answer (C) is incorrect because the O/H application
is at $4.50, not $5.00, per hour.
Answer (D) is incorrect because the goods to which
these costs apply are in process.
Labor eff. var. (50 - 45) x $12 = $60 U

Labor price var. ($12 - $10) x 50 = $100 F
Answer (B) is incorrect because this entry omits the
price variance and fails to inventory the labor costs.
Answer (C) is incorrect because this entry would be
the proper entry if the hourly rate were greater than
estimated, but hours worked were less.
Answer (D) is incorrect because the labor variances
must be recognized.
Answer (A) is incorrect because this entry assumes
the price variance is not recorded at time of
purchase.
Answer (B) is correct. The entry at the time of
purchase is to charge inventory for $520, which is the
actual quantity purchased ($650 $5 per unit = 130
units) times the standard unit price ($4). Accounts
payable is credited for $650 (actual quantity x actual
price). The difference between the actual and
standard prices is the price variance. Because the
actual price exceeded the standard, the price
variance is debited for the difference. The price
variance is $130 [130 units x ($5 - $4)] unfavorable.
Answer (A) is incorrect because the variance is a

debit to a spending variance account, not a credit to a
variance summary.
Answer (B) is correct. The spending variance is
recognized by a debit, given that more was spent for
that activity than was estimated. The entry to record
the unfavorable variable O/H spending variance is to
charge the variable O/H spending variance account
for the appropriate amount. The variable O/H applied
account is charged for its balance. The variable O/H
control account is credited for its balance. These
entries will result in a zero balance in both the applied
and the control accounts assuming that no variable
O/H efficiency variance existed.
Answer (C) is incorrect because the variance is a
spending variance resulting from the excess of an
actual cost over a standard cost, not an efficiency
variance.
Answer (D) is incorrect because variable O/H
applied is debited and variable O/H control is
credited to close out the accounts.
Answer (C) is incorrect because the variance should

be charged to a separate account, not WIP.
Answer (D) is incorrect because materials should be
debited to inventory.
Answer (A) is incorrect because the normal balances

in the O/H applied and O/H control accounts are a
credit and a debit, respectively. Hence, the closing
entries must be the reverse.
Answer (B) is incorrect because the fixed O/H
applied account must be closed with a debit entry.
Answer (A) is incorrect because actual indirect

production costs are debited to O/H control.
Answer (C) is incorrect because this entry does not

close the O/H accounts.
Answer (B) is incorrect because O/H application is

usually based on standard rates and a given activity
base, not amounts actually incurred. O/H is applied
by crediting O/H control (or a separate applied O/H
account) and debiting WIP.
Answer (D) is correct. The entry is to debit fixed

O/H applied and credit fixed O/H control for their
respective balances. The difference is attributable
solely to the production volume variance because the
budget (spending) variance is zero (actual fixed
factory O/H = the budgeted amount). The volume
variance is unfavorable because fixed O/H is
underapplied. The underapplication (the unfavorable
volume variance debited) is $2,500 [$32,500
budgeted fixed factory O/H - (2,000 hours x $15 per
hour)].
Answer (C) is correct. The entry to record actual

variable O/H incurred ($5 x 530 hours = $2,650) is
to charge the variable O/H control account. A
corresponding credit is made to accounts payable or
any other appropriate account.
Answer (D) is incorrect because the variable O/H is
debited to variable O/H control, not variable O/H
applied.
Answer (A) is correct. The entry to record the
application of variable O/H is to charge the WIP
[115] Source: CMA 0694 3-19

Answer (A) is incorrect because budgetary
accountants are involved in the setting of standard
costs.
Answer (B) is incorrect because industrial engineers
are involved in the setting of standard costs.
Answer (C) is correct. A standard cost is an estimate

of what a cost should be under normal operating
conditions based on studies by accountants and
engineers. In addition, line management is usually
involved in the setting of standard costs as are quality
control personnel. Top management would not be
involved because cost estimation is a lower level
operating activity. Participation by affected
employees in all control systems permits all
concerned to understand both performance levels
desired and the measurement criteria being applied.
Answer (D) is incorrect because quality control
personnel are involved in the setting of standard
costs.
Answer (B) is incorrect because a change in product

mix would not explain the price variance.
Answer (C) is incorrect because materials of higher
than standard quality would more likely cause an
unfavorable price variance and a favorable quantity
variance.
Answer (D) is correct. A favorable materials price
variance is the result of paying less than the standard
price for materials. An unfavorable materials usage
variance is the result of using an excessive quantity of
materials. If a purchasing manager were to buy
substandard materials to achieve a favorable price
variance, an unfavorable quantity variance could
result from using an excessive amount of poor quality
materials.
[116] Source: CMA 0694 3-21

[119] Source: CMA 1294 3-24
Answer (A) is correct. The materials efficiency
variance is the difference between actual and
standard quantities used in production, times the
standard price. An unfavorable materials efficiency
variance is usually caused by wastage, shrinkage, or
theft. Thus, it may be the responsibility of the
production department because excess usage would
occur while the materials are in that department.
Similarly, industrial engineering may play a role
because it is responsible for design of the production
process.
Answer (B) is incorrect because purchasing rarely
can control the materials efficiency variance.
Answer (C) is incorrect because sales has no effect
on the materials efficiency variance.
Answer (D) is incorrect because sales has no effect
on the materials efficiency variance.
Answer (A) is incorrect because no variance relates

quantity purchased to quantity used.
Answer (B) is incorrect because no variance relates
quantity purchased to quantity used.
Answer (C) is correct. The materials price variance
may be isolated at the time of purchase or at the time
of transfer to production. It equals the actual quantity
of materials purchased or transferred times the
difference between the actual and standard unit
prices. Hence, a favorable materials price variance
means that materials were purchased at a price less
than the standard price.
Answer (D) is incorrect because the unfavorable
quantity variance indicates that more materials were
used than allowed by the standards. The materials
quantity variance equals the standard unit price times
the difference between the actual quantity used and
the standard quantity allowed for the actual output.
[117] Source: CMA 0694 3-22

Answer (A) is correct. The labor price (rate)
variance is the difference between the actual rate paid
and the standard rate, times the actual hours. This
difference may be attributable to a change in labor
rates since the establishment of the standards, using a
single average standard rate despite different rates
earned among different employees, assigning
higher-paid workers to jobs estimated to require
lower-paid workers (or vice versa), or paying hourly
rates, but basing standards on piecework rates (or
vice versa). The difference should not be caused by a
union contract approved before the budgeting cycle
because such rates would have been incorporated
into the standards.
Answer (B) is incorrect because predictions about
labor rates may have been inaccurate.
Answer (C) is incorrect because using a single
average standard rate may lead to variances if some
workers are paid more than others and the
proportions of hours worked differ from estimates.
Answer (D) is incorrect because assigning higher paid
(and higher skilled) workers to jobs not requiring
such skills would lead to an unfavorable variance.
[118] Source: CMA 0694 3-23
Answer (A) is incorrect because machine efficiency
problems would not explain the price variance.
[120] Source: CMA 1294 3-25

Answer (A) is incorrect because the variable
overhead spending variance may be affected by, but
does not affect, a direct labor efficiency variance. It
equals the difference between actual variable
overhead, which includes indirect but not direct labor,
and the variable overhead applied based on the
standard rate and the actual activity level, which may
or may not be measured in direct labor hours. Thus,
the effect of an unfavorable direct labor efficiency
variance is to decrease an unfavorable variable
overhead spending variance or to increase a
favorable variable overhead spending variance.
Answer (B) is correct. An unfavorable direct labor
efficiency variance indicates that actual hours
exceeded standard hours. Too many hours may have
been used because of inefficiency on the part of
employees, excessive coffee breaks, machine
down-time, inadequate raw materials, or materials of
poor quality that required excessive rework. An
unfavorable materials usage variance might be related
to an unfavorable labor efficiency variance. Working
on a greater quantity of raw materials may require
more direct labor time.
Answer (C) is incorrect because the fixed overhead
volume variance does not affect, and is not affected
by, a direct labor efficiency variance. It equals the
fixed overhead applied based on the standard rate
and the standard input (e.g., direct labor) allowed for
the actual output.

Answer (D) is incorrect because the variable
overhead spending variance may be affected by, but
does not affect, a direct labor efficiency variance. It
equals the difference between actual variable
overhead, which includes indirect but not direct labor,
and the variable overhead applied based on the
standard rate and the actual activity level, which may
or may not be measured in direct labor hours. Thus,
the effect of an unfavorable direct labor efficiency
variance is to decrease an unfavorable variable
overhead spending variance or to increase a
favorable variable overhead spending variance.
Answer (B) is incorrect because $60,000 favorable

is the variable overhead spending variance calculated
based on capacity, not actual hours.
Answer (C) is incorrect because $96,000
unfavorable is based on the difference between
standard hours allowed for the actual output and
capacity hours.
Answer (D) is incorrect because $200,000
unfavorable is the excess of actual direct labor costs
over actual variable overhead costs.
[124] Source: CMA 1294 3-29
[121] Source: CMA 1294 3-26

Answer (A) is correct. The fixed overhead spending
(budget) variance is the difference between actual
and budgeted fixed factory overhead. Actual fixed
overhead was $540,000. Budgeted fixed overhead
was $5 per hour based on a capacity of 100,000
direct labor hours per month, or $500,000. Because
these costs are fixed, the budgeted fixed overhead is
the same at any level of production. Hence, the
variance is $40,000 unfavorable ($540,000 $500,000).
Answer (B) is incorrect because $70,000
unfavorable is the difference between actual fixed
overhead and the product of the standard rate and
the actual direct labor hours.
unfavorable is the volume variance.
unfavorable is the difference between actual variable
overhead and budgeted fixed overhead.
Answer (A) is incorrect because $54,000

unfavorable is the direct labor efficiency variance.
Answer (B) is correct. The direct labor price
variance equals actual labor hours times the
difference between standard and actual labor rates.
The actual labor cost was $940,000 for 94,000
hours, or $10 per hour. The standard rate was $9
per hour. Thus, the variance is $94,000 [94,000
hours x ($10 - $9)]. The variance is unfavorable
because the actual rate paid was higher than the
standard rate.
Answer (C) is incorrect because $60,000 favorable
equals the actual rate times the difference between
capacity and actual hours.
unfavorable is the total direct labor variance.
[125] Source: CMA 1294 3-30
is based on the difference between standard and
capacity hours.
[122] Source: CMA 1294 3-27

is based on 100,000 hours, not the actual hours of
94,000.
Answer (B) is correct. The variable overhead
spending variance is the difference between actual
variable overhead and the variable overhead based
on the standard rate and the actual activity level.
Thus, the variable overhead spending variance was
$12,000 favorable [$740,000 actual cost - ($8
standard rate x 94,000 actual hours)]. Because actual
is less than standard, the variance was favorable.
unfavorable is the variable overhead efficiency
variance.

is based on the actual rate and the difference between
standard hours and capacity.
is based on the actual rate and the difference between
actual hours and capacity.
Answer (D) is correct. The direct labor efficiency
variance equals the standard rate times the difference
between actual and standard hours. Hence, the
variance is $54,000 {$9 x [94,000 hours - (4
standard hours per unit x 22,000 units)]}. The
variance is unfavorable because the actual hours
exceeded the standard hours.
[126] Source: CMA 0695 3-10

unfavorable is the fixed overhead spending variance.
[123] Source: CMA 1294 3-28

efficiency variance equals the standard price ($8 an
hour) times the difference between the actual hours
and the standard hours allowed for the actual output.
Thus, the variance is $48,000 {$8 x [94,000 actual
hours - (4 standard hours per unit x 22,000 units
produced)]}. The variance is unfavorable because
actual hours exceeded standard hours.
Answer (A) is incorrect because MBO is a

behavioral, communication-oriented, responsibility
approach to employee self-direction; although MBO
can be used with standard costs, the two are not
necessarily related.
Answer (B) is incorrect because rates of return relate
to revenues as well as costs, whereas a standard
costing system concerns costs only.
Answer (C) is incorrect because participative
management stresses multidirectional communication;
it has no relationship to standard costs.
Answer (D) is correct. A standard cost is an estimate

of what a cost should be under normal operating
conditions based on accounting and engineering
studies. Comparing actual and standard costs permits
an evaluation of the effectiveness of managerial
performance. Because of the impact of fixed costs in
most businesses, a standard costing system is usually
not effective unless the company also has a flexible
budgeting system. Flexible budgeting uses standard
costs to prepare budgets for multiple activity levels.
[127] Source: CMA 0695 3-23
Answer (A) is incorrect because $450 unfavorable
equals the standard quantity needed for the actual
output times the $.05 unfavorable price variance per
part.
unfavorable, and $450 is the amount of the variance
that relates only to the standard input for the actual
output.
unfavorable. Furthermore, the variance is based on
the quantity purchased, not the quantity consumed.
[Note: The materials price variance is sometimes
isolated at the time of transfer to production.]
Answer (D) is correct. The standard cost per part is
$1.45. The actual cost was $18,000 for 12,000
parts, or $1.50 each. Thus, the price variance is
$600 unfavorable [12,000 parts x ($1.50 - $1.45)].
The variance is unfavorable because the actual cost
was higher than the standard cost.
nonskilled workers, or the purchase of

below-standard-quality materials by the purchasing
department. Changes in product design can also
affect the quantity of materials used. Sales volume of
the product should not be a contributing factor to a
materials efficiency variance.
[130] Source: CMA 0695 3-29
Answer (A) is incorrect because the sales price
variance is a separate variance and is not a
component of the sales volume variance.
Answer (B) is incorrect because the sales price
variance is a separate variance and is not a
component of the sales volume variance.
Answer (C) is correct. The sales volume variance can
be divided into the sales quantity variance and the
sales mix variance. The sales quantity variance is the
change in contribution margin caused by the
difference between actual and budgeted volume,
assuming that budgeted sales mix, unit variable costs,
and unit sales prices are constant. Thus, it equals the
sales volume variance when the sales mix variance is
zero. In a multiproduct firm, the sales mix variance is
a variance caused by a sales mix that differs from that
budgeted. For example, even when the sales quantity
is exactly as budgeted, an unfavorable sales mix
variance can be caused by greater sales of a
low-contribution product at the expense of lower
sales of a high-contribution product.
Answer (D) is incorrect because the production
volume variance is a fixed overhead variance. It is not
related to the sales volume variance.
[128] Source: CMA 0695 3-24

[131] Source: CMA 0695 3-30
Answer (A) is correct. Standard usage was three
parts per radio at $1.45 each. For a production level
of 3,000 units, the total materials needed equaled
9,000 parts, but materials actually used totaled
10,000 parts. Thus, the variance is $1,450
unfavorable [$1.45 standard cost per part x (10,000
used - 9,000 standard usage)].
unfavorable. The actual quantity used exceeded the
standard input allowed.
Answer (C) is incorrect because $4,350 unfavorable
assumes that 12,000 parts were consumed.
Answer (D) is incorrect because $4,350 favorable
assumes that 12,000 parts were consumed and that
the variance is favorable.
Answer (A) is incorrect because the direct labor

efficiency variance relates to inefficient or efficient use
of direct labor hours.
Answer (B) is incorrect because the variable
overhead efficiency variance relates to efficient or
inefficient use of variable overhead.
Answer (C) is correct. The production volume
variance (also called an idle capacity variance) is a
component of the total factory overhead variance. It
is the difference between budgeted fixed costs and
the product of the standard fixed cost per unit of
input times the standard units of input allowed for the
actual output. Thus, the production volume variance
equals under- or overapplied fixed factory overhead.
This variance results when actual activity differs from
the activity base used to calculate the fixed factory
overhead application rate.
[129] Source: CMA 0695 3-25

Answer (A) is incorrect because worker
performance is a possible cause of a materials
efficiency variance.

is related to overhead application, not direct labor.
[132] Source: CMA 1295 3-3
Answer (B) is incorrect because purchasing

department actions are possible causes of a materials
Answer (C) is incorrect because product design is a
possible cause of a materials efficiency variance.
Answer (D) is correct. An unfavorable materials
quantity or usage (efficiency) variance can be caused
by a number of factors, including waste, shrinkage,
theft, poor performance by production workers,
Answer (A) is incorrect because a static budget

variance is the difference between actual costs or
revenues and those budgeted on a static budget.
Answer (B) is incorrect because a master budget
increment is an increase in a budgeted figure on the
firm's master budget.
Answer (C) is incorrect because the sales mix
variance is caused when a company's actual sales mix
is different from the budgeted sales mix.

