7 CHAPTER FLEXIBLE BUDGETS, DIRECT-COST 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 variancedenoted Fis a variance that has the effect of increasing operating income relative to the budgeted amount. An unfavorable variancedenoted Uis a variance that has the effect of decreasing 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) the difference between actual and budgeted output levels, and (b) the difference 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 cost per output unit, actual quantity of output, and budgeted fixed costs. Four reasons for using standard costs are: (i) cost management, (ii) pricing decisions, (iii) budgetary planning and control, and (iv) financial statement preparation.
7-7
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.
7-1
7-9
Possible causes of a favorable direct 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).
7-10 Some possible reasons for an unfavorable direct manufacturing labor efficiency variance are the hiring and use of underskilled workers; inefficient scheduling of work so that the workforce was not optimally occupied; poor maintenance of machines resulting in a high proportion of non-value-added labor; unrealistic time standards. Each of these factors would result in actual direct manufacturing labor-hours being higher than indicated by the standard work rate. 7-11 Variance analysis, by providing information about actual performance relative to standards, can form the basis of continuous operational improvement. The underlying causes of unfavorable variances are identified, and corrective action taken where possible. Favorable variances can also provide information if the organization can identify why a favorable variance occurred. Steps can often be taken to replicate those conditions more often. As the easier changes are made, and perhaps some standards tightened, the harder issues will be revealed for the organization to act onthis is continuous improvement. 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.
7-2
7-16
(2030 min.) Flexible budget.
Actual Results (1) 2,800g $313,600a 229,600d 84,000 50,000g $ 34,000 FlexibleBudget Variances (2) = (1) (3) 0 $ 5,600 F 22,400 U 16,800 U 4,000 F $12,800 U Flexible Budget (3) 2,800 $308,000b 207,200e 100,800 54,000g $ 46,800 Sales-Volume Variances (4) = (3) (5) 200 U $22,000 U 14,800 F 7,200 U 0 $ 7,200 U Static Budget (5) 3,000g $330,000c 222,000f 108,000 54,000g $ 54,000
Units sold Revenues Variable costs Contribution margin Fixed costs Operating income
$12,800 U $ 7,200 U Total flexible-budget variance Total sales-volume variance $20,000 U Total static-budget variance
a
$112 2,800 = $313,600 $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
b
2.
The key information items are: Units Unit selling price Unit variable cost Fixed costs Actual 2,800 $ 112 $ 82 $50,000 Budgeted 3,000 $ 110 $ 74 $54,000
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.
7-3
7-17
(15 min.) Flexible budget.
The existing performance report is a Level 1 analysis, based on a static budget. It makes no adjustment for changes in output levels. The budgeted output level is 10,000 unitsdirect materials of $400,000 in the static budget budgeted direct materials cost per attach case of $40. The following is a Level 2 analysis that presents a flexible-budget variance and a salesvolume variance of each direct cost category: FlexibleSalesActual Budget Flexible Volume Results Variances Budget Variances (1) (2) = (1) (3) (3) (4) = (3) (5) 8,800 0 8,800 1,200 U $364,000 $12,000 U $352,000 $48,000 F 78,000 7,600 U 70,400 9,600 F 110,000 4,400 U 105,600 14,400 F $552,000 $24,000 U $528,000 $72,000 F
$24,000 U Sales-volume variance $48,000 F $72,000 F
Output units Direct materials Direct manufacturing labor Direct marketing labor Total direct costs
Static Budget (5) 10,000 $400,000 80,000 120,000 $600,000
Flexible-budget variance Static-budget variance
The Level 1 analysis shows total direct costs have a $48,000 favorable variance. However, the Level 2 analysis reveals that this favorable variance is due to the reduction in output of 1,200 units from the budgeted 10,000 units. Once this reduction in output is taken into account (via a flexible budget), the flexible-budget variance shows each direct cost category to have an unfavorable variance indicating less efficient use of each direct cost item than was budgeted, or the use of more costly direct cost items than was budgeted, or both.
Each direct cost category has an actual unit variable cost that exceeds its budgeted unit cost:
Units Direct materials Direct manufacturing labor Direct marketing labor
Actual 8,800 $41.36 $ 8.86 $12.50
Budgeted 10,000 $ 40 $ 8 $ 12
Analysis of price and efficiency variances for each cost category could assist in further the identifying causes of these more aggregated (Level 2) variances.
7-4
7-18 1.
(2530 min.) Flexible-budget preparation and analysis. Variance Analysis for Bank Management Printers for September 2007 Level 1 Analysis Actual Results (1) 12,000 $252,000a 84,000d 168,000 150,000 $ 18,000 Static-Budget Variances (2) = (1) (3) 3,000 U $ 48,000 U 36,000 F 12,000 U 5,000 U $ 17,000 U Static Budget (3) 15,000 $300,000c 120,000f 180,000 145,000 $ 35,000
Units sold Revenue Variable costs Contribution margin Fixed costs Operating income
$17,000 U Total static-budget variance
2.
Level 2 Analysis
Actual Results (1) 12,000 $252,000a 84,000d 168,000 150,000 $ 18,000 FlexibleBudget Variances (2) = (1) (3) 0 $12,000 F 12,000 F 24,000 F 5,000 U $19,000 F Flexible Budget (3) 12,000 $240,000b 96,000e 144,000 145,000 $ (1,000) Sales Volume Variances (4) = (3) (5) 3,000 U $60,000 U 24,000 F 36,000 U 0 $36,000 U Static Budget (5) 15,000 $300,000c 120,000f 180,000 145,000 $ 35,000
Units sold Revenue Variable costs Contribution margin Fixed costs Operating income
$19,000 F $36,000 U Total flexible-budget Total sales-volume variance variance $17,000 U Total static-budget variance
a
12,000 $21 = $252,000 12,000 $20 = $240,000 c 15,000 $20 = $300,000
b
d e
12,000 $7 = $ 84,000 12,000 $8 = $ 96,000 f 15,000 $8 = $120,000
3. Level 2 analysis provides a breakdown of the static-budget variance into a flexiblebudget 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).
7-5
7-19 1.
(30 min.) Flexible budget, working backward.
FlexibleBudget Variances (2)=(1)(3) 0 $1,300,000 F 1,275,000 U 25,000 F 100,000 U $ 75,000 U
Units sold Revenues Variable costs Contribution margin Fixed costs Operating income
Actual Results (1) 650,000 $3,575,000 2,575,000 1,000,000 700,000 $ 300,000
Flexible Budget (3) 650,000 $2,275,000a 1,300,000b 975,000 600,000 $ 375,000
Sales-Volume Variances (4)=(3)(5) 50,000 F $175,000 F 100,000 U 75,000 F 0 $ 75,000 F
Static Budget (5) 600,000 $2,100,000 1,200,000 900,000 600,000 $ 300,000
$75,000 U Total flexible-budget variance
$75,000 F Total sales volume variance
$0 Total static-budget variance
a b
650,000 $3.50 = $2,275,000; $2,100,000 650,000 $2.00 = $1,300,000; $1,200,000
600,000 = $3.50 600,000 = $2.00
$3,575,000 2,100,000 2,575,000 1,200,000 650,000 600,000 650,000 600,000 = = = = $5.50 $3.50 $3.96 $2.00
2.
