FLEXIBLE BUDGETS, VARIANCES, AND MANAGEMENT CONTROL
7-1
Management by exception is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected. Variance analysis helps managers identify areas not operating as expected. The larger the variance, the more likely an area is not operating as expected.
7-2
Two sources of information about budgeted amounts are
(a) past amounts and
(b) detailed engineering studies.
7-3
A favorable variance––denoted F––is a variance that increases operating income relative to the budgeted amount.
An unfavorable variance––denoted U––is a variance that decreases operating income relative to the budgeted amount.
7-4
The key difference is the output level used to set the budget. A static budget is based on the level of output planned at the start of the budget period. A flexible budget is developed using budgeted revenues or cost amounts based on the actual output level in the budget period. The actual level of output is not known until the end of the budget period.
7-5
A Level 2 flexible-budget analysis enables a manager to distinguish how much of the difference between an actual result and a budgeted amount is due to
(a) differences between actual and budgeted output levels, and
(b) differences between actual and budgeted selling prices, variable costs, and fixed costs.
7-6
The steps in developing a flexible budget are:
Step 1: Identify the actual quantity of output.
Step 2: Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output.
Step 3: Calculate the flexible budget for costs based on budgeted variable costs per output unit, actual quantity of output, and budgeted fixed costs.
7-7
Four reasons for using standard costs are:
(i) cost management,
(ii) pricing decisions,
(iii) budgetary planning and control, and
(iv) financial statement preparation.
7-8
A manager should subdivide the flexible-budget variance for direct materials into a price variance (that reflects the difference between actual and budgeted prices of direct materials) and an efficiency variance (that reflects the difference between the actual and budgeted quantities of direct materials used to produce actual output). The individual causes of these variances can then be investigated, recognizing possible interdependencies across these individual causes.
7-9
Possible causes of a favorable materials price variance are:
• purchasing officer negotiated more skillfully than was planned in the budget,
• purchasing manager bought in larger lot sizes than budgeted, thus obtaining quantity discounts, • materials prices decreased unexpectedly due to, say, industry oversupply,
• budgeted purchase prices were set without careful analysis of the market, and
• purchasing manager received unfavorable terms on nonpurchase price factors (such as lower quality materials).
7-11
Budgeted costs can be successively reduced over consecutive time periods to incorporate continuous improvement. The chapter uses the phrase continuous improvement budgeted costs to describe this approach.
7-12
An individual business function, such as production, is interdependent with other business functions. Factors outside of production can explain why variances arise in the production area. For example:
• poor design of products or processes can lead to a sizable number of defects,
• marketing personnel making promises for delivery times that require a large number of rush orders can create production-scheduling difficulties, and
• purchase of poor-quality materials by the purchasing manager can result in defects and waste.
7-13
The plant supervisor likely has good grounds for complaint if the plant accountant puts excessive emphasis on using variances to pin blame. The key value of variances is to help understand why actual results differ from budgeted amounts and then to use that knowledge to promote learning and continuous improvement.
7-14
Variances can be calculated at the activity level as well as at the company level. For example, a price variance and an efficiency variance can be computed for an activity area.
7-15
Evidence on the costs of other companies is one input managers can use in setting the performance measure for next year. However, caution should be taken before choosing such an amount as next year's performance measure. It is important to understand why cost differences across companies exist and whether these differences can be eliminated. It is also important to examine when planned changes (in, say, technology) next year make even the current low-cost producer not a demanding enough hurdle.
7-16 Flexible budget.
1.
a $112 × 2,800 = $313,600
b $110 × 2,800 = $308,000
c $110 × 3,000 = $330,000
d Given. Unit variable cost = $229,600 ÷ 2,800 = $82 per tire
e $74 × 2,800 = $207,200
f $74 × 3,000 = $222,000
G Given
2.
The key information items are:
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The total static-budget variance in operating income is $20,000 U. There is both an unfavorable total flexible-budget variance ($12,800) and an unfavorable sales-volume variance ($7,200).
The unfavorable sales-volume variance arises solely because actual units manufactured and sold were 200 less than the budgeted 3,000 units. The unfavorable flexible-budget variance of $12,800 in operating income is due primarily to the $8 increase in unit variable costs. This increase in unit variable costs is only partially offset by the $2 increase in unit selling price and the $4,000 decrease in fixed costs.