Answer (D) is correct. If a firm's sales differ from the
amount budgeted, the difference could be attributable
either to the sales price variance or the sales volume
variance. The sales volume variance is the change in
contribution margin caused by the difference between
the actual and budgeted sales volumes.
combining several materials or classes of labor in

varying proportions (when substitutions are allowable
in combining resources).
[136] Source: CMA 1295 3-11
Answer (A) is incorrect because both the purchasing
manager and the production manager could be at
fault.
[133] Source: CMA 1295 3-4

Answer (A) is incorrect because both efficiency
variances are based on the same number of hours
worked. Therefore, if one is unfavorable, the other
will also be unfavorable.
Answer (B) is correct. If variable overhead is applied
to production on the basis of direct labor hours, then
both the variable overhead efficiency variance and the
direct labor efficiency variance will be calculated on
the basis of the same number of hours. If the labor
efficiency variance is unfavorable, then the overhead
efficiency variance will also be unfavorable because
both variances are based on the difference between
standard and actual labor hours worked.
Answer (C) is incorrect because both efficiency
variances are based on the same number of hours
worked. Therefore, if one is unfavorable, the other
will also be unfavorable.
Answer (D) is incorrect because the amount of the
variances will be different depending on the amount
of the costs anticipated and actually paid.
[134] Source: CMA 1295 3-7
Answer (A) is incorrect because the fixed overhead
fixed costs and budgeted costs.
Answer (B) is incorrect because the efficiency
variance is applicable to variable overhead.
Answer (C) is correct. A denominator level of
activity must be used to establish the standard cost
(application rate) for fixed factory overhead. The
production volume variance is the difference between
budgeted fixed costs and the standard cost per unit of
input times the standard units of input allowed for the
actual production.
Answer (D) is incorrect because the flexible budget
variance is the difference between actual and
budgeted figures on a flexible budget.
Answer (B) is incorrect because the plant controller

is at too high a level for an investigation of a material
usage variance.
Answer (C) is incorrect because both the purchasing
manager and the production manager could be at
fault.
Answer (D) is correct. An unfavorable materials
quantity variance is usually caused by waste,
shrinkage, or theft. Alternatively, an unfavorable
variance could be attributable to the purchasing
department's not buying the proper quality of
materials in an attempt to achieve a favorable material
price variance. Thus, either the production manager
or the purchasing manager could be responsible for a
material usage variance.
[137] Source: CMA 1295 3-25
Answer (A) is incorrect because the material price
variance can be greatly influenced by the purchasing
manager.
Answer (B) is correct. The production control
supervisor has the most control over the material
usage variance. The material usage variance measures
the excess amount of materials used over the amount
specified in the standards. The material usage (or
material quantity) variance, when unfavorable, is often
attributable to waste, shrinkage, or theft in the
production areas. The excess usage occurs under the
supervision of the production department.
Answer (C) is incorrect because the variable
overhead spending variance is both a quantity and a
price variance. Prices paid are not controllable by the
production control supervisor.
Answer (D) is incorrect because fixed overhead
variances usually cannot be controlled by the
manufacturing departments.
[138] Source: CMA 1289 4-2
[135] Source: CMA 1295 3-8

Answer (A) is incorrect because a spending variance
is not the same as an efficiency variance.
Answer (B) is incorrect because a price variance is
not the same as an efficiency variance.
Answer (C) is incorrect because a volume variance is
based on fixed costs, while an efficiency variance is
based on variable costs.
Answer (D) is correct. An efficiency variance is
calculated by multiplying the difference between
standard and actual usage times the standard cost per
unit of input. The efficiency variances can be divided
into yield and mix variances. These variances are
calculated only when the production process involves
Answer (A) is incorrect because the overhead

variances would not cause a change in the direct
Answer (B) is incorrect because the overhead
Answer (C) is correct. An unfavorable direct labor
efficiency variance results when production requires
more labor hours than expected, for example,
because employees take longer coffee breaks and
earlier wash-up times than anticipated when the
standards were established. The variance can also be
the result of production delays, such as those caused
by poor quality materials or material shortages. Thus,
an unfavorable material usage variance could indicate
that excessive materials were used. The excessive use
of materials would require more labor time.

Answer (D) is incorrect because the overhead
[139] Source: CMA 0692 3-15
Answer (A) is incorrect because $9,500,000 equals
variable labor costs only.
Answer (B) is incorrect because adding the
$600,000 of fixed costs to the $9,500,000 of
variable labor costs produces a total cost of
$10,100,000.
Answer (C) is correct. The flexible budget provides
for a cost of $1,000 per article ($10,000,000
10,000 articles). Each article should require 20 hours
of labor (200 hours 10 articles). Thus, the standard
labor rate is $50 per hour ($1,000 20 hours), and
total standard variable labor cost is $9,500,000
(9,500 articles x 20 hours x $50 per hour).
Accordingly, total expected costs are $10,100,000
($9,500,000 + $600,000 FC).
Answer (D) is incorrect because labor costs will
decline as production declines, but fixed costs will
not.
[140] Source: CMA 0692 3-16
Answer (A) is correct. Budgeted fixed costs are
$600,000. The actual fixed costs were $618,000
($9,738,000 total costs - $9,120,000 flexible costs).
Because actual costs were $18,000 higher than the
budget, the variance is unfavorable.
Answer (A) is incorrect because the variance is

unfavorable. The purchase price exceeded standard
cost.
Answer (B) is correct. The materials price variance
equals the actual quantity purchased times the
difference between actual and standard unit prices.
Actual cost was $475,000, or $3.80 per pound.
Hence, the variance is $25,000 unfavorable
[125,000 pounds x ($3.80 - $3.60)].
unfavorable. The purchase price exceeded standard
cost.
computed on the actual quantity purchased, not the
quantity used.
[143] Source: CMA 0692 3-19
favorable. Actual usage was less than the standard.
calculated by multiplying the quantity difference times
the standard unit cost of $3.60, not the actual unit
cost.
favorable. Actual usage was less than the standard.
Answer (D) is correct. This variance equals the
standard unit cost times the difference between the
actual quantity used and the standard quantity for
good production. Consequently, the variance is
$7,200 favorable {$3.60 x [(5 pounds x 22,000
units) - 108,000 pounds used]}.

unfavorable.
[144] Source: CMA 0692 3-20
on a false presumption that fixed costs will be less at
a 9,500 production level than a 10,000 level.
Answer (D) is incorrect because the variance was
unfavorable.
[141] Source: CMA 0692 3-17
Answer (A) is correct. The labor efficiency variance
is the difference between standard and actual hours,
multiplied by the standard cost per hour. The
standard labor rate is $50 per hour, and the standard
time allowed for 9,500 articles is 190,000 hours
(9,500 x 20). Actual hours worked totaled 192,000.
Thus, an unfavorable variance of 2,000 hours
occurred. The unfavorable labor efficiency variance
was therefore $100,000 ($50 x 2,000 hours).
difference between total (fixed + variable) standard
labor cost ($9,500,000) and total actual cost
($9,738,000).
unfavorable.
Answer (D) is incorrect because the efficiency
variance is based on standard hours for actual
production levels--in this case 190,000 hours.
[142] Source: CMA 0692 3-18
Answer (A) is correct. The direct labor rate variance

equals the actual quantity of hours worked times the
difference between the standard and actual labor
rates. Total direct labor cost was $327,600 (90% x
$364,000), and the actual unit direct labor cost was
$11.70 ($327,600 28,000 hours). Thus, the
variance is $8,400 favorable [28,000 hours x ($12 $11.70)].
favorable. The actual labor rate was less than the
standard rate.
favorable. The actual labor rate was less than the
standard rate.
Answer (D) is incorrect because $6,000 is the labor
efficiency variance, not the labor rate variance.
[145] Source: CMA 0692 3-21
unfavorable. More hours were worked than allowed
by the standards.
Answer (B) is correct. The direct labor efficiency
variance equals the standard unit cost times the
difference between actual hours and standard hours.
Accordingly, the variance is $6,000 unfavorable
{$12 x [28,000 hours - (1.25 hours x 22,000
units)]}.
Answer (C) is incorrect because the labor efficiency
variance is $6,000 unfavorable.
Cost/DLH
DLH/unit
Unit DL cost

unfavorable. More hours were worked than allowed
by the standards.
[146] Source: CMA 1279 4-10
volume variance concerns the application of fixed
cost to product and does not encompass revenue or
sales concepts in any way.
Answer (B) is correct. The fixed overhead volume
variance is the difference between budgeted fixed
costs and actual overhead applied, which equals the
budgeted fixed overhead rate times the standard input
allowed for the actual output. It is solely a measure of
capacity usage and does not signify that fixed costs
were more or less than budgeted.
volume variance is calculated on the assumption that
fixed costs are constant.
concerns output levels rather than the efficiency of
production.
[147] Source: CMA 1279 4-11
Answer (A) is incorrect because ideal capacity
standards are hypothetical; they do not consider the
practical realities of operations such as breakdowns,
employee illness, normal waste, etc.
Answer (B) is incorrect because cost standards
should not be based on normal or average historical
performance concepts. Rather, they should be based
upon what is attainable according to a technical,
scientific, or engineering approach.
Answer (C) is incorrect because cost standards
should not be based on normal or average historical
performance concepts. Rather, they should be based
upon what is attainable according to a technical,
scientific, or engineering approach.
Answer (D) is correct. Engineered costs are those
having a relatively measurable and constant
relationship between input and output. Most labor
and direct materials costs are engineered. They are
determined by work measurement. Flexible budgets
and standard cost systems are means of controlling
engineered costs.
[148] Source: CMA 0684 4-26
Answer (A) is incorrect because $21.00 excludes
employee benefits.
Answer (B) is correct. The standard direct labor unit
cost equals 3 hours times the cost per DLH. This
amount is determined by adding employee benefits to
weekly wages and dividing by hours per week.
------$ 8.75
x
3
------$ 26.25
=======
Answer (C) is incorrect because the standard direct

labor unit cost equals 3 hours times the cost per
DLH. The cost per DLH equals weekly wages plus
employee benefits, divided by productive hours per
week, or $8.75 [($245.00 + 61.25) 35]. The
standard direct labor cost per unit is $26.25 ($8.75 x
3 hours).
Answer (D) is incorrect because $36.75 results from
dividing weekly wages plus benefits by 25 employees
instead of 35 weekly productive hours per employee.
[149] Source: CMA 0687 4-16
Answer (A) is incorrect because $400 is the
difference between budgeted and actual variable
selling and administrative costs.
Answer (B) is correct. The volume variance isolates
the effect of selling more or less units than budgeted.
It equals budgeted unit contribution margin (UCM)
times the difference between budgeted and actual
units sold. Given expected sales of 4,000 units and
revenue of $60,000, unit price is $15. Variable costs
are $16,000 for manufacturing and $8,000 for selling,
and unit variable cost is $6 ($24,000 4,000 units).
The UCM is $9 ($15 - $6). Since actual sales were
200 units less than budgeted (4,000 - 3,800), the lost
contribution margin was $1,800 ($9 x 200). This
variance is unfavorable because actual sales were less
than budgeted.
Answer (C) is incorrect because 200 units is the
difference between budgeted and actual units. This
difference, multiplied by the UCM of $9 ($15 - $6)
equals the $1800 unfavorable contribution margin
volume variance.
Answer (D) is incorrect because $6,800 is the
difference between budgeted and actual revenue.
[150] Source: CMA 1287 4-30
Answer (A) is incorrect because the quantity of
materials purchased cannot be determined from the
information given.
Answer (B) is incorrect because the quantity of
materials purchased cannot be determined from the
information given.
Answer (C) is correct. A favorable price variance
indicates that the materials were purchased at a price
less than standard. The unfavorable quantity variance
indicates that the quantity of materials used for actual
production exceeded the standard quantity for the
good units produced.
Answer (D) is incorrect because the actual usage was
greater than standard.
[151] Source: CMA 1289 4-1
Weekly wages
$245.00
Plus benefits (.25 x $245)
61.25
------$306.25
Divided by hours/week
35
Answer (A) is incorrect because the efficiency

variances are directly correlated.
Answer (B) is correct. The calculation of the variable
overhead efficiency variance is similar to that of the

direct labor efficiency variance in that both measure
the effect of the difference between actual and
standard hours. Assuming overhead is applied on the
basis of direct labor hours, both variance calculations
will be based on the same number of hours. Thus, if
the direct labor efficiency variance is unfavorable, the
variable overhead efficiency variance will also be
unfavorable.
Answer (C) is incorrect because the amount of the
variance is dependent upon the actual costs incurred.
variances are directly correlated.
actual and standard direct labor hours times the

standard cost per hour. Fixed overhead was
budgeted at $600,000 ($3 x 200,000 expected
units). Thus, total variable overhead was estimated to
be $300,000 ($900,000 total OH - $600,000), and
the variable overhead application rate was $.75 per
hour [$300,000 (2 hours x 200,000 units)].
Standard hours for actual production are 396,000
(198,000 units x 2). Actual hours worked were
440,000. Hence, the variable overhead efficiency
variance is $33,000 [$.75 x (440,000 actual hours 396,000 standard hours for actual output)]. The
variance is unfavorable because actual hours
exceeded budgeted hours.
overhead efficiency variance is $33,000U.
[152] Source: CMA 1289 4-4

Answer (C) is incorrect because the variable
Answer (A) is incorrect because the efficiency
variances would not cause the favorable price
variance.
Answer (B) is incorrect because the purchase of
higher than standard materials would lead to an
unfavorable price variance.
Answer (C) is correct. A favorable price variance
might indicate that cheaper materials of lower quality
were purchased and that greater usage was
necessary.
Answer (D) is incorrect because labor mix problems
would cause labor variances, not material variance.
[153] Source: CMA 1289 4-5
Answer (A) is incorrect because the purchasing
department has more control over the price variance
than does the production department.
Answer (B) is correct. The production control
supervisor would have the most control over the
material usage variance because it is typically
influenced most by activities within the production
department.
Answer (C) is incorrect because it is not as
controllable as the material usage variance.
Answer (D) is incorrect because the fixed overhead
variances are outside the control of production.

