7-28 (25 min.) Flexible budget (Refer to data in Exercise 7-26).A more detailed analysis underscores the fact that the world of variances may be divided into three general parts: price, efciency,and what is labeled here as a salesvolume variance. !ailure to pinpoint these three categories muddies the analyticaltas". #heclearer analysis follows (in dollars):ActualCostsIncurred(ActualInut !t".$ Actual#rice)Actual Inut !t".$ $udgeted #riceFlexible $udget($udgeted Inut!t". Allo%ed for Actual &utut $ $udgeted #rice)'tatic$udget%irect &aterials '(),)*+ '(),5++ '2+,+++ '25,+++(a) ',*+ - (b) '(,5++ ! (c) '5,+++ !%irect &anuf..abor '),)2+ '/,+++ '(+,+++ '(2,5++(a) '()+ ! (b) '(,+++ ! (c) '2,5++ !(a)0rice variance (b) 1fciency variance (c) 2alesvolume variance#he salesvolume variances are favorable here in the sense that less cost would be e3pected solely because the output level is lessthan budgeted. 4owever, this is an e3ample of how variances must be interpreted cautiously.&anagersmay be incensed at thefailure to reach scheduled production (it may mean fewer sales) even though the 2,+++ units were turned out with supreme efciency.2ometimes this phenomenon is called being efcient but ine5ective, where e5ectiveness is de6ned as the ability to reach originaltargets and efciency is the optimal relationship of inputs to any given outputs. 7ote that a target can be reached in an efcient orinefcient way8 similarly, as this problem illustrates, a target can be missed but the given output can be attained efciently.7-2( (2+ min.) 'ales )olu*e+ *ar,et s-are and *ar,et si.e )ariances. (. 2ales volume variance. 9udgeted contribution margin per unit : (',,,++,+++ ; 22+,+++) $ (( < =>?) : '5.>+ per unit 2ales volume variance : 9udgeted contribution margin per unit $ (Actual units sold < budgeted units sold) : '5.>+ $ (2,+,55+ < 22+,+++) : '5=,/*+ ! 2. &ar"et share and mar"et si@e variances 9udgeted mar"et share : 22+,+++ ; >,>++,+++ : 5? Actual mar"et share : 2,+,55+ ; >,,5+,+++ : 5.,+?Actual /ar,et 'i.e $ Actual &ar"et 2hare $ $udgeted Contribution /argin er 0nit Actual /ar,et 'i.e $ 9udgeted &ar"et 2hare $ $udgeted Contribution /argin er 0nit 'tatic $udget1 $udgeted /ar,et 'i.e $ 9udgeted &ar"et 2hare $ $udgeted Contribution /argin er 0nit (>,,5+,+++ $ 5.,? $ '5.>+) '(,2>>,/*+ (>,,5+,+++ $ 5? $ '5.>+) '(,(*>,5++ (>,>++,+++ $ 5? $ '5.>+ '(,()),+++ '*+,>*+ ! '(,,5++ - &ar"etshare variance&ar"etsi@e variance

'5=,/*+ ! 2alesvolume variance,. #he mar"et share variance is favorable indicating that the company increased its percentage of the mar"et. 2ince the total mar"etdecreased, this could be due to providing a higher Auality product or more aftersale services than competitors, a decrease in salesprice, or due to negative actions by competitors. 7-1Actual Results (2)Flexible $udget 3ariances (2) 4 (2) 5 (6) Flexible $udget (6)'ales 3olu*e 3ariances (7) 4 (6) 5 (8) 'tatic $udget -nits sold5,5 ++a+ 5,5 ++5 ++ !6 ,+++a%irect materials ' ==),)++'),)++ - ' ==+,+++ b'=+,+++ -'*2+,+++c%irect manufacturing labor /52,*5+a/,*5+ ! /=2,5++d)*,5++ ! (+5+,+++e!i3ed costs 1,180 ,+++a20 ,+++ ! 1,2 ++,+++a +1,2 ++,+++a#otal costs $2,801,55 + $20,95 + ! $2,822,5 ++$147,5 ++ ! $2,97 +,+++ a Biven b '(2+Cunit $ 5,5++ units : '==+,+++c '(2+Cunit $ =,+++ units : '*2+,+++d '(*5Cunit $ 5,5++ units : '/=2,5++ e '(*5Cunit $ =,+++ units : '(,+5+,+++7-69 (,+ min.) Flexible budget+ direct *aterials and direct *anufacturing labor )ariances. '20,950 F!le3iblebudget $147,500-2alesvolume '(=),>5+ ! 