site.iugaza.edu.pssite.iugaza.edu.ps/mhato/files/2018/11/ch06.docx · Web viewChapter 6 – Performance Evaluation: Variance Analysis. Chapter 6 – Performance Evaluation: Variance

CHAPTER

6

Chapter 6 – Performance Evaluation: Variance Analysis

Performance Evaluation: Variance Analysis

Learning Objectives

1. Prepare a flexible budget and explain its use in evaluating performance. (Unit 6.1)2. Calculate the direct materials price and quantity variances. (Unit 6.2)3. Identify potential causes of the direct materials price and quantity variances. (Unit 6.2)4. Calculate the direct labor rate and efficiency variances. (Unit 6.3)5. Identify potential causes of the direct labor rate and efficiency variances. (Unit 6.3)6. Calculate the variable overhead spending and efficiency variances. (Unit 6.4)7. Calculate the fixed overhead spending variance. (Unit 6.4)8. Identify potential causes of the variable overhead spending and efficiency variances and the fixed

overhead spending variance.

Summary of End of Chapter Material

Difficulty: E = Easy, M = Moderate, D = DifficultBloom: K = Knowledge, C = Comprehension, AP = Application, AN = Analysis, S = Synthesis, E = EvaluationAACSB: A = Analytic, C = Communication, E = EthicsAICPA FN: DM = Decision modeling, RA = Risk Analysis, M = Measurement, R = Reporting, RS = Research, T = TechnologyAICPA PC: C = Communication, I = Interaction, L = Leadership, P = Professional demeanor, PM = Project Management,

PS = Problem Solving and Decision Making, T = TechnologyIMA: BA = Business applications, BP = Budget Preparation, CM = Cost Management, DA = Decision Analysis,

PM = Performance Measurement, R = Reporting, SP = Strategic Planning

Item L. O. Difficulty Level

Minutes to Complete

Bloom’s Taxonomy

AACSB AICPA FN

AICPA PC

IMA EthicsCoverage

GUIDED UNIT PREPARATIONUnit 6.1

1 1 E 2 K A R C BP2 1 E 3 K A R C PM3 1 M 3 K A R C PM4 1 E 4 K, C A R C BP5 1 M 4 K A M PS PM

Unit 6.21 2 M 3 K A M PS PM2 2 M 3 K A M PS PM3 2 M 2 K A M PS PM4 2 D 3 C A M PS PM5 3 D 4 C A M PS PM6 3 D 4 C A M PS PM

Unit 6.31 4 M 3 K A M PS PM2 4 M 3 K A M PS PM3 5 D 4 C A M PS PM4 5 D 4 C A M PS PM

6-1

photo: © jsnyderdesign / iStockphoto

Solutions for Davis & Davis, Managerial Accounting, 2nd ed.

Unit 6.41 6 M 3 K A M PS PM2 6 M 3 K A M PS PM3 7 E 2 K A M PS PM4 8 D 3 C A M PS PM5 8 D 3 C A M PS PM

Item L. O. Difficulty Level

Minutes to Complete

Bloom’s Taxonomy

AACSB AICPA FN

AICPA PC

IMA EthicsCoverage

EXERCISES6-1 1 M 15 AP A M PS BP6-2 1 M 15 AP A M PS PM6-3 1 M 15 AP A M PS PM6-4 1 M 15 AP A M PS BP, PM6-5 1 M 15-20 AP A M PS PM6-6 2 E 5 AP A M PS PM6-7 2 E 5 AP A M PS PM6-8 2 M 8 AP A M PS PM6-9 2 D 5 AP A M PS PM6-10 2 D 5 AP A M PS PM6-11 2 D 8 AP A M PS PM6-12 3 D 10-15 AN A R C PM6-13 2, 3 M 12 AP, AN A M PS PM6-14 4 E 5 AP A M PS PM6-15 4 E 5 AP A M PS PM6-16 4 M 8 AP A M PS PM6-17 4 M 5 AP A M PS PM6-18 4 D 5 AP A M PS PM6-19 4 D 8 AP A M PS PM6-20 4, 5 D 12 AP, AN A M PS PM6-21 6 D 8 AP A M PS PM6-22 7 E 3 AP A M PS PM6-23 7 E 5 AP A M PS PM6-24 7 E 5 AP A M PS PM6-25 2, 4, 6, 7 M 25-30 AP, AN A M PS PM6-26 2, 4, 6, 7 M 20-25 AP A M PS PMPROBLEMS6-27 1 D 35-40 AP, AN A M PS BP6-28 3, 5 D 10-15 AN A M PS PM6-29 6, 7 M 10-15 AP A M PS PM6-30 1, 2, 3, 4,

