7-1
CHAPTER 7
FLEXIBLE BUDGETS, DIRECT-COST VARIANCES,
AND MANAGEMENT CONTROL
What is the relationship between management by exception and variance analysis?
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.
What are two possible sources of information a company might use to compute the
7-2
budgeted amount in variance analysis?
Two sources of information about budgeted amounts are (a) past amounts and (b) detailed
engineering studies.
7-3
Distinguish between a favorable variance and an unfavorable variance.
A favorable variance––denoted F––is a variance that has the effect of increasing operating
income relative to the budgeted amount. An unfavorable variance––denoted U––is a variance
that has the effect of decreasing operating income relative to the budgeted amount.
7-4
What is the key difference between a static budget and a flexible budget?
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.
Why might managers find a flexible-budget analysis more informative than a static7-5
budget analysis?
A 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
Describe the steps in developing a flexible budget.
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.
7-7
List four reasons for using standard costs.
7-1
Four reasons for using standard costs are:
(i) cost management,
(ii) pricing decisions,
(iii) budgetary planning and control, and
(iv) simplified inventory costing and financial statement preparation.
7-8
How might a manager gain insight into the causes of a flexible-budget variance for direct
materials?
A manager should subdivide the flexible-budget variance for direct materials into a price
variance (that reflects the difference between actual and budgeted prices of direct materials) and
an efficiency variance (that reflects the difference between the actual and budgeted quantities of
direct materials used to produce actual output). The individual causes of these variances can then
be investigated, recognizing possible interdependencies across these individual causes.
7-9
List three causes of a favorable direct materials price variance.
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
Describe three reasons for an unfavorable direct manufacturing labor efficiency variance.
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 nonvalue-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
How does variance analysis help in continuous improvement?
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
on—this is continuous improvement.
7-12 Why might an analyst examining variances in the production area look beyond that
business function for explanations of those variances?
7-2
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 Comment on the following statement made by a plant manager: “Meetings with my plant
accountant are frustrating. All he wants to do is pin the blame on someone for the many
variances he reports.”
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 When inputs are substitutable, how can the direct materials efficiency variance be
decomposed further to obtain useful information?
The direct materials efficiency variance can be decomposed into two parts: a direct materials mix
variance that reflects the impact of using a cheaper mix of inputs to produce a given quantity of
output, and the direct materials yield variance, which captures the impact of using less input to
achieve a given quantity of output.
7-15 “Benchmarking against other companies enables a company to identify the lowest-cost
producer. This amount should become the performance measure for next year.” Do you agree?
Evidence on the costs of other companies is one input managers can use in setting the
performance measure for next year. However, caution should be taken before choosing such an
amount as next year's performance measure. It is important to understand why cost differences
across companies exist and whether these differences can be eliminated. It is also important to
examine when planned changes (in, say, technology) next year make even the current low-cost
producer not a demanding enough hurdle.
7-16 Metal Shelf Company’s standard cost for raw materials is $4.00 per pound and it is
expected that each metal shelf uses two pounds of material. During October Year 2, 25,000
pounds of materials are purchased from a new supplier for $97,000 and 13,000 shelves are
produced using 27,000 pounds of materials. Which statement is a possible explanation
concerning the direct materials variances?
a. The production department had to use more materials since the quality of the materials was
inferior.
b. The purchasing manager paid more than expected for materials.
c. Production workers were more efficient than anticipated.
d. The overall materials variance is positive; no further analysis is necessary.
7-3
SOLUTION
Choice "a" is correct. The materials price variance is $3,000 favorable since 25,000 pounds of
materials were purchased for $97,000. The materials efficiency variance is $4,000 unfavorable
since it took 27,000 pounds of material to produce 13,000 shelves ($4.00 × 1,000 additional
pounds). It is possible that the materials which were purchased from a new supplier at a lower
price were of a lesser quality and caused more material to be used in the production process.
Choice "b" is incorrect. The purchasing manager paid less than expected for materials. The
materials price variance is $3,000 favorable since 25,000 pounds of materials were purchased for
$97,000.
Choice "c" is incorrect. Production workers used more materials than expected. The materials
efficiency variance is $4,000 unfavorable since it took 27,000 pounds of material to produce
13,000 shelves ($4.00 × 1,000 additional pounds).
Choice "d" is incorrect. The overall material variance is unfavorable. Even if the overall variance
were favorable, the components of the variance are analyzed to identify the details on why the
variance is favorable and whether there are areas for further improvement. Also, consistent
favorable or unfavorable variances may indicate that the standards are not properly set.
7-17 All of the following statements regarding standards are accurate except:
a. Standards allow management to budget at a per-unit level.
b. Ideal standards account for a minimal amount of normal spoilage.
c. Participative standards usually take longer to implement than authoritative standards.
d. Currently attainable standards take into account the level of training available to employees.
SOLUTION
Choice "b" is correct. Ideal standards do not make any provisions for normal spoilage or
downtime. They assume perfect efficiency and effectiveness, which is helpful as an initial
benchmark but is often unrealistic and unattainable.
The other three choices are incorrect as they are factually true.
Choice "a" is incorrect. Standards are thought of as per unit budgets.
Choice "c" is incorrect. Because they involve managers and their employees, participative
standards take longer to implement than authoritative standards which are set solely by
management.
Choice "d" is incorrect. Currently attainable standards assume an appropriate level of training for
the employees who are to be held accountable in achieving those standards.
7-18 Amalgamated Manipulation Manufacturing’s (AMM) standards anticipate that there will
be 3 pounds of raw material used for every unit of finished goods produced. AMM began the
7-4
month of May with 5,000 pounds of raw material, purchased 15,000 pounds for $19,500 and
ended the month with 4,000 pounds on hand. The company produced 5,000 units of finished
goods. The company estimates standard costs at $1.50 per pound. The materials price and
efficiency variances for the month of May were:
Price Variance
Efficiency Variance
1. $3,000 U
$1,500 F
2. $3,000 F
$
3. $3,000 F
$1,500 U
4. $3,200 F
$1,500 U
0
SOLUTION
Choice "3" is correct.
Actual Quantity Purchased = 15,000 pounds (given)
Actual Quantity Used = Beginning Inventory 5,000 + Purchases 15,000
- Ending Inventory 4,000 = 16,000 pounds
Standard Quantity Allowed = 5,000 finished units x 3 pounds per unit = 15,000 pounds
Actual Price = $19,500 ÷ 15,000 = $1.30
Standard Price = $1.50 (given)
Price variance = Actual Quantity Purchased x (Standard Price - Actual Price)
= 15,000 × ($1.50 − $1.30) = $3,000 F
Efficiency variance
= Standard Price x (Standard Quantity Allowed – Actual Quantity Used)
= $1.50 × (15,000 − 16,000) = $1,500 U
Choice "1" is incorrect. Computation makes an incorrect determination with regard to whether
the variance is favorable or unfavorable.
Choice "2" is incorrect. Computation inappropriately uses actual quantity purchased in the
quantity variance.
Choice "4" is incorrect. Computation inappropriately uses the quantity used in the price variance.
7-19 Atlantic Company has a manufacturing facility in Brooklyn that manufactures robotic
equipment for the auto industry. For Year 1, Atlantic collected the following information from its
main production line:
Actual quantity purchased
200 units
Actual quantity used
110 units
Units standard quantity
100 units
Actual price paid
$ 8 per unit
7-5
Standard price
$ 10 per unit
Atlantic isolates price variances at the time of purchase. What is the materials price variance for
Year 1?
1. $400 favorable.
2. $400 unfavorable.
3. $220 favorable.
4. $220 unfavorable.
SOLUTION
Choice "1" is correct.
The question asks for the materials price variance for a production line. Materials price variances
are isolated at the time of purchase.
The actual price was $8 per unit, and the standard price was $10 per unit. The materials price
variance has got to be favorable.
The variance formula for the materials price variance can be stated as the actual units purchased
of 200 units times the difference between the actual and standard price of $2 ($10 − $12), or
$400 (favorable).
7-20 Basix Inc. calculates direct manufacturing labor variances and has the following
information:
Actual hours worked: 200
Standard hours: 250
Actual rate per hour: $12
Standard rate per hour: $10
Given the information above, which of the following is correct regarding direct manufacturing labor
variances?
a. The price and efficiency variances are favorable.
b. The price and efficiency variances are unfavorable.
c. The price variance is favorable, while the efficiency variance is unfavorable.
d. The price variance is unfavorable, while the efficiency variance is favorable.
SOLUTION
Choice "d" is correct. The direct labor variance is an expense variance. Therefore, when the
actual hours worked are less (greater) than the standard hours worked, this is favorable
(unfavorable). Also, when the actual rate per hour is less (greater) than the standard hours
worked, this is favorable (unfavorable).
This question can be solved without actually calculating the variances. All that is needed is a
comparison between the actual and standard hours worked for the efficiency variance and a
7-6
comparison between the actual and standard rate per hour for the price variance. Here, the actual
rate per hour is higher than the standard rate, meaning the price variance is unfavorable. The
actual hours worked are less than the standard hours worked, meaning the efficiency variance is
favorable.
Choice "a" is incorrect. The efficiency variance is favorable, but because the actual rate per hour
is greater than the standard rate, the price variance is unfavorable.
Choice "b" is incorrect. The price variance is unfavorable, but the efficiency variance is
favorable because fewer hours were worked than budgeted.
Choice "c" is incorrect. The price variance is unfavorable, while the efficiency variance is
favorable.
7-21 Flexible budget. Sweeney Enterprises manufactures tires for the Formula I motor racing
circuit. For August 2017, it budgeted to manufacture and sell 3,600 tires at a variable cost of $71
per tire and total fixed costs of $55,000. The budgeted selling price was $114 per tire. Actual
results in August 2017 were 3,500 tires manufactured and sold at a selling price of $116 per tire.
The actual total variable costs were $280,000, and the actual total fixed costs were $51,000.
Required:
1. Prepare a performance report (akin to Exhibit 7-2, page 254) that uses a flexible budget and a
static budget.
2. Comment on the results in requirement 1.
SOLUTION
(20–30 min.)
Flexible budget.
Variance Analysis for Sweeney Enterprises for August 2017
Units (tires) sold
Revenues
Variable costs
Contribution margin
Fixed costs
Actual
Results
(1)
3,500g
$406,000a
280,000d
126,000
51,000g
FlexibleBudget
Variances
(2) = (1) – (3)
0
$ 7,000 F
31,500 U
24,500 U
4,000 F
Flexible
Budget
(3)
3,500
$399,000b
248,500e
150,500
55,000g
Sales-Volume
Variances
(4) = (3) – (5)
100 U
$11,400 U
7,100 F
4,300 U
0
Static
Budget
(5)
3,600g
$410,400c
255,600f
154,800
55,000g
Operating income
$ 75,000
$20,500 U
$ 95,500
$ 4,300 U
$ 99,800
$20,500 U
$ 4,300 U
Total flexible-budget variance Total sales-volume variance
$24,800 U
Total static-budget variance
a
$116 × 3,500 = $406,000
$114 × 3,500 = $399,000
c
$114 × 3,600 = $410,400
b
7-7
d
Given. Unit variable cost = $280,000 ÷ 3,500 = $80 per tire
$71 × 3,500 = $248,500
f
$71 × 3,600 = $255,600
g
Given
e
2.
The key information items are:
Units
Unit selling price
Unit variable cost
Fixed costs
Actual
3,500
$ 116
$
80
$51,000
Budgeted
3,600
$ 114
$
71
$55,000
The total static-budget variance in operating income is $24,800 U. There is both an unfavorable
total flexible-budget variance ($20,500) and an unfavorable sales-volume variance ($4,300).
The unfavorable sales-volume variance arises solely because actual units manufactured and
sold were 100 less than the budgeted 3,600 units. The unfavorable flexible-budget variance of
$20,500 in operating income is due primarily to the $9 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.
7-22 Flexible budget. Bryant Company’s budgeted prices for direct materials, direct
manufacturing labor, and direct marketing (distribution) labor per attaché case are $43, $6, and
$13, respectively. The president is pleased with the following performance report:
Actual Costs
Static Budget
Variance
Direct materials
$438,000
$473,000
$35,000 F
Direct manufacturing labor
63,600
66,000
2,400 F
143,000
9,500 F
Direct marketing (distribution) 133,500
labor
Required:
Actual output was 10,000 attaché cases. Assume all three direct-cost items shown are variable
costs.
Is the president’s pleasure justified? Prepare a revised performance report that uses a flexible
budget and a static budget.
SOLUTION
(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 11,000 units––direct
materials of $473,000 in the static budget ÷ budgeted direct materials cost per attaché case of
$43.
7-8
The following is a Level 2 analysis that presents a flexible-budget variance and a salesvolume variance of each direct cost category.
Variance Analysis for Bryant Company
Output units
Direct materials
Direct manufacturing labor
Direct marketing labor
Total direct costs
FlexibleSalesActual
Budget
Flexible
Volume
Results
Variances
Budget
Variances
(1)
(2) = (1) – (3)
(3)
(4) = (3) – (5)
10,000
0
10,000
1,000 U
$438,000
$ 8,000 U
$430,000
$43,000 F
63,600
3,600 U
60,000
6,000 F
133,500
3,500 U
130,000
13,000 F
$635,100
$15,100 U
$620,000
$62,000 F
Static
Budget
(5)
11,000
$473,000
66,000
143,000
$682,000
$15,100 U
$62,000 F
Flexible-budget variance
Sales-volume variance
$46,900 F
Static-budget variance
The Level 1 analysis shows total direct costs have a $46,900 favorable variance.
