CPA Quiz: Analyze Budget Variances
20 questions · exam conditions
0:00
Analyze Budget VariancesQuestion 1 of 20

Ridgewood Manufacturing's standard allows 3 pounds of aluminum per unit at $5.00 per pound. During July, 800 units were produced using 2,600 pounds of aluminum. What is the direct materials quantity variance?

$2,600 unfavorable
$1,000 favorable
$1,000 unfavorable
$13,000 favorable
← Back to quizzes

CPA Quiz

CPA Quiz: Analyze Budget Variances

Practice Analyze Budget Variances in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Analyze Budget Variances, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Ridgewood Manufacturing's standard allows 3 pounds of aluminum per unit at $5.00 per pound. During July, 800 units were produced using 2,600 pounds of aluminum. What is the direct materials quantity variance?

  1. $2,600 unfavorable
  2. $1,000 favorable
  3. $1,000 unfavorable (correct answer)
  4. $13,000 favorable
Explanation: Materials quantity variance = (AQ - SQ) x SP. Standard quantity for actual production = 800 x 3 = 2,400 lbs. MQV = (2,600 - 2,400) x $5.00 = $1,000 unfavorable. More material was used than the standard allowed, which is an unfavorable result. Option A confuses the actual quantity amount with the variance calculation. Option B applies the correct formula but labels the direction incorrectly. Option D multiplies the actual quantity by the standard price rather than computing the variance.

Question 2

Sumner Products' standard for Component Y is 4 units at $7.50 each. During October, 1,200 finished goods units were produced. Actual usage was 4,600 units of Component Y purchased and used at $8.00 each. What is the direct materials price variance?

  1. $800 unfavorable
  2. $2,300 unfavorable (correct answer)
  3. $1,500 favorable
  4. $2,300 favorable
Explanation: Materials price variance = (AP - SP) x AQ = ($8.00 - $7.50) x 4,600 = $0.50 x 4,600 = 2,300unfavorable.Theactualpriceexceededthestandardpriceforthequantitypurchased,makingthevarianceunfavorable.OptionAisthetotaldirectmaterialsvariance(price+quantitycombined),notthepricecomponentalone.OptionCisthematerialsquantityvariance(2,300 unfavorable. The actual price exceeded the standard price for the quantity purchased, making the variance unfavorable. Option A is the total direct materials variance (price + quantity combined), not the price component alone. Option C is the materials quantity variance (1,500 favorable), not the price variance. Option D applies the correct formula but labels the direction incorrectly.

Question 3

A company's variance investigation policy requires review when a variance exceeds $2,500 or 4% of standard cost, whichever threshold is smaller. Standard material cost for a product is $45,000 and the reported variance is $1,900. Should this variance be investigated, and why?

  1. No, because the dollar threshold of $2,500 has not been exceeded
  2. No, because neither threshold has been technically exceeded
  3. Yes, because the $2,500 dollar threshold governs and is exceeded
  4. Yes, because the 4% threshold equals $1,800, and the $1,900 variance exceeds it (correct answer)
Explanation: The 4% threshold = 4% x $45,000 = $1,800. The dollar threshold = $2,500. The operative trigger is the smaller of the two thresholds, which is $1,800. Since $1,900 exceeds $1,800, the variance meets the investigation criteria. Option A is incorrect because the relevant benchmark is not the dollar threshold but the smaller percentage-based threshold. Option B is incorrect because $1,900 does exceed the 1,800threshold.OptionCmisidentifieswhichthresholdisoperative;thedollarthreshold(1,800 threshold. Option C misidentifies which threshold is operative; the dollar threshold (2,500) has not been exceeded, but the policy requires investigation when either threshold is triggered.

Question 4

A company consistently reports large unfavorable direct labor efficiency variances each period despite no unusual operational disruptions. Investigation reveals the current standard was derived from time-and-motion studies conducted under ideal conditions with no machine downtime or material delays. Which of the following corrective actions is most appropriate?