2alesvolume variance2. Flexible $udget ($udgeted Inut Actual Incurred!t". Allo%ed for(Actual Inut !t". Actual Inut !t". Actual &utut : : Actual #rice) : $udgeted #rice $udgeted #rice)%irect materials'==),)++a '*+>,+++ b'==+,+++ c ',5,2++ ! '>>,+++ - 0rice variance1fciency variance'),)++ -!le3iblebudget variance%irect manufacturing labor '/52,*5+a'/25,+++e'/=2,5++f'2*,*5+ - ',*,5++ !0rice variance 1fciency variance'/,*5+ !!le3iblebudget variancea *+,>++ pounds $ '/.5Cpound : '==),)++b *+,>++ pounds $ '(+Cpound : '*+>,+++ c 5,5++ statues $ (2 poundsCstatue $ '(+Cpound : ==,+++ pounds $ '(+Cpound : '==+,+++ d (),5++ hours $ '5(.5+Chour : '/52,*5+ e (),5++ hours $ '5+Chour : '/25,+++ f 5,5++ statues $ ,.5 hoursCstatue $ '5+Chour : (/,25+ hours $ '5+Chour : '/=2,5++7-66 (2+,+++D $ +.5D $ '2+D)'>+,+++'(,/++ -D '2,+++ !D 0rice variance 1fciency variance 0urchases -sage%irect ((,,+++ $ '5.25) ((,,+++ $ '5D) ((2,5++ $ '5D) (>,+++D $ ,D $ '5D)&aterials '=),25+D '=5,+++ '=2,5++ '=+,+++',,25+ -D '2,5++ -D0rice variance 1fciency variance(. >,+++ units $ +.5 hoursCunit : 2,+++ hours2. !le3ible budget < 1fciency variance : '>+,+++ < '2,+++ : ',),+++Actual dir. manuf. labor hours : ',),+++ ; 9udgeted price of '2+Chour : (,/++ hours ,. ',),+++ E 0rice variance, '(,/++ : ',/,/++, the actual direct manuf. labor costActual rate : Actual cost ; Actual hours : ',/,+++ ; (,/++ hours : '2(Chour (rounded)>. 2tandard Aty. of direct materials : >,+++ units $ , poundsCunit : (2,+++ pounds5. !le3ible budget E %ir. matls. e5cy. var. : '=+,+++ E '2,5++ : '=2,5++Actual Auantity of dir. matls. used : '=2,5++ ; 9udgeted price per lb: '=2,5++ ; '5Clb : (2,5++ lbs=. Actual cost of direct materials, '=),25+ < 0rice variance, ',,25+ : '=5,+++Actual Aty. of direct materials purchased : '=5,+++ ; 9udgeted price, '5Clb : (,,+++ lbs.*. Actual direct materials price : '=),25+ ; (,,+++ lbs : '5.25 per lb.7-27-62 (,+ min.) 3ariance anal"sis+ non*anufacturing setting1. #his is Fust a simple problem of two eAuations G two un"nowns.#he two eAuations relate to the number of cars detailed and the labor costs (the wages paid to the employees).H : number of cars detailed by longterm employeeI : number of cars detailed by both shortterm employees (combined) 9udget:H E I : 2++ Actual:H E I: 225 >+H E 2+I : 5=++ >+H E 2+I : =+++2ubstitution: 2ubstitution:>+H E 2+(2++H) : 5=++ >+H E 2+(225H) : =+++2+H : (=++ 2+H : (5++H:)+ H : *5I:(2+ I:(5+$udget1 #he e3perienced employee is budgeted to detail )+ cars (and earn ',,2++), and the less e3perienced employees are budgeted to detail =+ cars each and earn '(,2++ apiece. Actual1 #he e3perienced employee details *5 cars (and grosses ',,+++ for the month), and the other two wash *5 each and gross '(,5++ apiece. .a 225 $ (',+,+++C2++) b 225 $ ('(,5++C2++) c 225 $ (',,2++C2++)d 225 $ ('2,>++C2++),. Actual sales price : ',/,,*5 ; 225 : '(*5 2ales 0rice Jariance : (Actual sales price < 9udgeted sales price) $ Actual number of cars detailed: : ('(*5 < '(5+) $ 225:'5,=25 !avorable .abor efciency for e3perienced wor"er: 2tandard cars e3pected to be completed by e3perienced wor"er based on actual number of cars detailed : ()+ ; 2++) $ 225 : /+ cars .abor efciency variance : 9udgeted wage rate per car $ (Actual cars detailed < budgeted cars detailed) : '>+ $ (*5 < /+): '=++ !avorable .abor efciency for less e3perienced wor"ers: 2tandard cars e3pected to be completed by less e3perienced wor"ers based on actual number of cars detailed :((2+ ; 2++) $ 225 : (,5 cars .abor efciency variance : 9udgeted wage rate per car $ (Actual cars detailed < budgeted cars detailed) : '2+ $ ((5+ < (,5): ',++ -nfavorable 7-66 (2+ min.) #ossible causes for rice and e,(*2 - 0rice variance(=,(5+,+++ $ 0eso +.,=)'2,2(>,+++ .1fciencyvariance.0esos,*),+++ -(,>+,+++ $ (5 $ 0eso +.,=) '(,),=,+++0esos 2,,/2+ - 0esos >2/,+++ -0rice variance 1fciency variance(,5 min.) /aterial cost )ariances+ use of )ariances for erfor*ance e)aluation 2.