However, the Level 2 analysis reveals that this favorable variance is due to the reduction in
output of 1,000 units from the budgeted 11,000 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:
Actual
Budgeted
Units
10,000
11,000
Direct materials
$ 43.80
$ 43.00
Direct manufacturing labor
$ 6.36
$ 6.00
Direct marketing labor
$ 13.35
$ 13.00
Analysis of price and efficiency variances for each cost category could assist in further the
identifying causes of these more aggregated (Level 2) variances.
7-23 Flexible-budget preparation and analysis. Bank Management Printers, Inc., produces
luxury checkbooks with three checks and stubs per page. Each checkbook is designed for an
individual customer and is ordered through the customer’s bank. The company’s operating budget
for September 2017 included these data:
Number of checkbooks
15,000
Selling price per book
$
20
Variable cost per book
$
8
7-9
Fixed costs for the month
$145,000
The actual results for September 2017 were as follows:
Number of checkbooks produced and sold
12,000
Average selling price per book
$
21
Variable cost per book
$
7
Fixed costs for the month
$150,000
The executive vice president of the company observed that the operating income for September
was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-thanbudgeted variable cost per unit. As the company’s management accountant, you have been asked
to provide explanations for the disappointing September results.
Bank Management develops its flexible budget on the basis of budgeted per-output-unit
revenue and per-output-unit variable costs without detailed analysis of budgeted inputs.
Required:
1. Prepare a static-budget-based variance analysis of the September performance.
2. Prepare a flexible-budget-based variance analysis of the September performance.
3. Why might Bank Management find the flexible-budget-based variance analysis more
informative than the static-budget-based variance analysis? Explain your answer.
SOLUTION
(25–30 min.) Flexible-budget preparation and analysis.
1.
Variance Analysis for Bank Management Printers for September 2017
Level 1 Analysis
Units sold
Revenue
Variable costs
Contribution margin
Fixed costs
Operating income
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
$17,000 U
7-10
Static
Budget
(3)
15,000
$300,000c
120,000f
180,000
145,000
$ 35,000
Total static-budget variance
2.
Level 2 Analysis
Units sold
Revenue
Variable costs
Contribution margin
Fixed costs
Actual
Results
(1)
12,000
$252,000a
84,000d
168,000
150,000
Operating income
$ 18,000
FlexibleBudget
Variances
(2) = (1) – (3)
0
$12,000 F
12,000 F
24,000 F
5,000 U
$19,000 F
Sales
Flexible
Volume
Static
Budget
Variances
Budget
(3)
(4) = (3) – (5)
(5)
12,000
3,000 U
15,000
$240,000b
$60,000 U $300,000c
e
96,000
24,000 F
120,000f
144,000
36,000 U
180,000
145,000
0
145,000
$ (1,000)
$36,000 U
$ 35,000
$19,000 F
$36,000 U
Total flexible-budget
Total sales-volume
variance
variance
$17,000 U
Total static-budget variance
a
d
b
e
12,000 × $21 = $252,000
12,000 × $20 = $240,000
c
15,000 × $20 = $300,000
12,000 × $7 = $ 84,000
12,000 × $8 = $ 96,000
f
15,000 × $8 = $120,000
3.
Level 2 analysis breaks down the static-budget variance into a flexible-budget variance
and a sales-volume variance. The primary reason for the static-budget variance being
unfavorable ($17,000 U) is the reduction in unit volume from the budgeted 15,000 to an actual
12,000. One explanation for this reduction is the increase in selling price from a budgeted $20 to
an actual $21. Operating management was able to reduce variable costs by $12,000 relative to
the flexible budget. This reduction could be a sign of efficient management. Alternatively, it
could be due to using lower quality materials (which in turn adversely affected unit volume).
7-11
7-24 Flexible budget, working backward. The Clarkson Company produces engine parts for
car manufacturers. A new accountant intern at Clarkson has accidentally deleted the company’s
variance analysis calculations for the year ended December 31, 2017. The following table is what
remains of the data.
Required:
1. Calculate all the required variances. (If your work is accurate, you will find that the total
static-budget variance is $0.)
2. What are the actual and budgeted selling prices? What are the actual and budgeted variable costs
per unit?
3. Review the variances you have calculated and discuss possible causes and potential
problems. What is the important lesson learned here?
SOLUTION
(30 min.) Flexible budget, working backward.
1. Variance Analysis for The Clarkson Company for the year ended December 31, 2017
Units sold
Revenues
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
Results
(1)
130,000
$715,000
515,000
200,000
140,000
$ 60,000
FlexibleBudget
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
$455,000a
260,000b
195,000
120,000
$ 75,000
$15,000 U
Total flexible-budget variance
Sales-Volume
Variances
(4)=(3)(5)
10,000 F
$35,000 F
20,000 U
15,000 F
0
$15,000 F
$15,000 F
Total sales volume variance
$0
Total static-budget variance
7-12
Static
Budget
(5)
120,000
$420,000
240,000
180,000
120,000
$ 60,000
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 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
$15,000 Unfavorable
$15,000 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 $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 flexible-budget revenue variance in the amount of $260,000. 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,
Clarkson’s customers may have stocked up, anticipating future increases in direct material
prices. Alternatively, Clarkson’s selling price increases may have been lower than competitors’
price increases. Understanding the reasons why actual results differ from budgeted amounts can
help Clarkson better manage its costs and pricing decisions in the future. The 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 Clarkson
not been able to pass costs on to customers, losses would have been considerable.
7-13
7-25 Flexible-budget and sales volume variances. Cascade, Inc., produces the basic fillings used in many popular frozen desserts and
treats—vanilla and chocolate ice creams, puddings, meringues, and fudge. Cascade uses standard costing and carries over no inventory
from one month to the next. The ice-cream product group’s results for June 2017 were as follows:
Jeff Geller, the business manager for ice-cream products, is pleased that more pounds of ice cream were sold than budgeted and that
revenues were up. Unfortunately, variable manufacturing costs went up, too. The bottom line is that contribution margin declined by
$52,900, which is just over 2% of the budgeted revenues of $2,592,600. Overall, Geller feels that the business is running fine.
Required:
1. Calculate the static-budget variance in units, revenues, variable manufacturing costs, and contribution margin. What percentage
is each static-budget variance relative to its static-budget amount?
2. Break down each static-budget variance into a flexible-budget variance and a sales-volume variance.
3. Calculate the selling-price variance.
4. Assume the role of management accountant at Cascade. How would you present the results to Jeff Geller? Should he be more
concerned? If so, why?
SOLUTION
(30-40 min.) Flexible budget and sales volume variances, market-share and market-size variances.
1. and 2.
7-14
Performance Report for Cascade, Inc., June 2017
Units (pounds)
Revenues
Variable mfg. costs
Contribution margin
Actual
(1)
460,000
$2,626,600
1,651,400
$975,200
Flexible
Budget
Variances
(2) = (1) – (3)
$ 41,400 U
41,400 U
$ 82,800 U
Flexible
Budget
(3)
460,000
$2,668,000a
1,610,000b
$1,058,000
$82,800
U
Flexible-budget variance
Sales Volume
Variances
(4) = (3) – (5)
13,000 F
$75,400 F
45,500 U
$ 29,900 F
Static
Budget
(5)
447,000
$2,592,600
1,564,500
$1,028,100
$ 29,900 F
Sales-volume variance
$52,900 U
Static-budget variance
a
Budgeted selling price = $2,592,600 ÷ 447,000 lbs = $5.80 per lb.
Flexible-budget revenues = $5.80 per lb. × 460,000 lbs. = $2,668,000
b
Budgeted variable mfg. cost per unit = $1,564,500 ÷ 447,000 lbs. = $3.50
Flexible-budget variable mfg. costs = $3.50 per lb. × 460,000 lbs. = $1,610,000
7-15
Static
Budget
Variance
(6) = (1) – (5)
13,000 F
$34,000 F
86,900 U
$52,900 U
Static Budget
Variance as
% of Static
Budget
(7) = (6)  (5)
2.91%
1.31%
5.55%
5.15%
3.
The selling price variance, caused solely by the difference in actual and budgeted selling
price, is the flexible-budget variance in revenues = $41,400 U.
4.
The flexible-budget variances show that for the actual sales volume of 460,000 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 2017. Geller should be more
concerned because the static-budget variance in contribution margin of $52,900 U is actually
made up of a favorable sales-volume variance in contribution margin of $29,900, an unfavorable
selling-price variance of $41,400 and an unfavorable variable manufacturing costs variance of
$41,400. Adler should analyze why each of these variances occurred and the relationships among
them. Could the efficiency of variable manufacturing costs be improved? The sales volume
appears to have increased due to the lower average selling price per pound.
7-26 Price and efficiency variances. Sunshine Foods manufactures pumpkin scones. For
January 2017, it budgeted to purchase and use 14,750 pounds of pumpkin at $0.92 a pound.
Actual purchases and usage for January 2017 were 16,000 pounds at $0.85 a pound. Sunshine
budgeted for 59,000 pumpkin scones. Actual output was 59,200 pumpkin scones.
Required:
1. Compute the flexible-budget variance.
2. Compute the price and efficiency variances.
3. Comment on the results for requirements 1 and 2 and provide a possible explanation for
them.
SOLUTION
(20–30 min.) Price and efficiency variances.
1.
The key information items are:
Output units (scones)
Input units (pounds of pumpkin)
Cost per input unit
Actual
59,200
16,000
$ 0.85
Budgeted
59,000
14,750
$ 0.92
Sunshine budgets to obtain 3 pumpkin scones from each pound of pumpkin.
The flexible-budget variance is $16 F.
Pumpkin costs
a
b
Actual
Results
(1)
$13,600a
16,000 × $0.85 = $13,600
59,200 × 0.25 × $0.92 = $13,616
FlexibleBudget
Variance
(2) = (1) – (3)
$16 F
Flexible
Budget
(3)
$13,616b
Sales-Volume Static
Variance
Budget
(4) = (3) – (5)
(5)
$46 U
$13,570c
c
59,000 × 0.25 × $0.92 = $13,570
2.
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
$13,600a
Actual Input Qty.
× Budgeted Price
$14,720b
$1,120 F
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
$13,616c
$1,104 U
Efficiency variance
$16 F
Flexible-budget variance
a
16,000 × $0.85 = $13,600
16,000 × $0.92 = $14,720
c
59,200 × 0.25 × $0.92 = $13,616
b
3.
The favorable flexible-budget variance of $16 has two offsetting components:
(a) favorable price variance of $1,120––reflects the $0.85 actual purchase cost being
lower than the $0.92 budgeted purchase cost per pound.
(b) unfavorable efficiency variance of $1,104––reflects the actual materials yield of 3.80
scones per pound of pumpkin (59,200 ÷ 16,000 = 3.70) being less than the budgeted
yield of 4.00 (59,000 ÷ 14,750 = 4.00). The company used more pumpkins (materials)
to make the scones than was budgeted.
One explanation may be that Sunshine purchased lower quality pumpkins at a lower cost per
pound.
7-27 Materials and manufacturing labor variances. Consider the following data collected
for Great Homes, Inc.:
Direct
Materials
Direct
Manufacturing
Labor
Cost incurred: Actual inputs  actual prices
$200,000
$90,000
Actual inputs  standard prices
214,000
86,000
Standard inputs allowed for actual output  standard
prices
225,000
80,000
Required:
Compute the price, efficiency, and flexible-budget variances for direct materials and direct
manufacturing labor.
SOLUTION
(15 min.) Materials and manufacturing labor variances.
Direct
Materials
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
$200,000
Actual Input Qty.
× Budgeted Price
$214,000
$14,000 F
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
$225,000
$11,000 F
Efficiency variance
$25,000 F
Flexible-budget variance
Direct
Mfg. Labor
$90,000
$86,000
$4,000 U
Price variance
$80,000
$6,000 U
Efficiency variance
$10,000 U
Flexible-budget variance
7-28 Direct materials and direct manufacturing labor variances. Rugged Life, Inc.,
designs and manufactures fleece quarter-zip jackets. It sells its jackets to brand-name outdoor
outfitters in lots of one dozen. Rugged Life’s May 2017 static budget and actual results for direct
inputs are as follows:
Static Budget
Number of jacket lots (1 lot = 1 dozen) 300
Per Lot of Jackets:
Direct materials
18 yards at $4.65 per yard = $83.70
Direct manufacturing labor
2.4 hours at $12.50 per hour = $30.00
Actual Results
Number of jacket lots sold
325
Total Direct Inputs:
Direct materials
6,500 yards at $4.85 per yard = $31,525
Direct manufacturing labor
715 hours at $12.60 = $9,009
Rugged Life has a policy of analyzing all input variances when they add up to more than 8% of the
total cost of materials and labor in the flexible budget, and this is true in May 2017. The production
manager discusses the sources of the variances: “A new type of material was purchased in May.
This led to faster cutting and sewing, but the workers used more material than usual as they learned
to work with it. For now, the standards are fine.”
Required:
1. Calculate the direct materials and direct manufacturing labor price and efficiency variances
in May 2017. What is the total flexible-budget variance for both inputs (direct materials and
direct manufacturing labor) combined? What percentage is this variance of the total cost of
direct materials and direct manufacturing labor in the flexible budget?
2. Comment on the May 2017 results. Would you continue the “experiment” of using the new
material?
SOLUTION
(20 min.) Direct materials and direct manufacturing labor variances.
1.
