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CHAPTER 12
STANDARD COSTS AND BALANCED SCORECARD

SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY
Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT
True-False Statements
1. 1 K 7. 2 K 13. 2 K 19. 4 C 25. 3 C
2. 1 K 8. 2 C 14. 2 C 20. 4 K 26. 5 K
3. 1 C 9. 2 C 15. 2 K 21. 5 K 27. 6 C
4. 1 K 10. 2 K 16. 2 K 22. 5 K *28. 9 C
5. 1 C 11. 2 C 17. 2 C 23. 5 C *29. 9 C
6. 2 C 12. 2 K 18. 3 K 24. 3 C *30. 9 C
Multiple Choice Questions
31. 1 K 51. 2 C 71. 3 K 91. 5 K 111. 3 AP
32. 1 C 52. 2 C 72. 3 K 92. 5 K 112. 3 AP
33. 1 C 53. 2 K 73. 3 AP 93. 5 C 113. 4 AP
34. 1 C 54. 2 C 74. 3 AP 94. 5 C 114. 4 AP
35. 1 K 55. 2 C 75. 3 AP 95. 5 K 115. 4 AP
36. 1 K 56. 2 K 76. 3 AP 96. 5 K 116. 3 AP
37. 1 C 57. 4 C 77. 3 AP 97. 5 K 117. 4 AP
38. 1 C 58. 3 C 78. 3 AP 98. 5 C 118. 8 K
39. 1 C 59. 4 C 79. 3 AP 99. 5 K 119. 8 K
40. 1 C 60. 3 K 80. 4 C 100. 6 K 120. 8 K
41. 1 C 61. 3 AP 81. 4 C 101. 6 C 121. 6 C
42. 2 K 62. 3 AP 82. 4 C 102. 6 K 122. 6 C
43. 2 K 63. 4 AP 83. 3 C 103. 7 K 123. 8 C
44. 2 K 64. 4 AP 84. 3 C 104. 4 C 124. 4,6 C
45. 2 C 65. 4 AP 85. 4 C 105. 7 K 125. 1 C
46. 2 K 66. 4 K 86. 5 K 106. 7 K 126. 8 AP
47. 2 K 67. 4 C 87. 5 K *107. 9 AP 127. 9 C
48. 2 K 68. 3 K 88. 5 C *108. 9 K 128. 6 C
49. 2 C 69. 5 K 89. 5 C *109. 9 C 129. 6 C
50. 2 K 70. 5 AP 90. 5 K *110. 9 K 130. 2 C
Brief Exercises
131. 1 AP 133. 4 AP 135. 9 AP 137. 4 AP
132. 3 AP 134. 5 AP 136. 9 AP 138. 3 AP
Exercises
139. 2 AP 144. 3,4 AP *149. 4,9 AP *154. 5,9 AP 159. 8 C
140. 4 AP 145. 3,4,5 AP *150. 4,9 AP 155. 7 AP 160. 8 C
141. 3 AP 146. 3,4,5 AN 151. 5 AP *156. 9 AP 161. 8 C
142. 3,4 AP *147 3,4,5,9 AP 152. 5 AP 157. 2 C 162. 3 AP
143. 3 AN *148. 3,9 AP 153. 5 AP 158. 3,4 AP 163. 4 AP
164. 1-4 AP
Completion Statements
165. 1 K 167. 3 K 169. 4 K 171. 4 K
166. 2 K 168. 4 K 170. 3 K 172. 6 K
Matching
173. 1-9 K
Short Answer
174. 2,4 E 175. 2,3 E 176. 1 E 177. 6 E
*This topic is dealt with in an Appendix to the chapter.
Standard Costs and Balanced Scorecard 12-2
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 5. TF 34. MC 38. MC 125. MC 173. M
2. TF 31. MC 35. MC 39. MC 131. BE 176. SA
3. TF 32. MC 36. MC 40. MC 164. Ex
4. TF 33. MC 37. MC 41. MC 165. C
Study Objective 2
6. TF 11. TF 16. TF 45. MC 50. MC 55. MC 164. Ex
7. TF 12. TF 17. TF 46. MC 51. MC 56. MC 166. C
8. TF 13. TF 42. MC 47. MC 52. MC 130. MC 173. M
9. TF 14. TF 43. MC 48. MC 53. MC 139. Ex 174. SA
10. TF 15. TF 44. MC 49. MC 54. MC 157. Ex 175. SA
Study Objective 3
18. TF 62. MC 75. MC 84. MC 141. Ex 147. Ex 170. C
24. TF 68. MC 76. MC 111. MC 142. Ex 148. Ex 173. M
25. TF 71. MC 77. MC 112. MC 143. Ex 158. Ex 175. SA
58. MC 72. MC 78. MC 116. MC 144. Ex 162. Ex
60. MC 73. MC 79. MC 132. BE 145. Ex 164. Ex
61. MC 74. MC 83. MC 138. BE 146. Ex 167. C
Study Objective 4
19. TF 65. MC 85. MC 124. MC 145. Ex 163. Ex 174. SA
20. TF 66. MC 104. MC 133. BE 146. Ex 164. Ex
57. MC 67. MC 113. MC 137. BE 147. Ex 168. C
59. MC 80. MC 114. MC 140. Ex 149. Ex 169. C
63. MC 81. MC 115. MC 142. Ex 150. Ex 171. C
64. MC 82. MC 117. MC 144. Ex 158. Ex 173. M
Study Objective 5
22. TF 70. MC 89. MC 93. MC 97. MC 145. Ex 152. Ex
23. TF 86. MC 90. MC 94. MC 98. MC 146. Ex 153. Ex
26. TF 87. MC 91. MC 95. MC 99. MC 147. Ex 154. Ex
69. MC 88. MC 92. MC 96. MC 134. BE 151. Ex 173. M
Study Objective 6
27. TF 101. MC 121. MC 124. MC 129. MC 173. M
100. MC 102. MC 122. MC 128. MC 172. C 177. SA
Study Objective 7
103. MC 105. MC 106. MC 155. Ex 173. M
Study Objective 8
118. MC 120. MC 126. MC 160. Ex 173. M
119. MC 123. MC 159. Ex 161. Ex
Study Objective 9
*28. TF *107. MC *110. MC *136. BE *149. Ex *156. Ex
*29. TF *108. MC 127. MC *147. Ex *150. Ex *173. M
*30. TF *109. MC *135. BE *148. Ex *154. Ex
Note: TF = True-False C = Completion BE = Brief Exercise

MC = Multiple Choice Ex = Exercise M = Matching
SA = Short Answer
The chapter also contains one set of ten Matching questions and four Short-Answer Essay
questions.
CHAPTER STUDY OBJECTIVES
1. Differentiate between a standard and a budget and identify the advantages of

standard costs. Both standards and budgets are predetermined costs. The main
difference is that a standard is a unit amount, whereas a budget is a total amount. A
standard may be regarded as the budgeted cost per unit of product. Standard costs offer
several advantages. They facilitate management planning, promote greater economy and
efficiency, are useful in setting selling prices, contribute to management control, permit
“management by exception,” simplify the costing of inventories, and reduce clerical costs.
2. Describe how companies set standards. The direct materials price standard should be
based on the delivered cost of raw materials plus an allowance for receiving and handling.
The direct materials quantity standard should establish the required quantity plus an
allowance for waste and spoilage. The direct labour price standard should be based on
current wage rates and expected adjustments, such as COLAs. It also generally includes
payroll taxes and fringe benefits. Direct labour quantity standards should be based on
required production time plus an allowance for rest periods, cleanup, machine setup, and
machine downtime. For manufacturing overhead, a standard predetermined overhead rate
is used. It is based on an expected standard activity index, such as standard direct labour
hours or standard direct labour cost.
3. State the formulas for determining direct materials. The formulas for the direct
materials variances are as follows:
(Total actual quantities x Actual price) - (Total standard quantities allowed x Standard
price) = Total materials variance
(Total actual quantities x Actual price) - (Total actual quantities x Standard price) =
Materials price variance
(Total actual quantities x Standard price) - (Total standard quantities allowed x Standard
price) = Materials quantity variance
4. State the formulas for determining direct labour variances. The formulas for direct
labour are as follows:
(Total actual hours x Actual rate) - (Total standard hours allowed x Standard rate) = Total
labour variance
(Total actual hours x Actual rate) - (Total actual hours x Standard rate) = Labour price
variance
(Total actual hours x Standard rate) - (Total standard hours allowed x Standard rate) =
Labour quantity variance
5. State the formulas for determining total manufacturing overhead variances. The
formulas for the manufacturing overhead variances are as follows:
Actual overhead - Overhead applied = Total overhead variance
Actual overhead - (Variable overhead applied + Fixed Overhead budgeted) = Overhead
budget variance
Fixed overhead rate x (Normal capacity hours - Standard hours allowed) = Overhead
volume variance
12-4 Test Bank for Managerial Accounting, Third Canadian Edition
6. Discuss the reporting of variances. Variances are reported to management in variance

reports. The reports aid management by exception by highlighting significant differences.
7. Prepare an income statement for management under a standard cost system. Under
a standard cost system, an income statement prepared for management will report the
cost of goods sold at standard cost and then disclose each variance separately.
8. Describe the balanced scorecard approach to performance evaluation. The balanced

scorecard uses financial and non-financial measures in an integrated system that links
performance measurement and a company’s strategic goals. It uses four perspectives:
financial, customer, internal processes, and learning and growth. Objectives are set within
perspectives.
9. Identify the features of a standard cost accounting system (Appendix 12A). In a

