Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
CHAPTER 14: OPERATIONAL PERFORMANCE MEASUREMENT:
SALES AND DIRECT-COST VARIANCES, AND THE ROLE OF
NONFINANCIAL PERFORMANCE MEASURES
QUESTIONS
14-1 Standard costs (and selling prices), and their use in the construction of flexible
budgets (prepared after the current operating period is over), establish targets or
planned amounts as to operating earnings for a period. This information can be
used at the end of the period to determine why actual operating earnings for the
period differed from operating earnings as specified in the firm’s master (static)
budget. The goal is to subdivide this “total operating income variance” into
portions attributable to each of the five factors that combine to determine
operating income, viz., sales volume, sales mix, selling prices, variable costs per
unit, and total fixed costs.
14-2 Yes. Standard costs can be used with either job-order costing or process costing.
Note that the use of standard costs in conjunction with a process cost system is
particularly attractive since it dramatically reduces the cost of operating the
system: the standard costs represent the equivalent-unit costs for labor,
materials, and manufacturing overhead. Automotive repair shops represent a
good example of how standard costs could be incorporated into a job-cost
system. Such shops use published labor-hour times for routine maintenance
work.
14-3 The term “standard cost” is normative in the sense that it refers to the costs that
should be incurred if operations are relatively efficient. For financial control
purposes, such costs can be compared to actual costs with follow-up analysis of
variances (deviations) between the two.
A standard cost system is one in which the flow of costs through the accounts
is at standard, not actual. Thus, standard cost systems can be used in
conjunction with either job-order or process cost systems.
Note that standard costs (and associated variance analysis) can be used
outside of the formal accounting system.
14-4 Although used interchangeably in the vernacular, we typically represent standard
costs as per-unit amounts (e.g., standard direct labor cost per unit produced or
standard wage rate per hour worked). Budgets, on the other hand, typically refer
to total amounts, such as Budgeted Sales, Budgeted Manufacturing Costs,
Budgeted Cost of Goods Manufactured, and Budgeted Operating Income.
14-5 A master budget represents forecasted operating profit based on a single output
level (“planned sales”) for an upcoming period. As such, this budget is also
referred to as a static budget.
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
Pro-forma budgets represent budgeted operating income for various output
levels (production or sales). Pro-forma budgets can be prepared for any output
level within the relevant range.
In this text, we reserve the term flexible budget for the control budget
prepared after the end of the period. That is, the flexible budget is “flexed” to the
actual output level achieved (e.g., sales volume). The introduction of the flexible
budget is key to the process of explaining the total static (master) budget
variance for the period. That is, the flexible budget allows us to break down the
total static budget variance for a period into a sales volume variance and a total
flexible-budget variance. For this reason, some accountants refer to this budget
as a “control budget.”
14-6 The amount of actual direct materials cost incurred could differ from the amount
reflected in the master (static) budget for three principal reasons: (1) the actual
sales volume for the period differed from the volume envisioned in the master
budget (this volume difference would cause the consumption of raw materials to
be different from the amount reflected in the master budget); (2) the price paid
per unit of raw material differed from the standard price; and (3) the efficiency of
raw materials consumption was different than expected. Note that items (2) and
(3) are reflected as part of the total flexible-budget variance for the period.
Finally, an astute student might mention that a fourth explanation is possible: the
amount of materials purchased differed from the amount issued to production
(i.e., there was a change in ending inventory).
14-7 By definition, as the level of output (or activity) changes, variable costs will
change in total—more or less in proportion to the change in output (activity). At
the 80 percent level of budgeted output, variable costs should have been
$64,000 ($80,000 x 0.8). Thus, based solely on this information, we can say that
the plant manager was not efficient, having spent $72,000 to operate at the 80%
level of budgeted production.
14-8 Of the three, for motivation and control purposes, standards based on the
average of recent historical performance are the least desirable. Many firms
prefer to use standards based on attainable performance in their standard cost
systems in order to have standards that are achievable but not frustrating to
workers. However, world-class firms or firms stressing continuous improvement
can choose to use standards based on ideal (i.e., maximum efficiency)
performance.
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-9 Any purely variable cost, such as direct manufacturing labor, is a function of two
factors: price (P) and quantity (Q). Thus, if a standard cost variance for a variable
cost exists for a given period, management might want to know the underlying
cause of the variance: how much of the total variance was attributable to wage
rates (P) being different from planned rates? How much of the total variance was
attributable to operational efficiencies? To answer these questions we must
decompose the total flexible-budget variance for a variable cost into its P and Q
components. Knowledge of the underlying causes of a given variance is
fundamental to taking corrective action.
14-10 Although the total materials cost variance is small and insignificant, this variance
might be the result of substantial but offsetting price and efficiency variances.
The breakdown of the total materials variance into price and quantity
components allows managers to draw conclusions regarding each of the two
separate functions regarding materials: their acquisition and their use in
production. Thus, the manager should not accept the report as an indicator of
satisfactory performance unless he/she feels that the components of the overall
variance are at an acceptable level.
14-11 A learning curve is a representation (either mathematical or graphical) of the
systematic effect of experience on the time it takes to perform a task (e.g.,
produce a batch of output). Thus, the variance that is most likely to reflect effects
of a learning curve phenomenon is the direct labor efficiency variance. A learning
curve phenomenon may also have effects on the uses of direct materials, as the
amount of waste or spoilage may decrease with experience.
14-12 The answer depends on how overtime premium is treated by the accounting
system. If overtime premium is included as part of factory overhead, then the
higher wages paid due to overtime premium should not affect any direct labor
variances. However, for firms that include overtime premium in the total wages,
rate variances are likely to be unfavorable when overtime premium is paid.
14-13 The performance of a division should not be considered as less than satisfactory
simply because all variances are “unfavorable.” For example, a company
expects unfavorable variances if it uses an ideal performance standard. As long
as there is making satisfactory progress toward the standard, unfavorable
variances can be thought of as a “progress report” toward meeting the goal; in
this context the unfavorable variances are not measures of “unsatisfactory”
performance.
However, if the company uses currently attainable standards, an unfavorable
variance may signal that the performance of the division is below expectations.
Companies with such standards expect the division to meet the goals in each
and every operation.
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
The more general point is that the terms “favorable” and “unfavorable”
should not be interpreted to mean “good” versus “bad.” Additional spending
associated with opportunities not originally envisioned in the master budget may
result in unfavorable spending variances, but can be critical in terms of the future
prospects of the firm. In short, the labels “favorable” and “unfavorable” are
defined solely on the basis of the impact of the variance (positive or negative) on
short-term operating profit. It is a value judgment as to whether such variances
are positive or negative.
14-14 Management time is scarce. According to the philosophy of management by
exception, managers give primary attention to things (operations, sales
promotions, production, revenue growth, productivity gains, etc.) that are not
going according to plan, or at least are departing materially from plan. The
corollary is that managers give relatively less attention to areas that are
basically proceeding according to plan.
Variances can be thought of as “information signals,” identifying situations
where, from a financial standpoint, things are not going according to plan. Thus,
when such variances are deemed “small” or “immaterial,” no intervention on the
part of managers is needed. On the other hand, when a variance is consider
“abnormal” (i.e., an “exception”) it may trigger the need for an investigation to
uncover the underlying cause, which in turn may lead to some type of
intervention or change.
14-15 The best answer among the choices is 3. A favorable materials purchase price
variance suggests that the actual purchase price of materials was less than the
standard price. The firm also used more than the quantity of materials specified
in the standard cost sheet for the units manufactured. Answer choice #3 includes
the possibility of both price and quantity factors and as such is the preferred
answer to the question.
14-16 Just-in-Time (JIT) firms emphasize the total cost of operations, not just materials
purchase costs. The importance of such factors as quality, reliability, and
availability often outweighs any savings due to purchase cost. Also, firms using
JIT systems are likely to have long-term purchase contracts with selected precertified suppliers. The negotiated prices are not subject to short-term
fluctuations so that, by definition, purchase price variances would be minor if not
non-existent.
14-17 One result of new manufacturing technologies (e.g., JIT or flexible manufacturing
systems) technologies, or strategic imperatives such as TQM, is the decreased
importance of direct labor variances. The utmost concern of firms using these
technologies is satisfying customers and providing better products than
competitors. A well-managed business or service provider is not the one with the
lowest unfavorable variances or the highest favorable variances. Rather, it is the
one with satisfied customers and consistently better products. The main point
here is that financial performance is but one consideration in evaluating the
performance of organizational subunits.
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-18 Establishing a standard cost system and identifying variances from the standard
are steps in gaining a better understanding of the operations and improving
operations. The focus of a standard cost system should be on influencing
behavior with positive reinforcements and motivations. Standard costing systems
should never be used negatively (e.g., to affix blame). Seldom will long-term
success result from the application of penalties and punishments.
A positive perception about the standards and variance identifications by all
affected workers is critical to the success of a standard cost system. Secrecy in
setting standards, authoritarian control procedures, poor communication,
excessive pressure, inflexibility, uneven reward systems, or excessive emphasis
on short-term financial results (profits) can all compromise the benefits of a
standard cost system.
14-19 Direct material price variances can be caused by any of the following factors:
purchasing material of a different quality than that envisioned in the standard
material cost; inapplicability of the standard cost per unit of raw material (i.e.,
outdated standards—the market price may have changed); purchasing was done
through a new supplier; delivery terms for purchases were different (and
therefore either more or less costly) than the terms envisioned when the standard
material costs were set; skill (or lack thereof) of the purchasing manager in
negotiating a price for raw materials; purchasing from a distress seller; “rush”
orders were used; and, the quantity of materials purchased differed from normal
(e.g., larger lot sizes might yield quantity discounts). Normally, the Purchasing
Manager is in the best position to influence the direct materials purchase price
variance.
Direct materials usage variances can be caused by: poorly supervised
employees; inadequately maintained machinery and equipment; inappropriate
standard (e.g., standard is out-of-date, or the standard was set incorrectly); or,
the use of non-standard raw materials. Normally, the Production Manager is in
the best position to influence the direct materials usage (quantity) variance. Note,
however, that this variance might also be affected by decisions made by the
Purchasing Department. For example, if the Purchasing Department obtains
materials of lower quality than envisioned in the standard (perhaps to secure a
price savings), excessive spoilage and waste may occur during the production
process. Thus, in this case the Purchasing Department (not the Production
Department), would be responsible for the variance.
14-20 Direct labor rate (price) variances could be caused by: highly skilled (and paid)
labor used in place of lower-skilled labor; standard is out of date (e.g., new labor
contract); or, overtime work that is included in direct labor cost (rather than
manufacturing overhead). In some cases, the Production Manager is in the best
position to influence the direct labor rate (price) variance because this individual
relates to how labor is deployed in the organization (e.g., skilled workers who are
paid more may be assigned to do tasks meant for lower-paid workers). In other
situations, the Personnel Manager or perhaps union negotiator has more
influence over this variance.
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
Direct labor efficiency (usage) variances could be caused by: using a different
mix of labor for the task at hand, as compared to the standard mix of labor;
poorly supervised employees; installation of new equipment; machinery and
equipment not maintained according to schedule (which could cause excess
waste and labor-hour consumption); inappropriate labor-hour standard (e.g., the
standard could be out of date; or, the standard could have been improperly set);
low employee morale; poor production scheduling (which could lead to excessive
idle time); or, the use of newly hired employees (break-in/training period).
Normally, the Production Manager is in the best position to influence the direct
labor usage (efficiency) variance. However, this variance (as noted in 14-19
above) may be assigned to the Purchasing Manager if the purchase of inferior
materials caused excess labor-hour consumption.
One particularly interesting situation that students should be aware of is the
potential for overemphasizing labor efficiency variances when labor is essentially
a short-term fixed cost. In this case, the labor efficiency variance can be largely
attributable to lack of orders (i.e., lack of sales demand), not worker efficiency.
For this reason, some writers suggest that when labor is essentially a short-term
fixed cost, that the labor efficiency variance not be reported for motivation and
control purposes. Otherwise, workers (and managers) may be motivated to
produce excess inventory which in turn would run counter to the JIT philosophy
that the firm may be embracing.
14-21 Organizations engage in a variety of processes in order to deliver the stated
value proposition to its targeted customers and in order to achieve its stated
financial objectives. These processes, for expository purposes, might be grouped
into the following: (a) operating processes, (b) customer-management processes,
(c) growth and innovation processes, and (d) social and regulatory processes.
Operating processes might be defined as what the organization does, on a dayto-day basis, to produce and deliver to customers its outputs (services and/or
products). Thus, operating processes include activities such as: acquiring raw
materials from supplier firms; producing finished goods and services; and,
distributing the finished product to customers.
14-22 A JIT system is very different from a conventional manufacturing system. In a JIT
system, a good or service is produced or delivered only when a customer
requires it. Some describe this as “demand pull” rather than “push.”
JIT production requires a product layout with a continuous flow once
production starts. Underlying the JIT system is a continuous improvement
philosophy of eliminating or reducing delay, error, and waste, such as materials
movement, storage, rework, and waiting time. In a typical JIT system, all types of
inventories (raw materials, work-in-process, and finished goods) are minimized.
The ultimate measure of success with JIT occurs when the processing cycle
efficiency ratio (that is, ratio of “value-added time” to “total cycle time”) equals 1.
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
Under many conventional manufacturing systems, goods are produced to a
production schedule that may not be directly tied to when customers require the
goods. All types of inventories are kept on hand in case unforeseen events
occur. Little attention is given to studying efficient and inefficient activities, and
materials movement, storage, rework, and waiting time are part of the
conventional work environment.
Financial benefits resulting from a shift to cellular manufacturing, just-in-time
production, or continuous quality improvements may include the following:
1. Increased sales because the short production cycle time enables a
company to win customers by cutting the delivery time.
2. Reduction in the number of workers needed to move materials from one
area to another, due to close proximity of manufacturing processes and
reduction in work-in-process inventory levels.
3. Reduced material waste because of reduced damage caused by materials
handling. Lower work-in-process inventory levels also reduce the potential
for products to become obsolete.
4. Reduced cost of storage because less space is used to store the reduced
work-in-process inventory.
5. Reduced clerical costs for keeping inventory records.
6. Reduced financing costs of inventories
The adoption of a JIT philosophy affects the organization’s management
accounting and control system in two primary ways:
1. To support the move to JIT, the accounting system needs to monitor
sources of process delay, error, and waste in operating processes.
2. Fewer resources are needed for clerical tracking and reporting of
inventories are needed
14-23 We might define total customer response time as the amount of time between
the time a customer places an order and the time when that order is received by
the customer. Manufacturing (production) cycle time can be defined as the
time-lapse between when the manufacturing department receives the order and
when the order is completed (i.e., when finished goods are created). (Note:
manufacturing cycle time is sometimes referred to as manufacturing lead time.)
As noted in the text, processing cycle efficiency (PCE) is a method of
assessing process efficiency, based on the relationship between actual
processing time and total production time. In formula form, we can define PCE
as:
PCE = processing time/total manufacturing time
PCE = processing time/(processing time + moving time + storage time
+ inspection time)
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
Alternatively, we can view PCE as the ratio of “value-added time” to the sum of
“value-added time” + “non-value-added time.” These terms are defined, and
viewed, from the perspective of the customer. That is, would the customer be
willing to pay for the indicated activities/time? Does the activity add value in the
eyes of the customer?
BRIEF EXERCISES
14-24 Budgeted (Pro-forma) Operating Profit = (cm/unit x #units) − FC
a. ($14/unit x 10,000 units) − $34,000 =
$106,000
b. ($14/unit x 15,000 units) − $34,000 =
$176,000
14-25 Total static (master) budget variance = actual operating income − static (master)
budget operating income
= ($180,000 − $54,000 − $50,000) − ($160,000 − $48,000 − $52,000)
=
$76,000 − $60,000
=
$16,000F
14-26 Sales volume variance = cm/unit x (actual sales volume - master budget sales
volume)
= ($24.00 − $12.00)/unit x (47,000 units − 50,000 units) = $36,000U
14-27 Sales price variance = actual sales volume x (actual − budgeted) selling price/unit
= AQ x (AP − SP)
= (0.95 x 10,000 units) x ($49.50 − $55.00)/unit
= 9,500 units x $5.50/unit
=
$52,250U
14-28 Total static (master) budget variance in operating profit = actual operating profit −
static (master) budget operating profit
= ($350,000 − $225,000 − $95,000) − ($400,000 − $250,000 − $100,000)
=
$30,000 − $50,000
=
$20,000U
Sales volume variance in operating income = flexible-budget operating income −
master budget operating income
=
$35,000 − $50,000
=
$15,000U
Flexible-budget variance = actual operating income − flexible-budget operating
income
14-8
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
=
$30,000 − $35,000
14-9
=
$5,000U
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-29 Direct materials usage (quantity) variance for PVC = Standard price/lb. x (actual lbs.
used – standard quantity of lbs. that should have been used, given the actual
output for the period)
=
=
=
=
SP x (AQ - SQ)
$40.00/lb. x (720 lbs. − [780 units x 1lb./unit])
$40.00/lb. x (720 lbs. − 780lbs.)
$40.00/lb. x 60lbs. = $2,400F
14-30 Purchase price variance for PVC = actual pounds purchased – (actual – standard)
price/lb.
= AQ x (AP − SP)
= 720 lbs. x ($41.00 − $40.00)/lb. = $720U
14-31 Flexible-budget variance for PVC = actual PVC cost for units produced – FB cost
= (actual price/lb. x actual lbs. used) – (actual output x standard #lbs./unit of
output x standard price/lb.)
= ($41.00/lb. x 720lbs.) – (780 units x 1lb./unit x $40/lb.)
= $29,520 − $31,200 = $1,680F
14-32 Direct labor efficiency variance = standard wage rate/hr. x (actual – standard) direct
labor hours = SP x (AQ − SQ)
= $8.00/hr. x (980 hrs. – [6,000 units x 1/6 hr./unit])
= $8.00/hr. x (980 hrs. – 1,000 hrs.) = $160F
14-33 Direct labor rate (price) variance = actual hours worked x (actual – standard) wage
rate/hr.
= AQ x (AP − SP)
= 980 hours x ($8.40/hr. − $8.00/hr.) = $392U
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
EXERCISES
14-34 Applicability of Standard Cost Systems (30-40 minutes)
1. The major advantages of using a standard cost accounting system include the
following:





