Chapter 8

When would a sales variance be listed as favorable?

When actual sales exceed budgeted or expected sales Favorable sales variances occur when actual sales are greater than expected sales. Unfavorable sales variances occur when actual sales are less than expected sales.

Abbot Company spent less than expected for materials and more than expected for labor. Select the incorrect statement from the following.

You can always expect unfavorable labor variances if you have favorable material variances. A favorable materials variance could mean purchasing agents were shrewd in negotiating price concessions, discounts, or delivery terms and therefore reduced the price the company paid for materials.

The sales volume variance is the difference between the:

static budget (based on planned volume) and the flexible budget (based on actual volume).

Burruss Company developed a static budget at the beginning of the company's accounting period based on an expected volume of 8,000 units: Per UnitRevenue$4.00 Variable costs 1.50 Contribution margin$2.50 Fixed costs 2.00 Net income$0.50 If actual production totals 10,000 units, which is within the relevant range, the flexible budget would show fixed costs of:

$16,000. Based on 8,000 units: Total budgeted fixed costs = 8,000 units × $2.00 per unit = $16,000 This amount is unchanged if the flexible budget is prepared at a level of 10,000 units.

The Boyle Company estimated that April sales would be 150,000 units with an average selling price of $6.00. Actual sales for April were 149,000 units, and average selling price was $6.12. The sales revenue flexible budget variance was:

$17,880 favorable. Sales revenue flexible budget variance = (149,000 units × $6.12 per unit) − (149,000 units × $6.00 per unit) Sales revenue flexible budget variance = $911,880 − $894,000 = $17,880 favorable Since actual sales were greater than the flexible budget amount, the variance is favorable.

The Boyle Company estimated that April sales would be 150,000 units with an average selling price of $6.00. Actual sales for April were 149,000 units, and average selling price was $6.12. The sales volume variance was:

$6,000 unfavorable. Sales volume variance = Static budget (based on planned volume) − Flexible budget (based on actual volume) Sales volume variance = (150,000 units × $6.00 per unit) − (149,000 units × $6.00 per unit) Sales volume variance = $900,000 − $894,000 = $6,000 unfavorable Since the actual volume was less than the planned volume, the variance is unfavorable.

White Company budgeted for $277,200 of fixed overhead cost and volume of 44,000 units. During the year, the company produced and sold 43,000 units and spent $286,000 on fixed overhead. The fixed overhead cost spending variance is:

$8,800 unfavorable. Fixed cost spending variance = Actual fixed cost - Budgeted fixed cost Fixed cost spending variance = $286,000 - $277,200 = $8,800 Since actual costs are greater than the budgeted costs, the variance is unfavorable.

The Russell Company provides the following standard cost data per unit of product: Direct material (4 gallons @ $4 per gallon)$16.00 Direct labor (3 hours @ $12 per hour)$36.00 During the period, the company produced and sold 21,000 units, incurring the following costs: Direct material86,000gallons@$3.90per gallon Direct labor63,500hours@$11.75per hour The direct material usage variance was:

$8,000 unfavorable. Usage variance = (Actual quantity - Standard quantity) × Standard price Usage variance = [86,000 gallons - (21,000 units × 4 gallons per unit)] × $4 per gallon Usage variance = (86,000 gallons - 84,000 gallons) × $4 per hour = $8,000 Since the actual quantity is greater than the standard quantity, the variance is unfavorable.

Standards that do allow for normal downtime and can be achieved with reasonable amounts of effort are known as:

Practical standards.