Exercise 10-6 (20 minutes)
1.
Standard Quantity Allowed
for Actual Output,
at Standard Price
(SQ × SP)
18,000 ounces* ×
$2.50 per ounce
= $45,000
Actual Quantity of
Input,
at Standard Price
(AQ × SP)
20,000 ounces ×
$2.50 per ounce
= $50,000
Actual Quantity of
Input,
at Actual Price
(AQ × AP)
20,000 ounces ×
$2.40 per ounce
= $48,000
Materials quantity
Materials price
variance = $5,000 U
variance = $2,000 F
Spending variance = $3,000 U
*2,500 units × 7.2 ounces per unit = 18,000 ounces
Alternatively, the variances can be computed using the formulas:
Materials quantity variance = SP (AQ – SQ)
= $2.50 per ounce (20,000 ounces – 18,000 ounces)
= $5,000 U
Materials price variance = AQ (AP – SP)
= 20,000 ounces ($2.40 per ounce – $2.50 per ounce)
= $2,000 F
Exercise 10-6 (continued)
2.
Standard Hours Allowed
for Actual Output,
at Standard Rate
(SH × SR)
1,000 hours* ×
$10.00 per hour
= $10,000
Actual Hours of Input,
at Standard Rate
(AH × SR)
900 hours ×
$10.00 per hour
= $9,000
Actual Hours of Input,
at Actual Rate
(AH × AR)
$10,800
Labor efficiency variance
Labor rate variance
= $1,000 F
= $1,800 U
Spending variance = $800 U
*2,500 units × 0.4 hour per unit = 1,000 hours
Alternatively, the variances can be computed using the formulas:
Labor efficiency variance = SR (AH – SH)
= $10 per hour (900 hours – 1,000 hours)
= 1,000 F
Labor rate variance = AH (AR – SR)
= 900 hours ($12 per hour* – $10 per hour)
= $1,800 U
*10,800 ÷ 900 hours = $12 per hour
Exercise 10-7 (15 minutes)
Notice in the solution below that the materials price variance is computed
on the entire amount of materials purchased, whereas the materials
quantity variance is computed only on the amount of materials used in
production.
Standard Quantity Allowed
for Actual Output,
at Standard Price
(SQ × SP)
14,400 ounces* ×
$2.50 per ounce
= $36,000
Actual Quantity
of Input,
at Standard Price
(AQ × SP)
16,000 ounces ×
$2.50 per ounce
= $40,000
Actual Quantity
of Input,
at Actual Price
(AQ × AP)
20,000 ounces ×
$2.40 per ounce
= $48,000
Materials quantity
variance = $4,000 U
20,000 ounces ×
$2.50 per ounce
= $50,000
Materials price variance
= $2,000 F
*
Alternatively, the variances can be computed using the formulas:
Materials quantity variance = SP (AQ – SQ)
= $2.50 per ounce (16,000 ounces – 14,400 ounces)
= $4,000 U
Materials price variance = AQ (AP – SP)
= 20,000 ounces ($2.40 per ounce – $2.50 per ounce)
= $2,000 F
Exercise 10-8 (30 minutes)
1. a. Notice in the solution below that the materials price variance is
computed on the entire amount of materials purchased, whereas the
materials quantity variance is computed only on the amount of
materials used in production.