Actual selling price: Budgeted selling price: Actual variable cost per unit: Budgeted variable cost per unit:
3. The CEOs 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 Total sales-volume variance $75,000 Unfavorable $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 direct material prices. Spencer was able to pass most of the increase in costs onto their customersactual selling price increased by 57% [($5.50 $3.50) $3.50], 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. The company should examine why the units sold increased despite an increase in direct material prices. For example, Spencers customers may have stocked up, anticipating future increases in direct material prices. Alternatively, Spencers selling price increases may have been lower than competitors price increases. Understanding the reasons why actual results differ from budgeted amounts can help Spencer better manage its costs and pricing decisions in the future. 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 Spencer not been able to pass costs on to customers, losses would
7-6
have been considerable.
7-7
7-20 1. and 2. Performance Report, June 2007 Flexible Budget Variances (2) = (1) (3) $ 52,500 U 52,500 U $105,000 U Static Budget Variance (6) = (1) (5) 25,000 F $110,000 F 140,000 U $ 30,000 U Static Budget Variance as % of Static Budget (7) = (6) (5) 5.0% 3.4% 8.0% 2.0%
Units (pounds) Revenues Variable mfg. costs Contribution margin
Actual (1) 525,000 $3,360,000 1,890,000 $1,470,000
Flexible Budget (3) 525,000 $3,412,500a 1,837,500b $1,575,000
Sales Volume Variances (4) = (3) (5) 25,000 F $162,500 F 87,500 U $ 75,000 F
Static Budget (5) 500,000 $3,250,000 1,750,000 $1,500,000
$105,000 U Flexible-budget variance
$ 75,000 F Sales-volume variance
$30,000 U Static-budget variance
a
Budgeted selling price = $3,250,000 500,000 lbs = $6.50 per lb. Flexible-budget revenues = $6.50 per lb. 525,000 lbs. = $3,412,500 Budgeted variable mfg. cost per unit = $1,750,000 Flexible-budget variable mfg. costs = $3.50 per lb.
b
500,000 lbs. = $3.50 525,000 lbs. = $1,837,500
7-8
3. The selling price variance, caused solely by the difference in actual and budgeted selling price, is the flexible-budget variance in revenues = $52,500 U. 4. The flexible-budget variances show that for the actual sales volume of 525,000 pounds, selling prices were lower and costs per pound were higher. The favorable sales volume variance in revenues (because more pounds of ice cream were sold than budgeted) helped offset the unfavorable variable cost variance and shored up the results in June 2007. Levine should be more concerned because the small static-budget variance in contribution margin of $30,000 U is actually made up of a favorable sales-volume variance in contribution margin of $75,000, an unfavorable selling-price variance of $52,500 and an unfavorable variable manufacturing costs variance of $52,500. Levine should analyze why each of these variances occurred and the relationships among them. Could the efficiency of variable manufacturing costs be improved? Did the sales volume increase because of a decrease in selling price or because of growth in the overall market? Analysis of these questions would help Levine decide what actions he should take.
7-9
7-21
1.
(2030 min.) Price and efficiency variances.
The key information items are:
Output units (scones) Input units (pounds of pumpkin) Cost per input unit
Actual 60,800 16,000 $ 0.82
Budgeted 60,000 15,000 $ 0.89
Peterson budgets to obtain 4 pumpkin scones from each pound of pumpkin. The flexible-budget variance is $408 F. Actual Results (1) $13,120a FlexibleBudget Variance (2) = (1) (3) $408 F Flexible Budget (3) $13,528b Sales-Volume Static Variance Budget (4) = (3) (5) (5) $178 U $13,350c
Pumpkin costs
a b
16,000 $0.82 = $13,120 60,800 0.25 $0.89 = $13,528 c 60,000 0.25 $0.89 = $13,350
2. Actual Costs Incurred (Actual Input Qty. Actual Price) $13,120a Actual Input Qty. Budgeted Price $14,240b
Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) $13,528c
$1,120 F $712 U Price variance Efficiency variance $408 F Flexible-budget variance
a
16,000 $0.82 = $13,120 16,000 $0.89 = $14,240 c 60,800 0.25 $0.89 = $13,528
b
3.
The favorable flexible-budget variance of $408 has two offsetting components: (a) favorable price variance of $1,120reflects the $0.82 actual purchase cost being lower than the $0.89 budgeted purchase cost per pound. (b) unfavorable efficiency variance of $712reflects 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.
7-10
7-22 (15 min.) Materials and manufacturing labor variances. Actual Costs Incurred (Actual Input Qty. Actual Price) $200,000 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) $225,000
Direct Materials
Actual Input Qty. Budgeted Price $214,000
$14,000 F $11,000 F Price variance Efficiency variance $25,000 F Flexible-budget variance Direct Mfg. Labor $90,000 $86,000 $80,000
$4,000 U $6,000 U Price variance Efficiency variance $10,000 U Flexible-budget variance
7-23 1.
(30 min.) Price and efficiency variances. Flexible Budget Variances (2) = (1) (3) $57,750 U 9,200 U
Direct materials Direct labor
Actual Results (1) $429,000 99,200
Flexible Budget (3) $371,250 90,000
Actual Results Direct materials: 8,580,000a minutes $0.05 per minute= $429,000 Direct labor: 1,600 hours $62 per minute = $99,200
a
7,800,000 minutes 110% purchase = 8,580,000
CellOne commits to purchase 110% of the budgeted amount of time. Due to the forward commitment of time purchase, the actual time purchased will be the same as the budgeted amount of time to be purchased. Flexible Budget Direct materials: 8,250,000a $0.045 = $371,250 Direct labor: 1,500 $60 = $90,000
a
7,500,000 minutes 110% to be purchased = 8,250,000 minutes
7-11
b
7,500,000 minutes sold 5,000 minutes per hour = 1,500 hours
2.
Actual Incurred (Actual Input Qty. Actual Price) (1) (8,580,000 $0.05) $429,000 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (3) (8,250,000 $0.045) $371,250
Direct materials
Actual Input Qty. Budgeted Price (2) (8,580,000 $0.045) $386,100
$42,900 U Price variance
$14,850 U Efficiency variance
$57,750 U Flexible-budget variance Direct Labor (1,600 $62) $99,200 (1,600 $60) $96,000 $3,200 U Price variance (1,500 $60) $90,000
$6,000 U Efficiency variance
$9,200 U Flexible-budget variance
Students may question why the flexible budget is 8,250,000 minutes. Had the actual output of 7,500,000 minutes been used in the static budget, CellOne would have planned to purchase 8,250,000 (7,500,000 1.10) minutes.
7-12
724 1.
(30min.) Directmaterialsanddirectmanufacturinglaborvariances.
