7-21 Price and efficiency variances. Peterson Foods manufactures pumpkin scones. For
January 2007, it budgeted to purchase and use 15,000 pounds of pumpkin at $0.89 a
pound. Actual purchases and usage for January 2007 were 16,000 pounds at $0.82 a
pound. It budgets for 60,000 pumpkin scones. Actual output was 60,800 pumpkin scones.
1. Compute the flexible-budget variance.
The key information items are:
Actual
60,800
16,000
$0.82
Output units (scones)
Input units (pounds of pumpkin)
Cost per input unit
Budgeted
60,000
15,000
$0.89
Peterson budgets to obtain 4 pumpkin scones from each pound of pumpkin.
The flexible-budget variance is $408 F.
Pumpkin costs
Actual
Results
(1)
$13,120
FlexibleBudget
Variance
(2) = (1) –
(3)
$408 F
Flexible
Budget
(3)
$13,528
SalesVolume
Variance
(4) = (3) –
(5)
$178 U
Static
Budget
(5)
$13,350
Calculations:
16,000*$0.82 = $13,120
60,800*$0.82 = $13,528
60,000*$0.89 = $13,350
2. Compute the price and efficiency variances.
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)
$13,120
Actual Input Qty.
× Budgeted Price
$14,240
$1,120 F
Price variance
Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
$13,528
$712 U
Efficiency variance
$408 F
Flexible-budget variance
3. Comment on the results in requirements 1 and 2.
The favorable flexible-budget variance of $408 has two offsetting components:
(a)
Favorable price variance of $1,120––reflects the $0.82 actual purchase
cost being lower than the $0.89 budgeted purchase cost per pound.
(b)
Unfavorable efficiency variance of $712–-reflects the actual materials
yield of 3.80 scones per pound of pumpkin (60,800 ÷ 16,000 = 3.80) being
less than the budgeted yield of 4.00 (60,000 ÷ 15,000 = 4.00). (The
company used more pumpkins (materials) to make the scones than was
budgeted.)
One explanation may be that Peterson purchased lower quality pumpkins at a lower cost
per pound.
Discussion Question 2
th
• Resource: Cost Accounting (12 ed.)
• Due Date: Day 4 [Main] forum
• Complete Exercise 7-21 on p. 246.
• Post your answers to the [Main] Forum as an attachment.
• Answer the following question:
How can determining the causes of these variances help the company improve?
Determining the causes of variances would help the company improve as managers’
attention could be focused on problematic areas, if for example materials of higher
quality are purchased at a higher price, such price increase should be taken into
account when preparing the budget for the next period. If lower quality materials
have been purchased, the purchasing manager should be advised not to use lower
quality materials as this would result in a lower product quality. In the case of
Quantity Variances could be a result from an unexpected machinery breakdowns,
for example, hence managers would need to put a maintenance schedule for the
machines to avoid such unpleasant problems.
In the case of an Unfavorable Efficiency Variance which mostly result from hiring
unskilled workers, management can start arranging training courses for such
unskilled labor so as they achieve the company’s standards
In short, all variances either favorable or unfavorable need to be investigated. A
threshold may be fixed at say 5% and all variances above this should be
investigated. The causes of the variances should be ascertained and the processes
changed so as to ensure that the variances do no recur. If it is found that variances
are due to incorrect standards in which case the standards themselves need to be
changed.