CHAPTER 7
FLEXIBLE BUDGETS, DIRECT-COST VARIANCES,
AND MANAGEMENT CONTROL
7-1
Management by exception is the practice of concentrating on areas not operating as
expected and giving less attention to areas operating as expected. Variance analysis helps
managers identify areas not operating as expected. The larger the variance, the more likely an
area is not operating as expected.
7.2
Two sources of information about budgeted amounts are (a) past amounts and
(b) detailed engineering studies.
7.3
A favorable 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
The key difference is the output level used to set the budget. A static budget is based on
the level of output planned at the start of the budget period. A flexible budget is developed using
budgeted revenues or cost amounts based on the actual output level in the budget period. The
actual level of output is not known until the end of the budget period.
7-5
A flexible-budget analysis enables a manager to distinguish how much of the difference
between an actual result and a budgeted amount is due to (a) the difference between actual and
budgeted output levels, and (b) the difference between actual and budgeted selling prices,
variable costs, and fixed costs.
7-6
The steps in developing a flexible budget are:
Step 1: Identify the actual quantity of output.
Step 2: Calculate the flexible budget for revenues based on budgeted selling price and
actual quantity of output.
Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output
unit, actual quantity of output, and budgeted fixed costs.
7-7
Four reasons for using standard costs are
(i) cost management,
(ii) pricing decisions,
(iii) budgetary planning and control, and
(iv) financial statement preparation.
7-8
A manager should subdivide the flexible-budget variance for direct materials into a price
variance (that reflects the difference between actual and budgeted prices of direct materials) and
an efficiency variance (that reflects the difference between the actual and budgeted quantities of
direct materials used to produce actual output). The individual causes of these variances can then
be investigated, recognizing possible interdependencies across these individual causes.
7-1
7-9
Possible causes of a favorable direct materials price variance are
 purchasing officer negotiated more skillfully than was planned in the budget.
 purchasing manager bought in larger lot sizes than budgeted, thus obtaining quantity
discounts.
 materials prices decreased unexpectedly due to, say, industry oversupply.
 budgeted purchase prices were set without careful analysis of the market.
 purchasing manager received unfavorable terms on nonpurchase price factors (such as
lower quality materials).
7-10 Some possible reasons for an unfavorable direct manufacturing labor efficiency variance
are the hiring and use of underskilled workers; inefficient scheduling of work so that the
workforce was not optimally occupied; poor maintenance of machines resulting in a high
proportion of non-value-added labor; unrealistic time standards. Each of these factors would
result in actual direct manufacturing labor-hours being higher than indicated by the standard
work rate.
7-11 Variance analysis, by providing information about actual performance relative to
standards, can form the basis of continuous operational improvement. The underlying causes of
unfavorable variances are identified and corrective action taken where possible. Favorable
variances can also provide information if the organization can identify why a favorable variance
occurred. Steps can often be taken to replicate those conditions more often. As the easier changes
are made, and perhaps some standards tightened, the harder issues will be revealed for the
organization to act on—this is continuous improvement.
7-12 An individual business function, such as production, is interdependent with other
business functions. Factors outside of production can explain why variances arise in the
production area. For example:
 Poor design of products or processes can lead to a sizable number of defects.
 Marketing personnel making promises for delivery times that require a large number
of rush orders can create production-scheduling difficulties.
 Purchase of poor-quality materials by the purchasing manager can result in defects
and waste.
7-13 The plant supervisor likely has good grounds for complaint if the plant accountant puts
excessive emphasis on using variances to pin blame. The key value of variances is to help
understand why actual results differ from budgeted amounts and then to use that knowledge to
promote learning and continuous improvement.
7-14 The sales-volume variance can be decomposed into two parts: a market-share variance
that reflects the difference in budgeted contribution margin due to the actual market share being
different from the budgeted share; and a market-size variance, which captures the impact of
actual size of the market as a while differing from the budgeted market size.
7-15 Evidence on the costs of other companies is one input managers can use in setting the
performance measure for next year. However, caution should be taken before choosing such an
amount as next year's performance measure. It is important to understand why cost differences
7-2
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
(20–30 min.) Flexible budget.
Brabham Enterprises manufactures tires for the Formula I motor racing circuit. For August 2014,
it budgeted to manufacture and sell 3,000 tires at a variable cost of $74 per tire and total fixed
costs of $54,000. The budgeted selling price was $110 per tire. Actual results in August 2014
were 2,800 tires manufactured and sold at a selling price of $112 per tire. The actual total
variable costs were $229,600, and the actual total fixed costs were $50,000.
Required:
1. Prepare a performance report (akin to Exhibit 7-2, page 253) that uses a flexible budget and a
static budget.
2. Comment on the results in requirement 1.
SOLUTION
Variance Analysis for Brabham Enterprises for August 2014
Units (tires) sold
Revenues
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
Results
(1)
2,800g
$313,600a
229,600d
84,000
50,000g
FlexibleBudget
Variances
(2) = (1) – (3)
0
$ 5,600 F
22,400 U
16,800 U
4,000 F
Flexible
Budget
(3)
2,800
$308,000b
207,200e
100,800
54,000g
Sales-Volume
Variances
(4) = (3) – (5)
200 U
$22,000 U
14,800 F
7,200 U
0
Static
Budget
(5)
3,000g
$330,000c
222,000f
108,000
54,000g
$ 34,000
$12,800 U
$ 46,800
$ 7,200 U
$ 54,000
$12,800 U
$ 7,200 U
Total flexible-budget variance Total sales-volume variance
$20,000 U
Total static-budget variance
$112 × 2,800 = $313,600
$110 × 2,800 = $308,000
c
$110 × 3,000 = $330,000
d
Given. Unit variable cost = $229,600 ÷ 2,800 = $82 per tire
e
$74 × 2,800 = $207,200
f
$74 × 3,000 = $222,000
g
Given
a
b
2.
The key information items are:
Actual
7-3
Budgeted
Units
Unit selling price
Unit variable cost
Fixed costs
$
$
2,800
112
82
$50,000
$
$
3,000
110
74
$54,000
The total static-budget variance in operating income is $20,000 U. There is both an unfavorable
total flexible-budget variance ($12,800) and an unfavorable sales-volume variance ($7,200).
The unfavorable sales-volume variance arises solely because actual units manufactured
and sold were 200 less than the budgeted 3,000 units. The unfavorable flexible-budget variance
of $12,800 in operating income is due primarily to the $8 increase in unit variable costs. This
increase in unit variable costs is only partially offset by the $2 increase in unit selling price and
the $4,000 decrease in fixed costs.
7-17
(15 min.) Flexible budget.
Connor Company’s budgeted prices for direct materials, direct manufacturing labor, and direct
marketing (distribution) labor per attaché case are $40, $8, and $12, respectively. The president
is pleased with the following performance report:
Required:
Actual output was 8,800 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
The existing performance report is a Level 1 analysis, based on a static budget. It makes no
adjustment for changes in output levels. The budgeted output level is 10,000 units––direct
materials of $400,000 in the static budget ÷ budgeted direct materials cost per attaché case of
$40.
The following is a Level 2 analysis that presents a flexible-budget variance and a salesvolume variance of each direct cost category.
7-4
Variance Analysis for Connor Company
Output units
Direct materials
Direct manufacturing labor
Direct marketing labor
Total direct costs
Actual
Results
(1)
8,800
$364,000
78,000
110,000
$552,000
FlexibleSalesBudget
Flexible
Volume
Variances
Budget
Variances
(2) = (1) – (3)
(3)
(4) = (3) – (5)
0
8,800
1,200 U
$12,000 U $352,000
$48,000 F
7,600 U
70,400
9,600 F
4,400 U 105,600
14,400 F
$24,000 U $528,000
$72,000 F
$24,000 U
Flexible-budget variance
Static
Budget
(5)
10,000
$400,000
80,000
120,000
$600,000
$72,000 F
Sales-volume variance
$48,000 F
Static-budget variance
The Level 1 analysis shows total direct costs have a $48,000 favorable variance.
However, the Level 2 analysis reveals that this favorable variance is due to the reduction in
output of 1,200 units from the budgeted 10,000 units. Once this reduction in output is taken into
account (via a flexible budget), the flexible-budget variance shows each direct cost category to
have an unfavorable variance indicating less efficient use of each direct cost item than was
budgeted, or the use of more costly direct cost items than was budgeted, or both.
Each direct cost category has an actual unit variable cost that exceeds its budgeted unit
cost:
Actual
Budgeted
Units
8,800
10,000
Direct materials
$ 41.36
$ 40.00
Direct manufacturing labor
$ 8.86
$ 8.00
Direct marketing labor
$ 12.50
$ 12.00
Analysis of price and efficiency variances for each cost category could assist in further
identifying causes of these more aggregated (Level 2) variances.
7-18
(25–30 min.) 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 2014 included these data:
7-5
The actual results for September 2014 were as follows:
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
1.
Variance Analysis for Bank Management Printers for September 2014
Level 1 Analysis
Units sold
Revenue
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
Static-Budget
Results
Variances
(1)
(2) = (1) – (3)
12,000
3,000 U
a
$252,000
$ 48,000 U
84,000d
36,000 F
168,000
12,000 U
150,000
5,000 U
$ 18,000
$ 17,000 U
Static
Budget
(3)
15,000
$300,000c
120,000f
180,000
145,000
$ 35,000
$17,000 U
Total static-budget variance
2.