Standard Quantity Allowed
for Actual Output,
at Standard Price
(SQ × SP)
40,000 diodes* ×
$0.30 per diode
= $12,000
Actual Quantity
of Input,
at Standard Price
(AQ × SP)
50,000 diodes ×
$0.30 per diode
= $15,000
Actual Quantity
of Input,
at Actual Price
(AQ × AP)
70,000 diodes ×
$0.28 per diode
= $19,600
Materials quantity
variance = $3,000 U
70,000 diodes ×
$0.30 per diode
= $21,000
Materials price variance
= $1,400 F
*5,000 toys × 8 diodes per toy = 40,000 diodes
Alternatively, the variances can be computed using the formulas:
Materials quantity variance = SP (AQ – SQ)
= $0.30 per diode (50,000 diodes – 40,000 diodes)
= $3,000 U
Materials price variance = AQ (AP – SP)
= 70,000 diodes ($0.28 per diode – $0.30 per diode)
= $1,400 F
Exercise 10-8 (continued)
b. Direct labor variances:
Standard Hours Allowed
for Actual Output,
at Standard Rate
(SH × SR)
3,000 hours* ×
$14.00 per hour
= $42,000
Actual Hours of Input,
at Standard Rate
(AH × SR)
3,200 hours ×
$14.00 per hour
= $44,800
Actual Hours of Input,
at Actual Rate
(AH × AR)
$48,000
Labor efficiency variance
Labor rate variance
= $2,800 U
= $3,200 U
Spending variance = $6,000 U
*5,000 toys × 0.6 hours per toy = 3,000 hours
Alternatively, the variances can be computed using the formulas:
Labor efficiency variance = SR (AH – SH)
= $14.00 per hour (3,200 hours –3,000 hours)
= $2,800 U
Labor rate variance = AH (AR – SR)
= 3,200 hours ($15.00* per hour – $14.00 per hour)
= $3,200 U
*$48,000 ÷ 3,200 hours = $15.00 per hour
Exercise 10-8 (continued)
2. A variance usually has many possible explanations. In particular, we
should always keep in mind that the standards themselves may be
incorrect. Some of the other possible explanations for the variances
observed at Topper Toys appear below:
Materials Price Variance Since this variance is favorable, the actual price
paid per unit for the material was less than the standard price. This could
occur for a variety of reasons including the purchase of a lower grade
material at a discount, buying in an unusually large quantity to take
advantage of quantity discounts, a change in the market price of the
material, and particularly sharp bargaining by the purchasing department.
Materials Quantity Variance Since this variance is unfavorable, more
materials were used to produce the actual output than were called for by
the standard. This could also occur for a variety of reasons. Some of the
possibilities include poorly trained or supervised workers, improperly
adjusted machines, and defective materials.
Labor Rate Variance Since this variance is unfavorable, the actual
average wage rate was higher than the standard wage rate. Some of the
possible explanations include an increase in wages that has not been
reflected in the standards, unanticipated overtime, and a shift toward
more highly paid workers.
Labor Efficiency Variance Since this variance is unfavorable, the actual
number of labor hours was greater than the standard labor hours allowed
for the actual output. As with the other variances, this variance could have
been caused by any of a number of factors. Some of the possible
explanations include poor supervision, poorly trained workers, low-quality
materials requiring more labor time to process, and machine breakdowns.
In addition, if the direct labor force is essentially fixed, an unfavorable
labor efficiency variance could be caused by a reduction in output due to
decreased demand for the company’s products.
Exercise 11-6 (15 minutes)
1.
Margin =
=
Turnover =
=
Net operating income
Sales
$800,000
= 10%
$8,000,000
Sales
Average operating assets
$8,000,000
= 2.5
$3,200,000
ROI = Margin × Turnover
= 10% × 2.5 = 25%
2.
Margin =
Net operating income
Sales
=
$800,000(1.00 + 4.00)
$8,000,000(1.00 + 1.50)
=
$4,000,000
= 20%
$20,000,000
Turnover =
Sales
Average operating assets
=
$8,000,000 (1.00 + 1.50)
$3,200,000
=
$20,000,000
= 6.25
$3,200,000
ROI = Margin × Turnover
= 20% × 6.25 = 125%
Exercise 11-6 (continued)
3.
Margin =
Net operating income
Sales
=
$800,000 + $250,000
$8,000,000 + $2,000,000
=
$1,050,000
= 10.5%
$10,000,000
Turnover =
Sales
Average operating assets
=
$8,000,000 + $2,000,000
$3,200,000 + $800,000
=
$10,000,000
= 2.5
$4,000,000
ROI = Margin × Turnover
= 10.5% × 2.5 = 26.25%
Exercise 11-7 (20 minutes)
1. ROI computations:
2.
ROI =
Net operating income
Sales
×
Sales
Average operating assets
Perth:
$630,000
$9,000,000
×
= 7% × 3 = 21%
$9,000,000
$3,000,000
Darwin:
$1,800,000
$20,000,000
×
= 9% × 2 = 18%
$20,000,000
$10,000,000
Average operating assets ....................
Net operating income .........................
Minimum required return on average
operating assets—16% × Average
operating assets ..............................
Residual income .................................