  1. Revise the standard to an attainable level that reflects normal operating conditions, including typical downtime (correct answer)
  2. Require workers to achieve the ideal standard before year-end in order to eliminate the accumulated variance
  3. Suspend direct labor variance reporting until operations can match the conditions used to set the standard
  4. Transfer accountability for the variance from the production department to the facilities management team
Explanation: Standards set under ideal (perfect) conditions consistently produce unfavorable variances that carry no diagnostic value - they simply reflect normal operational reality rather than genuine inefficiency. Revising the standard to an attainable level (achievable under normal, not perfect, conditions) restores the variance's usefulness as a management control signal. Option B ignores the root cause and places unrealistic demands on workers for conditions outside their control. Option C eliminates a useful monitoring tool rather than calibrating it properly. Option D shifts accountability without addressing the underlying standard-setting problem.

Question 5

Windlass Corp. reports for the quarter: direct materials price variance $4,200 favorable, direct materials quantity variance $6,800 unfavorable, direct labor rate variance $2,100 unfavorable, direct labor efficiency variance $5,400 favorable. Which of the following statements best characterizes the overall performance implied by these variances?

  1. The company achieved strong cost control across all dimensions, with net favorable variances on every component
  2. Labor inefficiency was the primary driver of adverse results while materials were managed below standard cost
  3. Materials purchasing drove all favorable results while labor performance was poor on both rate and efficiency
  4. Production efficiency was generally strong, though material waste and above-standard labor rates created partial offsets (correct answer)
Explanation: Net variance = +$4,200 - $6,800 - $2,100 + 5,400=+5,400 = +700 favorable overall. The favorable items - materials price savings and labor efficiency - indicate favorable procurement pricing and efficient use of worker time. The unfavorable items - materials quantity excess and labor rate premium - indicate material waste and above-standard wage rates. Together, the pattern reflects solid production efficiency (favorable labor efficiency) offset by a materials waste problem and a rate cost pressure. Option A is incorrect because two of four variances are unfavorable. Option B is incorrect because the labor efficiency variance was strongly favorable. Option C misstates the labor position by ignoring the favorable efficiency result.

Question 6

A company set its predetermined fixed overhead rate using practical capacity of 50,000 machine hours with budgeted fixed overhead of $200,000. During the period, 42,000 machine hours were used for actual production. What does the resulting fixed overhead volume variance indicate?

  1. The company over-absorbed fixed overhead because it operated near practical capacity
  2. The company under-absorbed fixed overhead because actual production fell below practical capacity (correct answer)
  3. The fixed overhead budget variance exceeded the volume variance for the period
  4. Variable overhead costs were insufficient to cover fixed costs at the actual production level
Explanation: Standard rate = $200,000 / 50,000 = $4.00 per machine hour. Absorbed = 42,000 x $4.00 = $168,000. Volume variance = $168,000 - $200,000 = $32,000 unfavorable. With 8,000 hours of unused capacity, $32,000 of budgeted fixed cost was not absorbed into product cost. Option A is incorrect because production was below, not at, practical capacity. Option C cannot be evaluated from the given data and does not describe the volume variance. Option D confuses fixed and variable overhead components.

Question 7

Which of the following formulas correctly calculates the direct materials price variance?

  1. (Actual price - Standard price) x Actual quantity purchased (correct answer)
  2. (Actual price - Standard price) x Standard quantity for actual production
  3. (Actual quantity used - Standard quantity allowed) x Standard price
  4. (Actual quantity used - Standard quantity allowed) x Actual price
Explanation: The direct materials price variance = (AP - SP) x AQ purchased. It isolates the cost of paying more or less than the standard price, applied to the actual quantity purchased. Option B uses standard quantity, which is the quantity variance formula component. Options C and D describe the materials quantity variance formula, not the price variance.

Question 8

Lakemont Company reports a favorable direct materials price variance of $9,000 and an unfavorable direct materials quantity variance of $14,000 for the month. Which of the following most likely explains this combination of results?