[156] Source: CMA 1290 3-7
Answer (A) is incorrect because the variable
overhead spending variance is $22,000U.
Answer (C) is correct. Based on the 440,000 hours
actually worked and the $.75 per hour variable
overhead rate, the total standard cost for variable
overhead is $330,000. The actual variable overhead
totaled $352,000. The $22,000 variable overhead
spending variance is unfavorable because the actual
cost was higher than the standard.
[157] Source: CMA 1290 3-8
spending variance is $25,000F.
Answer (B) is correct. Actual fixed overhead was
$575,000. Budgeted fixed overhead was $3 per unit
at an estimated production of 200,000 units; a total
of $600,000. The difference of $25,000 is a
favorable variance because the actual amount was
less than that budgeted.
[154] Source: CMA 1290 3-5

Answer (A) is incorrect because total standard hours
allowed equal 396,000.
Answer (B) is correct. Two standard hours are
allowed for each unit of production. Given actual
production of 198,000 units, total standard hours
allowed equal 396,000 (2 x 198,000).

[158] Source: CMA 1290 3-9
Answer (C) is incorrect because total standard hours


applied is $594,000.
Answer (D) is incorrect because total standard hours

Answer (B) is incorrect because the fixed overhead

[155] Source: CMA 1290 3-6

efficiency variance equals the difference between
Answer (C) is correct. Fixed overhead is applied at

the rate of $3 per unit. The amount applied given
actual production is $594,000 ($3 x 198,000 units).
[159] Source: CMA 1290 3-10
favorable.
[162] Source: CMA 1291 3-3
Answer (A) is correct. The fixed overhead volume

variance results when production varies from the
denominator amount. The denominator amount is the
level of production used to determine the standard
cost per unit. Because production was expected to
be 200,000 units (the denominator level), but actual
production was only 198,000 units, an unfavorable
volume variance of 2,000 units occurred. Thus,
2,000 units were not charged with $3 per unit of
overhead, and the volume variance in dollars was
$6,000U (2,000 units x $3). This underapplication of
fixed overhead is unfavorable because it indicates an
underuse of facilities; that is, activity was less than
budgeted. Unlike other variances, this variance does
not measure deviations from expected costs but
rather the departure from the expected use of
productive capacity.
Answer (A) is correct. The direct labor rate variance

equals the actual quantity of labor used times the
difference between the actual and standard prices for
labor. The actual total price of labor was $42,000,
90% of which was for direct labor. Thus, the price of
direct labor was $37,800. A total of 5,000 hours of
direct labor was worked. Thus, the actual hourly rate
was $7.56 ($37,800 5,000 hrs.), and the variance
is $2,200 [5,000 hrs. x ($8.00 - $7.56)]. The actual
rate was less than standard, so the variance is
favorable.
Answer (B) is incorrect because the fixed overhead

volume variance is $6,000U.
Answer (D) is incorrect because the labor rate

variance is $2,200F.

[160] Source: CMA 1291 3-1
Answer (A) is incorrect because the price variance is
$16,000U.
Answer (B) is correct. The direct materials price
variance equals the actual quantity purchased times
the difference between the actual and standard unit
costs. The standard unit cost for direct materials is
$1.80 per pound. The actual cost for 160,000
pounds was $304,000, or $1.90 per pound. The
variance is unfavorable because the actual price
exceeded the standard price. Thus, the variance is
$16,000U ($.10 x 160,000 lbs.).
Answer (B) is incorrect because the labor rate

Answer (C) is incorrect because the labor rate
[163] Source: CMA 1291 3-4

Answer (A) is incorrect because the direct labor
efficiency variance is $2,000U.
Answer (B) is incorrect because the direct labor
Answer (C) is correct. The direct labor efficiency
variance equals the standard labor rate times the
difference between actual and standard hours.
Because each unit requires .25 hours of labor, the
standard hours allowed for November would have
been 4,750 (.25 x 19,000 units of output).
Accordingly, the variance is $2,000 [$8.00 standard
rate x (5,000 actual hrs. - 4,750 standard hrs.)]. This
variance is unfavorable because the actual hours
exceeded the standard hours.
Answer (D) is incorrect because the direct labor
Answer (C) is incorrect because the price variance is

$16,000U.
[164] Source: CMA 1291 3-14
$16,000U.
Answer (A) is incorrect because $30,000 is the

difference between the actual and budgeted
contribution margins.
[161] Source: CMA 1291 3-2

Answer (A) is incorrect because the direct materials
quantity variance is $17,100F.
Answer (B) is incorrect because the direct materials
Answer (C) is incorrect because the direct materials
Answer (D) is correct. The direct materials quantity
variance equals the standard price ($1.80 per pound)
times the difference between the actual and standard
quantities. The actual quantity used was 142,500
pounds. The standard quantity is 8 pounds per unit of
product. Given that 19,000 units were produced, the
standard quantity for the actual output was 152,000
pounds (8 lbs. x 19,000 units). Hence, the direct
materials quantity variance is $17,100 [$1.80 x
(152,000 - 142,500)]. Since the actual quantity used
was less than the standard quantity, the variance is
Answer (B) is incorrect because $18,000 equals the

difference between actual and budgeted unit sales
times the actual UCM.
Answer (C) is correct. The sales quantity variance is
the difference between the actual and budgeted units,
times the budgeted UCM.
$120,000
(5,000 - 6,000) x --------- = $20,000 U
6,000
Answer (D) is incorrect because $15,000 is the sales
price variance.
[165] Source: CMA 1291 3-15
difference between the actual and budgeted
contribution margins.
[169] Source: CIA 1192 IV-20

Answer (B) is incorrect because $18,000 equals the
difference between actual and budgeted unit sales
times the actual UCM.
Answer (C) is incorrect because $20,000 is the sales
quantity variance.
Answer (D) is correct. The sales price variance is the
actual number of units sold (5,000), times the
difference between budgeted selling price ($300,000
6,000) and actual selling price ($235,000 5,000).
($50 - $47) x 5,000 = $15,000 U
[166] Source: CMA 1291 3-16
Answer (A) is correct. The variable cost flexible
budget variance is equal to the difference between
actual variable costs and the product of the actual
quantity sold and the budgeted unit variable cost
($180,000 6,000 = $30).
($30 x 5,000) - $145,000 = $5,000 F
favorable.
Answer (C) is incorrect because $4,000 is the
amount of the fixed cost variance.
amount of the fixed cost variance.
[167] Source: CMA 1291 3-17

results from multiplying the standard direct materials
that should have been used in production [(3 x
7,500) = 22,500 lbs.] times the difference between
standard price and actual price [($1.60 - $1.55) =
$.05].
results from multiplying the direct materials issued to
production (23,000 lbs.) times the difference
between standard price and actual price [($1.60 $1.55) = $.05].
results from multiplying the direct materials that
should have been used for budgeted production [(3 x
8,000) = 24,000 lbs.] times the difference between
standard price and actual price [($1.60 - $1.55) =
$.05].
Answer (D) is correct. The materials price variance
measures the difference between what was actually
paid for the goods purchased and the standard
amount allowed for the goods purchased. Thus, it
equals the difference between actual price and
standard price, multiplied by the actual quantity
purchased. This question assumes that price
variances are isolated at the time of purchase. If they
are isolated when the materials are used, the variance
is the difference between standard and actual price,
times the amount used (not amount purchased).
Accordingly, the direct materials purchase price
variance is $1,250 F {[($38,750 TC 25,000 lbs.) $1.60 per lb.] x 25,000 lbs.}. The variance is
favorable because actual price was less than standard
price.

variable cost variance.
[170] Source: CIA 1192 IV-21
variable cost variance.
unfavorable.
Answer (D) is correct. The fixed cost variance equals
the difference between actual fixed costs and
budgeted fixed costs.
$84,000 - $80,000 = $4,000 U
[168] Source: CMA 1291 3-18
Answer (A) is incorrect because Folsom will need to
know the actual total market size.
Answer (B) is incorrect because Folsom will need to
know the actual total market size.
Answer (C) is correct. A change in market share
reflects a change in relative competitiveness. To
isolate the effect on operating income of an increase
or a decrease in market share, the company must
know its budgeted and actual market shares, the
actual size of the market for November, and the
budgeted weighted-average unit contribution margin.
Such computations may help Folsom to determine
whether its decline in sales resulted from a loss of
competitiveness or a shrinkage of the market.
Answer (D) is incorrect because Folsom will need to
know the budgeted market share.
Answer (A) is incorrect because $775 unfavorable

results from multiplying the difference between
standard quantity [(3 x 7,500) = 22,500] and actual
quantity used (23,000) times the actual price ($1.55).
Answer (B) is correct. The efficiency (quantity or
usage) variance for direct materials equals standard
unit price times the difference between actual usage
and the standard usage for the actual output.
Accordingly, the direct materials efficiency variance is
$800 U {[23,000 lbs. issued - (3 lbs. x 7,500 units)]
x $1.60}. The variance is unfavorable because actual
usage exceeded standard usage.
Answer (C) is incorrect because $1,600 results from
multiplying the difference between standard quantity
that should have been used for budgeted production
[(3 x 8,000) = 24,000] and actual quantity used
(23,000) times the standard price ($1.60).
results from multiplying the difference between the
actual quantity purchased (25,000) and actual
quantity used (23,000) times the standard price
($1.60).
unfavorable.
Answer (B) is correct. The direct materials price
variance equals the actual price minus the standard
price, times the actual quantity used in production.
The variance is $760,000 unfavorable [($28 - $24) x

190,000]. The variance is unfavorable because the
actual price exceeded the standard price.
direct materials efficiency variance.
direct labor rate variance.
is the direct labor rate variance.
Answer (B) is correct. The direct materials efficiency
variance equals the actual quantity minus the standard
quantity, times standard price. The variance is
$240,000 favorable {[190,000 - (10 x 20,000)] x
$24}. The variance is favorable because the actual
quantity was less than the standard quantity allowed
for the actual output.
favorable.

unfavorable.
Answer (C) is correct. The direct labor efficiency
variance equals actual quantity minus standard
quantity, times the standard price. The standard
quantity is the amount of standard labor hours
required for the actual good output achieved. Actual
labor hours equaled 3,200, standard hours were
2,500 (1,000 units of output x 2.5 hours), and the
standard direct labor price was $8. Hence, the labor
efficiency variance was $5,600 U [(3,200 actual
hours - 2,500 standard hours) x $8].
Answer (D) is incorrect because $6,090 equals the
difference between actual hours and standard hours
for the actual output (3,200 - 2,500 = 700), times the
actual direct labor cost per hour ($8.70).
[176] Source: CIA 0590 IV-15
Answer (A) is correct. The labor efficiency variance
is $980 ($9,800 - $8,820). It is the difference
between actual and standard hours multiplied by the
standard labor rate.
variance is $200. It is the difference between the
actual and standard rates time the actual hours.

is the direct materials efficiency variance.
favorable.
Answer (C) is correct. The direct labor rate variance
equals the actual rate minus the standard rate, times
the actual amount of labor used. The variance is
$156,000 favorable [($18 - $20) x 78,000]. The
variance is favorable because the actual rate was less
than the standard rate.
Answer (D) is incorrect because $40,000 results
from multiplying the actual units of output by the
difference between the actual rate and standard rate.
[174] Source: CIA 1189 IV-17
unfavorable.
Answer (B) is correct. The total direct labor variance
can be isolated into the price variance and the
efficiency variance. The labor price variance equals
the actual price minus the standard price, times the
actual quantity. Actual price is $8.70 ($27,840
3,200 hours). Hence, the variance is $2,240 U
[($8.70 - $8.00) x 3,200].
Answer (C) is incorrect because $3,840 equals
actual direct labor cost ($27,840) minus the standard
direct labor cost of the budgeted production (1,200 x
2.5 hours x $8).
Answer (D) is incorrect because $5,600 unfavorable
is the direct labor efficiency variance.
[175] Source: CIA 1189 IV-18
is the direct labor rate variance.
Answer (C) is incorrect because the volume variance

is the difference between budgeted fixed overhead
and the amount applied based on the standard input
allowed for the actual output.
Answer (D) is incorrect because the term "spending
variance" is usually applied to overhead variances.
Answer (A) is incorrect because machine repairs in
an automobile factory are usually an overhead
(indirect) cost.
Answer (B) is incorrect because electricity in an
electronics plant is usually an overhead (indirect)
cost.
Answer (C) is correct. Direct costs are readily
identifiable with and attributable to specific units of
production. Wood is a raw material (a direct cost) of
furniture.
Answer (D) is incorrect because sales commissions
are period costs. They are neither direct nor indirect
costs of products.
Answer (A) is incorrect because abnormal spoilage is
not charged to overhead but is expensed.
Answer (B) is correct. Factory overhead consists of
all costs other than direct materials and direct labor
that are associated with the manufacturing process.
Overtime premiums (amounts in excess of regular
hourly rates) are usually considered a part of
overhead.
Answer (C) is incorrect because prime costs include
direct labor and direct materials, which are not part
of overhead.
Answer (D) is incorrect because variances are usually

closed to cost of goods sold or prorated at the end of
the period to cost of goods sold and inventory.
[179] Source: CIA 1191 IV-15
Answer (A) is incorrect because $4,200 equals $12
times the difference between actual hours (6,600)
and the hours budgeted for planned output (5,000 x
1.25 = 6,250).
Answer (B) is incorrect because $3,000 equals $12
times 6,500 standard hours for the actual output
minus 6,250 standard hours for the budgeted output.
actual cost minus budgeted cost.
Answer (D) is correct. The direct labor efficiency
(quantity) variance equals standard price times the
difference between actual and standard amounts of
labor hours. The standard amount for the actual
output is 6,500 direct labor hours (1.25 DLH x
5,200 units). The variance is $1,200 U [(6,500
standard hours - 6,600 actual hours) x $12].
[180] Source: CIA 1191 IV-16

Answer (A) is incorrect because only significant
variances should be investigated. Also, the benefits of
each step in the entire standard-cost process must be
cost effective. Benefits should exceed costs.
Answer (B) is incorrect because the trend of
variances over time should be considered. A negative
variance that has been getting progressively smaller
may not need investigating, whereas a variance that is
increasing should be investigated promptly.
Answer (C) is incorrect because the objective of
variance investigation is pinpointing responsibility and
taking corrective action toward eliminating variances.
Answer (D) is correct. A variance shows a deviation
of actual results from the expected or budgeted
results. All significant variances should be
investigated, whether favorable or unfavorable.
[183] Source: CIA 1187 II-10
Answer (A) is incorrect because accountability is
adequately established by the inventory entries.
Answer (A) is incorrect because the price variance is

$3,000 F and the quantity variance is $4,000 U.
Answer (B) is incorrect because variance entries

cannot safeguard assets, they can only provide
information for use in controlling the cost of
production.
Answer (B) is incorrect because the quantity variance

is $4,000 U.
Answer (C) is incorrect because internal cost

accounting information need not comply with GAAP.
Answer (C) is correct. The direct materials purchase

price variance is the difference between the standard
price per pound ($4.00) and actual price per pound
($297,000 75,000 = $3.96) times the pounds of
direct materials purchased for the month. Hence, the
price variance is $3,000 F [($4.00 - $3.96) x 75,000
pounds]. The quantity variance is the difference
between actual usage of direct materials (70,000
pounds) and standard usage of direct materials for
actual output (23,000 actual units produced x 3
pounds = 69,000 pounds) valued at the standard
price per pound ($4.00). The quantity variance is
therefore $4,000 U [(70,000 - 69,000) x $4].
Answer (D) is correct. One step in the control

process is measurement of actual results against
standards. For example, the standard quantity of
materials for a given output is established prior to
production. If the actual materials usage exceeds the
standard, the variance is unfavorable and corrective
action may be needed.

