SM CH
SM CH
SHORT-ANSWER QUESTIONS
7-1 Static budget variance can mislead those assessing actual against pro forma
performance indicators. The key issue is that when production and sales volume exceed
pro forma amounts, an unfavourable cost variance analysis is an inevitable result of what
is usually considered good news. Managers may waste valuable time investigating
routine-cost behaviour.
7-4 The key difference is the output level used to set the budget. A static budget is
based on the level of output planned at the start of the budget period. A flexible budget is
developed using budgeted revenues or cost amounts based on the level of output
actually achieved in the budget period. The actual level of output is not known until the
end of the budget period. Flexible budgets give managers more insight into the causes of
variances than static budgets.
7-8 Direct materials price variances are often computed at the time of purchase while
direct materials efficiency variances are often computed at the time of usage. Purchasing
managers are typically responsible for price variances, while production managers are
typically responsible for usage variances.
7-10 A process where the inputs are nonsubstitutable leaves workers no discretion as to
the components to use. A process where the inputs are substitutable means there is
discretion about the exact number and type of inputs or about the weighting of inputs.
7-11 The direct materials efficiency variance is a Level 3 variance. Further insight into
this variance can be gained by moving to a Level 4 analysis where the effect of mix and
yield changes are quantified. The mix variance captures the effect of a change in the
relative percentage use of each input relative to that budgeted. The yield variance
captures the effect of a change in the number of inputs required to obtain a given output
relative to that budgeted.
7-14 The plant supervisor likely has good grounds for complaint if the plant accountant
puts excessive emphasis on using variances to pin blame. The key value of variances is to
help understand why actual results differ from budgeted amounts and then to use that
knowledge to promote learning and continuous improvement.
EXERCISES
7-15 Terminology.
The question is whether or not the actual results met expectations, exceeded
expectations or failed to meet expectations and a variance analysis will respond to
this question. A variance is the result of subtracting the budgeted or predicted
outcome from the actual outcome. A favourable (F) variance means the effect of the
variance is to increase operating income. An unfavourable (U) variance means the
effect of the variance is to decrease operating income. A static budget variance
simply fails to reflect the routine effect of changes in quantity produced and sold
on the revenue and the variable costs. A flexible budget does reflect the routine
changes to be expected when the quantity produced and sold fluctuates from what
was predicted. The flexible budget permits more fineness in the report of non-routine
variances and management by exception. The flexible budget variance plus the sales
volume variance equals the static budget variance.
7-15 (cont’d)
When quantities of direct materials purchased and used differs from budget
the variance can be the result of either a rate variance (input price variance) arising in
an unexpected difference in the cost/unit or an efficiency variance arising from an
unexpected difference in the quantity of the input used, or a combination of both.
When a direct materials input mix has substitutable inputs the direct materials mix and
the direct materials yield variance both become important. These elements of a level 4
analysis permit the managers to assess how changes from what was expected
affected the yield.
Sales-
Actual Flexible-Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Units (tires) sold 2,800g 0 2,800 200 U 3,000g
Revenues $313,600a $ 5,600 F $308,000b $22,000 U $330,000c
Variable costs 229,600d 22,400 U 207,200e 14,800 F 222,000f
Contribution
margin 84,000 16,800 U 100,800 7,200 U 108,000
Fixed costs 50,000g 4,000 F 54,000g 0 54,000g
Operating
income $ 34,000 $12,800 U $ 46,800 $ 7,200 U $ 54,000
$12,800 U $ 7,200 U
$20,000 U
Total static-budget variance
a b
$112 × 2,800 = $313,600 $110 × 2,800 = $308,000
c d
$110 × 3,000 = $330,000 Given. Unit variable cost = $229,600 ÷ 2,800 = $82 per tire
e f
$74 × 2,800 = $207,200 $74 × 3,000 = $222,000
g
Given
7-16 (cont’d)
Actual Budgeted
Units 2,800 3,000
Unit selling price $ 112 $ 110
Unit variable cost $ 82 $ 74
Fixed costs $50,000 $54,000
The existing performance report is a Level 1 analysis, based on a static budget. It makes
no adjustment for changes in output levels. The budgeted output level is 10,000 units––
direct materials of $400,000 in the static budget ÷ budgeted direct materials cost per
attaché case of $40.
The following is a Level 2 analysis that presents a flexible-budget variance and a
sales-volume variance of each direct cost category.
Flexible-
Actual Budget Flexible Sales-Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Output units 8,800 0 8,800 1,200 U 10,000
Direct materials $364,000 $12,000 U $352,000 $48,000 F $400,000
Direct manufacturing labour 78,000 7,600 U 70,400 9,600 F 80,000
Direct marketing labour 110,000 4,400 U 105,600 14,400 F 120,000
Total direct costs $552,000 $24,000 U $528,000 $72,000 F $600,000
$24,000 U $72,000 F
The Level 1 analysis shows total direct costs have a $48,000 favourable variance.
However, the Level 2 analysis reveals that this favourable variance is due to the
reduction in output of 1,200 units from the budgeted 10,000 units. Once this reduction
in output is taken into account (via a flexible budget), the flexible-budget variance
shows each direct cost category to have an unfavourable variance indicating less
efficient use of each direct cost item than was budgeted, or the use of more costly direct
cost items than was budgeted, or both.
7-17 (cont’d)
Each direct cost category has an actual unit variable cost that exceeds its
budgeted unit cost:
Actual Budgeted
Units 8,800 10,000
Direct materials $ 41.36 $ 40.00
Direct manufacturing labour $ 8.86 $ 8.00
Direct marketing labour $ 12.50 $ 12.00
Analysis of price and efficiency variances for each cost category could assist in further
the identifying causes of these more aggregated (Level 2) variances.