  1. Higher-quality materials were purchased at a premium, leading to less waste in production
  2. The purchasing department negotiated better payment terms and production reduced scrap simultaneously
  3. Lower-grade materials were purchased at a discount, resulting in excessive waste during production (correct answer)
  4. Workers were more productive than standard, which offset a price increase from the supplier
Explanation: A favorable price variance combined with an unfavorable quantity variance is the classic pattern of lower-grade materials purchased at a discount, where the savings on price are more than offset by excess waste, spoilage, or defects during production. Option A describes the opposite pattern - premium materials would produce an unfavorable price variance and likely a favorable quantity variance. Option B would produce favorable variances on both components, not one favorable and one unfavorable. Option D conflates labor productivity with materials usage and does not explain a price reduction.

Question 9

Kellner Industries' budgeted fixed overhead for the month is $72,000. Actual fixed overhead incurred was $75,600. What is the fixed overhead budget (spending) variance?

  1. $3,600 unfavorable (correct answer)
  2. $3,600 favorable
  3. $75,600 unfavorable
  4. $147,600 unfavorable
Explanation: Fixed overhead budget variance = Actual fixed OH - Budgeted fixed OH = $75,600 - $72,000 = $3,600 unfavorable. Actual spending exceeded the fixed overhead budget. Option B applies the correct formula but labels the direction incorrectly. Options C and D represent amounts that would result from misidentifying total actual overhead or adding actual and budgeted amounts rather than computing the difference.

Question 10

Harrisburg Co.'s static budget was prepared for 3,200 units of production using 9,600 standard direct labor hours. Actual production was 3,500 units completed in 10,850 actual hours. What is the standard hours allowed for actual production when constructing a flexible budget?

  1. 10,850 hours
  2. 9,600 hours
  3. 10,500 hours (correct answer)
  4. 11,200 hours
Explanation: Standard hours per unit = 9,600 / 3,200 = 3.0 hours. Flexible budget standard hours for actual production = 3,500 x 3.0 = 10,500 hours. The flexible budget adjusts allowed input quantities to match actual output, isolating efficiency differences from volume differences. Option A is actual hours worked - using this would eliminate any labor efficiency variance. Option B is the static budget hours, which reflect planned volume, not actual volume. Option D does not follow from the standard rate and is a fabricated figure.

Question 11

A division's year-end report shows revenue 8% above budget while operating expenses are 15% above budget, producing an unfavorable operating income variance. Which of the following is the most appropriate first step in analyzing this result?

  1. Reduce next year's expense budget to prevent recurrence of the overrun
  2. Decompose the expense overrun by cost category to identify the specific drivers (correct answer)
  3. Issue a corrective action plan requiring the division to eliminate all discretionary spending immediately
  4. Calculate the division's return on investment and compare it to the prior-year figure
Explanation: Effective variance investigation begins with decomposition - identifying which expense categories drove the overrun. Without knowing whether excess costs are in labor, materials, overhead, or selling and administrative items, management cannot take targeted corrective action. Option A is premature without understanding root causes and would likely produce an unrealistic budget that constrains useful spending. Option C is too aggressive before determining which costs are legitimately controllable versus those required to support higher-than-expected revenue. Option D provides useful context but does not identify what caused the expense overrun.

Question 12

Pemberton Manufacturing sets its fixed overhead rate using budgeted production of 20,000 units and budgeted fixed overhead of $80,000. Actual production was 22,000 units and actual fixed overhead was $81,500. What is the fixed overhead volume variance for the period?

  1. $1,500 unfavorable
  2. $3,600 favorable
  3. $1,500 favorable
  4. $8,000 favorable (correct answer)
Explanation: Standard fixed OH rate = $80,000 / 20,000 = $4.00 per unit. Absorbed fixed OH = 22,000 x $4.00 = $88,000. Volume variance = Absorbed - Budgeted = $88,000 - $80,000 = 8,000favorable.Producingabovethedenominatorvolumeabsorbsmorefixedoverheadthanbudgeted,creatingafavorablevolumevariance.OptionAisthefixedoverheadbudget(spending)variance(8,000 favorable. Producing above the denominator volume absorbs more fixed overhead than budgeted, creating a favorable volume variance. Option A is the fixed overhead budget (spending) variance (81,500 - $80,000 = $1,500 unfavorable), not the volume variance. Option B is an incorrect amount. Option C applies the spending variance amount but with an incorrect direction.