5, 6, 7, 8D 55-60 AP, AN, S A M PS BP, PM

6-31 1, 2, 3, 4, 5, 6, 7, 8

D 55-60 AP, AN, S A M PS BP, PM

6-32 2, 3, 4, 5, 6, 7, 8

D 55-60 AP, AN A M PS BP, PM

C&C CONTINUING CASE6-33 3, 5 D 30-35 AP, AN A M PS BP, PMCASES6-34 1 D 30-35 AP, AN, C A M PS BP, PM6-35 2, 3, 4, 5 D 55-60 AP, AN, E A, E M PS BA, PM 6-36 1, 2, 3, 4, 5,

6, 8D 60-70 AP, AN, S A M PS BP, PM

SOLUTIONS TO GUIDED UNIT PREPARATION

6-2


Unit 6.1

1. A static budget is a budget developed for a single level of expected output. The master budget is an example of a static budget. It is prepared before the beginning of an accounting period.

2. A variance is any difference between actual results and budgeted results. A favorable variance is a variance that increases operating income relative to the budgeted amount. An unfavorable variance is a variance that decreases operating income relative to the budgeted amount.

3. Management by exception requires managers to investigate only those variances that are considered material. Materiality can be measured in terms of absolute dollars, percentages, or trends. Both favorable and unfavorable variances that are material are investigated.

4. A flexible budget is a budget that can be prepared before an accounting period to show the operating income that is expected at various potential levels of output. A flexible budget can also be prepared after a budget period is over to reflect expected results at the actual level of output. In this instance, a flexible budget differs from a static budget in that it is prepared at the actual level of output rather than the original budgeted level of output.

5. A static budget variance can be separated into a flexible budget variance and a sales volume variance. The flexible budget variance is the difference between actual results and the flexible budget prepared for the actual level of output. The sales volume variance is the difference between the flexible budget prepared for the actual level of output and the static budget.

6-3


Unit 6.2

1. A direct materials price variance is the difference between the actual price paid for materials purchased and the standard price of those materials, multiplied by the actual quantity of materials purchased. In equation form, it is calculated as AQPurch × (AP – SP), where AQPurch = the actual quantity purchased, AP = the actual price paid per unit of material, and SP = the standard price allowed per unit of material.

2. A direct materials quantity variance is the difference between the actual quantity of materials used and the standard quantity of materials allowed for actual production, multiplied by the standard price per material. In equation form, it is calculated as SP × (AQUsed – SQ), where SP = the standard price allowed per unit of material, AQUsed = the actual quantity of materials used in production, and SQ = the standard quantity of materials allowed for the actual production level.

3. The standard quantity allowed is the amount of inputs allowed for the actual level of production. It is computed as the standard quantity per unit multiplied by the number of units produced.

4. The standard quantity of tires for 8 bicycles is 16 tires. Standard quantity is based on the actual level of production, not the budgeted level of production.

5. A difference in the quality of materials purchased will likely result in a materials price variance. For example, higher quality materials typically cost more, resulting in an unfavorable price variance. Another reason for a material price variance is receiving (or losing) volume discounts unexpectedly.

6. A difference in the quality of materials purchased will likely result in a materials quantity variance. For example, higher quality materials typically require the use of fewer materials per unit, resulting in a favorable quantity variance. Other reasons for a material quantity variance are the expertise of the workers and the precision of the machines used in production.