Level 2 Analysis
Units sold
Revenue
Variable costs
FlexibleActual
Budget
Results
Variances
(1)
(2) = (1) – (3)
12,000
0
$252,000a
$12,000 F
84,000d
12,000 F
7-6
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
Contribution margin
Fixed costs
Operating income
168,000
150,000
24,000 F
5,000 U
144,000
145,000
36,000 U
0
180,000
145,000
$ 18,000
$19,000 F
$ (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
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
a
d
b
e
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).
7-19
(30 min.) Flexible budget, working backward.
The Clarkson Company produces engine parts for car manufacturers. A new accountant intern at
Clarkson has accidentally deleted the calculations on the company’s variance analysis
calculations for the year ended December 31, 2014. 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?
7-7
3. Review the variances you have calculated and discuss possible causes and potential
problems. What is the important lesson learned here?
SOLUTION
1. Variance Analysis for The Clarkson Company for the year ended December 31, 2014
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
Static
Budget
(5)
120,000
$420,000
240,000
180,000
120,000
$ 60,000
$15,000 F
Total sales volume variance
$0
Total static-budget variance
a
b
130,000 × $3.50 = $455,000; $420,000  120,000 = $3.50
130,000 × $2.00 = $260,000; $240,000  120,000 = $2.00
2.
Actual selling price:
Budgeted selling price:
Actual variable cost per unit:
Budgeted variable cost per unit:
$715,000
420,000
515,000
240,000

÷
÷
÷
130,000 =
120,000 =
130,000 =
120,000 =
$5.50
$3.50
$3.96
$2.00
3.
A zero total 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
7-8
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.
7-20 (30-40 min.) Flexible budget and sales volume variances, market-share and
market-size variances.
Luster, Inc., produces the basic fillings used in many popular frozen desserts and treats—vanilla
and chocolate ice creams, puddings, meringues, and fudge. Luster uses standard costing and
carries over no inventory from one month to the next. The ice-cream product group’s results for
June 2014 were as follows:
Sam Adler, 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
$63,000, which is less than 3% of the budgeted revenues of $1,976,500. Overall, Adler 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 staticbudget 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 Luster. How would you present the results to
Sam Adler? Should he be more concerned? If so, why?
7-9
SOLUTION
1. and 2.
Performance Report for Luster, Inc., June 2014
Units (pounds)
Revenues
Variable mfg. costs
Contribution margin
Actual
(1)
350,000
$2,012,500
1,137,500
$875,000
Flexible
Budget
Variances
(2) = (1) – (3)
$ 52,500 U
52,500 U
$ 105,000 U
Flexible
Budget
(3)
350,000
$2,065,000a
1,085,000b
$ 980,000
$105,000 U
Flexible-budget variance
Sales Volume
Variances
(4) = (3) – (5)
15,000 F
$88,500 F
46,500 U
$ 42,000 F
Static
Budget
(5)
335,000
$1,976,500
1,038,500
$938,000
Static
Budget
Variance
(6) = (1) – (5)
15,000 F
$36,000 F
99,000 U
$ 63,000 U
Static Budget
Variance as
% of Static
Budget
(7) = (6)  (5)
4.48%
1.82%
9.53%
6.72%
$ 42,000 F
Sales-volume variance
$63,000 U
Static-budget variance
a
Budgeted selling price = $1,976,500 ÷ 335,000 lbs = $5.90 per lb.
Flexible-budget revenues = $5.90 per lb. × 350,000 lbs. = $2,065,000
b
Budgeted variable mfg. cost per unit = $1,038,500 ÷ 335,000 lbs. = $3.10
Flexible-budget variable mfg. costs = $3.10 per lb. × 350,000 lbs. = $1,085,000
3.
The selling price variance, caused solely by the difference in actual and budgeted selling price, is the flexible-budget variance
in revenues = $52,500 U.
7-10
4.
The flexible-budget variances show that for the actual sales volume of 350,000 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 2014. Adler should be more
concerned because the static-budget variance in contribution margin of $63,000 U is actually
made up of a favorable sales-volume variance in contribution margin of $42,000, an unfavorable
selling-price variance of $52,500 and an unfavorable variable manufacturing costs variance of
$52,500. 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.
7-21
(20–30 min.) Price and efficiency variances.
Peterson Foods manufactures pumpkin scones. For January 2014, it budgeted to purchase and
use 15,000 pounds of pumpkin at $0.89 a pound. Actual purchases and usage for January 2014
were 16,000 pounds at $0.82 a pound. Peterson budgeted for 60,000 pumpkin scones. Actual
output was 60,800 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
1.
The key information items are:
Output units (scones)
Input units (pounds of pumpkin)
Cost per input unit
Actual
60,800
16,000
$ 0.82
Budgeted
60,000
15,000
$ 0.89
Peterson budgets to obtain four pumpkin scones from each pound of pumpkin.
The flexible-budget variance is $408 F.
Pumpkin costs
Actual
Results
(1)
$13,120a
FlexibleBudget
Variance
(2) = (1) – (3)
$408 F
Flexible
Budget
(3)
$13,528b
16,000 × $0.82 = $13,120
60,800 × 0.25 × $0.89 = $13,528
c
60,000 × 0.25 × $0.89 = $13,350
a
b
7-11
Sales-Volume Static
Variance
Budget
(4) = (3) – (5)
(5)
$178 U
$13,350c
2.
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
$13,120a
Actual Input Qty.
× Budgeted Price
$14,240b
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
$13,528c
$1,120 F
$712 U
Price variance
Efficiency variance
$408 F
Flexible-budget variance
16,000 × $0.82 = $13,120
16,000 × $0.89 = $14,240
c
60,800 × 0.25 × $0.89 = $13,528
a
b
3.
The favorable flexible-budget variance of $408 has two offsetting components:
(a) favorable price variance of $1,120––reflects the $0.82 actual purchase cost being
lower than the $0.89 budgeted purchase cost per pound.
(b) unfavorable efficiency variance of $712––reflects the actual materials yield of 3.80
scones per pound of pumpkin (60,800 ÷ 16,000 = 3.80) being less than the budgeted
yield of 4.00 (60,000 ÷ 15,000 = 4.00). The company used more pumpkins (materials)
to make the scones than was budgeted.
One explanation may be that Peterson purchased lower quality pumpkins at a lower cost per
pound.
7-22 (15 min.) Materials and manufacturing labor variances.
Consider the following data collected for Great Homes, Inc.:
Required:
Compute the price, efficiency, and flexible-budget variances for direct materials and direct
manufacturing labor.
7-12
SOLUTION
Direct
Materials
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
$200,000
Actual Input Qty.
× Budgeted Price
$214,000
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
$225,000
$14,000 F
$11,000 F
Price variance
Efficiency variance
$25,000 F
Flexible-budget variance
Direct
Mfg. Labor
$90,000
$86,000
$80,000
$4,000 U
$6,000 U
Price variance
Efficiency variance
$10,000 U
Flexible-budget variance
7-13
7-23 (30 min.) Direct materials and direct manufacturing labor variances.
SallyMay, Inc., designs and manufactures T-shirts. It sells its T-shirts to brand-name clothes
retailers in lots of one dozen. SallyMay’s May 2013 static budget and actual results for direct
inputs are as follows:
SallyMay has a policy of analyzing all input variances when they add up to more than 10% of the
total cost of materials and labor in the flexible budget, and this is true in May 2013. 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 2013. 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. Sally King, the CEO, is concerned about the input variances. But she likes the quality and
feel of the new material and agrees to use it for one more year. In May 2014, SallyMay again
produces 450 lots of T-shirts. Relative to May 2013, 2% less direct material is used, direct
material price is down 5%, and 2% less direct manufacturing labor is used. Labor price has
remained the same as in May 2013. Calculate the direct materials and direct manufacturing
labor price and efficiency variances in May 2014. 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?
3. Comment on the May 2014 results. Would you continue the “experiment” of using the new
material?
7-14
SOLUTION
1.
May 2013
Units
Direct materials
Direct labor
Total price variance
Total efficiency variance
Actual
Results
(1)
450
$13,338.00
$ 5,535.00
Actual
Quantity 
Budgeted
Price
(3)
Price
Variance
(2) = (1)–(3)
$11,628.00a
$ 5,467.50c
$1,710.00 U
$ 67.50 U
$1,777.50 U
Efficiency
Variance
(4) = (3) – (5)
$918.00 U
$364.50 F
Flexible
Budget
(5)
450
$10,710.00b
$5,832.00d
$553.50 U
6,840 meters × $1.70 per meter = $11,628
450 lots × 14 meters per lot × $1.70 per meter = $10,710
c
675 hours × $8.10 per hour = $5,467.50
d
450 lots × 1.6 hours per lot × $8.10 per hour = $5,832
a
b
Total flexible-budget variance for both inputs = $1,777.50 U + $553.50 U = $2,331.00U
Total flexible-budget cost of direct materials and direct labor = $10,710 + $5,832 = $16,542
Total flexible-budget variance as % of total flexible-budget costs = $2,331.00 ÷ $16,542 = 14.09%
2.
