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Exercise 4-1

Write R if the statement is true. Write W if the statement is false.

An unfavorable volume variance may be due to a failure of supervisors to maintain an even flow of
work.

Favorable volume variances are never harmful, since achieving them encourages managers to run the
factory above normal capacity.

Volume variance measures fixed factory overhead.

Though favorable volume variances are usually good news, if inventory levels are too high, additional
production could be harmful.

Standard costs are a useful management tool that can be used solely as a statistical device apart from
the ledger or they can be incorporated in the accounts.

Variances from standard rarely conflict with nonfinancial performance measures, such as employee
satisfaction.

A variable cost system is an accounting system where standards are set for each manufacturing cost
element.

Standard costs serve as a device for measuring efficiency.

The standard cost is how much a product should cost to manufacture.

Standard costs can be used with both the process cost and job order cost systems.

Cost systems using detailed estimates of each element of manufacturing cost entering into the finished
product are called standard cost systems.

The fact that workers are unable to meet a properly determined direct labor standard is sufficient cause
to change the standard.

The difference between the standard cost of a product and its actual cost is called a variance.

Standards are performance goals used to evaluate and control operations.

Standards are set for only direct labor and direct materials.

Principle of exceptions allows managers to focus on correcting variances between standard costs and
actual costs.

A favorable cost variance occurs when actual cost is less than budgeted cost at actual volumes.

An unfavorable cost variance occurs when budgeted cost at actual volumes exceeds actual cost.
Standards are designed to evaluate price and quantity variances separately.

Standard costs should always be revised when they differ from actual costs.

In most businesses, cost standards are established principally by accountants.

It is correct to rely exclusively on past cost data when establishing standards.

Ideal standards are developed under conditions that assume no idle time, no machine breakdowns, and
no materials spoilage.

Currently attainable standards do not allow for reasonable production difficulties.

Standard costs are determined by multiplying expected price by expected quantity.

The direct labor time variance measures the efficiency of the direct labor force.

The variance from standard for factory overhead cost resulting from operating at a level above or below
100% of normal capacity is termed volume variance.

The variance from standard for factory overhead cost resulting from incurring a total amount of factory
overhead cost that is greater or less than the amount budgeted for the level of operations achieved is
termed controllable variance.

The most effective means of presenting standard factory overhead cost variance data is through a
factory overhead cost variance report.

Since the controllable variance measures the efficiency using variable overhead resources, if budgeted
variable overhead exceeds actual results, the variable is favorable.

Exercise 4-3 (Multiple Choice – Computation). Encircle the letter that corresponds to the best chosen
answer.

Use the following information for Questions 1 to 2.

Actual costs 4,600 pounds at P5.50


Standard costs 4,500 pounds at P6.00

What is the direct materials price variance?

P2,250 favorable

P2,250 unfavorable

P2,300 favorable

P1,700 unfavorable
What is the direct materials quantity variance?

P550 unfavorable

P600 favorable

P550 favorable

P600 unfavorable

USE THE FOLLOWING INFORMATION FOR QUESTIONS 3 TO 4.

The following data is given for the Walker Company:

Budgeted production 1,000 units


Actual production 980 units
Materials:
Standard price per lb P2.00
Standard pounds per completed unit 12
Actual pounds purchased and used in production 11,800
Actual price paid for materials P23,000
Labor:
Standard hourly labor rate P14 per hour
Standards hours allowed per completed unit 4.5
Actual labor hours worked 4,560
Actual total labor costs P62,928
Overhead:
Actual and budgeted fixed overhead P27,000
Standard variable overhead rate P3.50 per standard labor hour
Actual variable overhead costs P15,500

Overhead is applied on standard labor hours.

The direct material price variance is

600F

600U

80F

80U

The direct material quantity variance is:

600F

600U
80F

80U

The following data relate to direct labor costs for the current period:

Standard costs 7,500 hours at P11.60


Actual costs 6,000 hours at P12.00
What is the direct labor time variance?