7-17 Flexible budget preparation and analysis.
1.
Variance Analysis for Bank Management Printers for September 2004
Level 1 Analysis
2.
Level 2 Analysis
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a 12,000 × $21 = $252,000 d 12,000 × $7 = $ 84,000
b 12,000 × $20 = $240,000 e 12,000 × $8 = $ 96,000
c 15,000 × $20 = $300,000 f 15,000 × $8 = $120,000
3.
Level 2 analysis provides a breakdown of the static-budget variance into a flexible-budget variance and a sales-volume variance. The primary reason for the static-budget variance being unfavorable ($17,000 U) is the reduction in unit volume from the budgeted 15,000 to an actual 12,000. One explanation for this reduction is the increase in selling price from a budgeted $20 to an actual $21. Operating management was able to reduce variable costs by $12,000 relative to the flexible budget. This reduction could be a sign of efficient management. Alternatively, it could be due to using lower quality materials (which in turn adversely affected unit volume).
7-18 Flexible budget, working backward.
1.
a 650,000 × $3.50 = $2,275,000
b 650,000 × $2.00 = 1,300,000
2.
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3.
The CEO’s reaction was inappropriate. A zero total static-budget variance may be due to offsetting total flexible-budget and total sales-volume variances. In this case, these two variances exactly offset each other:
Total flexible-budget variance = $75,000 Unfavorable
Total sales-volume variance .. = $75,000 Favorable
A closer look at the variance components reveals some major deviations from plan. Actual variable costs increased from $2.00 to $3.96, causing an unfavorable flexible-budget variable cost variance of $1,275,000. Such an increase could be a result of, for example, a jump in platinum prices. Specialty Balls was able to pass most of the increase in costs onto their customers - average selling price went up about 57%, bringing about an offsetting favorable flexible-budget revenue variance in the amount of $1,300,000. An increase in the actual number of units sold also contributed to more favorable results. Although such an increase in quantity in the face of a price increase may appear counter-intuitive, customers may have forecast higher future platinum prices and therefore decided to stock up.
4.
The most important lesson learned here is that a superficial examination of summary level data (Levels 0 and 1) may be insufficient. It is imperative to scrutinize data at a more detailed level (Level 2). Had Specialty Balls not been able to pass costs on to customers, losses would have been considerable.
7-20 Price and efficiency variances.
1.
The key information items are:
Peterson budgets to obtain 4 pumpkin scones from each pound of pumpkin.
The flexible-budget variance is $408 F.
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a 16,000 × $0.82 = $13,120
b 60,800 × 0.25 × $0.89 = $13,528
c 60,000 × 0.25 × $0.89 = $13,350
2.
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a 16,000 × $0.82 = $13,120
b 16,000 × $0.89 = $14,240
c 60,800 × 0.25 × $0.89 = $13,528
3.
The favorable flexible-budget variance of $408 has two offsetting components:
(a) favorable price variance of $1,120––reflects the $0.82 actual purchase cost being lower than the $0.89 budgeted purchase cost per pound.
(b) unfavorable efficiency variance of $712–-reflects the actual materials yield of 3.80 scones per pound of pumpkin (60,800 ÷ 16,000 = 3.80) being less than the budgeted yield of 4.00 (60,000 ÷ 15,000 = 4.00). (The company used more pumpkins (materials) to make the scones than was budgeted.)
One explanation may be that Peterson purchased lower quality pumpkins at a lower cost per pound.
7-21 Materials and manufacturing labor variances.
7-23 Price and efficiency variances, journal entries.
1.
Direct materials and direct manufacturing labor are analyzed in turn:
a $310,000 ÷ 100,000 = $3.10
b $102,900 ÷ 4,900 = $21
2.
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3.
Some students’ comments will be immersed in conjecture about higher prices for materials, better quality materials, higher grade labor, better efficiency in use of materials, and so forth. A possibility is that approximately the same labor force, paid somewhat more, is taking slightly less time with better materials and causing less waste and spoilage.