6-4


Unit 6.3

1. A direct labor rate variance is the difference between the actual wage rate and the standard wage rate, multiplied by the actual hours worked. In equation form, it is calculated as AQ × (AP – SP), where AQ = the actual direct labor hours worked, AP = the actual wage rate paid per direct labor hour, and SP = the standard wage rate per direct labor hour.

2. A labor efficiency variance is the difference between the actual hours worked and the hours allowed for actual production, multiplied by the standard wage rate per direct labor hour. In equation form, it is calculated as SP × (AQ – SQ), where SP = the standard wage rate per direct labor hour, AQ = the actual number of direct labor hours used in production, and SQ = the standard total direct labor hours allowed for the actual production level.

3. Actual labor rates might differ from standard rates if a different skill class of worker is used. For example, if not enough level 1 workers are available to complete the work, an operations manager may decide to use level 2 workers. The level 2 workers get paid a higher rate per hour, so the labor rate variance would be unfavorable. Another reason for a labor rate variance is unexpected overtime resulting in workers getting paid time and a half.

4. Actual labor hours might differ from standard hours if a different skill class of worker is used. For example if not enough level 1 workers are available to complete production, an operations manager may decide to use level 2 workers. The level 2 workers are more skilled and work more efficiently, so the labor efficiency variance would be favorable. Other reasons for a labor efficiency variance include a difference in the quality of materials and the precision of production equipment. Higher quality materials and precise equipment would increase workers’ efficiency and vice versa.

6-5


Unit 6.4

1. A variable overhead spending variance is the difference between the actual amount spent on variable overhead items and the amount of variable overhead that is expected to be incurred at the actual level of the activity base. Actual VOH – (AQ SP)

2. The variable overhead efficiency is the difference between the actual quantity of the activity base and the standard quantity of the activity base allowed for actual production, multiplied by the standard variable overhead rate. The variance captures the effect of the efficient use of the activity base. SP (AQ – SQ)

3. The fixed overhead spending variance is the difference between the actual amount spent on fixed overhead items and the budgeted amount of fixed overhead.

4. Paying more or less than expected on the overhead items will cause spending variances. For variable overhead, efficient or inefficient use of variable overhead items (such as indirect materials) can cause a spending variance.

5. A variable overhead efficiency is strictly due to the use of the activity base that is used to apply variable overhead. If the activity base is used efficiently (inefficiently), then the variable overhead efficiency variance will be favorable (unfavorable).

6-6


SOLUTIONS TO EXERCISES

Exercise 6-1

Unit 1,500 2,500 3,500 Sales revenue $50 .00 $75,000 $125,000 $175,000 Less variable expenses: Cost of goods sold 30.00 45,000 75,000 105,000 Operating expenses 3 .50 5,250 8,750 12,250 Total variable expenses 33 .50 50,250 83,750 117,250 Contribution margin $16 .50 24,750 41,250 57,750 Fixed operating expenses 28,000 d 28,000 28,000 Operating income ($3,250 ) $ 13,250 $ 29,750

a

b

c

d $35,000 × 0.80

Exercise 6-2

Flexible Budget

Sales Volume Variance

Static Budget

Unit sales 2,100 100 F 2,000 Sales revenue $105,000 $5,000 F $100,000Cost of goods sold 63,000 3,000 U 60,000

or

Sales revenue = (2,100 – 2,000) × $50 = $5,000 FCost of goods sold = (2,100 – 2,000) × $30 = $3,000 U

Exercise 6-3

6-7


Sales price variance = ($48 - $50) × 2,100 = $4,200 U

6-8


Exercise 6-4

Unit 2,500 3,000 3,500 Sales revenue $800 $2,000,000 $2,400,000 $2,800,000 Less variable expenses: Direct material 300 750,000 900,000 1,050,000 Direct labor 150 375,000 450,000 525,000 Utilities 35 87,500 105,000 122,500 Indirect material 30 75,000 90,000 105,000 Indirect labor 60 150,000 180,000 210,000 Total variable expenses 575 1,437,500 1,725,000 2,012,500 Contribution margin $225 562,500 675,000 787,500 Less fixed expenses: Maintenance 20,000 20,000 20,000 Depreciation 40,000 40,000 40,000 Insurance 27,000 27,000 27,000 Rent 30,000 30,000 30,000 Total fixed expenses 117,000 117,000 117,000 Operating income $ 445,500 $ 558,000 $ 670,500