May
2014
Units
Direct materials
Direct manuf. labor
Total price variance
Total efficiency variance
Actual
Results
(1)
450
$12,400.92a
$ 5,424.30d
Actual
Quantity 
Budgeted
Price
(3)
Price
Variance
(2) = (1) – (3)
$1,005.48
$ 66.15
$1,071.63
U
U
U
$11,395.44b
$ 5,358.15e
Efficiency
Variance
(4) = (3) – (5)
$685.44
$473.85
U
F
$211.59
U
Flexible
Budget
(5)
450
$10,710.00c
$5,832.00c
Actual dir. mat. cost, May 2014 = Actual dir. mat. cost, May 2013 × 0.98 × 0.95 = $13,338 × 0.98 × 0.95 =
$12.400.92
Alternatively, actual dir. mat. cost, May 2014
= (Actual dir. mat. quantity used in May 2013 × 0.98) × (Actual dir. mat. price in May 2013 × 0.95)
= (6,840 meters × 0.98) × ($1.95/meter × 0.95)
= 6,703.20 × $1.852 = $12,400.92
b
(6,840 meters × 0.98) × $1.70 per meter = $11,395.44
c
Unchanged from 2013.
d
Actual dir. labor cost, May 2014 = Actual dir. manuf. cost May 2013 × 0.98 = $5,535.00 × 0.98 = $5,424.30
Alternatively, actual dir. labor cost, May 2014
= (Actual dir. manuf. labor quantity used in May 2013 × 0.98) × Actual dir. labor price in 2013
= (675 hours × 0.98) × $8.20 per hour
= 661.50 hours × $8.20 per hour = $5,424.30
e
(675 hours × 0.98) × $8.10 per hour = $5,358.15
a
7-15
Total flexible-budget variance for both inputs = $1,071.63U + $211.59U = $1,283.22U
Total flexible-budget cost of direct materials and direct labor = $10,710 + $5,832 = $16,542
Total flexible-budget variance as % of total flexible-budget costs = $1,283.22  $16,542 = 7.76%
3.
Efficiencies have improved in the direction indicated by the production manager—but, it
is unclear whether they are a trend or a one-time occurrence. Also, overall, variances are still 7.8
percent of flexible input budget. SallyMay should continue to use the new material, especially in
light of its superior quality and feel, but it may want to keep the following points in mind:
7-24

The new material costs substantially more than the old ($1.95 in 2013 and $1.852 in
2014 versus $1.70 per meter). Its price is unlikely to come down even more within
the coming year. Standard material price should be reexamined and possibly changed.

SallyMay should continue to work to reduce direct materials and direct
manufacturing labor content. The reductions from May 2013 to May 2014 are a good
development and should be encouraged.
(30 min.) 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:
The number of finished units budgeted for January 2014 was 10,000; 9,850 units were actually
produced.
Actual results in January 2014 were as follows:
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 2014 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 2014 price and efficiency variances of Schuyler Corporation.
7-16
4. Why might Schuyler calculate direct materials price variances and direct materials efficiency
variances with reference to different points in time?
SOLUTION
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
(9,850 × 0.5 × $30) or
(4,925 × $30)
$147,750
(4,900 × $30)
$147,000
$7,350 U
Price variance
a
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
$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.
7-17
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.
7-25
(2030 min.) Materials and manufacturing labor variances, standard costs.
Dunn, Inc., is a privately held furniture manufacturer. For August 2014, Dunn had the following
standards for one of its products, a wicker chair:
The following data were compiled regarding actual performance: actual output units (chairs)
produced, 2,000; square yards of input purchased and used, 3,700; price per square yard, $5.10;
direct manufacturing labor costs, $8,820; actual hours of input, 900; labor price per hour, $9.80.
Required:
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 6,000 square yards of materials were purchased (at $5.10 per square yard), even
though only 3,700 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
1.
Direct Materials
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Actual Input Qty.
× Budgeted Price
(3,700 sq. yds. × $5.10)
$18,870
(3,700 sq. yds. × $5.00)
$18,500
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(2,000 × 2 × $5.00)
(4,000 sq. yds. × $5.00)
$20,000
$370 U
Price variance
$1,500 F
Efficiency variance
$1,130 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
7-18
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
(900 hrs. × $9.80)
$8,820
(900 hrs. × $10.00)
$9,000
$180 F
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(2,000 × 0.5 × $10.00)
(1,000 hrs. × $10.00)
$10,000
$1,000 F
Efficiency variance
$1,180 F
Flexible-budget variance
The favorable labor price variance may be due to, say, (a) a reduction in labor rates due
to a recession, or (b) the standard being set without detailed analysis of labor compensation. The
favorable labor efficiency variance may be due to, say, (a) more efficient workers being
employed, (b) a redesign in the plant enabling labor to be more productive, or (c) the use of
higher quality materials.
7-19
2.
Control
Point
Purchasing
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(6,000 sq. yds.× $5.10)
$30,600
Actual Input Qty.
× Budgeted Price
(6,000 sq. yds. × $5.00)
$30,000
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted
Price)
$600 U
Price variance
Production
(3,700 sq. yds.× $5.00)
$18,500
(2,000 × 2 × $5.00)
$20,000
$1,500 F
Efficiency variance
Direct manufacturing labor variances are the same as in requirement 1.
7-20
7-26
(1525 min.) Journal entries and T-accounts (continuation of 7-25).
Prepare journal entries and post them to T-accounts for all transactions in Exercise 7-25,
including requirement 2. Summarize how these journal entries differ from the normal-costing
entries described in Chapter 4, pages 121–123.
SOLUTION
For requirement 1 from Exercise 7-25:
a.
Direct Materials Control
Direct Materials Price Variance
Accounts Payable Control
To record purchase of direct materials.
18,500
370
18,870
b. Work-in-Process Control
Direct Materials Efficiency Variance
Direct Materials Control
To record direct materials used.
20,000
1,500
18,500
c. Work-in-Process Control
10,000
Direct Manufacturing Labor Price Variance
Direct Manufacturing Labor Efficiency Variance
Wages Payable Control
To record liability for and allocation of direct labor costs.
Direct
Materials Control
(a) 18,500 (b) 18,500
Work-in-Process Control
(b) 20,000
(c) 10,000
Wages Payable Control
(c) 8,820
Direct Materials
Price Variance
(a) 370
Direct Manufacturing
Labor Price Variance
(c) 180
180
1,000
8,820
Direct Materials
Efficiency Variance
(b) 1,500
Direct Manuf. Labor
Efficiency Variance
(c) 1,000
Accounts Payable Control
(a) 18,870
For requirement 2 from Exercise 7-25:
The following journal entries pertain to the measurement of price and efficiency variances when
6,000 sq. yds. of direct materials are purchased:
a1. Direct Materials Control
Direct Materials Price Variance
Accounts Payable Control
30,000
600
30,600
7-21
To record direct materials purchased.
a2. Work-in-Process Control
Direct Materials Control
Direct Materials Efficiency Variance
To record direct materials used.
Direct
Materials Control
(a1) 30,000
(a2) 18,500
20,000
18,500
1,500
Direct Materials
Price Variance
(a1) 600
Accounts Payable Control
(a1) 30,600
Work-in-Process Control
(a2) 20,000
Direct Materials
Efficiency Variance
(a2) 1,500
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.
7-22
7-27
(25 min.) Price and efficiency variances, benchmarking.
Topiary Co. produces molded plastic garden pots and other plastic containers. In June 2014,
Topiary produces 1,000 lots (each lot is 12 dozen pots) of its most popular line of pots, the 14inch “Grecian urns,” at each of its two plants, which are located in Mineola and Bayside. The
production manager, Janice Roberts, asks her assistant, Alastair Ramy, to find out the precise
per-unit budgeted variable costs at the two plants and the variable costs of a competitor, Land
Art, who offers similar-quality pots at cheaper prices. Ramy pulls together the following
information for each lot:
Required:
1. What is the budgeted variable cost per lot at the Mineola Plant, the Bayside Plant, and at
Land Art?
2. Using the Land Art data as the standard, calculate the direct materials and direct labor price
and efficiency variances for the Mineola and Bayside plants.
3. What advantage does Topiary get by using Land Art’s benchmark data as standards in
calculating its variances? Identify two issues that Roberts should keep in mind in using the
Land Art data as the standards.
SOLUTION
1.
Direct materials
Direct labor
Variable overhead
Budgeted variable cost
Direct materials
Direct labor
Variable overhead
Budgeted variable cost
Mineola Plant
Prices and quantities
13.50 lbs @ $ 9.20 per lb
3 hrs @ $10.15 per hr
Bayside Plant
Prices and quantities
14.00 lbs @ $ 9.00 per lb
2.7 hrs @ $10.20 per hr
7-23
Cost per lot
$124.20
30.45
12.00
$166.65
Cost per lot
$126.00
27.54
11.00
$164.54
Direct materials
Direct labor
Variable overhead
Budgeted variable cost
2.
