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costacctg13_sm_ch07 - CHAPTER 7 FLEXIBLE BUDGETS,...

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Unformatted text preview: CHAPTER 7 FLEXIBLE BUDGETS, DIRECT­COST VARIANCES, AND MANAGEMENT CONTROL 7­1 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 ident ify areas not operating as expected. The larger the variance, the more likely a n area is not operating as expected. 7­2 Two sources of informat ion about budgeted amounts are (a) past amounts and (b) detailed engineering studies. 7­3 A favorable variance––denoted F––is a variance that has the effect of increasing operating inco me relative to the budgeted amount. An unfavorable variance––denoted U––is a variance that has the effect of decreasing operating income relat ive to the budgeted amount. 7­4 The key difference is the output level used to set the budget. A static budget is based on the level o f 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 unt il the end of the budget period. 7­5 A flexible­budget analysis enables a manager to dist inguish 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. 7­6 The steps in developing a flexible budget are: Step 1: Ident ify the actual quant it y of output. Step 2: Calculate the flexible budget for revenues based on budgeted selling price and actual quant it y of output. Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output unit, actual quant it y of output, and budgeted fixed costs. Four reasons for using standard costs are: (i) cost management, (ii) pricing decisio ns, (iii) budgetary planning and control, and (iv) financial statement preparation. 7­7 7­8 A manager should subdivide the flexible­budget 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 quantit ies o f direct materials used to produce actual output). The individual causes of these variances can then be invest igated, recognizing possible interdependencies across these individual causes. 7­1 7­9 Possible causes of a favorable direct materials price variance are: · purchasing o fficer negotiated more skillfully than was planned in the budget, · purchasing manager bought in larger lot sizes than budgeted, thus obtaining quant it y discounts, · materials prices decreased unexpectedly due to, say, industry oversupply, · budgeted purchase pr ices were set without careful analys is of the market, and · purchasing manager received unfavorable terms on nonpurchase price factors (such as lower qualit y materials). 7­10 Some possible reasons for an unfavorable direct manufacturing labor efficiency variance are the hiring and use of underskilled workers; inefficient scheduling o f work so that the workforce was not optimally occupied; poor maintenance of machines result ing in a high proportion o f non­value­added labor; unrealist ic time standards. Each of these factors would result in actual direct manufacturing labor­hours being higher than indicated by the standard work rate. 7­11 Variance analys is, by providing informat ion about actual performance relative to standards, can form the basis of cont inuous operational improvement. The underlying causes o f unfavorable variances are ident ified, and corrective act ion taken where possible. Favorable variances can also provide informat ion if the organizat ion can identify why a favorable variance occurred. Steps can often be taken to replicate those condit ions more often. As the easier changes are made, and perhaps so me standards tightened, the harder issues will be revealed for the organizat ion to act on—this is continuous improvement. 7­12 An individual business funct ion, such as production, is interdependent with other business funct ions. Factors outside o f 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, · market ing personnel making promises for delivery t imes that require a large number of rush orders can create production­scheduling difficult ies, and · purchase of poor­qualit y materials by the purchasing manager can result in defects and waste. 7­13 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 fro m budgeted amounts and then to use that knowledge to promote learning and continuous improvement. 7­14 Variances can be calculated at the activit y level as well as at the company level. For example, a price variance and an efficiency variance can be co mputed for an activit y area. 7­15 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, techno logy) next year make even the current low­cost producer not a demanding enough hurdle. 7­2 7­16 (20–30 min.) Flexible budget. Variance Analysis for Brabham Enterpr ises for August 2009 Actual Results (1) g 2,800 a $313,600 d 229,600 84,000 g 50,000 $ 34,000 Flexible­ Budget 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 b $308,000 e 207,200 100,800 g 54,000 $ 46,800 Sales­Volume Variances (4) = (3) – (5) 200 U $22,000 U 14,800 F 7,200 U 0 $ 7,200 U Static Budget (5) g 3,000 c $330,000 f 222,000 108,000 g 54,000 $ 54,000 Units (tires) sold Revenues Variable costs Contribution margin Fixed costs Operating income $12,800 U $ 7,200 U Total flexible­budget variance Total sales­volume variance $20,000 U Total static­budget 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 informat ion items are: Actual 2,800 $ 112 $ 82 $50,000 Budgeted 3,000 $ 110 $ 74 $54,000 Units Unit selling price Unit variable cost Fixed costs The total static­budget variance in operating income is $20,000 U. There is both an unfavorable total flexible­budget variance ($12,800) and an unfavorable sales­vo lume variance ($7,200). The unfavorable sales­vo lume variance arises so lely because actual unit s manufactured and so ld were 200 less than the budgeted 3,000 units. The unfavorable flexible­budget variance of $12,800 in operating inco me is due primarily to the $8 increase in unit variable costs. This increase in unit variable costs is only part ially o ffset by the $2 increase in unit selling price and the $4,000 decrease in fixed costs. 7­3 7­17 (15 min.) Flexible budget. The exist ing 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 units––direct materials of $400,000 in the static budget ÷ budgeted direct materials cost per attaché case of $40. The fo llowing is a Level 2 analysis that presents a flexible­budget variance and a sales­ vo lume variance of each direct cost category. Variance Analysis for Connor Company Flexible­ Sales­ Actual Budget Flexible Volume Static Results Variances Budget Variances Budget (1) (2) = (1) – (3) (3) (4) = (3) – (5) (5) Output units 8,800 0 8,800 1,200 U 10,000 Direct materials $364,000 $12,000 U $352,000 $48,000 F $400,000 Direct manufacturing labor 78,000 7,600 U 70,400 9,600 F 80,000 Direct marketing labor 110,000 4,400 U 105,600 14,400 F 120,000 Total direct costs $552,000 $24,000 U $528,000 $72,000 F $600,000 $24,000 U $72,000 F Flexible­budget variance Sales­volume variance $48,000 F Static­budget variance The Level 1 analysis shows total direct costs have a $48,000 favorable variance. However, the Level 2 analys is reveals that this favorable variance is due to the reduction in output of 1,200 units fro m the budgeted 10,000 units. Once this reduction in output is taken into account (via a flexible budget), the flexible­budget variance shows each direct cost category to have an unfavorable variance indicat ing 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: Actual Budgeted Units 8,800 10,000 Direct materials $ 41.36 $ 40.00 Direct manufacturing labor $ 8.86 $ 8.00 Direct marketing labor $ 12.50 $ 12.00 Analys is of price and efficiency variances for each cost category could assist in further the ident ifying causes o f these more aggregated (Level 2) variances. 7­4 7­18 (25–30 min.) Flexible­budget preparation and analysis. 