A key point in this problem is that all of these efficiency variances are likely to be insignificant. They are so small as to be nearly meaningless. Fluctuations about standards are bound to occur in a random fashion. Practically, from a control viewpoint, a standard is a band or range of acceptable performance rather than a single-figure measure.
4.
The purchasing point is where responsibility for price variances is found most often. The production point is where responsibility for efficiency variances is found most often. Chemical Inc. may calculate variances at different points in time to tie in with these different responsibility areas.
7-24 Continuous improvement. (continuation of 7-23)
1.
Standard quantity input amounts per output unit are:
2.
The answer to requirement 1 of Question 7-23 is identical except for the flexible- budget amount.
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a $310,000 ÷ 100,000 = $3.10
b $102,900 ÷ 4,900 = $21
Using continuous improvement standards sets a tougher benchmark. The efficiency variances for January (from Exercise 7-23) and March (from Exercise 7-24) are:
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Note that the question assumes the continuous improvement applies only to quantity inputs. An alternative approach is to have continuous improvement apply to budgeted input cost per output unit ($30 for direct materials in January and $10 for direct manufacturing labor in January). This approach is more difficult to incorporate in a Level 2 variance analysis, as Level 2 requires separate amounts for quantity inputs and the cost per input.
7-25 Materials and manufacturing labor variances, standard costs.
1.
Direct Materials
The unfavorable materials price variance may be unrelated to the favorable materials efficiency variance. For example,
(a) the purchasing officer may be less skillful than assumed in the budget, or
(b) there was an unexpected increase in materials price per square yard due to reduced competition.
Similarly, the favorable materials efficiency variance may be unrelated to the unfavorable materials price variance. For example,
(a) the production manager may have been able to employ higher-skilled workers, or
(b) the budgeted materials standards were set too loosely.
It is also possible that the two variances are interrelated. The higher materials input price may be due to higher quality materials being purchased. Less material was used than budgeted due to the high quality of the materials.
Direct Manufacturing Labor
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The favorable labor price variance may be due to, say,
(a) a reduction in labor rates due to a recession, or
(b) the standard being set without detailed analysis of labor compensation.
The favorable labor efficiency variance may be due to, say,
(a) more efficient workers being employed,
(b) a redesign in the plant enabling labor to be more productive, or
(c) the use of higher quality materials.
2.
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7-26 Journal entries and T-accounts (continuation of 7-25).
a.
b.
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b.
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Requirement 2 from Exercise 7-25:
The following journal entries pertain to the measurement of price variances when materials of 600,000 are purchased:
a1.
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a2.
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The difference between standard costing and normal costing for direct cost items is:
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These journal entries differ from the normal costing entries because Work-in-Process Control is no longer carried at “actual” costs. Furthermore, Materials Control can also be carried at standard unit prices rather than actual unit prices. Finally, variances appear for direct materials and direct manufacturing labor under standard costing but not under normal costing.
7-27 Flexible budget (Refer to data Exercise 7-25).
The manager’s glee may be warranted, but the magnitude of the favorable variances may be deceptively large. Furthermore, if the manager had aimed at a scheduled production of 24,000 units, he or she may be troubled at the inability to obtain that output target. A more detailed analysis underscores the fact that the world of variances may be divided into three general parts: price, efficiency, and what is labeled here as a sales-volume variance. Failure to pinpoint these three categories muddies the analytical task. The clearer analysis follows (in dollars):
(a) Price variance
(b) Efficiency variance
(c) Sales-volume variance
The sales-volume variances are favorable here in the sense that less cost would be expected solely because the output level is less than budgeted. However, this is an example of how variances must be interpreted cautiously. The general manager may be incensed at the failure to reach scheduled production (it may mean fewer sales) even though the 20,000 units were turned out with supreme efficiency. Sometimes this phenomenon is called being efficient but ineffective, where effectiveness is defined as the ability to reach original targets and efficiency is the optimal relationship of inputs to any given outputs. Note that a target can be reached in an efficient or inefficient way; similarly, as this problem illustrates, a target can be missed but the given output can be attained efficiently.
7-28 Activity-based costing, flexible-budget variances for finance function activities.
1.