Land Art
Prices and quantities
13.00 lbs @ $ 8.80 per lb
2.5 hrs @ $10.00 per hr
Cost per lot
$114.40
25.00
11.00
$150.40
Mineola Plant
Lots
Direct materials
Direct labor
Actual
Results
(1)
1,000
$124,200
$ 30,450
Price
Variance
(2) = (1) – (3)
Actual
Quantity 
Budgeted
Price
(3)
Efficiency
Variance
(4) = (3) – (5)
$118,800b
$ 30,000c
$4,400 U
$5,000 U
$5,400 U
$ 450 U
Flexible
Budgeta
(5)
1,000
$114,400
$ 25,000
a
Using Land Art’s prices and quantities as the standard:
Direct materials: (13 lbs./lot  1,000 lots)  $8.80/lb. = $114,400
(2.5 hrs./lot  1,000 lots)  $10.00/hr. = $25,000
b
(13.50 lbs./lot  1,000 lots)  $8.80 per lb. = $118,800
c
(3 hours/lot  1,000 lots)  $10/hr. = $30,000
Bayside Plant
Lots
Direct Materials
Direct Labor
Actual
Results
(1)
1,000
$126,000
$ 27,540
Price
Variance
(2) = (1) – (3)
$2,800 U
$ 540 U
Actual
Quantity 
Budgeted
Price
(3)
$123,200b
$ 27,000c
Efficiency
Variance
(4) = (3) – (5)
$8,800 U
$2,000 U
Flexible
Budgeta
(5)
1,000
$114,400
$ 25,000
a
Using Land Art’s prices and quantities as the standard:
Direct materials: (13 lb./lot  1,000 lots)  $8.80/lb. = $114,400
(2.5 hrs./lot  1,000 lots)  $10.00/lb. = $25,000
b
(14 lbs./lot  1,000 lots)  $8.80 per lb. = $123,200
c
(2.7 hours/lot  1,000 lots)  $10/hr. = $27,000
3.
Using an objective, external benchmark, like that of a competitor, will preempt the
possibility of any one plant feeling that the other is being favored. That this competitor, Land
Art, is successful will also put positive pressure on the two plants to improve (note that all
variances are unfavorable). Issues that Topiary should keep in mind include the following:
 Ensure that Land Art is indeed the best and most relevant standard (for example, is
7-24


7-28
there another competitor in the marketplace which should be considered?).
Ensure that the data is reliable.
Ensure that Land Art is similar enough to use as a standard (if Land Art has a
different business model, for example, it may be following a strategy of lowering
costs that Topiary may not want to emulate because Topiary is trying to differentiate
its products).
(50 min.) Static and flexible budgets, service sector.
Student Finance (StuFi) is a startup 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 2014 are
presented below.
Required:
1. Prepare StuFi’s static budget of operating income for the third quarter of 2014.
2. Prepare an analysis of variances for the third quarter of 2014 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 2014.
4. What factors would you consider in evaluating the effectiveness of professional labor in the
third quarter of 2014.
SOLUTION
Static Budget
$9,512,000
1. Revenue (8,200 × 0.8% × $145,000)
Variable costs:
7-25
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. Actual results for third quarter 2014:
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
7-26
2,952,000
820,000
984,000
410,000
5,166,000
4,346,000
800,000
1,300,000
$2,246,000
$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
Level 2 Analysis
Actual
Results
(1)
Loans
FlexibleBudget
Variances
(1) – (3)
10,250
0
Flexible
Budget
(3)
SalesVolume
Variances
(3) – (5)
Static
Budget
(5)
10,250
2,050 F
8,200
Revenue
$13,284,000 $1,394,000 F $11,890,000
Variable costs:
Professional labor
4,868,750 1,178,750 U 3,690,000
Credit verification
1,025,000
0
1,025,000
Federal doc. Fees
1,281,250
51,250 U 1,230,000
Courier services
553,500
41,000 U
512,500
Total variable costs
7,728,500 1,271,000 U 6,457,500
Contribution margin
5,555,500 123,000 F
5,432,500
Fixed administrative costs
945,000
145,000 U
800,000
Fixed technology costs
1,415,000
115,000 U 1,300,000
Operating income
$3,195,500 $ 137,000 U $3,332,500
$2,378,000 $9,512,000
738,000 U
205,000 U
246,000 U
102,500 U
1,291,500 U
1,086,500 F
0
0
$1,086,500 F
2,952,000
820,000
984,000
410,000
5,166,000
4,346,000
800,000
1,300,000
$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. In addition, 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 2014.
7-27
7-29
(30 min.) Flexible budget, direct materials and direct manufacturing labor variances.
Milan 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 2014:
Standard quantities, standard prices, and standard unit costs follow for direct materials and direct
manufacturing labor:
During 2014, actual number of units produced and sold was 5,100, at an average selling price of
$730. Actual cost of direct materials used was $1,149,400, based on 70,000 pounds purchased at
$16.42 per pound. Direct manufacturing labor-hours actually used were 17,000, at the rate of
$33.70 per hour. As a result, actual direct manufacturing labor costs were $572,900. Actual fixed
costs were $1,200,000. 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.
7-28
SOLUTION
1.
Variance Analysis for Milan Statuary for 2014
Actual
Results
FlexibleBudget
Variances
Flexible
Budget
SalesVolume
Variances
Static
Budget
Units sold
Revenues
(1)
(2) = (1) – (3)
(3)
(4) = (3) – (5)
(5)
5,100a
0
5,100
1,000 U
6,100a
b
c
$3,723,000 $153,000 F $3,570,000 $700,000 U $4,270,000d
Direct materials
Direct manufacturing labor
Fixed costs
Total costs
Operating income
$1,149,400
$ 7,000 U $1,142,400e $224,000 F $1,366,400f
572,900a
8,500 F
581,400g 114,000 F
695,400h
a
a
1,200,000
150,000 F 1,350,000
0
1,350,000a
$2,922,300 $151,500 F $3,073,800 $338,000 F $3,411,800
$ 800,700 $304,500 F $ 496,200 $362,000 U $ 858,200
$304,500 F
$362,000 U
Flexible-budget variance
Sales-volume variance
$57,500 U
Static-budget variance
a
Given
$730/unit × 5,100 units = $3,723,000
c
$700/unit × 5,100 units = $3,570,000
d
$700/unit × 6,100 units = $4,270,000
e
$224/unit × 5,100 units = $1,142,400
f
$224/unit × 6,100 units = $1,366,400
g
$114/unit × 5,100 units = $581,400
h
$114/unit × 6,100 units = $695,400
b
7-29
2.
Actual Incurred
(Actual Input Qty.
× Actual Price)
Direct materials
Actual Input Qty.
× Budgeted Price
$1,149,400a
$980,000b
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output ×
Budgeted Price)
$1,142,400c
$169,400 U
Price variance
$162,400 F
Efficiency variance
$7,000 U
Flexible-budget variance
Direct manufacturing labor
$572,900d
$510,000e
$581,400f
$62,900 U
$71,400 F
Price variance
Efficiency variance
$8,500 F
Flexible-budget variance
a
70,000 pounds × $16.42/pound = $1,149,400
70,000 pounds × $14/pound = $980,000
c
5,100 statues × 16 pounds/statue × $14/pound = 81,600 pounds × $14/pound = $1,142,400
d
17,000 hours × $33.70/hour = $572,900
e
17,000 hours × $30/hour = $510,000
f
5,100 statues × 3.8 hours/statue × $30/hour = 19,380 hours × $30/hour = $581,400
b
7-30
7-30
(30 min.) Variance analysis, nonmanufacturing setting.
Marcus McQueen has run In-A-Flash Car Detailing for the past 10 years. His static budget and
actual results for June 2014 are provided next. Marcus has one employee who has been with him
for all 10 years that he has been in business. In addition, at any given time he also employs two
other less experienced workers. It usually takes each employee 2 hours to detail a vehicle,
regardless of his or her experience. Marcus pays his experienced employee $30 per vehicle and
the other two employees $15 per vehicle. There were no wage increases in June.
Required:
1. How many cars, on average, did Marcus budget for each employee? How many cars did each
employee actually detail?
2. Prepare a flexible budget for June 2014.
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
Marcus to gather, if you wanted to improve operational efficiency?
SOLUTION
Note: Some print versions of the text refer to the Image line of sunglasses managed by John
Puckett. The name of the line should be Delta and the manager’s name is John Barton.
1. This is a problem of two equations and two unknowns. The two equations relate to the
number of cars detailed and the labor costs (the wages paid to the employees).
X = number of cars detailed by the experienced employee
Y = number of cars detailed by the less experienced employees (combined)
Budget:
X + Y = 280
$30X + $15Y = $6,720
Actual: X + Y
= 320
$30X + $15Y = $8,400
Substitution:
30X + 15(280 – X) = 6,720
Substitution:
30X + 15(320 – X) = 8,400
7-31
15X = 2,520
X= 168 cars
Y=112 cars
15X = 3,600
X = 240 cars
Y= 80 cars
Budget: The experienced employee is budgeted to detail 168 cars (and earn
$5,040), and the less experienced employees are budgeted to detail 56 cars each
and earn $840 apiece.
Actual: The experienced employee details 240 cars (and grosses $7,200 for the
month), and the other two wash 40 each and gross $600 apiece.
2.