1. Variance Analysis for Bank Management Printers for September 2009 Level 1 Analysis Actual Results (1) 12,000 a $252,000 d 84,000 168,000 150,000 $ 18,000 Static­Budget 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 c $300,000 f 120,000 180,000 145,000 $ 35,000 Units so ld Revenue Variable costs Contribut ion margin Fixed costs Operating income $17,000 U Total static­budget variance 2. Level 2 Analysis Actual Results (1) Units sold 12,000 a Revenue $252,000 d Variable costs 84,000 Contribution margin 168,000 Fixed costs 150,000 Operating income $ 18,000 Flexible­ Sales Budget Flexible Volume Static Variances Budget Variances Budget (2) = (1) – (3) (3) (4) = (3) – (5) (5) 0 12,000 3,000 U 15,000 b c $12,000 F $240,000 $60,000 U $300,000 e f 12,000 F 96,000 24,000 F 120,000 24,000 F 144,000 36,000 U 180,000 5,000 U 145,000 0 145,000 $19,000 F $ (1,000) $36,000 U $ 35,000 $19,000 F $36,000 U Total flexible­budget Total sales­volume variance variance $17,000 U Total static­budget variance a 12,000 × $21 = $252,000 12,000 × $7 = $ 84,000 e 12,000 × $20 = $240,000 12,000 × $8 = $ 96,000 c f 15,000 × $20 = $300,000 15,000 × $8 = $120,000 b d 3. Level 2 analysis breaks down the static­budget variance into a flexible­budget variance and a sales­vo lume variance. The primary reason for the static­budget variance being unfavorable ($17,000 U) is the reduction in unit vo lume from the budgeted 15,000 to an actual 12,000. One explanat ion for this reduct ion 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. Alternat ively, it could be due to using lower qualit y materials (which in turn adversely affected unit vo lume). 7­5 7­19 (30 min.) Flexible budget, working backward. 1. Variance Analysis for The Clarkson Co mpany for the year ended December 31, 2009 Actual Results (1) 130,000 $715,000 515,000 200,000 140,000 $ 60,000 Flexible­ Budget Variances (2)=(1)-(3) 0 $260,000 F 255,000 U 5,000 F 20,000 U $ 15,000 U Flexible Budget (3) 130,000 a $455,000 b 260,000 195,000 120,000 $ 75,000 Sales­Volume Variances (4)=(3)-(5) 10,000 F $35,000 F 20,000 U 15,000 F 0 $15,000 F Static Budget (5) 120,000 $420,000 240,000 180,000 120,000 $ 60,000 Units sold Revenues Variable costs Contribution margin Fixed costs Operating income $15,000 U Total flexible­budget variance $15,000 F Total sales volume variance $0 Total static­budget variance a b 130,000 × $3.50 = $455,000; $420,000 ¸ 120,000 = $3.50 130,000 × $2.00 = $260,000; $240,000 ¸ 120,000 = $2.00 2. Actual selling price: Budgeted selling price: Actual variable cost per unit: Budgeted variable cost per unit: $715,000 420,000 515,000 240,000 ¸ ÷ ÷ ÷ 130,000 120,000 130,000 120,000 = = = = $5.50 $3.50 $3.96 $2.00 3. A zero total static­budget variance may be due to offsetting total flexible­budget and total sales­vo lume variances. In this case, these two variances exact ly o ffset each other: Total flexible­budget variance Total sales­volume variance $15,000 Unfavorable $15,000 Favorable A closer look at the variance co mponents reveals some major deviat ions from plan. Actual variable costs increased fro m $2.00 to $3.96, causing an unfavorable flexible­budget variable cost variance of $255,000. Such an increase could be a result of, for example, a jump in direct material prices. Clarkson was able to pass most of the increase in costs onto their customers—actual selling price increased by 57% [($5.50 – $3.50) ¸ $3.50], bringing about an offsetting favorable flexible­budget revenue variance in the amount of $260,000. An increase in the actual number of units so ld also contributed to more favorable results. The company should examine why the units so ld increased despite an increase in direct material prices. For example, Clarkson’s customers may have stocked up, anticipat ing future increases in direct material prices. Alternat ively, Clarkson’s selling price increases may have been lower than compet itors’ price increases. Understanding the reasons why actual results differ from budgeted amounts can help Clarkson better manage its costs and pricing decisio ns in the future. The important lesson learned here is that a superficial examinat ion o f summary level data (Levels 0 and 1) may be insufficient. It is imperat ive to scrutinize data at a more detailed level (Level 2). Had Clarkson not been able to pass costs on to customers, losses would have been considerable. 7­6 7­20 (30­40 min.) Flexible budget and sales volume variances. 1. and 2. Performance Report for Marron, Inc., June 2009 Static Budget Static Variance as Budget % of Static Variance Budget (6) = (1) – (5) (7) = (6) ¸ (5) 25,000 F 5.0% $110,000 F 3.4% 140,000 U 8.0% $ 30,000 U 2.0% Units (pounds) Revenues Variable mfg. costs Contribut ion margin Actual (1) 525,000 $3,360,000 1,890,000 $1,470,000 Flexible Budget Variances (2) = (1) – (3) ­ $ 52,500 U 52,500 U $105,000 U Flexible Sales Volume Budget Variances (3) (4) = (3) – (5) 525,000 25,000 F a $3,412,500 $162,500 F b 1,837,500 87,500 U $1,575,000 $ 75,000 F Static Budget (5) 500,000 $3,250,000 1,750,000 $1,500,000 $105,000 U Flexible­budget variance $ 75,000 F Sales­vo lume variance $30,000 U Static­budget variance a Budgeted selling price = $3,250,000 ¸ 500,000 lbs = $6.50 per lb. Flexible­budget revenues = $6.50 per lb. ´ 525,000 lbs. = $3,412,500 Budgeted variable mfg. cost per unit = $1,750,000 ¸ 500,000 lbs. = $3.50 Flexible­budget variable mfg. costs = $3.50 per lb. ´ 525,000 lbs. = $1,837,500 b 7­7 3. The selling price variance, caused so lely by the difference in actual and budgeted selling price, is the flexible­budget variance in revenues = $52,500 U. 4. The flexible­budget variances show that for the actual sales vo lume of 525,000 pounds, selling prices were lower and costs per pound were higher. The favorable sales vo lume 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 2009. Levine should be more concerned because the small static­budget variance in contribut ion margin o f $30,000 U is actually made up o f a favorable sales­vo lume variance in contribut ion margin of $75,000, an unfavorable selling­price variance o f $52,500 and an unfavorable variable manufacturing costs variance o f $52,500. Levine should analyze why each of these variances occurred and the relat ionships among them. Could the efficiency of variable manufacturing costs be improved ? Did the sales vo lume increase because of a decrease in selling price or because o f growth in the overall market? Analys is of these quest ions would help Levine decide what actions he should take. 7­8 7­21 (20–30 min.) Price and efficiency variances. 1. The key informat ion items are: Actual 60,800 16,000 $ 0.82 Budgeted 60,000 15,000 $ 0.89 Output units (scones) Input units (pounds of pumpkin) Cost per input unit Peterson budgets to obtain 4 pumpkin scones from each pound of pumpkin. The flexible­budget variance is $408 F. Flexible­ Budget Variance (2) = (1) – (3) $408 F Pumpkin costs a b Actual Results (1) a $13,120 Flexible Budget (3) b $13,528 Sales­Volume Static Variance Budget (4) = (3) – (5) (5) c $13,350 $178 U 16,000 × $0.82 = $13,120 60,800 × 0.25 × $0.89 = $13,528 c 60,000 × 0.25 × $0.89 = $13,350 2. Flexible Budget Actual Costs (Budgeted Input Incurred Qty. Allowed for (Actual Input Qty. Actual Input Qty. Actual Output × Actual Price) × Budgeted Price × Budgeted Price) a b c $13,120 $14,240 $13,528 $1,120 F $712 U Price variance Efficiency variance $408 F Flexible­budget 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 flexible­budget variance of $408 has two offsetting co mponents: (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 explanat ion may be that Peterson purchased lower qualit y pumpkins at a lower cost per pound. 7­9 7­22 (15 min.) Materials and manufacturing labor variances. Flexible Budget Actual Costs (Budgeted Input Incurred Qty. Allowed for (Actual Input Qty. Actual Input Qty. Actual Output × Actual Price) × Budgeted Price × Budgeted Price) $200,000 $214,000 $225,000 Direct Materials $14,000 F $11,000 F Price variance Efficiency variance $25,000 F Flexible­budget variance Direct Mfg. Labor $90,000 $86,000 $80,000 $4,000 U $6,000 U Price variance Efficiency variance $10,000 U Flexible­budget variance 7­23 (30 min.) Direct materials and direct manufacturing labor variances. 