Receivables
Receivables is an output unit level activity. Its flexible-budget variance can be calculated as follows:
Flexible budget variance
= Actual costs – Flexible budget costs
= ($0.75 × 948,000) – ($0.639 × 948,000)
= $711,000 – $605,772
= $105,228 U
Payables
Payables is a batch level activity.
Step 1:
The number of batches in which payables should have been processed
= 948,000 actual units ÷ 5 budgeted units per batch
= 189,600 batches
Step 2:
The flexible-budget amount for payables
= 189,600 batches × $2.90 budgeted cost per batch
= $549,840
The flexible-budget variance can be computed as follows:
Flexible-budget variance
= Actual costs – Flexible-budget costs
= (212,175 × $2.80) – (189,600 × $2.90)
= $594,090 – $549,840 = $44,250 U
Travel expenses
Travel expenses are a batch level activity.
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Step 1:
The number of batches in which the travel expense should have been processed
= 948,000 actual units ÷ 500 budgeted units per batch
= 1,896 batches
Step 2:
The flexible-budget amount for travel expenses
= 1,896 batches × $7.60 budgeted cost per batch
= $14,410
The flexible budget variance can be calculated as follows:
Flexible budget variance
= Actual costs – Flexible-budget costs
= (1,890 × $7.40) – (1,896 × $7.60)
= $13,986 – $14,410 = $424 F
2.
The flexible budget variances can be subdivided into price and efficiency variances.
Price variance
= (Actual price of input – Budgeted price of input)
...× Actual quantity of input
Efficiency variance
= (Act. qty of input used – Budgeted qty of input allowed for act. output)
...x Budgeted price of input
Receivables
Price Variance
= ($0.750 – $0.639) × 948,000
= $105,228 U
Efficiency variance
= (948,000 – 948,000) × $0.639
= $0
Payables
Price variance
= ($2.80 – $2.90 ) × 212,175
= $21,218 F
Efficiency variance
= (212,175 – 189,600) × $2.90
= $65,468 U
Travel expenses
Price variance
= ($7.40 – $7.60) × 1,890
= $378 F
Efficiency variance
= (1,890 – 1,896) × $7.60
= $46 F
7-30 Flexible budget, direct materials and direct manufacturing labor variances.
a Given
b $100 × 6,000 = $600,000
c $100 × 5,000 = $500,000
d $160 × 6,000 = $960,000
e $160 × 5,000 = $800,000
2.
Flexible Budget
(Budgeted Input
Actual Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output ×
× Actual Price) × Budgeted Price Budgeted Price)
Direct materials $594,000a $540,000b $600,000c
$54,000 U $60,000 F
Price variance Efficiency variance
$6,000 F
Flexible-budget variance
Direct manufacturing labor $950,000d $1,000,000e $960,000f
$50,000 F $40,000 U
Price variance Efficiency variance
$10,000 F
Flexible-budget variance
a 54,000 pounds × $11/pound = $594,000
b 54,000 pounds × $10/pound = $540,000
c 6,000 statues × 10 pounds/statue ×$10/pound = 60,000 pounds × $10/pound = $600,000
d 25,000 pounds × $38/pound = $950,000
e 25,000 pounds × $40/pound = $1,000,000
f 6,000 statues × 4 hours/statue × $40/hour = 24,000 hours × $40/hour = $960,000
7-31 Static budget, flexible budget, service sector, professional labor efficiency and effectiveness.
1.
2.
Flexible budget for November 2007:
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Level 2 Analysis
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (1) – (3) (3) (3) – (5) (5)
Loans 120 0 120 30 F 90
Revenue $134,400 $14,400 F $120,000 $30,000 $90,000
Variable costs:
Professional labor 36,288 7,488 U 28,800 7,200 U 21,600
Loan filing fees 12,000 0 12,000 3,000 U 9,000
Credit-worthiness checks 15,000 600 U 14,400 3,600 U 10,800
Courier mailings 6,480 480 U 6,000 1,500 U 4,500
Total variable costs 69,768 8,568 U 61,200 15,300 U 45,900
Contribution margin 64,632 5,832 F 58,800 14,700 F 44,100
Fixed costs 33,500 2,500 U 31,000 0 31,000
Operating income $ 31,132 $ 3,332 F $ 27,800 $14,700 $13,100
$3,332 F $14,700 F
Total flexible- Total sales-
budget variance volume variance
$18,032 F
Total static-budget variance
3. Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
(1) (2) (3)
(120 × 7.2 × $42) (120 × 7.2 × $40) (120 × 6.0 × $40)
864 hrs. × $42/hr. 864 hrs. × $40/hr. 720 hrs. ×$40/hr.