$3,000 F.
[181] Source: CMA 0683 4-5
Answer (A) is correct. In the long run, these costs
should be the same. In the short run, however, they
may differ because standard costs represent what
costs should be, whereas budgeted costs are
expected actual costs. Budgeted costs may vary
widely from standard costs in certain months, but, for
an annual budget period, the amounts should be
similar.
Answer (B) is incorrect because standard costs are
not necessarily determined by engineering studies.
Answer (C) is incorrect because standard costs are
usually based on currently attainable standards
applicable when a process is under control. They are
set without regard to variances or slack.
Answer (D) is incorrect because budgeted costs
include expected deviations from the standards.
[184] Source: CIA 0582 IV-22

Answer (A) is incorrect because, if materials do not
meet specifications, more will be used and an
unfavorable quantity (usage) variance will result.
Answer (B) is incorrect because machinery that has
not been maintained properly is more likely to ruin
units of production and therefore require more
materials to complete production.
Answer (C) is correct. An efficiency, or usage,
variance for materials occurs when usage differs from
the standard. Unfavorable variances occur when
actual usage is greater than standard. Labor whose
skill is commensurate with materials usage standards
should achieve standard materials usage; that is, little
or no variance should arise.
Answer (D) is incorrect because scheduling of
substantial overtime can lead to reduced quality and
the need for more material to produce units to
replace those units of unacceptable quality.
Answer (A) is incorrect because it states the
definition of the materials yield variance.
Answer (B) is incorrect because it defines the labor
yield variance.
Answer (C) is correct. Materials yield and mix

variances are the components of the materials usage
variance. They are useful only if certain classes or
types of materials can be substituted for each other.
The materials mix variance is calculated to isolate the
effects of the change in the mix of materials used.
Thus, it equals the sum of the products of the
difference between the amount of each class of
materials actually used and the standard amount
allowed times the difference between the budgeted
price for that class and the budgeted
weighted-average materials cost for all materials in
the mix. Because substitutability of materials may not
be possible in every situation, the materials mix
variance is suitable for analysis only when the
manager has some control over the composition of
the mix.
Answer (D) is incorrect because the mix variance is
based on budgeted prices.
Answer (A) is correct. The materials yield variance is
the difference between actual input and the standard
input allowed, times the budgeted average unit price.
The materials yield variance is a calculation based on
the assumption that the standard mix was maintained
in producing a given output.
Answer (B) is incorrect because it states the
definition of the labor mix variance.
Answer (C) is incorrect because it describes the
labor yield variance.
Answer (D) is incorrect because it defines the
materials mix variance.
Answer (A) is incorrect because this formula defines

the materials yield variance.
Answer (B) is correct. The labor mix variance is the
sum of the products of the difference between actual
and standard hours for each class of labor times the
difference between the budgeted standard for that
class of labor and the weighted-average standard
labor rate.
Answer (C) is incorrect because this is the equation
for the labor yield variance.
Answer (D) is incorrect because the labor mix
variance is based on budgeted rates.
Answer (A) is correct. The labor yield variance is the
portion of the labor efficiency variance attributable to
the difference between actual hours and the standard
hours allowed. Total hours worked were 1,575 (550
+ 650 + 375), and standard hours allowed equaled
1,500 (500 + 500 + 500). The 75-hour difference is
multiplied by the weighted-average standard labor
rate, which equals $6.67 {[(500 x $8) + (500 x $7)
+ (500 x $5)] 1,500 standard DLH}. Thus, the
variance is $500 unfavorable ($6.67 x 75).
Answer (B) is incorrect because the labor yield
variance is $500.
Answer (C) is incorrect because the difference
between the 1,575 AH (550 + 650 + 375) and the
1,500 SH (500 + 500 + 500) must be multiplied by
the $6.67 weighted-average SR {[(500 x $8) + (500
x $7) + (500 x $5)] 1,500 standard DLH}.
Answer (D) is incorrect because $1,500 is three
times the actual labor yield variance of $500.

Answer (A) is incorrect because the budgeted
weighted-average labor rate must be used, not the
budgeted weighted-average materials price.
Answer (B) is incorrect because this formula defines
the labor mix variance.
Answer (C) is correct. The labor yield and labor mix
variances are the components of the labor efficiency
variance (all price variances are excluded). The labor
yield variance isolates the effect of using more or
fewer total units of labor. The standard
weighted-average labor rate is used. Labor yield
variances are based on the assumptions that various
classes of labor are used having different labor rates
and that they are partially substitutable. The key to
analyzing labor yield variances is that the labor rate
and the mix of labor inputs are held constant. The
labor yield variance equals the difference between the
actual units of labor used and the standard units
allowed for the actual output, times the standard
Answer (D) is incorrect because the labor yield
variance equals the difference between the actual
units of labor used and the standard units allowed for
the actual output, times the standard
Answer (A) is correct. The labor mix variance is the

sum of the products of the difference between actual
and standard hours for each class of labor times the
difference between the budgeted standard rate for
that class of labor and the weighted-average standard
labor rate.
Standard Actual
Bud. Std.Class Hours Hours Variance W.A. Std. Product
----- -------- ------ -------- ---------- --------III
500
550
- 50 +$1.33
$66.67 U
II
500
650 - 150 + .33
50.00 U
I
500
375 + 125
-1.67
208.33 U
--------$325.00 U
=========
Answer (B) is incorrect because $66.67 is the labor
variance for labor Class III only.
Answer (C) is incorrect because the labor mix
variance is the sum of the products of the difference
between actual and standard hours for each class of
labor times the difference between the average
standard labor rate for that class of labor.
Answer (D) is incorrect because $50.00 is the labor
variance for labor Class II only.

Answer (A) is incorrect because the total labor

variance equals the labor efficiency and the labor rate
variances.
variance is the variance of price of the labor.
Answer (C) is correct. Labor mix and labor yield
variances are the components of the total labor
efficiency variance. For example, if the labor yield
variance was $500 U and the labor mix variance was
$320 U, the total labor efficiency variance would be
$820 U.
variance is not labor variances.
[192] Source: CMA 1284 4-1
allowed for the actual units of finished output is used,

not the AH.
Answer (B) is correct. Fixed factory O/H in a
standard costing system is applied to the product
based on the predetermined O/H rate multiplied by
the standard hours allowed for the actual output.
Thus, the applied fixed factory O/H is limited to the
standard amount.
Answer (C) is incorrect because the O/H application
is not based on units of production for the AH.
Answer (D) is incorrect because the applied fixed
factory O/H is limited to the standard amount
determined using the standard O/H rate per DL hour,
not the actual O/H cost per DL hour.
[195] Source: CMA 1273 4-13
Answer (A) is incorrect because, by definition, the

total variable factory O/H varies with the activity
level, but total fixed O/H and unit variable O/H do
not.
Answer (A) is incorrect because a labor price

variance reflects a difference between the actual price
of labor and the budgeted price of labor, which is
useful information for cost control.
Answer (B) is correct. The use of a production

volume as the denominator in calculating the factory
O/H rate has no effect on the fixed factory O/H
budget variance. This variance is the difference
between actual fixed costs and budgeted (lump sum)
fixed costs.
Answer (B) is incorrect because the materials

quantity variance is the difference between budgeted
and actual materials used during production. This is
an important variance for cost control.
Answer (C) is incorrect because the fixed factory

O/H production volume variance is the difference
between budgeted fixed O/H and fixed O/H applied
based on the predetermined rate. The overall (net)
fixed factory O/H variance is the difference between
the actual fixed O/H and the fixed O/H applied based
on the predetermined rate.
Answer (D) is incorrect because the fixed factory
O/H production volume variance is the difference
between budgeted fixed O/H and fixed O/H applied
based on the predetermined rate. The overall (net)
fixed factory O/H variance is the difference between
the actual fixed O/H and the fixed O/H applied based
on the predetermined rate.
Answer (C) is correct. The fixed O/H volume

variance occurs when actual activity levels differ from
anticipated levels. It is an excellent example of cost
allocation as opposed to cost control. Unlike other
variances, the volume variance does not directly
reflect a difference between actual and budgeted
expenditures. The economic substance of this
variance lies in the costs or benefits of capacity usage
or nonusage. For example, idle capacity results in the
loss of the contribution margin from units not
produced and sold.
Answer (D) is incorrect because the difference
between actual variable O/H and the product of the
actual input and the budgeted variable O/H rate is
useful information for cost control.
[196] Source: J.B. Romal
[193] Source: CMA 1284 4-2

Answer (A) is incorrect because sales volume is
irrelevant.
Answer (B) is incorrect because the difference
between actual direct labor hours and standard direct
labor hours allowed is the basis of the variable O/H
Answer (C) is incorrect because the difference
between fixed factory O/H applied on the basis of
standard allowed direct labor hours and the budgeted
fixed factory O/H defines the total fixed O/H
variance.
Answer (D) is correct. A fixed O/H production
volume variance is the difference between the
budgeted fixed factory O/H and the O/H applied
based on a predetermined rate and standard direct
labor hours allowed for the actual output.
[194] Source: CMA 1284 4-4

Answer (A) is incorrect because the standard hours
Answer (A) is incorrect because 32,425 assumes the

volume variable was favorable.
Answer (B) is incorrect because the actual machine
hours can be found by using the following equation:
Volume Variance = Budgeted Fixed O/H - Applied
Fixed O/H. The applied fixed O/H is equal to the
O/H rate multiplied by the actual hours. The O/H rate
is found by dividing the budgeted O/H ($480,000) by
the budgeted hours (32,000). Actual machine hours
are 31,576.
Answer (C) is incorrect because 32,000 equals the
budgeted machine hours.
Answer (D) is correct. The volume variance (VV)
arises from the difference between budgeted fixed
O/H and the fixed O/H applied at the standard rate
based on the standard input allowed for actual
output. The O/H rate is $15 per machine hour
($480,000 32,000).
VV = Budgeted Fixed O/H - Applied Fixed O/H
$6,360 = $480,000 - ($15 x AH)
$15 x AH = $480,000 - $6,360
AH = $473,640 $15
AH = 31,576.
[197] Source: CMA 0687 4-17
Answer (A) is incorrect because supervisor salaries
are expected to be incurred uniformly through the
year; thus, supervisor salaries are based on time, not
units produced.
Answer (B) is incorrect because supervisor salaries
are expected to be incurred uniformly through the
year; thus, supervisor salaries are based on time, not
units produced.
Answer (C) is correct. The budget (spending)
variance for fixed O/H equals actual minus budgeted
fixed O/H. The $324,000 cost of supervisory salaries
is fixed and is incurred at $27,000 per month. Thus,
the variance is the difference between actual costs of
$28,000 and the budgeted costs of $27,000, or
$1,000 unfavorable.
Answer (D) is incorrect because the actual O/H
($28,000) was greater than the budgeted O/H
($324,000 12 months = $27,000); therefore, the
variance is unfavorable.
$14.32).
Answer (A) is correct. The total O/H variance is the
over- or underapplied O/H, that is, the difference
between applied O/H and the actual O/H. The
applied O/H was determined to be $1,346,080. The
actual O/H is $1,358,250 ($133,250 + $1,225,000).
Consequently, the amount of underapplied O/H is
$12,170 U ($1,358,250 - $1,346,080).
Answer (B) is incorrect because the applied O/H is
$1,346,080, which is based on the budgeted DMH
for the equivalent units of production, not on the
actual DMH.
Answer (C) is incorrect because the applied O/H is
$1,346,080, which is based on the budgeted DMH
for the equivalent units of production, not on the
actual DMH. Furthermore, because the actual O/H is
greater than the O/H applied, the underapplied O/H
results in an unfavorable variance.
assumes that standard input for the actual output was
100,000 DMH and that overhead applied was
therefore $1,432,000.

Answer (A) is incorrect because $13.00 per DMH is
the variable O/H rate per machine hour. The standard
O/H rate also includes the fixed O/H rate.
Answer (B) is incorrect because $1.32 per DMH is
the fixed O/H rate per machine hour. The standard
O/H rate per machine hour includes the variable rate
per DMH.
Answer (C) is correct. The total O/H equation is
y = $132,000 + $13(DMH)
This equation is derived by summing individual O/H
items. The fixed portion needs to be converted to a
rate by dividing it by normal capacity. Thus, the fixed
O/H rate is $1.32 ($132,000 100,000). To
calculate the total O/H rate, the fixed rate is added to
the variable rate. Hence, the total O/H rate per DMH
is $14.32 ($1.32 + $13.00).
Answer (D) is incorrect because $13.76 per DMH is
the actual total O/H rate (total actual cost actual
hours).
Answer (A) is incorrect because the standard O/H
rate is multiplied by the 94,000 DMH allowed (not
98,700 actual DMH) for the 23,500 equivalent units
of production.
Answer (B) is incorrect because $1,432,000 is for
the original 100,000 DMH budgeted, not the 94,000
DMH budgeted for the production of 23,500 units.
[201] Source: CIA 1186 IV-12

Answer (A) is incorrect because the sales mix
variance is unaffected by a change in overall sales
volume, assuming the proportions of products sold
remain constant. However, an unfavorable sales
quantity variance will arise given a 5% decrease in
overall sales volume because a 5% decrease in
contribution margin will occur. This variance is
computed by holding the sales mix, budgeted prices,
and budgeted costs constant. It measures the change
in contribution margin caused by a change in overall
volume.
Answer (B) is incorrect because the variance will be
unfavorable.
Answer (C) is correct. The sales mix variance is a
sum of variances. For each product in the mix, the
difference between units sold and expected to be
sold is multiplied by the difference between the
budgeted UCM for the product and the budgeted
weighted-average UCM for all products. The results
of these computations are then added to determine
the mix variance. This variance measures the effect of
the change in the weighted-average UCM associated
with the changes in the quantities of items in the mix.
The sales mix variance is favorable when more units
with a higher than average UCM are sold or when
fewer units with a lower than average UCM are sold.
the materials mix variance.
[202] Source: CIA 1185 IV-12
Answer (C) is incorrect because $1,358,250 is the

total actual O/H.
Answer (D) is correct. In a standard-cost system,
O/H is applied using the standard activity allowed for
actual production. The standard activity allowed is
the standard activity per equivalent unit times the
actual production, or 94,000 hours (4 DMH x
23,500). The O/H applied is $1,346,080 (94,000 x
Answer (A) is correct. The sales price variance is the

difference between actual price and budgeted price,
times actual units. Actual price was $11.50 ($92,000
8,000). Budgeted price was $10.50 ($105,000
10,000). Sales price variance is therefore $8,000
[($11.50 - $10.50) x 8,000 actual units]. The
variance is favorable because actual sales price was
greater than budgeted sales price.