Question 13

Thornfield Co. has a variable overhead standard of $6.00 per direct labor hour. During September, 4,200 direct labor hours were worked and actual variable overhead totaled $26,460. What is the variable overhead spending variance?

  1. $1,260 unfavorable (correct answer)
  2. $1,260 favorable
  3. $2,460 unfavorable
  4. $460 favorable
Explanation: Variable overhead spending variance = Actual variable OH - (Standard rate x Actual hours) = 26,460−(26,460 - (6.00 x 4,200) = $26,460 - $25,200 = $1,260 unfavorable. Actual overhead exceeded what was expected at the actual hours level. Option B applies the correct formula but labels the direction incorrectly. Option C subtracts the standard rate from actual overhead without multiplying by hours. Option D results from an arithmetic error in the base calculation.

Question 14

A company sells two products: Premium (contribution margin $30 per unit) and Standard (contribution margin $12 per unit). Budgeted sales mix was 40% Premium and 60% Standard. Actual mix was 55% Premium and 45% Standard, with total units sold equal to the budgeted total. What is the most likely direction and explanation of the sales mix variance?

  1. Unfavorable, because the Standard product fell short of its targeted sales proportion
  2. Unfavorable, because total units sold did not increase above the budgeted total
  3. Favorable, because a higher proportion of the higher-margin product was sold than budgeted (correct answer)
  4. Zero, because total unit sales were equal to the budgeted total
Explanation: The sales mix variance measures the impact of selling products in proportions different from budget, holding total units constant at the budgeted mix. Selling more of Premium (CM $30) and less of Standard (CM $12) raises the weighted-average contribution margin above budget, producing a favorable mix variance. Option A correctly notes Standard fell short of its target but misidentifies the net direction; the gain from the Premium shift outweighs the Standard shortfall. Option B is incorrect - total units versus budget is captured by the sales volume variance, not the mix variance. Option D is incorrect because equal total units does not prevent a mix variance when proportions differ from budget.

Question 15

Sumner Products' standard for Component Y is 4 units at $7.50 each. During October, 1,200 finished goods units were produced. Actual usage was 4,600 units of Component Y purchased and used at $8.00 each. What is the total direct materials variance for the period?

  1. $800 unfavorable (correct answer)
  2. $2,300 unfavorable
  3. $1,500 favorable
  4. $3,800 unfavorable
Explanation: Standard cost for actual production = 1,200 x 4 x $7.50 = $36,000. Actual cost = 4,600 x $8.00 = $36,800. Total DM variance = $36,000 - $36,800 = 800unfavorable.Thiscanbeconfirmedbydecomposing:thepricevarianceis(800 unfavorable. This can be confirmed by decomposing: the price variance is (8.00 - $7.50) x 4,600 = $2,300 unfavorable, and the quantity variance is (4,600 - 4,800) x $7.50 = $1,500 favorable, netting to $800 unfavorable. Option B represents only the price variance component. Option C represents only the quantity variance, stated in the favorable direction. Option D combines incorrect sub-amounts.

Question 16

Pemberton Manufacturing's fixed overhead rate is based on budgeted production of 20,000 units with budgeted fixed overhead of $80,000. Actual production was 22,000 units and actual fixed overhead was $81,500. What does the fixed overhead volume variance indicate about this period?

  1. Actual fixed overhead costs exceeded the budget by $1,500
  2. Fixed overhead was under-absorbed because production fell below the denominator level
  3. Fixed overhead was over-absorbed because actual production exceeded the denominator level (correct answer)
  4. Variable overhead costs were higher than anticipated for the actual output achieved
Explanation: Standard rate = $80,000 / 20,000 = $4.00 per unit. Absorbed fixed OH = 22,000 x $4.00 = $88,000. Volume variance = $88,000 - $80,000 = 8,000favorable.Becauseactualproductionexceededthedenominatorvolumeusedtosettherate,morefixedoverheadwasabsorbedintoproductcostthanwasbudgeted−afavorableover−absorption.OptionAdescribesthebudget(spending)variance(8,000 favorable. Because actual production exceeded the denominator volume used to set the rate, more fixed overhead was absorbed into product cost than was budgeted - a favorable over-absorption. Option A describes the budget (spending) variance (81,500 - $80,000 = $1,500 unfavorable), not the volume variance. Option B is incorrect because production exceeded the denominator; under-absorption occurs when production is below the denominator level. Option D confuses fixed and variable overhead components.