Flexible Budget
Actual Costs (Budgeted Input
Incurred Actual Input Qty. Allowed for
(Actual Input Qty. Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Direct $200,000 $214,000 $225,000
Materials
$14,000 F $11,000 F
Price variance Efficiency variance
$25,000 F
Flexible-budget variance
$10,000 U
Flexible-budget variance
Peterson budgets to obtain 3.75 (60,000 ÷ 16,000) pumpkin scones from each kilogram
of pumpkin. The flexible-budget variance is $1,167 F.
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variance Budget Variance Budget
(1) (2)=(1)–(3) (3) (4)=(3)–(5) (5)
a b
Pumpkin costs 16,830 $1,167 F $17,997 $237 U $17,760c
2.
Flexible Budget
Actual Costs (Budgeted Input
Incurred Allowed for Actual
(Actual Input Actual Input Output Achieved
Actual Price Budgeted Price Budgeted Price)
$16,830a $18,870b $17,997c
$2,040 F $873 U
Price variance Efficiency variance
$1,167 F
Flexible-budget variance
a 17,000 $0.99 = $16,830
b 17,000 $1.11 = $18,870 (no inventory involved)
60,800 ÷ 3.75 $1.11 = $17,997
c
$105,000 U $ 75,000 F
Flexible-budget variance Sales-volume variance
$30,000 U
Static-budget variance
a
Budgeted selling price = $3,250,000 500,000 lbs = $6.50 per lb.
Flexible-budget revenues = $6.50 per lb. 525,000 lbs. = $3,412,500
b
Budgeted variable mfg. cost per unit = $1,750,000 500,000 lbs. = $3.50
Flexible-budget variable mfg. costs = $3.50 per lb. 525,000 lbs. = $1,837,500
7-20 (cont’d)
3. The selling price variance, caused solely by the difference in actual and budgeted
selling price, is the flexible-budget variance in revenue = $52,500 U.
4. The flexible-budget variances show that for the actual sales volume of 525,000
pounds, selling prices were lower and costs per pound were higher. The
favourable sales volume variance in revenue (because more pounds of ice cream
were sold than budgeted) helped offset the unfavourable variable cost variance
and shored up the results in June 2013. Levine should be more concerned
because the small static-budget variance in contribution margin of $30,000 U is
actually made up of a favourable sales-volume variance in contribution margin
of $75,000, an unfavourable selling-price variance of $52,500 and an unfavourable
variable manufacturing costs variance of $52,500. Levine should analyze why
each of these variances occurred and the relationships among them. Could the
efficiency of variable manufacturing costs be improved? Did the sales volume
increase because of a decrease in selling price or because of growth in the overall
market? Analysis of these questions would help Levine decide what actions he
should take.
1. Variance Analysis for Sol Electronics for the second quarter of 2013
Second- Flexible
Quarter Flexible Budget for Sales
2013 Budget Second Volume Static
Actuals Variance Quarter Variance Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Units 4,800 0 4,800 800 F 4,000
Selling price $ 71.50 $ 70.00 $ 70.00
Sales $343,200 $7,200 F $336,000 $56,000 F $280,000
Variable costs
Direct materials 57,600 2,592 F 60,192 a 10,032 U 50,160
Direct manuf.
labour 30,240 1,440 U 28,800 b 4,800 U 24,000
Other variable
costs 47,280 720 F 48,000 c 8,000 U 40,000
Total variable
costs 135,120 1,872 F 136,992 22,832 U 114,160
Contribution
margin 208,080 9,072 F 199,008 33,168 F 165,840
Fixed costs 68,400 400 U 68,000 0 68,000
Operating income $139,680 $8,672 F $131,008 $33,168 F $97,840
b 4,800 units 0.45 DMLH per unit $12 per DMLH = $25,920
7-21 (cont’d)
2. The following details, revealed in the variance analysis, should be used to rebut
the union if it focuses on the favourable operating income variance:
Most of the static budget operating income variance of $41,840F ($139,680
– $97,840) comes from a favourable sales volume variance, which only
arose because Sol sold more units than planned.
Of the $8,672 F flexible-budget variance in operating income, most of it
comes from the $7,200F flexible-budget variance in sales.
The net flexible-budget variance in total variable costs of $1,872 F is small,
and it arises from direct materials and other variable costs, not from
labour. Direct manufacturing labour flexible-budget variance is $1,440 U.
The direct manufacturing labour price variance, $4,320U, which is large
and unfavourable, is indeed partially offset by direct manufacturing
labour’s favourable efficiency variance—but the efficiency variance is
driven by the fact that Sol is using new, more expensive materials. Shaw
may have to “prove” this to the union, which will insist that it’s because
workers are working smarter. Even if workers are working smarter, the
favourable direct manufacturing labour efficiency variance of $2,880 does
not fully offset the unfavourable direct manufacturing labour price
variance of $4,320.
3. Changing the standards may make them more realistic, making it easier to
negotiate with the union. But the union will resist any tightening of labour
standards, and it may be too early (is one quarter’s experience sufficient?); a
change of standards at this point may be viewed as opportunistic by the union.
Perhaps a continuous improvement program to change the standards will be
more palatable to the union and will achieve the same result over a somewhat
longer period of time.
1. Variance Analysis for Bank Management Printers Inc. for September 2013
Level 1 Analysis
Static-
Actual Budget Static
Results Variances Budget
(1) (2) = (1) – (3) (3)
Units sold 12,000 3,000 U 15,000
Revenue $252,000a $ 48,000 U $300,000c
Variable costs 84,000d 36,000 F 120,000f
Contribution margin 168,000 12,000 U 180,000
Fixed costs 150,000 5,000 U 145,000
Operating income $ 18,000 $ 17,000 U $ 35,000
$17,000 U
$19,000 F $36,000 U
Total flexible-budget Total sales-volume
variance variance
$17,000 U
Total static-budget variance
a
12,000 × $21 = $252,000 d 12,000 × $7 = $84,000
b
12,000 × $20 = $240,000 e 12,000 × $8 = $96,000
c
15,000 × $20 = $300,000 f 15,000 × $8 = $120,000
7-22 (cont’d)
1.