variance is based on the actual units sold rather than
the budgeted sales.
Answer (C) is incorrect because the sales price
variance is the difference between the $11.50 actual
sales price ($92,000 8,000) and the $10.50
budgeted sales price ($105,000 10,000), times the
8,000 units sold.
Answer (D) is incorrect because the sales price
variance is the difference between the $11.50 actual
sales price ($92,000 8,000) and the $10.50
budgeted sales price ($105,000 10,000), times the
8,000 units sold.
[203] Source: CIA 1190 IV-18
Answer (A) is incorrect because the sales-volume
variance is the difference between the flexible-budget
contribution margin ($110,000) and the
master-budget amount ($120,000). The $10,000
variance is unfavorable because the flexible-budget
amount is less than the master-budget contribution
margin.
Answer (B) is correct. The sales-volume variance is
the difference between the flexible-budget
contribution margin and the static (master) budget
contribution margin. Its components are the sales
quantity and sales mix variances. The contribution
margin is used rather than operating income because
fixed costs are the same in both budgets. Unit sales
price and variable cost are held constant so as to
isolate the effect of the difference in unit sales volume.
Because the flexible-budget contribution margin
($110,000) is less than the master-budget amount
($120,000), the variance ($10,000) is unfavorable.
difference between actual and flexible variable costs.
The sales-volume variance is the difference between
the flexible-budget contribution margin ($110,000)
and the master-budget amount ($120,000). The
$10,000 variance is unfavorable because the
flexible-budget amount is less than the master-budget
difference between the flexible-budget revenue
($220,000) and the actual revenue ($208,000). The
sales-volume variance is measured as the difference
between the flexible-budget contribution margin and
the master-budget contribution margin.
Answer (C) is incorrect because the budgeted

variable cost must be subtracted from the selling price
before multiplying by the 2,000 difference in units
actually sold from budgeted sales.
Answer (D) is incorrect because the sales quantity
variance is found by multiplying the 2,000 unit
difference between actual and budgeted sales by the
$2.50 budgeted contribution margin.
Answer (A) is incorrect because a quantity (not
price) variance should be debited (not credited).
Answer (B) is incorrect because this entry records an
unfavorable price, not quantity, variance.
Answer (C) is correct. The entry to record direct
materials used is to charge WIP for the standard
quantity requisitioned times the standard unit price
(100 units x $4/unit = $400). Inventory will be
credited for the actual quantity requisitioned times the
standard unit price, or $520 (130 x $4). When actual
quantity used exceeds standard quantity allowed, an
unfavorable direct materials quantity variance results.
The variance account should be charged (debited) for
the $120 difference (30 extra units x $4 standard unit
cost).
unfavorable and should be debited.
Answer (A) is correct. The journal entry to record
the adjustment of FG inventory for external reporting
purposes is to charge the FG inventory adjustment
account for the desired amount and to credit fixed
O/H. To avoid alteration of the inventory accounts,
the adjustment is taken to an adjustment account.
Answer (B) is incorrect because costs are not
transferred from WIP to O/H.
Answer (C) is incorrect because debiting an
adjustment account avoids alteration of the inventory
accounts.
Answer (D) is incorrect because this entry represents
the transfer of completed units to FG.
[204] Source: CIA 0589 IV-14

Answer (A) is correct. The sales quantity variance is
the difference between the actual volume and the
budgeted volume in units, times the budgeted
weighted-average contribution margin for all units.
Actual Budgeted
Budgeted Wt.-Avg.
Sales
X Contribution
= Quantity
Volume Volume
Margin
Variance
(42,000 - 40,000) X ($6 - $3.50) = $5,000 F

Answer (B) is incorrect because the budgeted selling
price and budgeted variable cost must be used to
determine the sales quantity variance, not the actual
selling price and actual variable cost.
Answer (A) is incorrect because the net variance is

favorable and should be credited to income summary.
Answer (B) is incorrect because this entry does not
close the variance account. Moreover, the net
variance is $1,335.
Answer (C) is correct. The entry to record the
closing of an unfavorable variable O/H spending
variance and a favorable variable O/H efficiency
variance is to debit the latter and credit the former.
The difference between the two accounts can be
charged or credited to CGS or to income summary.
A favorable net variance of $1,335 is the result
($1,600 F - $265 U = $1,335 F). The net favorable
variance is credited to income summary (or allocated
among CGS and the inventories).
Answer (D) is incorrect because the spending
variance is unfavorable and was initially debited.
Closing the account therefore requires a credit.

Answer (A) is incorrect because only the wages paid
to the machine operator are directly identifiable with
the production of specific finished goods.
Answer (B) is correct. Direct labor costs are wages
paid to labor that can be specifically identified with
the production of finished goods. Because the wages
of a factory machine operator are identifiable with a
finished product, the wages are a direct labor cost.
Because a supervisor's or vice-president's salary is
not identifiable with the production of specific finished
goods, it is a part of factory overhead and not a
direct labor cost.
Answer (C) is incorrect because only the wages paid
the increase in June's inventory and does not include

the $200,000 used in production.
Answer (B) is incorrect because $170,000 subtracts
the increase in direct materials inventory.
Answer (C) is incorrect because $200,000 excludes
the increase in direct materials inventory.
Answer (D) is correct. Direct materials costs are the
costs of new materials included in finished goods that
can be feasibly traced to those goods. The beginning
direct materials inventory, plus the direct materials
purchases, minus ending direct materials inventory
equals the direct materials cost. Because the direct
materials inventory increased during the month, the
increase can be added to the direct materials used to
determine the amount of purchases. Thus, the direct
materials purchases for the month were $230,000
($200,000 + $30,000).
Answer (D) is incorrect because only the wages paid

Answer (A) is incorrect because fixed manufacturing

overhead is treated as a period cost under direct
costing. Selling costs are period costs under both
direct and absorption costing.

Answer (A) is incorrect because $230,000 includes
the salaries of machinery mechanics and factory
supervisors.
Answer (B) is incorrect because $205,000 includes
the salaries of factory supervisors.
Answer (C) is incorrect because $170,000 includes
the salaries of machinery mechanics.
Answer (D) is correct. Direct labor costs are wages
paid to labor that can feasibly be specifically
identified with the production of finished goods.
Because the wages of machine operators are
identifiable with the production of finished goods,
their $145,000 of salaries are a direct labor cost.
However, because the salaries and wages of the
factory supervisors and machinery mechanics are not
identifiable with the production of finished goods,
their $60,000 and $25,000 of salaries are not direct
labor costs.
Answer (A) is incorrect because $234,000 includes
factory overhead.
Answer (B) is correct. Product costs can be
associated with a specific product. Product costs
include direct materials and direct labor. Factory
overhead cannot be traced to specific products and
therefore is allocated to all products produced. Thus,
the amount of costs traceable to specific products in
the production process is $228,000 ($120,000 +
$108,000).
Answer (C) is incorrect because $120,000 excludes
direct labor.
Answer (D) is incorrect because $108,000 excludes
direct materials.
Answer (A) is incorrect because $30,000 represents
Answer (B) is incorrect because fixed manufacturing

Answer (C) is incorrect because fixed manufacturing
Answer (D) is correct. Product costs are incurred to
produce units of output. They are expensed when the
product is sold. Such costs include direct materials,
direct labor, and factory (not general and
administrative) overhead. Period costs are charged to
expense as incurred because they are not identifiable
with a product. Variable costing considers only
variable manufacturing costs to be product costs.
Fixed manufacturing costs are considered period
costs and are expensed as incurred. Selling costs are
period costs under both direct and absorption
costing. Thus, the entire $225,000 ($150,000 +
$75,000) is classified as period costs.
Answer (A) is incorrect because the spending
variance, not the volume variance, is useful in
detecting short-term problems in the control of
overhead costs.
Answer (B) is incorrect because the spending
overhead costs.
Answer (C) is correct. The volume variance is the
difference between total budgeted fixed overhead
and total fixed overhead absorbed (applied). It is a
measure of the use of capacity, not of the difference
between budgeted and actual costs. However, the
overhead incurred and the flexible budget amount for
the actual input. In four-way analysis of overhead
variances, the spending variance is divided into fixed
and variable components. Consequently, the

components of the spending variance, not the volume
variance, are useful in detecting short-term problems
in the control of overhead costs.
overhead costs.
and the standard hours allowed.

difference between the labor efficiency and rate
variances.
Answer (A) is incorrect because an unfavorable
variable overhead efficiency variance exists.

Answer (A) is incorrect because overhead variances
are by definition affected by activities outside the
production area.
Answer (B) is incorrect because the efficiency of
employees affects the labor efficiency variance.
Answer (C) is correct. The materials usage variance
is typically influenced most by activities within the
production department. It is the variance most
controllable by a production manager.
volume variance measures the effect of not operating
at the budgeted activity level. It is the least
controllable by a production manager.
Answer (A) is correct. The spending variance is the
difference between the actual total overhead and the
sum of budgeted fixed overhead and the variable
overhead budgeted for the actual input. The total
actual overhead is $140,000 ($106,250 + $33,750).
The sum of budgeted fixed overhead and variable
overhead budgeted for the actual input is $131,250
($100,000 + $31,250). Thus, the total spending
variance is $8,750 ($140,000 - $131,250). The
variance is unfavorable because the actual overhead
exceeds the budgeted overhead.
difference between the actual and budgeted variable
overhead.
difference between the fixed and variable
components of the variance.
difference between the actual and budgeted fixed
overhead.

efficiency variance equals the standard variable
overhead rate times the difference between the actual
input and the standard input allowed for the actual
output. The standard rate for variable overhead is $2
per direct labor hour. Actual direct labor hours are
24,500. Standard labor hours are 24,000 (8,000
units x 3 hours per unit). Thus, the variable overhead
efficiency variance is $1,000 [2 x (24,500 24,000)]. The variance is unfavorable because actual
hours exceeded standard hours.
Answer (C) is incorrect because $2,000 is the total
variable overhead variance (actual overhead minus
the overhead rate applied to the standard hours).
difference between actual variable overhead and the
product of the standard rate and the actual input (the
variable overhead spending variance). This variance
is favorable.
Answer (A) is correct. A standard-cost system
records the product at standard (predetermined)
costs and compares expected with actual cost. This
comparison allows deviations (variances) from
expected results to be identified and investigated. A
standard-cost system can be used in job-order,
process-costing, and activity-based systems to isolate
variances.
Answer (B) is incorrect because standard costs may
be used in any product costing system.
Answer (C) is incorrect because standard costs may
Answer (D) is incorrect because standard costs may

Answer (A) is incorrect because $2,050 uses the
actual labor price.
Answer (B) is correct. The direct labor efficiency
(quantity) variance equals standard price times the
difference between actual and standard amounts of
labor hours. The standard price is $10 per hour. The
actual amount of labor hours is 3,200 hours. The
standard amount of labor hours is 3,000 (2 hours x
1,500 units). Thus, the direct labor efficiency variance
is $2,000 [$10 x (3,200 - 3,000)]. The variance is
unfavorable because more labor hours were used
than the standard.
difference between the direct labor efficiency
variance and the product of the cost difference ($.25)
Answer (A) is correct. A flexible budget is a set of

static budgets prepared in anticipation of varying
levels of activity. Unlike a static budget, the use of a
flexible budget permits effective evaluation of actual
results when actual and expected production differ.
Setting cost standards facilitates preparation of a
flexible budget. For example, a standard unit variable
cost is useful in determining the total variable cost for
a given output.
Answer (B) is incorrect because standard costing and
flexible budgeting are the most appropriate
techniques.
Answer (C) is incorrect because standard costing
and flexible budgeting are the most appropriate
techniques.
Answer (D) is incorrect because standard costing
and flexible budgeting are the most appropriate

techniques.
Answer (A) is incorrect because a price variance is
the difference between the expected and actual
outlays caused by a variation in price.
Answer (B) is incorrect because the combined
price-quantity variance is the total actual outlay
(actual quantity x actual price) minus the budgeted
outlay (standard price x standard quantity).
Answer (C) is correct. The volume variance is the
amount applied based on the standard overhead rate
and standard input for the actual output.
Answer (D) is incorrect because a mix variance
results when the actual sales or production mix differs
from the budgeted mix.
Answer (A) is incorrect because engineering is
responsible for design, engineering, and quality
standards.
Answer (B) is incorrect because production is
responsible for materials usage.
Answer (C) is correct. Responsibility for variances
should bear some relationship to the decision and
control processes used. Materials price prices should
be the responsibility of purchasing management.
Answer (D) is incorrect because sales has
responsibility for marketing, not purchasing.
Answer (A) is correct. The materials price variance is
calculated by multiplying the difference between
actual price and standard price by the actual units
purchased. The materials usage variance is calculated
by multiplying the difference between the actual usage
and the standard usage by the standard price. Thus,
the standard unit cost is used to compute both
variances.
Answer (C) is correct. The direct materials price

variance is found by multiplying the difference
between the actual price (AP) of direct materials and
the standard price (SP) per unit by the actual quantity
(AQ).
AQ(AP - SP) = MPV
28,000($2.00 - $2.20) = $5,600 favorable
Answer (D) is incorrect because $2,200 unfavorable
is the usage variance.
Answer (A) is incorrect because the 1.5 yards of
good output should be divided (not multiplied) by
75% to determine the standard yards of material per
unit.
Answer (B) is incorrect because $3.00 is the cost per
unit excluding spoilage.
Answer (C) is incorrect because $3.75 is found by
adding 25% of the materials of the finished product
as spoilage and then multiplying by the $2.00 cost per
yard [(1.5 x 1.25) x $2].
Answer (D) is correct. If 1.5 yards remain in each
unit after spoilage of 25% of the direct materials
input, the total per unit input must have been 2 yards
(1.5 75%). The standard unit direct materials cost
is therefore $4.00 (2 yards x $2).
Answer (A) is incorrect because the quantity (usage)
variance is a direct materials variance that is not
affected by overtime wages.
Answer (B) is correct. Overtime premiums arising
from a heavy overall volume of work rather than from
the requirements of a specific job are deemed to
apply to all production. Hence, they are treated as
indirect costs and assigned to overhead.
Answer (C) is incorrect because the labor efficiency
variance concerns amounts of labor, not rates.
Answer (D) is incorrect because overtime wages do
not affect the yield variance.
Answer (B) is incorrect because direct materials and

direct labor variances are based on standard costs.
Answer (C) is incorrect because direct materials and
Answer (D) is incorrect because direct materials and
Answer (A) is incorrect because the direct materials
price variance is found by multiplying the actual
quantity (28,000) times the difference between the
AP ($2.00) and the SP ($2.20).
Answer (B) is incorrect because the direct materials
price variance is found by multiplying the actual
quantity (28,000) times the difference between the
AP ($2.00) and the SP ($2.20).
Answer (A) is incorrect because $44,496 was

determined using an actual rate of $5.88.
Answer (B) is correct. The direct labor rate variance
is determined by multiplying the difference between
the actual and standard rates by the actual hours. The
standard rate equals the direct labor efficiency
variance divided by the difference between the actual
and standard hours. The actual rate equals the total
direct labor payroll divided by the actual hours.
$3,840 (41,200 - 42,000) = $4.80 SR
$247,200 41,200 = 6.00 AR
----$1.20 diff.
x41,200 AH
------DL rate variance = $49,440 U
=======

unfavorable.
Answer (D) is incorrect because the $50,400 results
from multiplying $1.20 by standard hours (42,000).
Answer (A) is incorrect because $7.69 results from
treating the $.56 variance per unit as unfavorable and
subtracting it from the AR of $8.25.
hour times the actual DL hours, should be used in

calculating the payroll. Furthermore, a favorable DL
rate variance should be subtracted from, not added
to, the standard DL costs allowed for hours worked.
Answer (D) is incorrect because the $6,720 DL rate
variance is favorable, and should therefore be
subtracted from, not added to, the standard payroll
for the hours worked.
Answer (B) is incorrect because actual hours, not

standard hours, are used to determine the SR.
Furthermore, the favorable variance should be
added, not subtracted, in calculating the standard
rate.
Answer (A) is correct. The hourly wage per worker

is $15.00 ($600 40 hours). The direct labor cost
per hour is $18.00 [$15.00 x (1.0 + benefits equal to
20% of wages)]. Consequently, the standard direct
labor cost per unit is $54 ($18 x 3 hours).
Answer (C) is incorrect because $8.25 is the actual

rate.
Answer (B) is incorrect because the weekly wages

and benefits per worker ($600 x 1.2) should be
divided by 40 hours per week, not by 60 workers to
determine the direct labor cost per hour.
Answer (D) is correct. The direct labor rate variance

equals actual hours times the difference between the
actual and standard rates. When the variance is
favorable, the standard rate exceeds the actual rate
and the following equation is used:
AH(SR - AR) = favorable rate variance
10,000(SR - $8.25) = $5,600 F
SR - $8.25 = $.56
SR = $8.81
Answer (C) is incorrect because $30 results from

omitting the employee benefits (20% of wages) from
the calculation.
Answer (D) is incorrect because $18.00 is the DL
cost per hour.