Perth
Darwin
480,000
$150,000
1,600,000
$ 200,000
$3,000,000 $10,000,000
$630,000 $1,800,000
3. No, the Darwin Division is simply larger than the Perth Division and for
this reason one would expect that it would have a greater amount of
residual income. Residual income can’t be used to compare the
performance of divisions of different sizes. Larger divisions will almost
always look better. In fact, in the case above, Darwin does not appear to
be as well managed as Perth. Note from Part (1) that Darwin has only
an 18% ROI as compared to 21% for Perth.
Exercise 11-8 (15 minutes)
Sales .........................................
Net operating income .................
Average operating assets ...........
Return on investment (ROI) .......
Minimum required rate of return:
Percentage .............................
Dollar amount .........................
Residual income ........................
*Given.
Company A
Company B
Company C
15% *
$24,000
$8,000
20%
$50,000 *
$(5,000)
12% *
$18,000
$6,000 *
$400,000 * $750,000 *
$32,000
$45,000 *
$160,000 * $250,000
20% *
18% *
$600,000 *
$24,000
$150,000 *
16%
Exercise 11-9 (30 minutes)
1. Computation of ROI.
2.
Division A: ROI =
$300,000
$6,000,000
×
= 5% × 4 = 20%
$6,000,000
$1,500,000
Division B: ROI =
$900,000
$10,000,000
×
= 9% × 2 = 18%
$10,000,000
$5,000,000
Division C: ROI =
$180,000
$8,000,000
×
= 2.25% × 4 = 9%
$8,000,000
$2,000,000
Average operating assets .....
Required rate of return ........
Minimum required return .....
Actual net operating income.
Minimum required return
(above) ............................
Residual income ..................
Division A
$1,500,000
×
15%
$ 225,000
$ 300,000
225,000
$ 75,000
Division B
Division C
$5,000,000 $2,000,000
×
18% ×
12%
$ 900,000 $ 240,000
$ 900,000 $ 180,000
900,000
$
0
240,000
$ (60,000)
Exercise 12-1 (15 minutes)
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Item
Sales revenue .................
Direct materials ..............
Direct labor ....................
Variable manufacturing
overhead .....................
Book value—Model
A3000 machine ............
Disposal value—Model
A3000 machine ............
Depreciation—Model
A3000 machine ............
Market value—Model
B3800 machine (cost)...
Fixed manufacturing
overhead .....................
Variable selling expense ..
Fixed selling expense ......
General administrative
overhead .....................
Case 1
Case 2
Not
Relevant Relevant
Not
Relevant Relevant
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Exercise 12-3 (30 minutes)
1.
Cost of purchasing ......................
Direct materials ...........................
Direct labor .................................
Variable manufacturing overhead .
Fixed manufacturing overhead,
traceable1 .................................
Fixed manufacturing overhead,
common...................................
Total costs ..................................
Difference in favor of continuing
to make the parts .....................
1
Per Unit
Differential
Costs
Make Buy
$ 6
8
1
$20
2
0
$17
15,000 units
Make
Buy
$ 90,000
120,000
15,000
$300,000
30,000
0
$20
0
0
$255,000 $300,000
$3
$45,000
Only the supervisory salaries can be avoided if the parts are
purchased. The remaining book value of the special equipment is a
sunk cost; hence, the $3 per unit depreciation expense is not
relevant to this decision.
Based on these data, the company should reject the offer and should
continue to produce the parts internally.
2.
Cost of purchasing (part 1) .........................
Cost of making (part 1) ..............................
Opportunity cost—segment margin forgone
on a potential new product line ................
Total cost ...................................................
Difference in favor of purchasing from the
outside supplier .......................................
Make
Buy
$255,000
$300,000
65,000
$320,000 $300,000
$20,000
Thus, the company should accept the offer and purchase the parts from
the outside supplier.
Exercise 12-6 (20 minutes)
1. The value of relaxing the constraint can be determined by computing
the contribution margin per unit of the constrained resource:
Leather
Library
Chair
Selling price per unit...................................................
$1,800
Variable cost per unit .................................................
1,200
Contribution margin per unit (a) ..................................
$ 600
Upholstery shop time required to produce one unit (b) .
12 hours
Contribution margin per unit of the constrained
resource (a) ÷ (b) ................................................... $50 per hour
The company should be willing to pay up to $50 per hour to keep the
upholstery shop open after normal working hours.
2. To answer this question, it is desirable to compute the contribution
margin per unit of the constrained resource for all three products:
Selling price per unit..................
Variable cost per unit ................
