14-36
Kermit Company's master budget calls for production and sales of 12,000 units for
$48,000; variable costs of $18,000; and fixed costs of $16,000. The company incurred
$24,000 of variable costs to produce and sell 15,000 units for $64,000, and earned
$25,000 operating income.
Master budget sales volume (units)
Budgeted total sales revenue
Budgeted total variable costs
Budgeted fixed costs
Actual variable costs incurred
Actual production/sales volume (units)
Actual total sales revenue
Actual operating income
12,000
$48,000
$18,000
$16,000
$24,000
15,000
$64,000
$25,000
1. Determine Kermit Company’s
a. Flexible budget operating income.
b. Contribution margin flexible-budget variance.
c. Operating income flexible-budget variance.
d. Sales volume variance, in terms of contribution margin.
e. Sales volume variance, in terms of operating income.
2. Explain why the contribution margin sales volume variance and the operating income
sales volume variance for the same period are likely to be identical.
3. Explain why the contribution margin flexible-budget variance is likely to differ from
the operating income flexible-budget variance for the same period.
1.
Budget data:
Selling price
Variable cost
$48,000/12,000 units = $4.00 per unit
$18,000/12,000 units = $1.50 per unit
a. Flexible budget for 15,000 units
Sales
15,000 x $4.00 =
Variable costs
15,000 x $1.50 =
Contribution margin
Fixed costs
Operating income
$60,000
22,500
$37,500
16,000
$21,500
b. Contribution margin earned for the period:
$64,000 − $24,000 =
Flexible-budget contribution margin (see above)
=
Contribution margin flexible-budget variance
$40,000
37,500
$ 2,500F
c. Operating income flexible-budget variance:
$25,000 − $21,500 =
$3,500F
d. Sales volume variance, in terms of contribution margin:
$37,500 − ($48,000 − $18,000) =
$7,500F
e. Sales volume variance, in terms of operating income:
$21,500 − ($48,000 − $18,000 − $16,000) =
$7,500F
14-44
Rusty Industries manufactures a sugar substitute, SS-2, from a natural ingredient, natura.
Each 10-pound package of SS-2 is manufactured using 12 pounds of natura. The
company has determined the purchase price per pound of natura to be $5.00, with a
perchase term of 3/15, n/45 and FOB destination. The company has a policy of taking all
discounts offered.
Direct materials required per package (pounds)
Purchase price per pound
Purchase discount
Requirement
Determine the standard direct materials cost for one package of SS-2.
12
$5.00
3%
Total lbs. of Natura per package of SS-2
Standard purchase price per pound of Natura
12 lbs.
x $5.00
Total purchase price before purchase discount
Purchase discount (3% x $60.00)
Standard direct material cost per package of SS-2
$60.00
1.80
$58.20
14-48
Elof's direct labor costs for the month of January follow:
Direct labor hourly rate paid
Total standard direct labor hours for production
Direct labor hours worked
Direct labor rate variance - favorable
Compute:
1. Standard direct labor wage rate per hour in January.
2. Direct labor efficiency variance.
$30.00
12,000
11,000
$33,000
Actual Inputs
at Actual Cost
(AQ) x (AP)
Actual Inputs
at Standard Cost
(AQ) x (SP)
11,000 hrs. x $30.00/hr.
= $330,000
11,000 hrs. x (SP)
= ?
$33,000F
Labor Rate Variance
1.
Flexible-Budget
Amount
(SQ) x (SP)
12,000 hrs. x (SP)
= ?
?
Labor Efficiency Variance
Total actual direct labor hours worked
11,000
Actual hourly rate
x
Total actual total direct labor cost
$330,000
Plus: Favorable direct labor rate variance
+ 33,000
Total actual direct labor hours at standard hourly rate
Total actual direct labor hours worked
$30.00
$363,000
÷
11,000
Standard direct labor rate per hour
$33.00
2. Direct labor efficiency variance = actual hours at standard cost − standard labor
cost for units produced = [(AQ) x (SP)] − [(SQ) x (SP)] =
[11,000 hrs. x $33/hour] − [12,000 hrs. x $33/hr.] = $33,000F
or, = (AQ − SQ) x SP
= (11,000 − 12,000) hrs. x $33.00/hr.
= $33,000F
14-65
The Ono Tuna Company uses flexible budgets at the end of each period to evaluate the
financial performance of each operating unit. As the accountant in charge, you have been
asked to explain to management why actual results during the past year differed from the
results contained in the master budget that was prepared before the start of the year.
Units
Sales revenues
Variable costs
Fixed costs
Operating income
Actual
Results
205,000
$2,255,000
J?
$170,000
O?
A?
C?
F?
$6,000U
L?
P?
Flexible
Budget
D?
$2,203,750
I?
$180,000
Q?
B?
E?
G?
K?
M?
R?
Mas
Bud
200,
H
$660
N
S
1.
FlexibleActual
Budget
Sales
Flexible
Master
Volume
(Static)
Results
Variance
Budget
Unit sales
Sales
$2,150,000
Variable costs
Fixed costs
Operating income
Variance
Budget
205,000
$2,255,000
0
$51,250F
205,000
$2,203,750
5,000F
$53,750F
200,000
682,500
170,000
$1,402,500
6,000U
10,000F
$55,250F
676,500
180,000
$1,347,250
16,500U
-0$37,250F
660,000
$180,000
$1,310,000
Notes:
(A) Title (“Flexible-Budget Variance”)
(B) Title (“Sales Volume Variance”)
(C) 0, by definition
(D) Actual units sold (205,000)
(E) 5,000F (205,000 − 200,000)
(F) $2,255,000 − $2,203,750 = $51,250F
(G) Budgeted selling price/unit = $2,203,750/205,000units = $10.75;
$10.75/unit x 5,000 units = $53,750
(H) $2,203,750 − $53,750 = $2,150,000
(I) 205,000 units x ($660,000/200,000 units) = 205,000 x $3.30/unit =
$676,500
(J) $676,500 + $6,000 = $682,500
(K) $676,500 − $660,000 = $16,500U
(L) $170,000 − $180,000 = $10,000F
(M) $0 (by definition, as long as both actual sales volume and master
budget sales volume are in the relevant range)
(N) $180,000 (same as flexible-budget amount)
(O) $2,255,000 − ($682,500 + $170,000) = $1,402,500
(P) $51,250F + $6,000U + $10,000F = $55,250F
(Q) $1,402,500 − $55,250 = $1,347,250, or, $2,203,750 − ($676,500 +
$180,000) = $1,347,250
(R) $53,750F + $16,500U = $37,250F, or, 5,000 units x budgeted cm/unit
= 5,000 units x ($10.75 − $3.30)/unit = $37,250F
(S) $1,347,250 − $37,250 = $1,310,000, or, $2,150,000 − ($660,000 +
$180,000) = $1,310,000