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2)=(1)–(3) (3) (4)=(3)–(5) (5)
Units sold 130,000 0 130,000 10,000 F 120,000
Revenue $715,000 $260,000 F $455,000a $35,000 F $420,000
Variable costs 515,000 255,000 U 260,000b 20,000 U 240,000
Contribution margin 200,000 5,000 F 195,000 15,000 F 180,000
Fixed costs 140,000 20,000 U 120,000 0 120,000
Operating income $ 60,000 $15,000 U $ 75,000 $15,000 F $ 60,000
$15,000 U $15,000 F
Total flexible-budget varianceTotal sales-volume variance
$0
Total static-budget variance
a 130,000 $3.50 = $455,000
b 130,000 $2.00 = $260,000
7-23 (cont’d)
3. A nil total static-budget variance is due to offsetting total flexible-budget and total
sales-volume variances. In this case, these two variances exactly offset each other:
A closer look at the variance components reveals some major deviations from
plan. Actual variable costs increased from $2.00 to $3.96, causing an unfavourable
flexible-budget variable cost variance of $255,000. Such an increase could be a
result of, for example, a jump in material prices. Clarkson Company was able to
pass most of the increase in costs (fixed and variable) on to their customers—
average selling price went up about 57%, bringing about an offsetting favourable
flexible-budget variance in the amount of $15,000. An increase in the actual
number of units sold also contributed to more favourable results. Although such
an increase in quantity in the face of a price increase may appear counterintuitive,
customers may have forecast higher future platinum prices and therefore decided
to stock up.
The most important lesson learned here is that a superficial examination of
summary level data (Levels 0 and 1) may be insufficient. It is imperative to
scrutinize data at a more detailed level (Level 2). Had Clarkson not been able to
pass costs on to customers, losses would have been considerable.
7-24 (35 min.) Material cost variances, use of variances for performance
evaluation
1. Materials Variances
$12,000 F $20,000 U
Price variance Efficiency variance
a
$108,000 ÷ 6,000 = $18
2. The favourable price variance is due to the $2 difference ($20 - $18) between the
standard price based on the previous suppliers and the actual price paid through
the on-line marketplace. The unfavourable efficiency variance could be due to
several factors including inexperienced workers and machine malfunctions. But
the likely cause here is that the lower-priced titanium was lower quality or less
refined, which led to more waste. The labour efficiency variance could be
affected if the lower quality titanium caused the workers to use more time.
3. Switching suppliers was not a good idea. The $12,000 savings in the cost of
titanium was outweighed by the $20,000 extra material usage. In addition, the
$20,000U efficiency variance does not recognize the total impact of the lower
quality titanium because, of the 6,000 pounds purchased, only 5,000 pounds were
used. If the quantity of materials used in production is relatively the same, Better
Bikes could expect the remaining 1,000 kgs to produce 100 more units. At
standard, 100 more units should take 100 × 8 = 800 kg. There could be an
additional unfavourable efficiency variance of
(1,000 $20) (100 × 8 × $20)
$20,000 $16,000
$4,000U
7-24 (cont’d)
4. The purchasing manager’s performance evaluation should not be based solely on
the price variance. The short-run reduction in purchase costs was more than
offset by higher usage rates. His evaluation should be based on the total costs of
the company as a whole. In addition, the production manager’s performance
evaluation should not be based solely on the efficiency variances. In this case, the
production manager was not responsible for the purchase of the lower-quality
titanium, which led to the unfavourable efficiency scores. In general, it is
important for Stanley to understand that not all favourable material price
variances are “good news,” because of the negative effects that can arise in the
production process from the purchase of inferior inputs. They can lead to
unfavourable efficiency variances for both materials and labour. Stanley should
also that understand efficiency variances may arise for many different reasons
and she needs to know these reasons before evaluating performance.
5. Variances should be used to help Better Bikes understand what led to the current
set of financial results, as well as how to perform better in the future. They are a
way to facilitate the continuous improvement efforts of the company. Rather
than focusing solely on the price of titanium, Scott can balance price and quality
in future purchase decisions.
6. Future problems can arise in the supply chain. Scott may need to go back to the
previous suppliers. But Better Bikes’ relationship with them may have been
damaged and they may now be selling all their available titanium to other
manufacturers. Lower quality bicycles could also affect Better Bikes’ reputation
with the distributors, the bike shops and customers, leading to higher warranty
claims and customer dissatisfaction, and decreased sales in the future.
1. Direct Materials
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
(2,000 × 2 × $5.00)
(3,700 sq. m × $5.10) (3,700 sq. m × $5.00) (4,000 sq. m × $5.00)
$18,870 $18,500 $20,000
$370 U $1,500 F
Price variance Efficiency variance
$1,130 F
Flexible-budget variance
7-25 (cont’d)
$180 F $1,000 F
Price variance Efficiency variance
$1,180 F
Flexible-budget variance
The favourable labour price variance may be due to, say, (a) a reduction in
labour rates due to a recession, or (b) the standard being set without detailed
analysis of labour compensation. The favourable labour efficiency variance may
be due to, say, (a) more efficient workers being employed, (b) a redesign in the
plant enabling labour to be more productive, or (c) the use of higher quality
materials.
2.
Flexible Budget
(Budgeted
Input
Qty. Allowed
Actual Costs for
Incurred Actual Output
Control (Actual Input Qty. Actual Input Qty. × Budgeted
Point × Actual Price) × Budgeted Price Price)
Purchasing (6,000 sq. m × $5.10) (6,000 sq. m × $5.00)
$30,600 $30,000
$600 U
Price variance
Production (3,700 sq. m × $5.00) (2,000 × 2 × $5.00)
$18,500 $20,000
$1,500 F
Efficiency variance
Direct manufacturing labour variances are the same as in requirement 1.