May 2017
Lots
Direct materials
Direct labor
Total price variance
Total efficiency variance
Actual
Results
(1)
325
$31,525.00
$ 9,009.00
Price
Variance
(2) = (1)–(3)
$1,300.00 U
$ 71.50 U
$1,371.50 U
Actual
Quantity 
Budgeted
Price
(3)
Efficiency
Variance
(4) = (3) – (5)
$30,225.00a
$ 8,937.50c
$3,022.50 U
$812.50 F
Flexible
Budget
(5)
325
$27,202.50b
$9,750.00d
$2,210.00 U
a
6,500 yards × $4.65 per yard = $30,225
325 lots × 18 yards per lot × $4.65 per yard = $27,202.50
c
715 hours × $12.50 per hour = $8,937.50
d
3250 lots × 2.4 hours per lot × $12.50 per hour = $9,750.00
b
Total flexible-budget variance for both inputs = $1,371.50 U + $2,210.00 U = $3,581.50 U
Total flexible-budget cost of direct materials and direct labor = $27,202.50 + $9,750.00 = $36,952.50
Total flexible-budget variance as % of total flexible-budget costs = $3,581.50 ÷ $36,952.50 = 9.69%
2.
It is unclear whether the excess use of materials will continue, or whether it was indeed
a result of workers getting accustomed to the new fabric. The time required was indeed lower as
predicted, but not nearly enough to overcome the unfavorable direct material efficiency variance.
However, direct labor usage will probably decline even further as workers gain experience in
working with the new material. The unfavorable direct labor price variance is insignificant and
unlikely to be related to the change of material. Rugged Life may wish to 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 ($4.85 versus $4.65 per yard).
Its price is unlikely to come down even more within the coming year. Standard
material price should be reexamined and possibly changed.
•
Rugged Life should continue to work to reduce direct materials and direct
manufacturing labor usage.
7-29 Price and efficiency variances, journal entries. The Schuyler Corporation
manufactures lamps. It has set up the following standards per finished unit for direct materials
and direct manufacturing labor:
Direct materials: 10 lb. at $4.50 per lb.
$45.00
Direct manufacturing labor: 0.5 hour at $30 per hour
15.00
The number of finished units budgeted for January 2017 was 10,000; 9,850 units were actually
produced.
Actual results in January 2017 were as follows:
Direct materials: 98,055 lb. used
Direct manufacturing labor: 4,900 hours
$154,350
Assume that there was no beginning inventory of either direct materials or finished units.
During the month, materials purchased amounted to 100,000 lb., at a total cost of $465,000.
Input price variances are isolated upon purchase. Input-efficiency variances are isolated at the
time of usage.
Required:
1. Compute the January 2017 price and efficiency variances of direct materials and direct
manufacturing labor.
2. Prepare journal entries to record the variances in requirement 1.
3. Comment on the January 2017 price and efficiency variances of Schuyler Corporation.
4. Why might Schuyler calculate direct materials price variances and direct materials efficiency
variances with reference to different points in time?
SOLUTION
(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)
Direct
Materials
(100,000 × $4.65a)
$465,000
Actual Input Qty.
× Budgeted Price
Purchases
Usage
(100,000 × $4.50)
$450,000
(98,055 × $4.50)
$441,248
$15,000 U
Price variance
Direct
Manufacturing
Labor
(4,900 × $31.5b)
$154,350
b
(9,850 × 10 × $4.50)
$443,250
$2,002 F
Efficiency variance
(4,900 × $30)
$147,000
$7,350 U
Price variance
a
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(9,850 × 0.5 × $30) or
(4,925 × $30)
$147,750
$750 F
Efficiency variance
$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
450,000
15,000
Work-in-Process Control
Direct Materials Control
Direct Materials Efficiency Variance
443,250
Work-in-Process Control
Direct Manuf. Labor Price Variance
Wages Payable Control
Direct Manuf. Labor Efficiency Variance
147,750
7,350
465,000
441,248
2,002
154,350
750
3.
Some students’ comments will be immersed in conjecture about higher prices for
materials, better quality materials, higher grade labor, better efficiency in use of materials, and so
forth. A possibility is that approximately the same labor force, paid somewhat more, is taking
slightly less time with better materials and causing less waste and spoilage.
A key point in this problem is that all of these efficiency variances are likely to be
insignificant. They are so small as to be nearly meaningless. Fluctuations about standards are
bound to occur in a random fashion. Practically, from a control viewpoint, a standard is a band
or range of acceptable performance rather than a single-figure measure.
4.
The purchasing point is where responsibility for price variances is found most often. The
production point is where responsibility for efficiency variances is found most often. The
Schuyler Corporation may calculate variances at different points in time to tie in with these
different responsibility areas.
7-30 Materials and manufacturing labor variances, standard costs. Dawson, Inc., is a
privately held furniture manufacturer. For August 2017, Dawson had the following standards for
one of its products, a wicker chair:
Standards per Chair
Direct materials
3 square yards of input at $5.50 per square
yard
Direct manufacturing labor
0.5 hour of input at $10.50 per hour
The following data were compiled regarding actual performance: actual output units (chairs)
produced, 2,200; square yards of input purchased and used, 6,200; price per square yard, $5.70;
direct manufacturing labor costs, $9,844; actual hours of input, 920; labor price per hour, $10.70.
1. Show computations of price and efficiency variances for direct materials and direct
manufacturing labor. Give a plausible explanation of why each variance occurred.
2. Suppose 8,700 square yards of materials were purchased (at $5.70 per square yard), even
though only 6,200 square yards were used. Suppose further that variances are identified at
their most timely control point; accordingly, direct materials price variances are isolated and
traced at the time of purchase to the purchasing department rather than to the production
department. Compute the price and efficiency variances under this approach.
SOLUTION
(2030 min.) Materials and manufacturing labor variances, standard costs.
1.
Direct Materials
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
(6,200 sq. yds. × $5.70)
$35,340
(6,200 sq. yds. × $5.50)
$34,100
$1,240 U
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(2,200 × 3 × $5.50)
(6,600 sq. yds. × $5.50)
$36,300
$2,200 F
Efficiency variance
$960 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)
Actual Input Qty.
× Budgeted Price
(920 hrs. × $10.70)
$9,844
(920 hrs. × $10.50)
$9,660
$184 U
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(2,200 × 0.5 × $10.50)
(1,100 hrs. × $10.50)
$11,550
$1,890 F
Efficiency variance
$1,706 F
Flexible-budget variance
The unfavorable labor price variance may be due to, say, (a) an increase in labor rates due
to a booming economy, 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.
Control
Point
Purchasing
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(8,700 sq. yds.× $5.70)
$49,590
Actual Input Qty.
× Budgeted Price
(8,700 sq. yds. × $5.50)
$47,850
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted
Price)
$1,740 U
Price variance
Production
(6,200 sq. yds.× $5.50)
$34,100
(2,200 × 3 × $5.50)
$36,300
$2,200 F
Efficiency variance
Direct manufacturing labor variances are the same as in requirement 1.
7-31 Journal entries and T-accounts (continuation of 7-30). Prepare journal entries and post
them to T-accounts for all transactions in Exercise 7-30, including requirement 2. Summarize how
these journal entries differ from the normal-costing entries described in Chapter 4, pages 120–123.
SOLUTION
(2025 min.) Journal entries and T-accounts (continuation of 7-30).
For requirement 1 from Exercise 7-30:
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.
34,100
1,240
35,340
36,300
c. Work-in-Process Control
11,550
Direct Manufacturing Labor Price Variance
184
Direct Manufacturing Labor Efficiency Variance
Wages Payable Control
To record liability for and allocation of direct labor costs.
2,200
34,100
1,890
9,844
Direct
Materials Control
(a) 34,100 (b) 34,100
Work-in-Process Control
(b) 36,300
(c) 11,550
Wages Payable Control
(c) 9,844
Direct Materials
Price Variance
(a) 1,240
Direct Materials
Efficiency Variance
(b) 2,200
Direct Manufacturing
Labor Price Variance
(a) 184
Direct Manuf. Labor
Efficiency Variance
(c) 1,890
Accounts Payable Control
(a) 35,340
For requirement 2 from Exercise 7-30:
The following journal entries pertain to the measurement of price and efficiency variances when
8,700 sq. yds. of direct materials are purchased:
a1. Direct Materials Control
Direct Materials Price Variance
Accounts Payable Control
To record direct materials purchased.
47,850
1,740
a2. Work-in-Process Control
Direct Materials Control
Direct Materials Efficiency Variance
To record direct materials used.
36,300
Direct
Materials Control
(a1) 47,850 (a2) 34,100
Accounts Payable Control
(a1) 49,590
49,590
34,100
2,200
Direct Materials
Price Variance
(a1) 1,740
Work-in-Process Control
(a2) 36,300
Direct Materials
Efficiency Variance
(a2) 2,200
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.
7-32 Price and efficiency variances, benchmarking. Nantucket Enterprises manufactures
insulated cold beverage cups printed with college and corporate logos, which it distributes
nationally in lots of 12 dozen cups. In June 2017, Nantucket produced 5,000 lots of its most popular
line of cups, the 24-ounce lidded tumbler, at each of its two plants, which are located in Providence
and Amherst. The production manager, Shannon Bryant, asks her assistant, Joel Hudson, to find out
the precise per-unit budgeted variable costs at the two plants and the variable costs of a competitor,
Beverage Mate, who offers similar-quality tumblers at cheaper prices. Hudson pulls together the
following information for each lot:
Per lot
Providence Plant
Direct materials
74 lbs. @ $3.20 per lb. 76.5 lbs. @ $3.10 per
lb.
Direct manufacturing
labor
2.5 hrs. @ $12.00 per
hr.
2.4 hrs. @ $12.20 per
hr.
2.4 hrs. @ $10.50 per hr.
$20 per lot
$22 per lot
$20 per lot
Variable overhead
Amherst Plant
Beverage Mate
70 lbs. @ $2.90 per lb.
Required:
1. What is the budgeted variable cost per lot at the Providence Plant, the Amherst Plant, and at
Beverage Mate?
2. Using the Beverage Mate data as the standard, calculate the direct materials and direct
manufacturing labor price and efficiency variances for the Providence and Amherst plants.
3. What advantage does Nantucket get by using Beverage Mate’s benchmark data as standards
in calculating its variances? Identify two issues that Bryant should keep in mind in using the
Beverage Mate data as the standards.
SOLUTION
(25 min.) Price and efficiency variances, benchmarking.
1.
Providence Plant
Prices and quantities
Cost per lot
Direct materials
Direct labor
Variable overhead
Budgeted variable cost
Direct materials
Direct labor
Variable overhead
Budgeted variable cost
Direct materials
Direct labor
Variable overhead
Budgeted variable cost
2.
74.0 lbs @ $ 3.20 per lb
2.5 hrs @ $12.00 per hr
Amherst Plant
Prices and quantities
76.50 lbs @ $ 3.10 per lb
2.4 hrs @ $12.20 per hr
Beverage Mate
Prices and quantities
70.00 lbs @ $ 2.90 per lb
2.4 hrs @ $10.50 per hr
$236.80
30.00
20.00
$286.80
Cost per lot
$237.15
29.28
22.00
$288.43
Cost per lot
$203.00
25.20
20.00
$248.20
Providence Plant
Lots
Direct materials
Direct labor
Actual
Results
(1)
5,000
$1,184,000
$ 150,000
Price
Variance
(2) = (1) – (3)
$111,000 U
$ 18,750 U
Actual
Quantity 
Budgeted
Price
(3)
$1,073,000b
$ 131,250c
Efficiency
Variance
(4) = (3) – (5)
$58,000 U
$5,250 U
Flexible
Budgeta
(5)
5,000
$1,015,000
$ 126,000
Using Beverage Mate’s prices and quantities as the standard:
Direct materials: (70 lbs./lot  5,000 lots)  $2.90/lb. = $1,015,000
Direct labor: (2.4 hrs./lot  5,000 lots)  $10.50/hr. = $126,000
b
(74.0 lbs./lot  5,000 lots)  $2.90 per lb. = $1,073,000
c
(2.5 hours/lot  5,000 lots)  $10.50/hr. = $131,250
a
Amherst Plant
Actual
Results
(1)
Lots
5,000
Direct Materials $1,185,750
Direct Labor
$ 146,400
a
Price
Variance
(2) = (1) – (3)
$76,500 U
$20,400 U
Using Beverage Mate’s prices and quantities as the standard:
Actual
Quantity 
Budgeted
Price
(3)
$1,109,250b
$ 126,000c
Efficiency
Variance
(4) = (3) – (5)
$8,800 U
$
0F
Flexible
Budgeta
(5)
5,000
$1,015,000
$ 126,000
Direct materials: (70 lbs./lot  5,000 lots)  $2.90/lb. = $1,015,000
Direct labor: (2.4 hrs./lot  5,000 lots)  $10.50/hr. = $126,000
b
(76.5 lbs./lot  5,000 lots)  $2.90 per lb. = $1,109,250
c
(2.4 hours/lot  5,000 lots)  $10.50/hr. = $126,000
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, Beverage Mate, is
successful will also put positive pressure on the two plants to improve (note that all variances are
zero or unfavorable). Issues that Bryant should keep in mind include the following:
• Ensure that Beverage Mate 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 Beverage Mate is similar enough to use as a standard (if Beverage Mate
has a different business model, for example, it may be following a strategy of
lowering costs that Nantucket may not want to emulate because Nantucket is trying to
differentiate its products)
• The difference in hourly wages is not likely something that Nantucket can easily
remedy, as it is associated with the market wage rate for the location of its plants.