standard cost accounting system, standard costs are journalized and posted, and
separate variance accounts are maintained in the ledger. When actual costs and standard
costs do not differ significantly, inventories may be reported at standard costs
.TRUE-FALSE STATEMENTS
1. Inventories cannot be valued at standard cost in financial statements.
2. Standard cost is the industry average cost for a particular item.
3. A standard is a unit amount, whereas a budget is a total amount.
4. Standard costs may be incorporated into the accounts in the general ledger.
5. An advantage of standard costs is that they simplify costing of inventories and reduce
clerical costs.
6. Setting standard costs is relatively simple because it is done entirely by accountants.
7. Normal standards should be rigorous but attainable.
8. Actual costs that vary from standard costs always indicate inefficiencies.
9. Ideal standards will generally result in favourable variances for the company.
10. Normal standards incorporate normal contingencies of production into the standards.
11. Once set, normal standards should not be changed during the year.
12. In developing a standard cost for direct materials, a price factor and a quantity factor must
be considered.
13. A direct labour price standard is frequently called the direct labour efficiency standard.
14. The standard predetermined overhead rate must be based on direct labour hours as the
standard activity index.
15. Standard cost cards are the subsidiary ledger for the Work in Process account in a
standard cost system.
16. A variance is the difference between actual costs and standard costs.
17. If actual costs are less than standard costs, the variance is favourable.
18. A materials quantity variance is calculated as the difference between the standard direct
materials price and the actual direct materials price multiplied by the actual quantity of
direct materials used.
19. An unfavourable labour quantity variance indicates that the actual number of direct labour
hours worked was greater than the number of direct labour hours that should have been
worked for the output attained.
20. Standard cost + price variance + quantity variance = Budgeted cost.
21. The total overhead budget variance relates primarily to fixed overhead costs.
22. The fixed overhead volume variance relates only to fixed overhead costs.
23. If production exceeds normal capacity, the overhead volume variance will be favourable.
24. There could be instances where the production department is responsible for a direct
materials price variance.
25. The starting point for determining the causes of an unfavourable materials price variance
is the purchasing department.
26. A two-variance analysis of overhead consists of a spending variance and a volume

variance.
27. Variance analysis facilitates the principle of "management by exception."
*28. A credit to a Materials Quantity Variance account indicates that the actual quantity of
direct materials used was greater than the standard quantity of direct materials allowed.
*29. A standard cost system may be used with a job order cost system but not a process cost
system.
*30. A debit to the Overhead Volume Variance account indicates that the standard hours
allowed for the output produced was greater than the standard hours at normal capacity.
ANSWERS TO TRUE-FALSE STATEMENTS

Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans.
. . . . .
1. F 6. F 11. F 16. T 21. F 26. T
2. F 7. T 12. T 17. T 22. T 27. T
3. T 8. F 13. F 18. F 23. T *28. F
4. T 9. F 14. F 19. T 24. T *29. F
5. T 10. T 15. F 20. F 25. T *30. F
MULTIPLE CHOICE QUESTIONS
31. A standard cost is

a. a cost which is paid for a group of similar products.
b. the average cost in an industry.
c. a predetermined cost.
d. the historical cost of producing a product last year.
32. The difference between a budget and a standard is that

a. a budget expresses what costs were, while a standard expresses what costs
should be.
b. a budget expresses management's plans, while a standard reflects what actually
happened.
c. a budget expresses a total amount while a standard expresses a unit amount.
d. standards are excluded from the cost accounting system, whereas budgets are
generally incorporated into the cost accounting system.
33. Standard costs may be used by

a. universities.
b. governmental agencies.
c. charitable organizations.
d. all of these.
34. Which of the following statements is false?

a. A standard cost is more accurate than a budgeted cost.
b. A standard is a unit amount.
c. In concept, standards and budgets are essentially the same.
d. The standard cost of a product is equivalent to the budgeted cost per unit of
product.
35. Budget data are not journalized in cost accounting systems with the exception of
a. the application of manufacturing overhead.
b. direct labour budgets.
c. direct materials budgets.
d. cash budget data.
36. It is possible that a company's financial statements may report inventories at

a. budgeted costs.
b. standard costs.
c. both budgeted and standard costs.
d. none of these.
37. If standard costs are incorporated into the accounting system,

a. it may simplify the costing of inventories and reduce clerical costs.
b. it can eliminate the need for the budgeting process.
c. the accounting system will produce information which is less relevant than the
historical cost accounting system.
d. approval of the stockholders is required.
38. Standard costs

a. may show past cost experience.
b. help establish expected future costs.
c. are the budgeted costs per unit in the present.
d. all of these.
39. Which of the following statements about standard costs is false?

a. Properly set standards should promote efficiency.
b. Standard costs facilitate management planning.
c. Standards should not be used in "management by exception."
d. Standard costs can simplify the costing of inventories.
40. Which of the following is not considered an advantage of using standard costs?
a. Standard costs can reduce clerical costs.
b. Standard costs can be useful in setting prices for finished goods.
c. Standard costs can be used as a means of finding fault with performance.
d. Standard costs can make employees "cost-conscious."
41. If a company is concerned with the potential negative effects of establishing standards,
they should
a. set loose standards that are easy to fulfill.
b. offer wage incentives to those meeting standards.
c. not employ any standards.
d. set tight standards in order to motivate people.
42. A standard which represents an efficient level of performance that is attainable under
expected operating conditions is called a(n)
a. ideal standard.
b. loose standard.
c. tight standard.
d. normal standard.
43. Ideal standards

a. are rigorous but attainable.
b. are the standards generally used in a master budget.
c. reflect optimal performance under perfect operating conditions.
d. will always motivate employees to achieve the maximum output.
44. The final decision as to what standard cost should be is the responsibility of
a. the quality control engineer.
b. the managerial accountants.
c. the purchasing agent.

d. management.
45. The labour time requirements for standards may be determined by the
a. sales manager.
b. product manager.
c. industrial engineers.
d. payroll department manager.
46. The two levels that standards may be set at are

a. normal and fully efficient.
b. normal and ideal.
c. ideal and less efficient.
d. fully efficient and fully effective.
47. The most rigorous of all standards is the

a. normal standard.
b. realistic standard.
c. ideal standard.
d. conceivable standard.
48. Most companies that use standards set them at

a. the normal level.
b. a conceivable level.
c. the ideal level.
d. last year's level.
49. A managerial accountant

1. does not participate in the standard setting process.
2. provides knowledge of cost behaviours in the standard setting process.
3. provides input of historical costs to the standard setting process.
a. 1
b. 2
c. 3
d. 2 and 3
50. The cost of freight-in

a. is to be included in the standard cost of direct materials.
b. is considered a selling expense.
c. should have a separate standard apart from direct materials.
d. should not be included in a standard cost system.
51. The direct materials quantity standard would not be expressed in

a. kilograms.
b. barrels.
c. dollars.
d. board metres.
52. The direct materials quantity standard should

a. exclude unavoidable waste.
b. exclude quality considerations.
c. allow for normal spoilage.
d. always be expressed as an ideal standard.
53. The direct labour quantity standard is sometimes called the direct labour
a. volume standard.
b. effectiveness standard.
c. efficiency standard.
d. quality standard.
54. A manufacturing company would include setup and downtime in their direct
a. materials price standard.
b. materials quantity standard.
c. labour price standard.
d. labour quantity standard.
55. Allowance for spoilage is part of the direct

a. materials price standard.
b. materials quantity standard.
c. labour price standard.
d. labour quantity standard.
56. The total standard cost to produce one unit of product is shown
a. at the bottom of the income statement.
b. at the bottom of the balance sheet.
c. on the standard cost card.
d. in the Work in Process Inventory account.
57. An unfavourable materials quantity variance would occur if

a. more materials are purchased than are used.
b. actual kilograms of materials used were less than the standard kilograms llowed.
c. actual labour hours used were greater than the standard labour hours allowed.
d. actual kilograms of materials used were greater than the standard kilograms
allowed.
58. If actual direct material costs are greater than standard direct materials costs, it means that
a. actual costs were calculated incorrectly.
b. the actual unit price of direct materials was greater than the standard unit price of
direct materials.
c. the actual unit price of raw materials or the actual quantities of raw materials
used was greater than the standard unit price or standard quantities of raw
materials expected.
d. the purchasing agent or the production foreman is inefficient.
59. If actual costs are greater than standard costs, there is a(n)
a. normal variance.
b. unfavourable variance.
c. favourable variance.
d. error in the accounting system.
60. A total materials variance is analyzed in terms of

a. price and quantity variances.
b. buy and sell variances.
c. quantity and quality variances.
d. tight and loose variances.
Use the following information for questions 61 and 62:
A company developed the following per-unit standards for its product: 5 kilograms of direct
materials at $3 per kilogram. Last month, 1,000 kilograms of direct materials were purchased for
$2,900. Also last month, 700 kilograms of direct materials were used to produce 135 units.
61. What was the direct materials price variance for last month?
a. $12,100 favourable
b. $100 favourable
c. $12,100 unfavourable
d. $100 unfavourable
62. What was the direct materials quantity variance for last month?
a. $75 unfavourable
b. $75 favourable
c. $900 unfavourable
d. $900 favourable
63. The per-unit standards for direct labour are 3 direct labour hours at $15 per hour. If in
producing 700 units, the actual direct labour cost was $31,175 for 2,150 direct labour
hours worked, the total direct labour variance is
a. $50 unfavourable.
b. $325 favourable.
c. $50 favourable.
d. $325 unfavourable.
64. The standard rate of pay is $15 per direct labour hour. If the actual direct labour payroll
was $58,800 for 4,000 direct labour hours worked, the direct labour price (rate) variance is
a. $1,200 unfavourable.
b. $1,200 favourable.
c. $1,500 unfavourable.
d. $1,500 favourable.
65. The standard number of hours that should have been worked for the output attained is
8,000 direct labour hours and the actual number of direct labour hours worked was 8,400.
If the direct labour price variance was $8,400 unfavourable, and the standard rate of pay
was $18 per direct labour hour, what was the actual rate of pay for direct labour?
a. $17.00 per direct labour hour
b. $15.00 per direct labour hour
c. $19.00 per direct labour hour
d. $18.00 per direct labour hour
66. Variances from standards are

a. expressed in total dollars.
b. expressed on a per-unit basis.
c. expressed on a percentage basis.
d. all of these.
67. A favourable variance

a. is an indication that the company is not operating in an optimal manner.
b. implies a positive result if quality control standards are met.
c. implies a positive result if standards are flexible.
d. means that standards are too loosely specified.
68. The total materials variance is equal to the

a. materials price variance.
b. difference between the materials price variance and materials quantity variance.
c. product of the materials price variance and the materials quantity variance.
d. sum of the materials price variance and the materials quantity variance.
69. The total overhead budget variance is equal to the

a. sum of the total materials variance and the total labour variance.
b. difference between the total materials variance and the total labour variance.
c. difference between the actual overhead costs and the overhead costs applied to
the work done.
d. total variance minus the spending variance and the volume variance.
70. The total variance is $10,000. The total materials variance is $4,000. The total labour
variance is twice the total overhead variance. What is the total overhead variance?
a. $1,000
b. $2,000
c. $3,000
d. $4,000
71. The formula for the materials price variance is