$36,288 $34,560 $28,800
$1,728 U $5,760 U
Price variance Efficiency variance
$7,488 U
Flexible-budget variance
4. Effectiveness refers to the degree to which a predetermined objective is accomplished. One objective of Meridian Finance professional labor is to maximize loan-based revenue (0.5% of loan amount × number of loans). The professional staff has increased loans from a budgeted 90 to 120, a significant increase. Additionally, the average loan amount increased from a budgeted $200,000 to $224,000. The result is an increase in revenue from the budgeted $90,000 to actual $134,400.
With both a higher number of loans and a higher average amount per loan, there was an increase in the effectiveness of professional labor in November 2007.
7-32 Comprehensive variance analysis, responsibility issues.
1a. Actual selling price = $82.00
Budgeted selling price = $80.00
Actual sales volume = 4,850 units
Selling price variance = (Actual sales price - Budgeted sales price) × Actual units
= ($82 - $80) × 4,850 = $9,700 Favorable
1b. Development of Flexible Budget
Budgeted UnitAmounts
Actual Volume
Flexible BudgetAmount
Revenues
$80.00
4,850
$388,000
Variable costs
DM-Frames
$2.20/oz. × 3.00 oz.
6.60a
4,850
32,010
DM-Lenses
$3.10/oz. × 6.00 oz.
18.60b
4,850
90,210
Direct manuf. labor
$15.00/hr. × 1.20 hrs.
18.00c
4,850
87,300
Total variable manufacturing costs
$209,520
Fixed manufacturing costs
75,000
Total manufacturing cost
284,520
Gross margin
$103,480
a$33,000 ÷ 5,000 units; b$93,000 ÷ 5,000 units; c$90,000 ÷ 5,000 units
ActualResults(1)
Flexible-BudgetVariances(2)=(1)-(3)
FlexibleBudget(3)
Sales -VolumeVariance(4)=(3)-(5)
StaticBudget(5)
Units sold
4,850
4,850
5,000
Revenues
$397,700
$ 9,700 F
$388,000
$ 12,000 U
$400,000
Variable costs
DM-frames
37,248
5,238 U
32,010
990 F
33,000
DM-lens
100,492
10,282 U
90,210
2,790 F
93,000
Direct labor
96,903
9,603 U
87,300
2,700 F
90,000
Total variable costs
234,643
25,123 U
209,520
6,480 F
216,000
Fixed manuf. costs
72,265
2,735 F
75,000
0
75,000
Total costs
306,908
22,388 U
284,520
6,480 F
291,000
Gross margin
$ 90,792
$12,688 U
$103,480
$ 5,520 U
$109,000
1c. Price and Efficiency Variances
DM-Frames-Actual ounces used = 3.20 per unit × 4,850 units = 15,520 oz.
Price per oz = $37,248/15,520 = $2.40
DM-Lenses-Actual ounces used = 7.00 per unit × 4,850 units = 33,950 oz.
Price per oz = $100,492/33,950 = $2.96
Direct Labor-Actual labor hours = $96,903/14.80 = 6,547.5 hours
Labor hours per unit = 6,547.5/4,850 units = 1.35 hours per unit
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(1)
Actual Input Qty.
