ICAEW BIP · Chapter 9
Standard costing and variance analysis MCQs with Answers
13 multiple-choice questions on Standard costing and variance analysis for ICAEW BIP Business Insight and Performance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A standard that assumes efficient but realistic operating conditions, with allowances for normal wastage, machine breakdowns and idle time, is known as:
- A) an ideal standard
- B) a basic standard
- C) an attainable standard
- D) a historical standard
Show answer & explanation
Answer: C) an attainable standard
An attainable standard can be achieved if operations are carried out efficiently, with allowances for normal losses and downtime. It is generally the most motivating. An ideal standard assumes perfect conditions with no allowances, and a basic standard is left unchanged over long periods to show trends.
Question 2
A company bought 8,400 kg of material for £36,960. The standard price is £4.50 per kg. What is the material price variance?
- A) £840 favourable
- B) £37,800 favourable
- C) £840 adverse
- D) £960 adverse
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Answer: A) £840 favourable
Standard cost of actual purchases = 8,400 x £4.50 = £37,800. Actual cost = £36,960. Price variance = £37,800 - £36,960 = £840 favourable, because the material cost less than standard (actual price £4.40 per kg).
Question 3
Output for the period was 2,000 units. The standard usage is 4 kg per unit at a standard price of £4.50 per kg. Actual usage was 8,400 kg, which cost £36,960. What is the material usage variance?
- A) £1,800 favourable
- B) £960 favourable
- C) £1,760 adverse
- D) £1,800 adverse
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Answer: D) £1,800 adverse
Standard usage for actual output = 2,000 x 4 kg = 8,000 kg. Actual usage = 8,400 kg, which is 400 kg more than standard. Usage variance = 400 kg x standard price £4.50 = £1,800 adverse. Usage variances are always valued at standard price.
Question 4
Employees were paid for 5,200 hours at a total cost of £85,280. The standard rate is £16 per hour. What is the labour rate variance?
- A) £2,080 adverse
- B) £6,880 favourable
- C) £6,880 adverse
- D) £2,080 favourable
Show answer & explanation
Answer: A) £2,080 adverse
Standard cost of hours paid = 5,200 x £16 = £83,200. Actual cost = £85,280. Rate variance = £83,200 - £85,280 = £2,080 adverse. The rate variance is based on all hours paid, including any idle time.
Question 5
Employees were paid for 5,200 hours but worked only 4,900 hours because of a machine breakdown. Output was 1,500 units, and the standard time is 3.2 hours per unit. The standard labour rate is £16 per hour. What are the idle time variance and the labour efficiency variance?
- A) Idle time nil; efficiency £6,400 adverse
- B) Idle time £4,800 adverse; efficiency £1,600 adverse
- C) Idle time £4,800 adverse; efficiency £6,400 adverse
- D) Idle time £4,800 favourable; efficiency £1,600 favourable
Show answer & explanation
Answer: B) Idle time £4,800 adverse; efficiency £1,600 adverse
Idle time variance = (5,200 - 4,900) idle hours x £16 = £4,800 adverse. Standard hours for actual output = 1,500 x 3.2 = 4,800. Efficiency variance = (4,800 - 4,900 hours worked) x £16 = £1,600 adverse. Efficiency is measured on hours worked, not hours paid, so that idle time is shown separately.
Question 6
Variable production overheads are absorbed at a standard rate of £5 per labour hour worked. In the period, 4,900 labour hours were worked and actual variable overheads were £26,100. What is the variable overhead expenditure variance?
- A) £2,100 adverse
- B) £100 favourable
- C) £1,600 adverse
- D) £1,600 favourable
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Answer: C) £1,600 adverse
Expected variable overhead for the hours worked = 4,900 x £5 = £24,500. Actual = £26,100. Expenditure variance = £24,500 - £26,100 = £1,600 adverse. Hours worked are used because variable overheads are assumed not to be incurred during idle time.
Question 7
Budgeted fixed production overheads are £120,000 and budgeted output is 10,000 units. Fixed overheads are absorbed per unit. Actual output was 10,800 units and actual fixed overheads were £126,500. What is the fixed overhead volume variance under absorption costing?