Actual
Results
(1)
Units sold
FlexibleBudget
Variances
(2) = (1) –
(3)
320
Revenues
Variable costs
Supplies
Labor – Experienced
Labor – Less experienced
Total variable costs
Contribution Margin
Fixed costs
Operating income
Flexible
Budget
(3)
Sales Volume
Variance
(4) = (3) –
(5)
320
Static
Budget
(5)
280
$72,000
$ 11,200 F
$60,800a
$ 7,600 F
$ 53,200
1,360
7,200
1,200
9,760
62,240
9,800
$52,440
80 F
1,440 U
720 F
640 U
10,560 F
0
$ 10,560 F
1,440b
5,760c
1,920d
9,120
51,680
9,800
$41,880
180 U
720 U
240 U
1,140 U
6,460 F
0
$ 6,460 F
1,260
5,040
1,680
7,980
45,220
9,800
$35,240
320 × ($53,200/280)
320 × ($1,260/280)
c
320 × ($5,040/280)
d
320 × ($1,680/280)
a
b
3. Actual sales price = $72,000 ÷ 320 = $225
Sales Price Variance
= (Actual sales price – Budgeted sales price) × Actual number of cars detailed:
= ($225 – $190) × 320
= $11,200 Favorable
Labor efficiency for experienced worker:
Standard cars expected to be completed by experienced worker based on actual number
of cars detailed = (168 ÷ 280) × 320 = 192 cars
Labor efficiency variance = Budgeted wage rate per car × (Actual cars detailed –
budgeted cars detailed)
= $30 × (240 – 192)
7-32
= $1,440 Unfavorable
Labor efficiency for less-experienced workers:
Standard cars expected to be completed by less-experienced workers based on actual
number of cars detailed = (112 ÷ 280) × 320 = 128 cars
Labor efficiency variance = Budgeted wage rate per car × (Actual cars detailed –
budgeted cars detailed)
= $15 × (80 – 128)
= $720 Favorable
4. In addition to understanding the variances computed above, Marcus should attempt to
keep track of the number of cars worked on by each employee, as well as the number of
hours actually spent on each car. In addition, Marcus should look at the prices charged
for detailing, 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 car, given his prior
years at work and the fact that he is paid twice the wage rate of the less-experienced
employees.
7-33
7-31
(60 min.) Comprehensive variance analysis, responsibility issues.
(CMA, adapted) Ultra, Inc., manufactures a full line of well-known sunglasses frames and
lenses. Ultra uses a standard costing system to set attainable standards for direct materials, labor,
and overhead costs. Ultra reviews and revises standards annually as necessary. Department
managers, whose evaluations and bonuses are affected by their department’s performance, are
held responsible to explain variances in their department performance reports.
Recently, the manufacturing variances in the Delta prestige line of sunglasses have caused
some concern. For no apparent reason, unfavorable materials and labor variances have occurred.
At the monthly staff meeting, John Puckett, manager of the Image line, will be expected to
explain his variances and suggest ways of improving performance. Barton will be asked to
explain the following performance report for 2014:
Barton collected the following information:
Three items comprised the standard variable manufacturing costs in 2014:
 Direct materials: Frames. Static budget cost of $35,880. The standard input for 2014 is 2.00
ounces per unit.
 Direct materials: Lenses. Static budget costs of $96,720. The standard input for 2014 is 4.00
ounces per unit.
 Direct manufacturing labor: Static budget costs of $140,400. The standard input for 2014 is 1
hour per unit.
Assume there are no variable manufacturing overhead costs.
The actual variable manufacturing costs in 2014 were as follows:
 Direct materials: Frames. Actual costs of $70,080. Actual ounces used were 4.00 ounces per
unit.
 Direct materials: Lenses. Actual costs of $131,400. Actual ounces used were 6.00 ounces per
unit.
 Direct manufacturing labor: Actual costs of $145,124. The actual labor rate was $14.20 per
hour.
Required:
1. Prepare a report that includes the following:
a. Selling-price variance
b. Sales-volume variance and flexible-budget variance for operating income in the format of
the analysis in Exhibit 7-2
c. Price and efficiency variances for the following:
7-34
 Direct materials: frames
 Direct materials: lenses
 Direct manufacturing labor
2. Give three possible explanations for each of the three price and efficiency variances at Ultra in
requirement 1c.
SOLUTION
1a.
Actual selling price = $79.00
Budgeted selling price = $78.00
Actual sales volume = 7,300 units
Selling price variance = (Actual sales price  Budgeted sales price) × Actual sales volume
= ($79  $78) × 7,300 = $7,300 Favorable
1b.
Development of Flexible Budget
Revenues
Variable costs
DMFrames
$2.30/oz. × 2.00 oz.
DMLenses
$3.10/oz. × 4.00 oz.
Direct manuf. labor
$18.00/hr. × 1.00 hrs.
Total variable manufacturing costs
Fixed manufacturing costs
Total manufacturing costs
Budgeted Unit
Amounts
$78.00
Actual
Volume
7,300
4.60a
12.40b
18.00c
Flexible Budget
Amount
$569,400
7,300
7,300
7,300
Gross margin
a
33,580
90,520
131,400
255,500
114,000
369,500
$199,900
$35,880 ÷ 7,800 units; b$96,720 ÷ 7,800 units; c$140,400 ÷ 7,800 units
Actual
Results
(1)
Units sold
Revenues
Variable costs
DMFrames
DMLenses
Direct manuf. labor
Total variable costs
Fixed manuf. Costs
Total costs
Gross margin
FlexibleBudget
Variances
(2) = (1) –
(3)
7,300
Flexible
Budget
(3)
Sales Volume
Variance
(4) = (3) –
(5)
7,300
Static
Budget
(5)
7,800
$576,700
$ 7,300 F
$569,400
$ 39,000 U
$608,400
70,800
131,400
145,124
346,604
111,000
457,604
$ 119,096
36,500 U
40,880 U
13,724 U
91,104 U
3,000 F
88,104 U
$80,804 U
33,580
90,520
131,400
255,500
114,000
369,500
$199,900
2,300 F
6,200 F
9,000 F
17,500 F
0
17,500 F
$ 21,500 U
35,880
96,720
140,400
273,000
114,000
387,000
$221,400
7-35
Level 2
$80,804 U
Flexible-budget variance
Level 1
$ 21,500 U
Sales-volume variance
$102,304 U
Static-budget variance
7-36
1c.
Price and Efficiency Variances
DMFramesActual ounces used = 4.00 per unit × 7,300 units = 29,200 oz.
Price per oz. = $70,080  29,200 = $2.40
DMLensesActual ounces used = 6.00 per unit × 7,300 units = 43,800 oz.
Price per oz. = $131,400  43,800 = $3.00
Direct LaborActual labor hours = $145,124  14.20 = 10,220 hours
Labor hours per unit = 10,220  7,300 units = 1.40 hours per unit
Direct
Materials:
Frames
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(1)
(7,300 × 4× $2.40)
$70,080
Actual Input Qty.
× Budgeted Price
(2)
(7,300 × 4 × $2.30)
$67,160
$2,920 U
Price variance
Direct
Materials:
Lenses
(7,300 × 6.0 × $3.00)
$131,400
$33,580 U
Efficiency variance
(7,300 × 6.0 × $3.10)
$135,780
$4,380 F
Price variance
Direct
Manuf.
Labor
(7,300 × 1.40 × $14.20)
$145,124
(7,300 × 4.00 × $3.10)
$90,520
$45,260 U
Efficiency variance
(7,300× 1.40 × $18.00)
$183,960
$38,836 F
Price variance
2.
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(3)
(7,300 × 2.00 × $2.30)
$33,580
(7,300 × 1.00 × $18.00)
$131,400
$52,560 U
Efficiency variance
Possible explanations for the price variances are
(a) unexpected outcomes from purchasing and labor negotiations during the year.
(b) higher quality of frames and/or lower quality of lenses purchased.
(c) standards set incorrectly at the start of the year.
Possible explanations for the uniformly unfavorable efficiency variances are
(a) substantially higher usage of lenses due to poor-quality lenses purchased at lower
price.
(b) lesser trained workers hired at lower rates result in higher materials usage (for both
frames and lenses), as well as lower levels of labor efficiency.
(c) standards set incorrectly at the start of the year.
7-37
7-32
(20 min.) Possible causes for price and efficiency variances.
You are a student preparing for a job interview with a Fortune 100 consumer products
manufacturer. You are applying for a job in the finance department. This company is known for
its rigorous case-based interview process. One of the students who successfully obtained a job
with them upon graduation last year advised you to “know your variances cold!” When you
inquired further, she told you that she had been asked to pretend that she was investigating wage
and materials variances. Per her advice, you have been studying the causes and consequences of
variances. You are excited when you walk in and find that the first case deals with variance
analysis. You are given the following data for May for a detergent bottling plant located in
Mexico:
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 May.
2. You are given the following context: “Union organizers are targeting our detergent bottling
plant in Puebla, Mexico, for a union.” Can you provide a better explanation for the variances
that you have calculated on the basis of this information?
7-38
SOLUTION
1.
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(1)
Direct
Materials:
Bottles
Pesos 2,205,000
Actual Input Qty.
× Budgeted Price
(2)
(6,300,000 × Peso 0.34)
Pesos 2,142,000
Pesos 63,000 U
Price variance
Direct
Manufacturing
Labor
Pesos 739,165
Pesos 306,000 U
Efficiency variance
(24,500 × Peso 29.30)
Pesos 717,850
Pesos 21,315 U
Price variance
2.
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(3)
(360,000 × 15 × Peso 0.34)
Pesos 1,836,000
(360,000 × (2/60) × Peso 29.30)
Pesos 351,600
Pesos 366,250 U
Efficiency variance
If union organizers are targeting our plant, it could suggest employee dissatisfaction with
our wage and benefits policies. During this time of targeting, we might expect employees
to work more slowly, and they may be less careful with the materials that they are using.