1. 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 Actual Quantity ´ Budgeted Price (3) a $10,890.00 c $ 8,360.00 May 2009 Units Direct materials Direct labor Total price variance Total efficiency variance a b Efficiency Variance (4) = (3) – (5) $990.00 U $440.00 F $550.00 U Flexible Budget (5) 550 b $9,900.00 d $8,800.00 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 flexible­budget variance for both inputs = $1,919.50U + $550U = $2,469.50U Total flexible­budget cost of direct materials and direct labor = $9,900 + $8,800 = $18,700 Total flexible­budget variance as % of total flexible­budget costs = $2,469.50 ¸ $18,700 = 13.21% 7­10 2. May 2010 Units Direct materials Direct manuf. labor Total price variance Total efficiency variance a Actual Results (1) 550 a $11,828.36 d $ 8,295.21 Price Variance (2) = (1) – (3) Actual Quantity ´ Budgeted Price (3) Efficiency Variance (4) = (3) – (5) $772.20 U $607.20 F $165.00 U b $1,156.16 U $10,672.20 e $ 102.41 U $ 8,192.80 $1,258.57 U Flexible Budget (5) 550 c $9,900.00 c $8,800.00 Actual dir. mat. cost, May 2010 = Actual dir. mat. cost, May 2009 ´ 0.98 ´ 0.95 = $12,705 ´ 0.98 ´ 0.95 = $11.828.36 Alternativel y, actual dir. mat. cost, May 2010 = (Actual dir. mat. quantity used in May 2009 ´ 0.98) ´ (Actual dir. mat. price in May 2009 ´ 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 2009. d Actual dir. labor cost, May 2010 = Actual dir. manuf. cost May 2009 ´ 0.98 = $8,464.50 ´ 0.98 = $8,295.21 Alternativel y, actual dir. labor cost, May 2010 = (Actual dir. manuf. labor quantity used in May 2009 ´ 0.98) ´ Actual dir. labor price in 2009 = (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 flexible­budget variance for both inputs = $1,258.57U + $165U = $1,423.57U Total flexible­budget cost of direct materials and direct labor = $9,900 + $8,800 = $18,700 Total flexible­budget variance as % of total flexible­budget costs = $1,423.57 ¸ $18,700 = 7.61% 3. Efficiencies have improved in the direct ion indicated by the production manager—but, it is unclear whether they are a trend or a one­time occurrence. Also, overall, variances are st ill 7.6% of flexible input budget. GloriaDee should continue to use the new material, especially in light of its superior qualit y and feel, but it may want to keep the fo llowing points in mind: · The new material costs substantially more than the old ($1.75 in 2009 and $1.6625 in 2010 vs. $1.50 per meter). Its price is unlikely to come down even more within the coming year. Standard material price should be re­examined and possibly changed. · GloriaDee should continue to work to reduce direct materials and direct manufacturing labor content. The reductions from May 2009 to May 2010 are a good development and should be encouraged. 7­11 7­24 (30 min.) Price and efficiency variances, journal entries. 1. Direct materials and direct manufacturing labor are analyzed in turn: Actual Costs Incurred (Actual Input Qty. × Actual Price) a (100,000 × $4.65 ) $465,000 Actual Input Qty. × Budgeted Price Purchases Usage (100,000 × $4.50) $450,000 (98,055 × $4.50) $441,248 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) Direct Materials (9,850 × 10 × $4.50) $443,250 $15,000 U Price variance Direct Manufacturing Labor b $2,002 F Efficiency variance (9,850 × 0.5 × $30) or (4,925 × $30) $147,750 $750 F Efficiency variance (4,900 × $31.5 ) $154,350 (4,900 × $30) $147,000 $7,350 U Price variance a b $465,000 ÷ 100,000 = $4.65 $154,350 ÷ 4,900 = $31.5 2. Direct Materials Control Direct Materials Price Variance Accounts Payable or Cash Control Work­in­Process Control Direct Materials Control Direct Materials Efficiency Variance Work­in­Process Control Direct Manuf. Labor Price Variance Wages Payable Control Direct Manuf. Labor Efficiency Variance 450,000 15,000 465,000 443,250 441,248 2,002 147,750 7,350 154,350 750 3. Some students’ co mments will be immersed in conjecture about higher prices for materials, better qualit y materials, higher grade labor, better efficiency in use o f materials, and so forth. A possibilit y is that approximately the same labor force, paid somewhat more, is taking slight ly less time with better materials and causing less waste and spoilage. A key po int 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 fashio n. Practically, fro m a control viewpoint, a standard is a band or range of acceptable performance rather than a single­figure measure. 4. The purchasing point is where responsibilit y for price variances is found most often. The production point is where responsibilit y for efficiency variances is found most often. The Monroe Corporation may calculate variances at different points in time to tie in with these different responsibilit y areas. 7­12 7­25 (20 min.) Continuous improvement (continuation of 7­24). 1. Standard quantit y input amounts per output unit are: Direct Direct Materials Manufacturing Labor (pounds) (hours) January 10.000 0.500 February (Jan. × 0.988) 9.880 0.494 March (Feb. × 0.988) 9.761 0.488 2. The answer is the same as that for requirement 1 of Question 7­24, except for the flexible­budget amount. Actual Costs Incurred (Actual Input Qty. × Actual Price) Direct Materials a (100,000 × $4.65 ) $465,000 Actual Input Qty. × Budgeted Price Purchases Usage (100,000 × $4.50) (98,055 × $4.50) $450,000 $441,248 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (9,850 × 9.761 × $4.50) $432,656 $15,000 U Price variance Direct Manuf. Labor b (4,900 × $31.5 ) $154,350 $8,592 U Efficiency variance (4,900 × $30) $147,000 (9,850 × 0.488 × $30) $144,204 $2,796 U Efficiency variance $7,350 U Price variance a b $465,000 ÷ 100,000 = $4.65 $154,350 ÷ 4,900 = $31.5 Using cont inuous improvement standards sets a tougher benchmark. The effic iency variances for January (fro m Exercise 7­24) and March (from Exercise 7­25) are: January $2,002 F $ 750 F March $8,592 U $2,796 U Direct materials Direct manufacturing labor Note that the question assumes the cont inuous improvement applies only to quantit y inputs. An alternat ive approach is to have continuous improvement apply to the total budgeted input cost per output unit ($45 for direct materials in January and $15 for direct manufacturing labor in January). 7­13 7­26 (20-30 min.) Materials and manufacturing labor variances, standard costs. 1. Direct Materials Actual Costs Incurred (Actual Input Qty. × Actual Price) (3,700 sq. yds. × $5.10) $18,870 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (2,000 × 2 × $5.00) (4,000 sq. yds. × $5.00) $20,000 Actual Input Qty. × Budgeted Price (3,700 sq. yds. × $5.00) $18,500 $370 U Price variance $1,500 F Efficiency variance $1,130 F Flexible­budget 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 compet it ion. 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 emplo y higher­skilled 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 qualit y materials being purchased. Less material was used than budgeted due to the high qualit y o f the materials. Direct Manufacturing Labor Actual Costs Incurred (Actual Input Qty. × Actual Price) (900 hrs. × $9.80) $8,820 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (2000 × 0.5 × $10.00) (1,000 hrs. × $10.00) $10,000 Actual Input Qty. × Budgeted Price (900 hrs. × $10.00) $9,000 $180 F Price variance $1,000 F Efficiency variance $1,180 F Flexible­budget 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 analys is o f labor compensat ion. The favorable labor efficiency variance may be due to, say, (a) more efficient workers being emplo yed, (b) a redesign in the plant enabling labor to be more productive, or (c) the use of higher qualit y materials. 7­14 2. Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) Control Point Purchasing Actual Costs Incurred (Actual Input Qty. Actual Input Qty. × Actual Price) × Budgeted Price (6,000 sq. yds.× $5.10) (6,000 sq. yds. × $5.00) $30,600 $30,000 $600 U Price variance Production (3,700 sq. yds.× $5.00) (2,000 × 2 × $5.00) $18,500 $20,000 $1,500 F Efficiency variance Direct manufacturing labor variances are the same as in requirement 1. 7­15 7­27 (15-25 min.) Journal entries and T­accounts (continuation of 7­26). For requirement 1 fro m Exercise 7­26: a. Direct Materials Pr ice Variance Accounts Payable Control To record purchase of direct materials. b. Work­in­Process Control Direct Materials Effic iency Variance Direct Materials Control To record direct materials used. Direct Materials Control 18,500 370 18,870 20,000 1,500 18,500 c. Work­in­Process Control 10,000 Direct Manufacturing Labor Price Variance Direct Manufacturing Labor Efficiency Variance Wages Payable Control To record liabilit y for and allocat ion of direct labor costs. Direct Materials Control (a) 18,500 (b) 18,500 Direct Materials Price Variance (a) 370 Direct Manufacturing Labor Price Variance (c) 180 180 1,000 8,820 Direct Materials Efficiency Variance (b) 1,500 Direct Manuf. Labor Efficiency Variance (c) 1,000 Work­in­Process Control (b) 20,000 (c) 10,000 Wages Payable Control (c) 8,820 Accounts Payable Control (a) 18,870 For requirement 2 fro m Exercise 7­26: The fo llowing journal entries pertain to the measurement of price and efficiency variances when 6,000 sq. yds. of direct materials are purchased: a1. Direct Materials Control Direct Materials Pr ice Variance Accounts Payable Control To record direct materials purchased. a2. Work­in­Process Control Direct Materials Control Direct Materials Effic iency Variance To record direct materials used. 30,000 600 30,600 20,000 18,500 1,500 7­16 Direct Materials Control (a1) 30,000 (a2) 18,500 Direct Materials Price Variance (a1) 600 Accounts Payable Control (a1) 30,600 Work­in­Process Control (a2) 20,000 Direct Materials Efficiency Variance (a2) 1,500 The T­account 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: Standard Costs Direct Costs Standard price(s) × Standard input allowed for actual outputs achieved Normal Costs Actual price(s) × Actual input These journal entries differ fro m the normal costing entries because Work­in­Process 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. 7­17 7­28 (25 min.) Flexible budget (Refer to data in Exercise 7­26). 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 sales­vo lume variance. Failure to pinpo int these three categories muddies the analyt ical task. The clearer analys is fo llows (in dollars): Actual Costs Flexible Budget Incurred (Actual (Budgeted Input Qty. Allowed for Input Qty. × Actual Actual Input Qty. Actual Output × Budgeted Price × Budgeted Price) Price) Direct Materials $18,870 $18,500 (b) $1,500 F $20,000 Static Budget $25,000 (a) $370 U Direct Manuf. Labor (c) $5,000 F $8,820 (a) $180 F $9,000 $10,000 (b) $1,000 F $12,500 (c) $2,500 F (a) Price variance (b) Efficiency variance (c) Sales­vo lume variance The sales­vo lume 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. Managers may be incensed at the failure to reach scheduled production (it may mean fewer sales) even though the 2,000 units were turned out with supreme efficiency. Sometimes this pheno menon is called being efficient but ineffective, where effect iveness is defined as the abilit y to reach original targets and efficiency is the optima l relat ionship 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 efficient ly. 7­18 7­29 (45–50 min.) Activity­based costing, flexible­budget variances for finance­function activities. 1. Receivables Receivables is an output unit level act ivit y. Its flexible­budget variance can be calculated as fo llo ws: Flexible­budget Actual Flexible­budget = costs – variance costs = ($0.80 × 945,000) – ($0.639 × 945,000) = $756,000 – $603,855 = $152,145 U Payables Payables is a batch level activit y. Static­budget Amounts 1,000,000 5 200,000 $2.90 $580,000 Actual Amounts 945,000 4.468 211,504 $2.85 $602,786 a. b. c. d. e. Number of deliveries Batch size (units per batch) Number of batches (a ÷ b) Cost per batch Total payables act ivit y cost (c × d) Step 1: The number of batches in which payables should have been processed = 945,000 actual units ÷ 5 budgeted units per batch = 189,000 batches Step 2: The flexible­budget amount for payables = 189,000 batches × $2.90 budgeted cost per batch = $548,100 The flexible­budget variance can be co mputed as follows: Flexible­budget variance = Actual costs – Flexible­budget costs = (211,504 × $2.85) – (189,000 × $2.90) = $602,786 – $548,100 = $54,686 U Travel expenses Travel expenses is a batch level act ivit y. Static­Budget Amounts Number of deliveries 1,000,000 Batch size (units per batch) 500 Number of batches (a ÷ b) 2,000 Cost per batch $7.60 Total travel expenses act ivit y cost (c × d) $15,200 Actual Amounts 945,000 501.587 1,884 $7.45 $14,036 a. b. c. d. e. 7­19 Step 1: The number of batches in which the travel expense should have been processed = 945,000 actual units ÷ 500 budgeted units per batch = 1,890 batches Step 2: The flexible­budget amount for travel expenses = 1,890 batches × $7.60 budgeted cost per batch = $14,364 The flexible budget variance can be calculated as follows: Flexible budget variance = Actual costs – Flexible­budget costs = (1,884 × $7.45) – (1,890 × $7.60) = $14,036 – $14,364 = $328 F 2. The flexible budget variances can be subdivided into price and efficiency variances. Price variance = Actual price Budgeted price of input – of input Actual quantity × of input Efficiency variance = Actual quantity Budgeted quantity of Budgeted price of input used – input allowed for × of input actual output Receivables Price Variance = = Efficiency variance = = Payables Price variance ($0.800 – $0.639) × 945,000 $152,145 U (945,000 – 945,000) × $0.639 $0 = = Efficiency variance = = Travel expenses Price variance ($2.85 – $2.90 ) × 211,504 $10,575 F (211,504 – 189,000) × $2.90 $65,262 U = = Efficiency variance = = ($7.45 – $7.60) × 1,884 $283 F (1,884­1,890) × $7.60 $46 F 7­20 7­30 (30 min.) Flexible budget, direct materials and direct manufacturing labor variances. 1. Variance Analysis for Tuscany Statuary for 2009 Flexible­ Sales­ Actual Budget Flexible Volume Static Results Variances Budget Variances Budget (1) (2) = (1) – (3) (3) (4) = (3) – (5) (5) a a Units so ld 6,000 0 6,000 1,000 F 5,000 b c Direct materials $ 594,000 $ 6,000 F $ 600,000 $100,000 U $ 500,000 a d e Direct manufacturing labor 950,000 10,000 F 960,000 160,000 U 800,000 a a a Fixed costs 1,005,000 5,000 U 1,000,000 0 1,000,000 Total costs $2,549,000 $11,000 F $2,560,000 $260,000 U $2,300,000 $11,000 F $260,000 U Flexible­budget variance Sales­vo lume variance $249,000 U Static­budget variance a Given $100 × 6,000 = $600,000 c $100 × 5,000 = $500,000 d $160 × 6,000 = $960,000 e $160 × 5,000 = $800,000 b 2. Actual Incurred (Actual Input Qty. × Actual Price) Direct materials a $594,000 Actual Input Qty. × Budgeted Price b $540,000 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) c $600,000 $54,000 U Price variance $60,000 F Efficiency variance $6,000 F Flexible­budget variance e $1,000,000 f $960,000 Direct manufacturing labor a $950,000 $50,000 F $40,000 U Price variance Efficiency variance $10,000 F Flexible­budget 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 7­21 7­31 (30 min.) Variance analysis, nonmanufacturing setting 1. Lightning Car Detailing Income Statement Variances For the month ended June 30, 2011 Static Budget Variance 25 F $ 9,375 F Cars Detailed Revenue Variable Costs Costs of supplies Labor Total Variable Costs Contribution Margin Fixed Costs Operating Income Budget Actual 200 225 $ 30,000 $ 39,375 1,500 5,600 7,100 22,900 9,500 2,250 6,000 8,250 31,125 9,500 750 U 400 U 1,150 U 8,225 