7-26 (cont’d)
Direct Materials
Efficiency Variance
(a2) 1,500
The T-account entries related to direct manufacturing labour are the same as in
requirement 1. The difference between standard costing and normal costing for direct
cost items is:
Standard Costs Normal Costs
Direct Costs Standard price(s) Actual price(s)
× Standard input × Actual input
allowed for actual
outputs achieved
These journal entries differ from the normal costing entries because Work-in-
Process Control is no longer carried at “actual” costs. Furthermore, Direct Materials
Control is carried at standard unit prices rather than actual unit prices. Finally, variances
appear for direct materials and direct manufacturing labour under standard costing but
not under normal costing.
A more detailed analysis underscores the fact that the world of variances may be
divided into three general parts: price, efficiency, and what is labelled here as a sales-
volume variance. Failure to pinpoint these three categories muddies the analytical task.
The clearer analysis follows (in dollars):
Actual
Costs
Incurred Flexible Budget
(Actual (Budgeted Input
Input Qty. Qty. Allowed for
× Actual Actual Input Qty. Actual Output Static
Price) × Budgeted Price × Budgeted Price) Budget
Direct
Materials $18,870 $18,500 $20,000 $25,000
Direct
Manuf.
Labour $8,820 $9,000 $10,000 $12,500
The sales-volume variances are favourable here in the sense that less cost would
be expected solely because the output level is less than budgeted. However, this
is an example of how variances must be interpreted cautiously. Managers may be
incensed at the failure to reach scheduled production (it may mean fewer sales)
even though the 2,000 units were turned out with supreme efficiency. Sometimes
this phenomenon is called being efficient but ineffective, where effectiveness is
defined as the ability to reach original targets and efficiency is the optimal
relationship of inputs to any given outputs. Note that a target can be reached in
an efficient or inefficient way; similarly, as this problem illustrates, a target can
be missed but the given output can be attained efficiently.
7-28 (20-25 min.) Direct materials efficiency, mix, and yield variances.
1 and 2. Actual total quantity of all inputs used and actual input mix percentages for
each input are as follows:
Budgeted total quantity of all inputs allowed and budgeted input mix percentages
for each input are as follows:
The total direct materials yield variance can also be computed as the sum of the
direct materials yield variances for each input:
7-28 (cont’d)
The total direct materials mix variance can also be computed as the sum of the direct
materials mix variances for each input:
3. Energy Products used a larger total quantity of direct materials inputs than
budgeted, and so showed an unfavourable yield variance. The mix variance was
favourable because the actual mix contained more of the cheapest input, Benz, and
less of the most costly input, Protex, than the budgeted mix. The favourable mix
variance offset some, but not all, of the unfavourable yield variance—the overall
efficiency variance was unfavourable. Energy Products will find it profitable to
shift to the cheaper mix only if the yield from this cheaper mix can be improved.
Energy Products must also consider the effect on output quality of using the
cheaper mix, and the potential consequences for future revenues.
Flexible Budget:
Budgeted Total Quantity of
Actual Total Quantity Actual Total Quantity All Inputs Allowed for
of All Inputs Used of All Inputs Used Actual Output Achieved
Actual Input Mix Budgeted Input Mix Budgeted Input Mix
Budgeted Price Budgeted Price Budgeted Price
(1) (2) (3)
Echol 86,000 0.28 $0.22 = $5,298 86,000 0.30 $0.22= $5,676 84,000 0.30 $0.22 = $5,544
Protex 86,000 0.18 $0.47 = 7,276 86,000 0.20 $0.47 = 8,084 84,000 0.20 $0.47 = 7,896
Benz 86,000 0.42 $0.17 = 6,140 86,000 0.40 $0.17=5,848 84,000 0.40 $0.17 = 5,712
CT-40 86,000 0.12 $0.32 = 3,302 86,000 0.10 $0.32 = 2,752 84,000 0.10 $0.32 = 2,688
$22,016 $22,360 $21,840
$344 F $520 U
Total mix variance Total yield variance
$176 U
Total efficiency variance
7-29 (35 min.) Direct materials rate, efficiency, mix, and yield variances.
1. Solution Exhibit 7-29A presents the total rate variance ($3,100F), the total efficiency
variance ($2,760U), and the total flexible-budget variance ($340F).
Total direct materials rate variance can also be computed as:
7-29 (cont’d)
2. Solution Exhibit 7-29B presents the total direct materials yield and mix variances for
Greenwood Inc. for November 2013.
The total direct materials yield variance can also be computed as the sum of the direct
materials yield variances for each input:
The total direct materials mix variance can also be computed as the sum of the direct
materials mix variances for each input:
3. Greenwood paid less for Tolman and Ribston apples and, so, had a favourable
direct materials rate variance of $3,100. It also had an unfavourable efficiency
variance of $2,760. Greenwood would need to evaluate if these were unrelated
events or if the lower price resulted from the purchase of apples of poorer quality
that affected efficiency. The net effect in this case from a cost standpoint was
favourable—the savings in price being greater than the loss in efficiency. Of
course, if the apple jelly and applesauce are of poorer quality, Greenwood must
also evaluate the potential effects on current and future revenues that have not
been considered in the variances described in requirements 1 and 2.
7-29 (cont’d)
Flexible Budget:
Budgeted Total Quantity of
Actual Total Quantity Actual Total Quantity All Inputs Allowed for
of All Inputs Used of All Inputs Used Actual Output Achieved
Actual Input Mix Budgeted Input Mix Budgeted Input Mix
Budgeted Prices Budgeted Prices Budgeted Prices
(1) (2) (3)
Tolman 310,000 0.20a $0.32 = $19,840 310,000 0.15d $0.32 = $14,880 300,000 0.15d $0.32 =
$14,400
Golden
Delicious 310,000 0.50b $0.28 = 43,400 310,000 0.60e $0.28 = 52,080 300,000 0.60e $0.28 = 50,400
Ribston 310,000 0.30c $0.24 = 22,320 310,000 0.25f $0.24 = 18,600 300,000 0.25f $0.24 = 18,000
$85,560 $85,560 $82,800
0 $2,760 U
Total mix variance Total yield variance
$2,760 U
Total efficiency variance
PROBLEMS
1.