&aterials Jariances Actual CostsIncurred(Actual Inut !t".$ Actual #rice)Actual Inut !t".$ $udgeted #riceFlexible $udget($udgeted Inut !t". Allo%ed for Actual &utut $ $udgeted #rice)%irect&aterials(),>++ $ '(/a)'(5/,=++ 0urchases -sage (),>++ $ '22) (*,/++ $ '22)'()>,)++ '(*,,)++()++ $ ) $ '22)(=,>++ $ '22)'(>+,)++'25,2++ ! 0rice variance1fciency variancea '(5/,=++ ; ),>++ : '()/,. 2witching suppliers was not a good idea. #he '25,2++ savings in the cost of titanium was outweighed by the ',,,+++ e3tra material usage. Nn addition, the ',,,+++- efciency variance does not recogni@e the total impact of the lower Auality titanium because, of the ),>++ pounds purchased, only *,/++ pounds were used. Nf the Auantity of materials used in production is relatively the same, 9etter 9i"es could e3pect the remaining 5++ lbs to produce appro3imately 5+ more units. At standard, 5+ more units should ta"e 5+ $ ) : >++ lbs. #here could be an additional unfavorable efciency variance of (5++H '22) (5+ $ ) $ '22) '((,+++'),)++ '2,2++- Flexible $udget($udgeted Inut2. Actual Costs !t". Allo%ed forIncurred (ActualActual Inut !t". Actual &ututInut !t".: Actual #rice): $udgeted #rice $ $udgeted #rice)%irect mfg. labor'*,/,/++a '*,5,+++b'*>2,5++c'>,/++ -'*,5++ !0rice variance1fciency variance'2,=++ !!le3iblebudget variancea Given (or 49,000 hours $15.10/hour)49,000 hours $15/hour ! $735,000 " 5,500 uni#s 9 hours/uni# $15/hour ! $742,5002. -nfavorable direct materials efciency variance of '(2,5++ indicates that more pounds of directmaterials were actually used than the budgeted Auantity allowed for actual output. : $ri"e u%&e#e% $oun% $er$3 varian"e e''i"ien"( $1,500 : 5++ pounds)u%&e#e% $oun%s a**o+e% 'or #he ou#$u# a"hieve% ! 5,500 30 ! 165,000 $oun%s ,"#ua* $oun%s o' %ire"# -a#eria*s use% ! 165,000 500 ! 164,500 $oun%s,. Actual price paid per pound : 190,000$79,500 : ',.+5 per pound>. Actual Costs IncurredActual Inut :(Actual Inut : Actual #rice) $udgeted #rice'5*/,5++a'5*+,+++b'/,5++ -7-4%irect&anufacturing.abor 0esos *)>,>2+(2=,+++ $ 0eso 2/.25)'*=+,5++(,>+,+++ $ (2C=+) $ 0eso 2/.25)',,(,5++7-68 (,+ min.) ;irect *anufacturing labor and direct *aterials )ariances+ *issing data. 0rice variancea Given 190,000 $oun%s $3/$oun% ! $570,007-57-67-37 (20 -in.) Direct materials and manufacturing labor variances, journal entries. 1. .ire"# /a#eria*s0 C=A#>ER 7 F?E@I$?E $0;AE>'+ ;IREC>-C&'> 3ARIABCE'+ AB; /ABAAE/EB> C&B>R&? 7-2 Management by exception is the practice of concentrating on areas not operating as e3pected and giving less attention to areas operating as e3pected. Jariance analysis helps managers identify areas not operating as e3pected. #he larger the variance, the more li"ely an area is not operating as e3pected. 7-2 #wo sources of information about budgeted amounts are (a) past amounts and (b) detailed engineeringstudies. 7-6 A favorable varianceER 29;E>ER/IBIBA =&C C&'>' $E=A3E 29-2 #he two assumptions are (. Jariations in the level of a single activity (the cost driver) e3plain the variations in the related total costs. 2. Lost behavior is appro3imated by a linear cost function within the relevant range. A linear cost function is a cost function where, within the relevant range, the graph of total costs versus the level of a single activity forms a straight line. 29-2 #hree alternative linear cost functions are (. Jariable cost function