Chapter 17 Additional Topics in Variance Analysis
True / False Questions
1. The variable production cost variances are computed using the units produced instead of the
units sold.
TRUE
Production variances are based on units produced.
2. If variances are not prorated at the end of the accounting period, they are closed to the Cost of
Goods Sold.
TRUE
They are being treated as if they are period costs.
3. If the number of units produced exceeds the number of units sold, the full-absorption operating
profit will be lower than variable costing operating profit.
FALSE
Absorption costing operating profit will be greater since fixed production costs are going into
inventory rather than into cost of goods sold.
4. The direct material price variance is based on the quantity of materials purchased when the
quantity purchased is different from the quantity used.
TRUE
The price variance is due to the purchasing activity and should be related to units purchased.
5. The market share variance is more controllable by the marketing department than the industry
volume variance.
TRUE
The industry volume is due to external activities. Market share can be influenced more readily
by the marketing staff.
6. The industry volume variance is the portion of the sales activity variance due to a change in
the company's proportion of sales in the markets in which they operate.
FALSE
This is the market share variance. Industry volume is due to changes in the overall size of the
market.
17-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
,7. An increase in an industry's volume and a decrease in a company's market share implies that
the company's sales price variance is unfavorable.
FALSE
There is no relation between market size and the price. The relationship is between market
size and sales quantity.
8. The general approach in variance analysis is to separate the variance into components based
on a budgeting formula.
TRUE
Separating the variance into components is the general approach for variance analysis. For
example, budget revenues can be expressed as: Budget revenues = SP × SQ
9. If a company sells two products, it is possible for both products to have a favorable sales mix
variance.
FALSE
The mix variance measures the impact of substitution—if you sell more of one, you must have
sold less of another.
10. The sales quantity variance is the same as the sales activity variance on a flexible budget
performance report.
FALSE
Sales quantity + sales mix = sales activity.
11. If a company sells two products, it is possible for both products to have an unfavorable sales
quantity variance.
TRUE
The quantity variance measures the difference between actual sales and budgeted sales. Both
products could have sold fewer units than budgeted.
12. The production cost yield variance is conceptually the same as the sales quantity variance.
TRUE
Both measure expected output given a mix of products versus actual output.
13. The production mix variance measures the impact of substituting one material for another
material during the production process.
17-2
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
, TRUE
The production mix can be either materials or labor.
14. The direct labor yield variance is unfavorable when the total hours worked during a period are
less than the total standard hours allowed for the actual number of units produced.
FALSE
If less hours are worked it would be a favorable variance.
15. The basic variance analysis framework used for manufacturing companies can also be used in
service organizations.
TRUE
The emphasis is more on labor and overhead but the same framework is used.
16. Labor variances are more important than material variances in service organizations.
TRUE
Labor is a much greater proportion of the inputs than are materials.
17. Professional accounting firms could not compute a labor mix and labor yield variance for their
auditors because labor in accounting is not substitutable.
FALSE
The labor is substitutable.
18. Output is usually defined as sales units in merchandising, but service organi-zations use
measures of activity units, like patient days.
TRUE
Service organization use activity units, while merchandisers typically use output defined in
sales units.
19. Two important characteristics to consider when deciding how many variances to review are
how large the variance is and the extent to which the variance can be managed.
TRUE
These are also called impact and controllability.
20. The only variances that should be investigated are those for which the expected benefits of
correction exceed the costs of investigating and correcting.
17-3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
, TRUE
This is a basic principle of cost-benefit.
21. Some variances are the result of accounting errors and omissions, including timing
differences.
TRUE
This would make the information less valuable for operating managers.
22. Some variances are the result of standards that are inaccurate or do not reflect the current
production process.
TRUE
Variances are only as good as the standards they are based on.
23. Which of the following statements is(are) true?
(A) If variances are prorated at the end of the accounting period, an unfavorable direct
materials price variance will, when prorated, increase the value of the Finished Goods
Inventory.
(B) Insignificant variances are not generally prorated at the end of the accounting period and
are closed to the Cost of Goods Sold.
A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.
Unfavorable variances are like expenses and will increase inventory; small variances normally
are closed to COGS.
24. Standard costs should be based on:
A. perfect performance.
B. an average of past costs.
C. most likely level of performance.
D. reasonably attainable levels of efficiency.
Standards should not be too tight or too loose.
