23-Ind-B7 Financial and Managerial Accounting · May 2013
Nivaar worked solution (AI-drafted; not reviewed by a licensed engineer)
National Examinations — May 2013 — 98-Ind-B7 Financial and Managerial Accounting. Three-hour, closed-book exam; Casio or Sharp approved calculators only. Format: Question 1 (28 marks, mandatory), Question 2 or Question 3 (28 marks, candidate's choice — both are solved below for completeness), Questions 4–7 (14+12+8+10 marks, mandatory), totaling 100 marks. Unless otherwise requested, all answers are based on Canadian GAAP (ASPE).
Reference texts: Libby, Libby & Short, Financial Accounting (Canadian ed.) — accrual accounting, transaction/journal-entry analysis, financial-statement preparation, inventory costing (FIFO/weighted-average), discontinued operations, earnings per share; Garrison, Noreen & Brewer, Managerial Accounting (Canadian ed.) — standard costing and variance analysis, flexible budgets, cash budgeting, cost-volume-profit analysis.
Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.
Given. A completed flexible-budget variance table (flexible budget, price/rate variance, quantity/efficiency variance, actual results) for two direct materials and direct labor for October.
Find. (a) A plain-language explanation of each of the four named variances; (b) which two variances warrant management investigation, with justification.
| Flexible budget | Price/Rate variance | Qty/Efficiency variance | Actual results | |
|---|---|---|---|---|
| Material A | $30,000 | $1,000 F | $3,000 U | $32,000 |
| Material B | 40,000 | 500 U | 1,500 F | 39,000 |
| Direct labor | 50,000 | 500 U | 2,500 F | 48,000 |
Part (a)(i) — Material A favorable price variance. Grey paid less per unit of Material A than the standard price allowed for — e.g. a better-negotiated purchase price, a volume discount, or a lower-grade/cheaper source of the material. This is a purchasing-department result and says nothing yet about how much material was actually used.
Part (a)(ii) — Material A unfavorable quantity variance. Production used more Material A than the standard allowed for the units actually made — possible causes include excess scrap/waste, inefficient machine settings, inadequately trained operators, or (notably) the very price saving in (i): a cheaper or lower-grade material may itself cause higher spoilage or rework, so the two variances here are plausibly linked rather than independent events.
Part (a)(iii) — Direct labor unfavorable price (rate) variance. Grey paid a higher average wage rate than the labor standard assumed — e.g. more senior/skilled workers were scheduled than planned, an overtime premium was incurred, or a wage increase has not yet been reflected in the standard rate.
Part (a)(iv) — Direct labor favorable efficiency variance. Fewer labor hours were used than the standard allowed for the actual output — consistent with (iii): the more experienced (and more expensive) workforce implied by the unfavorable rate variance would plausibly also work faster than the standard assumes, trading a higher rate for fewer hours.
Part (b) — which two variances to investigate. Management-by-exception directs attention to the variances that are large in both dollar terms and as a percentage of the flexible-budget line, since a small-dollar variance on a small budget line is rarely worth the cost of investigating:
| Variance | $ amount | % of budget line |
|---|---|---|
| Material A quantity variance | $3,000 U | 10.0% |
| Direct labor efficiency variance | $2,500 F | 5.0% |
| Material B quantity variance | $1,500 F | 3.75% |
| Material A price variance | $1,000 F | 3.3% |
| Direct labor price variance | $500 U | 1.0% |
| Material B price variance | $500 U | 1.25% |
The Material A quantity variance ($3,000 U, 10% of its budget line — the largest of all six by both measures) and the direct labor efficiency variance ($2,500 F, 5% of its budget line — the second largest) stand out from the rest. The material variance is unfavorable and controllable at the production-floor level, so it is the clearer candidate for corrective action; the labor variance, although favorable, is large enough that it may signal the labor standard itself is too loose (over-budgeted hours) rather than a genuinely repeatable efficiency gain — a favorable variance this size is still worth understanding so the standard can be tightened for future budgets, not just accepted as good news.