Actual Quantity Budgeted Price (3) $10,890.00a $ 8,360.00c
June 2007 Units Direct materials Direct manuf. labor Total price variance Total efficiency variance
a b
Actual Results (1) 550 $12,705.00 $ 8,464.50
Price Variance (2) = (1)(3) $1,815.00 U $ 104.50 U $1,919.50 U
Efficiency Variance (4) = (3) (5) $990.00 $440.00 U F
Flexible Budget (5) 550 $9,900.00b $8,800.00d
$550.00 U
7,260 meters $1.50 per meter = $10,890 550 lots 12 meters per lot $1.50 per meter = $9,900 c 1,045 hours $8.00 per hour = $8,360 d 550 lots 2 hours per lot $8 per hour = $8,800
Total flexible-budget variance for both inputs = $1,919.50U + $550U = $2,469.50U Total flexible-budget cost of direct materials and direct manuf. labor = $9,900 + $8,800 = $18,700 Total flexible-budget variance as % of total flexible-budget costs = $2,469.50 $18,700 = 13.21% 2.
June 2008 Units Direct materials Direct manuf. labor Total price variance Total efficiency variance
a
Actual Results (1) 550 $11,828.36a $ 8,295.21d
Price Variance (2) = (1) (3) $1,156.16 U $ 102.41 U $1,258.57 U
Actual Quantity Budgeted Price (3) $10,672.20b $ 8,192.80e
Efficiency Variance (4) = (3) (5) $772.20 $607.20 U F
Flexible Budget (5) 550 $9,900.00c $8,800.00c
$165.00 U
Actual dir. mat. cost, June 2008 = Actual dir. mat. cost, June 2007 0.98 0.95 = $12,705 0.98 0.95 = $11.828.36 Alternatively, actual dir. mat. cost, June 2008 = (Actual dir. mat. quantity used in June 2007 0.98) (Actual dir. mat. price in June 2007 0.95) = (7,260 meters 0.98) ($1.75/meter 0.95) = 7,114.80 $1.6625 = $11,828.36 b (7,260 meters 0.98) $1.50 per meter = $10,672.20 c Unchanged from 2007. d Actual dir. manuf. labor cost, June 2008 = Actual dir. manuf. cost June 2007 0.98 = $8,464.50 0.98 = $8,295.21 Alternatively, actual dir. manuf. labor cost, June 2008 = (Actual dir. manuf. labor quantity used in June 2007 0.98) Actual dir. manuf. labor price in 2007 = (1,045 hours 0.98) $8.10 per hour = 1,024.10 hours $8.10 per hour = $8,295.21 e (1,045 hours 0.98) $8.00 per hour = $8,192.80
Total flexible-budget variance for both inputs = $1,258.57U + $165U = $1,423.57U Total flexible-budget cost of direct materials and direct labor = $9,900 + $8,800 = $18,700
7-13
Total flexible-budget variance as % of total flexible-budget costs = $1,423.57 $18,700 = 7.61% 3. Efficiencies have improved in the direction indicated by the production managerbut, it is unclear whether they are a trend or a one-time occurrence. Also, overall, variances are still 7.6% of flexible input budget. GloriaDee should continue to use the new material, especially in light of its superior quality and feel, but it may want to keep the following points in mind: The new material costs substantially more than the old ($1.75 in 2007 and $1.6625 in 2008 vs. $1.50 per meter). Its price is unlikely to come down even more within the coming year. Standard material price should be re-examined and possibly changed. GloriaDee should continue to work to reduce direct materials and direct manufacturing labor content. The reductions from June 2007 to June 2008 are a good development and should be encouraged.
7-14
7-25
(30 min.)
Price and efficiency variances, journal entries.
Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (9,810 10 $3.00) $294,300
1. Direct materials and direct manufacturing labor are analyzed in turn:
Actual Costs Incurred (Actual Input Qty. Actual Price) Direct Materials (100,000 $3.10a) $310,000
Actual Input Qty. Budgeted Price Purchases Usage (100,000 $3.00) (98,073 $3.00) $300,000 $294,219
$10,000 U Price variance Direct Manufacturing Labor (4,900 $21b) $102,900 (4,900 $20) $98,000 $4,900 U Price variance
a b
$81 F Efficiency variance (9,810 0.5 $20) or (4,905 $20) $98,100 $100 F Efficiency variance
$310,000 100,000 = $3.10 $102,900 4,900 = $21
2.
Direct Materials Control Direct Materials Price Variance Accounts Payable or Cash Control Work-in-Process Control Direct Materials Control Direct Materials Efficiency Variance Work-in-Process Control Direct Manuf. Labor Price Variance Wages Payable Control Direct Manuf. Labor Efficiency Variance
300,000 10,000 310,000 294,300 294,219 81 98,100 4,900 102,900 100
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. 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.
4.
7-26 1.
(20 min.) Continuous improvement (continuation of 7-25).
Standard quantity input amounts per output unit are: Direct Direct Materials Manufacturing Labor (pounds) (hours) January 10.0000 0.5000 February (Jan. 0.997) 9.9700 0.4985 March (Feb. 0.997) 9.9401 0.4970
2. The answer to requirement 1 of Question 7-25 is identical except for the flexible- budget amount.
Actual Costs Incurred (Actual Input Qty. Actual Price) Direct Materials (100,000 $3.10a) $310,000 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (9,810 9.940 $3.00) $292,534
Actual Input Qty. Budgeted Price Purchases Usage (100,000 $3.00) (98,073 $3.00) $300,000 $294,219
$10,000 U Price variance Direct Manuf. Labor (4,900 $21b) $102,900 $4,900 U Price variance
a b
$1,685 U Efficiency variance (4,900 $20) $98,000 (9,810 0.497 $20) $97,511 $489 U Efficiency variance
$310,000 100,000 = $3.10 $102,900 4,900 = $21
Using continuous improvement standards sets a tougher benchmark. The efficiency variances for January (from Exercise 7-25) and March (from Exercise 7-26) are: Direct materials Direct manufacturing labor January $ 81 F $100 F March $1,685 U $ 489 U
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, because Level 2 requires separate amounts for quantity inputs and the cost per input.
7-27 1.
(20 min.) Materials and manufacturing labor variances, standard costs. 30 Direct Materials
Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (20,000 2 $10.00) (40,000 sq. yds. $10.00) $400,000
Actual Costs Incurred (Actual Input Qty. Actual Price) (37,000 sq. yds. $10.20) $377,400
Actual Input Qty. Budgeted Price (37,000 sq. yds. $10.00) $370,000
$7,400 U Price variance
$30,000 F Efficiency variance $22,600 F Flexible-budget variance
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 Actual Costs Incurred (Actual Input Qty. Actual Price) (9,000 hrs. $19.60) $176,400 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (20,000 0.5 $20.00) (10,000 hrs. $20.00) $200,000
Actual Input Qty. Budgeted Price (9,000 hrs. $20.00) $180,000
$3,600 F Price variance
$20,000 F Efficiency variance $23,600 F Flexible-budget variance
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. Actual Costs Incurred (Actual Input Qty. Actual Price) (60,000 sq. yds. $10.20) $612,000 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price)
Control Point Purchasing
Actual Input Qty. Budgeted Price (60,000 sq. yds. $10.00) $600,000
$12,000 U Price variance
Production
(37,000 sq. yds. $10.00) $370,000
(20,000 2 $10.00) $400,000
$30,000 F Efficiency variance
Direct manufacturing labor variances are the same as in requirement 1.