These tactics might be seen as helpful in either organizing the union or in receiving
increases in wages and/or benefits. We should expect unfavorable efficiency variances
for both wages and materials. We may see an unfavorable wage variance, if we need to
pay overtime due to work slowdowns. We do, in fact, see a substantial unfavorable
materials quantity variance, representing a serious overuse of materials. While we may
not expect each bottle to use exactly 15 oz. of materials, we do expect the shrinkage to be
much less than this. Similarly, we see well over double the number of hours used relative
to what we expect to make and fill this number of bottles. They are able to produce just
under 15 bottles per hour, instead of the standard 30 bottles per hour. It is plausible that
this waste and inefficiency are either caused by, or are reflective of, the reasons behind
the attempt to organize the union at this plant.
7-39
7-33
(35 min.) Material cost variances, use of variances for performance evaluation.
Katharine Johnson is the owner of Best Bikes, a company that produces high-quality crosscountry 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:
Actual results for the first month using the online supplier of titanium are as follows:
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. Should Michael Bentfield’s performance evaluation be based solely on price variances?
Should 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?
7-40
SOLUTION
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
Flexible Budget
(Budgeted Input Qty. Allowed
for Actual Output
× Budgeted Price)
(400 × 8 × $18)
(3,200 × $18)
$57,600
$27,000 U
Efficiency variance
$88,400 ÷5,200 = $17
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 online
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
7-41
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.
7-42
7-34
(30 min.) Direct manufacturing labor and direct materials variances, missing data.
(CMA, heavily adapted) Young Bay Surfboards manufactures fiberglass surfboards. The
standard cost of direct materials and direct manufacturing labor is $223 per board. This includes
40 pounds of direct materials, at the budgeted price of $2 per pound, and 10 hours of direct
manufacturing labor, at the budgeted rate of $14.30 per hour. Following are additional data for
the month of July:
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
1.
Direct mfg. labor
Actual Costs
Incurred (Actual
Input Qty.× Actual Price)
$594,500a
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Input Qty. Actual Output
× Budgeted Price × Budgeted Price)
$586,300b
$786,500c
$8,200 U
Price variance
$200,200 F
Efficiency variance
$192,000 F
Flexible-budget variance
Given (or 41,000 hours × $14.50/hour)
41,000 hours × $14.30/hour = $735,000
c
5,500 units × 10 hours/unit × $14.30/hour = $786,500
a
b
2.
The favorable direct materials efficiency variance of $1,700 indicates that fewer pounds
of direct materials were actually used than the budgeted quantity allowed for actual output.
7-43
=
$1,700 efficiency variance
$2 per pound budgeted price
= 850 pounds
Budgeted pounds allowed for the output achieved = 5,500 × 40 = 220,000 pounds
Actual pounds of direct materials used = 220,000  850 = 219,150 pounds
3. Actual price paid per pound = 432,000/160,000
= $2.70 per pound
4.
Actual Costs Incurred
(Actual Input × Actual Price)
$432,000a
Actual Input ×
Budgeted Price
$320,000b
$112,000 U
Price variance
a
b
7-35
Given
160,000 pounds × $2/pound = $320,000
(35 min.) Direct materials efficiency, mix, and yield variances.
Nature’s Best Nuts produces specialty nut products for the gourmet and natural foods market. Its
most popular product is Zesty Zingers, a mixture of roasted nuts that are seasoned with a secret
spice mixture and sold in 1-pound tins. The direct materials used in Zesty Zingers are almonds,
cashews, pistachios, and seasoning. For each batch of 100 tins, the budgeted quantities and
budgeted prices of direct materials are as follows:
Changing the standard mix of direct material quantities slightly does not significantly affect the
overall end product, particularly for the nuts. In addition, not all nuts added to production end up
in the finished product, as some are rejected during inspection.
In the current period, Nature’s Best made 2,500 tins of Zesty Zingers in 25 batches with the
following actual quantity, cost, and mix of inputs:
7-44
Required:
1. What is the budgeted cost of direct materials for the 2,500 tins?
2. Calculate the total direct materials efficiency variance.
3. Why is the total direct materials price variance zero?
4. Calculate the total direct materials mix and yield variances. What are these variances telling
you about the 2,500 tins produced this period? Are the variances large enough to investigate?
SOLUTION
1.
Almonds ($1 × 180 cups)
Cashews ($2 × 300 cups)
Pistachios ($3 × 90 cups)
Seasoning ($6 × 30 cups)
Budgeted cost per batch
Number of batches
Budgeted Cost
$
180
600
270
180
$ 1,230
× 25
$30,750
2.
Solution Exhibit 7-35A presents the total price variance ($0), the total efficiency variance
($610 U), and the total flexible-budget variance ($610 U).
Total direct materials efficiency variance can also be computed as:

Direct materials
Actual quantity  Budgeted quantity of input
Budgeted
 efficiency variance =
× price of input
of
input
allowed
for
actual
output
for each input


Almonds
=
(5,280 – 4,500) × $1 = $780 U
Cashews
=
(7,520 – 7,500) × $2 =
40 U
Pistachios
=
(2,720 – 2,250) × $3 = 1,410 U
Seasoning
=
( 480 – 750) × $6 = 1,620 F
Total direct materials efficiency variance
$610 U
 SOLUTION EXHIBIT 7-35A
Columnar Presentation of Direct Materials Price and Efficiency Variances for Nature’s Best
Company.
7-45
Actual Costs
Incurred
(Actual Input Quantity
× Actual Price)
(1)
5,280 × $1 = $ 5,280
7,520 × $2 = 15,040
2,720 × $3 = 8,160
480 × $6 = 2,880
$31,360
Almonds
Cashews
Pistachios
Seasoning
Actual Input Quantity
× Budgeted Price
(2)
5,280 × $1 = $ 5,280
7,520 × $2 = 15,040
2,720 × $3 = 8,160
480 × $6 = 2,880
$31,360
$0
Total price variance
Flexible Budget
(Budgeted Input Quantity
Allowed for Actual Output
× Budgeted Price)
(3)
4,500 × $1 = $ 4,500
7,500 × $2 = 15,000
2,250 × $3 =
6,750
750 × $6 =
4,500
$30,750
$610 U
Total efficiency variance
$610 U
Total flexible-budget variance
F = favorable effect on operating income; U = unfavorable effect on operating income
3. The total direct materials price variance equals zero because, for all four inputs, actual price
per cup equals the budgeted price per cup.
4.
Solution Exhibit 7-35B presents the total direct materials yield and mix variances.
The total direct materials yield variance can also be computed as the sum of the direct
materials yield variances for each input:
Direct
materials
yield variance =
for each input
Budgeted
 Actual total
Budgeted total quantity 
direct
materials
 quantity of all  of all direct materials inputs  ×
input
mix
 direct materials allowed for actual output 
 inputs used

percentage

Budgeted
price of
× direct materials
inputs
Almonds
= (16,000 – 15,000) × 0.30a × $1 = 1,000 × 0.30 × $1 = $ 300 U
Cashews
= (16,000 – 15,000) × 0.50b × $2 = 1,000 × 0.50 × $2 = 1,000 U
Pistachios
= (16,000 – 15,000) × 0.15c × $3 = 1,000 × 0.15 × $3 = 450 U
Seasoning
= (16,000 – 15,000) × 0.05d × $6 = 1,000 × 0.05 × $6 = 300 U
Total direct materials yield variance
$2,050 U
a
180  600; b 300  600; c 90  600; d30  600
The total direct materials mix variance can also be computed as the sum of the direct materials
mix variances for each input:
Direct
materials
mix variance =
for each input
Almonds
Actual total
Budgeted
Actual
Budgeted 

quantity
of
all
price of
 direct materials  direct materials  ×
× direct materials
direct
materials
 input mix
input mix 
 percentage
inputs used
inputs
percentage 

= (0.33 – 0.30) × 16,000 × $1 =
0.03 × 16,000 × $1 =
7-46
$ 480 U
Cashews = (0.47 – 0.50) × 16,000 × $2 =
Pistachios = (0.17 – 0.15) × 16,000 × $3 =
Seasoning = (0.03 – 0.05) × 16,000 × $6 =
Total direct materials mix variance
–0.03 × 16,000 × $2 =
0.02 × 16,000 × $3 =
–0.02 × 16,000 × $6 =
960 F
960 U
1,920 F
$ 1,440 F
 SOLUTION EXHIBIT 7-35B
Columnar Presentation of Direct Materials Yield and Mix Variances for Nature’s Best Company.
Actual Total Quantity
of All Inputs Used
× Actual Input Mix
× Budgeted Price
(1)
Almonds
Cashews
Pistachios
Seasoning
16,000 × 0.33 × $1
16,000 × 0.47 × $2
16,000 × 0.17 × $3
16,000 × 0.03 × $6
= $ 5,280
= 15,040
= 8,160
= 2,880
$31,360
Actual Total Quantity
of All Inputs Used
× Budgeted Input Mix
× Budgeted Price
(2)
16,000 × 0.30 × $1
16,000 × 0.50 × $2
16,000 × 0.15 × $3
16,000 × 0.05 × $6
= $ 4,800
= 16,000
= 7.200
= 4,800
$32,800
$1,440 F
Total mix variance
Flexible Budget:
Budgeted Total Quantity of
All Inputs Allowed for
Actual Output ×
Budgeted Input Mix
× Budgeted Price
(3)
15,000 × 0.30 × $1
15,000 × 0.50 × $2
15,000 × 0.15 × $3
15,000 × 0.05 × $6
= $ 4,500
= 15,000
= 6,750
=
4,500
$30,750
$2,050 U
Total yield variance
$610 U
Total efficiency variance
F = favorable effect on operating income; U = unfavorable effect on operating income.