P3,000 favorable

P15,000 unfavorable

P2,400 favorable

P17,400 favorable

The following data relate to direct labor costs for the current period:

Standard costs 6,000 hours at P.80 per hour


Actual costs 7,500 hours at P11.60
What is the direct labor rate variance?

P15,000 unfavorable

P3,000 favorable

P17,400 unfavorable

P2,400 favorable

USE THE FOLLOWING INFORMATION FOR QUESTIONS 7 TO 9.

The standard costs and actual costs for factory overhead for the manufacture of 2.500 units of actual
production are as follows:

Standard Costs
Fixed overhead (based on 10,000 hours) 3 hours @ P.80 per hour
Variable overhead 3 hours @ P2 per hour

Actual Costs
Total variable cost, P18,000
Total fixed cost, P8,000

The amount of factory overhead volume variance is:

P2,000 favorable
P2,000 unfavorable

P2,500 unfavorable

P0

The amount of total factory overhead cost variance is:

P2,000 favorable

P5,000 unfavorable

P2,500 unfavorable

P0

The amount of factory overhead controllable variance is:

P2,000 unfavorable

P3,000 favorable

P3,000 unfavorable

USE THE FOLLOWING INFORMATION FOR QUESTIONS 10 TO 19.

Forrest Company uses a standard cost system for its production process and applies overhead based on
direct labor hours. The following information is available for August when Forrest made 4,500 units:

Standard:
DLH per unit 2.50
Variable overhead per DLH P1.75
Fixed overhead per DLH P3.10
Budgeted variable overhead P21,875
Budgeted fixed overhead P38,750

Actual:
Direct labor hours 10,000
Variable overhead P26,250
Fixed overhead P38,000
Using the one-variance approach, what is the total overhead variance?

a. P6,062.50 U
b. P3,625.00 U
c. P9,687.50 U
d. P6,562.50 U

Using the two-variance approach, what is the controllable variance?


a. P5,812.50 U
b. P5,812.50 F
c. P4,375.00 U
d. P4,375.00 F

Using the two-variance approach , what is the noncontrollable variance?

a. P3,125.00 F
b. P3,875.00 U
c. P3,875.00 F
d. P6,062.50 U

Using the three-variance approach, what is the spending variance?

a. P4,375 U
b. P3,625 F
c. P8,000 U
d. P15,750 U

Using the three-variance approach, what is the efficiency variance?

a. P9,937.50 F
b. P2,187.50 F
c. P2,187.50 U
d. P2,937.50 F

Using the three-variance approach, what is the volume variance?

a. P3,125.00 F
b. P3,875.00 F
c. P3,875.00 U
d. P6,062.50 U

Using the four-variance approach, what is the variable overhead spending variance?

a. P4,375.00 U
b. P4,375.00 F
c. P8,750.00 U
d. P6,562.50 U

Using the four-variance approach, what is the variable overhead efficiency variance?

a. P2,187.50 U
b. P9,937.50 F
c. P2,187.50 F
d. P2,937.50 F
Using the four-variance approach, what is the fixed overhead spending variance?

a. P7,000 U
b. P3,125 F
c. P750 U
d. P750 F

Using the four-variance approach, what is the volume variance?

a. P3,125 F
b. P3,875 F
c. P6,063 U
d. P3,875 U

Problem 4-1. Materials Standards

Swagger Corporation is developing standards for its products. One product requires an input that is
purchased for P62.00 per kilogram from the supplier. By paying cash, the company gets a discount of 6%
off this purchase price. Shipping costs from the supplier’s warehouse amount to P4.45 per kilogram.
Receiving costs are P0.50 per kilogram. Each unit of output requires 0.48 kilogram of this output. The
allowance for waste and spoilage is 0.04 kilogram of this input for each unit of output. The allowance for
rejects is 0.13 kilogram of this input for each unit of output.