a. (AQ × SP) – (SQ × SP).
b. (AQ × AP) – (AQ × SP).
c. (AQ × AP) – (SQ × SP).
d. (AQ × SP) – (SQ × AP).
72. The formula for the materials quantity variance is

a. (SQ × AP) – (SQ × SP).
b. (AQ × AP) – (AQ × SP).
c. (AQ × SP) – (SQ × SP).
d. (AQ × AP) – (SQ × SP).
73. A company uses 3,150 kilograms of materials and exceeds the standard by 150
kilograms. The quantity variance is $900 unfavourable. What is the standard price?
a. $2.00
b. $3.50
c. $4.00
d. $6.00
74. A company purchases 130,000 kilograms of materials. The materials price variance is
$26,000 favourable. What is the difference between the standard and actual price paid for
the materials?
a. $5.00
b. $0.20
c. $5.50
d. $0.25
75. A company uses 40,000 kilograms of materials for which they paid $9.00 a kilogram. The
materials price variance was $80,000 favourable. What is the standard price per
kilogram?
a. $2.00
b. $7.00
c. $10.00
d. $11.00
76. If the materials price variance is $600 F and the materials quantity and labour variances
are each $450 U, what is the total materials variance?
a. $600 F
b. $450 U
c. $150 F
d. $1,050 U
Use the following information for questions 77–79
Bridgeware Company has a materials price standard of $2.50 per kilogram. Four thousand
kilograms of materials were purchased at $2.40 a kilogram. The actual quantity of materials used
was 3,500 kilograms, although the standard quantity allowed for the output was 3,400 kilograms.
77. Bridgeware Company's materials price variance is

a. $400 U.
b. $400 F.
c. $350 U.
d. $300 F.
78. Bridgeware Company's materials quantity variance is

a. $250 U.
b. $250 F.
c. $340 F.
d. $340 U.
79. Bridgeware Company's total materials variance is

a. $1,100 U.
b. $1,500 U.
c. $1,250 U.
d. $100 F.
80. The matrix approach to variance analysis

a. will yield slightly different variances than the formula approach.
b. is more accurate than the formula approach.
c. does not separate the price and quantity variance calculations.
d. provides a convenient structure for determining each variance.
81. Labour efficiency is measured by the

a. materials quantity variance.
b. total labour variance.
c. labour quantity variance.
d. labour rate variance.
82. An unfavourable labour quantity variance may be caused by

a. paying workers higher wages than expected.
b. paying workers a bonus at year-end.
c. worker fatigue or carelessness.
d. higher pay rates mandated by union contracts.
83. The investigation of a materials price variance usually begins in the

a. first production department.
b. purchasing department.
c. controller's office.
d. accounts payable department.
84. The investigation of a materials quantity variance usually begins in the

a. production department.
b. purchasing department.
c. sales department.
d. controller's department.
85. If the labour quantity variance is unfavourable and the cause is inefficient use of direct
labour, the responsibility rests with the
a. sales department.
b. production department.
c. budget office.
d. controller's department.
86. An overhead fixed volume variance is calculated as the difference between normal
capacity hours and standard hours allowed
a. times the total predetermined overhead rate.
b. times the predetermined variable overhead rate.
c. times the predetermined fixed overhead rate.
d. divided by actual number of hours worked.
87. Manufacturing overhead costs are applied to work in process on the basis of
a. actual hours worked.
b. standard hours allowed.
c. ratio of actual variable to fixed costs.
d. actual overhead costs incurred.
88. Which of the following statements is false?

a. The overhead volume variance indicates whether plant facilities were used
efficiently during the period.
b. The costs that cause the overhead volume variance are usually controllable
costs.
c. The overhead volume variance relates solely to fixed costs.
d. The overhead volume variance is favourable if standard hours allowed for output
are greater than the standard hours at normal capacity.
89. If the standard hours allowed are less than the standard hours at normal capacity,
a. the overhead volume variance will be unfavourable.
b. variable overhead costs will be under-applied.
c. the overhead controllable variance will be favourable.
d. variable overhead costs will be over-applied.
90. Which of the following statements about overhead variances is false?

a. Standard hours allowed are used in calculating the spending variance.
b. Standard hours allowed are used in calculating the volume variance.
c. The spending variance pertains solely to fixed costs.
d. The total overhead variance pertains to both variable and fixed costs.
91. The overhead volume variance relates only to

a. variable overhead costs.
b. fixed overhead costs.
c. both variable and fixed overhead costs.
d. all manufacturing costs.
92. The fixed overhead spending variance is calculated as the difference between actual
overhead costs incurred and the budgeted
a. overhead costs for the standard hours allowed.
b. overhead costs applied to the product.
c. overhead costs at the normal level of activity.
d. fixed overhead costs.
93. If the standard hours allowed are less than the standard hours at normal capacity, the
volume variance
a. cannot be calculated.
b. will be favourable.
c. will be unfavourable.
d. will be greater than the spending variance.
94. The budgeted overhead costs for standard hours allowed and the overhead costs applied
to the product are the same amount
a. for both variable and fixed overhead costs.
b. only when standard hours allowed is less than normal capacity.
c. for variable overhead costs.
d. for fixed overhead costs.
95. The spending variance relates to

a. fixed overhead costs.
b. variable overhead costs.
c. both fixed and variable overhead costs.
d. all manufacturing costs.
96. The difference between fixed overhead budgeted and overhead applied is the
a. budget variance.
b. spending variance.
c. total overhead variance.
d. volume variance.
97. The fixed overhead variance that indicates whether plant facilities were efficiently used is
the
a. budget variance.
b. efficiency variance.
c. spending variance.
d. volume variance.
98. Each of the following may cause an unfavourable variable budget variance except
a. higher than expected use of indirect materials.
b. greater than expected use of indirect labour.
c. increases in indirect manufacturing costs.
d. inefficient use of direct labour.
99. The difference between actual overhead costs and overhead costs applied is the
a. budget variance.
b. spending variance.
c. total overhead variance.
d. volume variance.
100. Variance reports are

a. external financial reports.
b. Revenue Canada tax reports.
c. internal reports for management.
d. all of these.
101. In using variance reports, management looks for

a. total assets invested.
b. significant variances.
c. competitors’ costs in comparison to the company's costs.
d. more efficient ways of valuing inventories.
102. All of the following variances are reported to the production department except the
a. labour price variance.
b. materials price variance.
c. overhead controllable variance.
d. labour price and materials price variances.
103. The costing of inventories at standard cost for external financial statement reporting
purposes is
a. not permitted.
b. preferable to reporting at actual costs.
c. in accordance with generally accepted accounting principles if significant
differences exist between actual costs and standard costs.
d. in accordance with generally accepted accounting principles if significant
differences do not exist between actual and standard costs.
104. Which of the following could cause a debit balance in the direct material price variance
accounts?
a. Paying more than the standard price per unit for direct material
b. Paying less than the standard price per unit for direct material
c. Using more than the standard quantity of direct material

d. Using less than the standard quantity of direct material
105. Income statements prepared internally for management often show cost of goods sold at
standard cost and variances are
a. separately disclosed.
b. deducted as other expenses and revenues.
c. added to cost of goods sold.
d. closed directly to retained earnings.
106. In income statements prepared for management under a standard cost accounting
system, each of the following are reported at actual amounts except
a. sales.
b. selling expenses.
c. gross profit.
d. cost of goods sold.
*107. If 20,000 kilograms of direct materials are purchased for $14,400 on account and the
standard cost is $.70 per kilogram, the journal entry to record the purchase is
a. Raw Materials Inventory .............................................. 14,400
Accounts Payable ................................................ 14,400
b. Work In Process Inventory .......................................... 14,400
Materials Quantity Variance .................................. 400
c. Raw Materials Inventory .............................................. 14,400
Materials Price Variance ....................................... 400
d. Raw Materials Inventory .............................................. 14,000
Materials Price Variance ............................................. 400
*108. A standard cost system may be used with

a. job order costing only.
b. process costing only.
c. activity-based costing.
d. either job order or process costing.
*109. The materials price variance is recorded

a. at the end of the accounting period.
b. when materials are purchased.
c. when materials are issued to production.
d. at the beginning of the accounting period.
*110. Each of the following accounts is recorded at standard cost except

a. Factory Labour.
b. Raw Materials Inventory.
c. Wages Payable.
d. Work in Process Inventory.
Use the following information to answer questions 111 to 115:
EKPN Co. Produces wooden boxes. The company’s standards per box require 6 boards, each
costing $10 per board, and half of an hour of direct labour. The standard labour rate is $15 per
hour. In August, EKPN Co. Purchased 12,000 boards for a total cost of $123,000. It used 11,500
boards to manufacture 1,900 boxes. Total labour hours were 1,000 hours, and total labour costs
were $16,250.
111. What was the materials price variance for August?

a. $3,000 F
b. $3,000 U
c. $ 8,000 F
d. $8,000 U
112. What was the material quantity variance for August?

a. $5,000 U
b. $5,000 F
c. $1,000 U
d. $1,000 F
113. What was the labour quantity variance for August?

a. $750 F
b. $750 U
c. $13,500 F
d. $13,500 U
114. What was the labour price variance?

a. $1,250 U
b. $1,250 F
c. $4,250 F
d. $4,250 U
115. What was the total labour variance for August?

