Title: Cost Variance Analysis
Course: Question Banks

Q: A review of your fitness center shows 25 classes running with an average of 5 participants each. Your instructors are paid $20 per class regardless of the number of students attending. Your space could hold 15 students. What is the best way to lower your payroll costs?
- Pay your instructors per student, even if this lowers employee morale.
- Lower the pay rate for instructors.
- Streamline your class schedule and work to funnel students into the remaining classes.
A: Streamline your class schedule and work to funnel students into the remaining classes.

Q: As a manager, you have computed the variance in your utilities line item and noticed it is 25% higher than budget. What would your next step be in the analysis process?
- Immediately reprimand the production manager for not monitoring the machinery to make sure it is turned off at the end of each shift.
- Shut down production until you can figure out why the utility bills are so high.
- Review the utility bills for errors, then find out if machinery was running more, production was higher or if there were other reasons the bills were higher.
A: Review the utility bills for errors, then find out if machinery was running more, production was higher or if there were other reasons the bills were higher.

Q: Insurance expense is 50% over budget you notice in your monthly review of the income statement. After noticing the variance and investigating, you discover there was a rate increase for your liability policy. What would your next step be?
- Immediately cancel the policy while you search for new carriers.
- Just adjust the budget. You probably won’t be able to find lower cost coverage anyway.
- Talk with your direct supervisor about securing new bids on your insurance to see if you can bring the cost back in line with budget.
A: Talk with your direct supervisor about securing new bids on your insurance to see if you can bring the cost back in line with budget.

Q: A sales increase of 10% should produce a supplies expense increase of 1%, but a review of your budget to actual shows an increase in your supplies of 5% this period. Is this a favorable or unfavorable supplies variance, and how might you handle analyzing this?
- Unfavorable variance, and call the vendor, since there must have been an invoicing error.
- Favorable variance, as the sales increase more than offset the expense increase, so no further analysis is needed.
- Unfavorable variance, and I would check the supplies invoices for errors, or to determine if one may have been recorded in the period incorrectly.
A: Unfavorable variance, and I would check the supplies invoices for errors, or to determine if one may have been recorded in the period incorrectly.

Q: If revenue decreases and expenses decrease, this would create:
- An unfavorable revenue variance and a favorable expense variance.
- Unfavorable revenue and expense variances.
- An unfavorable revenue variance and either a favorable or unfavorable expense variance, depending on how much expense should have decreased with the decrease in revenue.
A: An unfavorable revenue variance and either a favorable or unfavorable expense variance, depending on how much expense should have decreased with the decrease in revenue.

Q: Z-Fit Fitness is showing an increase in payroll expense of $500 and an increase in sales revenue of $1,500. Typically, for each additional $1 of revenue, they should $.50 in payroll expense. Do they have favorable or unfavorable variances?
- Favorable revenue and unfavorable expense variances.
- Unfavorable revenue and expense variances.
- Favorable revenue and expense variances.
A: Favorable revenue and expense variances.

Q: XYZ Corp is struggling with their labor budget. They have always been within 5% of budget, but this year their direct labor budget was $30,000 and actual labor cost was $36,000. This is 20% over budget! Is this significant and what might XYZ want to do about this variance?
- This is significant and they should do layoffs to get their labor costs back in line with budget.
- This is not significant and they will need to adjust their budget to their current level of wages.
- This is significant and they may want to examine machinery breakdown issues, employee turnover, increases in wages due to a competitive labor market or other reasons for the increase.
A: This is significant and they may want to examine machinery breakdown issues, employee turnover, increases in wages due to a competitive labor market or other reasons for the increase.

Q: Analyzing a variance can help a business to:
- Know when to hire or lay off employees or find lower priced sources for materials.
- Learn who is responsible for a budgeting error.
- Learn whether a variance is significant and if the budget needs to be updated or changes need to be made in business operations.
A: Learn whether a variance is significant and if the budget needs to be updated or changes need to be made in business operations.