Budgeting. Standard costs can be the building blocks for budget preparations
and allow the development of flexible budgets.
Performance evaluation. By comparing actual costs to standard costs, the
performance of the company, a department, or an individual can be evaluated.
Financial Control. An analysis of the variances between actual costs and
standard costs can identify problem areas and allow for remedial action.
Pricing. Standard costs based on carefully determined materials and labor usage
plus overhead rates based on normal activity levels form an acceptable basis for
pricing strategies that provide for full recovery of all costs.
Recordkeeping cost and effort. Standard costs reduce recordkeeping costs. For
example, subsidiary ledgers under a standard cost system need to be maintained
only in terms of physical quantities. As another example, standard costs greatly
simplify the operation of a process cost system: the standard costs represent the
costs per equivalent unit (i.e., these costs do not have to be calculated
separately using FIFO or the weighted-average method).
2. The setting of physical standards such as materials quantities, labor hours, machine
time, and set-up time generally requires information about materials, laborers,
equipment specifications, production procedures, and work flow; this information is
generated from studies conducted by technical personnel and/or from the production
expertise of line personnel. There must also be adequate cost and price information
to convert the physical standards into monetary terms. In addition, a firm’s cost
must be separable into cost per unit of production or hour of service, and the
production process must be fairly stable and predictable.
3. a. Because cash-maximization is important for a product classified as a cash cow,
efficiency of operations is essential. Standard costs provide targets for monitoring
costs and identifying inefficiencies so that such problems can be corrected.
Because a cash cow is a slow-growing established product, costs should be fairly
predictable and easy to track.
b. Because a product classified as a question mark is facing strong competition, the
ability to control product costs may be the difference between success and
failure. The efficiency gained from the application and monitoring of a standard
cost system could give the question mark a longer period of time to gain market
acceptance. The cost control afforded by standard cost allows a firm to be more
flexible in its pricing including the ability to price its question marks below similar
competitive products.
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-34 (Continued)
4. In an advanced manufacturing environment, characterized by the increased use of
technology in the manufacturing process and the existence of world-class
competitors, several important criticisms of standard cost systems have been raised
in the literature, including:






the use of such standards, as defined and used conventionally, does not
motivate continuous improvement (Kaizen), which could put the organization at a
competitive disadvantage.
conventional standard cost systems focus too much on direct labor, which for
some organizations is a minor part of total manufacturing cost.
products produced in this environment typically have shorter life cycles, which
mean that standard costs quickly become out-of-date.
the focus of conventional standard cost systems is primarily if not exclusively on
cost-reduction, which may not be strategically important to the organization (e.g.,
when the organization is pursuing a product-differentiation strategy in which
quality of output is of primary importance).
traditional standard costs, e.g. those for direct materials, are not comprehensive
enough (i.e., do not include the “cost of total ownership”).
many highly-automated manufacturing processes, based on advanced
manufacturing technologies, are highly reliable and consistent; in this case, the
incremental information to management from standard-cost variances can be
small.
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-35 Flexible Budget and Variances (45 minutes)
1. Flexible budget for June, at 90% of the master-budget level:
Units sold
Sales (90% x $800,000)
Variable expenses (90% x $450,000)
Contribution margin
Fixed expenses
Budgeted operating income
900
$720,000
405,000
$315,000
150,000
$165,000
2. Refer to text Exhibit 14.1 for master-budget data
a. Sales volume variance, in terms of operating income = flexible-budget
operating income – master (static) budget operating income
= $165,000 − $200,000 = $35,000U
or, budgeted cm/unit x (actual sales volume - master budget sales volume)
= $350/unit x (900 − 1,000) units = $35,000U
b. Sales volume variance, in terms of contribution margin = flexible-budget
contribution margin − master (static) budget contribution margin
= $315,000 − $350,000 =
$35,000U
or, budgeted cm/unit x (actual – master budget) sales volume
= $350/unit x (900 – 1,000) units = $35,000U
3.
Actual Operating Results
For the Month of June
Sales (900 x $840)
Total variable expenses
Contribution margin
Fixed expenses
Operating income
$756,000
414,000
$342,000
180,000
$162,000
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Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-35 (Continued)
a. Total flexible-budget variance = actual operating income − flexible-budget
operating income = $162,000 − $165,000 = $3,000U
b. Total variable cost flexible-budget variance = actual variable costs − flexiblebudget variable costs = $414,000 − $405,000 =
$9,000U
or, AQ x (AP − SP) = 900 units x ($460 − $450)/unit = $9,000U
c. Total fixed cost flexible-budget variance = actual fixed costs − flexible-budget fixed
costs = $180,000 − $150,000 = $30,000U
d. Selling price variance = actual sales revenue – flexible-budget sales revenue =
$756,000 − $720,000 = $36,000F
or, AQ x (AP − SP) = 900 units x ($840 − $800) =
$36,000F
NOTE: total flexible-budget variance ($3,000U) = selling price variance ($36,000F) +
total variable cost flexible-budget variance ($9,000U) + total fixed cost flexiblebudget variance ($30,000U).
The following presentation, similar to text Exhibit 14.4, might be useful for in-class
presentation purposes:
SCHMIDT MACHINERY COMPANY
Analysis of Operating Results
June 2010
Unit sales
Sales (900 x $840)
Total variable expenses
Contribution margin
Fixed expenses
Operating income
Actual
900
$756,000
414,000
$342,000
180,000
$162,000
Flexible
Budget
900
$720,000
405,000
$315,000
150,000
$165,000
Static (Master)
Budget
1,000
$800,000
450,000
$350,000
150,000
$200,000
Total Master (Static) Budget Variance
$38,000U
Flexible-budget
Variance
$3,000U
14-15
Sales Volume
Variance
$35,000U
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-36 Flexible Budget and Variances (30-45 minutes)
1.
Budget data:
Selling price
Variable cost
$48,000/12,000 units = $4.00 per unit
$18,000/12,000 units = $1.50 per unit
a. Flexible budget for 15,000 units
Sales
15,000 x $4.00 =
Variable costs
15,000 x $1.50 =
Contribution margin
Fixed costs
Operating income
$60,000
22,500
$37,500
16,000
$21,500
b. Contribution margin earned for the period:
$64,000 − $24,000 =
Flexible-budget contribution margin (see above)
=
Contribution margin flexible-budget variance
$40,000
37,500
$ 2,500F
c. Operating income flexible-budget variance:
$25,000 − $21,500 =
$3,500F
d. Sales volume variance, in terms of contribution margin:
$37,500 − ($48,000 − $18,000) =
$7,500F
e. Sales volume variance, in terms of operating income:
$21,500 − ($48,000 − $18,000 − $16,000) =
$7,500F
The following summary, similar to text Exhibit 14.4, may be helpful for in-class
presentation purposes:
Unit sales
Sales
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
15,000
$64,000
24,000
$40,000
15,000
$25,000
FlexibleBudget
Variance
-0$4,000F
1,500U
$2,500F
1,000F
$3,500F
14-16
Flexible
Budget
15,000
$60,000
22,500
$37,500
16,000
$21,500
Sales
Master
Volume
(Static)
Variance Budget
3,000F
12,000
$12,000F $48,000
$4,500U 18,000
$7,500F $30,000
0
16,000
$7,500F $14,000
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-36 (Continued)
2. As long as both the budgeted and the actual operations are within the “relevant
range,” the flexible budget for the actual operating level and the master budget
will have the same total fixed costs. Since both the flexible budget and the
master budget subtracted the same total fixed costs from the contribution margin
to arrive at operating income, the sales volume variance determined in terms of
contribution margin and in terms of operating income will be identical.
3. The actual fixed costs for a period are likely to differ from the budgeted amount.
As a result, the contribution margin flexible-budget variance is likely to differ from
the operating income flexible-budget variance. This difference is equal to the total
flexible-budget fixed cost variance for the period.
14-17
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-37 Flexible Budgets and Variance Analysis (45 minutes)
1.
FlexibleBudget
Actual Variance
3,800
-0-
Units
Sales
Variable costs:
Manufacturing
Selling & Admin.
Total variable costs
Contribution margin
Fixed costs:
Manufacturing
Selling & Admin.
Total fixed costs
Operating income
Sales
Flexible
Volume
Master
Budget
Variance
Budget
3,800
200U
4,000
$53,200
$3,800U
$57,000
1
$3,000U
$60,000
$19,000
7,700
$26,700
$26,500
$3,800U
100U
$3,900U
$7,700U
$15,200
7,600
$22,800
$34,200
2
$800F
400F
1,200F
$1,800U
$16,000
8,000
$24,000
$36,000
$16,000
10,000
$26,000
$ 500
$1,000U
1,000U
$2,000U
$9,700U
$15,000
9,000
$24,000
$10,200
-0$1,800U
$15,000
9,000
$24,000
$12,000
3
1
Budgeted selling price per unit x number of units sold
= ($60,000/4,000) x 3,800 units
= $15 per unit x 3,800 units = $57,000
2
Standard variable manufacturing cost per unit x number of units sold
= ($16,000/4,000) x 3,800 units
= $4 variable manufacturing cost per unit x 3,800 units = $15,200
3
Standard variable selling and administrative expense per unit x number of units
= ($8,000/4,000) x 3,800 units
= $2 per unit x 3,800 units = $7,600
Sales volume variances
In terms of contribution margin:
In terms of operating income:
$34,200 − $36,000 =
$10,200 − $12,000 =
$1,800U
$1,800U
Flexible-budget variances
Contribution margin:
Operating income:
$26,500 − $34,200 =
$500 − $10,200 =
$7,700U
$9,700U
14-18
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-37 (continued)
2. The company reduced its selling price (from $15 per unit to $14 per unit) to
compete in the market, suggesting the pursuit of a cost-leadership, not a
differentiation, competitive strategy for the product. However, the company failed to
exercise proper control of its operating costs, as indicated by unfavorable variances
for manufacturing and for selling and administrative costs. The excess costs reduced
the flexible-budget operating income of the period by 95 percent. Unless the
company can get its costs under control, it will likely not be able to compete
successfully as a cost leader or low-cost producer.
The company has unfavorable selling price and sales-volume variances. Even
though the company reduced its selling price, it failed to attain the budgeted sales
volume. The strategy of competing through reduced selling prices to gain sales has
apparently failed.
3. An Excel spreadsheet solution file is embedded below. You can open this “object” by
doing the following:
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return
to...” while you are in the spreadsheet mode. The screen should then
return you to this Word document.
14-37: Flexible Budgets and Variance Analysis
Input Area
Item
Units sold
Sales revenue
Variable manufacturing costs
Variable selling & administrative costs
Fixed manufacturing costs
Actual
Results
3,800
$ 53,200
$ 19,000
$ 7,700
$ 16,000
14-19
Master
Budget
4,000
$ 60,000
$ 16,000
$
8,000
$ 15,000
Actual
Per
Unit
$ 14.00
$ 5.00
$ 2.03
Budgeted
Per
Unit
$
$
$
15.00
4.00
2.00
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-38 Direct Materials and Direct Labor Variances (20-30 minutes)
Note: Refer to Exhibit 14.4 for standard cost information.
1. Purchase price variance–Aluminum:
Total lbs. aluminum purchased = lbs. used + ending inventory −
beginning inventory = 3,375 + 25 − 50 = 3,350 pounds
Purchase price variance = ($30 - $25)/lb. x 3,350 lbs. = $16,750U
Usage (quantity) variance–Aluminum:
Standard lbs. of aluminum allowed for the units manufactured:
= 900 units x 4 pounds per unit = 3,600 pounds
Usage variance: (3,375 − 3,600) lbs. x $25/lb. = $5,625F
The following diagram, similar to text Exhibit 14.11, may be useful for in-class
presentation purposes.
(1)
Actual Purchases
at Actual Cost
(AQ) x (AP)
(3,350 lbs. x $30/lb.)
(2)
Actual Purchases
at Standard Cost
(AQ) x (SP)
(3,350 lbs. x $25/lb.)
Purchase Price Variance = (1) – (2)
= $16,750U
Actual Usage
at Standard Cost
(AQ) x (SP)
(3,375 lbs. x $25/lb.)
(3)
Flexible-Budget
Amount
(SQ) x (SP)
(3,600 lbs. x $25/lb.)
Usage Variance = (2) – (3)
= $5,625F
14-20
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-38 (Continued)
2. Direct labor rate variance: ($42 − $40)/hr. x 4,200 hrs. = $8,400U
Direct labor efficiency variance:
Standard direct labor hours allowed for the units manufactured:
900 units x 5 hours/unit = 4,500 hours
Efficiency variance: (4,200 − 4,500) hrs. x $40/hr. = $12,000F
The following diagram, similar to text Exhibit 14.7, may be useful for in-class
presentation purposes:
(1)
Actual Input Cost
(AQ) x (AP)
(4,200 hrs. x $42/hr.)
(2)
Actual Input
at Standard Cost
(AQ) x (SP)
(4,200 hrs. x $40/hr.)
Price (Rate) Variance = (1) - (2)
= $8,400U
Quantity (Efficiency)
Variance = (2) - (3)
= $12,000F
Total Flexible-Budget Variance = (1) - (3)
= $176,400 - $180,000 = $3,600F
14-21
(3)
Flexible-budget
Amount
(SQ) x (SP)
(4,500 hrs. x $40/hr.)
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-39 Journal Entries (10-15 minutes)
Oct. 7
Materials Inventory (720 lbs. x $40/lb.)
Materials Purchase-Price Variance—PVC (720 lbs. x $1/lb.)
$28,800
$720
Accounts Payable (720 lbs. x $41/lb.)
$29,520
Purchased 720 pounds of PVC at $41/lb.; standard price = $40/lb.
Oct. 9
Work-in-Process Inventory (780 units x $40/unit)
Materials Usage Variance—PVC
Materials Inventory (720 lbs. x $40/lb.)
$31,200
$2,400
$28,800
Issued 720 pounds of PVC for the production of 780 units of XV-1. Standard
usage is 1 lb. per unit of XV-1, at $40 per pound.
14-22
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-40 Materials Variances—Working Backwards (20-25 minutes)
Actual Purchases
at Actual Cost
(AQ) x (AP)
40,000 lbs. x AP
= $120,000
Actual Purchases
at Standard Cost
(AQ) x (SP)
40,000 lbs. x $3.50/lb.
= $140,000
Purchase Price Variance?
Actual Usage at
Standard Cost
(AQ) x (SP)
Flexible-Budget
Amount
(SQ) x (SP)
38,000 lbs. x $3.50/lb.
SQ x $3.50/lb.
$6,500 U
Usage Variance
1. Purchase price per pound for direct materials:
$120,000 ÷ 40,000 lbs. = $3.00 per lb.
2. Total actual cost of direct materials purchased
$120,000
Total direct materials purchased (pounds)
Standard cost per pound of direct materials
40,000
x
3.50
Total standard cost of direct materials purchased
Direct materials purchase-price variance
3. Total direct materials used at standard cost = 38,000 x $3.50 =
140,000
$ 20,000F
$133,000
Less: unfavorable direct materials usage variance
–
Standard DM cost for the units manufactured =
$126,500
÷
Standard cost per lb. of direct material
Total standard quantity of DM for the units manufactured =
14-23
6,500
$3.50
36,143 lbs.
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-41 Behavioral Considerations (30-40 minutes)
1. Managerial time can be considered a scare resource. Time spent in terms of
securing operational control detracts from time spent dealing with issues of a more
strategic (or long-term) nature. For this reason, many managers embrace a
managerial philosophy known as “management by exception.” When variances
(e.g., labor cost variances) are considered immaterial, no intervention on the part
of management is required: the underlying system is considered to be “in control.”
When the variances are considered “large” or “material,” some kind of intervention
on the part of management is suggested. In short, therefore, timely reporting of
standard cost variances allow managers to take corrective action before costs (and
the underlying system) get out of control. A breakdown (decomposition) of
variances directs management’s attention to the underlying source of any
operating problems. Assuming standards are “internalized,” they may properly
motivate employees to work more efficiently, an important element of “control.”
2. A standard cost system can have a negative impact on worker motivation if the
standards are too “loose” (i.e., too easily attainable) or too “tight” (i.e., too difficult
to attain). In the former case, the standards tend to reduce productivity; in the latter
case, in the extreme, employees simply ignore the standards—that is, they do not
“internalize” the standards as legitimate goals. Some research in management
control systems suggests that if standards are set without worker input the
standards will not be accepted as realistic by these workers. Finally, standards
should not, as in the case of Chen, Inc., be used to assign “blame.” Rather, they
should be used positively to motivate continual operating improvements.
3. The purpose of this question is to get students to think about the strategic role of
standard costs and flexible budgets in a comprehensive management accounting
and control system. In this regard, students should think about both the costs and
benefits of using these elements of a traditional financial control mechanism.
Finally, the question should expose students to some of the current controversies
surrounding the use of standard costs and flexible budgets in “the new
manufacturing environment.” As such, students (particularly undergraduate
students) will come to realize that cost-system design is a challenging and dynamic
issue. Resolution of this issue is one specific area where the management
accountant can add value to his/her organization.
Criticisms/Limitations of Conventional Standard Cost Variance Analysis
1. Variances are too aggregated and concentrate on consequences rather than
the causes of problems. This criticism, in fact, gets to the heart of the issue:
whether traditional standard cost variance analysis provides useful information
for operational control purposes.
14-24
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
2. Traditional standard cost variance reports are too late to be useful. In order to
take prompt managerial action, accounting information should be timely. Due to
the use of modern scanning technologies, manufacturers can now monitor in
14-41 (Continued-1)
3.
4.
5.
6.
7.
8.
real time the consumption of resources (e.g., labor and materials). Traditional
standard cost systems provide variance information only infrequently, e.g., at
the end of each month. Thus, the relevance of this information can be called
into question.
Standard costing systems tend to focus too heavily on cost minimization. For
companies competing on the basis of cost (i.e., those pursuing a costleadership strategy) this may be appropriate. However, for those companies
pursuing a differentiation strategy, an overemphasis on short-term cost control
can be dysfunctional.
Standard costing systems take a departmental perspective rather than a
process perspective. The point here is that traditional standard costing systems
are not “integrated.” As such, each department or cost center tends to focus on
maximimizing its own position (variances) regardless of the attendant affect on
the operating performance of other segments of the organization. This problem
can be viewed either as one of goal congruency or of local vs. global
optimization.
Too much emphasis is placed on the cost and efficiency of direct labor.
Traditional systems focus on the analysis of labor and material cost variances,
in spite of the fact that labor, as a percentage of total manufacturing cost, is
relatively small for many manufacturers. Further, in many situations today labor
is essentially a short-term fixed cost.
JIT Manufacturing: JIT is a strategy that requires continuous working to improve
quality and reduce costs. Some question whether traditional standard cost
systems motivate continuous improvement that is at the heart of a JIT system.
These individuals suggest, as an alternative to traditional standard costs, the
use of Kaizen costing or the use of rolling average of actual costs.
Standard costs become outdated quickly due to shorter product life cycles.
Some critics maintain that the use of standard costs and variances (via flexible
budgets) is misplaced in terms of securing operational control. These critics
maintain that operating personnel perform or participate in one or more
business processes, such as those described in this chapter. As such, the
focus should be on the use of non-financial performance indicators associated
with key objectives specified for each business process. The theory here is that
if operating personnel take care of these processes, guided by relevant nonfinancial performance metrics, the financial results will “take care of
themselves.”
14-25
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
Benefits/Advantages of Using a Standard Cost System
1. Provides a good basis for cost comparisons. To the extent that “cost” is a
critical variable on which the organization competes, a standard cost system
with associated variances (based on flexible budgets) can be a useful
component of an organization’s overall management accounting and control
system.
14-41 (Continued-2)
2. Enables managers to use management by exception. As noted above, a
standard cost system can be viewed as a “diagnostic control system,” which
monitors itself and therefore frees management to attend to more strategic
issues confronting the organization.
3. Provides a basis for performance evaluation and determining bonuses. Again,
the key here is that managers who decide to use standard costs and variances
for performance evaluation purposes recognize the limitations and criticisms of
traditional standard cost systems. That is, it is important for such users to
address or be cognizant of these limitations—and that they use such systems
“intelligently.”
4. As noted above, participation in setting standards and assigning responsibility
can have motivational effects on employees.
5. Standard costs can be used for external reporting purposes (as long as such
standards do not deviate significantly from actual costs).
14-26
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-42 Direct Materials Variances—Journal Entries (20-25 minutes)
1. Determination of variances for March:
Actual Purchases
at Actual Cost
(AQ) x (AP)
Actual Purchases
at Standard Cost
(AQ) x (SP)
(AQ) x $7.50/lb.
=?
(AQ) x $7.25/lb.
=?
Purchase-Price Variance = ?
Actual Usage at
Standard Cost
(AQ) x (SP)
Flexible-Budget
Amount
(SQ) x (SP)
2,300 lbs. x $7.25/lb.
= $16,675
2,100 lbs. x $7.25/lb.
= $15,225
Usage Variance = ?
Pounds of direct materials purchased = pounds used − decrease in ending inventory
= 2,300 − 100 = 2,200 lbs.
a. Direct materials purchase-price variance:
($7.50 − $7.25)/lb. x 2,200 lbs. =
$550U
b. Direct materials usage variance:
(2,300 − 2,100) lbs. x $7.25/lb. = $1,450U
2. Journal entries:
Materials Inventory
Purchase-Price Variance
Accounts Payable
$15,950
$ 550
$16,500
To record the cost of purchases during the month; standard cost per pound =
$7.25; actual cost per pound = $7.50.
14-27
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-42 (Continued)
WIP Inventory
Materials Usage Variance
Materials Inventory
$15,225
$1,450
$16,675
To record the standard direct materials cost for this period’s production.
14-28
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-43
Determining Standard Direct
Materials Cost (10-15 minutes)
Standard direct material cost per bag of Insect-Be-Gone
Total direct materials per unit of output =
60 lbs.
Divided by: Proportion of direct materials inputs remaining
in one unit of finished product = (1 − evaporation rate) =
75%
Total standard quantity of DM inputs/unit of output
Purchase price per pound
80 lbs.
x $2.50/lb.
Total DM cost/bag of output prior to purchase discount
Less: Purchase discount = 2% x $200 =
Standard direct material cost per bag of output =
14-29
$200.00
4.00
$196.00
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-44 Determining Standard Direct Materials Cost (5-10 minutes)
Total lbs. of Natura per package of SS-2
Standard purchase price per pound of Natura
Total purchase price before purchase discount
Purchase discount (3% x $60.00)
12 lbs.
x $5.00
$60.00
1.80
Standard direct material cost per package of SS-2
14-30
$58.20
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-45 Master (Static) Budget Variance and Components (45 minutes)
1. Actual operating income = actual sales revenue − actual variable costs − actual
fixed costs = $390,000 − $220,000 − $140,000 = $30,000
2. Master (static) budget operating income = budgeted sales − budgeted variable
costs − budgeted fixed costs = $450,000 − $270,000 − $138,000 = $42,000
3. Total master (static) budget variance, in terms of operating income = actual
operating income − master budget operating income = $30,000 − $42,000 =
$12,000U (because actual income < budgeted income, we label this variance as
“unfavorable”)
4. The first-level decomposition of the total master (static) budget variance in
operating income is accomplished through the introduction of a flexible-budget
(based on actual sales volume for the period). In this case, the flexible-budget
operating income = $400,000 − $240,000 − $138,000 = $22,000. Thus:
a) Total flexible-budget variance = actual operating income − flexible-budget
operating income = $30,000 − $22,000 = $8,000F
b) Sales volume variance, in terms of operating income = flexible-budget
operating income − master budget operating income = $22,000 − $42,000 =
$20,000U.
c) Total flexible-budget variance + Sales volume variance = master budget
variance = $12,000U
14-31
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-45 (Continued)
In tabular form, we have:
Unit sales
Sales
Total variable expenses
Contribution margin
Fixed expenses
Operating income
Actual
Results
Flexible
Budget
Master
Budget
40,000
$390,000
220,000
$170,000
140,000
$30,000
40,000
$400,000
240,000
$160,000
138,000
$22,000
45,000
$450,000
270,000
$180,000
138,000
$42,000
Total Master (Static) Budget Variance
$12,000U
Flexible-Budget
Variance
Sales Volume
Variance
$8,000F
$20,000U
5. The sales volume variance represents the impact on operating profit of selling a
different volume of sales compared to the budgeted volume reflected in the
master budget. As such, the calculation of the variance holds three other factors
constant: selling price per unit, variable cost per unit, and total fixed costs. Note
that this variance can be defined in terms of contribution margin, in which case
the calculation looks at the impact on contribution margin of selling an amount
different from the sales volume reflected in the master budget for the period.
The flexible-budget variance represents the composite effect on operating
income of changes in three factors: selling price per unit, variable cost per unit,
and total fixed costs. Thus, in calculating the flexible-budget variance we “hold
constant” sales volume.
14-32
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-46 Financial versus Operational Control; Behavioral Considerations in the
Standard-Setting Process (20 minutes)
As indicated in the text, we use the term “management accounting and control
system” to refer to the entire set of procedures and systems used by an organization
to monitor activities and guide actions in support of the overall goals and objectives
of the organization. As such, a comprehensive management accounting and control
system contains both a planning component (e.g., operational and financial budgets
covered in Chapter 10) and a feedback/assessment component (covered in Part
Four of the text).
While terminology may differ across textbooks and organizations, one useful way to
conceptualize feedback/performance evaluation systems is to view such systems as
consisting of two primary components: a financial control system and an operational
control system. The goal of the former system is to monitor financial results to
determine whether the organization is on-track in terms of its specified financial
goals. The goal of the latter system is to monitor nonfinancial performance indicators
associated with the operating factors considered critical to the organization for
achieving a competitive advantage.
One dimension of a financial control system is the use of flexible-budgets, standard
costs, and variance analysis—covered in Chapters 14, 15, and 16 of the text. In
essence, such procedures assess both effectiveness (e.g., did we attain budgeted
operating profits or budgeted sales volume for the period) and efficiency aspects of
financial performance (e.g., whether the purchasing department secured a favorable
price for materials purchased for production, or whether the organization used labor
resources effectively during the period). As indicated in Chapter 14, all purely
variable costs can be decomposed into a price variance component and an
efficiency (quantity) variance component.
No management accounting and control system is good or bad per se. Each is
judged, at least conceptually, by comparing costs and benefits. Among the more
important considerations are behavioral considerations. For example, one
consideration relates to the standard-setting process. Should standards be imposed
(authoritative), should employees whose performance will be judged develop the
standards (participative), or should the organization use a consultative process in
developing such standards?
14-33
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-47 Journal Entries Under Standard Costing (20 minutes)
a. Materials Inventory
Materials Purchase-Price Variance
Accounts Payable
b.
c.
d.
e.
WIP Inventory
Materials Quantity (Usage) Variance
Materials Inventory
$20,000
200
$20,200
$9,750
250
$10,000
WIP Inventory
Direct Labor Efficiency Variance
Direct Labor Rate Variance
Wages Payable (Accrued Payroll)
$22,000
$5,500
Finished Goods Inventory
WIP Inventory
$32,000
CGS ($32/unit x 900 units)
Finished Goods Inventory
$28,800
Accounts Receivable ($50/unit x 900 units)
Sales
$45,000
$2,500
$25,000
$32,000
$28,800
$45,000
Note to Instructor: An Excel file solution is embedded below. You can open this
“object” by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return
to...” while you are in the spreadsheet mode. The screen should then
return you to this Word document.
14-47: Standard Costing and Journal Entries
Inputs
Standards
Direct materials (lbs.) per unit of output =
Direct materials cost per pound =
14-34
2
$5.00
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-48
Standard Labor Rate and Labor Efficiency Variance (15 minutes)
Actual Inputs
at Actual Cost
(AQ) x (AP)
Actual Inputs
at Standard Cost
(AQ) x (SP)
11,000 hrs. x $30.00/hr.
= $330,000
11,000 hrs. x (SP)
= ?
$33,000F
12,000 hrs. x (SP)
= ?
?
Labor Rate Variance
1.
Flexible-Budget
Amount
(SQ) x (SP)
Labor Efficiency Variance
Total actual direct labor hours worked
11,000
Actual hourly rate
x
$30.00
Total actual total direct labor cost
$330,000
Plus: Favorable direct labor rate variance
+
Total actual direct labor hours at standard hourly rate
$363,000
÷
Total actual direct labor hours worked
Standard direct labor rate per hour
33,000
11,000
$33.00
2. Direct labor efficiency variance = actual hours at standard cost − standard labor
cost for units produced = [(AQ) x (SP)] − [(SQ) x (SP)] =
[11,000 hrs. x $33/hour] − [12,000 hrs. x $33/hr.] = $33,000F
or, = (AQ − SQ) x SP
= (11,000 − 12,000) hrs. x $33.00/hr.
14-35
= $33,000F
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-49 Basic Analysis of Direct Labor Variances (20-25 minutes)
1.
Actual Quantity
at Standard Price
(AQ) x (SP)
Actual Labor Cost
(AQ) x (AP)
Actual Hrs.
Worked x Actual
Wage Rate/Hr.
Actual Hrs.
Worked x Std.
Wage Rate/Hr.
5,800 hrs. x $27.50/hr.
= $159,500
5,800 hrs. x $25/hr.
= $145,000
Labor Rate Variance
$14,500U
Flexible Budget (FB)
Based on Outputs
(SQ) x (SP)
Std. Hrs.
Allowed x Std.
Wage Rate/Hr.
(1,200 x 5) hrs. x $25/hr.
= $150,000
Labor Efficiency Variance
$5,000F
Recap: Labor rate variance = AQ x (AP − SP) = 5,800 hrs. x ($27.50 −
$25.00)/hr.
= $14,500U
Labor efficiency variance = SP x (AQ − SQ)
= $25.00/hr. x (5,800 hrs. − 6,000 hrs.) = $5,000F
2. The unfavorable rate variance arises because the actual labor rate per hour,
$159,500 ÷ 5,800 hrs. = $27.50/hr., exceeds the budgeted rate of $25.00/hr. by
10%. The reasons for this unfavorable variance could include the hiring of more
skilled workers than planned, an unexpected labor rate increase negotiated with a
trade union, or the initial $25 standard being set without a careful analysis.
The $5,000 favorable labor efficiency variance could be due to the hiring of more
skilled workers, above-expected productivity by existing workers due to a plant
layout change, or the initial standard of 5 hours per dinette being set without
conducting a careful analysis.
14-36
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-50 Control of Operating Processes/Non-financial Performance Indicators (30-40
minutes)
1. Organizations engage in a variety of processes in order to deliver the stated value
proposition to its targeted customers and in order to achieve its stated financial
objectives. These processes, for expository purposes, might be grouped into the
following: (a) operating processes, (b) customer-management processes, (c) growth
and innovation processes, and (d) social and regulatory processes.
Operating processes might be defined as what the organization does, on a day-today basis, to produce and deliver to customers its outputs (services and/or products).
Thus, operating processes include activities such as: acquiring raw materials from
supplier firms; producing finished goods and services; and, distributing the finished
product to customers. Customer-management processes relate to activities designed to
strengthen and expand relationships with the organization’s targeted customers. More
specifically, customer-management processes included the following activities:
customer selection (i.e., specification of targeted customers), customer acquisition
(everything from generate leads to closing the sale), customer retention (e.g., through
the use of customer-service units and call centers), and customer growth (e.g., through
cross-selling activities). Growth and innovation processes relate to the development of
new products, services, and processes that allow the firm to penetrate new markets or
market segments. (Without growth and innovation, the firm risks losing its competitive
advantage.) Growth and innovation processes might be further subdivided into the
following four categories: (1) identifying opportunities for new products and services—
that is, generating new ideas; (2) managing the organization’s R&D portfolio; (3)
designing and developing new products and services—the core of product
development; and, (4) bringing new products and services to market. Social and
regulatory processes relate to the interaction between the organization and the
environment (legal, social, and regulatory) in which the organization operates. Specific
activities in this category relate to environmental management, health & safety,
employment practices, and investment in the community.
2. The following are examples of possible objectives and associated performance
indicators for two operating processes: production, and distribution.
Production Process
(1) Achieve Reduction in the Cost of Outputs (Products and/or Services)
•
•
•
Activity-based costs of key operating processes
Cost per unit of output
Operating Costs (Selling, General, and Administrative) as % of total costs
14-37
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
(2) Achieve Continuous Improvement in Key Processes
•
% of processes with improvements
14-50 (Continued-1)
•
•
•
•
•
•
•
•
Total Cost of Quality (COQ), over time
Ratio of Prevention + Appraisal Costs to Internal + External Failure Costs
Total Cost of Quality (COQ), as a percentage of:
o Sales Revenue
o Total Costs
Part-Per-Million (ppm) Defect Rate
% First-Pass Yield
Machine Uptime
% Yield (Ratio of Good Outputs to Resource Inputs, for example)
Total Scrap and Waste Produced Each Period
(3) Increase the Responsiveness of the Manufacturing Process
•
•
•
Process Cycle Efficiency (PCE) (i.e., ratio of value-added time to total
time; ratio of processing [manufacturing] time to total cycle time)
Cycle Time (total time, measured from time production begins to point of
product completion)
Processing (Manufacturing) Time (i.e., time actually used for processing; it
excludes “non-value-added” time such as wait time, movement, and setup time)
(4) Improve the Utilization of Capital (Fixed) Assets
•
•
•
•
•
Number and % of machine breakdowns
Manufacturing Flexibility (e.g., number of products or services that the
facility in question can produce and deliver to customers)
Percentage Capacity Utilization (or, conversely, Amount of Idle Capacity)
Machine Uptime/Availability for Production
Inventory Turnover
14-38
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
Distribution Process
Reduce Cost of Servicing Customers
•
•
Activity-based costs associated with key activities (e.g., storage and
delivery to customers)
% of customers in low-cost-to-serve channels (e.g., electronic ordering or
web-based ordering, versus manual or telephone options)
Improve Delivery Process
•
•
% of on-time deliveries
time interval between completion of product/service and installation/use by
the customer
• lead time, from placement of orders to delivery of product/service
14-50 (Continued-2)
Enhance Quality of the Distribution Process
•
•
•
% of items delivered on or before schedule
% of deliveries with no (zero) defective items
number and frequency of customer complaints
14-39
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-51 Process Cycle Efficiency (PCE) and JIT (45-50 minutes)
1. In a JIT system, a good or service is produced or delivered only when a customer
requires it. JIT production requires a product layout with a continuous flow once
production starts. Underlying the JIT system is a continuous improvement philosophy
of eliminating or reducing delay, error, and waste, such as materials movement,
storage, rework, and waiting time. In a typical JIT system, all types of inventories (raw
materials, work-in-process, and finished goods) are minimized.
In such an environment, management might anticipate the following benefits, both
financial and non-financial in nature:
(a) Reduction in inventory-holding costs, both out-of-pockets (e.g., insurance,
property taxes, obsolescence, storage costs) and opportunity costs (financing costs
associated with inventory holdings)
(b) Reduction in inventory-tracking and clerical costs (i.e., labor cost savings)
(c) Significant improvements in output quality (i.e., reductions in internal and external
failure costs and improvements in non-financial indicators, such as defect rates,
waste, spoilage, cycle time efficiency, and customer response times)
(d) Increased sales because reductions in production cycle time enable a company to
win customers by cutting the delivery time.
(e) Reduction in the number of workers needed to move materials from one area to
another (including moving materials into and out of storage), due to close proximity of
manufacturing processes and reduction in work-in-process (WIP) inventory levels.
To achieve the afore-mentioned benefits, management might anticipate the following
costs associated with the implementation of a JIT manufacturing approach:
(a) Process reorganization costs—plant layout(s) would likely need to be reconfigured
to accommodate the smooth and efficient processing of outputs (out-of-pocket costs
associated with moving and reinstalling machinery, plus the purchase cost of new
machinery and equipment, can be significant “start-up” costs associated with a new
factory layout)
(b) Worker education/training costs—at the heart of a successful JIT system is a
knowledgeable and well-trained workforce: these individuals are expected to carry out
production activities using the highest standards of quality
14-40
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
(c) Revision of Management Accounting System: the organization’s management
accounting and control system would most likely have to be revised to help support
the move to JIT manufacturing. That is, the accounting system should monitor,
identify, and report to management sources of manufacturing process delay, waste,
and inefficiency. Some examples of relevant performance indicators in a JIT
environment include the following: cycle times, defect rates, order accuracy, actual
14-51 (Continued-1)
production as a percentage of planned production, actual machine time available
relative to planned machine time available, % first-pass yield, defect rates, and partsper-million (ppm) defects.
2. It is not clear that this question has a clear-cut answer. On the one hand, the cost
savings associated with the implementation of a JIT system (see answer to question
1, above) suggest that companies competing on the basis of cost (i.e., low-cost
producer) would benefit most from such a system. On the other hand, it is clear that
improvements in quality and customer response time, both of which are typically
associated with JIT manufacturing, could be key differentiators for a company. That
is, companies that compete on the basis of time and/or quality may benefit most from
the introduction of a JIT system. This may be one case where such a system
provides benefits to most if not all companies.
3. The term “processing time” refers to actual production time (i.e., time expended for
the product to be made). Excluded from this measure are “non-value-added” times
associated with moving, storing, or inspecting the product. A measure of processing
time efficiency is called “processing cycle efficiency (PCE),” which is defined as
follows:
PCE = “Value-Added Time”/“Total Manufacturing Cycle Time”
or,
PCE = Processing Time/(Processing Time + Moving Time + Storage Time +
Inspection Time)
Processing Cycle Efficiency (PCE), Pre-JIT:
PCE = 2 hrs./(2 hrs. + 3 hrs. + 40/60 hr. + 75/60 hr.)
= 2/(2 + 3 + 0.6667 + 1.25)
= 2/6.9167 = 29%
(alternatively, 120 minutes/238 minutes = 29%)
Processing Cycle Efficiency (PCE), Post-JIT Implementation:
PCE = 1.25 hrs./(1.25 hrs. + 1.00 hr. + 08/60 hr. + 20/60 hr.)
= 1.25/(1.25 + 1.00 + 0.133 + 0.333)
14-41
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
= 1.25/2.7163 = 46%
(alternatively, 46% = 75 minutes/164 minutes)
14-51 (Continued-2)
Percentage Improvement, Pre- versus Post-JIT Implementation:
% change = (0.46 − 0. 29)/0.29 = 58.6%
Note that the maximum value for PCE is 1.00. In this situation, total cycle time =
value-added time.
4. The purpose of this question is to have students think about the difference between
an internal and an external perspective when developing appropriate performance
indicators (metrics). In the case at hand, the terms “value-added” and “non-valueadded” are defined from the perspective of the customer (i.e., an external perspective
is taken). We note here that these terms are derived from the literature of activitybased costing (ABC). We note, too, that because the perspective is external, the
notions of value-added vs. non-value-added are not strictly or uniquely defined. The
key question in classifying activities is whether the consumer would “pay” for the
activity. This is one way to operationalize the two terms.
14-42
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-52 JIT and Process Cycle Time Efficiency (PCE) (45-50 minutes)
1. The terms “value-added” and “non-value-added” are defined from the perspective of
the customer (i.e., an external perspective is taken). Because the perspective is
external, the notions of “value-added” vs. “non-value-added” are not strictly or
uniquely defined. The key question in classifying activities is whether the consumer
would “pay” for the activity. This is one way to operationalize the two terms. We note
here in passing that these terms are derived from the literature of activity-based
costing (ABC). The purpose of this part of question #1 is to have students think about
the difference between an internal and an external perspective when developing
appropriate performance indicators (metrics).
With an understanding of the terms “value-added” and “non-value-added,” the
student is now in a position to understand the notion of “processing cycle efficiency
(PCE).” The term “processing time” or processing cycle time refers to actual
production time (i.e., time expended for the product to be made). Excluded from this
measure are “non-value-added” times associated with moving, storing, or inspecting
the product. A measure of processing time efficiency is called “processing cycle
efficiency (PCE),” which is defined as follows:
PCE = “Value-Added Time”/“Total Manufacturing Cycle Time”
or,
PCE = Processing Time/(Processing Time + Moving Time + Storage Time +
Inspection Time)
2. Cycle time is the total time required from the start of production to completion of
outputs. Process (or processing or manufacturing) time represents the time actually
required for processing. As such, process time excludes waiting time, storage time,
moving time, set-up time, and inspection time, all of which can be considered “nonvalue-added” from the standpoint of the customer.
As shown in text Exhibit 14-14, we might begin by defining Customer Response Time
(CRT), as the difference between when a customer places an order and when the
customer actually receives the order. This total lapse of time can be broken down into
the following three components: receipt time (time between when manufacturing
receives an order and the time the customer placed that order), manufacturing lead
(cycle) time (time between when an order is received by manufacturing and the time
that order is completed), and delivery time (time between when an order is completed
and when that order is received by the customer). As shown in Exhibit 14-14, we
might further break-down manufacturing lead (cycle) time into waiting time and
manufacturing (or, production cycle) time. Finally, manufacturing time can be
decomposed into the elements reflected above in the formula for PCE.
14-43
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-52 (Continued)
3. Processing Cycle Efficiency (PCE), Pre-JIT:
PCE = 1.0 hr./(1.0 hr. + 1.0 hr. + 0.50 hr. + 0.75 hr.)
= 1.0/3.25
= 30.77%
Alternatively, 60 minutes/195 minutes = 30.77%.
Processing Cycle Efficiency (PCE), Post-JIT Implementation:
PCE = 0.50 hr./(0.50 hr. + 20/60 hr. + 15/60 hr. + 15/60 hr.)
= 0.50/(0.50 + 0.333 + 0.25 + 0.25)
= 0.50/1.3333 = 37.50%
Alternatively, 30 minutes/80 minutes = 37.50%.
4. Percentage Improvement, Pre-JIT versus Post-JIT Implementation:
% change = (0.375 − 0.3077)/0.3077 = 22% (actual amount is 21.87%)
5. The move to a JIT manufacturing process should be accompanied by improvements
in quality, reductions in waste and inefficiencies, reduction in inventories held,
improvements in cycle times (and customer response time, CRT), and, perhaps,
increases in sales. These expectations suggest the following non-financial
performance indicators be monitored and reported to management by the
organization’s management accounting and control system:
Supplier-Related Measures
• lead time from placement of order (for raw materials) and receipt of such
materials from the supplier
• on-time delivery percentage
• % of orders delivered by suppliers directly to the production process
• % of defects, incoming orders (supplies, materials, and subassemblies)
• % of suppliers that are certified (i.e., who are qualified to deliver without
incoming inspections)
Production-Related Measures
•
•
•
•
parts-per-million (ppm) defect rates
scrap and waste percentage
% first-pass yield
inventory turnover rates
14-44
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
• machine uptime
14-52 (Continued)
•
•
% capacity utilization (i.e., managing the supply of resource capacity)
actual production as % of planned production
Distribution Activities
•
•
•
•
•
% of items delivered with no (zero) defects
number and frequency of customer complaints
% on-time delivery
lead time from placement of order to delivery
delivery time (i.e., time from completion of production to delivery to
customer)
14-45
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-53 Generating a Flexible Budget (45-50 minutes)
1. Flexible Budget, sales volume = 42,000 units
Sales (42,000 units)
$1,344,000
Less: Cost of Goods Sold:
Direct materials
Direct labor
Manufacturing overhead:
Variable (40% x $378,000)
Fixed [$240,000 − (40% x $450,000)]
Gross profit
Less: Operating expenses:
Selling expenses:
Sales commissions [$1,344,000 x ($160,000 ÷
$1,600,000)]
Rent
Insurance
General expenses:
Salaries
Rent
Depreciation
Operating profit
$126,000
378,000
151,200
60,000
$715,200
$628,800
$134,400
40,000
30,000
92,000
77,000
51,000
$424,400
$204,400
Note to Instructor: An Excel file solution for Part 1 and Part 2 of assignment 14-53
is embedded below. You can open this “object” by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return
to...” while you are in the spreadsheet mode. The screen should then
return you to this Word document.
14-53: Preparing a Flexible Budget
Inputs
Planned sales volume
Budgeted Sales Revenue
50,000 units
$ 1,600,000
14-46
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-53 (Continued)
2. Flexible budget, sales volume = 52,000 units
Sales (52,000 units)
$1,664,000
Less: Cost of Goods Sold:
Direct materials
Direct labor
Manufacturing overhead:
Variable (40% x $468,000)
Fixed [$240,000 − (40% x $450,000)]
Gross profit
Less: Operating expenses:
Selling expenses:
Sales commissions [$1,664,000 x ($160,000 ÷
$1,600,000)]
Rent
Insurance
General expenses:
Salaries
Rent
Depreciation
Operating profit
$156,000
468,000
187,200
60,000
$871,200
$792,800
$166,400
40,000
30,000
92,000
77,000
51,000
$456,400
$336,400
3. The text uses the term pro-forma budget to refer to a budget prepared for any
level of operating activity for a given period. We reserve the term “flexible-budget”
to refer to the control budget prepared after the period based on the actual activity
level (e.g., sales volume) achieved. The flexible-budget is key to the financial
control process: it allows us to decompose overall variances into more detailed
components. Normally, the amount of fixed costs reported in the flexible-budget is
exactly the same as the amount of fixed costs contained in the master (static)
budget for the period. This assumes, however, that both budgets are based on
output levels within the “relevant range” (i.e., range of output under which the
assumed cost functions of the organization hold). If budgeted fixed costs in the
flexible-budget and in the master budget are the same, then any difference
between these two budgets must be due solely to sales activity. For a singleproduct company, we refer to this difference as the “sales volume variance.” For
multi-product companies, the sales-activity variance can be broken down into finer
components, as discussed in Chapter 16.
14-47
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-54
Labor Rate and Efficiency Variances (20 minutes)
Actual Inputs
at Actual Cost
(AQ) x (AP)
Actual Inputs
at Standard Cost
(AQ) x (SP)
AQ x $18.00/hr.
= $207,000
AQ x $16.00/hr.
= ?
?
2.
(10,000 x 1.5) x $16.00
= $240,000
?
Labor Rate Variance
1.
Flexible-Budget
Amount
(SQ) x (SP)
Labor Efficiency Variance
Direct labor rate variance:
Difference in hourly wage rates:
Actual direct labor wage rate (AP)
Standard direct labor wage rate (SP)
Actual direct labor hours worked (AQ):
Actual direct labor costs
Actual direct labor hourly rate (AP)
Actual direct labor hours worked (AQ)
Direct labor rate variance
$18.00
− 16.00
$207,000
÷ $18.00
x 11,500
$23,000U
Direct labor efficiency variance:
Actual direct labor hours worked (AQ)
Total standard direct labor hours allowed for the
units manufactured (SQ):
Number of finished units manufactured
Standard direct labor hours per unit
11,500
10,000
x
1.5
Difference in direct labor hours (AQ − SQ)
Standard direct labor hourly wage rate (SP)
Direct labor efficiency variance
3.
$2.00U
15,000
3,500F
x $16.00
$56,000F
If the unfavorable rate variance is a result of the production manager’s decision
to employ workers with higher skill levels, then the production manager made a
right decision to do so. The favorable efficiency variance more than offsets the
higher wages paid to these skilled workers.
Direct labor rate variance
Direct labor efficiency variance
Total direct labor variance
$23,000U
56,000F
$33,000F
14-48
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-55 Ethical Considerations (20-25 minutes)
1. The IMA Statement of Ethical Professional Practice provides a set of four overarching
principles designed to guide member behavior. As well, there is an expectation that
IMA members “encourage others within their organization to adhere to the principles
of honesty, fairness, objectivity, and responsibility.”
In the present case, however, we focus on the ethical standards related to the
behavior of the Purchasing Manager:

Competence: the “reporting” of sub-standard purchase prices for raw
(represented by sub-standard materials) violates the expectation that
support information should be accurate. (The lower-than-expected
costs for materials cannot, in the absence of additional information,
upon for clear, accurate decision-making by others in the organization.)

Integrity: in general, this standard imposes a responsibility to mitigate actual
conflicts of interest and to communicate regularly with business associates to
avoid apparent conflicts of interest. As applied to this case, the purchasing
manager has a responsibility to advise affected parties about any conflicts
associated with the proposed purchase of sub-standard materials at a “bargain”
price. The expected negative results associated with the use of the sub-standard
materials is the key issue.

Credibility: the purchasing manager, working with the cost accountant, in this
case has a responsibility to ensure that information is communicated fairly and
objectively. Further, this standard requires the disclosure of all relevant
information that could reasonably be expected to influence a user’s
understanding of any resulting reports or analyses, such as the standard cost
variance information related to the purchasing transaction.
14-49
materials
decisionpurchase
be relied
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
2. The IMA Standards of Ethical Professional Practice indicate that in resolving ethical
conflicts the accountant should first act in accordance with the organization’s
established policies regarding the resolution of such conflicts. If this step does not
resolve the issue, the accountant should then discuss the issue with his/her
immediate supervisor, which in this case could be the controller of the organization.
If, after such consultation, resolution cannot be reached, the individual should
contact the next higher level in the organization, in this case the CFO. Note,
however, that this step should be taken only after informing the cost accountant’s
supervisor. (In the absence of any clear violation of law, it is generally not
appropriate to bring the matter to the attention of individuals outside of the
organization. For example, if safety issues regarding use of the product could be
raised, then it might be appropriate at a certain point for the accountant to make
contact with an outside authority.)
14-50
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-56 Standard Costing and Journal Entries (20-25 minutes)
1.
Materials Inventory (6,000 gals. x $10.00/gal.)
$60,000
Purchase Price Variance
$2,700
Accounts Payable (6,000 gals. x $10.45/gal.)
$62,700
To record, on open account, direct materials: 6,000 gals. @ standard cost of
$10.00/gal. Actual cost per gallon = $10.45.
2.
WIP Inventory (2,500 x 2 gals. x $10/gal.)
Materials Usage Variance (100 gals. x $10/gal.)
$1,000
Materials Inventory (5,100 gals. x $10/gal.)
$50,000
$51,000
To record the standard direct materials cost ($20/unit) for the completed production
of the period (2,500 units produced).
3. WIP Inventory (2,500 x 2 hrs. x $25/hr.)
$125,000
Labor Rate Variance ($5.50/hr. x 4,900 hrs.)
$26,950
Labor Efficiency Variance (100 hrs. x $25/hr.)
$2,500
Wages Payable (4,900 hrs. x $19.50/hr.)
$95,550
To record the standard direct labor cost ($50/unit) of the completed production for
the period (2,500 units produced) and the actual labor costs incurred for the period.
4. Finished Goods Inventory ($70 x 2,500 units)
$175,000
WIP Inventory
$175,000
To record the direct manufacturing cost component of cost of goods manufactured
for the period.
5. CGS ($70/unit x 2,000 units)
$140,000
Finished Goods Inventory
$140,000
To record the direct manufacturing cost component of the cost of goods sold (CGS)
for the period.
6. Accounts Receivable ($150/unit x 2,000 units)
$300,000
Sales Revenue
$300,000
To record sales revenue and associated accounts receivable for the period.
14-51
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-57 Behavioral Considerations and Continuous Improvement Standards (20-25
minutes)
1. Direct labor-hour standards, October 2010–January 2011:
Month
Previous Standard
October 2010
November 2010
December 2010
January 2011
Reduction
N/A
1.0000hr./unit
0.9900hr./unit
0.9801hr./unit
New Standard/Unit
N/A
0.01 x 1.0000hr.
0.01 x 0.9900hr.
0.01 x 0.9801hr.
1.0000hr./unit
0.9900hr./unit
0.9801hr./unit
0.9703hr./unit
2. Computation of direct-labor efficiency variance, December 2010:
Actual Inputs
at Standard Cost
(AQ) x (SP)
Flexible-Budget
Amount
(SQ) x (SP)
9,980 hrs. x $40.00/hr.
(10,000 x 0.9801) hrs. x $40.00/hr.
Labor Efficiency Variance
Direct-labor efficiency variance = $399,200 - $392,040 = $7,160U
3. The basic trade-off is a problem similar to the situation with Kaizen: pushing
employees too hard for improvements, month after month. In response, workers
may perceive that the performance goal is simply not achievable, in which case
the standard itself loses its motivational value. In many processes, significant
improvements can occur initially. However, it becomes successively more difficult
to achieve efficiency improvements over time. For this reason, the use of a
constant % decrease in the standard over time may have unintended behavioral
consequences. On the positive side, the use of continuous-improvement
standards, in whatever form, signals to all employees the importance of
constantly seeking ways to cut costs and improve operational efficiency.
14-52
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-58 Financial versus Nonfinancial Performance Indicators for Operational Control
(15 minutes)
Repetitive operations, such as consumption of power (or direct materials) in an automated
manufacturing facility, require constant feedback and data to ensure that the
underlying process is “in control.” That is, the managers of such operations cannot
wait for financial reports in order to correct (put back into control) a malfunctioning
process. In this context, real-time nonfinancial performance indicators
(supplemented perhaps, by personal observation) help the manager to “control”
operations. Thus, non-financial performance indicators, such as defect rates, % of
first-pass yields, process time, etc., can all be provided to decision-makers on a
real-time basis. Further, the use of nonfinancial performance indicators is generally
preferable to operating personnel since they relate to factors under their control or
jurisdiction—that is, the performance indicators relate to factors that operating
personnel are familiar with.
On the other hand, managers are likely to be more interested in financial operating
results, for several reasons. One, the performance of managers is often judged on
the basis of financial results. Two, financial metrics provide decision-makers with a
common unit that can be used to evaluate the economic effects of different courses
of action (e.g., changes in sources of supply, product mix, etc.). Operating
personnel might also be interested in financial performance indicators. For
example, such measures communicate to such individuals the “bottom-line” impact
of their decisions and operating efficiencies.
14-53
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-59 Standard Costs and Ethics (15 Minutes)
As controller of the company, Mary’s behavior is not ethical. Under the Credibility
standard, Mary has an obligation to communicate information fairly and objectively.
Further, under the Credibility standard she has a responsibility to prepare complete
and clear reports and recommendations. That is, she must disclose the price
information since this information could reasonably be expected to influence the
owner’s decision-making.
By intentionally misrepresenting the acquisition cost of apple juice, Mary hopes to
support her friend’s business, but at the expense of her employer, OAO, Inc. Under
the Integrity standard, Mary should avoid this conflict of interest (personal loyalty
versus loyalty to the company for which she works) by: (1) not being the person who
sets the standard cost for the apple juice, and (2) not restricting source of supply
(e.g., by mandating that apple juice must be purchased from her friend’s business).
14-54
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-60 Flexible Budgets and Direct Labor Variances (30-40 minutes)
1.
Flexible budget: 1,200,000 papers
Master Budget: Total variable cost
Master Budget: Number of papers processed
$2,700,000
÷ 1,500,000
Master Budget: Standard variable cost/paper processed
Actual number of papers processed during the year
Total budgeted variable cost for 1,200,000 papers
Budgeted fixed costs per year
2.
x
1,200,000
$2,160,000
150,000
Flexible budget: cost to process 1,200,000 papers
$2,310,000
Total actual labor cost
$1,710,000
Actual total labor hours
190,000
Standard labor rate/hour ($1,200 ÷ 150)
x $8.00
Total labor hours worked at the standard hourly rate
Direct labor rate variance
3.
$1.80
Actual total labor hours
− $1,520,000
$190,000U
190,000
Total standard labor hours for 1,200,000 papers processed:
(1,200,000 ÷ 1,000) x 150 hrs./thousand papers =
Excess labor hours worked (AQ − SQ)
Standard labor rate per hour (SP)
Direct labor efficiency variance
14-55
180,000
10,000
x $8.00
$80,000U
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-60 (Continued)
Note to Instructor: An Excel file solution for this assignment is embedded below.
You can open this “object” by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return
to...” while you are in the spreadsheet mode. The screen should then
return you to this Word document.
Ex. 14-60--Flexible Budget and Direct Labor Variances
Data Input
Processing standards for clerical employees:
Diagrammatic Representation for Parts 2 and 3:
Actual Labor Cost
(AQ) x (AP)
Actual Quantity
at Standard Price
(AQ) x (SP)
Flexible Budget (FB)
Based on Outputs
(SQ) x (SP)
Actual Hrs.
Worked x Actual
Wage Rate/Hr.
Actual Hrs.
Worked x Std.
Wage Rate/Hr.
Std. Hrs.
Allowed x Std.
Wage Rate/Hr.
190,000 hrs. x $9/hr.
= $1,710,000
190,000 hrs. x $8/hr.
= $1,520,000
180,000 hrs. x $8/hr.
= $1,440,000
Labor Rate Variance
$190,000U
Labor Efficiency Variance
$80,000U
Another way of looking at this situation is:
Budgeted labor cost per paper processed =
$1,440,000/1,200,000 =
$1.200
Actual labor cost per paper processed
=
$1,710,000/1,200,000 =
$1.425
Labor cost variance, per paper processed
=
$0.225
This total labor cost variance per paper processed can be explained by calculating
the rate and efficiency variance components for labor cost for the year, as indicated
above.
14-56
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
PROBLEMS
14-61 Standard Cost Systems—Behavioral Considerations (45-50 minutes)
1. a. The major advantages of using a standard cost system include:




Budgeting. Standard costs can be the building blocks for budget preparation
and allow the development of flexible-budgets.
Performance evaluation. Comparisons of actual costs to standard costs
facilitate evaluation of the performance at the company, department, cost
center, or individual level. Standards also allow employees to more clearly
understand what is expected of them.
Motivation. If “internalized” (i.e., accepted) by operating personnel, the
standards can motivate actions that help the organization achieve its strategic
objectives.
Recordkeeping. A standard cost system reduces recordkeeping costs and
facilities inventory control (i.e., items need be maintained in physical
quantities only).
b. The disadvantages/challenges that can result from using a standard cost system
include the following:




Cost standards that are too tight can cause the employees to ignore the
standards, or worse, have negative behavioral implications leading to
undesirable actions.
Standards may ignore qualitative characteristics and jeopardize product
quality.
Changing manufacturing environment. The cost structure of many
manufacturing firms has changed dramatically (compared to the past). As a
consequence, standards and associated variances for controlling labor costs
are less important today.
Focus on cost-drivers. As a corollary to the above comment, many strategic
cost management systems today are focusing on the identification of the
factors that drive production costs (e.g., batch-level and customer-level
costs).
2. A standard cost system must be supported by top management to be successful.
However, the parties that should participate in the standard-setting processes
include all levels of the organization, (i.e., purchasing, engineering, production, and
cost accounting). The value of their participation is that they are more likely to accept
the standards as an evaluation criterion.
14-57
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-61 (Continued)
3. The general features and characteristics associated with the introduction and
operation of a standard cost system that make it an effective tool for cost control
include the following.



Standard-setting can be a participative process with those individuals most
familiar with the variables associated with standard-setting available to provide
the most accurate information. This sense of participation will help establish the
legitimacy of the standards and give the participants a greater feeling of being
part of the operation.
Standards that are set for routine activities, which can be identifiable and
measurable, can be associated with specific cost factors of uniform products in
long production runs.
Standards promote cost control through the use of variance analysis and
performance reports, similar to those discussed in Chapters 14, 15, and 16.
4. The consequences of having the standards set by an outside consulting firm are the
following:



There could be negative employee reaction as the employees did not participate
in the standard-setting process.
There could be dissatisfaction if the standards contain cost elements that are not
controllable by the production groups who would be held responsible for
unfavorable variances.
The outside firm may not fully understand the manufacturing process; this could
result in poor management decisions based on faulty information.
14-58
Chapter 14 - Operational Performance Measurement: Sales and Direct-Cost Variances, and the Role of
Nonfinancial Performance Measures
14-62 Standard Cost Sheet (30-45 minutes)
1. Standard direct manufacturing cost per unit of output:
Direct material:
Lumber (1.50 bd. ft.1 x $10.00/bd.ft.)
Pads (4 pads x $0.50/pad)
Direct labor:
Prepare/cut (14.4/60 hrs.2 x $18.00/hr.)
Assemble/finish (15/60 hrs. x $18.00/hr.)
Total standard direct manufacturing cost per unit
1
2
2.
$15.00
2.00
4.32
4.50
$17.00
8.82
$25.82
[1.25 board feet x (5 + 1)] ÷ 5 = 1.50 board feet per unit of output
[12 minutes/unit x (5 + 1)] ÷ 5 = 14.4 minutes per unit of output
The advantages of implementing a standard cost system include the following:



Standard costs are incorporated into the accounting system, making
recordkeeping easier and facilitating cost analysis.
Standard costs provide the basis for building a company’s budgets.
Standard costs serve as goals; they encourage cooperation and coordination
among all elements of the organization. The variance analysis associated with
standard costs provides a feedback system to those responsible for controlling
costs.
3. a. The role of the purchasing manager in the development of standards includes
establishing the standard cost for material specified in the bill of materials for the
product in question, determining whether the company should take advantage of
price reductions available through economic order size, and obtaining data
regarding the availability of materials.
b. The role of the industrial engineer in the development of standards includes
preparing the bill of materials that specifies the types and quantities of material
required, establishing, in conjunction with the manufacturing supervisor, any
allowances for scrap, shrinkage and waste, and participating in time-studies and
test-runs to facilitate the establishment of time standards.
c. The role of the cost accountant in the development of standards includes
reviewing all information regarding material and labor standards received from
other departments, establishing the labor rate standards based on the type of
labor required, determining application rates for indirect manufacturing costs
such as material handling and manufacturing overhead (covered in Chapter 15),
and converting physical standards (such as hours and quantities) to monetary
equivalents.
14-59
14-63 Standard Cost Sheet and Use of Variance Data (45-50 minutes)
1.
Standard cost for each ten-gallon batch of raspberry sherbet:
(a)
Standard
Quantity
Direct materials:
Raspberries
Other ingredients
Direct labor:
Sorting
Blending
Packaging
(b)
Standard
Rate
(7.5 qts.*
x
$4.00) = $30.00
(10 gal.
x
$2.25) =
22.50
(3 min. x 6 qts.)/60
x
$15.00 =
4.50
(12 min./ 60)
x
$15.00 =
3.00
(40 qts.**
x
$0.50) =
(c) Standard cost per ten-gallon batch
$52.50
7.50
20.00
$80.00
0 *[6 quarts/batch x (4 + 1)]/4 = 7.5 quarts of inputs required to obtain 6
acceptable quarts.
**4 quarts per gallon x 10 gallons = 40 quarts.
2. a. In general, the purchasing manager is held responsible for unfavorable
materials purchase price variances. Causes of these variances include
the following:






Failure to correctly forecast price increases.
Purchasing nonstandard materials or in uneconomical lots.
Outdated (i.e., inappropriate) standard.
Transport of materials other than method (e.g., second-day delivery)
embodying in the standard price.
Not purchasing from suppliers offering the most favorable terms.
General macro-economic factors affecting prices.
In some situations, however, someone other than the purchasing manager
may be responsible for the price variance. For example, an expedited
shipment of materials, with associated higher shipping cost, could be the
result of a rush order accepted by the sales department and as such not
assigned to the purchasing manager.
14-60
14-63 (Continued)
As a small producer, ColdKing’s competitive strategy is likely to be
differentiation through brand recognition, just as the firm has apparently
been doing. The success of the competitive strategy requires that the firm
maintains high quality and good cost control. Unfavorable price variances
decrease the profit of the firm and, unless corrected in the short run, may
compromise the firm’s competitive position and the survival of the firm in the
long-run.
b. In general, the production manager or foreman is held responsible for
unfavorable labor efficiency variances. Causes of these variances include
the following:





Poorly trained labor
Substandard, inefficient, or improperly set equipment
Inadequate supervision
Use of sub-standard material inputs
Outdated standard
Unfavorable efficiency variances increase costs, decrease profits, and may
affect the quality of the firm’s products. Continuous unfavorable efficiency
variances jeopardize the competitive position of the firm and threaten the
success of the firm’s strategy.
Note: One issue to raise with students at this point is the danger of too
much focus on the labor-efficiency variance. For example, in many cases
today, labor is a short-term fixed cost. Thus, a principal cause of an
unfavorable labor efficiency variance is lack of sales orders/production
demand, not worker efficiency! The only way a manager in this situation can
avoid an unfavorable labor efficiency variance is to produce excess
inventory, which would be counter to the JIT philosophy that many
organizations are pursuing today. The moral here is that when the
workforce is basically fixed in the short run, labor efficiency variances have
to be interpreted with caution. For this reason, some writers have advocated
doing away with the reporting of labor efficiency variances for control
purposes when the labor force is essentially fixed in the short run.
14-64 Master Budgets, Flexible-budgets, and Profit-Variance Analysis (45-60 minutes)
1.
Unit sales
Sales
Variable costs
Contribution margin
Fixed costs
Operating income
Actual
Results
50,000
$450,000
375,000
$75,000
65,000
$10,000
FlexibleBudget
Variance
0
$50,000U
25,000U
$75,000U
10,000F
$65,000U
Sales
Master
Flexible
Volume
(Static)
Budget
Variance
Budget
50,000
10,000F
40,000
$500,000 $100,000F $400,000
350,000
70,000U
280,000
$150,000
$30,000F $120,000
75,000
0
75,000
$75,000 $30,000F
$45,000
Total Master (Static) Budget Variance
$35,000U
Flexible-Budget
Variance
Sales Volume
Variance
$65,000U
$30,000F
2. Profit variances for December:
a. Total Master (Static) Budget Variance = actual operating income − master
budget operating income = $10,000 − $45,000 = $35,000U
b. Total Flexible-Budget Variance = actual operating income − flexible-budget
operating income = $10,000 − $75,000 = $65,000U
c. Sales Volume Variance, in terms of operating income = flexible-budget
operating income − master budget operating income = $75,000 − $45,000
= $30,000F
or, under the assumption that actual sales volume and master
budget sales volume are both in the “relevant range,” we can define
the sales volume variance as budgeted cm/unit x (actual −
budgeted) unit sales = ($10.00 − $7.00)/unit x (50,000 − 40,000)
units = $3.00/unit x 10,000 units = $30,000F
d. Sales Volume Variance, in terms of contribution margin = flexible-budget
contribution margin − master budget contribution margin = $150,000 −
$120,000 = $30,000F
14-62
14-64 (Continued)
e. Selling Price Variance = actual sales revenue − flexible-budget sales
revenue = $450,000 − $500,000 = $50,000U
or, selling price variance = AQ x (AP − SP)
= 50,000 units x ($9.00 − $10.00)/unit
= $50,000U
3. The labels “favorable” or “unfavorable” in the context of the type of profit-variance
report prepared above have a very narrow meaning: impact of the variance in
question on the short-run operating profit of the organization. Whether individual
variances represent “good news” or “bad news” is largely a function of the specific
context and circumstances.
4. The total flexible-budget variance contains the net (or composite) effect of selling
price per unit being different from planned, variable cost per unit being different
from planned, and total fixed cost being different from planned. In the calculation
of both the total flexible-budget variance and the three component variances (viz.,
selling price variance, total variable cost variance, and total fixed cost variance),
we are holding constant the volume factor and analyzing the effect on short-run
operating profit of letting each of the other three factors vary from budget/standard
amounts.
The total flexible-budget fixed cost variance can be further broken down by line
item. The total flexible-budget variable cost variance can be broken down into
individual costs (e.g., direct materials, direct labor, or, as we show in Chapter 15,
variable manufacturing overhead). In turn, these variances can be broken down
into price (rate) and efficiency (quantity) components.
5. The purpose of this question is to encourage students to think critically about the
use of traditional financial-control tools (viz., standard costs, flexible budgets, and
standard-cost variances) as part of a comprehensive management accounting
and control system. These criticisms are especially pronounced in an “advanced
manufacturing” setting. The question is also designed to reinforce in students the
notion that cost system design is a conscious decision made by management on
the basis of cost-benefit tradeoffs. Finally, this question is intended to get students
to think about the need to tie the design of a management accounting and control
system to the strategy the organization is pursuing.
Criticisms of Standard Costing
1. Variances are too aggregate and too late to be useful. The notion of aggregation
means that the organization may achieve local optimizations (various subunits of
the organization) at the expense of global optimization of results. This criticism can
also be framed as a problem in “goal congruence.” The timeliness issue relates to
14-64
14-64 (Continued-1)
the quality of information produced by the organization’s comprehensive
management accounting and control system. One desirable quality is that such
information be timely. (Another qualitative characteristic might be “accuracy.”) The
point is that to be useful/relevant to decision makers, accounting information
should be as timely as possible. Traditional standard cost systems provide
information at the end of a reporting period (e.g., each month). Contrast this with
the real-time measurements one can obtain today regarding the consumption of
labor and material resources. Bar-code and related technologies enable
organizations to monitor resource consumption on a real-time basis.
2. Variances are not tied to specific product lines, production batches, or FMS cells.
This is a variation of the data-aggregation argument presented above in (1).
3. Standard-costing systems focus too much on direct labor. In advanced
manufacturing settings, labor (especially what we have traditionally called “direct
labor”) is a relatively small component of total manufacturing cost. Thus, some
companies do not even track this cost component separately: they include labor as
part of indirect manufacturing (factory overhead) cost.
4. Many advanced manufacturers use a “cellular layout” to provide optimum flexibility
in outputs. By design, such cells produce, to order, a variety of outputs (e.g., to
comply with changing consumer preferences). Frequent switching among products
in these manufacturing cells makes cost standards less appropriate. Students
should recall that standard cost systems in this country were developed many
years ago when product layouts were used (in which long runs of relatively
standardized products were produced). This is, in essence, completely different
from the production environment of today’s advanced manufacturers.
5. In earlier days, products had relatively long life-cycles. This, combined with product
layouts (see #4 above), facilitated the development of standard manufacturing
costs. Today, however, products have much shorter product life cycles. In turn, this
means that individual standards are soon outdated.
6. Traditional standard costs are not defined broadly enough to include important
costs, such as the total cost of ownership. Thus, the focus on minimizing a portion
of total cost (i.e., manufacturing cost) at the expense of total cost across the lifecycle of the product can be strategically disastrous. In short, standard costs, as
traditionally implemented, may be too narrow in focus.
7. Automated manufacturing processes are highly reliable in meeting production
specifications. As a result variances from standards tend to be very small or
nonexistent.
8. A variation of argument #6 above is that traditional standard-costing systems tend
to focus too much on cost minimization, rather than increasing product quality or
customer service.
The instructor might provide, as a basis for discussion, the following plan that could be
used to evaluate the operating performance of a manufacturing facility each period:
14-64 (Continued-2)
a. Production processing activity: Cycle time, manufacturing-cycle efficiency, and
productivity measures.
b. Product quality: Number of defective finished products, number of products returned,
and # of warranty claims all show improvement over the period.
c. Customer acceptance: # of customer complaints; number of unresolved complaints;
% deliveries with zero defects;
d. In-process quality control activity: Number of products rejected in process; defect
rate; parts-per-million (ppm) defects; % first-pass yield
e. Productivity: Number of units produced per day per employee
f. Delivery activity: delivery lead time (average); % on-time deliveries
i. Machine maintenance: Machine downtime (minutes); bottleneck machine downtime
(minutes)
Note the focus on activities in the above hypothetical performance evaluation scorecard.
For each major activity (or business process) there would logically be, each period, one
or more strategic objectives. The extent to which these objectives are being
accomplished is assessed through the monitoring and reporting of non-financial
performance indicators such as those listed above. These non-financial performance
metrics would complement the financial performance measures (e.g., standard costs,
flexible budgets, and related variances) in a comprehensive management accounting
and control system.
Benefits/Advantages of Standard Cost Systems
1. Provides a good basis for cost comparisons. To the extent that “cost” is a critical
variable on which the organization competes, a standard cost system with
associated variances (based on flexible budgets) can be a useful component of
an organization’s overall management accounting and control system.
2. Enables managers to use management by exception. A standard cost system
can be viewed as a “diagnostic control system,” which monitors itself and
therefore frees management to attend to more strategic issues confronting the
organization.
3. Provides a basis for performance evaluation and determining bonuses. Again,
the key here is that managers who decide to use standard costs and variances
for performance evaluation purposes recognize the limitations and criticisms of
traditional standard cost systems. That is, it is important for such users to
address or be cognizant of these limitations—and that they use such systems
“intelligently.”
4. Participation in setting standards and assigning responsibility can have
motivational effects on employees.
5. Standard costs can be used for external reporting purposes (as long as such
standards do not deviate significantly from actual costs).
14-66
14-65 Master Budgets, Flexible Budgets, and Profit-Variance Analysis (50-60 Minutes)
1.
Unit sales
Sales
Variable costs
Fixed costs
Operating income
Actual
Results
205,000
$2,255,000
682,500
170,000
$1,402,500
FlexibleSales
Master
Budget
Flexible
Volume
(Static)
Variance
Budget
Variance
Budget
0
205,000
5,000F
200,000
$51,250F $2,203,750 $53,750F $2,150,000
6,000U
676,500 16,500U
660,000
10,000F 180,000
-0$180,000
$55,250F $1,347,250 $37,250F $1,310,000
Notes:
(A) Title (“Flexible-Budget Variance”)
(B) Title (“Sales Volume Variance”)
(C) 0, by definition
(D) Actual units sold (205,000)
(E) 5,000F (205,000 − 200,000)
(F) $2,255,000 − $2,203,750 = $51,250F
(G) Budgeted selling price/unit = $2,203,750/205,000units = $10.75;
$10.75/unit x 5,000 units = $53,750
(H) $2,203,750 − $53,750 = $2,150,000
(I) 205,000 units x ($660,000/200,000 units) = 205,000 x $3.30/unit =
$676,500
(J) $676,500 + $6,000 = $682,500
(K) $676,500 − $660,000 = $16,500U
(L) $170,000 − $180,000 = $10,000F
(M) $0 (by definition, as long as both actual sales volume and master
budget sales volume are in the relevant range)
(N) $180,000 (same as flexible-budget amount)
(O) $2,255,000 − ($682,500 + $170,000) = $1,402,500
(P) $51,250F + $6,000U + $10,000F = $55,250F
(Q) $1,402,500 − $55,250 = $1,347,250, or, $2,203,750 − ($676,500 +
$180,000) = $1,347,250
(R) $53,750F + $16,500U = $37,250F, or, 5,000 units x budgeted cm/unit
= 5,000 units x ($10.75 − $3.30)/unit = $37,250F
(S) $1,347,250 − $37,250 = $1,310,000, or, $2,150,000 − ($660,000 +
$180,000) = $1,310,000
14-65 (Continued)
2. Total master (static) budget variance = actual operating income − master budget
operating income = $1,402,500 − $1,310,000 = $92,500F
Sales volume variance, in terms of operating profit = flexible-budget operating
income − master budget operating income = $1,347,250 − $1,310,000 =
$37,250F; this variance is the pure effect of sales volume being different than
planned. That is, it is calculated holding selling price per unit, variable cost
per unit, and total fixed costs “constant” (they are all at budgeted/standard
prices).
Flexible-budget variance = actual operating income − flexible-budget operating
income = $1,402,500 − $1,347,250 = $55,250F. This variance is the net
(composite) effect of selling price per unit, variable cost per unit, and total
fixed costs being different than planned.
3. The $6,000 is probably considered “immaterial” when taken as a whole.
However, this net variance includes three variable cost items. As such, a firstlevel breakdown of this variance would calculate the variance for each of the
three variable costs. Then, since each variable cost is a function of two factors,
price (rate) and quantity (efficiency), each flexible-budget variable cost variance
could be broken down into a price variance component and a quantity variance
component.
4. A comprehensive operational control system will likely have a combination of
financial and nonfinancial performance indicators. Financial performance
indicators could include the standard cost variance data referred to above.
Nonfinancial performance indicators should be derived from (or linked to) critical
success factors—things at which the organization must succeed in order to
achieve competitive advantage. Thus, a variety of answers are possible here,
including quality indicators, yield, safety factors (level of contaminants in the fish
that are harvested), etc.
14-68
14-66 Summary Problem: All variances (75-90 minutes)
1. a. Direct materials price variance (calculated at point of production):
Formula: AQ x (AP − SP), where AQ = units of raw material used in
production during the period
 Calculation of actual prices per unit of raw material =
Actual cost ÷ AQ
Housing units
$44,000 ÷ 2,200 = $20 per unit
Printed circuit boards
$75,200 ÷ 4,700 = $16 per unit
Reading heads
$101,200 ÷ 9,200 = $11 per unit
 Calculation of price variance:
Housing units
2,200 x ($20 − $20) = $ 0
Printed circuit boards
4,700 x ($16 − $15) = 4,700U
Reading heads
9,200 x ($11 − $10) = 9,200U
Total direct materials price variance
$13,900U