2. To compute flexible budget variances for revenues and the variable costs, first
calculate the budgeted cost or revenue per car, and then multiply that by the
actual number of cars detailed. Subtract the actual revenue or cost, and the result
is the flexible budget variance.
7-30 (cont’d)
The flexible budget variance for fixed costs is the same as the static budget
variance, and equals $0 in this case. Therefore, the overall flexible budget
variance in income is given by aggregating the variances computed earlier,
adjusting for whether they are favourable or unfavourable. This yields:
4. This is a problem of two equations and two unknowns. The two equations relate
to the number of cars detailed and the labour costs (the wages paid to the
employees).
Substitution: Substitution:
40X + 20(200-X) = 5,600 40X + 20(225-X) = 6,000
20X = 1600 20X = 1500
X = 80 X = 75
Y = 120 Y = 150
7-30 (cont’d)
Therefore the long-term employee is budgeted to detail 80 cars, and the new
employees are budgeted to detail 60 cars each.
Actually, the long-term employee details 75 cars (and grosses $3,000 for the
month), and the other two wash 75 each and gross $1,500 apiece.
5. The two short-term employees are budgeted to earn gross wages of $18,000 per
year: 150 ÷ 2 × 2 hrs × $10 = $1,500 × 12 months = $18,000 (if June is typical, and
less if it is a high-volume month). If this is a part-time job for them, then that is
fine. If it is full-time, and they only get paid for what they wash, the excess
capacity may be causing motivation problems. Stevie needs to determine a better
way to compensate employees to encourage retention. This should increase
customer satisfaction, and potentially revenue, because longer-term employees
do a more thorough job. In addition, rather than paying the same wage per car,
Stevie might consider setting quality standards and improvement goals for all of
the employees.
2. The unfavourable materials price variances in March and April imply that
Metalmoulder paid more than $144 per kilogram above the 2,400 kilogram
contract amount.
The percentage price increases for the additional purchases above 2,400 kilograms
are:
With a long-term agreement that has a fixed purchase-price clause for a set
minimum quantity, no price variance will arise when the purchase amount is
below the minimum quantity (assuming the budgeted price per unit is the contract
price per unit). A price variance will occur only when the purchased amount
exceeds the set minimum quantity. A price variance signals that the purchased
amount exceeds this set minimum quantity (2,400 kilograms per month).
It is likely that the supplier will charge a higher price (above $144) for
purchases above the 2,400 base. If a lower price were charged, the purchaser might
apply pressure to renegotiate the contract purchase price for the base amount. If
the purchasing officer is able to negotiate only a small price increase for additional
purchases above the base amount, the purchasing performance may well be
“favourable” despite the materials price variance being labelled “unfavourable.”
Metalmoulder may see the advantage of a long-term contract in factors
other than purchase price (for example, a higher quality of materials, a lower
required level of inventories because of more frequent deliveries, and a
guaranteed availability of materials). In general, the existence of a long-term
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Purchases Usage
$15,000 U $2,002 F
Price variance Efficiency variance
$7,350 U $750 F
Price variance Efficiency variance
a
$465,000 ÷ 100,000 = $4.65
b
$154,350 ÷ 4,900 = $31.5
3. Some students’ comments will be immersed in conjecture about higher prices for
materials, better quality materials, higher grade labour, better efficiency in use of
materials, and so forth. A possibility is that approximately the same labour force,
paid somewhat more, is taking slightly less time with better materials and
causing less waste and spoilage.
A key point in this problem is that all of these efficiency variances are
likely to be insignificant. They are so small as to be nearly meaningless.
Fluctuations about standards are bound to occur in a random fashion.
Practically, from a control viewpoint, a standard is a band or range of acceptable
performance rather than a single-figure measure.
4. The purchasing point is where responsibility for price variances is found most often.
The production point is where responsibility for efficiency variances is found
most often. The Monroe Corporation may calculate variances at different points
in time to tie in with these different responsibility areas.
$1,900 U* $2,000 F*
Price variance Efficiency variance
Purchases Usage
Direct (13,000 × $5.25) (13,000 × $5*) (12,500 × $5*) (4,000* × 3* × $5*)
Materials $68,250* $65,000 $62,500 $60,000
$3,250 U* $2,500 U*
7-33 (cont’d)
3. $38,000 + Price variance, $1,900 = $39,900, the actual direct manuf. labour cost
Actual rate = Actual cost ÷ Actual hours = $39,900 ÷ 1,900 hours = $21/hour
7-34 (30 min.) Direct manufacturing labour and direct materials variances,
missing data.
1. Flexible Budget
(Budgeted Input
Actual Costs Qty.
Allowed for
Incurred (Actual Actual Input Qty.
Actual Output
Input Qty. × Actual Price) × Budgeted Price × Budgeted Price)
Direct mfg. labour $368,000a $384,000b $360,000c
$16,000 F $24,000 U
$8,000 U
Flexible-budget variance
= 6,250 pounds
$7,500 F
Price variance
a
Given
b
150,000 pounds × $2/pound = $300,000
1. Direct Materials:
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Actual Input Qty. Actual Output
Qty. × Budgeted Price × Budgeted Price)
× Actual Price)
Wool (given) 2,633.50 $3.00 230 12 $3.00
$395 U $379.50 F
Price variance Efficiency variance
$15.50 U
Flexible-budget variance
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
(given) 836 $10.50 230 3.5 $10.50
$963.50 F $325.50 U
Price variance Efficiency variance
$638 F
Flexible-budget variance
7-35 (cont’d)
2.