7-33 Static and flexible budgets, service sector. Student Finance (StuFi) is a start-up that aims
to use the power of social communities to transform the student loan market. It connects participants
through a dedicated lending pool, enabling current students to borrow from a school’s alumni
community. StuFi’s revenue model is to take an upfront fee of 40 basis points (0.40%) each from
the alumni investor and the student borrower for every loan originated on its platform.
StuFi hopes to go public in the near future and is keen to ensure that its financial results are in
line with that ambition. StuFi’s budgeted and actual results for the third quarter of 2017 are presented
below.
Required:
1. Prepare StuFi’s static budget of operating income for the third quarter of 2017.
2. Prepare an analysis of variances for the third quarter of 2017 along the lines of Exhibit 7-2;
identify the sales volume and flexible budget variances for operating income.
3. Compute the professional labor price and efficiency variances for the third quarter of 2017.
4. What factors would you consider in evaluating the effectiveness of professional labor in the
third quarter of 2017?
SOLUTION
(45 min.) Static and flexible budgets, service sector.
1.
Static Budget
$9,512,000
Revenue (8,200 × 0.8% × $145,000)
Variable costs:
Professional labor (8 × $45 × 8,200)
Credit verification ($100 × 8,200)
Federal documentation fees ($120 × 8,200)
Courier services ($50 × 8,200)
Total variable costs
Contribution margin
Fixed administrative costs
Fixed technology costs
Operating income
2,952,000
820,000
984,000
410,000
5,166,000
4,346,000
800,000
1,300,000
$2,246,000
2.
Actual results for third quarter 2017:
Revenue (10,250 × 0.8% × $162,000)
Variable costs:
Professional labor (9.5 × $50 × 10,250)
Credit verification ($100 × 10,250)
Federal documentation fees ($125 × 10,250)
Courier services ($54 × 10,250)
Total variable costs
Contribution margin
Fixed administrative costs
Fixed technology costs
Operating income
$13,284,000
4,868,750
1,025,000
1,281,250
553,500
7,728,500
5,555,500
945,000
_ 1,415,000
$ 3,195,500
31,000
Level 2 Analysis
Actual
Results
(1)
Loans
Revenue
Variable costs:
Professional labor
Credit verification
10,250
FlexibleBudget
Variances
(1) – (3)
0
Flexible
Budget
(3)
SalesVolume
Variances
(3) – (5)
Static
Budget
(5)
10,250
2,050 F
8,200
$13,284,000 $1,394,000 F $11,890,000 $2,378,000
4,868,750 1,178,750 U
1,025,000
0
3,690,000
1,025,000
738,000 U
205,000 U
$9,512,000
2,952,000
820,000
Federal doc. Fees
Courier services
Total variable costs
Contribution margin
Fixed administrative costs
Fixed technology costs
Operating income
1,281,250
51,250 U 1,230,000 246,000 U
984,000
553,500
41,000 U
512,500 102,500 U
410,000
7,728,500 1,271,000 U 6,457,500 1,291,500 U
5,166,000
5,555,500 123,000 F
5,432,500 1,086,500 F 4,346,000
945,000
145,000 U
800,000
0
800,000
1,415,000
115,000 U 1,300,000
0
1,300,000
$3,195,500 $ 137,000 U $3,332,500 $1,086,500 F $2,246,000
$137,000 U
Total flexiblebudget variance
$1,086,500 F
Total salesvolume variance
$949,500 F
Total static-budget variance
3.
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(1)
(10,250 × 9.5 × $50)
97,37 hrs. × $50/hr.
$4,868,750
Actual Input Qty.
× Budgeted Price
(2)
(10,250 × 9.5 × $45)
97,375 hrs. × $45/hr.
$4,381,875
$486,875 U
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(3)
(10,250 × 8.0 × $45)
82,000 hrs. ×$45/hr.
$3,690,000
$691,875 U
Efficiency variance
$1,178,750 U
Flexible-budget variance
4.
Effectiveness refers to the degree to which a predetermined objective is accomplished.
One objective of StuFi professional labor is to maximize loan-based revenue (0.8% of loan
amount × number of loans). The professional staff has increased the number of loans from a
budgeted 8,200 to 10,250, a significant increase. Additionally, the average loan amount
increased from a budgeted $145,000 to $162,000. The result is an increase in revenue from the
budgeted $9,512,000 to actual $13,284,000.
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 the third quarter of 2017.
7-34 Flexible budget, direct materials, and direct manufacturing labor variances.
Emerald Statuary manufactures bust statues of famous historical figures. All statues are the same
size. Each unit requires the same amount of resources. The following information is from the
static budget for 2017:
Expected production and sales
7,000 units
Expected selling price per unit
$
680
Total fixed costs
$1,400,000
Standard quantities, standard prices, and standard unit costs follow for direct materials and direct
manufacturing labor:
Direct materials
Direct manufacturing
labor
Standard Quantity
Standard Price
Standard Unit Cost
10 pounds
$ 8 per pound
$ 80
$50 per hour
$185
3.7 hours
During 2017, actual number of units produced and sold was 4,800, at an average selling price of
$720. Actual cost of direct materials used was $392,700, based on 66,000 pounds purchased at
$5.95 per pound. Direct manufacturing labor-hours actually used were 18,300, at the rate of $48
per hour. As a result, actual direct manufacturing labor costs were $878,400. Actual fixed costs
were $1,170,000. There were no beginning or ending inventories.
Required:
1. Calculate the sales-volume variance and flexible-budget variance for operating income.
2. Compute price and efficiency variances for direct materials and direct manufacturing labor.
SOLUTION
(30 min.) Flexible budget, direct materials and direct manufacturing labor variances.
1.
Variance Analysis for Emerald Statuary for 2017
Units sold
Revenues
FlexibleSalesActual
Budget
Flexible Volume
Static
Results
Variances
Budget
Variances
Budget
(1)
(2) = (1) – (3)
(3)
(4) = (3) – (5)
(5)
4,800a
0
4,800
2,200 U
7,000a
$3,456,000b $192,000 F $3,264,000c $1,496,000 U $4,760,000d
Direct materials
Direct manufacturing labor
Fixed costs
Total costs
Operating income
$ 392,700
$ 8,700 U $ 384,000e $ 176,000 F $ 560,000f
a
878,400
9,600 F
888,000g
407,000 F
1,295,000h
1,170,000a 230,000 F 1,400,000a
0
1,400,000a
$2,441,100 $230,900 F $2,672,000 $ 583,000 F $3,255,000
$1,014,900 $422,900 F $ 592,000 $ 913,000 U $1,505,000
$422,900 F
$913,000 U
Flexible-budget variance
Sales-volume variance
$490,100 U
Static-budget variance
a
Given
$720/unit × 4,800 units = $3,456,000
c
$680/unit × 4,800 units = $3,264,000
d
$680/unit × 7,000 units = $4,760,000
e
$80/unit × 4,800 units = $384,000
f
$80/unit × 7,000 units = $560,000
g
$185/unit × 4,800 units = $888,000
h
$185/unit × 7,000 units = $1,295,000
b
2.
Direct materials
Actual Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output ×
Budgeted Price)
$392,700a
$528,000b
$384,000c
$135,300 F
Price variance
$144,000 U
Efficiency variance
$8,700 U
Flexible-budget variance
Direct manufacturing labor
$878,400d
$915,000e
$36,600 F
Price variance
$888,000f
$27,000 U
Efficiency variance
$9,600 F
Flexible-budget variance
a
66,000 pounds × $5.95/pound = $392,700
66,000 pounds × $8/pound = $528,000
c
4,800 statues × 10 pounds/statue × $8/pound = 48,000 pounds × $8/pound = $384,000
d
18,300 hours × $48/hour = $878,400
e
18,300 hours × $50/hour = $915,000
f
4,800 statues × 3.7 hours/statue × $50/hour = 17,760 hours × $50/hour = $888,000
b
7-35 Variance analysis, nonmanufacturing setting. Joyce Brown has run Medical Maids, a
specialty cleaning service for medical and dental offices, for the past 10 years. Her static budget and
actual results for April 2017 are shown below. Joyce has one employee who has been with her for all
10 years that she has been in business. In addition, at any given time she also employs two other
less-experienced workers. It usually takes each employee 2 hours to clean an office, regardless of
his or her experience. Brown pays her experienced employee $30 per office and the other two
employees $15 per office. There were no wage increases in April.
Medical Maids Actual and Budgeted Income
Statements For the Month Ended April 30, 2017
Offices cleaned
Revenue
Budget
Actual
140
160
$26,600
$36,000
630
680
3,360
4,200
3,990
4,880
22,610
31,120
4,900
4,900
$17,710
$26,220
Variable costs:
Costs of supplies
Labor
Total variable costs
Contribution margin
Fixed costs
Operating income
Required:
1. How many offices, on average, did Brown budget for each employee? How many offices did
each employee actually clean?
2. Prepare a flexible budget for April 2017.
3. Compute the sales price variance and the labor efficiency variance for each labor type.
4. What information, in addition to that provided in the income statements, would you want
Brown to gather, if you wanted to improve operational efficiency?
SOLUTION
(30 min.) Variance analysis, nonmanufacturing setting
1. This is a problem of two equations & two unknowns. The two equations relate to the
number of offices cleaned and the labor costs (the wages paid to the employees).
X = number of offices cleaned by the experienced employee
Y = number of offices cleaned by the less experienced employees (combined)
Budget:
X + Y = 140
$30X + $15Y = $3,360
Actual: X + Y
= 160
$30X + $15Y = $4,200
Substitution:
30X + 15(140 – X) = 3,360
15X = 1,260
X= 84 offices
Y=140 – 84 = 56 offices
Substitution:
30X + 15(160 – X) = 4,200
15X = 1,800
X = 120 offices
Y= 160 – 120 = 40 offices
Budget: The experienced employee is budgeted to clean 84 offices (and earn
$2,520), and the less experienced employees are budgeted to clean 28 offices each
and earn $420 apiece.
Actual: The experienced employee cleans 120 offices (and grosses $3,600 for the
month), and the other two clean 20 offices each and gross $300 apiece.
2.
Actual
Results
(1)
Offices cleaned
Revenues
Variable costs
Supplies
Labor – Experienced
Labor – Less experienced
Total variable costs
Contribution Margin
Fixed costs
Operating income
a
160 × ($26,600/140)
160 × ($630/140)
c
160 × ($2,520/140)
d
160 × ($840/140)
b
FlexibleBudget
Variances
(2) = (1) –
(3)
160
Flexible
Budget
(3)
Sales Volume
Variance
(4) = (3) –
(5)
160
Static
Budget
(5)
140
$36,000
$ 5,600 F
$30,400a
$ 3,800 F
$ 26,600
680
3,600
600
9,760
31,120
4,900
$26,220
40 F
720 U
360 F
640 U
5,280 F
0
$ 5,200 F
720b
2,880c
960d
4,560
25,840
4,900
$20,940
90 U
360 U
120 U
570 U
3,230 F
0
$ 3,230 F
630
2,520
840
3,990
22,610
4,900
$17,710
3. Actual sales price = $36,000 ÷ 160 = $225
Sales Price Variance
= (Actual sales price – Budgeted sales price) × Actual number of offices cleaned:
= ($225 – $190) × 160
= $5,600 Favorable
Labor efficiency for experienced worker:
Standard offices expected to be completed by experienced worker based on actual
number of offices cleaned = (84 ÷ 140) × 160 = 96 offices
Labor efficiency variance = Budgeted wage rate per office × (Actual offices cleaned –
budgeted offices cleaned)
= $30 × (120 – 96)
= $720 Unfavorable
Labor efficiency for less-experienced workers:
Standard offices expected to be completed by less-experienced workers based on actual
number of offices cleaned = (56 ÷ 140) × 160 = 64 offices
Labor efficiency variance = Budgeted wage rate per office × (Actual offices cleaned –
budgeted offices cleaned)
= $15 × (40 – 64)
= $360 Favorable
Note that these are the same as the flexible budget variances calculated earlier for labor.
Since there were no wage increases, the labor price variances are zero, and so the flexible
budget variance and the efficiency variance for labor are the same.
4. In addition to understanding the variances computed above, Brown should attempt to
keep track of the number of offices cleaned by each employee, as well as the number of
hours actually spent on each office. In addition, Brown should look at the prices charged
for cleaning, in relation to the hours spent on each job. It should also be considered
whether the experienced worker should be asked to take less time per office, given her
prior years at work and the fact that she is paid twice the wage rate of the lessexperienced employees.
7-36 Comprehensive variance analysis review. Ellis Animal Health, Inc., produces a generic
medication used to treat cats with feline diabetes. The liquid medication is sold in 100 ml vials. Ellis
employs a team of sales representatives who are paid varying amounts of commission.
Given the narrow margins in the generic veterinary drugs industry, Ellis relies on tight standards
and cost controls to manage its operations. Ellis has the following budgeted standards for the month
of April 2017:
Average selling price per vial
$
8.30
Total direct materials cost per vial
$
3.60
Direct manufacturing labor cost per hour
$ 15.00
Average labor productivity rate (vials per hour)
100
Sales commission cost per vial
$
Fixed administrative and manufacturing
overhead
$990,000
0.72
Ellis budgeted sales of 700,000 vials for April. At the end of the month, the controller revealed
that actual results for April had deviated from the budget in several ways:







Unit sales and production were 90% of plan.
Actual average selling price decreased to $8.20.
Productivity dropped to 90 vials per hour.
Actual direct manufacturing labor cost was $15.20 per hour.