a. $1.25 F
b. $1.25 U
c. $2,000 F
d. $2,000 U
116. Blue Fin Co. produces a product requiring 10 kilograms of material at $1.50 per kilogram.
Blue Fin produced 10,000 products during 2009 resulting in a $30,000 unfavourable
materials quantity variance. How much direct material did Blue Fin use during 2009?
a. 120,000 kilograms
b. 100,000 kilograms
c. 200,000 kilograms
d. 145,000 kilograms
117. Wild West Inc. produces a product requiring 3 direct labour hours at $20.00 per hour.
During January, 2,000 products are produced using 6,300 direct labour hours. Wild
West’s actual payroll during January was $122,850. What is the labour quantity variance?
a. $2,850 U
b. $6,000 F
c. $3,150 F
d. $6,000 U
118. Which of the following statements describes the customer perspective in the balanced
scorecard?
a. It establishes which people should be targeted as potential customers.
b. It evaluates the profitability of specific customers rather than the profitability of
specific products or services.
c. It evaluates how well the company is performing from the viewpoint of those
people who buy and use its products or services.
d. It evaluates which customers are not profitable and should be dropped.
119. Which of the following would be an objective for the internal process perspective?
a. Profit per employee
b. Customer retention
c. Training hours
d. Planning accuracy
120. The perspectives included in the balanced scorecard approach include all of the following
except the
a. internal process perspective.
b. capacity utilization perspective.
c. learning and growth perspective.
d. customer perspective.
121. When analyzing period end variance reports, if a variance amount is small the manager
should:
a. Consider the variance within normal terms and ignore it for that period.
b. Combine all such small variances and if they show a larger variance, investigate
them then.
c. Consider investigating the variance as there may be undetected swings in the
intervening period that require investigation.
d. Focus his or her attention on more material variances.
122. A favourable variance in a cost report:

a. Is a positive result for a manager.
b. Is a negative result for a manager.
c. Can be ignored especially if it is a minor amount.

d. Should be investigated along with any negative variances.
123. If standard cost reports emphasize meeting predetermined standards:

a. There should be non-financial performance measures available to management
to supplement the cost reports.
b. Management can control the department properly with standard cost reports.
c. The budget process should be sufficient to support management’s performance.
d. All members of the team will be able to properly identify critical variance issues.
124. A problem with placing excessive emphasis on labour efficiency can be:
a. Material costs get ignored.
b. Pressure can be put on workers to work unsafely.
c. Overhead costs can be improperly estimated.
d. Work in progress and finished goods inventories can build up beyond acceptable
levels.
125. A good system of standard costing always:

a. Ensures that the right staff are to blame if there are negative variances.
b. Ensures that the right staff are both rewarded and blamed when there are
positive or negative variances.
c. Avoids excessive detail in examining small variances.
d. Considers the impact of morale on all those who utilize the reporting system.
126. When a company implements a balanced scorecard approach in its business:

a. It must ensure that it focuses on every aspect of its operations.
b. It must ensure that only one or two areas is seen as the focus.
c. It must establish performance measures that are focused on the specific strategy
of the company.
d. It must never supplant the traditional accounting information that is available to
management.
127. In designing a balanced scorecard approach for its operations, a company should:
a. Seek to determine as much detail as possible from its activities.
b. Be readily available as a discussion tool between management and
shareholders.
c. Attempt to link performance measures on a cause and effect basis.
d. Eliminate any financial results as these will be dealt with in.
128. One problem with standard cost reports is:

a. They can only be read effectively by trained accountants.
b. The are often prepared well after the events that give rise to them.
c. Not everyone in the organization can agree on their use.
d. They allow for shareholders to ask difficult questions from management.
129. In a standard cost variance report:

a. The largest unfavourable variance is the one that will impact on the company the
most.
b. The largest positive variance can be scanned and cleared the quickest.
c. The trend or pattern of variances on a period-to-period basis should be
monitored.
d. Management must set predetermined variance limits that will dictate what
variances must be investigated.
130. Which of the following would generally not be a cause to adjust standard cost rates in a
service industry?
a. Wage rate increase for the cleaners
b. Electricity charges from the municipality
c. Salary increases for management
d. Cleaning supplies increases from suppliers
ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans Item Ans.
. . . . . .
31. c 46. b 61. b 76. c 91. b 106. d 121. c
32. c 47. c 62. a 77. b 92. a 107. d 122. d
33. d 48. a 63. b 78. a 93. c *108 d 123. a
.
34. a 49. d 64. b 79. a 94. c *109 b 124. d
.
35. a 50. a 65. c 80. d 95. c *110. c 125. d
36. b 51. c 66. a 81. c 96. d 111. b 126. c
37. a 52. c 67. b 82. c 97. d 112. c 127. c
38. d 53. c 68. d 83. b 98. d 113. b 128. b
39. c 54. d 69. c 84. a 99. c 114. a 129. c
40. c 55. b 70. b 85. b 100. c 115. d 130. c
41. b 56. c 71. b 86. c 101. b 116. a
42. d 57. d 72. c 87. b 102. b 117. d
43. c 58. c 73. d 88. b 103. d 118. c
44. d 59. b 74. b 89. a 104. a 119. d
45. c 60. b 75. d 90. c 105. a 120. b
BRIEF EXERCISES
Brief Exercise 131

Go Mix Company uses both standards and budgets. The company estimates that production for
the year will be 125,000 units of Product Fast. To produce these units of Product Fast, the
company expects to spend $406,250 for materials and $1,875,000 for labour.
Instructions
Calculate the estimates for (a) a standard cost and (b) a budgeted cost.
Solution 131 (5 min.)

(a) Standards are stated as a per unit amount. Thus, the standards are
materials $3.25, ($406,250 ÷ 125,000), and labour $15, ($1,875,000 ÷ 125,000).
(b) Budgets are stated as a total amount. Thus, the budgeted costs for the year are materials
$406,250 and labour $1,875,000.
Brief Exercise 132

During March, Tile Company purchases and uses 15,125 kilograms of materials costing $22,990
to make 5,000 tiles. Tile Company’s standard material cost per tile is $4.50 (3 kilograms of
material x $1.50).
Instructions
Calculate the total, price, and quantity material variances for Tile Company for March.

Total materials variance = $490 U, (15,125 X $1.52) – (15,000 X $1.50).
Materials price variance = $302.50 U, (15,125 X $1.52) – (15,125 X $1.50).
Materials quantity variance = $187.50 U, (15,125 X $1.50) – (15,000 X $1.50).
Brief Exercise 133

During January, Ray Company incurs 2,250 hours of direct labour at an hourly cost of $10.10 in
producing 1,250 units of its finished product. Ray’s standard labour cost per unit of output is
$18.45 (1.75 hours x $10.25).
Instructions
Calculate the total, price, and quantity labour variances for Ray Company for January.

Total labour variance = $303.13 U, (2,250 X $10.10) – (2,187.50 X $10.25).
Labour price variance = $337.50 F, (2,250 X $10.10) – (2,250 X $10.25).
Labour quantity variance = $640.63 U, (2,250 X $10.25) – (2,187.50 X $10.25).
Brief Exercise 134

In October, Halo Inc. reports 35.000 actual direct labour hours, and it incurs $168,750 of
manufacturing overhead costs. Standard hours allowed for the work completed during October is
36,000 hours. Halo’s predetermined overhead rate is $4.70 per direct labour hour.
Instructions
Calculate the total manufacturing overhead variance for Halo Inc. for October.

The formula is:
Actual Overhead Total Overhead

Overhead – Applied = Variance
$168,750 *$169,200* $450 F
*36,000 X $4.70 = $169,200
*Brief Exercise 135

EKPN Co. purchased 5,000 units of raw material on account for $14,750, when the standard cost
was $15,000. Later in the month, EKPN Co. issued 4,700 units of raw materials for production,
when the standard units were 4,800.
Instructions
Journalize the transactions for EKPN Co. to account for this activity.

(a) Raw Materials Inventory...................................................................... 15,000
Materials Price Variance............................................................ 250
Accounts Payable...................................................................... 14,750
(b) Work in Process Inventory (4,800 X $3*)............................................. 14,400

Materials Quantity Variance....................................................... 300
Raw Materials Inventory (4,700 X $3)........................................ 14,100
*$3 = $15,000 ÷ 5,000 units
*Brief Exercise 136

M&H Inc. incurred direct labour costs of $72,000 for 9,000 hours. The standard labour cost was
$72,500. During the month, M&H Inc. assigned 9,000 direct labour hours costing $72,000 to
production. The standard hours were 9,100.
Instructions
Journalize the transactions for M&H Inc. to account for this activity.

(a) Factory Labour.................................................................................... 72,500
Labour Price Variance............................................................... 500
Wages Payable.......................................................................... 72,000
(b) Work in Process Inventory (9,100 X $8.06*)........................................ 73,346

Labour Quantity Variance.......................................................... 846
Factory Labour.......................................................................... 72,500
*$8.06 = $72,500 ÷ 9,000 hours

Brief Exercise 137

KMV Ltd. makes only one item and has a standard direct labour cost of $24 calculated as 2 hours
at $12 per hour.
In the recent month, 1,000 units were produced using 2,200 hours at $12.75 per hour.
Instructions
Calculate the direct labour efficiency variance. Is it favourable or unfavourable?

$12.00 x (2,200 – 2,000) = $2,400 Unfavourable
Brief Exercise 138

KMV Ltd. makes only one item and has a standard direct material cost of $8 per kg and uses 10
kgs to make one unit.
The expected production for the year was 5,000 units using 50,000 kg of material. During 2011
KMV produced 5,100 units and used 52,000 kgs purchased at $8.25 per kg.
Instructions
Calculate the direct materials quantity variance. Is it favourable or unfavourable?

$8.00 x (52,000 – (5,100 x 10)) = $8,000 Unfavourable
(50,000 ÷ 5,000 = 10)
EXERCISES
Exercise 139
Peter’s Pick-Me_Ups Inc. manufactures and sells a nutrition drink for children. The company
wants to develop a standard cost per kilogram. The following are required for production of a 10-
litre batch:
70 grams of lime Kool-Drink at $0.07 per gram
5 grams of granulated sugar $0.24 per gram
12 kiwi fruit at $0.70 each
30 protein tablets at $0.80 each
9 litres of mineral water at $0.05 per litre
Peter’s Pick-Me-Ups estimates that 3% of the lime Kool-Drink is wasted, 10% of the sugar is lost,
and 5% of the kiwis cannot be used.
Instructions
Calculate the standard cost of the ingredients for one litre of the nutrition drink.
Solution 139 (15–20 min.)