Direct Materials Price Variance (time of purchase = time of use):
Direct Materials Control 7,900.50
Direct Materials Price Variance 395.00
Accounts Payable Control or Cash 8,295.50
3. Plausible explanations for the above variances include: Shayna paid a little bit
extra for the wool, but the wool was thicker and allowed the workers to use less
of it. Shayna used more inexperienced workers in April than she usually does.
This resulted in payment of lower wages per hour, but the new workers were
more inefficient and took more hours than normal. Overall, the lower wage rates
resulted in Shayna’s total wage bill being significantly lower than expected.
1. (a) Aunt Molly's Old Fashioned Cookies unit selling prices and unit costs of
inputs:
Selling-price variance =
= ($9.48 – $9.60) 450,000 kg
= $54,000 U
(b) to (e)
Actual Budgeted
Direct materials
Cookie mix $0.384 $0.384
Milk chocolate $3.84 $2.88
Almonds $9.60 $9.60
Direct labour
Mixing $17.28 $17.28
Baking $21.60 $21.60
7-36 (cont’d)
Flex. Budget
Actual Costs (Budgeted Input
Incurred Actual Allowed for
(Actual Input Input Actual Output
Actual Price Budgeted Efficiency Achieved
Price) Variance Prices Variance Budgeted
Price)
(1) (2)=(1)–(3) (3) (4)=(3)–(5) (5)
Direct materials
Cookie mix $ 111,360 $ 0 $111,360a $ 3,360 U $108,000h
Milk chocolate $ 621,005 155,251 U 465,754b 60,754 U 405,000i
Almonds $ 285,000 0 285,000c 15,000 U 270,000j
$1,017,365 $155,251 U $862,114 $79,114 U $783,000
Direct labour costs
Mixing $129,600 $ 0 $129,600d $ 0 $129,600k
Baking $288,000 0 288,000e 36,000 F 324,000l
$417,600 $ 0 $417,600 $36,000 F $453,600
7-36 (cont’d)
2. (a) Selling price variance. This may arise from a proactive decision to reduce price to
expand market share or from a reaction to a price reduction by a competitor. It
could also arise from unplanned price discounting by salespeople.
(b) Material price variance. The $0.96 increase in the price per kilogram of milk
chocolate could arise from uncontrollable market factors or from poor contract
negotiations by Aunt Molly’s.
(c) Material efficiency variance. For all three material inputs, usage is greater than
budgeted. Possible reasons include lower quality inputs, use of lower quality
workers, and the mixing and baking equipment not being maintained in a fully
operational mode.
(d) Labour price variance. The zero variance is consistent with workers being on
long-term contracts that are not renegotiated on a month-by-month basis.
(e) Labour efficiency variance. The favourable efficiency variance for baking could
be due to workers eliminating non-valued-added steps in production.
7-37 (cont’d)
Flexible- Sales -
Actual Budget Flexible Volume Static
Results Variances Budget Variance Budget
(1) (2)=(1)-(3) (3) (4)=(3)-(5) (5)
Units sold 7,275 7,275 7,500
Level 1 $27,313 U
Static-budget variance
7-37 (cont’d)
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
(1) (2) (3)
Direct (7,275 × 3.2 × $2.40) (7,275 × 3.2 × $2.20) (7,275 × 3.00 × $2.20)
Materials: $55,872 $51,216 $48,015
Frames
$4,656 U $3,201 U
Price variance Efficiency variance
Direct (7,275 × 7.0 × $2.96) (7,275 × 7.0 × $3.10) (7,275 × 6.00 × $3.10)
Materials: $150,738 $157,868 $135,315
Lenses
$7,130 F $22,553 U
Price variance Efficiency variance
Direct (7,275 × 1.35 × $14.80) (7,275 × 1.35 × $15.00) (7,275 × 1.20 × $15.00)
Manuf. $145,355 $147,319 $130,950
Labour
$1,964 F $16,369 U
Price variance Efficiency variance
1. Actual Results
Units sold 1,400,000
Selling price per unit $4.86
Revenue $6,804,000
Direct materials purchased and used:
Total direct materials cost $1,316,000
Direct materials per unit $0.94
7-38 (cont’d)
Static-
Actual Budgeted
Results Amount
Revenue $6,804,000 $7,970,400
Variable costs
Direct materials 1,316,000 1,693,710
Direct manufacturing labour 90,000 99,630
Direct marketing labour 504,000 597,780
Total variable costs 1,910,000 2,391,120
Contribution margin 4,894,000 5,579,280
Fixed costs 1,047,000 1,080,000
Operating income $3,847,000 $4,499,280
3, 4, and 5.
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
Units sold 1,400,000 — 1,400,000 — 1,660,500
$223,000 F $875,280 U
Total flexible-budget varianceTotal sales-volume variance
$652,280 U
Total static-budget variance
a
(1,400,000 300) hrs $18/hr = $84,000
7-38 (cont’d)
6, 7, and 8.
Material Variances:
Flexible Budget
Actual Costs (Budgeted Input
Incurred Allowed for Actual
(Actual Input Actual Input Output
Actual Price) Budgeted Price Budgeted Price)
(1,400,000 $0.94) (1,400,000 $1.02) (1,400,000 $1.02)
$1,316,000 $1,428,000 $1,428,000
$112,000 F $0
Price variance Efficiency variance
$112,000 F
Flexible-budget variance
7-38 (cont’d)
The unfavourable efficiency variance arises because of the decline in productivity from
the budgeted 300 drives per hour to the actual 280 drives per hour.
7-39 (35 min.) Materials variances: price, efficiency, mix, and yield.
1.
