ACCT7310, Spring 2016
7-26, 27, 28, 29, 34, & 39; 14-23

Problem 7-26 Straightforward DM, DL

• Al
Formulas:
MPV = (AP-SP)*AQpurchased = ($5.10-5.00)*3700 = $370 U
MEV = (AQused-SQallowed) *SP = (3700-4000)*$5 = $1500 F
Also called Usage or Quantity variance!

Direct Manufacturing Labor
Actual Costs
Incurred
(Actual Input
Quantity
× Actual Price)
(900 hrs. × $9.80)
$8,820
Actual Input Quantity
× Budgeted Price
(900 hrs. × $10.00)
$9,000
$180 F
Price variance
$1,000 F
Efficiency variance
$1,180 F
Flexible-budget variance
Flexible Budget
(Budgeted Input
Quantity Allowed for
Actual Output
× Budgeted Price)
(2000 × 0.5 × $10.00)
(1,000 hrs. × $10.00)
$10,000
Or Rate variance
Here the term Efficiency is a good fit, because efficiency is commonly associated with labor.

Identifying DM variance at time of purchase

Ex. 7-27, Journal entries

Ex. 7-27, Journal entries cont’d

Ex. 7-27, Journal entries concluded

Ex. 7-27,assuming 6000 yds. purchased
(vs. 3700 used)

Ex. 7-28 —Reconciling to static budget

Ex. 7-29: Mkt Share, Mkt Size

Ex. 7-29: Mkt Share, Mkt Size

Ex. 7-29: Mkt Share, Mkt Size, Reasons
The market share variance is favorable; the company increased its percentage of the market.
Since the total market decreased , this could be due to providing a higher quality product or more after-sale services than competitors, a decrease in sales price, or negative actions by competitors.

Problem 7-34
Flexible budget for quantity purchased .
Flexible budget for quantity used .
Q2: Causal effects?
“Actual input” may be awkward terminology here.

3. Switching vendors good idea?
• Can we say whether it was a good decision?
• Outcome:
• The $25,200 savings in the cost of titanium was outweighed by the
$33,000 extra material usage.
• Also, the $33,000 does not reflect the total cost of inefficiency; 500 lbs remain to be used used. At current usage rate (7900/800), could produce about 50 more units. At standard, 50 more units should take 50 × 8 = 400 lbs., not 500 lbs.

Additional questions
4. Performance issues
•
•
Should PA (M. Scott) be evaluated solely on price variances?
The prod’n manager solely on efficiency variances?
• Important for owner to understand causes before evaluating performance.
• Variances raise questions . Managers must interpret--construct a story.
• 5. Other than performance evaluation, what reasons for calculating variances?
• 6. What future problems from decision to buy lowerquality of titanium?

Pr. 7-39: Comprehensive Review
Static Budget calculations
Static Budgeted Amounts
Units sold
Selling price per unit
Revenues (1,500,000 × $6.00)
Direct materials purchased and used:
Direct materials per unit
Total direct materials costs (1,500,000 × $1.50)
Direct manufacturing labor:
Direct manufacturing rate per hour
Labor productivity per hour in units
Manufacturing labor-hours of input (1,500,000 ÷ 300)
Total direct manufacturing labor cost (5,000 × $12.00)
Direct marketing costs:
Direct marketing cost per unit
Total direct marketing cost (1,500,000 × $0.30)
Fixed overhead costs
1,500,000
$ 6.00
$9,000,000
$ 1.50
$2,250,000
$ 12.00
300
5,000
$ 60,000
$ 0.30
$ 450,000
$ 800,000

Pr. 7-39: Comprehensive Review
.95*1,500,000 1,500,000 units
=1,425,000
Total static-budget variance
$ 263,290 U

Flexible Budget with Variances
Units (diskettes) sold
Revenues
Variable costs
Direct materials
Direct manuf. labor
Direct marketing costs
Total variable costs
Contribution margin
Fixed costs
Operating income
Actual
Results
Flexible-Budget
Variances
Flexible
Budget
Sales-
Volume
Variances
Static
Budget
1,425,000 0
$8,692,500
2,280,000
69,540
356,250
$142,500 F
142,500 U
12,540 U
71,250 F
@$6
@
$1.50
.04
1,425,000 75,000 1,500,000
$8,550,000 $450,000 U $9,000,000
2,137,500
57,000
.30
427,500
112,500 F
3,000 F
22,500 F
2,250,000
60,000
450,000
2,705,790 83,790 U
5,986,710 58,710 F
810,000 10,000 U
2,622,000
5,928,000
800,000
138,000 F
312,000 U
0
2,760,000
6,240,000
800,000
$5,176,710 $ 48,710 F $5,128,000 $312,000 U $5,440,000
$263,290 U
Total static-budget variance
$48,710 F
4
Total flexible-budget
variance
5
$312,000 U
Total sales-volume
variance

Analyzing the Sales Volume Variance

Market size & share var’s (contr. mgn)
If we had maintained our share, we would have sold this many units.
6
Only one product, so no question of “mix.”

Price, efficiency var’s for DL
7
Or, thinking in terms of formulas:
LRV = (AP-SP)*AQ = ($12.20-12.00)*5700 = $1140 U
LEV = (AQused-SQallowed) *SP = (5700-4750)*$12 = $11,400 U
8

Pr. 14-23, Detroit Penguins
Note that this is the difference between the Static and the Flexible budgets:
Static: 4000*$20+6000*5 = $110,000
Flex: 3300*$20 + 7700*$5 = 104,500
$104,500- $110,000 = $5500 U

24
Sales-Quantity Variance [from last week]
Effect on CM purely from quantity sold
=
(Actual units of all products sold
– Budgeted units of all products sold)
×
×
Budgeted sales-mix percentage
Budgeted contribution margin per unit
Rationale:
•If overall sales increased…
•and the sales mix had been as expected (budgeted)…
• then contribution margin would have increased at the budget rate per unit.
The sales-quantity variances are:
Lower-tier tickets = (11,000 – 10,000) × 0.40 × $20 = $ 8,000 F
Upper-tier tickets = (11,000 – 10,000) × 0.60 × $ 5 = 3,000 F
All tickets $11,000 F

Sales-Mix Variance
Actual units of all products sold
Change in mix:
(Actual sales % – Budgeted %)
Budgeted contribution margin per unit
Computed for each product and total.
25

Conclusions
• The Detroit Penguins increased average attendance by
10% per game. However, there was a sizable shift from lower-tier seats (budgeted contribution margin of $20 per seat) to the upper-tier seats (budgeted contribution margin of $5 per seat). The net result: the actual contribution margin was $5,500 below the budgeted contribution margin.