- A) £9,600 adverse
- B) £3,100 favourable
- C) £6,500 adverse
- D) £9,600 favourable
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Answer: D) £9,600 favourable
Absorption rate = £120,000 / 10,000 = £12 per unit. Volume variance = (actual output 10,800 - budgeted output 10,000) x £12 = £9,600 favourable. Producing more than budget means more fixed overhead is absorbed. The expenditure variance is £6,500 adverse (budget £120,000 vs actual £126,500).
Question 8
A company sold 4,600 units for total revenue of £262,200. The standard selling price is £55 per unit. What is the sales price variance?
- A) £9,200 favourable
- B) £2 favourable
- C) £22,000 adverse
- D) £9,200 adverse
Show answer & explanation
Answer: A) £9,200 favourable
Standard revenue for actual sales = 4,600 x £55 = £253,000. Actual revenue = £262,200. Price variance = £262,200 - £253,000 = £9,200 favourable, because the average actual price (£57) was higher than standard.
Question 9
Budgeted sales were 5,000 units and actual sales were 4,600 units. The standard contribution is £22 per unit and the standard profit is £14 per unit. If the company uses marginal costing, what is the sales volume variance?
- A) £8,800 favourable
- B) £8,800 adverse
- C) £22,000 adverse
- D) £5,600 adverse
Show answer & explanation
Answer: B) £8,800 adverse
Sales volume fell short of budget by 5,000 - 4,600 = 400 units. Under marginal costing the variance is valued at standard contribution: 400 x £22 = £8,800 adverse. Under absorption costing it would be valued at standard profit (£5,600).
Question 10
A company reports a favourable material price variance and an adverse material usage variance. Which of the following is the most likely single explanation for both?
- A) The standard usage was set too loosely
- B) A supplier increased its prices during the period
- C) Production staff were more skilled than standard
- D) The buyer bought cheaper, lower-quality material, which led to more wastage in production
Show answer & explanation
Answer: D) The buyer bought cheaper, lower-quality material, which led to more wastage in production
Lower-quality material is likely to be cheaper (favourable price variance) but to cause more waste or rejects (adverse usage variance). This shows how variances can be interdependent, so managers should look at them together. A price rise would cause an adverse price variance, and a loose usage standard would cause a favourable usage variance.
Question 11
A company's budgeted profit for a period was £84,000. The operating statement shows total favourable variances of £15,300 and total adverse variances of £21,450. What was the actual profit?
- A) £120,750
- B) £47,250
- C) £77,850
- D) £90,150
Show answer & explanation
Answer: C) £77,850
Actual profit = budgeted profit + favourable variances - adverse variances = £84,000 + £15,300 - £21,450 = £77,850. Favourable variances increase profit and adverse variances reduce it.
Question 12
A company bought 7,000 kg of material for £31,500. The material price variance was £2,100 adverse. What is the standard price per kg?
- A) £4.20
- B) £4.80
- C) £4.50
- D) £0.30
Show answer & explanation
Answer: A) £4.20
An adverse price variance means the actual cost was higher than the standard cost of the material bought. Standard cost of 7,000 kg = £31,500 - £2,100 = £29,400. Standard price = £29,400 / 7,000 = £4.20 per kg. Adding the variance would wrongly treat it as favourable.
Question 13
Which of the following is a factor in deciding whether a variance should be investigated?
- A) Whether the variance is favourable, since favourable variances never need investigating
- B) Whether the expected benefit of investigating is greater than the cost of investigating
- C) Whether the manager responsible agrees to an investigation
- D) Whether the variance arose in the first month of the year
Show answer & explanation
Answer: B) Whether the expected benefit of investigating is greater than the cost of investigating
Factors include the size (materiality) of the variance, whether it is controllable, any trend over several periods, the reliability of the standard and whether the benefit of investigating outweighs the cost. Favourable variances can also need investigating, for example if they come from an unrealistic standard or from cutting quality.