Student Sol13 4e

STUDENT SOLUTIONS MANUAL

CHAPTER 13 THE FLEXIBLE-BUDGET AND STANDARD COSTING: DIRECT MATERIALS AND DIRECT LABOR

EXERCISES

13-34 Flexible Budget and Variances (30 min)

1. Flexible budget for June, at 90% of the master-budget level:

Units sold 900Sales (90% x $800,000) $720,000Variable expenses (90% x $450,000) 405,000Contribution margin $315,000Fixed expenses 150,000Budgeted operating income $165,000

2. Refer to text Exhibit 13.1 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 = $35,000Uor, 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 ResultsFor the Month of June

Sales (900 x $840) $756,000Total variable expenses 414,000Contribution margin $342,000Fixed expenses 180,000

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 13-1 ©The McGraw-Hill Companies, 2008


Operating income $162,000



13-34 (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 – flexible-budget 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 flexible-budget variance ($30,000U).

The following presentation, similar to text Exhibit 13.5, might be useful for in-class presentation purposes:

SCHMIDT MACHINERY COMPANYAnalysis of Operating Results

June 2007

Flexible Static (Master)Actual Budget Budget

Unit sales 900 900 1,000Sales (900 x $840) $756,000 $720,000 $800,000Total variable expenses 414,000 405,000 450,000Contribution margin $342,000 $315,000 $350,000Fixed expenses 180,000 150,000 150,000Operating income $162,000 $165,000 $200,000

Total Master (Static) Budget Variance $38,00U

Flexible-budget Sales Volume Variance Variance $3,000U $35,000U



13-36 Flexible Budgets and Variance Analysis (25 minutes)

1. Flexible- Sales Budget Flexible Volume MasterActual Variance Budget Variance Budget

Units 3,800 - 0 - 3,800 200U 4,000

Sales $53,200 $3,800U $57,000 1 $3,000U $60,000Variable costs: Manufacturing $19,000 $3,800U $15,200 2 $800F $16,000

Selling & Admin. 7,700 100U 7,600 3 400F 8,000Total variable costs $26,700 $3,900U $22,800 1,200F $24,000Contribution margin $26,500 $7,700U $34,200 $1,800U $36,000Fixed costs: Manufacturing $16,000 $1,000U $15,000 $15,000 Selling & Admin. 10,000 1,000U 9,000 9,000Total fixed costs $26,000 $2,000U $24,000 - 0 - $24,000Operating income $ 500 $9,700U $10,200 $1,800U $12,000

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 variancesIn terms of contribution margin: $34,200 - $36,000 = $1,800UIn term of operating income: $10,200 - $12,000 = $1,800U

Flexible-budget variancesContribution margin: $26,500 - $34,200 = $7,700UOperating income: $500 - $10,200 = $9,700U



13-36 (continued)

2. The company reduced its selling price (from $15 per unit to $14 per unit) to compete in the market, suggesting that the firm is pursuing a cost-leadership, not 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 the Word document.



13-38 (Appendix): Journal Entries (10 minutes)

Oct. 7 Materials Inventory (720 lbs. x $40/lb.) $28,800

Materials Purchase Price Variance—PVC (720 X $1/lb.) $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) $31,200

Materials Usage Variance—PVC $2,400

Materials Inventory (720 lbs. x $40/lb.) $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.



13-40 Materials Variances—Working Backwards (15 minutes)

Actual Purchases Actual Purchasesat Actual Cost at Standard Cost

(AQ) x (AP) (AQ) x (SP)

40,000 lbs. x AP 40,000 lbs. x $3.50/lb.= $120,000 = $140,000

Purchase Price Variance?

Actual Usage at Flexible-Budget Standard Cost Amount

(AQ) x (SP) (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) 40,000

Standard cost per pound of direct materials x 3.50

Total standard cost of direct materials purchased 140,000

Direct materials purchase price variance $ 20,000F

3. Total direct materials used at standard cost = 38,000 x $3.50 =$133,000

Less: unfavorable direct materials usage variance – 6,500

Standard DM cost for the units manufactured = $126,500

Standard cost per lb. of direct material $3.50

Total standard quantity of DM for the units Manufactured = 36,143 lbs.