7-28
(15 min.) Journal entries and T-accounts (continuation of 7-27). 25 370,000 7,400 377,400 400,000 30,000 370,000
Requirement 1 from Exercise 7-27: a. Direct Materials Control Direct Materials Price Variance Accounts Payable Control To record purchase of direct materials. b. Work-in-Process Control Direct Materials Efficiency Variance Direct Materials Control To record direct materials used.
c. Work-in-Process Control 200,000 Direct Manufacturing Labor Price Variance Direct Manufacturing Labor Efficiency Variance Wages Payable Control To record liability for and allocation of direct labor costs. Direct Materials Control (a) 370,000 (b) 370,000 Work-in-Process Control (b) 400,000 (c) 200,000 Wages Payable Control (c) 176,400 Direct Materials Price Variance (a) 7,400 Direct Manufacturing Labor Price Variance (c) 3,600
3,600 20,000 176,400
Direct Materials Efficiency Variance (b) 30,000 Direct Manuf. Labor Efficiency Variance (c) 20,000
Accounts Payable Control 377,400 (a)
Requirement 2 from Exercise 7-27: The following journal entries pertain to the measurement of price and efficiency variances when 60,000 sq. yds. of direct materials are purchased: a1. Direct Materials Control Direct Materials Price Variance Accounts Payable Control To record direct materials purchased. a2. Work-in-Process Control Direct Materials Control Direct Materials Efficiency Variance To record direct materials used. 600,000 12,000 612,000 400,000 370,000 30,000
Direct Materials Control (a1) 600,000 (a2) 370,000 Accounts Payable Control (a1) 612,000 Direct Materials Efficiency Variance (a2) 30,000
Direct Materials Price Variance (a1) 12,000 Work-in-Process Control (a2) 400,000
The T-account entries related to direct manufacturing labor are the same as in requirement 1. The difference between standard costing and normal costing for direct cost items is: Direct Costs Standard Costs Standard price(s) Standard input allowed for actual outputs achieved Normal Costs Actual price(s) Actual input
These journal entries differ from the normal costing entries because Work-in-Process Control is no longer carried at actual costs. Furthermore, Direct Materials Control is 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.
7-29 (25 min.)
Flexible budget (Refer to date in Exercise 7-27).
The managers 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): Actual Costs Incurred (Actual Input Qty. Actual Actual Input Qty. Price) Budgeted Price Direct Materials $377,400 $370,000 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) $400,000
Static Budget $480,000
(a) $7,400 U Direct Manuf. Labor
(b) $30,000 F
(c) $80,000 F
$176,400
$180,000
$200,000
$240,000
(a) $3,600 F (a) Price variance (b) Efficiency variance (c) Sales-volume variance
(b) $20,000 F
(c) $40,000 F
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.
7-30
(4550 min.) 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: = = ($0.75 948,000) ($0.639 948,000) = $711,000 $605,772 = $105,228 U Payables Payables is a batch level activity. Static-budget a. b. c. d. e. Number of deliveries Batch size (units per batch) Number of batches (a b) Cost per batch Total payables activity cost (c d)
Actual Amounts 1,000,000 5 200,000 $2.90 $580,000
Amounts 948,000 4.468 212,175 $2.80 $594,090
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 is a batch level activity. Static-Budget a. b. c. d. e. Number of deliveries Batch size (units per batch) Number of batches (a b) Cost per batch Total travel expenses activity cost (c d) Actual Amounts 1,000,000 500 2,000 $7.60 $15,200 Amounts 948,000 501.587 1,890 $7.40 $13,986
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 = Budgeted quantity of input allowed for actual output
Efficiency =
Receivables variance Price Variance
= = Efficiency variance = = Payables Price variance = = Efficiency variance = = Travel expenses Price variance = = Efficiency variance = =
($0.750 $0.639) 948,000 $105,228 U (948,000 948,000) $0.639 $0 ($2.80 $2.90 ) 212,175 $21,218 F (212,175 189,600) $2.90 $65,468 U ($7.40 $7.60) 1,890 $378 F (1,890 1,896) $7.60 $46 F
7-31 1.
(20 min.) Price and efficiency variances, benchmarking.
Direct materials Direct labor Variable overhead Budgeted variable cost
Mineola Plant Prices and quantities 13.5 $ 0 lbs @ 9.20 per lb $10.1 3 hrs @ 5 per hr
Cost per lot $124.20 30.45 12.00 $166.65
Direct materials Direct labor Variable overhead Budgeted variable cost
Bayside Plant Prices and quantities 14.0 0 lbs @ $ 9.00 per lb $10.2 2.7 hrs @ 0 per hr
Cost per lot $126.00 27.54 11.00 $164.54
Direct materials Direct labor Variable overhead Budgeted variable cost
Miraclo Prices and quantities 13.0 0 lbs @ $ 8.80 per lb $10.0 2.5 hrs @ 0 per hr
Cost per lot $114.40 25.00 11.00 $150.40
2.
Mineola Plant Actual Quantity Budgeted Price (3) $118,800b $ 30,000c
Lots Direct materials Direct labor
a
Actual Results (1) 1,000 $124,200 $ 30,450
Price Variance (2) = (1) (3) $5,400 U $ 450 U
Efficiency Variance (4) = (3) (5) $4,400 U $5,000 U
Flexible Budgeta (5) 1,000 $114,400 $ 25,000
Using Miraclos prices and quantities as the standard: Direct materials: (13 lbs./lot 1,000 lots) $8.80/lb. = $114,400 (2.5 hrs./lot 1,000 lots) $10.00/hr.. = $25,000 b (13.50 lbs./lot 1,000 lots) $8.80 per lb. = $118,800 c (3 hours/lot 1,000 lots) $10/hr. = $30,000
BaysidePlant Actual Results (1) 1,000 $126,000 $ 27,540 Price Variance (2) = (1) (3) $2,800 U $ 540 U Actual Quantity Budgeted Price (3) $123,200b $ 27,000c Efficiency Variance (4) = (3) (5) $8,800 U $2,000 U Flexible Budgeta (5) 1,000 $114,400 $ 25,000
Lots Direct Materials Direct Labor
a
Using Miraclos prices and quantities as the standard: Direct materials: (13 lb./lot 1,000 lots) $8.80/lb. = $114,400 (2.5 hrs./lot 1,000 lots) $10.00/lb. = $25,000 b (14 lbs./lot 1,000 lots) $8.80 per lb. = $123,200 c (2.7 hours/lot 1,000 lots) $10/hr. = $27,000
3. Using an objective, external benchmark, like that of a competitor, will preempt the possibility of any one plant feeling that the other is being favored. That this competitor, Miraclo, is successful will also put positive pressure on the two plants to improve (note that all variances are unfavorable). Issues that Garden Art should keep in mind include the following: Ensure that Miraclo is indeed the best and most relevant standard (for example, is there another competitor in the marketplace which should be considered?) Ensure that the data is reliable Ensure that Miraclo is similar enough to use as a standard (if Miraclo has a different business model, for example, it may be following a strategy of lowering costs that Garden Art may not want to emulate because Garden Art is trying to differentiate its products)
7-32 1.