Actual total direct material cost per unit increased to $3.90.
Actual sales commissions were $0.70 per vial.
Fixed overhead costs were $110,000 above budget.
Calculate the following amounts for Ellis for April 2017:
Required:
1. Static-budget and actual operating income
2. Static-budget variance for operating income
3. Flexible-budget operating income
4. Flexible-budget variance for operating income
5. Sales-volume variance for operating income
6. Price and efficiency variances for direct manufacturing labor
7. Flexible-budget variance for direct manufacturing labor
SOLUTION
(60 min.) Comprehensive variance analysis review
Actual Results
Units sold (90% × 700,000)
Selling price per unit
Revenues (630,000 × $8.20)
Direct materials purchased and used:
630,000
$8.20
$5,166,000
Direct materials per unit
Total direct materials cost (630,000 × $3.90)
Direct manufacturing labor:
Actual manufacturing rate per hour
Labor productivity per hour in units
Manufacturing labor-hours of input (630,000 ÷ 90)
Total direct manufacturing labor costs (7,000 × $15.20)
Direct marketing costs:
Sales commissions per unit
Total direct marketing costs (630,000 × $0.70)
Fixed administrative and overhead costs ($990,000 + $110,000)
Static Budgeted Amounts
Units sold
Selling price per unit
Revenues (700,000 × $8.30)
Direct materials purchased and used:
Direct materials per unit
Total direct materials costs (700,000 × $3.60)
Direct manufacturing labor:
Direct manufacturing rate per hour
Labor productivity per hour in units
Manufacturing labor-hours of input (700,000 ÷ 100)
Total direct manufacturing labor cost (7,000 × $15.00)
Direct marketing costs:
Sales commissions per unit
Total direct marketing cost (700,000 × $0.72)
Fixed administrative and overhead 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
Static-budget operating income
Total static-budget variance
$3.90
$2,457,000
$15.20
90
7,000
$106,400
$0.70
$441,000
$1,100,000
700,000
$8.30
$5,810,000
$3.60
$2,520,000
$15.00
100
7,000
$105,000
$0.72
$504,000
$990,000
Actual
Results
$5,166,000
Static-Budget
Amounts
$5,810,000
2,457,000
106,400
441,000
3,004,400
2,161,600
1,100,000
$1,061,600
2,520,000
105,000
504,000
3,129,000
2,681,000
990,000
$1,691,000
$1,061,600
1,691,000
$ 629,400 U
Flexible-budget-based variance analysis for Ellis Animal Health, Inc. for April 2017:
Actual
Results
Units (vials) sold
Flexible-Budget
Variances
630,000
0
Flexible
Budget
SalesVolume
Variances
630,000
70,000
Static
Budget
700,000
Revenues
Variable costs
Direct materials
Direct manuf. labor
Direct marketing costs
Total variable costs
Contribution margin
Fixed costs
$5,166,000
$ 63,000 U
$5,229,000
$ 581,000 U
$5,810,000
2,457,000
106,400
441,000
3,004,400
2,161,600
1,100,000
189,000 U
11,900 U
12,600 F
188,300 U
251,300 U
110,000 U
2,268,000
94,500
453,600
2,816,100
2,412,900
990,000
252,000 F
10,500 F
50,400 F
312,900 F
268,100 U
0
2,520,000
105,000
504,000
3,129,000
2,681,000
990,000
Operating income
$1,061,600
$361,300 U
$1,422,900
$ 268,100 U
$1,691,000
$629,400 U
Total static-budget variance
$361,300 U
$268,100 U
Total flexible-budget
variance
Total sales-volume
variance
3.
Flexible-budget operating income = $1,422,900.
4.
Flexible-budget variance for operating income = $361,300 U.
5.
Sales-volume variance for operating income = $268,100 U.
6.
Analysis of direct mfg. labor flexible-budget variance for Ellis Animal Health, Inc. for April 2017:
Direct.
Mfg. Labor
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(7,000 × $15.20)
$106,400
Actual Input Qty.
× Budgeted Price
(7,000 × $15.00)
$105,000
$1,400 U
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(*6,300 × $15.00)
$94,500
$10,500 U
Efficiency variance
$11,900 U
Flexible-budget variance
* 630,000 units ÷ 100 direct manufacturing labor standard productivity rate per hour.
DML price variance = $1,400 U; DML efficiency variance = $10,500 U
7.
DML flexible-budget variance = $11,900 U
7-37 Possible causes for price and efficiency variances. You have been invited to interview
for an internship with an international food manufacturing company. When you arrive for the
interview, you are given the following information related to a fictitious Belgian chocolatier for the
month of June. The chocolatier manufactures truffles in 12-piece boxes. The production is labor
intensive, and the delicate nature of the chocolate requires a high degree of skill.
Actual
Boxes produced
10,000
Direct materials used in production
2,150,000 g
Actual direct material cost
60,200 euro
Actual direct manufacturing labor-hours
1,100
Actual direct manufacturing labor cost
12,650 euro
Standards
Purchase price of direct materials
0.03 euro/g
Materials per box
200 g
Wage rate
12 euro/hour
Boxes per hour
10
Please respond to the following questions as if you were in an interview situation:
Required:
1. Calculate the materials efficiency and price variance and the wage and labor efficiency
variances for the month of June.
2. Discuss some possible causes of the variances you have calculated. Can you make any possible
connection between the material and labor variances? What recommendations do you have for
future improvement?
SOLUTION
(20 min.) Possible causes for price and efficiency variances
1.
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(1)
Direct
Materials
€ 60,200
Actual Input Qty.
× Budgeted Price
(2)
(2,150,000 × € 0.03)
€ 64,500
€ 4,300 F
Price variance
Direct
Manufacturing
Labor
€ 550 F
Price variance
2.
€ 4,500 U
Efficiency variance
(1,100 × € 12)
€ 13,200
€ 12,650
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(3)
(10,000 × 200 × € .03)
€ 60,000
(10,000 × (1/10) × € 12)
€ 12,000
€ 1,200 U
Efficiency variance
The favorable materials price variance, paired with the unfavorable materials efficiency
variance could be an indication that the company purchased less expensive ingredients,
but at the cost of lower quality. Lower quality ingredients may have resulted in a higher
than standard number of rejected units. That theory is supported by the unfavorable labor
efficiency variance, as rejects cause both an unfavorable materials efficiency and
unfavorable labor efficiency variance.
The favorable labor price variance suggests that less experienced workers may have
worked more hours than more experienced workers. Those workers would have probably
worked slower, and their lack of experience may have caused higher than normal rejects
or waste.
The company should look at the number of rejected units, and if they are indeed
abnormal, determine the cause of the rejects. Is it because of faulty materials,
underskilled workers, or a combination of both? Perhaps additional training will help. If
rejects are not the problem, employees may be wasting both time and materials.
7-38 Material-cost variances, use of variances for performance evaluation. Katharine
Johnson is the owner of Best Bikes, a company that produces high-quality cross-country bicycles.
Best Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and
elite bicycle shops. For several years Best Bikes has purchased titanium from suppliers in the supply
chain. Best Bikes uses titanium for the bicycle frames because it is stronger and lighter than other
metals and therefore increases the quality of the bicycle. Earlier this year, Best Bikes hired Michael
Bentfield, a recent graduate from State University, as purchasing manager. Michael believed that he
could reduce costs if he purchased titanium from an online marketplace at a lower price.
Best Bikes established the following standards based upon the company’s experience with
previous suppliers. The standards are as follows:
Cost of titanium
$18 per pound
Titanium used per bicycle
8 lbs.
Actual results for the first month using the online supplier of titanium are as follows:
Bicycles produced
400
Titanium purchased
5,200 lb. for $88,400
Titanium used in production
4,700 lb.
Required:
1. Compute the direct materials price and efficiency variances.
2. What factors can explain the variances identified in requirement 1? Could any other variances
be affected?
3. Was switching suppliers a good idea for Best Bikes? Explain why or why not.
4. the production manager’s evaluation be based solely on efficiency variances? Why is it
important for Katharine Johnson to understand the causes of a variance before she evaluates
performance?
5. Other than performance evaluation, what reasons are there for calculating variances?
6. What future problems could result from Best Bikes’ decision to buy a lower quality of
titanium from the online marketplace?
SOLUTION
(35 min.) Material cost variances, use of variances for performance evaluation
1. Materials Variances
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Direct
Materials
(5,200 × $17a)
$88,400
Actual Input Qty.
× Budgeted Price
Purchases
Usage
(5,200 × $18)
(4,700 × $18)
$93,600
$84,600
$5,200 F
Price variance
a
$88,400 ÷5,200 = $17
Flexible Budget
(Budgeted Input Qty. Allowed
for Actual Output
× Budgeted Price)
(400 × 8 × $18)
(3,200 × $18)
$57,600
$27,000 U
Efficiency variance
2. The favorable price variance is due to the $1 difference ($18 - $17) between the standard
price based on the previous suppliers and the actual price paid through the on-line
marketplace. The unfavorable efficiency variance could be due to several factors
including inexperienced workers and machine malfunctions. But the likely cause here is
that the lower-priced titanium was lower quality or less refined, which led to more waste.
The labor efficiency variance could be affected if the lower quality titanium caused the
workers to use more time.
3. Switching suppliers was not a good idea. The $5,200 savings in the cost of titanium was
outweighed by the $27,000 extra material usage. In addition, the $27,000 U efficiency
variance does not recognize the total impact of the lower quality titanium because, of the
5,200 pounds purchased, only 4,700 pounds were used. If the quantity of materials used
in production is relatively the same, Best Bikes could expect the remaining 500 lbs to
produce approximately 40 more units. At standard, 40 more units should take 40 × 8 =
320 lbs. There could be an additional unfavorable efficiency variance of
(500  $18)
$9,000
(40 × 8 × $18)
$5,760
$3,240U
4. The purchasing manager’s performance evaluation should not be based solely on the
price variance. The short-run reduction in purchase costs was more than offset by higher
usage rates. His evaluation should be based on the total costs of the company as a whole.
In addition, the production manager’s performance evaluation should not be based solely
on the efficiency variances. In this case, the production manager was not responsible for
the purchase of the lower-quality titanium, which led to the unfavorable efficiency scores.
In general, it is important for Johnson to understand that not all favorable material price
variances are “good news,” because of the negative effects that can arise in the
production process from the purchase of inferior inputs. They can lead to unfavorable
efficiency variances for both materials and labor. Johnson should also that understand
efficiency variances may arise for many different reasons and she needs to know these
reasons before evaluating performance.
5. Variances should be used to help Best 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 solely
on the price of titanium, Scott can balance price and quality in future purchase decisions.
6. Future problems can arise in the supply chain. Bentfield may need to go back to the
previous suppliers. But Best Bikes’ relationship with them may have been damaged and
they may now be selling all their available titanium to other manufacturers. Lower quality
bicycles could also affect Best Bikes’ reputation with the distributors, the bike shops and
customers, leading to higher warranty claims and customer dissatisfaction, and decreased
sales in the future.
7-39 Direct manufacturing labor and direct materials variances, missing data. (CMA,
heavily adapted) Oyster Bay Surfboards manufactures fiberglass surfboards. The standard cost of
direct materials and direct manufacturing labor is $248 per board. This includes 35 pounds of
direct materials, at the budgeted price of $3 per pound, and 11 hours of direct manufacturing
labor, at the budgeted rate of $13 per hour. Following are additional data for the month of July:
Units completed
5,600 units
Direct material purchases
230,000 pounds
Cost of direct material purchases
$759,000
Actual direct manufacturing labor-hours
43,000 hours
Actual direct manufacturing labor cost
$623,500
Direct materials efficiency variance
$
1,200 F
There were no beginning inventories.
Required:
1. Compute direct manufacturing labor variances for July.
2. Compute the actual pounds of direct materials used in production in July.
3. Calculate the actual price per pound of direct materials purchased.
4. Calculate the direct materials price variance.
SOLUTION
(30 min.) Direct manufacturing labor and direct materials variances, missing data.
1.
Direct mfg. labor
Actual Costs
Incurred (Actual
Input Qty.× Actual Price)
$623,500a
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Input Qty. Actual Output
× Budgeted Price × Budgeted Price)
$559,000b
$800,800c
$64,500 U
Price variance
$241,800 F
Efficiency variance
$177,300 F
Flexible-budget variance
a
Given (or 43,000 hours × $14.50/hour)
43,000 hours × $13/hour = $559,000
c
5,600 units × 11 hours/unit × $13/hour = $800,800
b
2.
The favorable direct materials efficiency variance of $241,800 indicates that fewer
pounds of direct materials were actually used than the budgeted quantity allowed for actual
output.
=
$1,200 efficiency variance
$3 per pound budgeted price
= 400 pounds
Budgeted pounds allowed for the output achieved = 5,600 x 35 = 196,000 pounds
Actual pounds of direct materials used = 196,000  400 = 195,600 pounds
3. Actual price paid per pound = $759,000/230,000
= $3.30 per pound
4.
Actual Costs Incurred
(Actual Input × Actual Price)
$759,000a
Actual Input ×
Budgeted Price
$690,000b
$69,000 U
Price variance
a
b
Given
230,000 pounds × $3/pound = $690,000
7-40 Direct materials efficiency, mix, and yield variances. Sandy’s Snacks produces snack
mixes for the gourmet and natural foods market. Its most popular product is Tempting Trail Mix, a
mixture of peanuts, dried cranberries, and chocolate pieces. For each batch, the budgeted quantities
and budgeted prices are as follows:
Quantity per Batch
Price per Cup
Peanuts
60 cups
$1
Dried cranberries
30 cups
$2
Chocolate pieces
10 cups
$3
Small changes to the standard mix of direct materials reflected in the above quantities do not
significantly affect the overall end product. In addition, not all ingredients added to production end
up in the finished product, as some are rejected during inspection.