× Budgeted Price
(2)
Flexible Budget
(Budgeted Input
Qty. Allowed for Actual Output
× Budgeted Price)
(3)
DirectMaterials:Frames
(4,850 × 3.2 × $2.40)
$37,248
(4,850 × 3.2 × $2.20)
$34,144
(4,850 × 3.00 × $2.20)
$32,010
$3,104 U $2,134 U
Price variance Efficiency variance
DirectMaterials:Lenses
(4,850 × 7.0 × $2.96)
$100,492
(4,850 × 7.0 × $3.10)
$105,245
(4,850 × 6.00 × $3.10)
$90,210
$4,753 F $15,035 U
Price variance Efficiency variance
DirectManuf.Labor
(4,850 × 1.35 × $14.80)
$96,903
(4,850 × 1.35 × $15.00)
$98,212.50
(4,850 × 1.20 × $15.00)
$87,300
$1,309.50 F $10,912.50 U
Price variance Efficiency variance
2.a) Possible explanations for price variances are:
(a) Purchasing and labor negotiations.
(b) Quality of frames and lenses purchased.
(c) Standards set incorrectly.
2.b) Possible explanations for efficiency variance are:
(a) Higher materials usage due to lower quality frames and lenses purchased at lower price.
(b) Lesser trained workers hired at lower rates result in higher materials usage and lower labor efficiency.
(c) Standards set incorrectly.
7-34 Level 2 variance analysis, solve for unknowns.
1. Budgeted selling price = = $ 8.00 per cap
Actual selling price = = $10.00 per cap
2. = = $3.00 per unit
= = $2.80 per unit
3., 4., 5. and 6.
ActualResults(1)
Flexible-BudgetVariances(2)=(1)-(3)
FlexibleBudget(3)
Sales -VolumeVariance(4)=(3)-(5)
StaticBudget(5)
Units sold
500,000
0
500,000
100,000 U
600,000
Revenues (sales)
$5,000,000
$1,000,000 F
$4,000,000
$800,000 U
$4,800,000
Variable costs
1,400,000
100,000 F
1,500,000
300,000 F
1,800,000
Contribution margin
3,600,000
1,100,000 F
2,500,000
500,000 U
3,000,000
Fixed costs
1,150,000
150,000 U
1,000,000
0
1,000,000
Operating income
$2,450,000
$ 950,000 F
$1,500,000
$500,000 U
$2,000,000
$500, 000 UTotal sales-volume variance
$950, 000 FTotal flexible-budget variance
$450, 000 FTotal static-budget variance
3. Flexible-budget operating income = $1,500,000
4. Total flexible-budget variance = $950,000 F
5. Total sales-volume variance = $500,000 U
6. Total static-budget variance = $450,000 F
7-35 Direct labor and direct materials variances, missing data.
1. Flexible Budget
(Budgeted Input
Actual Costs Qty. Allowed for
Incurred (Actual Actual Input Qty. Actual Output
Input Qty.× Actual Price) × Budgeted Price × Budgeted Price)
Direct manufacturing labor $368,000a $384,000b $360,000c
$16,000 F $24,000 U
Price variance Efficiency variance
$8,000 U
Flexible-budget variance
a Given (or 32,000 hours × $11.50/hour)
b 32,000 hours × $12/hour = $384,000
c 6,000 units × 5 hours/unit × $12/hour = $360,000
2. Unfavorable direct materials efficiency variance of $12,500 indicates that more pounds of direct materials were actually used than the budgeted quantity allowed for actual output.
=
= 6,250 pounds
Budgeted pounds allowed for the output achieved = 6,000 × 20 = 120,000 pounds
Actual pounds of direct materials used = 120,000 + 6,250 = 126,250 pounds
3. Actual price paid per pound =
= $1.95 per pound
4. Actual Costs Incurred Actual Input ×
(Actual Input × Actual Price) Budgeted Price
$292,500a $300,000b
$7,500 F
Price variance
a Given
b 150,000 pounds × $2/pound = $300,000
7-36 Direct materials and manufacturing labor variances, solving unknowns.
All given items are designated by an asterisk.
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(1,900 × $21)
$39,900
Actual Input Qty.