Contribution margin per unit (a) .
Upholstery shop time required to
produce one unit (b) ...............
Contribution margin per unit of
the constrained resource
(a) ÷ (b) ................................
Gainsborough
Armchair
Leather
Library
Chair
Chippendale
Fabric
Armchair
8 hours
12 hours
5 hours
$62.50
per hour
$50.00
per hour
$80.00
per hour
$1,300
800
$ 500
$1,800
1,200
$ 600
$1,400
1,000
$ 400
The offer to upholster chairs for $45 per hour should be accepted. The
time would be used to upholster Chippendale Fabric Armchairs. If this
increases the total production and sales of those chairs, the time would
be worth $80 per hour—a net gain of $35 per hour. If Chippendale
Fabric Armchairs are already being produced up to demand, then having
these chairs upholstered in the other company would free up capacity to
produce more of the other two chairs. In both cases, the additional time
is worth more than $45 per hour.
Exercise 12-7 (10 minutes)
Sales value after further processing ..
Sales value at split-off point .............
Incremental revenue ........................
Cost of further processing ................
Incremental profit (loss) ...................
Product X Product Y Product Z
$80,000
50,000
30,000
35,000
$(5,000)
$150,000
90,000
60,000
40,000
20,000
$75,000
60,000
15,000
12,000
3,000
Products Y and Z should be processed further, but not Product X.
Exercise 12-8 (10 minutes)
Merifulon should be processed further:
Sales value after further processing ..................
Sales value at the split-off point .......................
Incremental revenue from further processing ....
Cost of further processing ................................
Profit from further processing ..........................
$60,000
40,000
20,000
13,000
$ 7,000
The $10,000 in allocated common costs (1/3 × $30,000) will be the same
regardless of which alternative is selected, and hence is not relevant to the
decision.
Exercise 12-9 (15 minutes)
The company should accept orders first for Product Z, second for Product
X, and third for Product Y. The computations are:
(a)
(b)
(c)
(d)
Direct materials required per unit ....
Cost per pound ...............................
Pounds required per unit (a) ÷ (b) ...
Contribution margin per unit ...........
Contribution margin per pound of
materials used (d) ÷ (c) ...............
Product
X
$24.00
$3.00
8
$32.00
$4.00
Product
Y
$15.00
$3.00
5
$14.00
$2.80
Product
Z
$9.00
$3.00
3
$21.00
$7.00
Because Product Z uses the least amount of material per unit of the three
products, and because it is the most profitable of the three in terms of its
use of this constrained resource, some students will immediately assume
that this is an infallible relationship. That is, they will assume that the way
to spot the most profitable product is to find the one using the least
amount of the constrained resource. The way to dispel this notion is to
point out that Product X uses more material (the constrained resource)
than does Product Y, but yet it is preferred over Product Y. The key factor is
not how much of a constrained resource a product uses, but rather how
much contribution margin the product generates per unit of the
constrained resource.
Exercise 12-10 (30 minutes)
No, the overnight cases should not be discontinued. The computations are:
Contribution margin lost if the cases are
discontinued .................................................
$(260,000)
Less fixed costs that can be avoided if the
cases are discontinued:
Salary of the product line manager.............. $ 21,000
Advertising ................................................ 110,000
Insurance on inventories ............................
9,000
140,000
Net disadvantage of dropping the cases............
$(120,000)
The same solution can be obtained by preparing comparative income
statements:
Difference:
Net Operating
Keep
Drop
Income
Overnight Overnight
Increase or
Cases
Cases
(Decrease)
Sales ............................................ $450,000 $
0
Variable expenses:
Variable manufacturing expenses
130,000
0
Sales commissions .....................
48,000
0
Shipping ....................................
12,000
0
Total variable expenses ................. 190,000
0
Contribution margin ...................... 260,000
0
Fixed expenses:
Salary of line manager ................
21,000
0
General factory overhead ............ 104,000
104,000
Depreciation of equipment ..........
36,000
36,000
Advertising—traceable ................ 110,000
0
Insurance on inventories.............
9,000
0
Purchasing department ...............
50,000
50,000
Total fixed expenses...................... 330,000
190,000
Net operating loss ......................... $ (70,000) $(190,000)
$(450,000)
130,000
48,000
12,000
190,000
(260,000)
21,000
0
0
110,000
9,000
0
140,000
$(120,000)