6-9


Exercise 6-5

Actual Results

Flexible Budget Variance

Flexible Budget


Static Budget

Unit sales 3,100 0 3,100 100 F 3,000 Sales revenue $2,635,000 $155,000 F $2,480,000 $80,000 F $2,400,000 Less variable expenses: Direct material 910,000 20,000 F 930,000 30,000 U 900,000 Direct labor 435,000 30,000 F 465,000 15,000 U 450,000 Overhead 398,000 10,500 U 387,500 12,500 U 375,000 Total variable expenses 1,743,000 39,500 F 1,782,500 57,500 U 1,725,000 Contribution margin 892,000 194,500 F 697,500 22,500 F 675,000Total fixed expenses 125,000 8,000 U 117,000 0 117,000 Operating income $ 767,000 $186,500 F $ 580,500 $22,500 F $ 558,000

6-10


Exercise 6-6

AQ × AP AQ × SP4,000 lbs. × AP 4,000 lbs. × $1.60/lb.

$6,800 $6,400

$400 UDirect materials price variance

Exercise 6-7

AQ × AP AQ × SP1,100 oz. × AP 1,100 oz. × $800/oz.

$875,000 $880,000

$5,000 FDirect materials price variance

Exercise 6-8

AQ × AP AQ × SP50,000 gallons × $2.50/gallon 50,000 gallons × SP

$125,000

$5,000 F

$125,000 – (50,000 gal. × SP) = ($5,000)$130,000 = 50,000 gal. × SP

=SP

$2.60/gal. = SP

6-11


Exercise 6-9

AQ × SP SQ × SP535,000 ft. × $0.23/ft. (63,000 cables × 8.5 ft.) × $0.23/ft.

535,500 ft. × $0.23/ft.$123,050 $123,165

$115 FDirect materials quantity variance

Exercise 6-10

AQ × SP SQ × SP800 suits × 1.2 yds. × $5/yd.

1,025 yds. × $5/yd. 960 yds. × $5/yd.$5,125 $4,800

$325 UDirect materials quantity variance

Exercise 6-11

AQ × SP SQ × SP40,000 oz. × $0.20/oz. # tests × 0.5 oz. × $0.20/oz.

$8,000

$500 UDirect materials quantity variance

$8,000 – (# tests × $0.10) = $500$7,500 = # tests × $0.10

=# tests

75,000 = # tests

6-12


Exercise 6-12

Purchasing from 12 vendors rather than a single vendor likely will result in an unfavorable price variance. Sourcing from a single vendor probably allowed Montrose to contract at a lower price as a result of volume purchasing, something that Montrose cannot achieve when purchases are spread among 12 vendors. The unfavorable direction of the price variance is also likely given small quantity purchases requiring overnight delivery and the three purchases of higher quality material.

The implications for the quantity variance are not as clear. The three higher quality purchases would tend to yield a favorable quantity variance, since higher quality materials often require fewer inputs to produce a unit of product. If other purchases were of standard quality, the total quantity variance would likely be favorable, although the size will depend on the relative size of the higher quality orders.

Exercise 6-13

a.

AQ × AP AQ × SP6,000 lbs. purchased × $7.70/lb. 6,000 lbs. purchased × $8/lb.

$46,200 $48,000


AQ × SP SQ × SP5,040 lbs. used × $8/lb. (2,800 boxes × 1.5 lbs.) × $8/lb.