Oak ($6 × 8 b.f.) $ 48
Pine ($2 × 12 b.f.) 24
Cost per dresser $ 72
Number of ×3,000 units
dressers
Total budgeted $216,000
cost
7-39 (cont’d)
2. Solution Exhibit 7-39A presents the total price variance ($5,246 F), the total
efficiency variance ($1,280 F), and the total flexible-budget variance ($6,526 F).
= ×
= ×
$6,526 F
Total flexible-budget variance
4. Solution Exhibit 7-39B presents the total direct materials yield and mix variances for
PDS Manufacturing.
The total direct materials yield variance can also be computed as the sum of the
direct materials yield variances for each input:
= × ×
The total direct materials mix variance can also be computed as the sum of the direct
materials mix variances for each input:
= × ×
should also be careful that using more of the cheaper pine does not reduce the quality of
the dresser or how customers perceive it.
Solution Exhibit 7-39B
Columnar Presentation of Direct Materials Yield and Mix Variances for PDS
Manufacturing
Flexible Budget:
Budgeted Total Quantity
Actual Total Quantity Actual Total Quantity of All Inputs Allowed for
of All Inputs Used of All Inputs Used Actual Output ×
× Actual Input Mix × Budgeted Input Mix Budgeted Input Mix
× Budgeted Price × Budgeted Price × Budgeted Price
(1) (2) (3)
Oak 61,000 × 0.38 × $6.00 = $139,080 61,000 × 0.40 × $6.00 = $146,400 60,000 × 0.40 × $6.00 = $144,000
Pine 61,000 × 0.62 × $2.00 = 75,640 61,000 × 0.60 × $2.00 = 73,200 60,000 × 0.60 × $2.00 = 72,000
$214,720 $219,600 $216,000
4,880 F $3,600 U
Total mix variance Total yield variance
$1,280 F
Total efficiency variance
1. The direct materials standard to produce 80 kilograms of tropical fruit salad are:
Therefore, budgeted input allowed for each kilogram of tropical fruit salad:
Solution Exhibit 7-40A presents the total direct materials price and efficiency
variances for Tropical Fruit Inc. for October.
The total direct materials price variances can also be computed as:
7-40 (cont’d)
Flexible Budget:
Actual Costs Budgeted Input
Incurred: Allowed for
Actual Input Actual Input Actual Outputs
Actual Price Budgeted Price Budgeted Price
(1) (2) (3)
Pineapple 36,400 $0.95 = $34,580 36,400 $1.05 = $38,220 33,750 $1.05 = $35,437.50
Watermelons 18,200 $0.65 = 11,830 18,200 $0.55 = 10,010 20,250 $0.55 = 11,137.50
Strawberries 15,400 $0.75 = 11,550 15,400 $0.80 = 12,320 13,500 $0.80 = 10,800.00
All Inputs $57,960 $60,550 $57,375.00
$2,590 F $3,175 U
Total price variance Total efficiency variance
$585 U
Total flexible-budget variance
2. Solution Exhibit 7-40B presents the total direct materials yield and mix variances for
Tropical Fruits Inc. for October.
The total direct materials yield variance can also be computed as the sum of the direct
materials yield variances for each input.
7-40 (cont’d)
The total direct materials mix variance can also be computed as the sum of the direct
materials mix variances for each input:
3. Tropical Fruits has traded off a favourable material price variance of $2,590 against
an unfavourable material efficiency variance of $3,175. Tropical Fruits should
investigate if the favourable price variances on pineapples and strawberries were
obtained by compromising quality. Both the yield and the mix variances are
unfavourable. Tropical Fruits could have used larger quantities of all fruits to
produce the given output because of lower quality of pineapples and strawberries.
The total direct materials mix variance is unfavourable because the actual mix of
direct materials inputs had a greater proportion of the more costly inputs
(pineapples and strawberries) than the budgeted mix.
4. Direct materials yield and direct materials mix variances are especially informative
when management can substitute among the individual material inputs. Such
substitution is possible in the processing of individual fruits into tropical fruit
salad.
Flexible Budget:
Budgeted Total Quantity of
Actual Total Quantity Actual Total Quantity All Inputs Allowed for
of All Inputs Used of All Inputs Used Actual Output
Actual Input Mix Budgeted Input Mix Budgeted Input Mix
Budgeted Price Budgeted Price Budgeted Price
(1) (2) (3)
Pineapple (70,000 0.52a) $1.05 = $38,220 (70,000 0.5b) $1.05 = $36,750 (67,500 0.5) $1.05 = $35,437.50
Watermelon (70,000 0.26c) $0.55 = 10,010 (70,000 0.3d) $0.55 = 11,550 (67,500 0.3) $0.55 = 11,137.50
Strawberries (70,000 0.22e) $0.80 = 12,320 (70,000 0.2f) $0.80 = 11,200 (67,500 0.2) $0.80 = 10,800.00
All Inputs $60,550 $59,500 $57,375.00
$1,050 U $2,125 U
Total mix variance Total yield variance
$3,175 U
Total efficiency variance
7-41 (30-40 min.) Possible causes for price and efficiency variances.
1. Variances
$25,000 U $210,000 U
Price variance Efficiency variance
Direct
Manufacturing (22,040 × $29.30) (12,000a × $29.30)
Labour $664,940 $645,772 $351,600
$19,168 U $294,172 U
Price variance Efficiency variance
a
0.5 bottle per minute equates to 30 bottles per hour; 360,000/30 = 12,000 hours
2. Materials and labour efficiency variances account for the most significant portion of
the total variance. Poor quality of materials and the resulting extra labour time
working required to work with poor quality materials are one possible reason for
the unfavourable efficiency variances.