Answer (A) is incorrect because the 220 hour
difference between AH and SH should not be
subtracted from the standard hours allowed.
Answer (B) is incorrect because the excess hours
should be determined using the standard, not the
actual, rate per hour, and the result should be added
to, not incorrectly subtracted from, standard hours
allowed.
Answer (C) is incorrect because excess hours should
be determined using the standard, not the actual, rate
per hour.
Answer (D) is correct. The standard hours allowed
equaled 3,000, and the labor efficiency variance was
$1,870 unfavorable; that is, actual hours exceeded
standard hours. The labor efficiency variance equals
the standard rate ($8.50) times the excess hours.
Given that the variance is $1,870, 220 excess hours
($1,870 $8.50) must have been worked. Thus,
3,220 actual hours (3,000 standard + 220 excess)
were worked.
Answer (A) is correct. When the actual direct labor
rate is unknown, the total direct labor payroll can be
found by multiplying the actual hours by the standard
rate, then subtracting the favorable labor variance.
(32,000 x $5.04) - $6,720 = $154,560
Answer (B) is incorrect because the total $6,720 DL
rate variance, not the DL rate variance per standard
hour times the actual DL hours, should be subtracted
in the calculation.
Answer (C) is incorrect because the total $6,720 DL
rate variance, not the DL rate variance per standard
Answer (A) is incorrect because the volume variance

consists of fixed overhead only, and the efficiency
variance, which consists of variable overhead only, is
not isolated in two-way analysis.
Answer (B) is incorrect because the volume variance
Answer (C) is correct. In two-way analysis, the total
overhead variance (fixed + variable) is composed of
the volume variance (total fixed overhead cost
budgeted - fixed overhead applied based on standard
input allowed for the actual output) and the
controllable (budget) variance (the difference
between the total actual overhead and the volume
variance). Consequently, the controllable (budget)
variance contains both fixed and variable elements.
Answer (A) is incorrect because a budget allowance
based on actual input is not used in the computation
of the controllable variance.
Answer (B) is incorrect because a budget allowance
based on actual input is not used in the computation
of the controllable variance.
Answer (C) is correct. In two-way analysis, the total
overhead variance (fixed + variable) is composed of
the volume variance (total fixed overhead cost
budgeted - fixed overhead applied based on standard
input allowed for the actual output) and the
controllable (budget) variance (the difference

between the total actual overhead and the volume
variance). Hence, the controllable (budget) variance
is the sum of 1) the difference between actual and
budgeted fixed overhead and 2) the difference
between actual variable overhead and the variable
overhead budgeted based on the standard input
allowed for the actual output.

difference between budgeted direct labor cost at
60,000 direct labor hours and actual direct labor cost
($450,000 - $432,000).
Answer (D) is incorrect because a budget allowance

based on applied fixed overhead is used to determine
the volume variance.
Answer (D) is incorrect because $37,000 is the sum

of the difference between budgeted overhead
($756,000) and the actual overhead ($775,000) and
the difference between the applied overhead
($787,500) and the budgeted overhead ($756,000).

difference between budgeted overhead ($756,000)
and the actual overhead ($775,000).

Answer (A) is correct. In three-way analysis, the
total overhead and the sum of the budgeted
(lump-sum) fixed overhead and the variable overhead
budgeted for the actual input at the standard rate. It
combines the variable overhead spending and the
fixed overhead budget (spending) variances used in
four-way analysis.
Answer (B) is incorrect because a budget allowance
based on actual input and the actual factory overhead
are used in the computation of the spending variance.
A budget allowance based on standard input is used
to calculate the efficiency variance in a three-way
analysis.
Answer (C) is incorrect because a budget allowance
analysis.
Answer (D) is incorrect because a budget allowance
analysis.
Answer (A) is incorrect because $137,500 equals
standard variable overhead applied.
Answer (B) is incorrect because $176,250 results
from subtracting the $2,500 overhead variance.
Answer (C) is correct. The applied factory overhead
equals the standard input allowed for actual output
multiplied by the total standard overhead rate per
hour.
27,500($5.00 VOH + $1.50 FOH) = $178,750
on the actual DLH worked.
Answer (A) is correct. Overhead was budgeted at
$756,000 based on a budgeted labor cost of
$432,000 ($7.20 x 60,000 hours). Thus, $1.75 of
overhead was applied for each $1 of labor cost.
Given actual labor costs of $450,000, $787,500
($1.75 x $450,000) of overhead was applied during
the period. Actual overhead was $775,000, so
$12,500 ($787,500 - $775,000) was overapplied.

Answer (A) is incorrect because $28,500 assumes a
fixed overhead application rate of $5.75.
Answer (B) is incorrect because $28,500 assumes a
fixed overhead application rate of $5.75.
Answer (C) is correct. The total overhead variance is
the difference between the actual overhead and
applied (absorbed) overhead. Given that neither fixed
nor variable overhead differed from budgeted
amounts, the only variance was caused by under- or
overabsorption of fixed overhead. The variable
overhead rate does not vary with the capacity. The
fixed overhead rate at 90% capacity is
$144,000 fixed overhead
----------------------- = $4.00
36,000 DLH
Given that the actual capacity achieved was 75%,
and that 30,000 standard hours were allowed,
$120,000 (30,000 x $4.00) of fixed overhead was
applied. Thus, $24,000 ($144,000 FOH $120,000) was underabsorbed.
variance for the year is $24,000 underabsorbed, not
overabsorbed.
Answer (A) is correct. Two-way analysis computes
only two overhead variances: the budget
(controllable) variance and the volume variance. The
product of the variable overhead rate and the
standard direct labor hours allowed for capacity
attained is the budgeted variable overhead. The
budgeted fixed overhead is then added to the
budgeted variable overhead, giving the total budgeted
overhead for the standard input allowed for actual
output. The difference between the actual overhead
and budgeted total overhead is the budget
(controllable) variance. Actual overhead equals
$220,500. Budgeted variable overhead equals $2
per hour ($72,000 36,000 DLH). Thus, budgeted
variable overhead based on standard hours allowed
equals $63,000 ($2 x 31,500 DLH). The total
budgeted overhead is $225,000 ($63,000 +
$162,000 FOH). The variance is $4,500 favorable
($225,000 - $220,500) because budgeted overhead
exceeds actual overhead.
the DLH worked (33,000).
Answer (C) is incorrect because $7,500 is based on
the DLH worked (33,000).
on normal capacity of 36,000 DLH.

Answer (A) is incorrect because $9,660 is based on
standard, not actual, hours.
Answer (B) is incorrect because $8,250 results from
using actual fixed overhead to calculate budgeted
overhead.
Answer (C) is correct. Three-way analysis of
variance combines the fixed overhead budget
(spending) and variable overhead spending variances
of four-way analysis of variance. It includes spending,
efficiency, and volume variances. The spending
variance is the difference between the actual
overhead incurred and the budgeted overhead for the
actual input.
Budgeted overhead [$10,500 + (5,250 x $3.80)] $30,450
Actual overhead
(22,500)
-----$7,950 F
======
variance is favorable.
Answer (A) is correct. Two-variance analysis
considers only budget (controllable) and volume
variances. When actual and budgeted fixed overhead
are equal, the budget (controllable) variance equals
the difference between actual variable overhead and
standard hours allowed times the variable overhead
rate per hour. Thus, the variance is $3,000 favorable
[(49,500 x $6) - $294,000]. A favorable variance
results when actual is less than standard.
manager has no control over the priced paid for

materials.
Answer (B) is incorrect because the cost accounting
manager has no control over the priced paid for
materials.
Answer (C) is incorrect because the sales manager
has no control over the priced paid for materials.
Answer (D) is correct. The materials price variance is
the difference between the standard price and the
actual price paid for materials. This variance is usually
the responsibility of the purchasing department. Thus,
the purchasing manager has an incentive to obtain the
best price possible.
[242] Source: CMA 0695 3-26
Answer (A) is incorrect because $12,000 assumes
that all costs are variable.
actual variable costs.
on actual sales revenues.
Answer (D) is correct. A flexible budget is
formulated for several different activity levels.
Assuming that unit sales price ($100,000 10,000
units = $10) and variable costs of sales ($60,000
10,000 unit = $6) and total fixed costs ($30,000) do
not change, a flexible budget may be prepared for the
actual sales level (12,000 units). Hence, the budgeted
contribution margin (sales - variable costs of sales)
equals $48,000 [(12,000 units x $10) - (12,000 units
x $6)]. The operating income is therefore $18,000
($48,000 CM - $30,000 FC).
[243] Source: CMA 0695 3-27

using actual DLH.
difference between standard and actual DLH, times
the variable overhead rate per hour.
difference between standard and actual DLH, times
the variable overhead rate per hour.
Answer (A) is incorrect because $134,400 equals
year 2 sales minus 85% of year 1 sales.
Answer (B) is incorrect because $142,560 equals
year 2 sales minus 85% of year 2 sales.
15% of year 1 sales.
Answer (D) is correct. Given a 15% decrease in
prices, year 2 sales were 85% of year 2 sales at year
1 prices. Hence, year 2 sales at year 1 prices equal
$1,118,118 ($950,400 85%). Sales and gross
profit were $167,718 ($1,118,118 - $950,400)
lower because of the decrease in prices.
[241] Source: CMA 0694 3-20
Answer (A) is incorrect because the production
Answer (A) is incorrect because the flexible budget

variance is $11,200 favorable ($29,200 actual
operating income - $18,000 flexible budget operating
income).
variance is $12,000 [$132,000 actual sales - ($10 x
12,000 units sold)].
Answer (C) is correct. The sales volume variance is
the change in contribution margin caused by the
difference between the actual and budgeted volume.
It equals the budgeted unit contribution margin times
the difference between actual and expected volume,
or $8,000 [($10 - $6) x (12,000 - 10,000)]. The
sales volume variance is favorable because actual
sales exceeded budgeted sales.
Answer (D) is incorrect because the total projected
variable costs at the actual sales level equal $72,000
(12,000 units x $6). Thus, the variable cost variance
is $1,200 favorable ($72,000 - $70,800 actual).
Answer (A) is incorrect because product costs
normally include both variable and fixed costs.
Answer (B) is incorrect because product costs
normally include both fixed and variable costs.
Answer (C) is correct. Standard costs are expected
or attainable costs. Normally, the standard costs

established are those expected to be actually
incurred, not those reflecting an ideal efficiency level.
to attain results. The use of practical standards does

not, however, negate the need to adjust standards if
working conditions change.
Answer (D) is incorrect because a joint cost is the

cost of producing two or more inseparable products.
Answer (D) is incorrect because practical standards

reflect expectations or at least standards that are
more likely to be attainable than ideal standards.
Consequently, unfavorable variances indicate that
operations have not been normally efficient and
effective.

Answer (A) is correct. A responsibility accounting
system should have certain controls that provide for
feedback reports indicating deviations from
expectations. Management may then focus on those
deviations (exceptions) for either reinforcement or
correction.
Answer (B) is incorrect because the responsibility
accounting system should not be used exclusively to
assess blame.
Answer (C) is incorrect because the responsibility
accounting system should not be used exclusively to
give rewards.
Answer (D) is incorrect because feedback reports
concentrate on deviations, but not to the total
exclusion of other budgeted variables.
[246] Source: CMA 1291 3-11
Answer (A) is incorrect because standard costs are
determined independently of the budget.
Answer (B) is correct. Standard costs are
predetermined, attainable unit costs. Standard cost
systems isolate deviations (variances) of actual from
expected costs. One advantage of standard costs is
that they facilitate flexible budgeting. Accordingly,
standard and budgeted costs should not differ when
standards are currently attainable. However, in
practice, budgeted (estimated actual) costs may differ
from standard costs when operating conditions are
not expected to reflect those anticipated when the
standards were developed.
Answer (C) is incorrect because budgeted costs are
expected future costs, not historical costs.
Answer (D) is incorrect because budgeted and
standard costs should in principle be the same, but in
practice they will differ when standard costs are not
expected to be currently attainable.
[247] Source: CMA 0693 3-24
Answer (A) is incorrect because practical standards
are more appropriate than ideal standards for
purposes of cash budgeting, product costing, and
departmental performance budgeting. Under one
interpretation of the term, practical standards are the
expected results.
Answer (B) is incorrect because practical standards
encourage employees to work diligently but do not
require perfect efficiency. Thus, employees are less
likely to be frustrated by an inability to reach
objectives than if ideal standards were set.
Answer (C) is correct. Practical or currently
attainable standards may be defined as the
performance that is reasonably expected to be
achieved with an allowance for normal spoilage,
waste, and downtime. An alternative interpretation is
that practical standards represent possible but difficult
[248] Source: CMA 1294 3-23