13-42 Behavioral Considerations (15-20 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.



13-44 Materials Variances—Journal Entries (20 minutes)

Actual Purchases Actual Purchasesat Actual Cost at Standard Cost

(AQ) x (AP) (AQ) x (SP)

8,300 lbs. x $/lb. (AQ) x $5.10/lb. = ? = ?

Purchase Price Variance = ?

Actual Usage at Flexible-Budget Standard Cost Amount

(AQ) x (SP) (SQ) x (SP)

(AQ) x $5.10/lb. (SQ) x $5.10/lb. = ? = ?

Usage Variance = ?

1. Quantity of materials used = (AQ) = materials purchased - increase in ending

inventory of materials = 8,300 - 500 = 7,800 lbs.

Standard quantity of direct materials for the units produced this period

= (SQ) = 2,000 units produced x 4 lbs. per unit = 8,000 pounds

Therefore, the direct materials usage variance = (AQ – SQ) x SP

= (7,800 lbs. - 8,000 lbs.) x $5.10/lb. = $1,020F

The direct materials purchase price variance = Total direct materials variance –

materials usage variance

= $640 U + $1,020 F = $1,660U



13-44 (Continued)

2. Actual cost of direct materials per pound (AP):

direct materials purchase price variance = (AP - SP) x AQ

$1,660 = (AP - $5.10)/lb. x 8,300 lbs.

AP = $5.10 + $0.20 = $5.30/lb.3. (Appendix): Journal entries

Materials Inventory (8,300 lbs. x $5.10/lb.) $42,330Materials purchase price variance $1,660

Accounts payable (8,300 lbs. x $5.30/lb.) $43,990

To record purchase of 8,300 lbs. of direct materials: actual cost per pound = $5.30; standard cost per pound = $5.10.

WIP Inventory (8,000 lbs. x $5.10/lb.) $40,800Materials usage variance $1,020Materials inventory (7,800 lbs. x $5.10/lb.) $39,780

To record the standard direct materials cost for the 2,000 units produced this period.



13-46 Determining Standard Direct Materials Cost (5 minutes)

Total lbs. of Natura per package of SS-2 12 lbs.

Standard purchase price per pound of Natura x $5 .00

Total purchase price before purchase discount $60.00

Purchase discount (3% x $60.00) 1 .80

Standard direct material cost per package of SS-2 $58 .20



13-48 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 8) 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 13 and 14 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 13, 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?



13-50 Standard Labor Rate and Labor Efficiency Variance (10-15 minutes)

Actual Inputs Actual Inputs Flexible-Budgetat Actual Cost at Standard Cost Amount

(AQ) x (AP) (AQ) x (SP) (SQ) x (SP)

11,000 hrs. x $30.00/hr. 11,000 hrs. x (SP) 12,000 hrs. x (SP) = $330,000 = ? = ?

$33,000F ?

Labor Rate Variance Labor Efficiency Variance

1. 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 + 33,000

Total actual direct labor hours at standard hourly rate $363,000

Total actual direct labor hours worked 11,000

Standard direct labor rate per hour $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.] = $33,000For = (AQ - SQ) x SP

= (11,000 - 12,000) hrs. x $33.00/hr. = $33,000F



13-52 Labor Variances and Journal Entry (15-20 minutes)

Actual Inputs Actual Inputs Flexible-budgetat Actual Cost at Standard Cost Amount


20,000 hrs. x (AP) 20,000 hrs. x (SP) (SQ) x (SP) = $378,000 = ? = ?

$6,000U ?