4,200 lbs. × $8/lb.$40,320 $33,600

$6,720 UDirect materials quantity variance

6-13


Exercise 6-13, continued

b. Chad’s Chocolates appears to have purchased a lower quality chocolate at a lower price than the standard specified. The lower quality chocolate does not appear to have processed as well as the standard quality, requiring additional chocolate to complete the production run.

Exercise 6-14

AQ × AP AQ × SP50,300 DLH × $6.75/DLH

$352,100 $339,525

$12,575 UDirect labor rate variance

Exercise 6-15

AQ × AP AQ × SP10,800 DLH × AP 10,800 DLH × $8.40/DLH

$88,000 $90,720

$2,720 FDirect labor rate variance

6-14


Exercise 6-16

AQ × AP AQ × SP$33,400 AQ × $8/DLH

$1,400 UDirect labor rate variance

$33,400 – (AQ × $8) = $1,400$32,000 = AQ × $8

=AQ

4,000 DLH = AQ

Exercise 6-17

Actual DLH worked = 25,000 + 800 = 25,800Standard wage rate = $9.25 - $0.50 = $8.75 per DLH

AQ × SP SQ × SP25,800 DLH × $8.75/DLH 25,000 DLH × $8.75/DLH

$225,750 $218,750

$7,000 UDirect labor efficiency variance

Exercise 6-18

AQ × SP SQ × SP7,200 DLH × $9/DLH

(420,000 balls × DLH/ball) × $9/DLH7,000 DLH × $9/DLH

$64,800 $63,000

$1,800 UDirect labor efficiency variance

6-15


6-16


Exercise 6-19

AQ × SP SQ × SPAQ × $6.50/DLH (50,000 reams × .25 DLH/ream) × $6.50/DLH

12,500 DLH × $6.50/DLH$81,250

$1,300 FDirect labor efficiency variance

(AQ × $6.50) – $81,250 = ($1,300)(AQ × $6.50) = $79,950

AQ =

AQ = 12,300 DLH

6-17


Exercise 6-20

a.AQ × AP AQ × SP SQ × SP

24,320 DLH × $15/DLH 24,320 DLH × $14/DLH (6,400 cellos × 4 DLH) × $14/DLH25,600 DLH × $14/DLH

$364,800 $340,480 $358,400

$24,320 U $17,920 FDirect labor rate variance Direct labor efficiency variance

b. Hunter may have hired workers who had a higher level of skill than its normal workers. The company had to pay a higher price than normal for this higher skill level, resulting in an unfavorable labor rate variance. The higher skill level resulted in the workers being more efficient and requiring fewer DLH to produce the cellos, resulting in the favorable direct labor efficiency variance.

Exercise 6-21

AQ × AP AQ × SP SQ × SP19,500 DLH × $3/DLH (12,320 pkgs. × 1.5 DLH) × $3/DLH

18,480 DLH × $3/DLH$50,000 $58,500 $55,440

$8,500 F $3,060 UVariable overhead spending variance

Variable overhead efficiency variance

6-18


Exercise 6-22

Actual Budget$485,000 $500,000

$15,000 FFixed overhead spending variance

Exercise 6-23


$6,000 FFixed overhead spending variance

Exercise 6-24

Actual Budget

$70,00050,000 boxes × $1.35/box

$67,500

$2,500 UFixed overhead spending variance

6-19


Exercise 6-25

a. AQPurch × AP AQPurch × SP

8,500 lbs. purchased × $?/lb. 8,500 lbs. purchased × $0.75/lb.$5,100 $6,375


b. AQused × SP SQ × SP

6,300 lbs. used × $0.75/lb. (2,050 tests × 3 lbs.) × $0.75/lb.6,150 lbs. used × $0.75/lb.