In the current period, Sandy’s Snacks made 100 batches of Tempting Trail Mix with the
following actual quantity, cost, and mix of inputs:
Actual Quantity
Actual Cost
Actual Mix
Peanuts
6,720 cups
$ 5,712
64%
Dried cranberries
2,625 cups
5,775
25%
Chocolate pieces
1,155 cups
3,350
11%
Total actual
10,500 cups
$14,837
100%
Required:
1. What is the budgeted cost of direct materials for the 100 batches?
2. Calculate the total direct materials efficiency variance.
3. Calculate the total direct materials mix and yield variances.
4. How do the variances calculated in requirement 3 relate to those calculated in requirement 2?
What do the variances calculated in requirement 3 tell you about the 100 batches produced
this period? Are the variances large enough to investigate?
SOLUTION
(35 min.) Direct materials efficiency, mix, and yield variances
1.
Peanuts ($1 × 60 cups)
Dried cranberries ($2 × 30 cups)
Chocolate pieces ($3 × 10 cups)
Budgeted cost per batch
Number of batches
Budgeted Cost
$
60
60
30
$ 150
× 100
$15,000
2.
Solution Exhibit 7-40A presents the total price variance ($598 F), the total efficiency
variance ($435 U), and the total flexible-budget variance ($163 F).
• SOLUTION EXHIBIT 7-40A
Columnar Presentation of Direct Materials Price and Efficiency Variances for Sandy’s Snacks
Company.
Peanuts
Dried Cranberries
Chocolate Pieces
Actual Costs
Incurred
(Actual Input Quantity
× Actual Price)
(1)
$ 5,712
5,775
3,350
$14,837
Actual Input Quantity
× Budgeted Price
(2)
6,720 × $1 = $ 6,720
2,625 × $2 = 5,250
1,155 × $3 = 3,465
$15,435
$598 F
Flexible Budget
(Budgeted Input Quantity
Allowed for Actual Output
× Budgeted Price)
(3)
6,000 × $1 = $ 6,000
3,000 × $2 = 6,000
1,000 × $3 = 3,000
$15,000
$435 U
Total price variance
Total efficiency variance
$163 F
Total flexible-budget variance
F = favorable effect on operating income; U = unfavorable effect on operating income
3.
Solution Exhibit 7-40B presents the total direct materials yield ($750 U) and mix ($315
F) variances.
SOLUTION EXHIBIT 7-40B
Columnar Presentation of Direct Materials Yield and Mix Variances for Sandy’s Snacks
Company.
Actual Total Quantity
of All Inputs Used
× Actual Input Mix
× Budgeted Price
(1)
Peanuts
Dried Cranberries
Chocolate Pieces
10,500 × 0.64 × $1 = $ 6,720
10,500 × 0.25 × $2 = 5,250
10,500 × 0.11 × $3 = 3,465
$ 15,435
Actual Total Quantity
of All Inputs Used
× Budgeted Input Mix
× Budgeted Price
(2)
Flexible Budget:
Budgeted Total Quantity of
All Inputs Allowed for
Actual Output ×
Budgeted Input Mix
× Budgeted Price
(3)
10,500 × 0.60 × $1 = $ 6,300
10,500 × 0.30 × $2 = 6,300
10.500 × 0.10 × $3 = 3,150
$ 15,750
10,000 × 0.60 × $1 = $ 6,000
10,000 × 0.30 × $2 = 6,000
10,000 × 0.10 × $3 = 3,000
$15,000
$315 F
Total mix variance
$750 U
Total yield variance
$435 U
Total efficiency variance
F = favorable effect on operating income; U = unfavorable effect on operating income.
4.
The total mix variance combines with the total yield variance to equal the total efficiency
variance calculated in part 2. The direct materials mix variance of $315 F indicates that the actual
product mix uses relatively more of less-expensive ingredients than planned. In this case, the actual mix
contains more peanuts while using fewer dried cranberries, and only slightly more chocolate pieces.
The direct materials yield variance of $750 U occurs because the amount of total inputs needed (10,500
cups) exceeded the budgeted amount (10,000 cups) expected to produce 100 batches.
The direct materials yield variance is significant enough to be investigated. The mix variance may be
within expectations but should be monitored since it is favorable largely due to the use of fewer dried
cranberries, which is considered an important element of the product’s appeal to customers.
7-41 Direct materials and manufacturing labor variances, solving unknowns. (CPA,
adapted) On May 1, 2017, Bovar Company began the manufacture of a new paging machine known
as Dandy. The company installed a standard costing system to account for manufacturing costs. The
standard costs for a unit of Dandy follow:
Direct materials (3 lb. at $4 per lb.)
$12.00
Direct manufacturing labor (1/2 hour at $20 per hour)
10.00
Manufacturing overhead (75% of direct manufacturing
labor costs)
7.50
$29.50
The following data were obtained from Bovar’s records for the month of May:
Debit
Revenues
Credit
$125,000
Accounts payable control (for May’s purchases of direct materials)
Direct materials price variance
55,000
$3,500
Direct materials efficiency variance
2,400
Direct manufacturing labor price variance
1,890
Direct manufacturing labor efficiency variance
2,200
Actual production in May was 4,000 units of Dandy, and actual sales in May were 2,500 units.
The amount shown for direct materials price variance applies to materials purchased during May.
There was no beginning inventory of materials on May 1, 2017.
Compute each of the following items for Bovar for the month of May. Show your
computations.
Required:
1. Standard direct manufacturing labor-hours allowed for actual output produced
2. Actual direct manufacturing labor-hours worked
3. Actual direct manufacturing labor wage rate
4. Standard quantity of direct materials allowed (in pounds)
5. Actual quantity of direct materials used (in pounds)
6. Actual quantity of direct materials purchased (in pounds)
7. Actual direct materials price per pound
SOLUTION
(20–30 min.) Direct materials and manufacturing labor variances, solving unknowns.
All given items are designated by an asterisk.
Direct
Manufacturing
Labor
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(1,890 × $21)
$39,690
(1,890 × $20*)
$37,800
(4,000* × 0.5* × $20*)
$40,000
$1,890 U*
Price variance
Direct
Materials
(12,875 × $4.27)
$55,000*
Purchases
(12,875 × $4*)
$51,500
$3,500 U*
Price variance
$2,200 F*
Efficiency variance
Usage
(12,600 × $4*)
$50,400
(4,000* × 3* × $4*)
$48,000
$2,400 U*
Efficiency variance
1. 4,000 units × 0.5 hours/unit = 2,000 hours
2. Flexible budget – Efficiency variance = $40,000 – $2,200 = $37,800
Actual dir. manuf. labor hours = $37,800 ÷ Budgeted price of $20/hour = 1,890 hours
3. $37,800 + Price variance, $1,890 = $39,690, the actual direct manuf. labor cost
Actual rate = Actual cost ÷ Actual hours = $39,690 ÷ 1,890 hours = $21/hour
4. Standard qty. of direct materials = 4,000 units × 3 pounds/unit = 12,000 pounds
5. Flexible budget + Dir. matls. effcy. var. = $48,000 + $2,400 = $50,400
Actual quantity of dir. matls. used = $50,400 ÷ Budgeted price per lb
= $50,400 ÷ $4/lb = 12,600 lbs
6. Actual cost of direct materials, $55,000 – Price variance, $3,500 = $51,500
Actual qty. of direct materials purchased = $51,500 ÷ Budgeted price, $4/lb = 12,875 lbs.
7. Actual direct materials price = $51,500 ÷ 12,875 lbs = $4.27 per lb.
7-42 Direct materials and manufacturing labor variances, journal entries. Collegiate Corn
Hole is a small business that Zach Morris developed while in college. He began building wooden
corn hole game sets for friends, hand painted with college colors and logos. As demand grew, he
hired some workers and began to manage the operation. Collegiate Corn Hole maintains two
departments: construction and painting. In the construction department, the games require wood and
labor. Collegiate Corn Hole has some employees who have been with the company for a very long
time and others who are new and inexperienced.
Collegiate Corn Hole uses standard costing for the game sets. Zach expects that a typical set
should take 4 hours of labor in the construction department, and the standard wage rate is $10.00 per
hour. An average set uses 24 square feet of wood, allowing for a certain amount of scrap. Because of
the nature of the wood, workers must work around flaws in the materials. Zach shops around for
good deals and expects to pay $5.00 per square feet.
Zach does not store inventory, and buys the wood as he receives an order.
For the month of September, Zach’s workers produced 60 corn hole sets using 250 hours and
1,500 square feet of wood. Zach bought wood for $7,350 (and used the entire quantity) and
incurred labor costs of $2,375.
Required:
1. For the construction department, calculate the price and efficiency variances for the wood
and the price and efficiency variances for direct manufacturing labor.
2. Record the journal entries for the variances incurred.
3. Discuss logical explanations for the combination of variances that the construction
department of Collegiate Corn Hole experienced.
SOLUTION
(20 min.) Direct materials and manufacturing labor variances, journal entries.
1.
Direct Materials:
Wood
Actual Costs
Incurred
(Actual Input
Qty.
× Actual Price)
(given)
$7,350
Actual Input Qty.
× Budgeted Price
1,500  $5.00
$7,500
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
60  24  $5.00
$7,200
$150 F
$300 U
Price variance
Efficiency variance
$150 U
Flexible-budget variance
Direct Manufacturing Labor:
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
250  $10
(given)
$2,375
$2,500
$125 F
Price variance
60  4  $10
$2,400
$100 U
Efficiency variance
$25 F
Flexible-budget variance
2.
Direct Materials Price Variance (time of purchase = time of use)
Direct Materials Control
7,500
Direct Materials Price Variance
150
Accounts Payable Control or Cash
7,350
Direct Materials Efficiency Variance
Work in Process Control
Direct Materials Efficiency Variance
Direct Materials Control
7,200
300
7,500
Direct Manufacturing Labor Variances
Work in Process Control
Direct Mfg. Labor Efficiency Variance
Direct Mfg. Labor Price Variance
Wages Payable or Cash
2,400
100
125
2,375
3.
Plausible explanations for the above variances include:
Collegiate Corn Hole paid a little less for the wood, but the wood was lower quality (more flaws
in the wood), and workers had to use more of it. Collegiate used less experienced workers in
September than usual. This resulted in payment of lower average hourly wages, but the new
workers were less efficient and took more hours than normal. However, overall the lower wage
rates resulted in Collegiate’s total wage bill being lower than expected.
7-43 Use of materials and manufacturing labor variances for benchmarking. You are a
new junior accountant at In Focus Corporation, maker of lenses for eyeglasses. Your company
sells generic-quality lenses for a moderate price. Your boss, the controller, has given you the
latest month’s report for the lens trade association. This report includes information related to
operations for your firm and three of your competitors within the trade association. The report also
includes information related to the industry benchmark for each line item in the report. You do not
know which firm is which, except that you know you are Firm A.
Unit Variable Costs Member Firms for the
Month Ended September 30, 2017
Firm A
Firm B
Firm C
Firm D
Industry Benchmark
Materials input
2.15
2.00
2.20
2.60
2.15
oz. of glass
Materials price
$ 5.00
$ 5.25
$ 5.10
$ 4.50
$ 5.10
per oz.
0.75
1.00
0.65
0.70
0.70
hours
Wage rate
$14.50
$14.00
$14.25
$15.25
$12.50
per DLH
Variable overhead
rate
$ 9.25
$14.00
$ 7.75
$11.75
$12.25
per DLH
Labor-hours used
Required:
1. Calculate the total variable cost per unit for each firm in the trade association. Compute the
percent of total for the material, labor, and variable overhead components.
2 Using the trade association’s industry benchmark, calculate direct materials and direct
manufacturing labor price and efficiency variances for the four firms. Calculate the percent
over standard for each firm and each variance.
3. Write a brief memo to your boss outlining the advantages and disadvantages of belonging to
this trade association for benchmarking purposes. Include a few ideas to improve
productivity that you want your boss to take to the department heads’ meeting.
SOLUTION
(30 min.) Use of materials and manufacturing labor variances for benchmarking
1.
Unit variable cost (dollars) and component percentages for each firm:
Firm A
DM
DL
VOH
Total
2.
Firm B
$10.75 37.6%
10.88 38.1%
6.94 24.3%
$28.57 100.0%
$10.50 27.3%
14.00 36.3%
14.00 36.4%
$38.50 100.0%
Firm C
Firm D
$11.22 44.0%
9.26 36.3%
5.04 19.7%
$25.52 100.0%
$11.70 38.2%
10.68 34.9%
8.23 26.9%
$30.61 100.0%
Variances and percentage over/under standard for each firm relative to the Industry Benchmark:
Firm A
Firm B
Firm C
Firm D
% over
% over
% over
% over
Variance standard Variance standard Variance standard Variance standard
DM Price
Variance
DM Efficiency
Variance
DL Price
Variance
DL Efficiency
Variance
$0.22 F
-1.96%
$0.30 U
2.94%
--
--
$1.56 F
-11.76%
--
--
$0.77 F
-6.98%
$0.26 U
2.33%
$2.30 U
20.93%
$1.50 U
16.00%
$1.50 U
12.00%
$1.14 U
14.00%
$1.93 U
22.00%
$0.63 U
7.14%
$3.75 U
42.86%
$0.63 F
-7.14%
--
--
We illustrate these calculations for Firm A.