Q: A local business noticed a large variance in both their direct labor and direct materials. They called you in as a consultant to take a look at the variances and help them to understand how it may have happened that they were over budget by 20% on both items, but sales had only increased by 10%. What might you offer them for reasons for this variance?
- This type of variance is typically caused by poor budgeting practices.
- The production manager may be to blame due to poor management of the manufacturing facility.
- Raw material pricing, machinery breakdowns or wage spikes due to labor negotiations or a labor shortage could cause this type of variance.
A: Raw material pricing, machinery breakdowns or wage spikes due to labor negotiations or a labor shortage could cause this type of variance.

Q: ABC company used 5,000 components for their widgets at a cost of $4 each. The original budget called for 4,000 widgets at $5 each. What is their quantity variance?
- $5,000 favorable
- -0-
- $5,000 unfavorable
A: $5,000 unfavorable

Q: An unfavorable price variance and a favorable quantity variance will create a:
- A favorable spending variance
- An unfavorable spending variance.
- Either a favorable or unfavorable spending variance.
A: Either a favorable or unfavorable spending variance.

Q: If the actual price is lower than the standard price, this will create a(n):
- Unfavorable price variance.
- Either a favorable or unfavorable price variance.
- Favorable price variance
A: Favorable price variance

Q: If your actual price is less than your standard price for raw materials your price variance will be:
- Unfavorable
- Either favorable or unfavorable. We don’t have enough information.
- Favorable
A: Favorable

Q: ABC Company is concerned because the cost of the main component of their product has a standard cost of $2 each, but purchasing spent $3 each, as the quality of this component is higher than the cheaper version. What will you need to analyze to determine if this additional cost make sense?
- It doesn’t matter. Purchasing should continue to order the lower priced component so they don’t have an unfavorable price variance.
- If the quality is higher, it will be easier to use, and the production time will be less, so continue to order the higher priced component.
- How much waste do they have with each component, and how much time is it taking to complete the manufacturing of the product?
A: How much waste do they have with each component, and how much time is it taking to complete the manufacturing of the product?

Q: The purchasing manager is excited because he found fabric for the tents made by your company at half the price you were paying from your previous vendor. Unfortunately, there seem to be a high number of customer complaints due to the tents leaking. What analysis do you need to do to determine what needs to be done in this situation?
- Go back to the more expensive fabric. It isn’t worth the customer complaints.
- Keep using the inexpensive fabric, since your price variance is favorable.
- Review the complaints, determine quantities of the cheaper product being used, and decide whether to continue with the cheaper fabric or go back to the more costly one.
A: Review the complaints, determine quantities of the cheaper product being used, and decide whether to continue with the cheaper fabric or go back to the more costly one.

Q: You just reviewed the raw material quantity usage for last month, and see that production used 10% less raw material than the standard quantity budgeted! This is great news, but what might the reason be for this, so you can continue this saving?
- It is probably just a fluke, so I wouldn’t anticipate seeing this great news again next period.
- Purchasing may have gotten a good deal on a lesser quality of product, so it saved us on the spending variance.
- Proper training, great machinery maintenance or quality product purchased.
A: Proper training, great machinery maintenance or quality product purchased.

Q: A 25% decrease in the cost of raw materials caused a 25% increase in the quantity of product being used per item manufactured. If the overall spending variance was -0- (was right on budget), what needs to be done in this situation?
- You need to go back to the more costly product immediately.
- Inform your production department go review procedures and reduce waste.
- A poorer quantity of product was purchased so there is more waste, but since the spending variance is -0-, you could continue to use the poorer quality product, unless other budget items, such as direct labor are affected as well.
A: A poorer quantity of product was purchased so there is more waste, but since the spending variance is -0-, you could continue to use the poorer quality product, unless other budget items, such as direct labor are affected as well.