Ingredient Amount Per litre Standard Waste
Lime Kool-Drink 7 g. 3%
Sugar 0.5 g. 10%
Kiwis 1.2 5%
Protein Tablets 3 0%
Water 0.9 litres 0%
Standard Usage Standard Price Standard Cost

Lime Kool-Drink (a)7.22 gramsn $ .07 $.505
Sugar (b) .556 grams .24 .133
Kiwis (c) 1.26 .70 .882
Protein Tablets 3 .80 2.400
Water 0.9 litres .05 .045
Standard Cost per litre $3.965
(a) .97X = 7 grams X = 7.22
(b) .90X = .0.5 grams X = .556
(c) .95X = 1.2 kiwis X = .1.26
Exercise 140
The following direct labour data pertain to the operations of Bell Chime Manufacturing Company
for the month of January:
Actual labour rate $15.50 per hr.
Actual hours used 17,000
Standard labour rate $15.00 per hr.
Standard hours allowed 16,700
Instructions
Prepare a matrix and calculate the labour variances.
Price Variance Quantity Variance
Total
Labour Variance
Actual Hours Actual Hours Standard Hours

× Actual Rate × Standard Rate × Standard Rate
17,000 × $15.50 = 17,000 × $15.00 = 16,700 × $15.00 =
$263,500 $255,000 $250,500
$8,500 U $4,500 U
Total
Labour Variance
$13,000 U
Exercise 141
The following direct materials data pertain to the operations of Stone Wealth Manufacturing
Company for the month of March:
Standard materials price $9.00 per kilogram
Actual quantity of material purchased and used 65,000 kilograms
The standard cost card shows that a finished product contains 4.75 kilograms of material. The
65,000 kilograms were purchased in March at a discount of 10% from the standard price. In
March, 13,000 units of finished product were manufactured.
Instructions
Prepare a matrix for materials and calculate the materials variances.
Total
Materials Variance
Actual Quantity Actual Quantity Standard Quantity

× Actual Rate × Standard Rate × Standard Price
65,000 × $8.10 = 65,000 × $9.00 = 61,750 × $9.00 =
$526,500 $585,000 $555,750

$58,500 F $29,250 U
Total
Materials Variance
$29,250 F
Exercise 142
Camping Out Co. manufactures down sleeping bags. Each sleeping bag requires 4 kilograms of
down and takes .3 hours of direct labour. The standard cost of the down used by Camping Out is
$8 per kilogram and the standard labour cost is $10 per hour. In November, Camping Out
purchased and used 15,000 kilograms of down for $120,750. During the year, the company
manufactured 4,000 sleeping bags. Payroll reported a total of 1,480 direct labour hours at a cost
of $14,060.
Instructions
a. Calculate the materials price and quantity variances and indicate whether the variances are
favourable or unfavourable.
b. Calculate the labour price and quantity variances and indicate whether the variances are

a. Actual Quantity Actual Quantity Standard Quantity

× Actual Price × Standard Price × Standard Price
15,000 × $8.05 = 15,000 × $8 = 16,000 × $8 =
$120,750 $120,000 $128,000

$750 U $8,000 F
Total
Materials Variance
$7,250 F
b. Actual Hours Actual Hours Standard Hours

1,480 × $9.50 = 1,480 × $10 = 1,200 × $10 =
$14,060 $14,800 $12,000

$740 F $2,800 U
Total
Labour Variance
$2,060 U
Exercise 143
You have just been hired at SB Polo Supply as a managerial accountant. You are responsible for
variance analysis for direct materials required in the manufacturing of polo mallets. An old college
friend called and asked you to lunch. You raced out the door before finishing the cost analysis for
April. While you were gone, a janitor accidentally threw away your cost analysis sheet. You do
remember, however, that each mallet requires 4 metres of wood with a standard cost of $5 per
metre and that there were 3,000 mallets completed during April. In addition, you remember that
the materials price variance was $700 favourable, and the total materials variance was $30
favourable.
Instructions
a. Calculate the materials quantity variance.
b. Calculate the actual price paid per metre of wood.
Actual Quantity Actual Quantity Standard Quantity

(1
12,134 × (2)$4.94 = (1)
12,134 × $5 = 3,000 mallets x 4 m/mallet × $5 =
$59,970 $60,670 $60,000

$700 F $670 U(a)
Total
Materials Variance
$30 F
a. Materials quantity variance = $670 U ($700 F – $30 F)
b. Actual price paid per metre of wood = $4.94.
Exercise 144
Salt-of-the-Earth Brick Company makes fired clay bricks for construction. The company uses a
standard costing system that calls for 2.75 kilograms of clay at $.20 per kilogram for each brick.
The standard cost for labour is .075 hour at $32 per hour for each brick. In August, Salt-of-the-
Earth anticipates production to be at a level of 200,000 bricks. During August, Salt-of-the-Earth
manufactured 201,000 bricks. The company purchased 553,000 kilograms of clay at a cost of
$132,720. The cost of direct labour was $485,060 for 15,350 hours.
Instructions
a. Calculate the materials price and quantity variances and indicate whether the variances are
b. Calculate the labour price and quantity variances and indicate whether the variances are

a. Actual Quantity Actual Quantity Standard Quantity

553,000 × $.24 = 553,000 × $.20 = 552,750 × $.20 =
$132,720 $110,600 $110,550

$22,120 U $50 U
Total
Materials Variance
$22,170 U
b. Actual Hours Actual Hours Standard Hours

15,350 × $31.60 = 15,350 × $32 = 15,075 × $32 =
$485,060 $491,200 $482,400

$6,140 F $8,800 U
Total
Labour Variance
$2,660 U
Exercise 145
Ducker Company has developed the following standard costs for its product for 2012:
DUCKER COMPANY
Standard Cost Card
Product A
Cost Element Standard Quantity × Standard Price = Standard Cost
Direct materials 1.5 kilograms $4 $6
Direct labour 2 hours 11 22
Manufacturing overhead 2 hours 7 14
$42
The company expected to produce 15,000 units of Product A in 2012 and work 75,000 direct
labour hours.
Actual results for 2012 are as follows:

 14,700 units of Product A were produced.
 Actual direct labour costs were $340,000 for 34,000 direct labour hours worked.
 Actual direct materials purchased and used during the year cost $89,000 for 23,000
kilograms.
 Actual variable overhead incurred was $179,000 and actual fixed overhead incurred was
$87,000.
Instructions
Calculate the following variances showing all computations to support your answers. Indicate
whether the variances are favourable or unfavourable.
(a) Materials quantity variance.
(b) Total direct labour variance.
(c) Direct labour quantity variance.
(d) Direct materials price variance.
(e) Total overhead variance.

(a) Materials quantity variance = $3,800 unfavourable.
(AQ × SP) – (SQ × SP) = Materials quantity variance
(23,000 × $4) – (22,050 × $4) = $92,000 – $88,200= $3,800 unfavourable
SQ = 14,700 units × 1.5 kg/unit = 22,050 kilograms
(b) Total direct labour variance = $16,600 unfavourable.

(AH × AR) – (SH × SR) = Total direct labour variance
(34,000 × $10) – (29,400 × $11) = $340,000 – $323,400 = $16,600 unfavourable
SH = 14,700 × 2 = 29,400 direct labour hours
(c) Direct labour quantity variance = $50,600 unfavourable.

(AH × SR) – (SH × SR) = Direct labour quantity variance
(34,000 × $11) – (29,400 × $11) = $374,000 – $323,400 = $50,600 unfavourable
(d) Direct materials price variance = $3,000 favourable.

(AQ × AP) – (AQ × SP) = Direct materials price variance
(23,000 × $3.87) – (23,000 × $4) = $89,000 – $92,000 = $3,000 favourable
(e) Total overhead variance = $60,200 unfavourable.

(Actual overhead) – (Overhead applied) = Total overhead variance
($179,000 + $87,000) – (29,400 × $7) = $266,000 – $205,800 = $60,200 unfavourable
Standard hours = 14,700 × 2 = 29,400 direct labour hours
Exercise 146
Chefs Company developed the following standard costs for its product for 2012:
CHEFS COMPANY
Standard Cost Card
Cost Elements Standard Quantity × Standard Price = Standard Cost

Direct materials 4 kilograms $ 10 $40
Direct labour 2 hours 20 40
Variable overhead 2 hours 8 16

Fixed overhead 2 hours 4 8
$104
The company expected to work at the 30,000 direct labour hours level of activity and produce
15,000 units of product.
Actual results for 2012 were as follows:

 14,200 units of product were actually produced.
 Direct labour costs were $552,420 for 27,900 direct labour hours actually worked.
 Actual direct materials purchased and used during the year cost $543,320 for 57,800
kilograms.
 Total actual manufacturing overhead costs were $340,000.
Instructions
Calculate the following variances for Chefs Company for 2012 and indicate whether the variance
is favourable or unfavourable.
1. Direct materials price variance.
2. Direct materials quantity variance.
3. Direct labour price variance.
4. Direct labour quantity variance.
5. Overhead budget variance.
6. Overhead volume variance.

1. Direct materials price variance = $34,680 favourable.
(AQ × AP) – (AQ × SP) = Materials price variance
(57,800 × $9.40) – (57,800 × $10) = $543,320 – $578,000 = $34,680 favourable
2. Direct materials quantity variance = $10,000 unfavourable.

(AQ × SP) – (SQ × SP) = Materials quantity variance
(57,800 × $10) – (56,800 × $10) = $578,000 – $568,000 = $10,000 unfavourable
SQ = 14,200 products × 4 lbs = 56,800 lbs.
3. Direct labour price variance = $5,580 favourable.

(AH × AR) – (AH × SR) = Labour price variance
(27,900 × $19.80) – (27,900 × $20) = $552,420 – $558,000 = $5,580 favourable
4. Direct labour quantity variance = $10,000 favourable.

(AH × SR) – (SH × SR) = Labour quantity variance
(27,900 × $20) – (28,400 × $20) = $558,000 – $568,000 = $10,000 favourable
SH = 14,200 units × 2 hrs = 28,400 direct labour hours
5. Overhead budget variance = $7,200 favourable.

Actual overhead – Budgeted overhead for = Budget overhead variance
standard hours allowed
$340,000 – $347,200 = $7,200 favourable
Budgeted overhead for 28,400 direct labour hours allowed.

Variable overhead (28,400 × $8) = $227,200
Fixed overhead = 120,000
$347,200
6. Overhead volume variance = $6,400 unfavourable.