The direct materials mix variance of $1,440 F indicates that the actual product mix uses relatively more
of less-expensive ingredients than planned. In this case, the actual mix contains slightly more almonds
and pistachios while using fewer cashews and substantially less seasoning.
The direct materials yield variance of $2,050 U occurs because the amount of total inputs needed
(16,000 cups) exceeded the budgeted amount (15,000 cups) expected to produce 2,500 tins.
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 less
seasoning, which is considered an important element of the product’s appeal to customers.
7-47
7-36
(20–30 min.) Direct materials and manufacturing labor variances, solving
unknowns.
(CPA, adapted) On May 1, 2014, Lowell 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:
The following data were obtained from Lowell’s records for the month of May:
Actual production in May was 4,700 units of Dandy, and actual sales in May were 3,000 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, 2014.
Compute each of the following items for Lowell 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
All given items are designated by an asterisk.
7-48
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)
(2,350 × $15.87)
$37,300
(2,350 × $16*)
$35,600
(4,700* × 0.5* × $16*)
$37,600
$1,700 U*
Price variance
Direct
Materials
(10,600 × $3.42)
$36,300*
$2,000 F*
Efficiency variance
Purchases
(10,600 × $3*)
$31,800
$4,500 U*
Price variance
Usage
(10,367 × $3*)
$31,100
(4,700* × 2* × $3*)
$28,200
$2,900 U*
Efficiency variance
1. 4,700 units × 0.5 hours/unit = 2,350 hours
2.
Flexible budget – Efficiency variance = $37,600 – $2,000 = $35,600
Actual dir. manuf. labor hours = $35,600 ÷ Budgeted price of $16/hour = 2,225 hours
3.
$35,600 + Price variance, $1,700 = $37,300, the actual direct manuf. labor cost
Actual rate = Actual cost ÷ Actual hours = $37,300 ÷ 2,225 hours = $17/hour (rounded)
4.
Standard qty. of direct materials = 4,700 units × 2 pounds/unit = 9,400 pounds
5.
Flexible budget + Dir. matls. effcy. var. = $28,200 + $2,900 = $31,100
Actual quantity of dir. matls. used = $31,100 ÷ Budgeted price per lb
= $31,100 ÷ $3/lb = 10,367 lbs
6.
Actual cost of direct materials, $36,300 – Price variance, $4,500 = $31,800
Actual qty. of direct materials purchased = $31,800 ÷ Budgeted price, $3/lb = 10,600 lbs.
7. Actual direct materials price = $36,300 ÷ 10,600 lbs = $3.42 per lb.
7-49
7-37 (20 min.)
Direct materials and manufacturing labor variances, journal entries.
Zanella’s Smart Shawls, Inc., is a small business that Zanella developed while in college. She
began hand-knitting shawls for her dorm friends to wear while studying. As demand grew, she
hired some workers and began to manage the operation. Zanella’s shawls require wool and labor.
She experiments with the type of wool that she uses, and she has great variety in the shawls she
produces. Zanella has bimodal turnover in her labor. She has some employees who have been
with her for a very long time and others who are new and inexperienced.
Zanella uses standard costing for her shawls. She expects that a typical shawl should take 3
hours to produce, and the standard wage rate is $9.00 per hour. An average shawl uses 13 skeins
of wool. Zanella shops around for good deals and expects to pay $3.40 per skein.
Zanella uses a just-in-time inventory system, as she has clients tell her what type and color of
wool they would like her to use.
For the month of April, Zanella’s workers produced 200 shawls using 580 hours and 3,500
skeins of wool. Zanella bought wool for $9,000 (and used the entire quantity) and incurred labor
costs of $5,520.
Required:
1. Calculate the price and efficiency variances for the wool 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 Zanella experienced.
SOLUTION
1.
Direct Materials:
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
Wool
(given)
$9,000
Actual Input Qty.
× Budgeted Price
3,500  $3.40
$11,900
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
200  13  $3.40
$8,840
$2,900 F
$3,060 U
Price variance
Efficiency variance
$160 U
Flexible-budget variance
Direct Manufacturing Labor:
7-50
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(given)
$5,520
Actual Input Qty.
× Budgeted Price
580  $9
$5,220
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
200  3  $9
$5,400
$300 U
$180 F
Price variance
Efficiency variance
$120 U
Flexible-budget variance
2.
Direct Materials Price Variance (time of purchase = time of use)
Direct Materials Control
11,900
Direct Materials Price Variance
2,900
Accounts Payable Control or Cash
9,000
Direct Materials Efficiency Variance
Work in Process Control
Direct Materials Efficiency Variance
Direct Materials Control
8,840
3,060
11,900
Direct Manufacturing Labor Variances
Work in Process Control
Direct Mfg. Labor Price Variance
Direct Mfg. Labor Efficiency Variance
Wages Payable or Cash
5,400
300
180
5,520
3.
Plausible explanations for the above variances include:
Zanella paid a little less for the wool, but the wool was lower quality (more knots in the yarn that
had to be cut out), and workers had to use more of it. Zanella used more experienced workers in
April than she usually does. This resulted in payment of higher wages per hour, but the new
workers were more efficient and took fewer hours than normal. However, overall the higher
wage rates resulted in Zanella’s total wage bill being higher than expected.
7-51
7-38
(30 min.) 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.
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
1.
Unit variable cost (dollars) and component percentages for each firm:
Firm A
DM
DL
VOH
Total
2.
$10.75 37.6%
10.88 38.1%
6.94 24.3%
$28.57 100.0%
Firm B
Firm C
$10.50 27.3%
14.00 36.3%
14.00 36.4%
$38.50 100.0%
$11.22 44.0%
9.26 36.3%
5.04 19.7%
$25.52 100.0%
Firm D
$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
7-52
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) × Benchmark Price
(2.15 oz. – 2.15 oz.) × $5.10
$0
The DL Price Variance is computed as:
=
=
(Firm A Rate – Benchmark Rate) × Firm A Hours
($14.50 – $12.50) × 0.75
$1.50 U
The DL Efficiency Variance is computed as follows:
=
=
(Firm A Usage – Benchmark Usage) × Benchmark Rate
(0.75 hrs. – 0.70 hrs.) × $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
7-53
Date: March 15, 2014
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.
7-54
7-39
(35 min.) Direct labor variances: price, efficiency, mix and yield.
Trevor Joseph employs two workers in his guitar-making business. The first worker, George, has
been making guitars for 20 years and is paid $30 per hour. The second worker, Earl, is less
experienced and is paid $20 per hour. One guitar requires, on average, 10 hours of labor. The
budgeted direct labor quantities and prices for one guitar are as follows:
That is, each guitar is budgeted to require 10 hours of direct labor, composed of 60% of George’s
labor and 40% of Earl’s, although sometimes Earl works more hours on a particular guitar and
George less, or vice versa, with no obvious change in the quality or function of the guitar.
During the month of August, Joseph manufactures 25 guitars. Actual direct labor costs are as
follows:
Required:
1. What is the budgeted cost of direct labor for 25 guitars?
2. Calculate the total direct labor price and efficiency variances.
3. For the 25 guitars, what is the total actual amount of direct labor used? What is the actual
direct labor input mix percentage? What is the budgeted amount of George’s and Earl’s labor
that should have been used for the 25 guitars?
4. Calculate the total direct labor mix and yield variances. How do these numbers relate to the
total direct labor efficiency variance? What do these variances tell you?
SOLUTION
1.
George ($30 × 6 hrs.)
Earl ($20 × 4 hrs.)
Cost per guitar
Number of guitars
Total budgeted cost
$
$
$
180
80
260
× 25units
6,500
2. Solution Exhibit 7-39A presents the total price variance ($0), the total efficiency variance
($10 U), and the total flexible-budget variance ($10U).
Total direct labor price variance can also be computed as:
7-55
Direct labor
price variance
for each input
=
Actual quantity
 Budgeted
 priceActual
of input
of input price of input  ×
George
= ($30 – $30) × 145 = $0
Earl
= ($20 – $20) × 108 = 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


George
= (145 – 150) × $30.00 = $150 F
Earl
= (108 – 100) × $20.00 = 160 U
Total direct labor efficiency variance
$ 10 U
 SOLUTION EXHIBIT 7-39A
Columnar Presentation of Direct Labor Price and Efficiency Variances for Trevor Joseph Guitars
George
Earl
Actual Costs
Incurred
(Actual Input Quantity
× Actual Price)
(1)
145 × $30 = $4,350
108 × $20 = 2,160
$6,510
Actual Input Quantity
× Budgeted Price
(2)
145 × $30 = $4,350
108 × $20 = 2,160
$6,510
$0
Total price variance
Flexible Budget
(Budgeted Input Quantity
Allowed for Actual Output
× Budgeted Price)
(3)
150 × $30 = $4,500
100 × $20 = 2,000
$6,500
$10 U
Total efficiency variance
$10 U
Total flexible-budget variance
F = favorable effect on operating income; U = unfavorable effect on operating income
3.