Q: You noticed a quantity variance of 5,000 pounds, unfavorable, this period. You checked in with purchasing who noted no change in vendor or purchase price for product this period. Who might you talk with next?
- Check with accounting and make sure they recorded everything correctly.
- Reprimand the maintenance manager, since most likely there were equipment breakdowns.
- Check in with production and find out if they had new employees or maintenance issues this period causing them to use additional product.
A: Check in with production and find out if they had new employees or maintenance issues this period causing them to use additional product.

Q: A material variance is large at ABC Company and they are concerned. They have called you in to evaluate the problem. How would you proceed?
- In order to find out who is to blame for the problem. Talk to each person involved privately so they can tell you what is going on.
- Buy better quality raw materials to lower waste.
- Discuss the potential reasons for the variance with those who may be involved, such as the purchasing department, production and maintenance. Compile the information and offer potential solutions.
A: Discuss the potential reasons for the variance with those who may be involved, such as the purchasing department, production and maintenance. Compile the information and offer potential solutions.

Q: An old piece of equipment has been narrowed down as the cause of a 25% increase in waste of your most expensive raw material. What might you do to decide how to proceed?
- Continue to fix the old equipment and adjust the raw materials budget.
- Purchase the new equipment and begin using it.
- Research new equipment and analyze how much raw material waste or labor could be saved.
A: Research new equipment and analyze how much raw material waste or labor could be saved.

Q: Putting in place good systems can:
- Allow the company to make record profits.
- Pay dividends to the shareholders in the company to keep the stock price high.
- Help companies provide the best product at the lowest cost.
A: Help companies provide the best product at the lowest cost.

Q: Estimating expected labor costs can be a multifacted process. The first thing to look at is”
- The price and quality of the raw materials.
- The age and condition of the machinery.
- The skill level and experience of your labor force.
A: The skill level and experience of your labor force.

Q: The standard hourly rate for ABC Corporation is $30 per hour. When reviewing the actual rate for the last period, the company actually spend $27 per hour. This is called:
- Labor rate variance- Unfavorable
- Labor spending variance-favorable
- Labor rate variance-Favorable
A: Labor rate variance-Favorable

Q: Your new production worker John is making $4 per hour less than your previous worker, Jane. But boy is John slow. Jane could make seven widgets per hour and John is only making five. How will this affect your labor budget?
- Favorable efficiency variance and an unfavorable rate variance.
- A favorable spending variance.
- Favorable rate variance and an unfavorable efficiency variance.
A: Favorable rate variance and an unfavorable efficiency variance.

Q: We have to pay a higher hourly rate, but used the same number of hours as budgeted. This would be called:
- A spending variance
- An efficiency variance
- A rate variance
A: A rate variance

Q: If our actual hours used was lower than the standard allowed and our hourly rate was also lower than our standard rate, we would see:
- Labor rate, labor efficiency and spending variances would all be unfavorable.
- We don’t have enough information to calculate the variances.
- Labor rate, labor efficiency and spending variances would all be favorable.
A: Labor rate, labor efficiency and spending variances would all be favorable.

Q: Turnover has been high at ABC Company, causing the labor hours to rise. How might you help ABC to retain employees?
- Review their training programs to insure that the goals are clear, and employees understand the speed required to complete their jobs.
- Create goals that seem unattainable so that the employees work hard and quickly to reach them.
- Review their training programs and onboarding procedures to make sure employees understand their job, are well trained and feel valued by the company.
A: Review their training programs and onboarding procedures to make sure employees understand their job, are well trained and feel valued by the company.

Q: The new materials Josh has been getting to manufacture his widgets is causing jams in the machinery and increasing the hours his employees are working. As a consultant, how might you help Josh figure out what might help bring his labor hours back in line?
- Immediately tell his purchasing department to go back to the old raw material supplier regardless of the cost to bring labor hours back in line with budget.
- It must be a machinery issue. Bring the maintenance department in to fix the machinery.
- Compare the new raw material to the old material for quality and price. Determine if the savings in price is more than the additional labor hours, and then decide how to proceed.
A: Compare the new raw material to the old material for quality and price. Determine if the savings in price is more than the additional labor hours, and then decide how to proceed.