1. Standard direct labor hourly rate:

Total payroll (AQ x AP) $378,000

Unfavorable direct labor rate variance – 6,000

Direct labor hours worked @ standard rate/hr. $372,000

Actual direct labor hours (AQ) 20,000

Standard direct labor hourly rate (SP) $18.602. Direct labor efficiency variance:

Budgeted total direct hours 24,000

Budgeted units to manufacture 8,000

Standard direct labor hours per unit of output 3

Total units manufactured x 6,000

Total standard hours for units manufactured 18,000

Direct labor efficiency variance = (AQ - SQ) x SP

= (20,000 - 18,000) hrs. x $18.60/hr. = $37,200 U3. (Appendix): Journal Entry for Labor Cost, January

WIP Inventory (18,000 hrs. x $18.60) $334,480DL rate variance $6,000DL efficiency variance $37,200

Wages payable (20,000 x $18.90/hr.) $378,000



13-54 Labor Rate and Efficiency Variances (20 minutes)



AQ x $18.00/hr. AQ x $16.00/hr. 10,000 x 1.5) x $16.00 = $207,000 = ? = $240,000

? ?


1. Direct labor rate variance:Difference in hourly wage rates:

Actual direct labor wage rate (AP) $18.00Standard direct labor wage rate (SP) - 16.00 $2.00U

Actual direct labor hours worked (AQ):Actual direct labor costs $207,000Actual direct labor hourly rate (AP) $18.00

Actual direct labor hours worked (AQ) x 11,500Direct labor rate variance $23,000U

2. Direct labor efficiency variance :

Actual direct labor hours worked (AQ) 11,500Total standard direct labor hours allowed for the

units manufactured (SQ):Number of finished units manufactured 10,000

Standard direct labor hours per unit ` x 1.5 15,000 Difference in direct labor hours (AQ - SQ) 3,500FStandard direct labor hourly wage rate (SP) x $16.00Direct labor efficiency variance $56,000F

3. 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 $23,000UDirect labor efficiency variance 56,000F

Total direct labor variance $33,000F



13-56 (Appendix): Standard Costing and Journal Entries (20 minutes)

Materials Inventory (6,000 gals. x $10.00/gal.) $60,000Purchase Price Variance $2,700

Accounts Payable (6,000 gals. x $10.45/gal.) $62,700To record, on open account, direct materials: 6,000 gals. @ standard cost of $10.00/gal. Actual cost per gallon = $10.45.

WIP Inventory (2,500 x 2 gals. x $10/gal.) $50,000Materials Usage Variance (100 gals. x $10/gal.) $1,000

Materials Inventory (5,100 gals. x $10/gal.) $51,000

To record the standard direct materials cost ($20/unit) for the completed production of the period (2,500 units produced).

WIP Inventory (2,500 x 2 hrs. x $25/hr.) $125,000Labor Rate Variance ($5.50/hr. x 4,900 hrs.) $26,950Labor Efficiency Variance (100 hrs. x $25/hr.) $2,500Wages 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.

Finished Goods Inventory ($70 x 2,500 units) $175,000WIP Inventory $175,000

To record the direct manufacturing cost component of cost of goods manufactured for the period.

CGS ($70/unit x 2,000 units) $140,000Finished Goods Inventory $140,000

To record the direct manufacturing cost component of the cost of goods sold (CGS) for the period.

Accounts Receivable ($150/unit x 2,000 units) $300,000Sales Revenue $300,000

To record sales revenue and associated accounts receivable for the period.



13-58 Direct Labor Variances (15 minutes)



18,000 hrs. x AP 18,000 hrs. x $50.00/hr. 16,000 hrs. x $50.00/hr.

? $


Flexible-Budget Variance for Direct Labor$20,000F

1. Direct Labor Efficiency variance = (AQ - SQ) x SP

= (18,000 - 16,000) hrs. x $50/hr.

= $100,000U

2. Total Flexible-Budget Variance = Rate variance + Efficiency variance

Rate variance = Total variance - Efficiency variance

= $20,000F - $100,000U

= $120,000F

3. Actual direct labor hours (AQ) 18,000

Standard direct labor rate per hour (SP) x $50.00

Total actual direct labor hours at the standard rate $900,000

Direct labor rate variance–Favorable – 120,000

Total direct labor payroll in May (AQ x AP) $780,000



13-60 Standard Direct Labor Cost Per Unit (10 minutes)

Total hours paid per week per employee 40

Hourly wage rate x $30

Weekly wages per employee $1,200

Employee benefits (40%) + 480

Total weekly payroll cost per employee $1,680

Weekly productive hours per employee 35

Direct labor cost per productive hour $48

Number of standard direct labor hours per unit x 3

Standard direct labor cost per unit of output $144



13-62 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).