$4,725.00 $4,612.50

$112.50 UDirect materials quantity variance

c. AQ × AP AQ × SP

850 DLH × $12/DLH$9,775 $10,200

$425 FDirect labor rate variance

d. AQ × SP SQ × SP

(2,050 tests × .4 DLH) × $12/DLH850 DLH × $12/DLH 820 DLH × $12/DLH

$10,200 $9,840

$360 UDirect labor efficiency variance

6-20



e. AQ × AP AQ × SP

850 DLH × $9/DLH$7,700 $7,650

$50 UVariable overhead spending variance

f. AQ × SP SQ × SP

(2,050 tests × .4 DLH) × $9/DLH850 DLH × $9/DLH 820 DLH × $9/DLH

$7,650 $7,380

$270 UVariable overhead efficiency variance

g. Actual Budget

$13,7502,100 tests × .4 DLH × $16/DLH

$13,440

$310 UFixed overhead spending variance

6-21



h.

TO: Andrew NicholsFROM: John StudentDATE: April 5, 20XXRE: Variance investigations for March

During the month of March, the direct materials price variance was favorable, indicating that we paid less than the standard price per pound of material. That same month, the direct materials quantity variance was unfavorable, indicating that we used more pounds of material than allowed for the tests. I recommend that you investigate the reason we were able to acquire our materials at a price that was lower than the standard price. If the lower price was due to lower quality material or a new supplier, that could explain the excess usage. However, if we conclude that the tests were of our standard quality, the cost savings outweighs the increased quantity usage, and we may want to consider changing our standards.

The direct labor price variance for March was favorable, indicating we paid less per direct labor hour than our standard rate. For that same period, the direct labor efficiency variance was unfavorable, indicating that it took longer to perform the tests than allowed by the standard. We need to investigate whether the efficiency variance was a result of using less skilled workers or because of lower quality materials used for the tests.

6-22


Exercise 6-26

Direct materials price variance

AQ × AP AQ × SP500,000 lbs. purchased × $?/lb. 500,000 lbs. purchased × $6/lb.

$2,750,000 $3,000,000

$250,000 F

Direct materials quantity variance

AQ × SP SQ × SP382,000 lbs. used × $6/lb. (22,000 pumps × 15 lbs.) × $6/lb.

330,000 lbs. used × $6/lb.$2,292,000 $1,980,000

$312,000 U

6-23



Direct LaborAQ × AP AQ × SP SQ × SP

94,000 DLH × $9/DLH (22,000 pumps × 4 DLH) × $9/DLH88,000 DLH × $9/DLH

$940,000 $846,000 $792,000

$94,000 U $54,000 UDirect labor rate variance Direct labor efficiency variance

Variable OverheadAQ × AP AQ × SP SQ × SP

94,000 DLH × $8/DLH (22,000 pumps × 4 DLH) × $8/DLH 88,000 DLH × $8/DLH

$740,000 $752,000 $704,000

$12,000 F $48,000 UVariable overhead spending variance

Variable overhead efficiency variance

Fixed Overhead Spending VarianceActual Budget

$540,00025,000 pumps × 4 DLH × $5/DLH

$500,000

$40,000 U

6-24


SOLUTIONS TO PROBLEMS

Problem 6-27

a. Unit 180,000 games

Sales revenue $16 .00 a $2,880,000 Less variable expenses: Direct material 4.50b 810,000 Direct labor 2.00c 360,000 Variable overhead 3 .00 d 540,000 Total variable expenses 9 .50 1,710,000 Contribution margin $6 .50 1,170,000 Less fixed expenses: Overhead 250,000 Selling and administrative expenses 500,000 Total fixed expenses 750,000 Operating income $420,000

a

b

c

d

6-25


Problem 6-27, continued

b.Actual

ResultsStatic Budget

VarianceStatic

BudgetUnit Sales 180,000 30,000 F 150,000 Sales revenue $2,870,000 $470,000 F $2,400,000 Less variable expenses: Direct material 798,000 123,000 U 675,000 Direct labor 375,000 75,000 U 300,000 Overhead 550,000 100,000 U 450,000 Total variable expenses 1,723,000 298,000 U 1,425,000 Contribution margin 1,147,000 172,000 F 975,000 Less fixed expenses: Overhead 270,000 20,000 U 250,000 Selling and administrative 500,000 0 500,000 Total fixed expenses 770,000 20,000 U 750,000 Operating income $377,000 $152,000 F $225,000

c. No, the static budget variance is of little use to managers. It is impossible to determine from the static budget variance whether the variances are due to changes in prices or changes in volume.