b. Direct material usage variance:
Formula: SP x (AQ − SQ)
Calculation of standard quantities (SQ) = Units Produced x Standard
quantity of raw material inputs per unit of output:
Housing units
2,200 x 1 = 2,200 parts
Printed circuit boards
2,200 x 2 = 4,400 parts
Reading heads
2,200 x 4 = 8,800 parts
 Calculation of variance:
Housing units
$20 x (2,200 − 2,200) =
$
0
Printed circuit boards
$15 x (4,700 − 4,400) =
4,500U
Reading heads
$10 x (9,200 − 8,800) =
4,000U
Total direct materials quantity variance
$8,500U


c. Direct labor efficiency variance:
Formula: SP x (AQ − SQ)
Calculation of standard hours allowed for output achieved (SQ) =
Actual units of output x Standard labor hours per unit of output:
Assembly Group
2,200 x 2.0 =
4,400 hours
PCB Group2,200 x 1.0 = 2,200 hours
RH Group
2,200 x 1.5 =
3,300 hours
 Calculation of labor efficiency variance:
Assembly Group
$10/hr. x (3,900 − 4,400) = $5,000F
PCB Group
$11/hr. x
(2,400 − 2,200) = $2,200U


$12/hr. x (3,500 − 3,300) = $2,400U
RH Group
Total direct labor efficiency variance
14-70
$ 400F
14-66 (Continued-1)
d. Direct labor rate variance:
Formula: Total wages paid − (AQ x SP)
Calculation of labor rate variance:
Assembly Group
$31,200 − (3,900 x $10) = $7,800F
PCB Group $31,060 −
(2,400 x $11) =
$4,660U
RH Group
$50,000 − (3,500 x $12) = $8,000U


Total direct labor rate variance
$4,860U
e. Selling price variance:
Formula: Units sold x (AP - SP)
Calculate budgeted selling price per unit, SP:
Total budgeted sales ÷ Budgeted unit sales volume
$400,000 ÷ 2,000 units = $200 per unit
 Actual selling price per unit, AP:
Actual sales revenue ÷ Actual units sold
= $396,000 ÷ 2,200 = $180 per unit
Selling Price Variance = 2,200 units x ($180 − $200)/unit =


$44,000U
f. Sales volume variance, in terms of contribution margin:
 Formula: Budgeted cm/unit x (Actual Sales – Budgeted Sales)
 Calculate budgeted unit contribution margin:
Total budgeted contribution margin ÷ Budgeted units
= $122,000 ÷ 2,000 = $61 per unit
Sales volume variance: $61/unit x (2,200 − 2,000) units =
$12,200F
2. The unfavorable variance of $58,660 between budgeted and actual contribution
margin for Funtime, Inc. during May 2010 can be explained by aggregating the
variances calculated above in part (1):
Direct materials price variance
Direct materials usage variance
Direct labor efficiency variances
Direct labor rate variances
Selling price variance
Sales volume variance
Total contribution margin variance
$ 13,900U
8,500U
400F
4,860U
44,000U
12,200F
$58,660U
14-66 (Continued-2)
3. Behavioral factors that may promote friction among the production managers and
between the production managers and the maintenance manager include the
following:


The managers of the PCB and RH groups will be dissatisfied with the
maintenance manager as equipment downtime has caused them to incur
additional overtime costs.
The Assembly Group is dependent on input from the other production
departments. To increase production, the managers of the Assembly Group are
likely to pressure the other managers. This type of pressure is most probably the
reason why the PCB and RH groups began rejecting parts that would normally
have been modified and then used.
4. An evaluation of Constance Brown's report leads to the conclusion that it is
incomplete as she has not identified the real causes of the unfavorable results and
has left management to draw its own conclusions. In addition, Brown has only
addressed the labor issues and has failed to account for the material variances or
mention the maintenance problems that resulted in downtime for some departments.
The department managers are likely to resent the report as being unfair.
Note to Instructor: An Excel file solution covering parts (1) and (2) of this
assignment is embedded below. You can open this “object” by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return
to...” while you are in the spreadsheet mode. The screen should then
return you to this Word document.
Pr. 14-66: Summary Problem--All Variances
Background
Funtime, Inc., manufactures video game machines. Market saturation and technolo
that resulted in declining profits. To stem the slide in profits until new products can
attention to both manufacturing economics and increased production. To realize th
incentive program to reward production managers who contribute to an increase in
decrease in costs.
The production managers responded to the pressure of improving manufacturing in
completed units beyond normal production levels. The assembly group puts togeth
from both the printed circuit boards (PCB) and the reading heads (RH) groups. To
and RH groups began rejecting parts that previously would have been tested and m
Preventive maintenance on machines used to produce these parts has been postp
performed to keep production lines
moving.
14-72
The maintenance department is concerned about serious breakdowns and unsafe
The more aggressive assembly group production supervisors pressured maintenan
rather than those of other groups. This resulted in machine downtime in the PCB a
14-67 Revision of Standards (45-50 minutes)
1. a. Revising the standards immediately would facilitate their use in a master budget.
Use of revised standards would minimize production coordination problems and
facilitate cash planning. Revised standards would facilitate more meaningful costvolume-profit analysis and result in simpler, more meaningful variance analysis.
Standards are often used in decision analysis such as make-or-buy, product
pricing, or product discontinuance. The use of obsolete standards would impair
the analysis. Variances are often computed and then ignored by decisionmakers/ managers. Retaining the current standards and expanding the analysis
of variances would force a diagnosis of the costs and would increase the
likelihood that significant variances would be investigated.
b. Standard costs are carried through the accounting system in a standard cost
system. Retaining the current standards and expanding the analysis of variances
would eliminate the need to make changes in the accounting system. However,
changing standards could have an adverse motivational impact on the persons
using them. Retaining the current standards would preserve the well-known
benchmark and allow for consistency in reporting variances throughout the year.
2. a. Change in cost/unit due to the use of new direct materials:
Change due to price = (New materials price − Old materials price) x (New
materials quantity) = ($7.77 − $7.00)/lb. x 1 lb./unit =
$0.77U
 Change due to the effect of direct materials quality on direct materials usage
= (Old materials quantity − New materials quantity) x (Old materials price) =
(1.25 − 1.00) lb./unit x $7.00/lb. =
$1.75F
 Change in labor usage due to the effect of materials quality =
(Old labor time − New labor time) x (Old labor rate) =
(24/60 − 22/60) x $12.60/hr. =
$0.42F
Total changes in per unit cost due to use of new materials =
$1.40F

b. Changes in per unit cost due to the new labor contract= (New wage rate − Old
wage rate) x New labor time = ($14.40 − $12.60)/hr. x (22/60) hrs.
=
c. Total change in direct manufacturing cost per unit = (a) + (b) =
14-73
$0.66U
$0.74F
14-68 Standard Cost in Process Costing; Variances, and Journal Entries (45-60
minutes)
1. Equivalent units of production in November:
Units completed
Direct
Materials
5,600
Equivalent units in ending WIP inventory
+
800
Equivalent units of production
+
6,400
Standard quantity of input per unit of output
x
Total standard quantity for production in November
a.
Direct
Labor
5,600
8
600
6,200
x
51,200
6
37,200
Labor efficiency variance = SP x (AQ - SQ)
= $18.20/hr. x (36,500 − 37,200) hrs. = $12,740F
Alternatively: $109.20/unit x 6,200 Equivalent Units
Less: $18.20/hour x 36,500 hours
b.
= $677,040
=
664,300
$ 12,740 F
Labor rate variance = (AP x AQ) − (SP x AQ)
$600,000 − ($18.20/hr. x 36,500 hrs.) = $64,300F
c.
Actual kgs. of material used in November = standard quantity allowed +/– efficiency
variance = 51,200 kg. + ($1,500 ÷ $5/kg.) =
51,500 kg.
Alternatively: $40/unit x 6,400 equivalent units = $256,000
Add:
1,500U
= (AP x AQ) =
$257,000
∴ AQ = $257,500/$5 per kg. =
d.
51,500 kg.
Materials price variance = Total materials variance – Materials usage variance =
$750U − $1,500U = $750F
∴Actual price per kilogram (AP) = Standard price per kg. (SP) – Per unit favorable
price variance = $5.00/kg. – ($750 ÷ 50,000 kgs.) = $4.985 (note: this answer
assumes that the price variance for DM is calculated at point of purchase)
e.
Total amount of prime costs transferred to the finished goods account in November
= Standard manufacturing cost/unit x #units manufactured in November = ($40.00 +
$109.20) x 5,600 units = $835,520
14-74
14-68 (Continued)
f.
Materials
Equivalent units in ending WIP inventory
2.
Labor
800
600
Standard cost per unit
x $40.00
x $109.20
Ending inventory at standard cost
$32,000
Materials Inventory ($5 x 50,000 kg.)
$65,520
Total
$97,520
$250,000
Materials Purchase-Price Variance (see (d) above)
$750
Accounts Payable (plug)
$249,250
Purchase of 50,000 kilograms of materials for $249,250 ($4.985/kg.)
Work-in-Process Inventory (6,400 eq. units x $40)
Materials Usage Variance (plug)
$256,000
$1,500
Materials Inventory (51,500 kg. x $5/kg.)
$257,500
Issued 51,500 kilograms of material to produce 6,400 equivalent units.
Work-in-Process Inventory (6,200 eq. units x $109.20/unit)
$677,040
Labor Rate Variance (see 1b above)
$64,300
Labor Efficiency Variance (see 1a above)
$12,740
Accrued Payroll (given)
$600,000
Direct labor wages incurred to manufacture 6,200 equivalent units; actual wage rate
= $16.438/hr.
14-75
14-69 Direct Materials: Joint Price-Quantity Variance (30-45 minutes)
1. Direct materials price variance = AQ x (AP − SP)
= 25,000 tons x ($12 − $10)/ton =
$50,000U
2. Standard direct materials allowed for the units manufactured, SQ:
5,000 units x 4.5 tons per unit = 22,500 tons
Direct materials usage variance = SP x (AQ − SQ)
= $10/ton x (25,000 tons − 22,500 tons) =
$25,000U
3. “Pure” direct materials price variance = SQ x (AP − SP)
= 22,500 tons x ($12 − $10)/ton =
$45,000U
Direct materials joint price-quantity variance = (AP − SP) x (AQ − SQ)
= ($12 − $10)/ton x (25,000 − 22,500) tons =
+ $5,000U
Total direct materials price variance (as determined in practice)
= AQ x (AP − SP) =
$50,000U
The preceding calculations are illustrated graphically below:
14-76
14-69 (continued)
P
SQ x (AP - SP)
[(AP - SP) x (AQ − SQ)]
AP
SP
SP x (AQ − SQ)
Q
SQ
AQ
Legend:
AP = actual price per ton of raw material
SP = standard price per ton of raw material
AQ = actual tons of raw material used in production
SQ = standard # of tons allowed for the output achieved
SQ x (AP − SP) = “pure” price variance
SP x (AQ − SP) = “pure” quantity variance
(AP − SP) x (AQ − SQ) = “joint” price-quantity variance
Note that in practice the joint price-quantity variance is usually included as part of the
price variance under the assumption that price paid is less controllable than quantity
consumed in the production process. That is, there is a desire to keep the efficiency
variance as “pure” as possible.
14-77
14-70 Flexible Budget and Operating-Profit Variances (60 minutes)
1.
Units sold
Revenues
Professional labor
Credit check
Contribution margin
Fixed costs
Operating income
Actual
Results
90
$36,000
$9,500
$14,850
$11,650
$3,600
$8,050
FlexibleBudget
Variances
-0$4,500F
$1,400U
$1,350U
$1,750F
$600U
$1,150F
Flexible
Budget
90
$31,500
$8,100
$13,500
$9,900
$3,000
$6,900
Sales
Volume
Variances
10U
$3,500U
$900F
$1,500F
$1,100U
-0$1,100U
Master
(Static)
Budget
100
$35,000
$9,000
$15,000
$11,000
$3,000
$8,000
Total Master (Static) Budget Variance
$50F
Flexible-Budget
Variance
$1,150F
Sales Volume
Variance
$1,100U
Detailed Calculations:
Master budget:
Number of apartments rented
Revenue per apartment rented
$700 ÷ 2 =
Total revenue
Less: Variable costs:
Professional labor:
(1.5 hr./application x $20/hr.) x 300 applicants =
$ 9,000
Credit check: $50/appl. x 300 applicants =
15,000
Contribution margin
Less: Other expenses (lease, secretarial help, utilities)
Operating income
Flexible Budget
Total revenue
90 rentals x $350/rental =
Less: Variable costs:
Professional labor (1.5 x $20) x 270 applications =
$ 8,100
Credit check $50/applicant x 270 applications =
13,500
Contribution margin
Less: Other expenses
Operating income
14-78
100
$ 350
$35,000
24,000
$11,000
3,000
$8,000
$31,500
21,600
$ 9,900
3,000
$6,900
14-70 (continued)
Operating Income:
Total revenue
90 rentals x $800/rental x 0.5 =
Less: Variable costs:
Professional labor
$ 9,500
Credit checks
$55/application x 270 apps. =
14,850
Contribution margin
Less: Other expenses
Operating income
$36,000
24,350
$11,650
3,600
$8,050
2.
Actual Quantity
at Standard Price
(AQ) x (SP)
Flexible Budget (FB)
Based on Outputs
(SQ) x (SP)
Actual Hrs.
Worked x Actual
Wage Rate/Hr.
Actual Hrs.
Worked x Std.
Wage Rate/Hr.
Std. Hrs.
Allowed x Std.
Wage Rate/Hr.
400 hrs. x AP
= $9,500
400 hrs. x $20/hr.
= $8,000
Actual Labor Cost
(AQ) x (AP)
Labor Rate Variance
$1,500U
(270 x 1.5hrs.) x $20/hr.
= $8,100
Labor Efficiency Variance
$100F
Total Flexible-Budget Variance for Professional Labor
$1,400U
3. Among factors to be considered in evaluating the effectiveness of professional labor
are:





Number of units successfully rented
Number of applicants
Demand for apartments in the area
Total number of apartments for rent in the area
Quality (credit worthiness of applicant)
14-79
14-71 Profit-Variance Analysis (75-90 minutes)
1.
Unit sales
Sales
Variable Costs:
Manufacturing
Marketing
Total Variable Costs
CM
Fixed Costs:
Manufacturing
Marketing
Total Fixed Costs
Operating Income
Actual
Results
4,000
$390,000
FlexibleBudget
Variances
0
$10,000U
Sales
Flexible
Volume
Budget
Variance
4,000
100F
$400,000 $10,000F
Master
(Static)
Budget
3,900
$390,000
$241,000
$39,000
$280,000
$110,000
$41,000U
$1,000F
$40,000U
$50,000U
$200,000
$40,000
$240,000
$160,000
$5,000U
$1,000U
$6,000U
$4,000F
$195,000
$39,000
$234,000
$156,000
$50,000
$40,000
$90,000
$20,000
$0
$4,000U
$4,000U
$54,000U
$50,000
$36,000
$86,000
$74,000
$0
$0
$0
$4,000F
$50,000
$36,000
$86,000
$70,000
Total Master (Static) Budget Variance
$50,000U
Flexible-Budget
Sales Volume
Variance
Variance
$54,000U
$4,000F
2. Profit-variance components:
a. total master (static) budget variance = actual operating income − master
budget operating income = $20,000 − $70,000 = $50,000U
b. total flexible-budget variance = actual operating income − flexible-budget
operating income = $20,000 − $74,000 = $54,000U
c. total variable cost flexible-budget variance = actual total variable costs −
flexible-budget total variable costs = $280,000 − $240,000 = $40,000U
1. flexible-budget variance for variable manufacturing costs = actual
variable manufacturing costs − flexible budget for variable
manufacturing costs = $241,000 − $200,000 = $41,000U
14-80
14-71 (Continued-1)
2. flexible-budget variance for variable nonmanufacturing costs = actual
variable nonmanufacturing costs − flexible-budget variable
nonmanufacturing costs = $39,000 - $40,000 = $1,000F
d. total fixed cost flexible-budget variance = actual total fixed costs − flexiblebudget total fixed costs = $90,000 − $86,000 = $4,000U
1. flexible-budget variance for fixed manufacturing costs = actual fixed
manufacturing costs − flexible-budget for fixed manufacturing costs =
$50,000 − $50,000 = $0
2. flexible-budget variance for fixed nonmanufacturing costs = actual fixed
nonmanufacturing costs − flexible-budget for fixed nonmanufacturing
costs = $40,000 - $36,000 = $4,000U
3. Interpretation of profit variances:
a. total master (static) budget variance: this is the total operating-profit variance for
the period, i.e., the difference between actual operating profit and operating profit
as stated in the master (static) budget. Notice that this variance is a function of
five factors: selling price per unit, sales mix, sales volume, variable cost per unit,
and total fixed costs. We abstract here in Chapter 14 from the multi-product case
and deal only with a single-output context. Thus, we should be able to
decompose any profit variance into variances related to the other four factors, as
explained below.
b. total flexible-budget variance: this variance explains the portion of the total profit
variance for the period related to a combination of three factors: selling price per
unit, variable cost per unit, and total fixed costs. These variances, and the total
flexible-budget variance by extension, are determined by holding constant sales
volume. That is, actual operating results are compared to budgeted results flexed
to the actual output level.
c. flexible-budget variance for total variable cost: this variance represents one
component of the total flexible-budget variance. That is, it represents the effect
on operating profit of the variable cost per unit being different from planned. The
variance can be broken be calculating a flexible-budget variance for each
variable cost (e.g., by functional category).
1. flexible-budget variance for total variable manufacturing costs: this variance
represents the portion of the flexible-budget variance that is attributable to
variable manufacturing cost per unit being different from budgeted amount.
As such, it can be further decomposed into a total variance for direct
materials, a total variance for direct labor, and a total variance for variable
overhead (the latter of which is covered in Chapter 15).
14-81
14-71 (Continued-2)
2. flexible-budget variance for total variable nonmanufacturing costs: this
variance represents the portion of the flexible-budget variance that is
attributable to nonmanufacturing cost per unit being different from budgeted
amount. As such, it can be further decomposed into a total variance for
each nonmanufacturing cost element (e.g., selling expenses).
d. flexible-budget variance for total fixed costs: this variance is also referred to as a
spending variance, since it represents the difference between actual fixed costs
and budgeted fixed costs. As such, the variance can be further broken down into
functional categories, as explained below.
1. flexible-budget variance for total fixed manufacturing costs: this is the
portion of the flexible-budget variance for total fixed costs that is attributable
to spending on fixed manufacturing costs being different from budgeted
spending. As such, this variance can be further broken down on a line-item
basis (property taxes, depreciation, supervisory salaries, etc.).
2. flexible-budget variance for total fixed nonmanufacturing costs: this is the
portion of the flexible-budget variance for total fixed costs that is attributable
to spending on nonmanufacturing fixed costs being different from budgeted
spending. As such, this variance can be further broken down on a line-item
basis (i.e., sales salaries, depreciation, etc.).
14-82
14-71 (Continued-3)
Ortiz & Co.
Master (Static) Budget Variance
(Actual Operating Income − Master Budget Operating Income)
$50,000U
Total FB-Variance
$54,000U
($20,000 − $74,000)
SP Variance
$10,000U
Sales Volume Variance
$4,000F
($40/unit x 100 units)
Variable Cost Variances
$40,000U
Manufacturing
$41,000U
Fixed Cost Variances
$4,000U
Marketing
$1,000F
Manufacturing
$0
14-83
Marketing
$4,000U
14-71 (Continued-4)
Note to Instructor: An Excel file solution covering parts (1) and (2) of this
assignment is embedded below. You can open this “object” by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return
to...” while you are in the spreadsheet mode. The screen should then
return you to this Word document.
14-71: Master Budget and Profit Variance Analysis
Input Area
Master Budget Data:
Sales volume (units) =
Selling price per unit =
Variable manufacturing costs/unit =
Variable selling cost (% of sales) =
Fixed manufacturing costs =
3,900
$100.00
$50.00
0.10
$50,000
14-84
14-72 Materials Purchase-Price Variance and Foreign Exchange Rates (20-30
minutes)
1.
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Year
Actual
Quantity
4,000
4,000
4,000
24,000
36,000
Actual Results
Purchase
Price
Total Cost
$68
$ 272,000
69
276,000
73
292,000
40***
960,000**
$1,800,000*
Standard
Price
$60
60
60
60
Price
Variance
$ 32,000U
36,000U
52,000U
480,000F
$360,000F
*Total actual purchases = 36,000 kg. x $50 avg. price/kg. = $1,800,000
**
$1,800,000 − ($272,000 + $276,000 + $292,000) = $960,000
***
$960,000 ÷ 24,000 = $40
Further analysis of the 4th Quarter’s materials purchase-price variance:
Price variance due to increase in the negotiated price:
24,000 kg. x ($76 − $60)/kg. =
Price variance due to changes in exchange rate:
24,000 kg. x ($40 − $76)/kg. =
Net Purchase-Price Variance = AQ x (AP − SP) =
24,000 kg. x ($40 − $60)/kg. =
$384,000U
$864,000F
$480,000F
2. The favorable materials purchase-price variance for the 4 th quarter and for
the year is due to fluctuations in foreign currency exchange rates. The firm
gained $864,000 from the favorable changes in currency exchange rates.
Without the favorable exchange rate in the 4 th quarter, the firm would have
had a total unfavorable purchase-price variance of $384,000 for the
quarter. Nevertheless, the purchasing department should be credited for
negotiating the term of purchases in local currencies, rather than in U.S.
dollars.
14-85
14-73 Variance Analysis and Accountability (75-90 Minutes)
1. Sanchez was correct in his analysis of direct materials usage. Both the regular
and alternative materials had an unfavorable usage variance, but the
alternative materials had significantly more variance, as follows:
Regular
Materials
Alternative
Materials
Total
12,000
8,000
20,000
x Materials requirements, lbs. per unit
1.5
1.5
1.5
Total standard materials requirements
18,000
12,000
30,000
Actual materials used in production
18,200
15,800
34,000
200
3,800
4,000
Standard cost per pound of material
$10.00
$10.00
$10.00
Material usage variances
$2,000U
$38,000U
$40,000U
Output (units produced)
Usage variance in pounds
% Variance from Standard
1.1%
31.7%
2. The components of the total direct labor variance are as follows:
Class III
Labor
Class II
Labor
Total
Labor
$281,200
$204,970
$486,170
Units produced
12,000
8,000
20,000
x Std. Labor cost/unit
$21.60
$21.60
$21.60
$259,200
$172,800
$432,000
Actual labor cost
Flexible-budget labor cost:
Flexible-budget labor cost
Total labor cost variance
$22,000U
14-86
$32,170U
$54,170U
14-73 (Continued-1)
Breakdown of total variance, by labor class:
Class III
Labor
Class II
Labor
Standard wage rate/hour (SP)
$18.00
$20.00
Actual wage rate/hour (AP)
$18.50
$19.90
$0.50
$0.10
Actual hours worked (AQ)
15,200
10,300
Labor rate variance
$7,600U
$1,030F
Total
Labor
a. Labor rate variance:
Rate variance per hour
Actual hours @ standard wage rate
$273,600
$206,000
$6,570U
$479,600
b. Labor substitution variance:
Class III standard wage rate
$18.00
Class II standard wage rate
$20.00
Substitution rate variance/hour
$2.00
x Actual hours worked (AQ)
10,300
Labor substitution variance
$20,600U
Actual hours at Class III std. rate
$273,600
$185,400
$20,600U
$459,000
c. Labor variance from use of nonstandard materials:
Units produced—alternative materials
4,800
3,200
1.2
1.2
Standard labor hours allowed
5,760
3,840
Actual hours worked
6,600
4,400
Hours saved (excess hours)
(840)
(560)
$18.00
$18.00
$15,120U
$10,080U
x Standard labor hours/unit
Class III labor rate/hour
Variance from use of non-std mat.:
Actual hours at std. wage rate, after
factoring out effect of non-std.
material usage
14-87
$258,480
$175,320
$25,200U
$433,800
14-73 (Continued-2)
d. Labor efficiency variance, based on regular materials:
Units produced—regular materials
7,200
4,800
1.2
1.2
Standard hours allowed
8,640
5,760
Actual hours worked
8,600
5,900
x Standard labor hours/unit
Saved (excess) hours
40
Class III std. wage rate/hour
$18.00
(140)
$18.00
Efficiency variance, based on use
of regular materials
$720F
$2,520U
$1,800U
$7,600U
$1,030F
$6,570U
$20,600U
$20,600U
Summary:
Labor rate variance
Labor substitution variance
Variance from using sub-standard
materials
Efficiency variance—based on use of
regular materials
N/A
$15,120U
$10,080U
$25,200U
$720F
$2,520U
$1,800U
Total
$22,000U
$32,170U
$54,170U
3. a. The following variances from parts 1 and 2 could be associated with the rush
order:

Direct materials usage (efficiency) variance from the use of sub-standard (i.e.,
the alternate) materials, $38,000 U. If the Sales Department had accepted the
order under normal circumstances, then the Purchasing Department could
have used its regular supplier and not have to deal with a new supplier on
short notice. The material proved to be substandard and resulted in materials
consumption that was much higher than the variance associated with the use
of regular materials.

Direct labor substitution variance, $20,600 U. The Production Department
was forced to redeploy Class II labor from another job. If there had not been a
rush order, the Production Department may have been able to spread the
production of this order over a longer time period and therefore could have
used the normal Class III labor.
14-88
14-73 (Continued-3)