PROBLEMS

13-64 Standard Cost Systems—Behavioral Considerations (30 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).



13-64 (Continued)

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.

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 13 and 14.

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.



13-66 Standard Cost Sheet and Use of Variance Data (30-40 minutes)

1. Standard cost for each ten-gallon batch of raspberry sherbet:

(a) (b) Standard StandardQuantity Rate

Direct materials:Raspberries (7.5 qts.* x $4.00) = $30.00

Other ingredients (10 gal. x $2.25) = 22.50 $52.50

Direct labor: Sorting (3 min. x 6 qts.)/60 x $15.00 = 4.50

Blending (12 min./ 60) x $15.00 = 3.00 7.50

Packaging (40 qts.** x $0.50) = 20.00

c. Standard cost per ten-gallon batch $80.00

*[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.



13-66 (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 here 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.



13-68 Fill-in Missing Data: Profit-Variance Reports (30 Minutes)

Flexible - Sales Master Actual Budget Flexible Volume (Static)

Results Variance Budget Variance Budget

Unit sales 1,600 N/A 1,600 100F 1,500Sales $38,400 $1,600U $40,000 $2,500F $37,500

Variable costs: Manufacturing $27,200 $1,600U $25,600 $1,600U $24,000 Selling & Admin. $4,000 $800U $3,200 $200U $3,000

Contribution margin $7,200 $4,000U $11,200 $700F $10,500Fixed costs $6,200 $1,400F $7,600 -0- $7,600

Operating income $1,000 $2,600U $3,600 $700F $2,900

1. a & b Actual units sold = Master budget units + Favorable sales volume variance =

1,500 + 100 F = 1,600 units

c. Budgeted selling price per unit: $37,500 1,500 = $25 per unit

Sales volume variance, in terms of sales revenue: 100 x $25 = $2,500F

d. Sales revenue, flexible-budget: 1,600 x $25/unit = $40,000

e. Sales revenue, actual: $40,000 - $1,600 U = $38,400

Variable manufacturing cost:

f. Standard cost per unit: $24,000 1,500 units = $16 per unit

Total flexible-budget amount: 1,600 units x $16 = $25,600

g. Sales volume variance: $25,600 - 24,000 = $1,600U

(or, 100 units x $16/unit = $1,600U)

h. Actual amount incurred: $25,600 + $1,600 U = $27,200

Variable selling and administrative expense:

i. Flexible-budget variance: $4,000 - $3,200 = $800U

j. Master-budget amount: ($3,200/1,600 units) x 1,500 units = $3,000



13-68 (Continued)

k. Sales volume variance, in terms of S&A: $3,200 - $3,000 = $200U

Contribution margin:

l. Actual amount: (e) $38,400 - (h) $27,200 - $4,000 = $7,200

m. Flexible-budget variance: $1,600 U + $1,600 U + (i) $800 U = $4,000U

n. Flexible-budget amount: (d) $40,000 - (f) $25,600 - $3,200 = $11,200

or, (l) $7,200 + (m) $4,000 U = $11,200

p. Sales volume variance: $2,500 F - $1,600 U - $200 U = $700F

q. Master-budget amount: $37,500 - 24,000 - (j) 3,000 = $10,500

or, (n) $11,200 - (p) $700 F = $10,500

r. Fixed cost, actual: (l) $7,200 - $1,000 = $6,200

s. Fixed cost, flexible budget: (n) $11,200 -$3,600 = $7,600

t. Fixed cost, master (static) budget: Same as (s) $7,600

u. Fixed cost flexible-budget variance: (r) $6,200 - (s) $7,600 = $1,400F

v. Fixed cost sales volume variance: (s) $7,600 - (t) $7,600 = - 0 -

w. Operating income flexible-budget variance: $1,000 - $3,600 = $2,600U

x. Operating income, master budget: (q) $10,500 - (t) $7,600 = $2,900

y. Sales volume variance, in terms of operating income =

$3,600 - $2,900 = $700F

or, $700 - $0 = $700F

2. Actual selling price per unit: (e) $38,400 (b) 1,600 units = $24.00



13-70 Fill in Missing Data (25 minutes)