(30 min.) Flexible budget, direct materials and direct manufacturing labor variances. Actual Results FlexibleBudget Variances Flexible Budget SalesVolume Variances Static Budget
(1) (2) = (1) (3) (3) (4) = (3) (5) (5) Units sold 6,000a 0 6,000 1,000 F 5,000a b Direct materials $ 594,000 $ 6,000 F $ 600,000 $100,000 U $ 500,000c Direct manufacturing labor 950,000a 10,000 F 960,000d 160,000 U 800,000e a a Fixed costs 1,005,000 5,000 U 1,000,000 0 1,000,000a Total costs $2,549,000 $11,000 F $2,560,000 $260,000 U $2,300,000 $11,000 F $260,000 U Flexible-budget variance Sales-volume variance $249,000 U Static-budget variance
a
Given $100 6,000 = $600,000 c $100 5,000 = $500,000
b
d e
$160 6,000 = $960,000 $160 5,000 = $800,000
2. Actual Incurred (Actual Input Qty. Actual Price) Direct materials $594,000a $54,000 U Price variance Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) $600,000c
Actual Input Qty. Budgeted Price $540,000b
$60,000 F Efficiency variance $6,000 F Flexible-budget variance $1,000,000e $960,000f
Direct manufacturing labor
$950,000a
$50,000 F $40,000 U Price variance Efficiency variance $10,000 F Flexible-budget variance
a
54,000 pounds $11/pound = $594,000 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
b
7-33
(50 min.) Static budget, flexible budget, service sector, professional labor efficiency, and effectiveness. Static Budget 1. Revenue (90 0.5% $200,000) $90,000 Variable costs: Professional labor (6 $40 90) 21,600 Loan filing fees ($100 90) 9,000 Credit-worthiness checks ($120 90) 10,800 Courier mailings ($50 90) 4,500 Total variable costs 45,900 Contribution margin 44,100 Fixed costs 31,000 Operating income $13,100 2. Flexible budget for November 2007: Revenue (120 0.5% $200,000) Variable costs: Professional labor (6 $40 120) Loan filing fees ($100 120) Credit-worthiness checks ($120 120) Courier mailings ($50 120) Total variable costs Contribution margin Fixed costs Operating income $120,000 28,800 12,000 14,400 6,000 61,200 58,800 31,000 $ 27,800
Level 2 Analysis Actual Results (1) FlexibleBudget Flexible Variances Budget (1) (3) (3) SalesVolume Variances (3) (5) 30 F $30,000 7,200 U 3,000 U 3,600 U 1,500 U 15,300 U 14,700 F 0 $14,700 F Static Budget (5) 90 $90,000 21,600 9,000 10,800 4,500 45,900 44,100 31,000 $13,100
Loans 120 0 120 Revenue $134,400 $14,400 F $120,000 Variable costs: Professional labor 36,288 7,488 U 28,800 Loan filing fees 12,000 0 12,000 Credit-worthiness checks 15,000 600 U 14,400 Courier mailings 6,480 480 U 6,000 Total variable costs 69,768 8,568 U 61,200 Contribution margin 64,632 5,832 F 58,800 Fixed costs 33,500 2,500 U 31,000 Operating income $ 31,132 $ 3,332 F $ 27,800
$3,332 F Total flexiblebudget variance
$14,700 F Total salesvolume variance $18,032 F Total static-budget variance
3. Actual Costs Incurred (Actual Input Qty. Actual Price) (1) (120 7.2 $42) 864 hrs. $42/hr. $36,288
$1,728 U Price variance
Actual Input Qty. Budgeted Price (2) (120 7.2 $40) 864 hrs. $40/hr. $34,560
Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (3) (120 6.0 $40) 720 hrs. $40/hr. $28,800
$5,760 U 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 number of 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.
7-34 1a.
(60 min.) Comprehensive variance analysis, responsibility issues. 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 sales volume = ($82 $80) 4,850 = $9,700 Favorable Development of Flexible Budget
Budgeted Unit Amounts $80.00 6.60a 18.60b 18.00c Actual Volume 4,850 4,850 4,850 4,850 Flexible Budget Amount $388,000 32,010 90,210 87,300 209,520 75,000 284,520 $103,480
1b.
Revenues Variable costs DM Frames $2.20/oz. 3.00 oz. DM Lenses $3.10/oz. 6.00 oz. Direct manuf. labor $15.00/hr. 1.20 hrs. Total variable manufacturing costs Fixed manufacturing costs Total manufacturing costs Gross margin
a
$33,000 5,000 units; b$93,000 5,000 units; c$90,000 5,000 units
Units sold Revenues Variable costs DM frames DM lens Direct labor Total variable costs Fixed manuf. costs Total costs Gross margin Level 2 Level 1
Actual Results (1) 4,850 $397,700 37,248 100,492 96,903 234,643 72,265 306,908 $ 90,792
FlexibleBudget Variances (2)=(1)-(3) $ 9,700 F 5,238 U 10,282 U 9,603 U 25,123 U 2,735 F 22,388 U $12,688 U
Flexible Budget (3) 4,850 $388,000 32,010 90,210 87,300 209,520 75,000 284,520 $103,480
Sales Volume Variance (4)=(3)-(5) $ 12,000 U 990 F 2,790 F 2,700 F 6,480 F 0 6,480 F $ 5,520 U
Static Budget (5) 5,000 $400,000 33,000 93,000 90,000 216,000 75,000 291,000 $109,000
$12,688 U Flexible-budget variance
$ 5,520 U Sales-volume variance
$18,208 U Static-budget variance
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) (4,850 3.2 $2.40) $37,248 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (3) (4,850 3.00 $2.20) $32,010
Direct Materials: Frames
Actual Input Qty. Budgeted Price (2) (4,850 3.2 $2.20) $34,144
$3,104 U Price variance
$2,134 U Efficiency variance
Direct Materials: 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 Price variance
$15,035 U Efficiency variance
Direct Manuf. 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 Price variance
$10,912.50 U Efficiency variance
2.
Possible explanations for price variances are: (a) Purchasing and labor negotiations. (b) Quality of frames and lenses purchased. (c) Standards set incorrectly. 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.
7-35
(20 min.) Service sector, solve for unknowns.