F ­ $ 8,225 F $ 13,400 $ 21,625 2. To compute flexible budget variances for revenues and the variable costs, first calculate the budgeted cost or revenue per car, and then multiply that by the actual number of cars detailed. Subtract the actual revenue or cost, and the result is the flexible budget variance. FBV(Revenue) = Actual Revenue ­ Actual number of cars ´ (Budgeted revenue/budgeted # cars) = $39,375 ­ 225 ´ ($30,000/200) = $39,375 ­ $33,750 = $5,625 Favorable FBV(Supplies) = Actual Supplies expense ­ Actual number of cars ´ (Budgeted cost of supplies/budgeted # cars) = $2,250 ­ 225 ´ ($1,500/200) = $2,250 ­ $1,687.50 = $562.50 Unfa vorable FBV(Labor) = Actual Labor expense ­ Actual number of cars ´ (Budgeted cost of labor/budgeted # cars) = $6,000 ­ 225 ´ ($5,600/200) = $6,000 ­ $6,300 = $300 Favorable 7­22 The flexible budget variance for fixed costs is the same as the static budget variance, and equals $0 in this case. Therefore, the overall flexible budget variance in inco me is given by aggregat ing the variances co mputed earlier, adjusting for whether they are favorable or unfavorable. This yields: FBV(Operat ing Inco me) = $5,625F (­) $562.50U (+) $300F = $5,362.50. 3. In addit ion to understanding the variances co mputed above, Stevie should attempt to keep track of the number of cars worked on by each emplo yee, as well as the number of hours actually spent on each car. In addit ion, Stevie should look at the prices charged for detailing, in relat ion to the hours spent on each jo b. 4. This is just a simple problem of two equations & two unknowns. The two equations relate to the number of cars detailed and the labor costs (the wages paid to the emplo yees). X = number of cars detailed by lo ng­term emplo yee Y = number of cars detailed by both short­term emplo yees (combined) Budget: X + Y = 200 40X + 20Y = 5600 Subst itution: 40X + 20(200­X) = 5600 20X = 1600 X=80 Y=120 Actual: X + Y = 225 40X + 20Y = 6000 Subst itution: 40X + 20(225­X) = 6000 20X = 1500 X = 75 Y=150 Therefore the long term emplo yee is budgeted to detail 80 cars, and the new emplo yees are budgeted to detail 60 cars each. Actually the long term emplo yee details 75 cars (and grosses $3,000 for the mo nth), and the other two wash 75 each and gross $1,500 apiece. 5. The two short­term emplo yees are budgeted to earn gross wages of $14,400 per year (if June is t ypical, and less if it is a high vo lume mo nth). If this is a part­time jo b for them, then that is fine. If it is full­t ime, and they only get paid for what they wash, the excess capacit y may be causing motivat ion problems. Stevie needs to determine a better way to compensate emplo yees to encourage retention. This should increase customer satisfact ion, and potentially revenue, because lo nger­term emplo yees do a more thorough jo b. In addition, rather than paying the same wage per car, Stevie might consider setting qualit y standards and improvement goals for all of the emplo yees. 7­23 7­32 (60 min.) Comprehensive variance analysis, responsibility issues. 1a. Actual selling price = $82.00 Budgeted selling price = $80.00 Actual sales vo lume = 7,275 units Selling price variance = (Actual sales price - Budgeted sales price) × Actual sales vo lume = ($82 - $80) × 7,275 = $14,550 Favorable Development of Flexible Budget Budgeted Unit Amounts $80.00 6.60 b 18.60 c 18.00 a 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 ma nufacturing costs Total manufacturing costs Gross margin a Actual Volume 7,275 7,275 7,275 7,275 Flexible Budget Amount $582,000 48,015 135,315 130,950 314,280 112,500 426,780 $155,220 b c $49,500 ÷ 7,500 units; $139,500 ÷ 7,500 units; $135,000 ÷ 7,500 units Units so ld Revenues Variable costs DM-Frames DM-Lenses Direct manuf. labor Total variable costs Fixed manuf. costs Total costs Gross margin Level 2 Actual Results (1) 7,275 $596,550 55,872 150,738 145,355 351,965 108,398 460,363 $ 136,187 Flexible­ Budget Variances (2)=(1)­(3) Flexible Budget (3) 7,275 $582,000 48,015 135,315 130,950 314,280 112,500 426,780 $155,220 Sales ­ Volume Variance (4)=(3)­(5) Static Budget (5) 7,500 $600,000 49,500 139,500 135,000 324,000 112,500 436,500 $163,500 $ 14,550 F 7,857 U 15,423 U 14,405 U 37,685 U 4,102 F 33,583 U $19,033 U $ 18,000 U 1,485 F 4,185 F 4,050F 9,720 F 0 9,720 F $ 8,280 U $19,033 U Flexible­budget variance $ 8,280 U Sales­vo lume variance Level 1 $27,313 U Static­budget variance 7­24 1c. Price and Efficiency Variances DM-Frames-Actual ounces used = 3.20 per unit × 7,275 units = 23,280 oz. Price per oz. = $55,872 ¸ 23,280 = $2.40 DM-Lenses-Actual ounces used = 7.00 per unit × 7,275 units = 50,925 oz. Price per oz. = $150,738 ¸ 50,925 = $2.96 Direct Labor-Actual labor hours = $145,355 ¸ 14.80 = 9,821.3 hours Labor hours per unit = 9,821.3 ¸ 7,275 units = 1.35 hours per unit Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (3) (7,275 × 3.00 × $2.20) $48,015 Direct Materials: Frames Actual Costs Incurred (Actual Input Qty. × Actual Price) (1) (7,275 × 3.2 × $2.40) $55,872 Actual Input Qty. × Budgeted Price (2) (7,275 × 3.2 × $2.20) $51,216 $4,656 U Price variance $3,201 U Efficiency variance Direct Materials: Lenses (7,275 × 7.0 × $2.96) $150,738 (7,275 × 7.0 × $3.10) $157,868 (7,275 × 6.00 × $3.10) $135,315 $7,130 F Price variance $22,553 U Efficiency variance Direct Manuf. Labor (7,275 × 1.35 × $14.80) $145,355 (7,275 × 1.35 × $15.00) $147,319 (7,275 × 1.20 × $15.00) $130,950 $1,964 F Price variance $16,369 U Efficiency variance 2. Possible explanations for the price variances are: (a) Unexpected outcomes fro m purchasing and labor negotiat ions during the year. (b) Higher qualit y of frames and/or lower qualit y o f lenses purchased. (c) Standards set incorrectly at the start of the year. Possible explanations for the uniformly unfavorable efficiency variances are: (a) Substant ially higher usage of lenses due to poor qualit y lenses purchased at lower price. (b) Lesser trained workers hired at lower rates result in higher materials usage (for both frames and lenses), as well as lower levels of labor efficiency. (c) Standards set incorrectly at the start of the year. 7­25 7­33 (20 min.) Possible causes for price and efficiency variances 1. Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (3) (360,000 × 15 × Peso 0.35) $1,890,000 Actual Costs Incurred (Actual Input Qty. × Actual Price) (1) Direct Materials: Bottles Pesos 2,125,000 Actual Input Qty. × Budgeted Price (2) (6,000,000 × Peso 0.35) $2,100,000 Pesos 25,000 U Price variance Pesos 210,000 U Efficiency variance Direct Manufacturing Labor Pesos 664,940 (22,040 × Peso 29.30) $645,772 (360,000 × (2/60) × Peso 29.30) $351,600 Pesos 19,168 U Price variance Pesos 294,172 U Efficiency variance 2. If unio n organizers are targeting our plant, it could suggest emplo yee dissat isfaction wit h our wage and benefits po licies. During this time of targeting, we might expect emplo yees to work more slowly and they may be less careful with the materials that they are using. These tactics might be seen as helpful in either organizing the union or in receiving increases in wages and/or benefits. We should expect unfavorable efficiency variances for both wages and materials. We may see an unfavorable wage variance, if we need to pay overtime due to work slowdowns. We do, in fact, see a substant ial unfavorable materials quant it y variance, represent ing a serious overuse of materials. While we ma y not expect each bottle to use exact ly 15 oz. of glass, we do expect the shrinkage to be much less than this. Similarly, we see over 80% more hours used than we expect to make this number of bottles. They are able to make just over 16 bottles per hour, instead of the standard 30 bottles per hour. It is plausible that this waste & inefficiency are either caused by, or are reflect ive of the reasons behind the attempt to organize the unio n at this plant. 