Answer (A) is incorrect because employees may not
cooperate with standards based on ideal
performance; attainable standards are usually better
for motivational purposes.
Answer (B) is incorrect because normal capacity may
not be sufficient to control production inefficiencies.
Answer (C) is incorrect because historical
performance may not always be a guide to future
performance, and standards should be based on
anticipated future conditions.
Answer (D) is correct. Standards must be accepted
by those who will carry them out if they are to have
maximum effectiveness. Subordinates should believe
that standards are both fair and achievable; otherwise
they may tend to sabotage, ignore, or circumvent
them. Standard costs are often based on the results
of time and motion studies, or other types of
engineering standards.
Answer (A) is incorrect because, in MBO, a
manager and his/her subordinates jointly formulate the
subordinates' objectives and the plans for attaining
them.
Answer (B) is incorrect because, in a responsibility
accounting system, managers are evaluated only on
the basis of factors they control.
Answer (C) is incorrect because benchmarking is the
practice of identifying, studying, and building upon the
best practices in the industry or in the world.
Answer (D) is correct. Management by exception
gives significant attention only to those areas in which
material variances from expectations occur.
Consequently, management focuses resources where
the greatest returns from supervisory effort may be
achieved.
[250] Source: CMA 1295 3-6
Answer (A) is incorrect because the production
volume variance equals under-or overapplied fixed
factory overhead.
Answer (B) is correct. A flexible budget is a series of
several budgets prepared for many levels of activity.
A flexible budget allows adjustment of the budget to
the actual level before comparing the budgeted and
actual results. The difference between the flexible
budget and actual figures is known as the flexible
budget variance.
Answer (C) is incorrect because the sales volume
variance is the difference between the flexible budget
amount and the static budget amount.
Answer (D) is incorrect because a standard cost

variance is not necessarily based on a flexible budget.
[251] Source: CMA 0696 3-22
amount of the materials price variance.
amount of the materials price variance.
Answer (C) is correct. The materials quantity
variance equals the standard price times the
difference between the actual and standard quantities.
Hence, the favorable materials quantity variance is
$4,950 [$1.50 standard x 1,650 units x (60 standard
pounds - 58 actual pounds)].
Answer (D) is incorrect because a favorable variance
exists. The standard amount for the actual output
exceeded the actual amount.
[252] Source: CMA 0696 3-23
Answer (A) is correct. The materials price variance
equals the actual quantity used times the difference
between the actual and standard price per unit. Thus,
the unfavorable materials price variance is $14,355
[58 actual pounds x 1,650 units x ($1.65 actual price
- $1.50 standard price)].
variance is the difference between actual overhead

costs and the flexible budget amount for the actual
output. Standard total fixed costs at any level of
production are $27,000. Standard variable overhead
is $9 per unit ($3 x 3 labor hours). Thus, total
standard variable overhead is $14,850 for the actual
output ($9 x 1,650 units), and the total flexible
budget amount is $41,850 ($27,000 FOH +
$14,850 VOH). Accordingly, the favorable flexible
budget variance is $1,920 ($41,850 flexible budget
amount - $39,930 actual amount).
[255] Source: CMA 1296 3-21
Answer (A) is correct. A materials price variance is
the difference between the actual and standard
prices, times the actual quantity. It is normally
considered the responsibility of the purchasing
manager because no one else has an opportunity to
influence the price. In this case, the purchasing
manager obtained the discount that led to the
favorable price variance.
Answer (B) is incorrect because an inventory
supervisor has no influence over the price paid for
materials.
Answer (C) is incorrect because the vice president
receives the materials without knowing the price.
Answer (D) is incorrect because the engineering
manager is concerned only with the quality of the
materials.

the standard unit quantity, not the actual quantity.
[256] Source: CMA 1296 3-23
unfavorable. The actual price is greater than the
standard price.
on the standard unit quantity, not the actual quantity.
[253] Source: CMA 0696 3-1
amount of the flexible budget overhead variance.
Answer (B) is correct. The labor rate variance equals
the actual hours used times the difference between
the actual and standard rates. Consequently, the
labor rate variance is zero [3.1 actual hours x 1,650
units x ($12 per hour standard rate - $12 per hour
actual rate)].
amount of the quantity variance.
amount of the quantity variance.
Answer (A) is correct. The purpose of identifying and

assigning responsibility for variances is to determine
who is likely to have information that will enable
management to find solutions. The constructive
approach is to promote learning and continuous
improvement in manufacturing operations, not to
assign blame. However, information about variances
may be useful in evaluating managers' performance.
Answer (B) is incorrect because, depending on a
cost-benefit determination, variances either are
adjustments of cost of goods sold or are allocated
among the inventory accounts and cost of goods
sold. Moreover, the accounting issues are distinct
from supervisory considerations.
Answer (C) is incorrect because selling prices are
based on much more than the cost of production; for
instance, competitive pressure is also a consideration.
Answer (D) is incorrect because, by itself, pinpointing
fault is not an appropriate objective. Continuous
improvement is the ultimate objective.
[257] Source: CMA 1296 3-24
[254] Source: CMA 0696 3-25

flexible budget amount for an output of 1,800 units.
flexible budget amount for an output of 1,800 units.
Answer (C) is incorrect because a favorable variance
exists. Actual overhead is less than the standard
overhead at the actual production level.
Answer (D) is correct. The flexible budget overhead
Answer (A) is incorrect because the sales manager

did not make the substitution decision.
Answer (B) is incorrect because the inventory
supervisor did not make the substitution decision.
Answer (C) is incorrect because the production
manager did not make the substitution decision.
Answer (D) is correct. An unfavorable direct labor
efficiency variance is normally charged to the
production manager, the person with the most control
over the amount and kinds of direct labor used.

However, that individual is not responsible. (S)he
was told to use the nonconforming part that required
extra labor time. Thus, the variance should be
charged to the vice president of production, the
individual who most influenced the incurrence of the
cost.
[258] Source: CMA 0697 3-22
Answer (A) is incorrect because $12 is the standard
cost.
first-line supervisor has the most control.

Answer (B) is incorrect because a first-line
supervisor normally does not control the price paid
for either raw materials or labor.
Answer (C) is incorrect because the first-line
supervisor does not control the prices paid for raw
materials or labor. Accordingly, output per dollar of
input is not a meaningful measure.
Answer (D) is incorrect because a first-line
supervisor normally does not control the price paid
for either raw materials or labor.
Answer (B) is incorrect because $12.01 is based on

the budgeted usage.
Answer (C) is incorrect because $12.24 equals the
$60,000 standard cost for 5,000 units divided by
4,900 units.
Answer (D) is correct. Dividing the actual cost of
$60,025 by the 4,900 units used results in an average
cost of $12.25 per unit.
[259] Source: CMA 0697 3-23
Answer (A) is incorrect because a price variance
exists. The actual price paid was greater than the
standard allowed.
unfavorable.
Answer (C) is correct. The price variance equals the
actual quantity times the difference between the actual
price and the standard price. The actual price is
$12.25, and the standard price is $12 (given). Thus,
the price variance is $1,225 unfavorable [4,900 units
x ($12.25 actual - $12.00 standard)].
unfavorable.
Answer (A) is correct. The materials quantity

variance equals the standard price times the
difference between the actual and standard quantities.
This variance is therefore equal to $9,900 favorable
[$1.50 standard unit cost x (116 lbs. used per unit 120 lbs. standard per unit) x 1,650 units produced].
Answer (B) is incorrect because the quantity variance
is favorable.
magnitude of the price variance.
magnitude of the price variance.
Answer (A) is correct. The materials price variance
equals the actual quantity used times the difference
between the actual and standard prices per unit. This
variance therefore equals $28,710 Unfavorable [(116
lbs. x 1,650 units) x ($1.65 - $1.50)].
magnitude of the variance if the standard quantity is
used.
[260] Source: CMA 0697 3-25

Answer (A) is incorrect because the total factor
productivity is measured in units of output per dollar
of input.
Answer (B) is incorrect because the total factor
productivity is measured in units of output per dollar
of input.

unfavorable.
magnitude of the variance if the standard quantity is
used.
Answer (C) is correct. Total factor productivity

equals units of output divided by the cost of all inputs.
It varies with output levels, input prices, input
quantities, and input mix. Hence, the total factor
productivity equals 0.25 units per dollar input {1,500
units [(450 pounds of A x $1.50) + (300 pounds
of Z x $2.75) + (300 hours x $15)]}.
Answer (D) is incorrect because 0.33 units per dollar
input is based only on labor costs. All input costs
should be included.
[261] Source: CMA 0697 3-26
Answer (A) is correct. A first-line supervisor's
primary job is employee supervision, so his/her
productivity should be measured on the basis of
output per labor hour. Thus, 5 units per labor hour
expended (1,500 units 300 labor hours) measures
productivity based on the factor over which the

magnitude of the labor efficiency variance if 1,800
units are produced.
magnitude of the labor efficiency variance if 1,800
units are produced.
Answer (C) is incorrect because $2,475 Unfavorable
is the labor efficiency variance.
Answer (D) is correct. The labor rate variance equals
actual hours used times the difference between actual
and standard rates. It is calculated in the same way as
the materials price variance. Because the standard
rate and actual rate were both $12 per hour, the
labor rate variance is $0.
Answer (A) is incorrect because a favorable variance

exists.
Answer (B) is incorrect because $6,540 Favorable
assumes 1,800 units were produced.

on the actual quantity used rather than the standard
quantity.
amount of actual purchases for the month.
Answer (C) is incorrect because a favorable variance

exists.
Answer (D) is correct. The flexible budget overhead
variance is the difference between total actual
overhead costs and the amount shown on a flexible
budget. Standard fixed costs within the relevant range
of production are $54,000. Standard variable
overhead is $6 per labor hour, or $18 per unit (3 x
$6). Accordingly, budgeted total overhead at the
actual output level is $83,700 [($18 VOH x 1,650
units) + $54,000 FOH], and the flexible budget
overhead variance is $3,840 Favorable ($79,860
actual - $83,700 budgeted).
Answer (A) is incorrect because $900 equals the unit
price variance ($.10) times 9,000 units (3 x 3,000) in
the radios manufactured.
Answer (B) is incorrect because $900 equals the unit
price variance ($.10) times 9,000 units (3 x 3,000) in
the radios manufactured.
Answer (C) is correct. The standard unit cost is
$2.90. The actual cost was $3.00 per unit ($36,000
12,000 units). Thus, the unfavorable price variance
is $1,200 [($3.00 - $2.90) x 12,000 units]. The
variance is unfavorable because the actual cost was
higher than the standard cost.
unfavorable. The actual cost was greater than the
standard cost.
Answer (A) is correct. At the given production level,
9,000 components (3,000 x 3) are needed.
However, 10,000 were used. Consequently, the
materials efficiency (quantity or usage) variance was
$2,900 unfavorable [(10,000 - 9,000) x $2.90
standard cost per component].
unfavorable. The actual quantity used was greater
than the quantity budgeted.
Answer (C) is incorrect because the quantity variance
is based on the quantity used during the period
(10,000), not the quantity purchased (12,000).
Answer (D) is incorrect because the quantity variance
is based on the quantity used during the period
(10,000), not the quantity purchased (12,000).
Answer (A) is correct. The 3,000 radios require
three units each of Part X, a total of 9,000 units. At a
standard unit cost of $2.90, the 9,000 units will total
$26,100.
Answer (A) is incorrect because $130 U is the

multiple-country sales price variance.
Answer (B) is incorrect because $120 U is the sales
volume variance for sales in multiple countries for
Gallia.
Answer (C) is correct. The sales volume variance for
Gallia is $120 U [$3.00 budgeted UCM x (260
actual units sold - 300 budgeted unit sales)]. The
sales volume variance for Helvetica is $150 F [$2.50
budgeted UCM x (260 actual units sold - 200
budgeted unit sales)]. Thus, the multiple-country sales
volume variance is $30 F ($150 F - $120 U).
Answer (D) is incorrect because $150 F is the sales
volume variance for sales in multiple countries for
Helvetica.
Answer (A) is incorrect because $156 U is the sales
mix variance for Gallia.
Answer (B) is incorrect because $30 F is the
multiple-country sales volume variance.
Answer (C) is correct. The sales quantity variance for
Gallia is $36 F {[(520 actual total units sold x .6
budgeted percentage) - 300 budgeted unit sales] x
$3 budgeted UCM}. The sales quantity variance for
Helvetica is $20 F {[(520 actual total units sold x .4
budgeted percentage) - 200 budgeted unit sales] x
$2.50 budgeted UCM}. Thus, the multiple-country
sales quantity variance is $56 F ($36 F + $20 F).
Answer (D) is incorrect because $100 F is the
combined sales price and sales volume variance.
Answer (A) is incorrect because $156 U is the sales
mix variance for Gallia.
Answer (B) is correct. The sales mix variance for
Gallia is $156 U {[260 actual units sold - (520 actual
total units sold x .6 budgeted percentage)] x $3
budgeted UCM}. The sales mix variance for
Helvetica is $130 F {[260 actual units sold - (520
actual total units sold x .4 budgeted percentage)] x
$2.50 budgeted UCM}. Thus, the multiple-country
sales mix variance is $26 U ($156 U - $130 F).
Answer (C) is incorrect because $56 F is the
multiple-country sales quantity variance.
Answer (D) is incorrect because $150 F is the sales
volume variance for Helvetica.
[272] Source: CMA 0693 3-23

actual unit costs incurred rather than the $2.90
standard cost.
Answer (A) is incorrect because ideal standards are

perfection standards.
based on the actual quantity used.

Answer (B) is incorrect because ideal standards are
based solely on the most efficient workers.
Answer (C) is incorrect because ideal standards
assume optimal conditions.
Answer (D) is correct. Ideal (perfect, theoretical, or
maximum-efficiency) standards are standard costs
that are set for production under optimal conditions.
They are based on the work of the most skilled
workers with no allowance for waste, spoilage,
machine breakdowns, or other downtime. Tight
standards can have positive behavioral implications if
workers are motivated to strive for excellence.
However, they are not in wide use because they can
have negative behavioral effects if the standards are
impossible to attain. Ideal, or tight, standards are
ordinarily replaced by currently attainable standards
for cash budgeting, product costing, and budgeting
departmental performance. Otherwise, accurate
financial planning will be impossible.
Answer (C) is correct. The materials purchase price

variance equals the quantity purchased multiplied by
the difference between the actual price and the
standard price, or $135 unfavorable [($.75 - $.72) x
4,500 lbs.]. The variance is unfavorable when the
actual price exceeds the standard price.
Answer (D) is incorrect because $150 unfavorable is
based on the assumption that 5,000 lbs. were
purchased.
results from using the standard cost per unit for each
direct material, and also by reversing the order of
subtraction.
Answer (B) is incorrect because $346,500
unfavorable results from using the standard cost per
unit for each direct material.

