Exam 10: How Do Managers Evaluate Performance Using Cost Variance Analysis

Prado Company applies fixed manufacturing overhead costs to products based on direct labor hours.Information for the month of April appears below.Prado's expected to produce and sell 500 units for the month. Budgeted fixed overhead costs \ 230,000 Budgeted direct labor hours \div10,000 Standard cost per direct labor hour \2 3 Standard direct labor hours per unit 20 Actual production 520 units Actual fixed overhead costs \ 202,000 Calculate the fixed overhead spending variance and production volume variance.Clearly label each variance as favorable or unfavorable.

Management by exception is a term used to describe managers who look at all variances,regardless of the amount.

Exhibit 10-2 Benny's Bakery produces bagels for resale at local grocery stores.The master budget indicates that the company expects to use 2.5 pounds of direct materials for each unit produced at a cost of $10.00 per pound (one unit = one batch of bagels).Each unit produced will require 0.30 direct labor hours at a cost of $24.00 per hour.Variable manufacturing overhead is applied based on direct labor hours at a rate of $4.80 per hour.Last year's sales were expected to total 40,000 units.Benny just received last year's actual results showing sales of 35,000 units. -Refer to Exhibit 10-2.What amount would the flexible budget show for direct materials?

Baxter Company incurred labor costs of $10,800 in June (payable in July)for work requiring 1,100 standard hours at a standard rate of $10 per hour;1,200 actual direct labor hours were worked.Based on this information,what was the labor efficiency variance?

Which of the following is true about "management by exception"?

A production manager is evaluated based on the quantity of direct materials used in production.If the production line actually uses materials to produce 50,000 units when the master budget shows materials needed for 44,000 units,the manager's evaluation should be based on a flexible budget.

Exhibit 10-5 Catalina Company uses activity-based costing to allocate variable manufacturing overhead costs to products.The company produced 1,800 units of product last month,and identified three activities with the following information for last month. Standard Actual Actual Quantity Activity Standard Rate per Unit Costs Quantity Produced Purchase \ 80 per order 0.50 order per unit \ 78,000 1,000 order's orders Product testing \ 10 per test 0.9 minutes per \ 28,000 2,000 test minute unit minutes direct labor \ 16 per direct 5 hours per unit \ 140,000 8,000 direct labor hour labor hour -Refer to Exhibit 10-5.What is the variable overhead efficiency variance for the purchase order activity?

Exhibit 10-1 Flatland Company applies fixed manufacturing overhead costs to products based on direct labor hours.Information for the month of April appears below.Flatland expects to produce and sell 18,000 units for the month. Below is budget information for Flatland Company. Budgeted fixed overhead costs \ 270,000 Budgeted direct labor hours 90,000 hours Standard direct labor hours per unit 5 hours per unit Actual production 17,000 Actual fixed overhead costs \ 280,000 -Refer to Exhibit 10-1.Based on this information,what is the fixed overhead production volume variance?

The materials quantity variance is defined as the difference between the actual quantity of materials purchased at the actual price and the actual quantity of materials purchased at the standard price.

If Ever Green Corporation has an unfavorable fixed overhead spending variance,which of the following would most likely be the reason for this variance?

Exhibit 10-4 Zingler Inc.applies variable manufacturing overhead at a standard rate of $9 per direct labor hour.The standard quantity of direct labor is 4 hours per unit.Variable overhead costs totaled $90,000 for the month of December.A total of 15,000 direct labor hours were worked during December to produce 4,000 units. -Refer to Exhibit 10-4.Based on this information,what is the variable overhead efficiency variance?

Jake's Cheese Company produces gourmet cheese for resale at local grocery stores.The master budget indicates that the company expects to use 3.0 pounds of direct materials for each unit produced at a cost of $8.00 per pound (one unit = one batch of cheese).Each unit produced will require 0.50 direct labor hours at a cost of $10.00 per hour.Variable manufacturing overhead is applied based on direct labor hours at a rate of $5.00 per hour.Last year's sales were expected to total 50,000 units.Jake just received last year's actual results showing sales of 45,000 units. (1)Calculate the standard cost per unit for direct materials,direct labor,and variable manufacturing overhead. (2)Prepare a flexible budget based on actual sales for direct materials,direct labor,and variable manufacturing overhead.

Olympia Inc.produces small row boats.Standard cost information for each boat is presented below. Direct materials \ 325 Direct labor 210 Variable overhead Total Olympia produced and sold 1,000 boats for the year,and encountered the following production variances. Direct materials price variance (\ 50,000) Favorable Direct materials quartity variance 30,000 Unfavorable Direct labor rate variance 24,500 Unfavorable Direct labor efficiency variarice (28,000) Favorable Variable overhead spending variarice 19,500 Unfavorable Variable overhead efficiency variance (8,000) Favorable Total variable production cost variance (\ 12,000) Unfavorable Company policy is to investigate all unfavorable variances above 10 percent of the flexible budget amount for direct materials,direct labor,and variable overhead. a.Identify the variances that should be investigated according to company policy.Show calculations to support your answer. b.What potential weakness exists in the company's current policy?

In the planning phase of budgeting,managers evaluate the company's performance by comparing budgeted amounts to actual results.

Exhibit 10-3 Glenbrook Inc.has the following standard costs the one product the company produces. Direct Materials (2 pounds at $18.00 per pound)= $36.00 per unit Direct Labor (0.6 hours at $48.00 per hour)= $28.80 per unit During March,Glenbrook produced 2,000 units,bought and used 4,200 pounds of direct materials at $19.20 per pound,and used 1,100 hours of labor at a total cost of $56,100. -Refer to Exhibit 10-3.Based on this information,what is the direct labor efficiency variance?

Exhibit 10-2 Benny's Bakery produces bagels for resale at local grocery stores.The master budget indicates that the company expects to use 2.5 pounds of direct materials for each unit produced at a cost of $10.00 per pound (one unit = one batch of bagels).Each unit produced will require 0.30 direct labor hours at a cost of $24.00 per hour.Variable manufacturing overhead is applied based on direct labor hours at a rate of $4.80 per hour.Last year's sales were expected to total 40,000 units.Benny just received last year's actual results showing sales of 35,000 units. -Refer to Exhibit 10-2.What amount would the flexible budget show for variable manufacturing overhead?

A favorable labor rate variance might be explained by an unexpected increase in available employees that caused lower wage rates than were anticipated.

Exhibit 10-4 Zingler Inc.applies variable manufacturing overhead at a standard rate of $9 per direct labor hour.The standard quantity of direct labor is 4 hours per unit.Variable overhead costs totaled $90,000 for the month of December.A total of 15,000 direct labor hours were worked during December to produce 4,000 units. -Refer to Exhibit 10-4.Based on this information,what is the variable overhead spending variance?

Which of the following would most likely be the reason for an unfavorable labor efficiency variance?

Kelton Company uses activity-based costing to allocate variable manufacturing overhead costs to products.The company identified three activities with the following information for last month. Standard Quantity Actual Actual Activity Standard Rate per Unit Produced Costs Quantity Purchase orders \ 80 per order 0.10 order per unit \ 141,000 2,000 orders Product testing \ 2 per test 0.50 minutes per \ 26,000 10,000 test minute unit minutes Indirect labor \ 5 per direct 1 hour per unit \ 90,000 16,000 direct labor hour labor hour Kelton Company produced 18,750 units last month.Prepare a variance analysis,clearly labeling each variance as favorable or unfavorable.