7­26 7­34 (35 min.) Material cost variances, use of variances for performance evaluation 1. Materials Variances Actual Costs Incurred (Actual Input Qty. × Actual Price) Direct Materials a (6,000 × $18 ) $108,000 Actual Input Qty. × Budgeted Price Purchases Usage (6,000 × $20) (5,000 × $20) $120,000 $100,000 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (500 × 8 × $20) (4,000 × $20) $80,000 $12,000 F Price variance a $20,000 U Efficiency variance $108,000 ÷ 6,000 = $18 2. The favorable pr ice variance is due to the $2 difference ($20 ­ $18) between the standard price based on the previous suppliers and the actual price paid through the on­line marketplace. The unfavorable efficiency variance could be due to several factors including inexperienced workers and machine malfunct ions. But the likely cause here is that the lower­priced t itanium was lower qualit y or less refined, which led to more waste. The labor efficiency variance could be affected if the lower qualit y t itanium caused the workers to use more time. 3. Switching suppliers was not a good idea. The $12,000 savings in the cost of titanium was outweighed by the $20,000 extra material usage. In addit ion, the $20,000U efficiency variance does not recognize the total impact of the lower qualit y titanium because, of the 6,000 pounds purchased, only 5,000 pounds were used. If the quantit y o f materials used in production is relat ively the same, Better Bikes could expect the remaining 1,000 lbs to produce 100 more units. At standard, 100 more units should take 100 × 8 = 800 lbs. There could be an addit ional unfavorable efficiency variance of (1000 ´ $20) $20,000 $4,000U 4. The purchasing manager’s performance evaluat ion should not be based so lely on the price variance. The short­run reduction in purchase costs was more than o ffset by higher usage rates. His evaluat ion should be based on the total costs of the company as a who le. In addit ion, the production manager’s performance evaluat ion should not be based so lely on the efficiency variances. In this case, the production manager was not responsible for the purchase of the lower­qualit y titanium, which led to the unfavorable effic iency scores. In general, it is important for Stanley to understand that not all favorable material price variances are “good news,” because o f the negative effects that can arise in the production process from the purchase of inferior inputs. They can lead to unfavorable 7­27 (100 × 8 × $20) $16,000 efficiency variances for both materials and labor. Stanley should also that understand efficiency variances may arise for many different reasons and she needs to know these reasons before evaluat ing performance. 5. Variances should be used to help Better Bikes understand what led to the current set of financial results, as well as how to perform better in the future. They are a way to facilitate the continuous improvement efforts of the company. Rather than focusing so lely on the price of titanium, Scott can balance price and qualit y in future purchase decisio ns. 6. Future problems can arise in the supply chain. Scott may need to go back to the previous suppliers. But Better Bikes’ relat ionship with them may have been damaged and they may now be selling all their available titanium to other manufacturers. Lower qualit y bicycles could also affect Better Bikes’ reputation with the distributors, the bike shops and customers, leading to higher warranty claims and customer dissat isfaction, and decreased sales in the future. 7­28 7­35 (30 min.) Direct manufacturing labor and direct materials variances, missing data. 1. Flexible Budget (Budgeted Input Qty. Allowed for Actual Input Qty. Actual Output × Budgeted Price × Budgeted Price) b c $384,000 $360,000 $24,000 U Efficiency variance Direct mfg. labor Actual Costs Incurred (Actual Input Qty.× Actual Price) a $368,000 $16,000 F Price variance $8,000 U Flexible­budget 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 quant it y 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 b $300,000 4. Actual Costs Incurred (Actual Input × Actual Price) a $292,500 $7,500 F Price variance a b Given 150,000 pounds × $2/pound = $300,000 7­29 7­36 (20–30 min.) Direct materials and manufacturing labor variances, solving unknowns. All given items are designated by an asterisk. Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (4,000* × 0.5* × $20*) $40,000 $2,000 F* Efficiency variance Actual Costs Incurred (Actual Input Qty. × Actual Price) Direct Manufacturing Labor (1,900 × $21) $39,900 Actual Input Qty. × Budgeted Price (1,900 × $20*) $38,000 $1,900 U* Price variance Direct Materials Purchases (13,000 × $5.25) (13,000 × $5*) $68,250* $65,000 $3,250 U* Price variance Usage (12,500 × $5*) $62,500 (4,000* × 3* × $5*) $60,000 $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 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 (rounded) 4. Standard qty. of direct materials = 4,000 units × 3 pounds/unit = 12,000 pounds 5. Flexible budget + Dir. mat ls. effcy. var. = $60,000 + $2,500 = $62,500 Actual quant it y of dir. mat ls. used = $62,500 ÷ Budgeted price per lb = $62,500 ÷ $5/lb = 12,500 lbs 6. Actual cost of direct materials, $68,250 – Price variance, $3,250 = $65,000 Actual qt y. of direct 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. 7­30 7­37 (20 min.) 1. Direct Materials: Direct materials and manufacturing labor variances, journal entries. Flexible Budget Actual Costs (Budgeted Input Incurred Qty. Allowed for (Actual Input Qty. Actual Input Qty. Actual Output × Actual Price) × Budgeted Price × Budgeted Price) Wool (given) 2,633.50 ´ $3.00 230 ´ 12 ´ $3.00 $8,295.50 $7,900.50 $8,280.00 $395 U $379.50 F Price variance Efficiency variance $15.50 U Flexible­budget variance Direct Manufacturing Labor: Flexible Budget Actual Costs (Budgeted Input Incurred Qty. Allowed for (Actual Input Qty. Actual Input Qty. Actual Output × Actual Price) × Budgeted Price × Budgeted Price) (given) 836 ´ $10.50 230 ´ 3.5 ´ $10.50 $7,814.50 $8,778.00 $8,452.50 $963.50 F $325.50 U Price variance Efficiency variance $638 F Flexible­budget variance 2. Direct Materials Pr ice Variance (time o f purchase = time of use) Direct Materials Control 7,900.50 Direct Materials Pr ice Variance 395.00 Accounts Payable Control or Cash 8,295.50 Direct Materials Effic iency Variance Work in Process Control Direct Materials Effic iency Variance Direct Materials Control 8,280.00 379.50 7,900.50 7­31 Direct Manufacturing Labor Variances Work in Process Control Direct Mfg. Labor Efficiency Variance Direct Mfg. Labor Price Variance Wages Payable or Cash 8,452.50 325.50 963.50 7,814.50 3. Plausible explanat ions for the above variances include: Shayna paid a litt le bit extra for the wool, but the wool was thicker and allo wed the workers to use less of it. Shayna used more inexperienced workers in April than she usually does. This resulted in payment of lower wages per hour, but the new workers were more inefficient and took more hours than normal. Overall though, the lower wage rates resulted in Shayna’s total wage bill being significant ly lower than expected. 7­32 7­38 (30 min.) Use of materials and manufacturing labor variances for benchmarking. 1. Unit variable cost (dollars) and component percentages for each fir m: Firm A DM DL VOH Total 2. Firm B $10.73 25.2% 17.05 40.0% 14.85 34.8% $42.63 100.0% Firm C $10.75 12.80 6.00 $29.55 Firm D $10.00 35.7% 11.25 40.2% 6.75 24.1% $28.00 100.0% 36.4% $11.25 32.3% 43.3% 14.03 40.3% 20.3% 9.56 27.4% 100.0% $34.84 100.0% Variances and percentage over/under standard for each fir m relative to Firm A: Firm B % over Variance standard DM Price Variance DM Efficiency Variance DL Price Variance DL Efficiency Variance 0.98 U 0.25 F 0.55 U 5.25 U 10.0% ­2.5% 3.3% 46.7% Firm C % over Variance standard ­ ­ 0.75 U 0.80 U 0.75 U 0.0% 7.5% 6.7% 6.7% Firm D % over Variance standard 1.25 F 2.50 U 1.28 U 1.50 U ­10.0% 25.0% 10.0% 13.3% To illustrate these calculations, consider the DM Price Variance for Firm B. This is computed as: Actual Input Quantity × (Actual Input Price – Price paid by Fir m A) 1.95 oz. × ($5.50 ­ $5.00) $0.98 U = = The % over standard is just the percentage differ ence in prices relative to Firm A. Again using the DM Price Variance calculation for Firm B, the % over standard is given by: (Actual Input Price – Price paid by Fir m A)/Price paid by Firm A ($5.50 ­ $5.00)/$5.00 10% over standard. = = 3. 