6-26



d.

Actual Results

Flexible Budget

Variance

Flexible Budget


Static Budget

Unit Sales 180,000 0 180,000 30,000 F 150,000Sales revenue $2,870,000 $10,000 U $2,880,000 $480,000 F $2,400,000 Less variable expenses: Direct material 798,000 12,000 F 810,000 135,000 U 675,000 Direct labor 375,000 15,000 U 360,000 60,000 U 300,000 Overhead 550,000 10,000 U 540,000 90,000 U 450,000 Total variable expenses 1,723,000 13,000 U 1,710,000 285,000 U 1,425,000 Contribution margin 1,147,000 23,000 U 1,170,000 195,000 F 975,000 Less fixed expenses: Overhead 270,000 20,000 U 250,000 0 250,000 Selling & administrative 500,000 0 500,000 0 500,000 Total fixed expenses 770,000 20,000 U 750,000 0 750,000 Operating income $377,000 $43,000 U $420,000 $195,000 F $225,000

e. The flexible budget suggests that if budget objectives had been met with higher sales, the operating income should have been $420,000. In fact, operating income was only $377,000. It appears that the average sales price had to be reduced to sell more units. While direct materials costs came in under budget, direct labor and variable overhead costs exceeded budget. Maybe overtime was worked or lesser skilled workers had to be hired to achieve the higher level of production/sales. Management needs to identify why costs increased to be able to anticipate future results.

6-27


Problem 6-28

a. “I’m not so sure Brian is doing us a favor by ordering the cheaper materials. These new materials may very well be the cause of the materials quantity variance. My guys had to scrap a whole batch of product because the materials were defective and we didn’t know it until assembly was complete. That affected the materials quantity variance in a big way. I also believe the materials are causing problems with the machines; I need to start keeping track of how often the machines are down. My guys can’t work if the machines aren’t operating properly.”

b. Russell should definitely conduct an investigation before he awards a bonus to Brian. Favorable variances are not always an indication of things going well. If, in fact, the cheaper materials are of lower quality and are causing the direct materials quantity and the direct labor efficiency variances, the savings in price is not worth extra costs and the company is worse off than it would have been with regular materials.

6-28


Problem 6-29

a. Variable Overhead

SP = $2,400,000 240,000 MH = $10/MH

AQ × AP AQ × SP SQ × SP21,600 MH × $10/MH 21,000 MH × $10/MH

$214,000 $216,000 $210,000

$2,000 F $6,000 UVariable Overhead Spending Variance

Variable Overhead Efficiency Variance

b. Fixed Overhead Spending Variance


$1,200 U

6-29


Problem 6-30

a. & b. Direct Materials

AQ × AP AQ × SP SQ × SP102,000 lbs. × $?/lb. 102,000 lbs. × $5.50/lb. (10,250 cases × 10 lbs.) × $5.50/lb.

102,500 lbs. × $5.50/lb.$561,000 $561,000 $563,750

$0 $2,750 FDirect material price variance Direct material quantity variance

c. & d. Direct Labor

AQ × AP AQ × SP SQ × SP26,500 DLH × $?/DLH 26,500 DLH × $10.00/DLH (10,250 cases × 2.6 DLH) × $10.00/DLH

26,650 DLH × $10.00/DLH$267,650 $265,000 $266,500

$2,650 U $1,500 FDirect labor rate variance Direct labor efficiency variance

6-30



e. & f. Variable Overhead

AQ × AP AQ × SP SQ × SP40,950 MH × $7.00/MH (10,250 cases × 4 MH) × $7.00/MH

41,000 MH × $7.00/MH$285,012 $286,650 $287,000

$1,638 F $350 FVariable Overhead Spending Variance


g. Fixed Overhead Spending Variance


$1,000 U

6-31



h. Price/Rate/Spending

VarianceQuantity/Efficiency

VarianceDirect materials $ 0 $2,750 FDirect labor 2,650 U 1,500 FVariable overhead 1,638 F 350 FFixed overhead 1,000 U 0 Total $2,012 U $4,600 F

i. The performance report that Irvin gave Lexi compared costs budgeted for 10,000 cases to actual costs for 10,250 cases. Flexible budgeting shows that Lexi did a good job managing operations for the month. While the price/rate/spending variances were unfavorable, Lexi more than made up for it with the favorable quantity/efficiency variances.