The DM Price Variance is computed as:
=
=
(Firm A Price – Benchmark Price) × Firm A Usage
($5.00 - $5.10) × 2.15 oz.
$0.22 F
The DM Efficiency Variance is computed as follows:
=
=
(Firm A Usage – Benchmark Usage) x Benchmark Price
(2.15 oz. – 2.15 oz.) x $5.10
$0
The DL Price Variance is computed as:
=
=
(Firm A Rate – Benchmark Rate) x Firm A Hours
($14.50 – $12.50) x 0.75
$1.50 U
The DL Efficiency Variance is computed as follows:
=
=
(Firm A Usage – Benchmark Usage) x Benchmark Rate
(0.75 hrs. – 0.70 hrs.) x $12.50
$0.63 U
The % over standard is the percentage difference in prices relative to the Industry Benchmark.
Again using the DM Price Variance calculation for Firm A, the % over standard is given by:
(Firm A Price – Benchmark Price)/Benchmark Price
=
($5.00 - $5.10)/$5.10
=
1.96% under standard.
3.
To: Controller
From: Junior Accountant
Re: Benchmarking & productivity improvements
Date: March 15, 2017
Benchmarking advantages
- we can see how productive we are relative to our competition and the industry benchmark
- we can see the specific areas in which there may be opportunities for us to reduce costs
Benchmarking disadvantages
- some of our competitors are targeting the market for high-end and custom-made 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 differentiating ourselves,
maintaining our competitive 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
- we may want to re-evaluate the training our employees receive given our level of
unfavorable labor efficiency variance compared to the benchmark.
- can we use Firm B’s materials efficiency and Firm C’s variable overhead consumption
levels as our standards for the coming year?
- It is unclear why the trade association is still using $12.50 for the labor rate benchmark.
Given the difficulty of hiring qualified workers, real wage rates are now substantially
higher. We pay our workers $2 more per hour, and at least one of our competitors pays
even higher wages than we do! Firm B does pay $0.50 less than we do per hour and that
may be worth looking into.
7-44 Direct manufacturing labor variances: price, efficiency, mix, and yield. Elena Martinez
employs two workers in her wedding cake bakery. The first worker, Gabrielle, has been making
wedding cakes for 20 years and is paid $25 per hour. The second worker, Joseph, is less experienced
and is paid $15 per hour. One wedding cake requires, on average, 6 hours of labor. The budgeted
direct manufacturing labor quantities for one cake are as follows:
Quantity
Gabrielle
3 hours
Joseph
3 hours
Total
6 hours
That is, each cake is budgeted to require 6 hours of direct manufacturing labor, composed of 50% of
Gabrielle’s labor and 50% of Joseph’s, although sometimes Gabrielle works more hours on a
particular cake and Joseph less, or vice versa, with no obvious change in the quality of the cake.
During the month of May, the bakery produces 50 cakes. Actual direct manufacturing labor costs
are as follows:
Gabrielle (140 hours)
Joseph (165 hours)
Total actual direct labor cost
$ 3,500
2,475
$ 5,975
Required:
1. What is the budgeted cost of direct manufacturing labor for 50 cakes?
2. Calculate the total direct manufacturing labor price and efficiency variances.
3. For the 50 cakes, what is the total actual amount of direct manufacturing labor used? What is
the actual direct manufacturing labor input mix percentage? What is the budgeted amount of
Gabrielle’s and Joseph’s labor that should have been used for the 50 cakes?
4. Calculate the total direct manufacturing labor mix and yield variances. How do these
numbers relate to the total direct manufacturing labor efficiency variance? What do these
variances tell you?
SOLUTION
(35 min.) Direct manufacturing labor variances: price, efficiency, mix and yield
1.
Gabrielle ($25 × 3 hrs.)
Joseph ($15 × 3 hrs.)
Cost per cake
Number of cakes
Total budgeted cost
$
$
$
75
45
120
× 50 units
6,000
2. Solution Exhibit 7-44A presents the total price variance ($0), the total efficiency variance
($25 F), and the total flexible-budget variance ($25 F).
Total direct labor price variance can also be computed as:
Direct labor
price variance
for each input
=
Actual quantity
×
 Budgeted
 priceActual
of input
of input price of input 
Gabrielle = ($25 – $25) × 140 = $0
Joseph
= ($15 – $15) × 165 = 0
Total direct labor price variance
$0
Total direct labor efficiency variance can also be computed as:
•
Direct labor
efficiency• variance = Actual quantity  Budgeted quantity of input × Budgeted
price of input
of input
allowed for actual output
for each input


Gabrielle = (140 – 150) × $25.00 = $250 F
Joseph
= (165 – 150) × $15.00 = 225 U
Total direct labor efficiency variance $ 25 F
• SOLUTION EXHIBIT 7-44A
Columnar Presentation of Direct Labor Price and Efficiency Variances for Elena Martinez
Wedding Cakes
Actual Costs
Incurred
(Actual Input Quantity
× Actual Price)
(1)
140 × $25 = $3,500
165 × $15 = 2,475
$5,975
Gabrielle
Joseph
Actual Input Quantity
× Budgeted Price
(2)
140 × $25 = $3,500
165 × $15 = 2,475
$5,975
$0
Total price variance
Flexible Budget
(Budgeted Input Quantity
Allowed for Actual Output
× Budgeted Price)
(3)
150 × $25 = $3,750
150 × $15 = 2,250
$6,000
$25 F
Total efficiency variance
$25 F
Total flexible-budget variance
F = favorable effect on operating income; U = unfavorable effect on operating income
3.
Actual
Quantity
of Input
140 hours
165 hours
305 hours
Gabrielle
Joseph
Total
Actual
Mix
45.9%
54.1%
100.0%
Budgeted Quantity
of Input for Actual Output
3 hours × 50 units = 150 hours
3 hours × 50 units = 150 hours
300 hours
Budgeted
Mix
50%
50%
100%
4. Solution Exhibit 7-44B presents the total direct labor yield and mix variances for Elena
Martinez Wedding Cakes.
The total direct labor yield variance can also be computed as the sum of the direct labor
yield variances for each input:
Direct labor
yield
variance for
each input
=
Actual total
Budgeted total quantity of
quantity of all
all direct labor inputs
direct labor – allowed for actual output
inputs used
×
Budgeted direct
labor input mix
percentage
×
Budgeted price
of direct labor
inputs
Gabrielle = (305 – 300) × 0.50 × $25 = 5 × 0.50 × $25 = $ 62.50 U
Joseph = (305 – 300) × 0.50 × $15 = 5 × 0.50 × $15 = 37.50 U
Total direct labor yield variance
$ 100.00 U
The total direct labor mix variance can also be computed as the sum of the direct labor mix
variances for each input:
Direct labor
mix
variance for
each input
=
Actual direct
labor input
mix
percentage
–
Budgeted direct
labor input mix
percentage
×
Actual total
quantity of all
direct labor
inputs used
×
Budgeted price
of direct labor
inputs
Gabrielle = (0.459 – 0.50) × 305 × $25 = – 0.041 × 305 × $25 = $312.63 F
Joseph = (0.541 – 0.50) × 305 × $15 = 0.041 × 305 × $15 = 187.58 U
Total direct labor mix variance
$125.05 F
round to $125 F
The sum of the direct labor mix variance and the direct labor yield variance equals the direct
labor efficiency variance. The favorable mix variance arises from using more of the cheaper
labor (and less of the costlier labor) than the budgeted mix. The yield variance indicates that the
cakes required more total inputs (305 hours) than expected (300 hours) for the production of 50
guitars. Both variances are relatively small and probably within tolerable limits. It is likely that
Joseph, who is less experienced, worked more slowly than Gabrielle, which caused the
unfavorable yield variance. Elena Martinez should be careful that using more of the cheaper
labor does not reduce the quality of the wedding cake or how customers perceive it.
• SOLUTION EXHIBIT 7-44B
Columnar Presentation of Direct Labor Yield and Mix Variances for Elena Martinez Wedding
Cakes
Actual Total Quantity
of All Inputs Used
× Actual Input Mix
× Budgeted Price
(1)
Gabrielle
Joseph
305 × 0.459 × $25
305 × 0.541 × $15
=
$3,499.88
=
2,475.08
rounded $5,975.00
Actual Total Quantity
of All Inputs Used
× Budgeted Input Mix
× Budgeted Price
(2)
Flexible Budget:
Budgeted Total Quantity of
All Inputs Allowed for
Actual Output ×
Budgeted Input Mix
× Budgeted Price
(3)
305 × 0.50 × $25 = $3,812.50
305 × 0.50 × $15 =
2,287.50
$6,100.00
300 × 0.50 × $25 = $3,750
300 × 0.50 × $15 = 2,250
$6,000
$125 F
$100 U
Total mix variance
Total yield variance
$25 F
Total efficiency variance
F = favorable effect on operating income; U = unfavorable effect on operating income.
7-45 Direct-cost and selling price variances. MicroDisk is the market leader in the Secure
Digital (SD) card industry and sells memory cards for use in portable devices such as mobile
phones, tablets, and digital cameras. Its most popular card is the Mini SD, which it sells through
outlets such as Target and Walmart for an average selling price of $8. MicroDisk has a standard
monthly production level of 420,000 Mini SDs in its Taiwan facility. The standard input
quantities and prices for direct-cost inputs are as follows:
Phoebe King, the CEO, is disappointed with the results for June 2017, especially in comparison
to her expectations based on the standard cost data.
King observes that despite the significant increase in the output of Mini SDs in June, the
product’s contribution to the company’s profitability has been lower than expected. She gathers
the following information to help analyze the situation:
Calculate the following variances. Comment on the variances and provide potential reasons why
they might have arisen, with particular attention to the variances that may be related to one
another:
Required:
1
2
3
4
5
Selling-price variance
Direct materials price variance, for each category of materials
Direct materials efficiency variance, for each category of materials
Direct manufacturing labor price variance, for setup and fabrication
Direct manufacturing labor efficiency variance, for setup and fabrication
SOLUTION
(30 min.) Direct-cost and selling price variances.
1.
Computing unit selling prices and unit costs of inputs:
Actual selling price
= $3,626,700 ÷ 462,000
= $7.85
Budgeting selling price
= $3,360,000 ÷ 420,000
= $8.00
Selling-price
Budgeted 
Actual
 Actual
=
–
×
selling price selling price units sold
variance
=
($7.85/unit – $8.00/unit)
= $69,300 U
× 462,000 units
2., 3., and 4.
The actual and budgeted unit costs are:
Actual
Direct materials
Specialty polymer
Connector pins
Wi-Fi transreceiver
Direct manuf. labor
Setup
Fabrication
Budgeted
$0.05 ($415,000 ÷ 8,300,000)
0.11 ($550,000 ÷ 5,000,000)
0.50 ($235,000 ÷ 470,000)
$0.05
0.10
0.50
24.00 ($182,000 ÷ 455,000 × 60)
31.00 ($446,400 ÷ 864,000 × 60)
24.00
30.00
The actual output achieved is 462,000 Mini SDs.
The direct cost price and efficiency variances are:
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(1)
Direct materials
Price
Variance
(2)=(1)–(3)
Actual
Input Qty.
× Budgeted
Price
(3)
Efficiency
Variance
(4)=(3)–(5)
Flex. Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(5)
Specialty polymer
$ 415,000
Connector pins
550,000
Wi-Fi transreceiver 235,000
$1,200,000
Direct manuf. labor costs
Setup
$182,000
Fabrication
446,400
$628,400
a
a
$
0
50,000 U
0
$50,000 U
$ 415,000
b
500,000
c
235,000
$1,150,000
d
$
0
14,400 U
$ 14,400 U
$0.05 × 8,300,000 = $415,000
b
$0.10 × 5,000,000 = $500,000
c
$0.50 × 470,000 = $235,000
d
$24.00/hr. × (455,000 min. ÷ 60 min./hr.) = $182,000
e
$30.00/hr. × (864,000 min. ÷ 60 min./hr.) = $432,000
$182,000
e
432,000
$614,000
f
$22,300 U
38,000 U
4,000 U
$64,300 U
$ 392,700
g
462,000
h
231,000
$1,085,700
$ 2,800 F
30,000 F
$32,800 F
$184,800
j
462,000
$646,800
f
$0.05 × 17 × 462,000 = $392,700
$0.10 × 10 × 462,000 = $462,000
h
$0.50 × 1 × 462,000 = $231,000
i
$24.00 × (462,000  60) = $184,800
j
$30.00 × (462,000  30) = $462,000
g
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 $0.01 increase in the price per connector pin could arise
from uncontrollable market factors or from poor contract negotiations by MicroDisk.
•
Material efficiency variance. For all three material inputs, usage is greater than
budgeted. Possible reasons include lower quality inputs, use of lower quality workers
(although this is not reflected in the labor price variances), and the setup and
fabrication equipment not being maintained in a fully operational mode. The higher
price paid for connector pins (and perhaps higher quality of pins) did not reduce the
number of connector pins used to produce actual output.
•
Labor efficiency variance. There is a small favorable efficiency variance for setup
labor and a larger one for fabrication, which could both result from workers
eliminating nonvalue-added steps in production.