7­33 To: Boss From: Junior Accountant Re: Benchmarking & productivit y improvements Date: October 15, 2010 Benchmarking advantages ­ we can see how productive we are relat ive to our compet it ion ­ we can see the specific areas in which there may be opportunit ies for us to reduce costs Benchmarking disadvantages ­ some of our compet itors are targeting the market for high­end and custom­made lenses. I'm not sure that looking at their costs helps with understanding ours better ­ we may focus too much on cost differentials and not enough on different iat ing ourselves, maintaining our compet itive advantages, and growing our margins Areas to discuss ­ we may want to find out whether we can get the same lower price for glass as Firm D ­ can we use Firm B’s materials efficiency and Firm C’s variable overhead consumpt ion levels as our standards for the coming year? 7­34 7­39 (60 min.) Comprehensive variance analysis review. Actual Results Units sold (90% × 2,000,000) Selling price per unit Revenues (1,800,000 × $4.80) Direct materials purchased and used: Direct materials per unit Total direct materials cost (1,800,000 × $0.80) Direct manufacturing labor: Actual ma nufacturing rate per hour Labor productivity per hour in units Manufacturing labor­hours of input (1,800,000 ÷ 250) Total direct manufacturing labor costs (7,200 × $15) Direct marketing costs: Direct marketing cost per unit Total direct marketing costs (1,800,000 × $0.30) Fixed costs ($850,000 - $30,000) Static Budgeted Amounts Units sold Selling price per unit Revenues (2,000,000 × $5.00) Direct materials purchased and used: Direct materials per unit Total direct materials costs (2,000,000 × $0.85) Direct manufacturing labor: Direct manufacturing rate per hour Labor productivity per hour in units Manufacturing labor­hours of input (2,000,000 ÷ 300) Total direct manufacturing labor cost (6,667 × $15.00) Direct marketing costs: Direct marketing cost per unit Total direct marketing cost (2,000,000 × $0.30) Fixed costs 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 Static­budget operating income Total static­budget variance Actual Results $8,640,000 1,440,000 108,000 540,000 2,088,000 6,552,000 820,000 $5,732,000 $5,732,000 6,750,000 $1,018,000 U 1,800,000 $4.80 $8,640,000 $0.80 $1,440,000 $15 250 7,200 $108,000 $0.30 $540,000 $820,000 2,000,000 $5.00 $10,000,000 $0.85 $1,700,000 $15.00 300 6,667 $100,000 $0.30 $600,000 $850,000 Static­Budget Amounts $10,000,000 1,700,000 100,000 600,000 2,400,000 7,600,000 850,000 $6,750,000 7­35 Flexible­budget­based variance analysis for Sonnet, Inc. for March 2010 Actual Results Units (diskett es) sold Revenues Variable costs Direct materials Direct manuf. labor Direct marketing costs Total variable costs Contribution margin Fixed costs Operating income 1,800,000 $8,640,000 1,440,000 108,000 540,000 2,088,000 6,552,000 820,000 $5,732,000 Flexible­Budget Variances 0 $360,000 U 90,000 F 18,000 U 0 72,000 F 288,000 U 30,000 F $258,000 U Flexible Budget 1,800,000 Sales­ Volume Variances 200,000 Static Budget 2,000,000 $9,000,000 $1,000,000 U $10,000,000 1,530,000 90,000 540,000 2,160,000 6,840,000 850,000 $5,990,000 $1,018,000 U 170,000 F 10,000 F 60,000 F 240,000 F 760,000 U 0 1,700,000 100,000 600,000 2,400,000 7,600,000 850,000 $ 760,000 U $6,750,000 Total static­budget variance $258,000 U Total flexible­budget variance $760,000 U Total sales­volume variance 3. 4. 5. Flexible­budget operating income = $5,990,000. Flexible­budget variance for operating inco me = $258,000U. Sales­vo lume variance for operating inco me = $760,000U. Analysis of direct mfg. labor flexible­budget variance for Sonnet, Inc. for March 2010 Actual Costs Incurred (Actual Input Qty. × Actual Price) (7,200 × $15.00) $108,000 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (*6,000 × $15.00) $90,000 Direct. Mfg. Labor Actual Input Qty. × Budgeted Price (7,200 × $15.00) $108,000 $0 Price variance $18,000 U Efficiency variance $18,000 U Flexible­budget variance * 1,800,000 units ÷ 300 direct manufacturing labor standard productivity rate per hour. 6. 7. DML price variance = $0; DML efficiency variance = $18,000U DML flexible­budget variance = $18,000U 7­36 7­40 (25 min.) Comprehensive variance analysis. 1. Variance Analysis for Sol Electronics for the second quarter of 2009 Second­ Quarter 2009 Actuals (1) 4,800 $ 71.50 $343,200 57,600 30,240 47,280 135,120 208,080 68,400 $139,680 Flexible Budget Variance (2) = (1) – (3) 0 $7,200 2,592 1,440 720 1,872 9,072 400 $8,672 F F U F F F U F Flexible Budget for Second Quarter (3) 4,800 $ 70.00 $336,000 60,192 a 28,800 b 48,000 c 136,992 199,008 68,000 $131,008 Sales Volume Variance (4) = (3) – (5) 800 F $56,000 F 10,032 4,800 8,000 22,832 33,168 0 $33,168 U U U U F F Units Selling price Sales Variable costs Direct materia ls Direct manuf. labor Other variable costs Total variable costs Contribution margin Fixed costs Operating income a b Static Budget (5) 4,000 $ 70.00 $280,000 50,160 24,000 40,000 114,160 165,840 68,000 $97,840 4,800 units ´ 2.2 lbs. per unit ´ $5.70 per lb. = $60,192 4,800 units ´ 0.5 hrs. per unit ´ $12 per hr. = $28,800 c 4,800 units ´ $10 per unit = $48,000 Direct materials Direct manuf. labor (DML) a b Second­ Quarter 2009 Actuals $57,600 30,240 Actual Input Qty. ´ Price Variance $2,880 U 4,320 U Budgeted Price $54,720 a 25,920 b Flexible Budget for Efficiency Second Variance Quarter $5,472 F $60,192 2,880 F 28,800 4,800 units ´ 2 lbs. per unit ´ $5.70 per lb. = $54,720 4,800 units ´ 0.45 DML hours per unit ´ $12 per DML hour = $25,920 7­37 2. The fo llowing details, revealed in the variance analysis, should be used to rebut the unio n if it focuses on the favorable operating income variance: · Most of the static budget operating inco me variance of $41,840F ($139,680 – $97,840) comes from a favorable sales volume variance, which only arose because Sol so ld more units than planned. · Of the $8,672 F flexible­budget variance in operating inco me, most of it comes fro m the $7,200F flexible­budget variance in sales. · The net flexible­budget variance in total variable costs of $1,872 F is small, and it arises from direct materials and other variable costs, not from labor. Direct manufacturing labor flexible­budget variance is $1,440 U. · The direct manufacturing labor price variance, $4,320U, which is large and unfavorable, is indeed offset by direct manufacturing labor’s favorable efficiency variance—but the efficiency variance is driven by the fact that Sol is using new, more expensive materials. Shaw may have to “prove” this to the unio n which will insist that it’s because workers are working smarter. Even if workers are working smarter, the favorable direct manufacturing labor efficiency variance of $2,880 does not offset the unfavorable direct manufacturing labor price variance of $4,320. 3. Changing the standards may make them more realist ic, making it easier to negotiate with the union. But the unio n will resist any t ightening of labor standards, and it may be too early (is one quarter’s experience enough to change on?); a change of standards at this po int may be viewed as opportunist ic by the unio n. 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. 7­38 7­41 (30 min.) Comprehensive variance analysis. 