Total direct labor variance from using substandard materials, $25,200U. The
rush order forced the Purchasing Department to seek an alternative source of
materials when the regular supplier was unable to provide the materials under
short notice. The Purchasing Department thought that the material was
comparable, but it proved to be substandard, a situation not uncovered until
the increase in spoilage was observed. Labor hours were wasted by working
on material that proved to be sub-standard.
3. b. Sanchez is justified in stating that the variances related to the rush order should
be charged, for performance evaluation purposes, to the Sales Department.
Under the notion of “responsibility accounting,” a unit should be held accountable
for its decisions and the consequences of those decisions. The Sales
Department should not have accepted the rush order without first consulting with
the Production Department to determine if the order could be filled within the time
frame demanded by the customer. The Production Department is responsible for
producing the product, but the Sales Department’s actions caused production
costs to increase above standard. Under the circumstances, there were
insufficient materials and labor, and the Sales Department did not leave many
alternatives for the Production Department. The Sales Department should,
therefore, be held accountable for the additional costs of this decision.
14-89
14-74 Standard Costing, Variance Analysis, and Strategic Considerations (40-50
Minutes)
1. The term “engineered labor standards” refers to the use of engineering (i.e., inputoutput) analysis regarding labor-hour consumption associated with the production of a
good or a service. This method of establishing the quantity component of labor-hour
standard costs can be contrasted to the use of historical observations as the basis for
establishing the standard. The term “time-and-motion studies” refers to the method of
estimating labor-hour consumption. Specifically, the term refers to the use of
observations, by trained industrial engineers (who have knowledge of the underlying
production process), of individual steps or activities and their associated times.
Typically, these times were “engineered” in the sense that they reflected highly
efficient effort on the part of employees.
2. An organization, for any given operating period, can determine for each class of labor
the difference between the actual labor cost incurred (given the output of the period)
and the standard labor cost for that period (based on the actual output). This latter
amount should be viewed as “the labor cost that should have been incurred, given
actual output for the period just ended.” This difference, in dollar terms, is referred to
the total flexible-budget variance for direct labor (or, in short, the total labor cost
variance). This variance, as with any variable cost, is a function of two factors: price
(p) and quantity (q). Thus, at the end of the period the accountant can subdivide this
total variance into a price (rate) component and an efficiency (quantity) component.
The former is referred to as the “direct labor rate variance” for the period, while the
latter is referred to as the “labor efficiency (quantity) variance” for the period. The
WSJ article in question focuses on the latter variance. The article explores ways in
which retailers might be able to use available software to estimate labor consumption
for activities performed by their employees (such as check-out clerks). In short, the
article focuses on the application of “work-measurement” techniques in a retailer
environment. Of particular interest is the fact that these techniques were developed,
many years ago, in a manufacturing environment.
3. As noted above in (2), the process of using time-and-motion studies to establish
standards for labor-hour consumption was developed and refined (many years ago!)
in a manufacturing environment. At that time (~1920s), assembly-line methods
dominated the manufacturing landscape. (Today, we refer to this production method
as a “product layout.”) One key characteristic in this production layout is the use of
repetitive processes by operating personnel. This, in turn, facilitates the development
of “engineered standards” for labor-hour consumption based, for example, on “timeand-motion studies.”
14-90
The key question, therefore, is whether in a retail environment worker activities are
sufficiently repetitive to allow for the development of labor-consumption standards
(expressed in minutes or portions thereof). As noted in the article, one possible
solution is to develop more refined standards—which would be able to capture the
unique (i.e., non-repetitive) nature of certain events and activities performed by retail
clerks.
14-74 (Continued-1)
4. As with any new employee monitoring/performance-evaluation system, behavioral
considerations are important for the implementation success of the new system. In
the present case, one might anticipate the following employee and customer-service
problems associated with the newly implemented system:
• employees manipulate the system (see the quote near the end of the
article) so that the system provides “false” (i.e., fabricated) data for evaluation
purposes
• employee morale suffers because of stress induced by the monitoring
system
• goal-congruency problems: employees take actions that improve the
performance variable that is being measured (viz., time consumption), while
ignoring performance on other key drivers of success (e.g., customer service
or customer satisfaction)
• customers are “processed efficiently,” but at the expense of poor or
inconsiderate service
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As indicated in the article, there are several steps that a retailer can take to improve the
success of the new system (by minimizing problems associated with the system):
• education—employees, through various types of education programs,
need to understand why the new system is needed (i.e., what business
problem is being addressed) and how the use of the new system can benefit
the employees
• follow-up: if the new system results in actual improvements (i.e., success),
this information needs to be communicated to employees
• sharing: can employees share in the success (cost-reduction) associated
with the new monitoring system?
• participation: the retail employees will likely accept (i.e., “internalize”) the
new system if they are given the opportunity to participate in the development
of the standards that will be used to evaluate their performance
• balanced scorecard type system: the new labor-efficiency system might be
implemented in conjunction with the use of other key performance measures,
such as customer satisfaction, increases in market share, etc.
• software sufficiency: the software used by the retailer might be sufficiently
refined so as to capture non-standard activities performed by retail clerks (see
the article for specific examples)
5. It would seem as if retailers competing on the basis of cost (low-cost strategy) rather
than a differentiation strategy would benefit most by the type of system discussed in
the article. The information from the new monitoring system can be used to improve
scheduling (identify the “best” or at least higher-performing employees) and to reduce
the amount of staff required. It could also be used to determine peak-load periods,
when increased staffing would be required. In all these cases, the retailer is able to
achieve a more efficient deployment of its labor force.
14-92
14-74 (Continued-2)
Below is a reproduction of the original article.
______________________________________________________________________
WSJ, Monday, November 17, 2008 (pp. A1, A15) By VANESSA O'CONNELL
SHELBY TOWNSHIP, Mich.--Daniel A. Gunther has good reason to keep his checkout
line moving at the Meijer Inc. store north of Detroit. A clock starts ticking the instant he
scans a customer's first item, and it doesn't shut off until his register spits out a receipt.
To assess his efficiency, the store's computer takes into account everything from the
kinds of merchandise he's bagging to how his customers are paying. Each week, he
gets scored. If he falls below 95% of the baseline score too many times, the 185-store
megastore chain, based in Walker, Mich., is likely to bounce him to a lower-paying job,
or fire him.
American retailers have come under tremendous financial pressure as beleaguered
consumers curtail their spending. At least 14 major chains have sought bankruptcy
protection over the past 12 months, and many others are struggling. With nearly all of
them under the gun to cut costs and improve profit margins, “labor-waste elimination”
systems like the one used by Meijer are sweeping the industry.
Daniel Gunther, who works at a Meijer megastore north of Detroit, says he has been
told ‘get people in and out’ of the checkout line to improve efficiency.
The brains behind Meijer's system is a consulting and software company known for
decades as H.B. Maynard & Co., which last year became the Operations Workforce
Optimization unit of Accenture Ltd. Borrowing from time-motion concepts first developed
for U.S. steel mills and factory floors, it breaks down tasks such as working a cash
register into quantifiable units and devises standard times to complete them, called
"engineered labor standards." Then it writes software to help clients keep watch over
their work forces.
The client list of OWO, as it is now known, has included more than five dozen retail
chains, including Gap Inc., TJX Cos., Limited Brands Inc., Office Depot Inc., Nike Inc.,
and Toys "R" Us Inc. A host of other "work force management" companies also offer to
help retailers improve worker productivity.
Interviews with cashiers at 16 Meijer stores suggest that its system has spurred many to
hurry up—and has dialed up stress levels along the way. Mr. Gunther, who is 22 years
old, says he recently told a longtime customer that he couldn't chat with her anymore
during checkout because he was being timed. “I was told to get people in and out,” he
says. Other cashiers say they avoid eye contact with shoppers and generally hurry
along older or infirm customers who might take longer to unload carts and count money.
14-93
14-74 (Continued-3)
Reactions from customers at Michigan stores vary. “Sometimes you like to get in and
get out right away,” says Barb Bush, who shops at Meijer stores in DeWitt and Owosso
and says she likes the current system. “A lot of [the cashiers] like to stop and chat, and I
don't really have the time for it.”
Linda Long, 58, who shops at the Okemos store weekly, says of the cashiers:
“Everybody is under stress. They are not as friendly. I know elderly people have a hard
time making change because you lose your ability to feel. They're so rushed at checkout
that they don't want to come here.”
Meijer spokesman Frank J. Guglielmi said in an email that “as the retail landscape
became more crowded and competitive, Meijer has focused more intently on
maximizing efficiencies.” The engineered standards, he said, take into account all types
of customers, including the elderly. The system, he said, has enabled Meijer to staff
stores more efficiently, and has increased customer-service ratings. Meijer, a familyowned chain with more than 60,000 employees in five states, doesn't disclose its
finances.
Mr. Guglielmi says Meijer “expects employees to be at 100% performance to the
standards, but we do not begin any formal counseling process until the performance
falls below 95%.” If a cashier is “challenged in their position,” he says, the company
provides “training and counseling to help improve their performance. If this doesn't help
them, there are various alternatives.” He declined to elaborate.
Customers at several Michigan stores said managers appeared to be opening fewer
checkout lines than before, relying on faster-moving cashiers and self-checkout systems
to pick up the slack. “I do notice that the cashiers go a little faster, but it doesn't
necessarily matter because there aren't that many cashiers,” says Melissa Shoe, 20, a
regular shopper at the Lansing store. Before Meijer installed its system a couple of
years ago, OWO, then still known as H.B. Maynard, helped devise engineered labor
standards for everything from greeting shoppers to scanning items too big to remove
from a shopping cart. By calculating a standard time for each task, a retailer can more
closely monitor worker performance and figure out how and where to reduce labor, the
single biggest controllable expense in retail. OWO says its methods can often cut labor
costs by 5% to 15%.
The approach is rooted in the time-motion theories of Frederick Taylor from the early
20th century, which were used to break down tasks into units to determine the
maximum work a person could do. Harold B. Maynard, the company's founder, began
his career in 1924 as a time-study engineer at Westinghouse, then formed his own
company. For 70 years, that company worked primarily for manufacturers.
14-94
In 2000, after demand from manufacturing industries declined, the company shifted into
retail. These days, about 80% of its $20 million in annual revenue comes from retail.
14-95
14-74 (Continued-4)
“As manufacturing gets shipped overseas, many people thought that would be the end
of engineered standards,” says John Lund, a professor of industrial engineering at an
extension program for workers at the University of Wisconsin. “In fact, we are not seeing
that at all. We are seeing a renaissance of engineered standards in the retail industry.”
Hannaford Bros., a subsidiary of the Belgian Delhaize Group, says OWO helped it
reduce labor costs at more than 150 supermarkets in New York and New England. Just
adding pre-sliced pickles to sandwiches, rather than having deli workers slice pickles
themselves, saved Hannaford $60,000 in labor costs, according to Mike Farago, a
former process-improvement specialist at Hannaford.
At Bob's Stores, a Northeastern clothing and footwear chain, the software revealed that
shaving one extra second from the checkout process for each shopper would produce
$15,000 in annual labor savings across its 34 stores, according to Kevin Campbell,
assistant vice president for store operations. He says Bob's used the software to
determine how many workers to schedule at any given time. The methods enabled it to
lower its labor budget by 8%, he says.
Engineering Meets Service
Unlike factory workers, most retail clerks deal face-to-face with customers, which raises
questions about how such labor standards can affect customer relations.
14-96
"If it is the type of job where you can lay out every element of the job, then you might get
more output per hour" using such a system, says Barry Hirsch, a labor professor in the
economics department at Georgia State University. "But if it is a job that requires things
that can't be quantified -- special effort for a customer, or just being friendly -- then
14-74 (Continued-5)
delineating things too carefully for how employees behave can decrease productivity,
because you're just so focused on working to precise guidelines."
OWO says retailers can, and should, adjust time standards to take into account
customer service and other variables such as store layout or sales volume, which can
affect how long it takes employees to perform certain tasks. In a study late last year for
a large clothing chain, for example, OWO determined that for every customer buying
something in a high-traffic urban store, 2.63 items were "disturbed" and required
straightening or reorganizing. That compared to 1.98 items in quieter suburban stores.
Meijer says it pioneered supercenters in the early 1960s. Each store stocks around
150,000 products, including groceries, apparel, sporting goods, home furnishings and
pet supplies.
In recent years, it has faced mounting competition from discount supercenters owned by
Wal-Mart Stores Inc., which often offered lower prices on general merchandise. Meijer
adopted the new labor standards for cashiers to boost productivity. It added fingerprint
readers to cash registers so cashiers can sign in for work directly at their registers, not
at a time clock, "saving minutes of wasted time," says Roy Smith Jr., the former director
of Meijer's Benton Harbor, Mich., store. The chain also installed a system to monitor
how many cases per hour stock workers were loading onto shelves.
In the late 1990s, the typical high-traffic Meijer store employed about 700 workers and
nearly 50 managers, says Mr. Smith, who worked at nine Meijer stores over 15 years
before quitting in September. Between late 2003 and late 2007, he says, Meijer's
"selling, general and administrative" expense, which includes labor, fell about 4%. The
company spokesman declined to comment on those numbers, but said that most Meijer
stores now employ between 250 and 400 workers.
In spring 2007, Meijer began disciplining cashiers who couldn't keep up with its baseline
standards, according to Mr. Smith and several longtime cashiers. Hitting the baseline
was "like a C-minus" grade, says Mr. Smith. Those who fell below 95% of the baseline
—a score of 95—faced penalties or weeding out. Meijer posted weekly "cashier
productivity" notices in employee-only areas.
14-97
Store managers used the scores to decide whether new cashiers still in the 90-day
probationary period should be transferred, or fired. Longtime employees also were
scrutinized. In a given week, up to one-fifth of the scores posted were below 95, current
and former cashiers say.
Before the scoring system, "nobody knew who was good," says Mr. Smith. Afterwards,
managers knew "this person isn't as strong as that person. It becomes really obvious,
and you're able to put a number to that." Cashiers were counseled for as many as
seven weeks on improving performance; those who didn't lost their jobs, he says.
14-74 (Continued-6)
Employees with scores below 95 are told: "Get your percentage up, and we'll have a
manager watch you to see what you should do differently," says Nastassia Gauna, who
worked as a cashier at the Adrian, Mich., Meijer store before quitting, she says, in
August.
The X Factors
The computer scores, Ms. Gauna says, don't "take into consideration the many things
that can go wrong at a register to kill your time" -- a customer who doesn't have enough
cash and is "digging through a purse," a credit card that doesn't swipe through the
charge, or an item with no price or item number on it. Some customers ask for
cigarettes located in another part of the store, and the cashier has to get them. Others
forget items and retreat to the aisles to find them.
Buying Time
Operations Workforce Optimization (OWO), a unit of Accenture, breaks down tasks into
quantifiable units, devises standard times to complete them, then writes software to help
clients keep watch over their workforces. Here are some ways it trimmed time from
common tasks at an unnamed grocery retailer.
Produce
Bananas, a top-selling item, are stocked by grasping inverted bunches by the
tips. Flipping the box over prior to stocking allows the employee to grasp multiple
bunches at once by the stems. Projected savings: $100,000 per year.*
•
Bakery
Some breads and rolls are packaged in plastic bags and closed with twist
ties. Innoseal or bag clips reduce the manual motions required. Projected savings:
$200,000 per year.*
•
14-98
During packaging of some goods, employees are walking to the work rather
than bringing the work to them, often traveling several steps for each tray rather than
bringing the rack to the workstation. Projected savings: $20,000 per year.*
•
(*Savings generally vary according to the number of stores in a chain.)
14-74 (Continued-7)
"Recovering" Items
At clothing retailers, OWO defines "recovery" as collecting an item that has been left
behind or disturbed by a shopper. Tasks vary, depending on the scenario -- re-hanging
a garment that's on the ground versus one that's not on the ground -- and the store.
Handling an item and looking for a tag should take about 1.8 seconds. Buttoning or
zipping a garment should take about 2.4 seconds.
To help a large clothing chain figure out efficient staffing, OWO's analysis found that in
high-traffic stores, for every 100 customers purchasing something, 50 pieces of
clothing need to get rehung and replaced back out on the sales floor. It takes more
than 11 seconds per shopper to recover an item.
In low-traffic (often suburban) stores, 15 items need to be returned to the floor,
for every 100 customers who buy something, and it takes about six seconds per
shopper to recover an item.
This kind of behavior, of course, tends to tick off other shoppers waiting in line, but
some of them sympathize with the cashiers. "I am 84, and I get behind some old person
and I can't stand it," says one shopper at the Owosso store. "They go into their purse
and they are counting out a penny, and I am thinking that poor clerk, and people are
lining up. But it's not the clerk's fault."
Kristine E. Barry, a cashier at the DeWitt store, says she began to see cashiers hurry
along elderly customers by telling them to put their items on the belt more quickly
because they were being timed. "When you have a situation where you are dealing with
an elderly customer who's not as speedy, you're under pressure," says Ms. Barry, who
has been a Meijer cashier for 22 years.
Jacqueline Sue Hanning, 25, took a job as a cashier in the Adrian, Mich., store for $7.15
an hour, in July 2007. She says she was "written up" three or four times last spring for
scores below 95. She was told she would have to move to another department, at lower
pay, if her score didn't improve, she says. "Make sure you're just scanning, grabbing,
bagging," she recalls being told. She quit after nearly one year on the job.
14-99
Two shoppers interviewed in front of the Okemos store said they were told by cashiers
that they were being timed. "There was one particular cashier that was in so much of a
hurry," recalls Ms. Long, the regular customer at that store. "And he was saying, 'When
you're afraid you're going to lose your job, you're going to make more mistakes.' "
The United Food and Commercial Workers Union, which covers about 27,000 Meijer
employees in Michigan, including 3,000 cashiers, has filed a grievance against the
company in connection with the cashier-performance system, saying it has found flaws
14-74 (Continued-8)
in it. The union says the matter is headed for arbitration. The Meijer spokesman
declined to comment.
Ms. Barry, the DeWitt cashier, who says her weekly score usually hits or exceeds the
baseline, admits to using a few tricks to improve her times. She makes heavy use of the
register's "suspend button," which stops the clock. The system detects when remote
scanning guns are used, automatically allowing slightly more time to scan big items that
stay in the cart. Ms. Barry sometimes uses the remote scanner for non-bulky
merchandise.
"It is pretty much survival," she says. "You have to learn the tricks of the trade."
Write to Vanessa O'Connell at vanessa.o'connell@wsj.com
14-100
Chapter 14: Check Figures
14-34 No check figure
14-35 1. Budgeted operating income = $165,000; 2a = $35,000U; 2b = $35,000U; 3a =
$3,000U; 3b = $9,000U; 3c = $30,000U; 3d = $36,000F.
14-36 1. Budgeted operating income = $21,500; 1b = $2,500F; 1c = $3,500F; 1d =
$7,500F; 1e = $7,500F
14-37 1. Sales volume variance = $1,800U; FB variance, in terms of CM = $7,700U; FB
variance, in terms of operating income = $9,700U; 3. Budgeted operating profit
when volume = 3,800 units = $10,200; for sales volume of 4,100, budgeted
operating profit = $12,900.
14-38 1a = $16,750U, 1b = $5,625F; 2a = $8,400U, 2b = $12,000F
14-39 No check figure
14-40 1 = $3.00/lb.; 2 = $20,000F; 3 = 36,143 lbs.
14-41 No check figure
14-42 $550U; $1,450U
14-43 $196.00
14-44 $58.20
14-45 1. $30,000 2. $42,000 3. $12,000U
14-46 No check figure
14-47 No check figure
14-48 1 = $33.00; 2 = $33,000F
14-49 Labor rate variance = $14,500U; labor efficiency variance = $5,000F
14-50 No check figure
14-51 3. PCE, Pre-JIT = 29%; PCE, Post-JIT = 46% (% improvement = 58.6%)
14-52 3. PCE, Pre-JIT = 30.77%; PCE, Post-JIT = 37.5%
4. % change = 22% (rounded; actual number is 21.88%)
14-53 1. Operating profit = $204,400 2. Operating profit = $336,400
14-54 1. $23,000U
2. $56,000F
14-55 No check figure
14-56 No check figure
14-57 1. 0.9703 hours/unit for January 2011; 2. $7,160U
14-58 No check figure
14-59 No check figure
14-60 1. $2,310,000 2. $190,000U 3. $80,000U
14-61 No check figure
14-62 1. Total standard direct manufacturing cost/unit = $25.82
14-63 1. Standard cost/ten-gallon batch = $80.00
14-64 1. Flexible-budget operating income = $75,000; 2a = $35,000U; 2b = $65,000U;
2c = $30,000F; 2d = $30,000F; 2e = $50,000U
14-65 1B = “Sales Volume Variance” 1D = 205,000 units; 1K = $16,500U; 1Q =
$1,347,250; 2: total master budget variance = $92,500F
14-66 1a = $13,900U; 1b = $8,500U; 1c = $400F; 1d = $4,860U; 1e = $44,000U; 1f =
$12,200F
14-101
14-67 2a: change due to price = $0.77U; change due to effect of direct materials quality
on materials usage = $1.75F; change in labor usage due to effect of materials
quality = $0.42F; 2b: changes in per unit cost due to the new labor contract =
$0.66U; 2c: total change in direct manufacturing cost per unit = $0.74F
14-68 1a = $12,740F; 1b = $64,300F; 1c = 51,500 kg.; 1d = $4.985; 1e = $835,520; 1f
= $97,520
14-69 1 = $50,000U; 2 = $25,000U; 3 = $5,000U
14-70 1: operating income flexible-budget variance = $1,150F; sales volume variance =
$1,100U; 2: Labor Rate Variance = $1,500U; Labor efficiency variance = $100F
14-71 2a = $50,000U; 2b = $54,000U; 2c(1) = $40,000U; 2c(2) = $1,000F; 2d(1) = $0;
2d(2) = $4,000U
14-72 1: Total purchase price variance for the year = $360,000F; total purchase price
variance for 4th quarter = $480,000F (portion of price variance due to increase in
the negotiated price = $384,000U; portion of price variance due to changes in the
exchange rate = $864,000F)
14-73 1: materials usage variance, regular materials = $2,000U; materials usage
variance, alternative materials = $38,000U; 2a: labor rate variance, Class III labor
= $7,600U; labor rate variance, Class II labor = $1,030F; 2b: labor substitution
variance, Class II labor = $20,600U; 2c: Class III labor variance from using nonstandard materials = $15,120U; Class II labor variance from using non-standard
materials = $10,080U; 2d: Class III labor efficiency variance, based on use of
regular materials = $22,000U; Class II labor efficiency variance, based on use of
regular materials = $32,170U. Note that the Total Labor Cost Variance, across
both labor classes, amounts to $54,170U for the period.
14-74 No check figure
14-102