This problem is best done by using a columnar format for the analysis of direct labor variance, as shown below. Start by inserting the four items of data provided in the problem (actual labor hours, direct labor flexible-budget variance, standard labor price and labor price variance) into the columnar presentation, as indicated by footnote a below. Then, proceed to calculate and fill in the other values in the columnar presentation in this order: Actual Quantity Budgeted Price = 1,000 hrs. $30 per hr. = $30,000. Actual Labor Cost = $30,000 + unfavorable labor price variance = $30,000 + $1,000U = $31,000 (iii) Actual Labor Price = Actual Labor Cost actual labor hrs. = $31,000 1,000 = $31 per hr. (Requirement 1) (iv) Flexible Budget Labor Cost = Actual Labor Cost + favorable flexible-budget variance = $31,000 + $3,500F = $34,500 (v) Standard labor hours for actual output = Flexible-budget Labor Cost Standard labor price = $34,500 $30 per hr. = 1,150 hrs. (Requirement 2) (i) (ii)
Actual Labor Cost Actual Actual Quantity Price $31 (iii) Direct 1,000 Labor hoursa per hour $31,000 (ii) Actual Budgeted Quantity Price 1,000 $30 hoursa per houra $30,000 (i)
Flexible Budget Labor Cost Budgeted Qty. Allowed for Budgeted Actual Output Price (v) 1,150 $30 assembly-hours per houra $34,500 (iv)
1,000 Ua Price variance
4,500 F Efficiency variance
$3,500 Fa Flexible-budget variance
a
Data provided in problem.
1.
The actual labor price is $31 per hour, as calculated in step (iii) above.
2. The standard labor quantity for actual output is 1,150 hours, as calculated in step (v) above.
7-36
1.
(30 min.) Level 2 variance analysis, solve for unknowns. = $4,800,000 = $ 8.00 per cap 600,000 $5,000,000 = $10.00 per cap 500,000 $1,800,000 = $3.00 per unit 600,000 $1,400,000 = $2.80 per unit 500,000
Budgeted selling price
Actual selling price Budgeted variable cost per unit Actual variable cost per unit
=
2.
=
=
Level 2 Flexible-budget-based Variance Analysis for Homerun Headgear for Year Ended December 2006 Actual Results (1) 500,000 $5,000,000 1,400,000 3,600,000 1,150,000 $2,450,000 FlexibleBudget Variances (2)=(1)(3) 0 $1,000,000 F 100,000 F 1,100,000 F 150,000 U $ 950,000 F Flexible Budget (3) 500,000 $4,000,000 1,500,000 2,500,000 1,000,000 $1,500,000 Sales Volume Variance (4)=(3)(5) 100,000 U $800,000 U 300,000 F 500,000 U 0 $500,000 U Static Budget (5) 600,000 $4,800,000 1,800,000 3,000,000 1,000,000 $2,000,000
Units sold Revenues (sales) Variable costs Contribution margin Fixed costs Operating income
$950, 000 F Total flexible-budget variance
$500, 000 U Total sales-volume variance
$450, 000 F Total static-budget variance
3. Flexible-budget operating income = $1,500,000 4. Flexible-budget variance for operating income = $950,000 F 5. Sales-volume variance for operating income = $500,000 U 6. Static-budget variance for operating income = $450,000 F
7-37 1.
(30 min.) Direct labor and direct materials variances, missing data. Flexible Budget (Budgeted Input Qty. Allowed for Actual Input Qty. Actual Output Budgeted Price Budgeted Price) $384,000b $360,000c $24,000 U Efficiency variance
Actual Costs Incurred (Actual Input Qty. Actual Price) Direct manufacturing labor $368,000a
$16,000 F Price variance
$8,000 U Flexible-budget variance
a
Given (or 32,000 hours $11.50/hour) 32,000 hours $12/hour = $384,000 c 6,000 units 5 hours/unit $12/hour = $360,000
b
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. = $12,500 efficiency variance $2 per pound budgeted price = 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 = $292,500 150,000 = $1.95 per pound Actual Input Budgeted Price $300,000b
4.
Actual Costs Incurred (Actual Input Actual Price) $292,500a $7,500 F Price variance
a b
Given 150,000 pounds $2/pound = $300,000
7-38
(2030 min.) Direct materials and manufacturing labor variances, solving unknowns. All given items are designated by an asterisk. Actual Costs Incurred (Actual Input Qty. Actual Price) Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (4,000* 0.5* $20*) $40,000
$2,000 F* Efficiency variance
Actual Input Qty. Budgeted Price (1,900 $20*) $38,000
Direct Manufacturing Labor
(1,900 $21) $39,900
$1,900 U* Price variance
Direct Materials
(13,000 $5.25) $68,250*
Purchases (13,000 $5*) $65,000
Usage (12,500 $5*) $62,500
(4,000* 3* $5*) $60,000
$3,250 U* Price variance
$2,500 U* Efficiency variance
1. 4,000 units 0.5 hours/unit = 2,000 hours 2. Flexible budget Efficiency variance = $40,000 $2,000 = $38,000 Actual dir. manuf. labor hours = $38,000 Budgeted price of $20/hour = 1,900 hours $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 (rounded) Standard qty. of direct materials = 4,000 units 3 pounds/unit = 12,000 pounds Flexible budget + Dir. matls. effcy. var. = $60,000 + $2,500 = $62,500 Actual quantity of dir. matls. used = $62,500 Budgeted price per lb = $62,500 $5/lb = 12,500 lbs Actual cost of direct materials, $68,250 Price variance, $3,250 = $65,000 Actual qty. of direct materials purchased = $65,000 Budgeted price, $5/lb = 13,000 lbs.
3. 4. 5.
6.
7. Actual direct materials price = $68,250 13,000 lbs = $5.25 per lb.
7-39 1.
(20 min.) Responsibility for variances. Actual Quantity Budgeted Price (3) $142,000b $ 91,000d
Cases Direct materials Direct manuf. labor
a b
Actual Results (1) 10,000 $127,800a $ 78,000
Price Variance (2) = (1) (3) $14,200 F $13,000 F
Efficiency Variance (4) = (3) (5) $22,000 U $21,000 U
Flexible Budget (5) 10,000 $120,000 c $ 70,000 e
71,000 lbs. $1.80 per lb. = $127,800 71,000 lbs. $2 per lb. = $142,000 c 10,000 cases 6 lbs. per case $2 per lb. = $120,000 d 6,500 dir. manuf. labor-hours $14 per dir. manuf. labor-hour = $91,000 e 10,000 cases 0.5 hrs. per case $14 per hr. = $70,000
2.a. If the favorable price and unfavorable efficiency variance for direct materials were due to purchase of poor-quality materials, the purchase manager is responsible for both variances. The favorable direct material price variance of $14,200 is more than offset by the unfavorable direct materials efficiency variance of $22,000, resulting in an overall flexible-budget direct materials variance of $7,800 unfavorable. If the poor quality of the direct materials caused workers to be inefficient, the supervisor may also want to assign the unfavorable direct manufacturing labor efficiency variance of $21,000 to the purchasing manager. The goal is not to allocate blame but rather to assign variances to managers most responsible for them. In this way, the purchasing manager can fully understand the consequences of purchasing poor-quality materials and the benefits of taking actions to prevent such events from recurring. The production manager and the human resource manager should be assigned the favorable direct manufacturing labor price variance to make them aware of the beneficial actions they took and to see if these actions can be repeated. 2.b. If the favorable price and unfavorable efficiency variance for direct manufacturing labor was due to the use of less-skilled workers, the production manager is responsible for both variances. The favorable direct manufacturing labor price variance of $13,000 is more than offset by the unfavorable direct manufacturing labor efficiency variance of $21,000, resulting in an overall flexible-budget direct manufacturing labor variance of $8,000 unfavorable. Furthermore, if the less-skilled workers caused the direct materials to be used inefficiently, the supervisor may also want to assign the unfavorable direct materials efficiency variance of $22,000 to the production manager. Holding the production manager accountable for these variances makes the production manager aware of the full consequences of hiring less-skilled workers, as well as the benefits of remedial actions. The purchasing manager should be assigned the favorable direct materials price variance to encourage her to continue to achieve lower direct material prices.