1. Flexible- Sales Master Actual Budget Flexible Volume (Static)

Results Variance Budget Variance BudgetUnit sales 1,200 -0- 1,200 200F 1,000Sales $69,600 $2,400U $72,000 $12,000F $60,000Variable costs $56,800 $8,800U $48,000 $8,000U $40,000Contribution margin $12,800 $11,200U $24,000 $4,000F $20,000

Fixed costs $7,000 $2,000U $5,000 -0- $5,000Operating income $5,800 $13,200U $19,000 $4,000F $15,000

a. - 0 -

b. 1,200 (by definition)

c. 1,200 - 1,000 = 200F

d. Budgeted selling price per unit: $60,000 1,000 units = $60/unit

Flexible-budget revenues = 1,200 units x $60/unit = $72,000

e. $69,600 - $72,000 = $2,400U

f. $72,000 - $60,000 = $12,000F

g. Standard (budgeted) variable cost per unit: $40,000 1,000 units = $40/unit

Flexible-budget variable cost: 1,200 units x $40 = $48,000

h. $48,000 - $40,000 = $8,000U

i. $11,200U - (e) $2,400U = $8,800U

j. (g) $48,000 + (i) $8,800 = $56,800

k. $69,600 - (j) $56,800 = $12,800

l. $12,800 + $11,200 = $24,000 or, $72,000 - $48,000 = $24,000

m. $12,000F - $8,000U = $4,000F, or, Budgeted contribution margin per unit:

$60/unit - $40/unit = $20/unit; 200 units x $20/unit = $4,000F

n. $60,000 - $40,000 = $20,000 or, 1,000 units x $20/unit = $20,000

p. $12,800 – $5,800 = $7,000

q. - 0 - (by definition, as long as both output levels are within the relevant range)

r. $5,000 (= master budget amount, as long as both output levels are within the



relevant range)



13-70 (Continued)

s. $7,000 (p) - $5,000 (r) = $2,000U

t. $20,000 (n) - $5,000 = $15,000

u. $4,000F (m) -$0 (q) = $4,000F

v. $15,000 (t) + $4,000 (u) = $19,000, or, $24,000 (l) - $5,000 (r) = $19,000

w. $5,800 - $19,000 (v) = $13,200U, or, $11,200U + $2,000U (s) = $13,200U



13-72 Direct Labor Variances: Working Backwards (20 minutes)

Actual Quantity Flexible Budget (FB) Actual Labor Cost at Standard Price Based on Outputs (AQ) x (AP) (AQ) x (SP) (SQ) x (SP)

(1.16 x SQ) x (AP) (1.16 x SQ) x $30/hr. (SQ) x $30/hr. = ? = ? = ?

Labor Rate Variance Labor Efficiency Variance $11,600F $24,000U

1. Efficiency variance = (AQ - SQ) x SP

$24,000 = (1.16 SQ - SQ) x $30/hr.

0.16 SQ = 800

SQ = 5,000 hours2. AQ = 1.16 SQ = 1.16 x 5,000 hrs. = 5,800 hours3. Labor rate variance = (AP - SP) x AQ

- $11,600 = (AP - $30.00)/hr. x 5,800 hrs.

AP - $30.00 = - $2.00

AP = $28.00/hr. 4. SQ = Number of units manufactured x Standard labor hours per unit

5,000 = Number of units manufactured x 2 hrs./unit

Number of units manufactured = 5,000hrs./2hrs.per unit = 2,500 units


Actual Hrs. Worked x Actual Wage Rate/Hr.

Actual Hrs. Worked x Std. Wage Rate/Hr.

Std. Hrs. Allowed x Std. Wage Rate/Hr.


13-74 Revision of Standards (30 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 cost-volume-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 decision-makers/ 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. = $0.42FTotal 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.