× Budgeted Price
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
Direct
Manufacturing
Labor
(1,900 × $20*)
$38,000
(4,000* × 0.5* × $20*)
$40,000
$1,900 U* $2,000 F*
Price variance Efficiency variance
Purchases Usage
Direct (13,000 × $5.25) (13,000 × $5*) (12,500 × $5*) (4,000* × 3* × $5*)
Materials $68,250* $65,000 $62,500 $60,000
$3,250 U* $2,500 U*
Price variance Efficiency variance
1. 4,000 units × 0.5 hours/unit = 2,000 hours
2. Flexible budget – Efficiency variance = $40,000 – $2,000 = $38,000
$38,000 ÷ Budgeted price of $20/hour = 1,900 hours
3. $38,000 + Price variance, $1,900 = $39,900, the actual direct manuf. labor cost
Actual rate = Actual cost ÷ Actual hours = $39,000 ÷ 1,900 hours = $21/hour
4. Standard qty. of direct materials = 4,000 units × 3 pounds/unit = 12,000 pounds
5. Flexible budget + Dir. matls. effcy. var. = $60,000 + $2,500 = $62,500
Actual quantity used = $62,500 ÷ Budgeted price per lb
= $62,500 ÷ $5/lb = 12,500 lbs
6. Actual cost of material, $68,250 – Price variance, $3,250 = $65,000
Actual qty. of materials purchased = $65,000 ÷ Budgeted price, $5/lb = 13,000 lbs.
7. Actual direct materials price = $68,250 ÷ 13,000 lbs = $5.25 per lb.
7-38 Comprehensive variance analysis review.
7. Actual Results
Units sold (80% × 1,500,000) 1,200,000
Selling price per unit $3.70
Revenues (1,200,000 × $3.70) $4,440,000
Direct materials purchased and used:
Direct materials per unit $0.80
Total direct materials cost (1,200,000 × $0.80) $960,000
Direct manufacturing labor:
Actual manufacturing rate per hour $ 15
Labor productivity per hour in units 250
Manufacturing labor-hours of input (1,200,000 ÷ 250) 4,800
Total direct manufacturing labor costs (4,800 × $15) $72,000
Direct marketing costs:
Direct marketing cost per unit $0.30
Total direct marketing costs (1,200,000 × $0.30) $360,000
Fixed costs ($900,000 - $30,000) $870,000
Static Budgeted Amounts
Units sold 1,500,000
Selling price per unit $4.00
Revenues (1,500,000 × $4.00) $6,000,000
Direct materials purchased and used:
Direct materials per unit $0.85
Total direct materials costs (1,500,000 × $0.85) $1,275,000
Direct manufacturing labor:
Direct manufacturing rate per hour $15.00
Labor productivity per hour in units 300
Manufacturing labor-hours of input (1,500,000 ÷ 300) 5,000
Total direct manufacturing labor cost (5,000 × $15.00) $75,000
Direct marketing costs:
Direct marketing cost per unit $0.30
Total direct marketing cost (1,500,000 × $0.30) $450,000
Fixed costs $900,000
Actual Static-Budgeted
Results Amounts
Revenues $4,440,000 $6,000,000
Variable costs
Direct materials 960,000 1,275,000
Direct manufacturing labor 72,000 75,000
Direct marketing costs 360,000 450,000
Total variable costs 1,392,000 1,800,000
Contribution margin 3,048,000 4,200,000
Fixed costs 870,000 900,000
Operating income $2,178,000 $3,300,000
2.
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3, 4, and 5.
Actual
Results
Flexible-Budget
Variances
Flexible
Budget
Sales-Volume
Variances
Static
Budget
Units sold
1,200,000
0
1,200,000
300,000
1,500,000
Revenues
Variable costs
Direct materials
Direct manuf. labor
Direct marketing costs Total variable costs
$4,440,000
960,000
72,000
360,000
1,392,000
$360,000 U
60,000 F
12,000 U
0
48,000 F
$4,800,000
1,020,000
60,000
360,000
1,440,000
$1,200,000 U
255,000 F
15,000 F
90,000 F
360,000 F
$6,000,000
1,275,000
75,000
450,000
1,800,000
Contribution margin
3,048,000
312,000 U
3,360,000
840,000 U
4,200,000
Fixed costs
870,000
30,000 F
900,000
0
900,000
Operating income
$2,178,000
$282,000 U
$2,460,000
$ 840,000 U
$3,300,000
$840, 000 UTotal sales-volume variance
$1,122,000 UTotal static-budget variance
$282, 000 UTotal flexible-budget variance
6, and 7.
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
Flexible Budget
(Budgeted Input
Qty. Allowed for Actual Output
× Budgeted Price)
Direct.