Budgeted overhead for 28,400 direct labour hours allowed
347,200
Overhead applied (28,400 × $12) = 340,800
Overhead volume variance $ 6,400 unfavourable
*Exercise 147
Universal Bats, Inc. manufactures aluminum baseball bats that it sells to university athletic
departments. It has developed the following per unit standard costs for 2012 for each baseball
bat:
Manufacturing
Direct Materials Direct Labour Overhead
Standard Quantity 2 Kilograms (Aluminum) 1/2 hour 1/2 hour
Standard Price $4.00 $10.00 $6.00
Unit Standard Cost $8.00 $5.00 $3.00
In 2012, the company planned to produce 40,000 baseball bats at a level of 20,000 hours of
direct labour.
Actual results for 2012 are presented below:

1. Direct materials purchased were 82,000 kilograms of aluminum which cost $344,400.
2. Direct materials used were 73,000 kilograms of aluminum.
3. Direct labour costs were $187,200 for 19,500 direct labour hours actually worked.
4. Total manufacturing overhead was $117,000.
5. Actual production was 38,000 baseball bats.
Instructions
(a) Calculate the following variances:
Direct materials price.
Direct materials quantity.
Direct labour price.
Direct labour quantity.
Total overhead variance.
(b) Prepare the journal entries to record the transactions and events in 2012.
*Solution 147 (40–45 min.)

(a) 1. Direct materials price variance = $16,400 Unfavourable.
(AQ × AP) – (AQ × SP)
(82,000 × $4.20) – (82,000 × $4.00) = $344,400 – $328,000 = $16,400
2. Direct materials quantity variance = $12,000 Favourable.

(AQ × SP) – (SQ × SP)
(73,000 × $4.00) – (76,000* × $4.00) = $292,000 – $304,000 = $12,000
*SQ = 38,000 × 2 kilograms = 76,000 kilograms
3. Direct labour price variance = $7,800 Favourable.

(AH × AR) – (AH × SR)
(19,500 × $9.60) – (19,500 × $10.00) = $187,200 – $195,000 = $7,800
4. Direct labour quantity variance = $5,000 Unfavourable.

(AH × SR) – (SH × SR)
(19,500 × $10.00) – (19,000* × $10.00) = $195,000 – $190,000 = $5,000
*SH = 38,000 × 1/2 hour = 19,000 hours
5. Actual overhead – Overhead applied = Total overhead variance.

$117,000 – $114,000* = $3,000 Unfavourable
*SH 19,000 × $6.00 = $114,000
(b) 1. Raw Materials Inventory ......................................................... 328,000

Materials Price Variance ......................................................... 16,400
Accounts Payable ............................................................ 344,400
(To record purchase of materials)
2. Work in Process Inventory ...................................................... 304,000

Materials Quantity Variance ............................................. 12,000
Raw Materials Inventory .................................................. 292,000
(To record issuance of direct materials)
3. Factory Labour ....................................................................... 195,000

Labour Price Variance ...................................................... 7,800
Wages Payable ................................................................ 187,200
(To record direct labour costs)

Labour Quantity Variance ....................................................... 5,000
Factory Labour ................................................................. 195,000
(To assign factory labour to jobs)
5. Manufacturing Overhead ........................................................ 117,000

Accounts Payable/Cash etc. ............................................ 117,000
(To record overhead incurred)

Manufacturing Overhead ................................................. 114,000
(To assign overhead to jobs)
7. Finished Goods Inventory (38,000 × $16) ............................... 608,000

Work in Process Inventory ............................................... 608,000
(To record transfer of completed work to finished goods)
*Exercise 148
The standard cost of a litre of paint manufactured by By-the-Numbers, Inc. includes 2 litres of
direct materials at $4.75 per litre. During February, 75,000 litres of direct materials are purchased
at a cost of $4.70 per litre, and 72,000 litres of direct materials are used to produce 36,500 litres
of paint.
Instructions
(a) Calculate the materials price and quantity variances.
(b) Journalize the purchase of the materials and the issuance of the materials, assuming a
standard cost system is used.

(a) Materials Price Variance:
$352,500 – $356,250 = $3,750 F
(75,000 × $4.70) (75,000 × $4.75)
Materials Quantity Variance:

$342,000 – $346,750 = $4.750 F
(72,000 × $4.75) *(73,000 × $4.75)
*36,500 × 2 litres = 73,000
(b) Raw Materials Inventory ................................................................ 356,250

Materials Price Variance ......................................................... 3,750
Accounts Payable ................................................................... 352,500
Work in Process Inventory ............................................................. 346,750

Materials Quantity Variance .................................................... 4,750
Raw Materials Inventory ......................................................... 342,000
*Exercise 149
Starlight Company's standard labour cost of producing one unit of product is 4 hours at the rate of
$28.00 per hour. During December, 77,000 hours of labour are incurred at a cost of $27.60 per
hour to produce 19,000 units of product.
Instructions
(a) Calculate the labour price and quantity variances.
(b) Journalize the incurrence of the labour costs and the assignment of direct labour to
production, assuming a standard cost system is used.

(a) Labour Price Variance:
$2,125,200 – $2,156,000 = $30,800 F
(77,000 × $27.60) (77,000 × $28.00)
Labour Quantity Variance:

$2,156,000 – $2,128,000 = $28,000 U
(77,000 × $28.00) (76,000 × $28.00)
(b) Factory Labour .............................................................................. 2,156,000

Labour Price Variance ............................................................ 30,800
Wages Payable ...................................................................... 2,125,200
Work in Process Inventory ............................................................. 2,128,000
Labour Quantity Variance .............................................................. 28,000
Factory Labour ....................................................................... 2,156,000
*Exercise 150
The following direct labour data pertain to the operations of Blue Vanity Company for the month of
June:
Standard labour rate $20.00 per hr.
Actual hours incurred and used 9,000
The standard cost card shows that 5 hours are required to complete one unit of product. The
actual labour rate incurred exceeded the standard rate by 10%. Two thousand units were
manufactured in June.
Instructions
(a) Calculate the price, quantity, and total labour variances.
(b) Journalize the entries to record the labour variances.
(a) Actual Hours Actual Hours Standard Hours

9,000 × $22.00 = 9,000 × $20.00 = 10,000 × $20.00 =
$198,000 $180,000 $200,000

$18,000 U $20,000 F
Total
Labour Variance
$2,000 F
(b) Factory Labour ............................................................................ 180,000

Labour Price Variance ................................................................. 18,000
Wages Payable .................................................................... 198,000
Work in Process Inventory ........................................................... 200,000

Labour Quantity Variance ..................................................... 20,000
Factory Labour ..................................................................... 180,000
Exercise 151
Preston Well Company planned to produce 25,000 units of product and work 100,000 direct
labour hours in 2012. Manufacturing overhead at the 100,000 direct labour hours level of activity
was estimated to be:
Variable manufacturing overhead $ 700,000
Fixed manufacturing overhead 300,000
Total manufacturing overhead $1,000,000
At the end of 2012, 26,000 units of product were actually produced and 107,000 actual direct
labour hours were worked. Total actual overhead costs for 2012 was $1,015,000, of which
$295,000 was fixed manufacturing overhead.
Instructions
(a) Calculate the total overhead variance.
(b) Calculate the variable overhead budget variance.
(c) Calculate the fixed overhead volume variance.

(a) Actual overhead – Overhead applied = Total overhead variance
$1,015,000 – $1,040,000 = $25,000 favourable
Overhead applied = 26,000 units × 4 hrs = 104,000 standard hours allowed

104,000 × $10 = $1,040,000
(b) Actual variable overhead – Variable overhead budgeted = variable

overhead budget variance
$720,000 – $728,000 = $8,000 favourable
Actual variable overhead = $1,015,000 - $295,000 = $720,000

Overhead budgeted at 104,000 actual
direct labour hours allowed.
Variable overhead (104,000 × $7) $ 728,000
(c) Budgeted fixed overhead – Fixed overhead applied = Fixed

overhead volume variance
$300,000 – $312,000 = $12,000 favourable
Fixed overhead applied = 26,000 units X 4 hours/unit X $3/hour = $312,000.
Exercise 152
Centre Black Company planned to produce 40,000 units of product and work at the 100,000
direct labour hours level of activity for 2012. Manufacturing overhead at this level of activity and
the predetermined overhead rate is as follows:
Predetermined
Overhead Rate per
Direct Labour Hour
Variable manufacturing overhead $600,000 $6
Fixed manufacturing overhead 300,000 3
Total manufacturing overhead $900,000 $9
At the end of 2012, 44,000 units were actually produced and 107,400 direct labour hours were
actually worked. Total actual manufacturing overhead costs were $950,000, of which $610,000
was variable.
Instructions
Calculate the following variances and indicate whether they are favourable or unfavourable:
(a) Variable overhead budget variance.
(b) Fixed overhead volume variance.

(a) Variable overhead budget variance = $50,000 favourable.
Overhead budgeted for standard hours allowed
Actual overhead incurred 610,000

Variable overhead budget variance $ 50,000 favourable
(b) Fixed overhead volume variance = $30,000 favourable.

Overhead budgeted for standard hours allowed
Fixed overhead applied (110,000 × $3) = $330,000
Fixed overhead volume variance $ 30,000 favourable
Exercise 153
The following information was taken from the annual manufacturing overhead cost budget of
Ashley Company:
Variable manufacturing overhead costs $124,000
Fixed manufacturing overhead costs $93,000
Normal production level in direct labour hours 62,000
Normal production level in units 31,000
During the year, 30,000 units were produced, 64,000 hours were worked, and the actual
manufacturing overhead costs were $225,000, of which $90,000 was fixed. The actual fixed
manufacturing overhead costs did not deviate from the budgeted fixed manufacturing overhead
costs. Overhead is applied on the basis of direct labour hours.
Instructions
(a) Calculate the total, fixed, and variable predetermined manufacturing overhead rates.
(b) Calculate the total, variable overhead budget, and fixed overhead volume variances.

(a) Item Amount Hours Rate
Variable Overhead $124,000 62,000 $2.00
Fixed Overhead 93,000 62,000 1.50
Total Overhead $217,000 62,000 $3.50
(b) Total overhead variance:

Overhead incurred – Overhead applied = $15,000 U
($225,000) (60,000 hours × $3.50)
Variable overhead budget variance:

Overhead incurred – Overhead budgeted = $15,000 U
($135,000) [(60,000 × $2)]
Fixed overhead volume variance:

Overhead budgeted – Overhead applied = $3,000 U
($93,000) (60,000 hours × $1.50)
*Exercise 154
Presented below is a flexible manufacturing budget for Bestwood Company, which manufactures
fine dining chairs:
Activity Index:
Standard direct labour hours 2,000 3,200 3,600 4,000
Variable costs
Indirect materials $ 4,000 $ 6,400 $ 7,200 $ 8,000
Indirect labour 2,300 3,680 4,140 4,600
Utilities 3,200 5,120 5,760 6,400
Total variable 9,500 15,200 17,100 19,000
Fixed costs
Supervisory salaries 1,000 1,000 1,000 1,000
Rent 3,000 3,000 3,000 3,000
Total fixed 4,000 4,000 4,000 4,000
Total costs $13,500 $19,200 $21,100 $23,000
The company applies the overhead on the basis of direct labour hours at $6.00 per direct labour
hour and the standard hours per dining chair is 1/2 hour each. The company's actual production
was 5,800 dining chairs with 3,000 actual hours of direct labour. Actual overhead was $18,200, of
which $4,100 was fixed.
Instructions
(a) Calculate the variable overhead budget and fixed overhead variances.
(b) Prepare the entries for manufacturing overhead during the period and the entry to recognize
the overhead variances at the end of the period.