7-40
(60 min.) Comprehensive variance analysis review.
Actual Results Units sold (80% 1,500,000) Selling price per unit Revenues (1,200,000 $3.70) Direct materials purchased and used: Direct materials per unit Total direct materials cost (1,200,000 $0.80) Direct manufacturing labor: Actual manufacturing rate per hour Labor productivity per hour in units Manufacturing labor-hours of input (1,200,000 250) Total direct manufacturing labor costs (4,800 $15) Direct marketing costs: Direct marketing cost per unit Total direct marketing costs (1,200,000 $0.30) Fixed costs ($900,000 $30,000) Static Budgeted Amounts Units sold Selling price per un Revenues (1,500,000 $4.00) Direct materials purchased and used: Direct materials per unit Total direct materials costs (1,500,000 $0.85) Direct manufacturing labor: Direct manufacturing rate per hour Labor productivity per hour in units Manufacturing labor-hours of input (1,500,000 300) Total direct manufacturing labor cost (5,000 $15.00) Direct marketing costs: Direct marketing cost per unit Total direct marketing cost (1,500,000 $0.30) Fixed costs 1,200,000 $3.70 $4,440,000 $0.80 $960,000 $15 250 4,800 $72,000 $0.30 $360,000 $870,000 1,500,000 $4.00 $6,000,000 $0.85 $1,275,000 $15.00 300 5,000 $75,000 $0.30 $450,000 $900,000 Static-Budget Amounts $6,000,000 1,275,000 75,000 450,000 1,800,000 4,200,000 900,000 $3,300,000
1. Revenues Variable costs Direct materials Direct manufacturing labor Direct marketing costs Total variable costs Contribution margin Fixed costs Operating income 2. Actual operating income Static-budget operating income Total static-budget variance
Actual Results $4,440,000 960,000 72,000 360,000 1,392,000 3,048,000 870,000 $2,178,000 $2,178,000 3,300,000 $1,122,000 U
Level 2 Flexible-budget-based variance analysis
Actual Results Units sold Revenues Variable costs Direct materials Direct manuf. labor Direct marketing costs Total variable costs Contribution margin Fixed costs Operating income 1,200,000 $4,440,000 960,000 72,000 360,000 1,392,000 3,048,000 870,000 $2,178,000 Flexible-Budget Variances 0 $360,000 U 60,000 F 12,000 U 0 48,000 F 312,000 U 30,000 F $282,000 U Flexible Budget 1,200,000 $4,800,000 1,020,000 60,000 360,000 1,440,000 3,360,000 900,000 $2,460,000 SalesVolume Variances 300,000 $1,200,000 U 255,000 F 15,000 F 90,000 F 360,000 F 840,000 U 0 $ 840,000 U Static Budget 1,500,000 $6,000,000 1,275,000 75,000 450,000 1,800,000 4,200,000 900,000 $3,300,000
$282, 000 U Total flexible-budget variance
$1,122,000 U Total static-budget variance
$840, 000 U Total sales-volume variance
3. 4. 5.
Flexible-budget operating income = $2,460,000. Flexible-budget variance for operating income = $282,000U. Sales-volume variance for operating income = $840,000U.
Level 3 Analysis of direct manufacturing labor flexible-budget variance
Actual Costs Incurred (Actual Input Qty. Actual Price) (4,800 $15.00) $72,000 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (*4,000 $15.00) $60,000
Direct. Mfg. Labor
Actual Input Qty. Budgeted Price (4,800 $15.00) $72,000
$0 Price variance
$12,000 U Efficiency variance
$12,000 U Flexible-budget variance
* 1,200,000 units 300 direct manufacturing labor standard productivity rate per hour.
6. 7.
DML price variance = $0; DML efficiency variance = $12,000U DML flexible-budget variance = $12,000U
7-41 1.
(20 min.) Comprehensive variance analysis.
SecondQuarter 2007 Actuals (1) Flexible Budget for Second Quarter (3) 12,000 $ $18,000 6,480 3,600 1,800 4,680 22,680 1,000 $21,680 F F U F F F U F 70.00 $140,00 0 25,080 12,000 20,000 57,080 82,920 0 $82,920 F F U U U U F
Flexible Budget Variance (2) = (1) (3) 0
Sales Volume Variance (4) = (3) (5) 2,000 F
Units Selling price Sales Variable costs Direct materials Direct manuf. labor Other variable costs Total variable costs Contribution margin Fixed costs Operating income
a b
12,000 $ 71.50
$858,000 144,000 75,600 118,200 337,800 520,200 171,000 $349,200
$840,000 150,480a 72,000b 120,000c 342,480 497,520 170,000 $327,520
Static Budget (5) 10,00 0 $ 70.00 $700,00 0 125,40 0 60,00 0 100,00 0 285,40 0 414,60 0 170,00 0 $244,60 0
12,000 units 2.2 lbs. per unit $5.70 per lb. = $150,480 12,000 units 0.5 hrs. per unit $12 per hr. = $72,000 c 12,000 units $10 per unit = $120,000
SecondQuarter 2007 Actuals Direct materials Direct manuf. labor (DML)
a b
Actual Input Qty. Price Variance $ 7,200 10,800 U U Budgeted Price $136,800a 64,800 b
Efficiency Variance $13,680 7,200 F F
$144,000 75,600
Flexible Budget for Second Quarter $150,48 0 72,00 0
12,000 units 2 lbs. per unit $5.70 per lb. = $136,800 12,000 units 0.45 DML hours per unit $12 per DML hour = $64,800
2. The following details, revealed in the variance analysis, should be used to rebut the union if it focuses on the favorable operating income variance: Most of the static budget operating income variance of $104,600F ($349,200 $244,600) comes from a favorable sales volume variance, which only arose because ESS sold more units than planned. Of the $21,680 F flexible-budget variance in operating income, most of it comes from the $18,000F flexible-budget variance in sales. The net flexible-budget variance in total variable costs of $4,680 F is small, and it arises from direct materials and other variable costs, not from labor. Direct manufacturing labor flexible-budget variance is $3,600 U. The direct manufacturing labor price variance ($10,800U), which is large and unfavorable, is indeed offset by direct manufacturing labors favorable efficiency variancebut the efficiency variance is driven by the fact that ESS is using new, more expensive materials. Noonan and Shaw may have to prove this to the union which will insist that its because workers are working smarter. Even if workers are working smarter, the favorable direct manufacturing labor efficiency variance of $7,200 does not offset the unfavorable direct manufacturing labor price variance of $10,800. 3. Changing the standards may make them more realistic, making it easier to negotiate with the union. But the union will resist any tightening of labor standards, and it may be too early (is one quarters experience enough to change on?); a change of standards at this point may be viewed as opportunistic by the union. Perhaps a continuous improvement program to change the standards will be more palatable to the union and will achieve the same result over a somewhat longer period of time.