Q: Currently, you, as the production manager, are not involved in the budgeting process for direct labor. Management just provided you with the direct labor standard and you know your production team cannot attain these hours. How would you proceed?
- Start training your employees immediately to speed up to meet the goal, even if it seems unattainable.
- Just keep doing the work at the current direct labor hours, and deal with the situation when management reviews the actual to budgeted labor hours.
- Have several employees complete the process and keep track of the time needed to do a safe and effective job of creating a quality product. Take this information to management and offer to participate in the budgeting process to keep labor as cost effective as possible.
A: Have several employees complete the process and keep track of the time needed to do a safe and effective job of creating a quality product. Take this information to management and offer to participate in the budgeting process to keep labor as cost effective as possible.

Q: When comparing the actual hours of input at the standard to the standard hours allowed, you notice that it took more hours than budgeted. This would be a:
- Overhead efficiency variance-favorable
- Overhead spending variance-unfavorable
- Overhead efficiency variance-unfavorable
A: Overhead efficiency variance-unfavorable

Q: If the variable overhead rate variance is unfavorable, and the variable overhead efficiency variance is favorable, our spending variance:
- Will be unfavorable
- Will be favorable
- Could be favorable or unfavorable depending on the amount of the two variances combined.
A: Could be favorable or unfavorable depending on the amount of the two variances combined.

Q: Your variable overhead rate went down due to a savings on one of your component items. If the component item causes an increase in your actual hours of input it may:
- Cause a favorable spending variance if the additional time needed outweighs the cost savings on the component item.
- Cause a favorable spending variance even if the additional time outweighs the cost savings on the component item.
- Cause an unfavorable spending variance if the additional time needed outweighs the cost savings on the component item.
A: Cause an unfavorable spending variance if the additional time needed outweighs the cost savings on the component item.

Q: Julie, the production manager has noticed an increase in her actual hours of input for one step in her manufacturing process. She found out that Lisa, the purchasing manager has been buying printer ink from a new supplier that is much cheaper than the old ink. What should Julie do?
- Julie should go to her supervisor and explain that her labor hours are being affected by this substandard ink.
- Julie needs to work with the new ink, and see if she can get back to her standard hours allowed with the lower quality ink.
- Julie should talk with Lisa to find out the price being paid for the new ink, so they can work together to see if the overall spending variance is favorable or unfavorable.
A: Julie should talk with Lisa to find out the price being paid for the new ink, so they can work together to see if the overall spending variance is favorable or unfavorable.

Q: If the efficiency variance is unfavorable and the rate variance is favorable the spending variance will;
- Not be affected, since one is favorable and the other unfavorable.
- Be unfavorable, since the process is taking more time.
- Be either favorable or unfavorable.
A: Be either favorable or unfavorable.

Q: Purchasing got a great deal on one of the supplies used in Greg’s manufacturing department. He has noticed higher waste, leading to an overall spending variance in his variable overhead. How might Greg address the issue?
- Immediately reprimand purchasing and ask them to return the product.
- Hold the manufacturing staff accountable for the variance.
- Talk with purchasing and the manufacturing staff to see if there is a quality issue with the lesser priced supply.
A: Talk with purchasing and the manufacturing staff to see if there is a quality issue with the lesser priced supply.

Q: If labor costs and waste goes up when a lower cost supply is used, a manager should always:
- Purchase the lower cost product to save money on materials.
- Purchase the higher cost product since labor costs and waste are less.
- Evaluate the overall variable overhead costs to determine if the lower cost increases or decreases the total variable overhead.
A: Evaluate the overall variable overhead costs to determine if the lower cost increases or decreases the total variable overhead.

Q: A selling price adjustment may need to be implemented when:
- Waste is higher due to inefficient or ineffective employee training.
- Material costs rise due to a market increase that can be offset by increased efficiency in the production process.
- Material costs rise due to a market increase that cannot be offset by increased efficiency in the production process.
A: Material costs rise due to a market increase that cannot be offset by increased efficiency in the production process.