17-4
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
True / False Questions
1. The variable production cost variances are computed using the units produced instead of the
units sold.
TRUE
Production variances are based on units produced.
2. If variances are not prorated at the end of the accounting period, they are closed to the Cost of
Goods Sold.
TRUE
They are being treated as if they are period costs.
3. If the number of units produced exceeds the number of units sold, the full-absorption operating
profit will be lower than variable costing operating profit.
FALSE
Absorption costing operating profit will be greater since fixed production costs are going into
inventory rather than into cost of goods sold.
4. The direct material price variance is based on the quantity of materials purchased when the
quantity purchased is different from the quantity used.
TRUE
The price variance is due to the purchasing activity and should be related to units purchased.
5. The market share variance is more controllable by the marketing department than the industry
volume variance.
TRUE
The industry volume is due to external activities. Market share can be influenced more readily
by the marketing staff.
6. The industry volume variance is the portion of the sales activity variance due to a change in
the company's proportion of sales in the markets in which they operate.
FALSE
This is the market share variance. Industry volume is due to changes in the overall size of the
market.
17-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
,7. An increase in an industry's volume and a decrease in a company's market share implies that
the company's sales price variance is unfavorable.
FALSE
There is no relation between market size and the price. The relationship is between market
size and sales quantity.
8. The general approach in variance analysis is to separate the variance into components based
on a budgeting formula.
TRUE
Separating the variance into components is the general approach for variance analysis. For
example, budget revenues can be expressed as: Budget revenues = SP × SQ
9. If a company sells two products, it is possible for both products to have a favorable sales mix
variance.
FALSE
The mix variance measures the impact of substitution—if you sell more of one, you must have
sold less of another.
10. The sales quantity variance is the same as the sales activity variance on a flexible budget
performance report.
FALSE
Sales quantity + sales mix = sales activity.
11. If a company sells two products, it is possible for both products to have an unfavorable sales
quantity variance.
TRUE
The quantity variance measures the difference between actual sales and budgeted sales. Both
products could have sold fewer units than budgeted.
12. The production cost yield variance is conceptually the same as the sales quantity variance.
TRUE
Both measure expected output given a mix of products versus actual output.
13. The production mix variance measures the impact of substituting one material for another
material during the production process.
17-2
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
, TRUE
The production mix can be either materials or labor.
14. The direct labor yield variance is unfavorable when the total hours worked during a period are
less than the total standard hours allowed for the actual number of units produced.
FALSE
If less hours are worked it would be a favorable variance.
15. The basic variance analysis framework used for manufacturing companies can also be used in
service organizations.
TRUE
The emphasis is more on labor and overhead but the same framework is used.
16. Labor variances are more important than material variances in service organizations.
TRUE
Labor is a much greater proportion of the inputs than are materials.
17. Professional accounting firms could not compute a labor mix and labor yield variance for their
auditors because labor in accounting is not substitutable.
FALSE
The labor is substitutable.
18. Output is usually defined as sales units in merchandising, but service organi-zations use
measures of activity units, like patient days.
TRUE
Service organization use activity units, while merchandisers typically use output defined in
sales units.
19. Two important characteristics to consider when deciding how many variances to review are
how large the variance is and the extent to which the variance can be managed.
TRUE
These are also called impact and controllability.
20. The only variances that should be investigated are those for which the expected benefits of
correction exceed the costs of investigating and correcting.
17-3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
, TRUE
This is a basic principle of cost-benefit.
21. Some variances are the result of accounting errors and omissions, including timing
differences.
TRUE
This would make the information less valuable for operating managers.
22. Some variances are the result of standards that are inaccurate or do not reflect the current
production process.
TRUE
Variances are only as good as the standards they are based on.
23. Which of the following statements is(are) true?
(A) If variances are prorated at the end of the accounting period, an unfavorable direct
materials price variance will, when prorated, increase the value of the Finished Goods
Inventory.
(B) Insignificant variances are not generally prorated at the end of the accounting period and
are closed to the Cost of Goods Sold.
A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.
Unfavorable variances are like expenses and will increase inventory; small variances normally
are closed to COGS.
24. Standard costs should be based on:
A. perfect performance.
B. an average of past costs.
C. most likely level of performance.
D. reasonably attainable levels of efficiency.
Standards should not be too tight or too loose.
17-4
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