Answer (A) is correct. The labor yield variance is the
difference between actual and budgeted inputs, times
the budgeted weighted-average rate for the planned
mix. Total hours worked were 1,575 (550 + 650 +
375), standard hours allowed equaled 1,500 (500 +
500 + 500), and the budgeted weighted-average rate
for the planned mix was $6.67 {[(500 x $8) + (500 x
$7) + (500 x $5)] 1,500 standard DLH}. Thus,
the variance is $500 unfavorable ($6.67 x 75).
Answer (B) is incorrect because $320 is the labor
mix variance.
Answer (C) is incorrect because $820 is the labor
Answer (D) is incorrect because $515 is based on
the budgeted weighted-average rate for the actual
mix.

unfavorable when the actual price is greater than the
standard price.
Answer (D) is correct. The total materials price
between the standard price and the actual price by
the actual quantity. The actual price is calculated by
dividing actual cost by actual quantity. Therefore, the
actual price for housing units is $20/unit ($44,000
2,200), for printed circuit boards, $16/unit ($75,200
4,700), and for reading heads, $11/unit ($101,200
9,200). Thus, total materials price variance is
Housing units:
2,200 x ($20 - $20) = $ 0
Printed circuit boards: 4,700 x ($15 - $16) = 4,700 U
Reading heads:
9,200 x ($10 - $11) = 9,200 U
$13,900 U

Answer (A) is incorrect because $50.00 is the
variance for labor class II only [($7 - $6.67) x (650
DLH - 500 DLH)].
Answer (B) is correct. The labor mix variance is the
rates for the actual and planned mixes, times the
actual labor inputs. The budgeted weighted-average
rate for the planned mix is $6.67 (see preceding
question). The budgeted weighted-average rate for
the actual mix is $6.873 [(550 x $8) + (650 x $7) +
(375 x $5) 1,575 actual DLH]. Thus, the mix
variance is $320 [($6.873 - 6.67) x 1,575].
Answer (C) is incorrect because $66.67 is the
variance for labor class III only [($8 - $6.67) x (550
DLH - 500 DLH)].
Answer (D) is incorrect because $500 is the labor
yield variance.
Answer (A) is incorrect because $117 unfavorable is
based on the standard input for 1,300 units.
Answer (B) is incorrect because $123 unfavorable is
Answer (A) is correct. The total materials quantity

between the standard quantity and actual quantity by
the standard price. Standard quantities are calculated
by multiplying the actual units by the standard quantity
per unit. In this example, the standard quantity for
housing units is 2,200 parts (2,200 x 1); for printed
circuit boards, 4,400 parts (2,200 x 2); and for
reading heads, 8,800 parts (2,200 x 4). Therefore,
the total materials quantity variance is
Housing units:
$20 x (2,200 - 2,200) = $ 0
Printed circuit boards: $15 x (4,400 - 4,700) = 4,500 U
Reading heads:
$10 x (8,800 - 9,200) = 4,000 U
$8,500 U
results from reversing the order of subtraction.
results from multiplying by actual price.
results from multiplying by the actual price and
reversing the order of subtraction.
efficiency variance is found by multiplying the

difference between standard hours and actual hours
by the standard rate. The number of standard hours is
calculated by multiplying the actual units by the
standard hours per unit. Therefore, the number of
standard hours is 9,900 ($2,200 x 4.5 hours per
unit), and the variable overhead efficiency is $0 [$2 x
(9,900 - 9,900)].
Answer (B) is incorrect because $900 unfavorable
results from multiplying by the budgeted number of
units, 2,000, instead of actual, 2,200.
results from using a standard hours per unit rate of 9
hours and reversing the order of subtraction.
results from using a standard hours per unit rate of 9
hours.
budget capacity results in an unfavorable variance.

Answer (D) is correct. The volume (idle capacity or
production volume) variance is the amount of underor overapplied fixed factory overhead. It is the
difference between budgeted fixed factory overhead
and the amount applied based on a predetermined
rate and the standard input allowed for actual output.
It measures the use of capacity rather than specific
cost outlays. The predetermined rate equals the
budgeted overhead divided by a measure of capacity.
Consequently, when the standard input allowed for
actual output exceeds the budgeted capacity, fixed
factory overhead is overapplied, and the volume
variance is favorable. If the master budget capacity is
the denominator value, the volume variance is
unfavorable. Conversely, when the standard input
allowed for actual output is less than the budgeted
capacity, fixed factory overhead is underapplied, and
the volume variance is unfavorable. If the normal
capacity is the denominator value, the volume
variance is favorable.

results from reversing the order of subtraction.
spending variance is found by subtracting actual
variable overhead from the product of actual hours
and the standard rate. Therefore, the variable
overhead spending variance is $1,000 favorable
[(9,900 x $2) - $18,800].
results from using the budgeted variable overhead
and by reversing the order of subtraction.
results from using the budgeted variable overhead.
results from multiplying by the actual unit contribution
and reversing the order of subtraction.

Answer (A) is incorrect because 20% of supervision
and indirect labor costs need to be subtracted from
total employee benefits to determine the employee
benefits associated with direct labor costs.
Answer (B) is incorrect because $75,000 is the result
of deducting 80% of supervision and indirect labor
costs from total employee benefits.
Answer (C) is correct. The total employee benefits
include 20% of supervision and direct and indirect
labor costs. To find the amount associated with direct
labor, 20% of supervision and indirect labor costs are
subtracted from total employee benefits [$575,000 20% x ($250,000 + $375,000)], or $450,000.
Answer (D) is incorrect because 20% of supervision
also needs to be deducted.

results from multiplying by the actual unit contribution.
Answer (A) is incorrect because $7.80/hr. is the

fixed manufacturing O/H rate per direct labor hour.
Answer (C) is correct. The contribution margin

volume variance is found by multiplying budgeted unit
contribution by the difference between actual units
and budgeted units. The budgeted unit contribution in
this example is $61 ($122,000 2,000 units).
Therefore, the variance is $12,200 favorable [$61
per unit x (2,200 actual units - 2,000 budgeted units).

manufacturing overhead rate is determined by
dividing variable expenses (supplies, indirect labor,
power, and direct and indirect labor benefits) by
direct labor hours.

unfavorable is the variance between budgeted and
actual contribution margins.
Answer (C) is incorrect because $5.17/hr. incorrectly

includes supervision benefits of $50,000.
Answer (D) is correct. To determine the variable
manufacturing O/H rate, all variable amounts must be
totaled ($1,500,000) and divided by the capacity in
DLH (300,000).

Answer (A) is incorrect because the standard input
for the actual output exceeds normal capacity. Thus,
use of normal capacity results in a favorable volume
variance.
Answer (B) is incorrect because the standard input
for the actual output exceeds normal capacity. Thus,
use of normal capacity results in a favorable volume
variance.
Answer (C) is incorrect because use of master
Total Per DLH

---------- ------Supplies
$ 420,000 $1.40
Indirect labor
375,000 1.25
Power
180,000
.60
Employee benefits:
20% direct labor
450,000 1.50
20% indirect labor
75,000
.25
---------- ------Total
$1,500,000 $5.00
========== ======
stools that can be produced is 125.

Answer (A) is correct. The variable manufacturing
cost to produce a 100-unit lot is 100 times the sum of
direct materials, direct labor, and variable O/H per
seat.
Cushion materials
Padding
Vinyl
$2.40
4.00
----Total cushion materials $6.40
Cost increase 10% (given)
x1.10
----Cost of cushioned seat
$ 7.04
Cushion fabrication labor ($7.50/DLH x .5 DLH) 3.75
Variable overhead ($5.00/DLH x .5 DLH)
2.50
----Total variable cost per cushioned seat
$13.29
======
Total variable cost per 100-unit lot
$1,329
======
Labor hours to make 100

deluxe stools (1.5 x 100)
150 hr.
Minus: Labor hours to make 100 cushioned
seats (cushion fabrication .5 x 100)
(50)hr.
--Labor hours available for economy stool
100 hr.
Labor hours to make one economy stool
8 hr.
--Stools produced by extra labor in
economy stool production (100 .8 hr.) 125 stools
===
Answer (C) is incorrect because the total hours
available for economy stools needs to be divided by
the .8 hr. required to make an economy stool.
Answer (D) is incorrect because 150 is the number
of hours required to make 100 deluxe stools before
considering the hours required to make 100
cushioned seats.

transfer price plus the opportunity cost of $540 of the
Office Division.
Answer (C) is incorrect because $789 is the transfer
price minus the opportunity cost of $540 of the
Office Division.
Answer (D) is incorrect because the transfer price
based on the variable manufacturing costs is $1,329.
Answer (A) is correct. Total fixed O/H is
$2,340,000 (see below). It is divided by the
300,000-hour level of activity to determine the $7.80
hourly rate.
Supervision
$ 250,000
Heat and light
140,000
Property taxes and insurance 200,000
Depreciation
1,700,000
Benefits (20% of supervision) 50,000
---------$2,340,000
==========
Answer (B) is incorrect because the fixed
manufacturing overhead rate is determined by
dividing fixed expenses (supervision, heat and light,
property taxes and insurance, depreciation, and
supervision benefits) by direct labor hours.
Answer (C) is incorrect because $5.17/hr. incorrectly
includes supervision benefits of $50,000.
Answer (D) is incorrect because $5.00/hr. is the
variable manufacturing O/H rate per hour.
Answer (A) is correct. The contribution margin per

unit is equal to the selling price minus the variable
costs. Variable costs per unit for the deluxe office
stool equal $33.30 and the selling price is $58.50.
Thus, the contribution margin is $25.20 per unit
($58.50 - $33.30). The total standard cost is
$45.00, which includes $11.70 of fixed O/H (1.5 hr.
x $7.80), and the variable costs are $33.30 ($45.00
- $11.70).
Answer (B) is incorrect because $15.84 is the
contribution margin of the economy office stool.
Answer (C) is incorrect because variable costs of
$33.30 need to be deducted from the sales price of
$58.50.
Answer (D) is incorrect because $33.30 is the
variable cost which must be deducted from the sales
price to yield the contribution margin.
Answer (A) is incorrect because $789 is the transfer
price of $1,329 minus the opportunity cost of $540
of the Office Division.
transfer price of $1,329 plus the opportunity cost of
$540 of the Office Division.
transfer price, not the opportunity cost of the Office
Division.
Answer (D) is correct. Opportunity cost is the benefit
of the next best opportunity forgone. The opportunity
cost here is the contribution margin forgone by
shifting production to the economy office stool
($2,520 - $1,980 = $540).
Answer (A) is incorrect because the total hours

available for economy stools needs to be divided by
the .8 hr. required to make an economy stool.
Deluxe
-----$58.50
------
Economy
-----$41.60
------
Selling price
Answer (B) is correct. The labor hours used in

cushion fabrication will be used to make the modified
cushioned seat. Thus, the labor time freed by not
making deluxe stools equals the frame fabrication and
assembly time only. The number of economy office
Costs
Materials
$14.55
$15.76
Labor ($7.50 x 1.5)
11.25 ($7.50 x .8) 6.00
Variable O/H ($5 x 1.5) 7.50 ($5 x .8)
4.00
Fixed O/H
---
Total costs
Unit CM
Units produced
Total CM
----------$33.30
$25.76
----------$25.20
$15.84
x 100
x 125
----------$2,520
$1,980
======
======

difference between the actual cost and the sum of the
products of actual hours and standard rates.
Moreover, the variance is unfavorable.
Answer (B) is incorrect because $2,205 unfavorable
is the labor rate variance.
unfavorable.
Answer (D) is correct. The total flexible budget
variance is the difference between the standard cost
of labor and the actual cost of labor. Based on the
standard hours and rates given, the standard cost of
labor is $159,060 [(7,920 x $12.00) + (4,620 x
$8.00) + (4,510 x $6.00)]. The actual cost of labor
is $160,805 ($100,245 + $35,260 + $25,300).
Thus, the total flexible budget variance is $1,745
unfavorable ($160,805 actual - $159,060 standard).
Answer (A) is incorrect because $3,539 results from
calculating the budgeted weighted-average standard
rate for the actual mix using actual rates.
calculating the budgeted weighted-average standard
rate for the actual mix using actual rates. Moreover,
the variance is unfavorable.
Answer (C) is correct. The labor mix variance is the
standard rates for the actual and standard mixes,
multiplied by the actual labor input. The total actual
labor input was 16,850 hours (8,150 + 4,300 +
4,400). Accordingly, the budgeted weighted-average
standard rate for the actual mix was $9.41 {[(8,150 x
$12) + (4,300 x $8) + (4,400 x $6)] 16,850}.
Given that the total standard labor input was 17,050
hours (7,920 + 4,620 + 4,510), the budgeted
weighted-average standard rate for the standard mix
was $9.33 {[(7,920 x $12) + (4,620 x $8) + 4,510
x $6)] 17,050}. Thus, the mix variance is $1,348
unfavorable [($9.41 - $9.33) x 16,850].
Answer (D) is incorrect because the variance was
unfavorable.
results from multiplying by the weighted-average
actual hourly rate for the actual mix instead of by the
budgeted weighted-average standard rate for the
standard mix.
Answer (B) is correct. The labor yield variance is the
difference between actual and budgeted inputs,
multiplied by the budgeted weighted-average
standard rate for the standard mix. Total actual hours
worked were 16,850 (8,150 + 4,300 + 4,400), and

standard hours allowed equaled 17,050 (7,920 +
4,620 + 4,510). The budgeted weighted-average
standard rate for the standard mix was $9.33
{[(7,920 x $12) + (4,620 x $8) + (4,510 x $6)]
17,050}. Hence, the yield variance is $1,866
favorable [$9.33 x (16,850 - 17,050)].
results from multiplying by the simple average of the
standard hourly rates.
Answer (D) is incorrect because $460 favorable
results from multiplying each labor class's hour
variance by its respective standard hourly rate.

Control and Performance Evaluation

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PART 3C

CONTROL AND PERFORMANCE

[5] Source: CIA 1184 III-12

[1] Source: CMA 0691 3-21

B. Process quality control is used to prevent defects,

D. TQM emphasizes doing each job right the first

C. $1,200 per month plus a 3% commission on all

B. Assignment of responsibility for deviations.

[4] Source: CIA 1184 III-11

[9] Source: CIA 1185 III-10

B. Planning and controlling are completely

D. Controlling cannot operate effectively without the

[10] Source: CIA 1186 III-13

D. Records of returned merchandise will be recorded

D. Feedback control (monitoring final results and

[12] Source: CIA 1187 III-9

[16] Source: CIA 1190 III-13

[13] Source: CIA 1187 III-10

B. Increased finished goods inspections.

[19] Source: CIA 0591 III-16

[24] Source: CIA 1191 III-10

B. Forecasting inventory needs.

A. Budgeting, financial ratio analysis, and cash

D. Restricting access to computer data by assigning

B. Objectives, standards, and an evaluation-reward

[20] Source: CIA 0591 III-43

D. Setting goals, empowering employees, and job

[21] Source: CIA 1192 III-17

B. There is no control standard.

[26] Source: CIA 1185 III-11

[22] Source: CIA 1191 III-11

C. Ability to work well with fellow engineers on

[23] Source: CIA 0592 III-17

[28] Source: CIA 0588 III-12

[37] Source: CMA 1292 3-29

C. Inventory turnover in days, the current ratio, and

C. External failure cost.

firm. The vice president of finance has decided that

B. Encourage more effective solutions to operational

[51] Source: Publisher

B. Preparing a master budget.

D. Controls should be simple.

B. External failure cost.

1. Selecting strategic control points at which to

[53] Source: Publisher

B. Communication to everyone involved of the need

[54] Source: CIA 1188 IV-51

[50] Source: Publisher

C. Automatic corrective mechanism for errors.

Which of the following is the principal advantage of

B. Decrease time customers spend in the line.

[61] Source: CMA 0697 3-27

[57] Source: Publisher

A. The control system highlights the things that the

[62] Source: CMA 1295 3-14

C. People tend to avoid pleasant situations.

A. Internal failure cost.

D. The control system establishes a standard of

[58] Source: Publisher