= $0.66U

c. Total change in direct manufacturing cost per unit = (a) + (b) = $0.74F



13-76 Direct Materials: Joint Price-Quantity Variance (25 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)

= ($12 - $10)/ton x 22,500 tons = $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:



13-76 (continued)

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 varianceSP 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.


Q

P

SP

AP

SQ AQ

[(AP - SP) x (AQ - SQ)] SQ x (AP - SP)

SP x (AQ - SQ)


13-78 Profit-Variance Analysis (60 - 75 minutes)

1.

Flexible Sales Master Actual Budget Flexible Volume (Static)

Results Variances Budget Variance BudgetUnit sales 4,000 0 4,000 100F 3,900Sales $390,000 $10,000U $400,000 $10,000F $390,000Variable Costs: Manufacturing $241,000 $41,000U $200,000 $5,000U $195,000 Marketing $39,000 $1,000F $40,000 $1,000U $39,000Total Variable Costs $280,000 $40,000U $240,000 $6,000U $234,000Fixed Costs: Manufacturing $50,000 $0 $50,000 $0 $50,000 Marketing $40,000 $4,000U $36,000 $0 $36,000Total Fixed Costs $90,000 $4,000U $86,000 $0 $86,000Operating Income $20,000 $54,000U $74,000 $4,000F $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



13-78 (Continued-1)

2. flexible-budget variance for variable nonmanufacturing costs = actual variable nonmanufacturing costs - flexible-budget variable nonmanufacturing costs = $39,000 - $40,000 = $1,000U

d. total fixed cost flexible-budget variance = actual total fixed costs - flexible-budget 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 in Chapter 13 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 (chapter 14).



13-78 (Continued-2)

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 (Chapter 14).

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.).



13-78 (Continued-3)

Ortiz & Co.Master (Static) Budget Variance

(Actual Operating Profit - Master Budget Operating Profit)

$50,000U

FB-Variance Sales Volume Variance $54,000U $4,000F ($20,000 - $74,000) ($40/unit x 100 units)

SP Variance Variable Cost Variances Fixed Cost Variances $10,000U $40,000U $4,000U

Manufacturing Marketing Manufacturing Marketing $41,000U $1,000F $0 $4,000U



13-78 (Continued-4)

Note to Student: 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 the Word document.



13-80 DM and DM variances, solving unknowns (40 minutes)

Direct Materials AQ x SP

AQ x AP AQ x $5= $136,500 = ?

Purchase Price variance

$6,500 U AQ x SP SQ x SP AQ x $5 ([4,500 x 6] x $5)

= ? = $135,000 Usage variance

$5,000 UDirect Labor

AQ x SP SQ x SP AQ x AP AQ x $30 ([4,500 x 2/3] x

$30) = ? = ? = ?

Rate variance Efficiency variance

$4,200 U $6,000 F

1. Total standard direct labor cost for the panels manufactured:4,500 units x 2/3 hour per unit x $30 per hour = $90,000

2. Total direct labor hours worked, AQ:Total hours worked at standard rate = $90,000 - $6,000 = $84,000 = AQ x SP AQ = $84,000 $30/hr. = 2,800 hours

3. Actual direct labor hourly wage rate, AP = actual labor cost labor hours worked = ($84,000 + $4,200) 2,800 hours worked = $31.50 per hour

4. Total standard quantity of direct materials for the panels manufactured:4,500 panels manufactured x 6 lbs./panel = 27,000 lbs.

5. Total pounds of direct materials used, AQ = total pounds used, at standard cost standard cost per pound = [(27,000 lbs. x $5) + $5,000] $5/lb. = $140,000 $5/lb. = 28,000 lbs.

6. Total pounds of direct materials purchased, AQ = total pounds purchased, at std. cost standard cost/lb. = ($136,500 - $6,500) $5/lb. = 26,000 lbs.

7. Actual direct materials price per pound = actual cost of purchases number of pounds purchased = $136,500 26,000 = $5.25/lb.


Student Sol13 4e

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Transcript of Student Sol13 4e