•
Labor price variance. There is an unfavorable price variance for fabrication as a result
of the $1 higher wage per hour paid for that labor. The higher labor quality could also
explain the significant efficiency variance for fabrication labor.
i
7-46 Variances in the service sector. Derek Wilson operates Clean Ride Enterprises, an auto
detailing company with 20 employees. Jamal Jackson has recently been hired by Wilson as a
controller. Clean Ride’s previous accountant had done very little in the area of variance analysis,
but Jackson believes that the company could benefit from a greater understanding of his business
processes. Because of the labor-intensive nature of the business, he decides to focus on
calculating labor variances.
Jackson examines past accounting records, and establishes some standards for the price and
quantity of labor. While Clean Ride’s employees earn a range of hourly wages, they fall into two
general categories: skilled labor, with an average wage of $20 per hour, and unskilled labor, with
an average wage of $10 per hour. One standard 5-hour detailing job typically requires a
combination of 3 skilled hours and 2 unskilled hours.
Actual data from last month, when 600 detailing jobs were completed, are as follows:
Skilled (2,006 hours)
Unskilled (944 hours)
Total actual direct labor cost
$ 39,117
9,292
$ 48,409
Looking over last month’s data, Jackson determines that Clean Ride’s labor price variance
was $1,151 favorable, but the labor efficiency variance was $1,560 unfavorable. When Jackson
presents his findings to Wilson, the latter is furious. “Do you mean to tell me that my employees
wasted $1,560 worth of time last month? I’ve had enough. They had better shape up, or else!”
Jackson tries to calm him down, saying that in this case the efficiency variance doesn’t
necessarily mean that employees were wasting time. Jackson tells him that he is going to perform
a more detailed analysis, and will get back to him with more information soon.
Required:
1. What is the budgeted cost of direct labor for 600 detailing jobs?
2. How were the $1,151 favorable price variance and the $1,560 unfavorable labor efficiency
variance calculated? What was the company’s flexible-budget variance?
3. What do you think Jackson meant when said that “in this case the efficiency variance doesn’t
necessarily mean that employees were wasting time”?
4. For the 600 detailing jobs performed last month, what is the actual direct labor input mix
percentage? What was the standard mix for labor?
5. Calculate the total direct labor mix and yield variances.
6. How could these variances be interpreted? Did the employees waste time? Upon further
investigation, you discover that there were some unfilled vacancies last month in the
unskilled labor positions that have recently been filled. How will this new information likely
impact the variances going forward?
SOLUTION
(35 min.) Variances in the service sector
1.
Skilled ($20 × 3 hrs.)
Unskilled ($10 × 2 hrs.)
Cost per job
Number of jobs
Total budgeted cost
$
60
20
$
80
× 600 units
$ 48,000
2. Solution Exhibit 7-46A presents the total price variance ($318 F), the total efficiency variance
($2,200 U), and the total flexible-budget variance ($1,882 U).
• SOLUTION EXHIBIT 7-46A
Columnar Presentation of Direct Labor Price and Efficiency Variances for Clean Ride Enterprises
Skilled
Unskilled
Actual Costs
Incurred
(Actual Input Quantity
× Actual Price)
(1)
$39,117
9,292
$48,409
Flexible Budget
(Budgeted Input Quantity
Allowed for Actual Output
× Budgeted Price)
(3)
1,800 × $20 = $36,000
1,200 × $10 = 12,000
$48,000
Actual Input Quantity
× Budgeted Price
(2)
2,006 × $20 = $40,120
944 × $10 =
9,440
$49,560
$1,151 F
Total price variance
$1,560 U
Total efficiency variance
$409 U
Total flexible-budget variance
F = favorable effect on operating income; U = unfavorable effect on operating income
3. In a company where there is a mixture of workers, some at higher wages and others at lower,
all working on the same projects, an unfavorable efficiency variance can be the result of which
employees worked on the project, not just how many hours were spent. If higher paid workers
worked more than their standard percentage of the time, an unfavorable efficiency variance will
result.
4.
Skilled:
Unskilled:
Total
Actual
Quantity
of Input
2,006 hours
944 hours
2,950 hours
Actual
Mix
68.0%
32.0%
100.0%
Budgeted Quantity
of Input for Actual Output
3 hours × 600 units = 1,800 hours
2 hours × 600 units = 1,200 hours
3,000 hours
Budgeted
Mix
60%
40%
100%
5. Solution Exhibit 7-46B presents the total direct labor yield and mix variances for Clean Ride
Enterprises.
• SOLUTION EXHIBIT 7-46B
Columnar Presentation of Direct Labor Yield and Mix Variances for Clean Ride Enterprises
Actual Total Quantity
of All Inputs Used
× Actual Input Mix
× Budgeted Price
(1)
Skilled: 2,950 × 0.68 × $20 = $40,120
Unskilled: 2,950 × 0.32 × $10 = 9,440
$49,560
Actual Total Quantity
of All Inputs Used
× Budgeted Input Mix
× Budgeted Price
(2)
Flexible Budget:
Budgeted Total Quantity of
All Inputs Allowed for
Actual Output ×
Budgeted Input Mix
× Budgeted Price
(3)
2,950 × 0.60 × $20 = $35,400
2,950 × 0.40 × $10 = 11,800
$47,200
3,000 × 0.60 × $20 = $36,000
3,000 × 0.40 × $10 =
12,000
$48,000
$2,360 U
$800 F
Total mix variance
Total yield variance
$1,560 U
Total efficiency variance
F = favorable effect on operating income; U = unfavorable effect on operating income.
6. While the efficiency variance was unfavorable, it was due to the mix of labor, not the total
hours used. The unfavorable mix variance is the result of a higher than standard percentage of
skilled labor (68% vs. 60%) used. The yield variance, which is a more accurate measure of
hours used, is favorable because total hours (2,950) were actually lower than the standard for 600
detail jobs (3,000). The skilled labor workers were probably able to work more quickly than the
unskilled.
In light of the information regarding the vacancies in the unskilled positions, last month
could be treated as an outlier (especially in terms of the mix of labor employed), and more
normal variances will likely follow in future months. While it is recommended that variances be
calculated monthly, no corrective action with the employees appears necessary.
7-47 Price and efficiency variances, benchmarking and ethics. Sunto Scientific
manufactures GPS devices for a chain of retail stores. Its most popular model, the Magellan XS,
is assembled in a dedicated facility in Savannah, Georgia. Sunto is keenly aware of the
competitive threat from smartphones that use Google Maps and has put in a standard cost system
to manage production of the Magellan XS. It has also implemented a just-in-time system so the
Savannah facility operates with no inventory of any kind.
Producing the Magellan XS involves combining a navigation system (imported from Sunto’s
plant in Dresden at a fixed price), an LCD screen made of polarized glass, and a casing
developed from specialty plastic. The budgeted and actual amounts for Magellan XS for July
2017 were as follows:
Budgeted Amounts
Magellan XS units produced
Actual Amounts
4,000
4,400
$81,600
$89,000
Navigation systems
4,080
4,450
Polarized glass cost
$40,000
$40,300
800
816
$12,000
$12,500
Ounces of specialty plastic used
4,000
4,250
Direct manufacturing labor costs
$36,000
$37,200
2,000
2,040
Navigation systems cost
Sheets of polarized glass used
Plastic casing cost
Direct manufacturing labor-hours
The controller of the Savannah plant, Jim Williams, is disappointed with the standard costing
system in place. The standards were developed on the basis of a study done by an outside
consultant at the start of the year. Williams points out that he has rarely seen a significant
unfavorable variance under this system. He observes that even at the present level of output,
workers seem to have a substantial amount of idle time. Moreover, he is concerned that the
production supervisor, John Kelso, is aware of the issue but is unwilling to tighten the standards
because the current lenient benchmarks make his performance look good.
Required:
1. Compute the price and efficiency variances for the three categories of direct materials and for
direct manufacturing labor in July 2017.
2. Describe the types of actions the employees at the Savannah plant may have taken to reduce
the accuracy of the standards set by the outside consultant. Why would employees take those
actions? Is this behavior ethical?
3. If Williams does nothing about the standard costs, will his behavior violate any of the
standards of ethical conduct for practitioners described in the IMA Statement of Ethical
Professional Practice (see Exhibit 1-7 on page 17)?
4. What actions should Williams take?
5. Williams can obtain benchmarking information about the estimated costs of Sunto’s
competitors such as Garmin and TomTom from the Competitive Intelligence Institute (CII).
Discuss the pros and cons of using the CII information to compute the variances in
requirement 1.
SOLUTION
(30 min.) Price and efficiency variances, benchmarking and ethics.
1. Budgeted navigation systems per unit = 4,080 systems ÷ 4,000 units = 1.02 systems
Budgeted cost of navigation system = $81,600 ÷ 4,080 units = $20 per system
Budgeted sheets of polarized glass per unit = 800 sheets ÷ 4,000 units = 0.20 sheets
Budgeted cost of sheet of polarized glass = $40,000 ÷ 800 sheets = $50 per sheet
Budgeted ounces of specialty plastic per unit = 4,000 ounces ÷ 4,000 units = 1 ounce per unit
Budgeted cost of specialty plastic = $12,000 ÷ 4,000 ounces = $3 per ounce
Budgeted direct manufacturing labor cost per hour ($36,000 ÷ 2,000) = $18 per hour
Budgeted direct manufacturing labor hours per unit = 2,000 hours ÷ 4,000 units = 0.50 hours
per unit
Actual output achieved = 4,400 XS units
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Navigation
Systems
$89,000
Actual Input Qty.
× Budgeted Price
(4,450 × $20)
$89,000
$0
Price variance
Polarized
Glass
(816 × $50)
$40,800
$40,300
$500 F
Price variance
Plastic
Casing
(4,250 × $3)
$12,750
$12,500
$250 F
Price variance
Direct
Manufacturing
Labor
(2,040 × $18)
$36,720
$37,200
$480 U
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(4,400 × 1.02 × $20)
$89,760
$760 F
Efficiency variance
(4,400 × 0.20 × $50)
$44,000
$3,200 F
Efficiency variance
(4,400 × 1 × $3)
$13,200
$450 F
Efficiency variance
(4,400 × 0.50 × $18)
$39,600
$2,880 F
Efficiency variance
2. Actions employees may have taken include:
(a) Adding steps that are not necessary in working on a GPS unit.
(b) Taking more time on each step than is necessary.
(c) Creating problem situations so that the budgeted amount of average downtime and
rates of spoilage of materials will be overstated.
(d) Creating defects in units 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 Sunto Scientific.
3.
If Williams 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 organization’s
objective to control costs; and
(c) standards of credibility, by not communicating information fairly and not disclosing
all relevant cost information.
4.
Williams should discuss the situation with Kelso and point out that the standards are lax
and that this practice is unethical. If Kelso does not agree to change, Williams should escalate the
issue up the hierarchy in order to effect change. If organizational change is not forthcoming,
Williams should be prepared to resign rather than compromise his professional ethics.
5.
are
Main pros of using Competitive Intelligence Institute information to compute variances
(a) Highlights to Sunto 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) Sunto (and the Savannah plant in particular) may not be comparable to companies in
the database.
(b) Cost data about other companies may not be reliable.
(c) Cost of Competitive Intelligence Institute reports.
Try It! 7-1
(a) Static-budget variance for revenues = (28,000 units × $11) − (27,500 units × $12)
= $308,000 − $330,000
= $22,000 U
(b) Static-budget variance for variable costs = $90,000 − (27,500 units × $3)
= $7,500 U
(c) Static-budget variance for fixed costs = $55,000 − $58,000
= $3,000 F
(d) Static-budget variance for operating income = $26,500 U
Units sold
Revenues
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
Results
28,000
Static
Budget
27,500
Static-Budget
Variance
$308,000
90,000
$218,000
55,000
$163,000
$330,000
82,500
$247,500
58,000
$189,500
$22,000
7,500
29,500
3,000
$26,500
U
U
U
F
U
Try It! 7-2
(a) Flexible budget for revenues = Actual units × Budgeted selling price per unit
= 28,000 units × $12
= $336,000
(b) Flexible budget for variable costs = Actual units × Budgeted variable cost per unit
= 28,000 units × $3
= $84,000
(c) Flexible budget for fixed costs = Static budget
= $58,000
(d) Flexible budget for operating income = $336,000 − $84,000 − $58,000
= $194,000
Try It! 7-3
Variance Analysis for Zenefit Corporation
Units sold
Revenues (a)
Variable costs (b)
Contribution margin
Fixed costs (c)
Operating income (d)
Actual
Results
(1)
28,000
$308,000
90,000
218,000
55,000
$ 163,000
Level 2
FlexibleBudget
Variances
(2) = (1)-(3)
$ 28,000 U
6,000 U
34,000 U
3,000 F
$31,000 U
Flexible
Budget
(3)
28,000
$336,000
84,000
252,000
58,000
$194,000
$31,000 U
Flexible-budget variance
Level 1
Sales Volume
Variance
(4) = (3)-(5)
$ 6,000 F
1,500 U
4,500 F
0
$4,500 F
a. Direct materials variances:
Actual unit cost
= $68,600/14,000 square yards
= $4.90 per square yard
Price variance
= 14,000 × ($5.00 - $4.90)
= $1,400 F
Efficiency variance = $5.00 × [14,000 - (1,500 × 10)]
= $5,000 F
b. Direct manufacturing labor variances:
Actual labor rate
= $79,800/7,600
= $10.50 per hour
Price variance
= 7,600 × ($10.50 - $10.00)
= $3,800 U
Efficiency variance = $10.00 × (7,600 - 7,500)
= $1,000 U
$330,000
82,500
247,500
58,000
$189,500
$ 4,500 F
Sales-volume variance
$26,500 U
Static-budget variance
Try It! 7-4
Static
Budget
(5)
27,500