Manuf.
Labor
(4,800 × $15.00)
$72,000
(4,800 × $15.00)
$72,000
(*4,000 × $15.00)
$60,000
$0 $12,000 U
Price variance Efficiency variance
$12,000 U
Flexible-budget variance
* 1,200,000 units ÷ 300 direct manufacturing labor standard productivity rate per hour.
7-39 Flexible budgeting, activity-based costing, variance analysis.
Step 1:
The number of batches in which the actual output units should have been produced:
= 22,500 actual units ÷ 250 budgeted batch size
= 90 batches
Step 2:
The number of cleaning labor-hours that should have been used:
= 3 budgeted hours per batch × 90 batches
= 270 cleaning labor-hours
Step 3:
The flexible-budget amount for cleaning labor-hours:
= 270 cleaning labor-hours × budgeted cost per cleaning labor-hours, $14
= $3,780
Flexible-budget variance
= Actual costs – Flexible-budget costs
= (350 × $12.50) – (270 × $14)
= $4,375 – $3,780 = $595 U
2.
Price variance
= (Actual price of input – Budgeted price of input)
...× Actual quantity of input
= ($14.00 – $12.50) × 350
= $525 F
Efficiency variance
= (Actual quantity of input used
...– Budgeted quantity of input allowed for actual output)
...x Budgeted price of input
= (350 – 270) × $14
= $1,120 U
The unfavorable flexible-budget variance of $595 is comprised of two offsetting amounts.
· Price variance of $525 F due to the actual cost of $12.50 per hour being fewer than the budgeted $14.00 per hour.
· Efficiency variance of $1,120 U due to the
(1) actual batch size of 225 units being below the budgeted size of 250 units, and
(2) higher actual cleaning labor-hours per batch of 3.5 hours instead of budgeted cleaning labor-hours per batch of 3 hours.
Toymaster should investigate various explanations as to why this occurred.
7-40 Price and efficiency variances, problems in standard setting, benchmarking.
1.
Budgeted direct materials input per shirt
= 400 rolls ÷ 4,000 shirts
= 0.10 roll of cloth
Budgeted direct manufacturing labor-hours per shirt
= 1,000 hours ÷ 4,000 shirts
= 0.25 hours
Budgeted direct materials cost
= $20,000 ÷ 400
= $50 per roll
Budgeted direct manufacturing labor cost per hour
= $18,000 ÷ 1,000
= $18 per hour
Actual output achieved
= 4,488 shirts
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2.
Actions employees may have taken include:
(a) Adding steps that are not necessary in working on a shirt.
(b) Taking more time on each step than is necessary.
(c) Creating problem situations so that the budgeted amount of average downtime will be overstated.
(d) Creating defects in shirts so that the budgeted amount of average rework will be overstated.
Employees may take these actions for several possible reasons.
(a) They may be paid on a piece-rate basis with incentives for above-budgeted production.
(b) They may want to create a relaxed work atmosphere, and less demanding standard can reduce stress.
(c) They have a “them vs. us” mentality rather than a partnership perspective.
(d) They may want to gain all the benefits that ensue from superior performance (job security, wage rate increases) without putting in the extra effort required.
This behavior is unethical if it is deliberately designed to undermine the credibility of the standards used at Savannah Fashions.
4.
Savannah could use Benchmarking Clearing House information in several ways:
(a) For pricing and product emphasis purposes. Savannah should avoid getting into a pricing war with a competitor who has a sizably lower cost structure.
(b) As indicators of areas where Savannah is either highly cost-competitive or highly cost-noncompetitive.
(c) As performance targets for motivating and evaluating managers and workers.
5.
Main pros of Benchmarking Clearing House information:
(a) Highlights to Savannah in a direct way how it may or may not be cost-competitive.
(b) Provides a “reality check” to many internal positions about efficiency or
effectiveness.
Main cons are:
(a) Savannah may not be comparable to companies in the database.
(b) Cost data about other companies may not be reliable.
(c) Cost of Benchmarking Clearing House reports.
Soalan yang tak ada jawapan:
7-10
7-19
7-22
7-29
7-33
7-37
7-40 (3)
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