Question 17

Crestline Corp. budgeted sales of 8,000 units with a contribution margin of $12.00 per unit. Actual unit sales for the period were 7,600 units. What is the sales volume variance expressed in contribution margin terms?

  1. $4,800 unfavorable (correct answer)
  2. $4,800 favorable
  3. $91,200 unfavorable
  4. $96,000 unfavorable
Explanation: Sales volume variance = (Actual units - Budgeted units) x Budgeted CM per unit = (7,600 - 8,000) x $12.00 = -400 x $12.00 = 4,800unfavorable.Selling400fewerunitsthanbudgetedreducedcontributionmarginbelowthetarget.OptionBappliesthecorrectformulabutlabelsthedirectionincorrectly.OptionCmultipliesactualunitsbythebudgetedCM(4,800 unfavorable. Selling 400 fewer units than budgeted reduced contribution margin below the target. Option B applies the correct formula but labels the direction incorrectly. Option C multiplies actual units by the budgeted CM (91,200), which represents total actual contribution at standard, not the variance. Option D represents total budgeted contribution margin ($96,000), not the variance.

Question 18

Peakwood Manufacturing reports an unfavorable direct labor rate variance of $6,500 and a favorable direct labor efficiency variance of $10,200 for November. Which of the following most likely explains this pattern?

  1. Less-experienced workers were hired at lower-than-standard rates but required more training hours to complete tasks
  2. Workers were paid the standard rate throughout November but produced at a slower pace than planned
  3. Overtime premiums increased the effective hourly cost and workers also took longer than standard to complete work
  4. Higher-skilled workers were employed at above-standard rates and completed work in fewer hours than standard (correct answer)
Explanation: An unfavorable rate variance combined with a favorable efficiency variance indicates workers cost more per hour than standard but used fewer total hours than allowed. This pattern is consistent with deploying higher-skilled or more experienced workers. Option A describes the reverse pattern - lower rates and more hours - which would produce a favorable rate variance and unfavorable efficiency variance. Option B would produce only an unfavorable efficiency variance with no rate variance. Option C would produce unfavorable results on both the rate and efficiency variances.

Question 19

When evaluating a production manager's controllable performance, which of the following budget variances is most directly within that manager's authority to influence?

  1. Direct materials price variance
  2. Fixed overhead volume variance
  3. Direct labor efficiency variance (correct answer)
  4. Corporate overhead allocation variance
Explanation: The direct labor efficiency variance measures how effectively workers used their time relative to standard - a factor the production manager can influence through scheduling, supervision, training, and process management. Option A (materials price variance) is primarily the responsibility of the purchasing department, which negotiates supplier contracts. Option B (fixed overhead volume variance) reflects the gap between actual and planned production volume, which is often driven by sales demand and capacity decisions outside the production manager's direct authority. Option D is an allocated cost with no connection to production floor decisions.

Question 20

Meridian Goods budgeted sales of 10,000 units at $25.00 per unit. Actual sales were 10,500 units at $23.50 per unit. What is the sales price variance?

  1. $12,500 unfavorable
  2. $12,500 favorable
  3. $15,750 favorable
  4. $15,750 unfavorable (correct answer)
Explanation: Sales price variance = (Actual price - Budgeted price) x Actual units sold = ($23.50 - 25.00)x10,500=−25.00) x 10,500 = -1.50 x 10,500 = $15,750 unfavorable. The actual selling price fell below the budgeted price, which is an unfavorable result for revenue. Option A uses budgeted units (10,000) instead of actual units (10,500) sold. Option B uses budgeted units and incorrectly labels the direction. Option C uses actual units but incorrectly labels the direction as favorable.