1. Comput ing unit selling prices and unit costs of inputs: Actual selling price = $1,777,500 ÷ 225,000 = $7.90 Budgeting selling price = $1,600,000 ÷ 200,000 = $8.00 Selling­price Budgeted ö Actual æ Actual = çselling price – selling price÷ × units so ld variance è ø = ($7.90/unit – $8.00/unit) × 225,000 units = $22,500 U 2., 3., and 4. The actual and budgeted unit costs are: Actual Direct materials Cream $0.02 ($46,500 ÷ 2,325,000) Vanilla Extract 0.20 ($266,000 ÷ 1,330,000) Cherr y 0.50 ($120,000 ÷ 240,000) Direct manufacturing labor Preparing 14.40 ($54,000 ÷ 225,000) × 60 Stirring 18.00 ($120,000 ÷ 400,000) × 60 The actual output achieved is 225,000 pounds of Cherr y Star. Budgeted $0.02 0.15 0.50 14.40 18.00 7­39 The direct cost price and efficiency variances are: Actual Costs Incurred (Actual Input Qty. × Actual Price) (1) Direct materials Cream Vanilla Extract Cherry $ 46,500 266,000 120,000 $432,500 Actual Input Qty. × Budgeted Price (3) $ 46,500 b 199,500 c 120,000 $366,000 d a Price Variance (2)=(1)–(3) $ 0 66,500 U 0 $ 66,500 U Efficiency Variance (4)=(3)–(5) $ 1,500 U 30,750 U 7,500 U $39,750 U Flex. Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (5) $ 45,000 g 168,750 h 112,500 $326,250 i f Direct manuf. labor costs Preparing $ 54,000 Stirring 120,000 $174,000 a $ 0 0 $ 0 f $ 54,000 e 120,000 $174,000 $ 0 15,000 F $15,000 F $ 54,000 j 135,000 $189,000 $0.02 × 2,325,000 = $46,500 b $0.15 × 1,330,000 = $199,500 c $0.50 × 240,000 = $120,000 d $14.40/hr. × (225,000 min. ÷ 60 min./hr.) = $54,000 e $18.00/hr. × (400,000 min. ÷ 60 min./hr.) = $120,000 $0.02 × 10 × 225,000 = $45,000 $0.15 × 5 × 225,000 = $168,750 h $0.50 × 1 × 225,000 = $112,500 i $14.40 × (225,000 ¸ 60) = $54,000 j $18.00 × (225,000 ¸ 30) = $135,000 g Comments on the variances include · Selling price variance. This may arise fro m a proactive decisio n to reduce price to expand market share or fro m a reaction to a price reduction by a competitor. It could also arise fro m unplanned pr ice discount ing by salespeople. · Material price variance. The $0.05 increase in the price per ounce of vanilla extract could arise fro m uncontrollable market factors or fro m poor contract negotiat ions by Iceland. · Material efficiency variance. For all three material inputs, usage is greater than budgeted. Possible reasons include lower qualit y inputs, use of lower qualit y workers, and the preparing and stirring equipment not being maintained in a fully operationa l mode. The higher price per ounce of vanilla extract (and perhaps higher qualit y o f vanilla extract) did not reduce the quant it y of vanilla extract used to produce actual output. · Labor efficiency variance. The favorable efficiency variance for stirring could be due to workers eliminat ing nonvalue­added steps in production. 7­40 7­42 (20 min.) Variance analysis with activity­based costing and batch­level direct costs 1. Flexible budget variances for batch activit ies Setup Actual Costs Incurred (Actual Input Qty. × Actual Price) æ 15, 000 ö ´ 7 ´ $ .00 ÷ 12 ç è 75 ø $16,800 Actual Input Qty. × Budgeted Price æ 15, 000 ö ´ 7 ´ $ .75 ÷ 10 ç è 75 ø $15,050 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) 15, 000 æ ö ´ 8 ´ $ 0.75 ÷ 1 ç è 100 ø $12,900 $1,750 U Price variance $2,150 U Efficiency variance $3,900 U Flexible­budget variance Quality Inspection Actual Costs Incurred (Actual Input Qty. × Actual Price) æ 15, 000 ö ´ 9 ´ $ .50 ÷ 15 ç è 100 ø $20,925 Actual Input Qty. × Budgeted Price æ 15, 000 ö ´ 9 ´ $ .50 ÷ 17 ç è 100 ø $23,625 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) æ 15, 000 ö ´10 ´ $ 7.50 ÷ 1 ç è 120 ø $21,875 $2,700 F Price variance $1,750 U Efficiency variance $950 F Flexible­budget variance 7­41 2. Re: Explanat ion of Variances Below I explain the implicat ions of the variances that I calculated. I would enjo y meet ing wit h you to discuss whether we are fo llowing the most efficient policies, given these calculat ions. Please let me know if there is any way to improve my work or my presentation to you. 1. Our batch sizes for both setups and qualit y inspect ion were smaller than planned. Even though we were able to reduce the setup and qualit y inspect ion time needed for each batch (because of the smaller batch sizes), these gains were more than offset by the increased number of batches. Overall, we ended up substant ially below the level of efficiency at which we wished to operate. 2. The hourly wage for the setup workers went over budget due to the tight labor market in our area for such emplo yees. However, we saved a considerable amount of money because we were able to negotiate reduced wage rates for the qualit y inspection labor after the expiration o f their previous contract. Overall, given our output level of 15,000 eels, we had a moderately favorable variance for qualit y inspect ion costs, and a significant unfavorable variance on setups, for the reasons outlined above. Thank you. 7­43 (30 min.) Price and efficiency variances, problems in standard­setting, benchmarking. 1. Budgeted direct materials input per shirt = 600 rolls ÷ 6,000 shirts= 0.10 roll of cloth Budgeted direct manufacturing. labor­hours per shirt (1,500 hours ÷ 6,000 shirts) = 0.25 hours Budgeted direct materials cost ($30,000 ÷ 600) = $50 per roll Budgeted direct manufacturing labor cost per hour ($27,000 ÷ 1,500) = $18 per hour Actual output achieved = 6,732 shirts Actual Costs Incurred (Actual Input Qty. × Actual Price) Direct Materials $30,294 Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (6,732 × 0.10 × $50) $33,660 Actual Input Qty. × Budgeted Price (612 × $50) $30,600 $306 F Price variance Direct Manufacturing Labor $3,060 F Efficiency variance $27,693 (1,530 × $18) $27,540 $153 U Price variance (6,732 × 0.25 × $18) $30,294 $2,754 F Efficiency variance 7­42 2. Act ions emplo yees 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 situat ions 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. Emplo yees may take these actions for several possible reasons. (a) They may be paid on a piece­rate basis wit h incentives for production levels above budget. (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” mentalit y rather than a partnership perspect ive. (d) They may want to gain all the benefits that ensue fro m superior performance (job securit y, wage rate increases) without putting in the extra effort required. This behavior is unethical if it is deliberately designed to undermine the credibilit y o f the standards used at New Fashio ns. 3. If Jorgenson does nothing about standard costs, his behavior will vio late the “Standards of Ethical Conduct for Practit ioners of Management Account ing.” In particular, he would vio late the (a) standards of co mpetence, by not performing pro fessio nal dut ies in accordance with relevant standards; (b) standards of integrit y, by passively subvert ing the attainment of the organizat ion’s object ive to control costs; and (c) standards of credibilit y, by not communicating informat ion fairly and not disclo sing all relevant cost informat ion. Jorgenson should discuss the situat ion with Fenton and po int out that the standards are lax and that this practice is unethical. If Fenton does not agree to change, Jorgenson should escalate the issue up the hierarchy in order to effect change. If organizat iona l change is not forthco ming, Jorgenson should be prepared to resign rather than compro mise his professio nal ethics. Main pros of using Benchmarking Clearing House informat ion to compute variances are: (a) Highlights to New Fashio ns in a direct way how it may or may not be cost­ compet it ive. (b) Provides a “realit y check” to many internal posit ions about efficiency or effect iveness. Main cons are: (a) New Fashio ns may not be comparable to companies in the database. (b) Cost data about other companies may not be reliable. (c) Cost of Benchmarking Clear ing House reports. 7­43 4. 5. ...
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