(a) Computation of variances:
Actual variable overhead – variable overhead = budget variance
$14,100 – [(5,800 × 1/2 × $4.75)] = $325 Unfavourable
Fixed overhead variance:

Budgeted overhead – Overhead applied
$4,100 – (5,800 × 1/2 × $1.25) = $475 Unfavourable
(b) 1. Manufacturing Overhead.......................................................... 18,200

Accounts Payable, Cash, Etc. .......................................... 18,200

Manufacturing Overhead ................................................. 17,400
(To assign overhead to production)
3. Variable overhead budget Variance ........................................ 325

Fixed overhead Variance ......................................................... 475
Manufacturing Overhead ................................................. 800

(To recognize overhead variances)
Exercise 155
M&H Inc. uses a standard cost accounting system. During January, 2012, the company reported
the following manufacturing variances:
Material price variance $1,500 F
Material quantity variance 1,300 U
Labour price variance 750 U
Labour quantity variance 1,300 U
Overhead controllable 600 F
Overhead volume 4,000 U
In addition, 12,000 units of product were sold at $20 per unit. Each unit sold had a standard cost
of $14. Selling and administrative expenses for the month were $11,000.
Instructions
Prepare an income statement for management for the month ending January 31, 2012.

M&H Inc.
Income Statement
For the Month Ended January 31, 2012
Sales (12,000 × $20) ............................................................................ $240,000

Cost of goods sold (12,000 × $14) ....................................................... 168,000
Gross profit (at standard) ..................................................................... 72,000
Variances:
Materials price ............................................................................. $(1,500)
Materials quantity ........................................................................ 1,300
Labour price ................................................................................ 750
Labour quantity ............................................................................ 1,300
Overhead controllable ................................................................. (600)
Overhead volume ........................................................................ 4,000
Total variances (unfavourable) ............................................ (5,250)
Gross profit (actual) .............................................................................. 66,750
Selling and administrative expenses .................................................... 11,000
Net income ........................................................................................... $ 55,750
*Exercise 156
Cactus Company developed the following standards for 2012:
CACTUS COMPANY
Standard Cost Card
Cost Elements Standard Quantity × Standard Price = Standard Cost

Direct materials 5 kilograms $ 5 $25
Direct labour 1 hour $18 18
Manufacturing overhead 1 hour $10 10

$53
The company planned to produce 30,000 units of product and work at the 30,000 direct labour
level of activity in 2012. The company uses a standard cost accounting system which records
standard costs in the accounts and recognizes variances in the accounts at the earliest
opportunity. During 2012, 29,000 actual units of product were produced.
Instructions
Prepare the journal entries to record the following transactions for Cactus Company during 2012.
(a) Purchased 147,000 kilograms of raw materials for $4.90 per kilogram on account.
(b) Actual direct labour payroll amounted to $527,000 for 28,500 actual direct labour hours
worked. Factory labour cost is to be recorded and distributed to production.
(c) Direct materials issued for production amounted to 147,000 kilograms which actually cost
$4.90 per kilogram.
(d) Actual manufacturing overhead costs incurred were $288,000 in 2012.
(e) Manufacturing overhead was applied when the 29,000 units were completed.
(f) Transferred the 29,000 completed units to finished goods.

(a) Raw Materials Inventory ................................................................ 735,000
Materials Price Variance ..................................................... 14,700
Accounts Payable ............................................................... 720,300
(To record purchase of materials)
(b) Factory Labour .............................................................................. 513,000

Labour Price Variance ................................................................... 14,000
Wages Payable ................................................................... 527,000
(To record direct labour costs)
Work in Process Inventory ............................................................ 522,000

Labour Quantity Variance ................................................... 9,000
Factory Labour .................................................................... 513,000
(To assign factory labour to jobs)
(c) Work In Process Inventory ............................................................ 725,000

Materials Quantity Variance .......................................................... 10,000
Raw Materials Inventory ..................................................... 735,000
(To record issuance of raw materials)
(d) Manufacturing Overhead ............................................................... 288,000

Accounts Payable/Cash/Acc. Depreciation ......................... 288,000
(e) Work In Process Inventory ............................................................ 290,000

Manufacturing Overhead .................................................... 290,000
(To assign overhead to jobs)
(f) Finished Goods Inventory ............................................................. 1,537,000

Work In Process Inventory .................................................. 1,537,000
(To record transfer of completed units to finished goods)
Exercise 157
(a) How are standards developed?
(b) What is the difference between ideal and currently attainable standards?
Solution 157
(a) Standards are developed by means of historical experience, engineering studies (time and
motion studies) and input from operating personnel most familiar with the task.
(b) Ideal standards are those that demand maximum efficiency with no allowances for break
downs, slack time or poor operational skills. In essence, everything must work perfectly.
In contrast, currently attainable standards are those that can be reasonably achieved under
efficient operating conditions. Allowances are made for normal breakdowns, interruptions, and
imperfect employee skills.
Exercise 158
Hasak Corp makes 100 kg containers of vegetable seeds, and has the following unit standard
costs for direct materials and direct labour:
Direct materials (100 kg @$1.00 per kg) $100.00

Direct labour (0.5 hours at $24 per hour) $12.00
Total standard costs per 100 kg container: $112.00
The following activities were recorded in June:

1) 1,000 containers were manufactured
2) 95,000 kg of materials costing $76,000 were purchased.
3) 102,500 kg of materials were used.
4) $12,000 was paid for 475 hours of direct labour.
There were neither beginning nor ending WIP inventories on hand.
Instructions
a) Compute the direct materials variances.
b) Compute the direct labour variances.
c) Suggest rational explanations for each variance.
Solution 158
a) Materials Price Variance: $76,000 – (95,000 x 1.00) = $19,000 F
Materials Usage Variance: 102,500 – 1,000(100) x 1.00 = $2,500 U
b) Labour Rate Variance: $12,000 – (475 hours x $24) = $600 U
Labour Efficiency Variance: [(0.5 x 1000) – 475 hours] x $24 = $600 F
c) Any of the variances above could be caused by out of date or inappropriate standards.
With respect to the materials price variance, the firm could be purchasing in larger quantities and
receiving quantity discounts, purchasing lower quality materials, or perhaps the supplier was
forced to offer purchase discounts because of economic factors beyond its control.
Regarding the materials usage variance, the following reasons are relevant: lower quality
materials than the standard provided for, lower skilled workers, less efficient machines, employee
dissatisfaction.
For the labour rate variance, it could be that more highly skilled workers were used than the
standard, or employees with more seniority – either case would mean a higher pay rate than
expected.
Regarding the labour efficiency variance, the firm could have used a more experienced work
force than originally planned.
Exercise 159
(a) Why does the Balanced Scorecard differ from company to company?
(b) Whose responsibility is its implementation?
Solution 159
(a) A given company’s scorecard should be directly derived from its established corporate
strategy. Since strategy differs from company to company, so will their respective Balanced
Scorecards.
(b) No one person is responsible for implementing the Balanced Scorecard. It is a company-wide
initiative and requires the commitment and contribution of the entire organization for successful
implementation and acceptance.
Exercise 160
(a) How can management communicate strategy?
(b) What management failure can keep strategy from being actionable?
Solution 160
(a) Strategy can be communicated to employees and lower level managers through he Balanced
Scorecard, which shows objectives, performance measures, targets and initiatives, on which to
focus attention. To align corporate objectives with employee objectives, employees must be fully
informed of the strategies, and share ownership for their implementation. Further, incentives must
support the strategy for employees to own it.
(b) For strategy to become actionable and fully implemented, it is critical that management
commit sufficient resources to its support.
Exercise 161
The following measures belong to one of the four perspectives within the Balanced Scorecard:
1) Product cost per unit

2) Satisfaction of employees
3) Satisfaction of the customer
4) Cycle time
Instructions
a) Identify the relevant perspective for each measure listed above.
b) Suggest a possible strategic objective that might be associated with each measure.
Solution 161
a)
1) Product cost per unit – Financial Perspective
2) Satisfaction of employees – Learning and Growth Perspective
3) Satisfaction of the customer – Customer Perspective
4) Cycle time – Process Perspective.
b)
1) Product cost per unit – Reduce product costs
2) Satisfaction of employees – Increase motivation and alignment of employee goals and

corporate goals
3) Satisfaction of the customer – increase repeat customer business
4) Cycle time – decrease total production time
Exercise 162
Dromedille Corporation has developed the following standards for the materials for each unit of
product that it manufactures:
Direct materials 1.2 kgs @ $3.00 per kg

Monthly production 475 units
In a recent month, Dromedille produced 300 widgets and incurred the following costs:
Direct materials purchased 500 kgs @ $3.50 per kg
There were no beginning or ending inventories.
Instructions
1) Calculate the direct materials price variance
2) Calculate the direct materials efficiency variance
Solution 162
1) 500 x ($3.50 - $3.00) = $250 Unfavourable
2) (500 – (300 x 1.2)) x $3.00 = $420 Unfavourable
Exercise 163
Dromedille Corporation has developed the following standards for labour for the product that it
manufactures:
Direct labour 1.8 hours @ $10.00 per hour