7-42 (20 min.) Variance analysis with activity-based costing and batch-level direct
costs
1. Flexible budget variances for batch activities
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Setup
$3,900 U
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Quality
Inspection
$2,700 F $1,750 U
7-42 (cont’d)
7-43 (cont’d)
The static budget for the 90-loan applicant level (and the flexible budget for the
120-loan application level in Requirement 2) are:
Requirement 1 Requirement 2
90 Loan 120 Loan
Applications Applications
Budgeted revenue (90, 120 × $1,200) $108,000 $144,000
Budgeted variable costs (90, 120 × $612) 55,080 73,440
Contribution margin 52,920 70,560
Fixed costs 37,200 37,200
Operating income $ 15,720 $ 33,360
Level 2 Analysis
Flexible- Sales-
Actual Budget Flexible Volume
Static
Results Variances Budget Variances
Budget
(1) (2)=(1)–(3) (3) (4)=(3)–(5)
(5)
Units sold 120 0 120 30 F 90
Revenue $161,280 $17,280 F $144,000 $36,000 F $108,000
Variable costs 83,722 10,282 U 73,440 18,360 U 55,080
Contribution margin 77,558 6,998 F 70,560 17,640 F 52,920
Fixed costs 40,200 3,000 U 37,200 0 37,200
Operating income $ 37,358 $ 3,998 F $ 33,360 $17,640 F $15,720
$3,998 F $17,640 F
Total flexible-budget variance Total sales-volume variance
$21,638 F
Total static-budget variance
7-43 (cont’d)
Note that the $21,638 favourable static-budget variance is largely the result of an
increase in loan applications from a budgeted 90 to an actual 120. In addition, the
average size of a loan increased from a budgeted $240,000 to $268,800 which
explains the flexible-budget variance of $17,280 F for revenues (0.5% × $28,800 ×
120 = $17,280). One possible explanation is a rapid decrease in interest rates
leading to an increase in demand for loan refinancing.
1. Detailed cost studies of the kind developed by Market Insights can provide insight
into one critical area of Horn’s performance that is, cost management.
Horn apparently believes in an “ask no questions” approach in relation to
cost management. When an institution is running large deficits, this approach is
totally unacceptable. (Even if surpluses were occurring, an “ask no questions”
approach is not appropriate.) Horn is correct in noting that in many areas of
hospital administration, it is not possible to have well-defined relationships
between inputs and outputs. He is also correct in observing that “good output” is
difficult to define. However, neither point means that he cannot learn from a study
that shows the cost management skills of other hospitals doing similar operations
to PUH.
2. The main inference is that PUH has well-above-average cost levels. At the
aggregate hospital level, its cost structure is 20% above the average cost. Even
more disconcerting, it is over 70% more costly than hospitals E, C and J.
PUH is above average cost for five of the six diagnostic groups listed. Even
more disconcerting is the magnitude of the difference between PUH and the 25th
percentile for five of the six diagnostic groups:
7-44 (cont’d)
4. Horn might make the following criticisms of the MI benchmark cost reports:
(a) The reports focus only on cost—they are “a cost accountant’s view of the
world.”
(b) The reports rely on data hospitals submit to various regulatory bodies.
These reports likely serve different purposes and hence may not be
appropriate to use for cost comparisons.
(c) Cost accounting systems of hospitals are of highly variable quality. Horn
probably would argue “garbage-in garbage-out” applies to this data.
Hergonia
= ($15.60* – $14.00) 250,000
= $400,000 U
Tanista
= ($13.67* – $14.00) 900,000
= $297,000 F
7-45 (cont’d)
Should Daley and Mullins be forthright and present all their concerns on (a), (b),
and (c)?
Both Daley and Mullins face the dilemma that any discussion of (a), (b), or
(c) will raise questions about their own behaviour at the time the acquisitions were
made. Board members may ask “When did you first know about (a), (b), and (c)?”
and “If it is only recently, why did you not undertake examination of these issues
at the time you supported the acquisitions?”
3. Mullins has very high standards of ethical conduct to meet. She should not make
presentations to the Board based on information she has strong doubts about. If
she decides to make the presentation, all her concerns and caveats should be
presented.
She should require detailed documentation for all payments. No future
payments should be made without adequate documentation.
Investigation of kickback allegations should be made, however difficult that
may be. Mullins should be able to show she made a good-faith effort to ensure
kickback payments are not an ongoing practice in Hergonia or Tanista.
1. Budgeted direct materials input per shirt = 600 rolls ÷ 6,000 shirts = 0.10 roll of cloth
Budgeted direct manufacturing labour-hours per shirt = 1,500 hours ÷ 6,000 shirts = 0.25 hours
Budgeted direct materials cost = $30,000 ÷ 600 = $50 per roll
Budgeted direct manufacturing labour cost per hour = $27,000 ÷ 1,500 = $18 per hour
Actual output achieved = 6,732 shirts
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Direct (612 × $50) (6,732 × 0.10 × $50)
Materials $30,294 $30,600 $33,660
$306 F $3,060 F
Price variance Efficiency variance
Direct
Manufacturing (1,530 × $18) (6,732 × 0.25 × $18)
Labour $27,693 $27,540 $30,294
$153 U $2,754 F
Price variance Efficiency variance
7-46 (cont’d)
(d) They may want to gain all the benefits that ensue from superior
performance (job security, wage rate increases) without putting in the
extra effort required.
3. If Jorgenson does nothing about standard costs, his behaviour will violate a
number of standards of ethical conduct for practitioners of management
accounting. In particular, he would violate the
(a) standards of competence, by not performing professional duties in
accordance with relevant standards;
(b) standards of integrity, by passively subverting the attainment of the
organization’s objective to control costs; and
(c) standards of credibility, by not communicating information fairly and not
disclosing all relevant cost information.
4. Jorgenson should discuss the situation with Fenton and point out that the
standards are lax and that this practice is unethical. If Fenton does not agree to
change, Jorgenson should escalate the issue up the hierarchy in order to effect
change. If organizational change is not forthcoming, Jorgenson should be
prepared to resign rather than compromise his professional ethics.