George
Earl
Total
Actual Quantity
of Input
145 hours
108 hours
253 hours
Actual
Mix
57.3%
42.7%
100.0%
Budgeted Quantity
of Input for Actual Output
6 hours × 25 units = 150 hours
4 hours × 25 units = 100 hours
250 hours
Budgeted
Mix
60%
40%
100%
4. Solution Exhibit 7-39B presents the total direct labor yield and mix variances for Trevor
Joseph Guitars.
The total direct labor yield variance can also be computed as the sum of the direct labor
yield variances for each input:
7-56
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
George = (253 – 250) × 0.60 × $30 = 3 × 0.60 × $30 = $54 U
Earl
= (253 – 250) × 0.40 × $20 = 3 × 0.40 × $20 = 24 U
Total direct labor yield variance
$78 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
George = (0.573 – 0.60) × 253 × $30 = 0.027 × 253 × $30 = $205 F
Earl
= (0.427 – 0.40) × 253 × $20 = –0.027 × 253 × $20= 137 U
Total direct labor mix variance
$ 68 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
guitars required more total inputs (253 hours) than expected (250 hours) for the production of 25
guitars. Both variances are relatively small and probably within tolerable limits. It is likely that
Earl, who is less experienced, worked more slowly than George, which caused the unfavorable
yield variance. Trevor Joseph should be careful that using more of the cheaper labor does not
reduce the quality of the guitar or how customers perceive it.
 SOLUTION EXHIBIT 7-39B
Columnar Presentation of Direct Labor Yield and Mix Variances for Trevor Joseph Guitars
Actual Total Quantity
of All Inputs Used
× Actual Input Mix
× Budgeted Price
(1)
George
Earl
253 × 0.573 × $30
253 × 0.427 × $20
=
=
$4,349
2,161
$6,510
Actual Total Quantity
of All Inputs Used
× Budgeted Input Mix
× Budgeted Price
(2)
253 × 0.60 × $30 = $4,554
253 × 0.40 × $20 = 2,024
$6,578
68 F
7-57
Flexible Budget:
Budgeted Total Quantity of
All Inputs Allowed for
Actual Output ×
Budgeted Input Mix
× Budgeted Price
(3)
250 × 0.60 × $30 = $4,500
250 × 0.40 × $20 = 2,000
$6,500
$78 U
Total mix variance
Total yield variance
$10 U
Total efficiency variance
F = favorable effect on operating income; U = unfavorable effect on operating income.
7-40
(30 min.) 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 to OEMs as well as 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 directcost inputs are as follows:
Phoebe King, the CEO, is disappointed with the results for June 2014, 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:
7-58
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. Selling-price variance
2. Direct materials price variance, for each category of materials
3. Direct materials efficiency variance, for each category of materials
4. Direct manufacturing labor price variance, for setup and fabrication
5. Direct manufacturing labor efficiency variance, for setup and fabrication.
SOLUTION
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,variance
= (Actual,selling price – Budgeted,selling price) ×
Actual,units sold
=
($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
$0.05 ($415,000 ÷ 8,300,000)
0.11 ($550,000 ÷ 5,000,000)
0.50 ($235,000 ÷ 470,000)
7-59
Budgeted
$0.05
0.10
0.50
Direct manuf. labor
Setup
Fabrication
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
Specialty polymer
Connector pins
Wi-Fi transreceiver
Direct manuf. labor costs
Setup
Fabrication
Price
Variance
(2) = (1) – (3)
$ 415,000
$
550,000
235,000
$1,200,000
$182,000
446,400
$628,400
$
0
50,000 U
0
$50,000 U
0
14,400 U
$ 14,400 U
7-60
Actual
Input Qty.
× Budgeted
Price
(3)
Efficiency
Variance
(4) = (3) –
(5)
a
$ 415,000
$22,300 U
b
500,000
38,000 U
c
235,000
4,000 U
$1,150,000 $64,300 U
d
$182,000
e
432,000
$614,000
$ 2,800 F
30,000 F
$32,800 F
Flex. Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(5)
f
$ 392,700
g
462,000
h
231,000
$1,085,700
i
$184,800
j
462,000
$646,800
a
f
$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
$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:
7-41

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 non-value-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.
(60 min.) Comprehensive variance analysis review.
Vivus Bioscience produces a generic statin pill that is used to treat patients with high cholesterol.
The pills are sold in blister packs of 10. Vivus employs a team of sales representatives who are
paid varying amounts of commission.
Given the narrow margins in the generic drugs industry, Vivus relies on tight standards and
cost controls to manage its operations. Vivus has the following budgeted standards for the month
of April 2014:
7-61
Vivus budgeted sales of 1,400,000 packs 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 increased to $7.30.
 Productivity dropped to 250 packs per hour.
 Actual direct manufacturing labor cost was $14.60 per hour.
 Actual total direct material cost per unit increased to $1.90.
 Actual sales commissions were $0.30 per unit.
 Fixed overhead costs were $12,000 above budget.
Calculate the following amounts for Vivus for April 2014:
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
Actual Results
Units sold (90% × 1,400,000)
Selling price per unit
Revenues (1,260,000 × $7.30)
Direct materials purchased and used:
Direct materials per unit
Total direct materials cost (1,260,000 × $1.90)
Direct manufacturing labor:
Actual manufacturing rate per hour
Labor productivity per hour in units
Manufacturing labor-hours of input (1,260,000 ÷ 250)
Total direct manufacturing labor costs (5,040 × $14.60)
Direct marketing costs:
Direct marketing cost per unit
Total direct marketing costs (1,260,000 × $0.30)
Fixed administrative and overhead costs ($960,000 + $12,000)
Static Budgeted Amounts
Units sold
Selling price per unit
Revenues (1,400,000 × $7.20)
Direct materials purchased and used:
Direct materials per unit
Total direct materials costs (1,400,000 × $1.80)
Direct manufacturing labor:
7-62
1,260,000
$7.30
$9,198,000
$1.90
$2,394,000
$14.60
250
5,040
$73,584
$0.30
$378,000
$972,000
1,400,000
$7.20
$10,080,000
$1.80
$2,520,000
Direct manufacturing rate per hour
Labor productivity per hour in units
Manufacturing labor-hours of input (1,400,000 ÷ 280)
Total direct manufacturing labor cost (5,000 × $14.40)
Direct marketing costs:
Direct marketing cost per unit
Total direct marketing cost (1,400,000 × $0.36)
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
$0.36
$504,000
$960,000
Actual
Results
$9,198,000
Static-Budget
Amounts
$10,080,000
2,394,000
73,584
378,000
2,845,584
6,352,416
972,000
$5,380,416
2,520,000
72,000
504,000
3,096,000
6,984,000
960,000
$6,024,000
$5,380,416
6,024,000
$ 643,584 U
7-63
$14.40
280
5,000
$72,000
Flexible-budget-based variance analysis for Vivus, Inc. for April 2014:
Actual
Results
Units (10-packs) sold
Flexible-Budget
Variances
1,260,000
SalesVolume
Variances
Flexible
Budget
0
1,260,000
Revenues
Variable costs
Direct materials
Direct manuf. labor
Direct marketing costs
Total variable costs
Contribution margin
Fixed costs
$9,198,000
$126,000 F
$9,072,000
2,394,000
73,584
378,000
2,845,584
6,352,416
972,000
126,000 U
8,784 U
75,600 F
59,184 U
66,816 F
12,000 U
2,268,000
64,800
453,600
2,786,400
6,285,600
960,000
Operating income
$5,380,416
$ 54,816 F
$5,325,600
Static
Budget
140,000
1,400,000
$1,008,000 U $10,800,000
252,000 F
7,200 F
50,400 F
309,600 F
698,400 U
0
$698,400 U
2,520,000
72,000
504,000
3,096,000
6,984,000
960,000
$6,024,000
$643,584 U
Total static-budget variance
$54,816 F
$698,400 U
Total flexible-budget
variance
Total sales-volume
variance
3.
Flexible-budget operating income = $5,325,600.
4.
Flexible-budget variance for operating income = $54,816 F.
5.
Sales-volume variance for operating income = $698,400 U.
Analysis of direct mfg. labor flexible-budget variance for Vivus, Inc. for April 2014:
Direct.
Mfg. Labor
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
(5,040 × $14.60)
$73,584
Actual Input Qty.
× Budgeted Price
(5,040 × $14.40)
$72,576
$1,008 U
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(*4,500 × $14.40)
$64,800
$7,776 U
Efficiency variance
$8,784 U
Flexible-budget variance
* 1,260,000 units ÷ 280 direct manufacturing labor standard productivity rate per hour.
7.
DML price variance = $1,008 U; DML efficiency variance = $7,776 U
8.
DML flexible-budget variance = $8,784 U
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7-42
(30 min.) 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 justin-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
2014 were as follows:
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 2014.
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 18)?
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.
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SOLUTION
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
$760 F
Efficiency variance
(816 × $50)
$40,800
$40,300
$500 F
Price variance
Plastic
Casing
$250 F
Price variance
Direct
Manufacturing
Labor
(4,400 × 1 × $3)
$13,200
$450 F
Efficiency variance
(2,040 × $18)
$36,720
$37,200
(4,400 × 0.20 × $50)
$44,000
$3,200 F
Efficiency variance
(4,250 × $3)
$12,750
$12,500
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
(4,400 × 1.02 × $20)
$89,760
$480 U
Price variance
(4,400 × 0.50 × $18)
$39,600
$2,880 F
Efficiency variance
7-66
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 versus 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.
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