Monthly production 475 direct labour hours
In a recent month, Dromedille produced 300 widgets and incurred the following costs:
Direct labour 480 hours @ $10.75 per hour
There were no beginning or ending inventories.
Instructions
1) Calculate the direct labour price variance
2) Calculate the direct labour efficiency variance
Solution 163
1) 480 x ($10.75 - $10.00) = $360 Unfavourable
2) $10 x (480 – (300 x 1.8) = $600 Favourable
Exercise 164
(CMA adapted) SkiTwin Corporation uses a standard cost system to assist in its manufacture of
water skiis and uses direct labour hours to apply its overhead. The company controller provides
you with the following information on the results of its most recent year end.
Budget Actual
Units produced 100,000 99,000
Units sold 100,000 96,000
Direct materials 50,000 kgs 47,840 kgs
Direct labour 40,000 DLHs 37,720 DLHs
Production costs:
Direct materials $200,000 $207,404
Direct labour $500,000 $471,500
Variable overhead $80,000 $84,640
Fixed overhead $160,000 $162,000
There were no beginning or ending work-in-process inventories but there were 4,000 units of
finished goods at the end of the year.
Instructions
1) Calculate the standard cost of goods sold for the year just ended
2) Calculate the direct materials flexible budget variance
3) Calculate the direct labour efficiency variance
Solution 164
1) Standard cost per unit: DM $2.00
DL 5.00
VOH 0.80
FOH 1.60
$9.40 x 96,000 units sold = $902,400
2) Actual DM cost $207,404

Budgeted DM 99,000 x $2 = 198,000
$ 9,404 Unfavourable
3) ($500,000 / 40,000 DLHs) x (37,720 – 39,600) = $23,500 Favourable

COMPLETION STATEMENTS
165. A ________________ is expressed as a unit amount, whereas a _________________ is

expressed as a total amount.
166. Standards which represent optimum performance under perfect operating conditions are
called _______________ standards, but most companies use _________________
standards which are rigorous but attainable.
167. In developing a standard cost for direct materials used in making a product, consideration
should be given to two factors: (1) __________________ per unit of direct materials and
(2) the __________________ of direct materials to produce one unit of product.
168. The difference between actual hours times the actual pay rate and actual hours times the
standard pay rate is the labour _________________ variance.
169. The standard number of hours allowed times the predetermined overhead rate is the
amount of ________________ to the products produced.
170. The difference between actual quantity of materials times the standard price and standard
quantity times the standard price is the materials ________________ variance.
171. If the actual direct labour hours worked is greater than the standard hours, the labour
quantity variance will be ___________________, and the labour rate variance will be
____________________ if the standard rate of pay is greater than the actual rate of pay.
172. In using variance reports, top management normally looks for _________________
variances.
ANSWERS TO COMPLETION STATEMENTS

165. standard, budget
166. ideal, normal
167. price, quantity
168. price
169. overhead applied
170. quantity
171. unfavourable, favourable
172. significant
MATCHING
173. Match the items in the two columns below by entering the appropriate code letter in the
space provided.
A. Variances F. Materials price variance

B. Standard costs G. Labour quantity variance
C. Standard cost accounting system H. Variable budget variance
D. Normal standards I. Overhead volume variance
E. Ideal standards J. Standard hours allowed
____ 1. The difference between actual variable overhead incurred and variable overhead
budgeted for the standard hours allowed.
____ 2. The hours that should have been worked for the units produced.
____ 3. The difference between the actual quantity of material used times the actual price of
materials purchased, and the actual quantity of material used times the standard price
of materials.
____ 4. The difference between total actual costs and total standard costs.
____ 5. The difference between actual hours times the standard rate and standard hours
times the standard rate.
____ 6. Predetermined unit costs that are measures of performance.
____ 7. The difference between fixed overhead budgeted for the standard hours allowed and
the fixed overhead applied.
____ 8. Standards based on an efficient level of performance that are attainable under
expected operating conditions.
____ 9. Standards based on the optimum level of performance under perfect operating
conditions.
____ 10. A double-entry system of accounting in which standard costs are used in making
entries and variances are recognized in the accounts.
ANSWERS TO MATCHING
1. H 6. B
2. J 7. I
3. F 8. D
4. A 9. E
5. G 10. C
SHORT-ANSWER ESSAY QUESTIONS
Short Answer Essay 174

Rand Company calculates variances as a basis for evaluating the performance of managers
responsible for controlling costs. For several months, the labour quantity variance has been
unfavourable. Briefly explain what could be causing the unfavourable labour quantity variance
and indicate what type of corrective action, if any, might be taken.
Solution 174
Since labour quantity variances relate to the efficiency of labour, the cause of an unfavourable
variance could be poor training, poor maintenance of machinery, fatigue, carelessness, or similar
problems that affect efficiency.
The management of Rand Company would need to identify the likely causes of the variance and
correct the situation with additional training, improved maintenance, better scheduling or similar
appropriate actions.
Short Answer Essay 175

In reviewing the activities of the Mixing Department for the month of June, the manager of the
department notices that there was an unfavourable materials price variance for the month and
there was an unfavourable materials quantity variance. Under what circumstances, if any, can
the responsibility for each variance be placed on (a) the purchasing department and (b) the
production department?
Solution 175
(a) Purchasing department. The investigation of a materials price variance usually begins with
this department. If the price standard has been properly set, purchasing is responsible.
However, it should be recognized that in a period of inflation, prices may rise faster than
expected.
The purchasing department may be responsible for an unfavourable quantity variance if it

purchased raw materials of inferior quality.
(b) Production department. Ordinarily, responsibility for an unfavourable quantity variance rests
with this department. For example, production is responsible if the variance is caused by
inexperienced workers, faulty machinery, or carelessness.
The production department may be responsible for an unfavourable price variance when the
materials must be ordered on a rush basis at a higher price than planned.
Short Answer Essay 176 (Ethics)

Tinikits, Inc. is the manufacturer of miniature models, especially of automobiles with historical
interest. The company is developing new standard costs. Trent Roswell suggests that the new
standards for materials should not include any waste for liquid plastics that spill out of the molds.
"After all," he says, "We're trying to be a world class company. When we build in waste, we tell
the workers it's okay to waste some." Mary Farrell, another manager, disagrees. "If we don't
allow for some normal human error," she says, "we'll have a mighty unhappy work force. Also, I
think that these kinds of perfection standards exploit the workers. I certainly wouldn't want to be
held up to perfection every day—what could I do but fail?"
The argument continued. Finally, the standards were prepared. All standards were prepared
according to normal expected performance, except that for materials, an ideal standard was
used. Mary, still maintaining the unfairness of the system, refused to hold her workers
accountable for materials quantity variances.
Instructions
1. Are ideal standards unethical? Explain briefly.
2. Is it unethical for Mary to refuse to support the standards? Explain.
Solution 176
1. Ideal standards are not necessarily unethical. They may be used unethically, such as in the
case in which employees are denied bonuses or other rewards because of not meeting a
standard which was out of their reach. If they are used as a guide to maximum attainable
performance, however, and not tied directly to the reward system, they may be ethical.
2. It is unethical for Mary simply to refuse to accept a particular standard. However, if the
company intends to use the standard unethically, she may refuse to hold her workers
accountable while she pursues a permanent disposition of the matter. If she simply refuses to
accept it, she may be indirectly sabotaging the company by hindering it from accomplishing its
legitimate objectives. This would be unethical.
Short Answer Essay 177 (Communication)

Mike Kiner has come to the accounting department for help in interpreting his variance report. He
says that he understands that last month was not a very good one for output, but he really
thought everyone put forth good effort, so he is confused about the existence of an unfavourable
labour efficiency variance. He cites as an example of the workers' effort their willingness to work
extra hours to get full output, even when a whole week's worth of production had to be scrapped.
He knew that his materials costs would be higher, and that overtime would make his rate variance
unfavourable, but he certainly didn't think his workers had been inefficient.
Instructions
Write a short note to Mike explaining the probable cause of the unfavourable labour efficiency
variance.
Solution 177
To: Mike,
From: name
Date: today’s date
Re: Cause of labour efficiency variance
Last month was a tough one for all of us, wasn't it? Your workers certainly did go
the extra mile, no doubt about it.
You asked about your efficiency variance. When we calculate it, we count the
number of hours it took to get good output. Since we had such high spoilage, we
got fewer units, but used more hours. That is why your efficiency variance was
negative. It does not imply that you didn't do your best. It just means that we
investigate to see what happened.
Good luck, and I hope this month is a better one for all of us.

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CHAPTER 12

STANDARD COSTS AND BALANCED SCORECARD

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False C = Completion BE = Brief Exercise

CHAPTER STUDY OBJECTIVES

1. Differentiate between a standard and a budget and identify the advantages of

6. Discuss the reporting of variances. Variances are reported to management in variance

8. Describe the balanced scorecard approach to performance evaluation. The balanced

9. Identify the features of a standard cost accounting system (Appendix 12A). In a

1. Inventories cannot be valued at standard cost in financial statements.

2. Standard cost is the industry average cost for a particular item.

3. A standard is a unit amount, whereas a budget is a total amount.

6. Setting standard costs is relatively simple because it is done entirely by accountants.

7. Normal standards should be rigorous but attainable.

20. Standard cost + price variance + quantity variance = Budgeted cost.

26. A two-variance analysis of overhead consists of a spending variance and a volume

27. Variance analysis facilitates the principle of "management by exception."

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

31. A standard cost is

32. The difference between a budget and a standard is that

33. Standard costs may be used by

34. Which of the following statements is false?

36. It is possible that a company's financial statements may report inventories at

37. If standard costs are incorporated into the accounting system,

38. Standard costs

39. Which of the following statements about standard costs is false?

43. Ideal standards

c. the purchasing agent.

46. The two levels that standards may be set at are

47. The most rigorous of all standards is the

48. Most companies that use standards set them at

49. A managerial accountant

50. The cost of freight-in

51. The direct materials quantity standard would not be expressed in

52. The direct materials quantity standard should

55. Allowance for spoilage is part of the direct

57. An unfavourable materials quantity variance would occur if

60. A total materials variance is analyzed in terms of

Use the following information for questions 61 and 62:

66. Variances from standards are

67. A favourable variance

68. The total materials variance is equal to the

69. The total overhead budget variance is equal to the

71. The formula for the materials price variance is

72. The formula for the materials quantity variance is

Use the following information for questions 77–79

77. Bridgeware Company's materials price variance is

78. Bridgeware Company's materials quantity variance is

79. Bridgeware Company's total materials variance is

80. The matrix approach to variance analysis

81. Labour efficiency is measured by the

82. An unfavourable labour quantity variance may be caused by

83. The investigation of a materials price variance usually begins in the