7-42 1.
(30 min.) Comprehensive variance analysis. Computing unit selling prices and unit costs of inputs: Actual selling price = $3,555,000 450,000 = $7.90 Budgeting selling price = $3,200,000 400,000 = $8.00 = = ($7.90/unit $8.00/unit) = $45,000 U
450,000 units
2., 3., and 4. The actual and budgeted unit costs are: Actual Direct materials Cookie mix Milk chocolate Almonds Direct manuf. labor Mixing Baking $0.02 ($93,000 4,650,000) 0.20 ($532,000 2,660,000) 0.50 ($240,000 480,000) 14.40 ($108,000 450,000 60) 18.00 ($240,000 800,000 60) Budgeted $0.02 0.15 0.50 14.40 18.00
The actual output achieved is 450,000 pounds of chocolate nut supreme.
The direct cost price and efficiency variances are:
Actual Costs Incurred (Actual Input Qty. Actual Price) (1) Direct materials Cookie mix Milk chocolate Almonds $ 93,000 532,000 240,000 $865,000 Actual Input Qty. Budgeted Price (3) $ 93,000a 399,000b 240,000c $732,000 $108,000d 240,000e $348,000
f g
Price Variance (2)=(1)(3) $ 0 133,000 U 0 $133,000 U $ $ 0 0 0
Efficiency Variance (4)=(3)(5) $ 3,000 U 61,500 U 15,000 U $79,500 U $ 0 30,000 F $30,000 F
Flex. Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (5) $ 90,000f 337,500g 225,000h $652,500 $108,000i 270,000j $378,000
Direct manuf. labor costs Mixing $108,000 Baking 240,000 $348,000
a b
$0.02 4,650,000 = $93,000 $0.15 2,660,000 = $399,000 c $0.50 480,000 = $240,000 d $14.40/hr. (450,000 min. 60 min./hr.) = $108,000 e $18.00/hr. (800,000 min. 60 min./hr.) = $240,000
$0.02 10 450,000 = $90,000 $0.15 5 450,000 = $337,500 h $0.50 1 450,000 = $225,000 i $14.40 (450,000 60) = $108,000 j $18.00 (450,000 30) = $270,000
Comments on the variances include Selling price variance. This may arise from a proactive decision to reduce price to expand market share or from a reaction to a price reduction by a competitor. It could also arise from unplanned price discounting by salespeople. Material price variance. The $0.05 increase in the price per ounce of milk chocolate could arise from uncontrollable market factors or from poor contract negotiations by Aunt Mollys. Material efficiency variance. For all three material inputs, usage is greater than budgeted. Possible reasons include lower quality inputs, use of lower quality workers, and the mixing and baking equipment not being maintained in a fully operational mode. The higher price per ounce of milk chocolate (and perhaps higher quality of milk chocolate) did not reduce the quantity of milk chocolate used to produce actual output. Labor efficiency variance. The favorable efficiency variance for baking could be due to workers eliminating nonvalue-added steps in production.
7-43 1.
(30 min.) Flexible budgeting, activity-based costing, variance analysis. Actual Amounts 30,000 250 120 3 360 $14 $5,040 Amounts 22,500 225 100 3.5 350 $12.50 $4,375
Static-budget a. b. c. d. e. f. g. Units of TGC produced and sold Batch size (units per batch) Number of batches (a b) Cleaning labor-hours per batch Total cleaning labor-hours (c d) Cost per cleaning labor-hour Total cleaning labor cost (e f)
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 quantity Actual price Budgeted price of input of input of input
)
= ($14.00 $12.50) 350 = $525 F Budgeted quantity Budgeted price Actual quantity of input allowed of input of input used for actual output = (350 270) $14 = $1,120 U
Efficiency variance =
(
The unfavorable flexible-budget variance of $595 is composed 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. The favorable price variance could be the result of skillful negotiations, abundance of labor, or poor quality of labor. Small actual batch sizes could be the result of quality problems. Higher actual cleaning laborhours per batch could result from unmotivated or underskilled workers or very tight standards for cleaning time.
7-44
(30 min.) 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
Actual Costs Incurred (Actual Input Qty. Actual Price) Direct Materials $20,196 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output Budgeted Price) (4,488 0.10 $50) $22,440
Actual Input Qty. Budgeted Price (408 $50) $20,400
$204 F Price variance Direct Manufacturing Labor (1,020 $18) $18,360 $102 U Price variance
$2,040 F Efficiency variance (4,488 0.25 $18) $20,196 $1,836 F Efficiency variance
$18,462
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 a 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.
3. If Anderson does nothing about standard costs, his behavior will violate the Standards of Ethical Conduct for Management Accountants. In particular, he would be violating the (a) standards of competence, by not performing technical duties in accordance with relevant standards; (b) standards of integrity, by passively subverting the attainment of the organizations objective to control costs; and (c) standards of objectivity, by not communicating information fairly and not disclosing all relevant cost information. 4. Anderson should discuss the situation with Fenton and point out that the standards are lax and that this practice is unethical. If Fenton does not agree to change, Anderson should escalate the issue up the hierarchy in order to effect change. If organizational change is not forthcoming, Anderson should be prepared to resign rather than compromise his professional ethics. 5. Main pros of using Benchmarking Clearing House information to compute variances are (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.
Chapter 7 Case The Starbucks case in this chapter may only be discussed using the textbook write-up. The case questions challenge students to apply the concepts learned in the chapter to a specific business situation. MANAGEMENT CONTROL AT STARBUCKS 1. The efficiency variance is $30 U ((1,000 actual units $0.70 budgeted cost per unit) $730 actual total costs). The manager has no control over the price paid by the store for the coffee from Starbucks corporate. This price is the budgeted price and hence the variance on account of direct materials is totally an efficiency variance. Trying to hold the manager accountable for a price variance would violate the concept of controllability (discussed in chapter 6), because the manager cannot influence the price charged by the corporate supply function. The manager does, however, have control over how well labor uses coffee to prepare drinks. The unfavorable efficiency variance is most likely a result of using too much coffee to make the 1,000 drinks, due to waste or inefficiency (or too much coffee in each drink). Keep in mind that this is one variance for one drinks coffee ingredient, for a one-week time period. Similar variances can be calculated for the remaining direct materials items and aggregated for periods of a month, quarter, or year. 2. Some examples of nonfinancial measures include employee commitment and satisfaction; employee turnover; number of drinks sold by category and by hour; customer waiting times in queues; product waste levels; customer satisfaction; labor hours worked; raw ingredient quantities; and market share. Nonfinancial measures matter because they draw attention to areas that may be problems and require action. Often, nonfinancial measures are leading indicators of future financial performance. For example, consistently low scores on customer waiting times may indicate that, as competition increases (that is, other premium coffee shops open nearby), customers will go elsewhere for their coffee fix, thereby reducing revenues in future periods. Nonfinancial measures also are relevant when evaluating the performance of store managers.