6-32


Problem 6-31

a.

Actual Results

Flexible Budget

Variance

Flexible Budget


Static Budget

Unit sales 14,500 0 14,500 500 U 15,000Sales revenue $2,972,500 $72,500 F $2,900,000 a $100,000 U $3,000,000 Less variable expenses: Cost of goods soldb 1,856,000 43,500 U 1,812,500 62,500 F 1,875,000 Selling & administrativec 148,625 3,625 U 145,000 5,000 F 150,000 Total variable expenses 2,004,625 47,125 U 1,957,500 67,500 F 2,025,000 Contribution margin 967,875 25,375 F 942,500 32,500 U 975,000 Less fixed expenses: Cost of goods sold 195,000 5,000 F 200,000 0 200,000 Selling & administrative 140,000 0 140,000 0 140,000 Total fixed expenses 335,000 5,000 F 340,000 0 340,000 Operating profit $632,875 $30,375 F $602,500 $32,500 U $635,000 a $3,000,000 static budget sales revenue ÷ 15,000 units = $200 per unit

$200 per unit × 14,500 units = $2,900,000

b Actual variable COGS = $2,051,000 - $195,000Flexible Budget variable COGS = 14,500 units × $125 standard variable COGS per unitStatic Budget variable COGS = 15,000 units × $125 standard variable COGS per unit

c Actual variable S & A = $288,625 - $140,000

Flexible Budget variable S & A = 14,500 units × standard variable S&A per unit

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Static Budget variable S & A = 15,000 units × standard variable S&A per unit

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b. Direct Materials

AQ × AP AQ × SP SQ × SP133,400 yards × $5.25/yd 133,400 yards × $5.00/yd (14,500 cushions × 10 yds/cushion) × $5.00/yd

145,000 yards × $5.00/yd$700,350 $667,000 $725,000

$33,350 U $58,000 FDirect material price variance Direct material quantity variance

$24,650 FDirect material flexible budget variance

c. Direct Labor

AQ × AP AQ × SP SQ × SP79,750 DLH × $7.80/DLH 79,750 DLH × $8.00/DLH (14,500 cushions × 5 DLH/cushion) × $8.00/DLH

72,500 DLH × $8.00/DLH$622,050 $638,000 $580,000

$15,950 F $58,000 UDirect labor rate variance Direct labor efficiency variance

$42,050 UDirect material flexible budget variance

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d. Variable Overhead

AQ × AP AQ × SP SQ × SP79,750 DLH × $7.00/DLH (14,500 cushions × 5 DLH/cushion) × $7.00/DLH

72,500 DLH × $7.00/DLH$533,600 $558,250 $507,500

$24,650 F $50,750 UVariable Overhead Spending Variance


$26,100 UVariable overhead flexible budget

e. Direct materials variance $24,650 FDirect labor variance 42,050 UVariable overhead variance 26,100 U Total $43,500 U

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f.

TO: Hank MartinezFROM: John StudentDATE: January 15, 20XXRE: Cost of goods sold variance analysis

As you requested, I have completed an analysis of why actual variable cost of goods sold for the past year differed from the static budget amount.

The company produced fewer units than we planned in the budget: 14,500 produced versus 15,000 budgeted. This lower level of production would normally be expected to result in actual variable cost of goods sold being less than the budgeted amount by $62,500 (500 cushions × $125 per cushion). However, the actual variable cost of goods sold incurred was $43,500 higher than it should have been for producing 14,500 cushions.

The $5.25 per yard price for direct materials was higher than the budgeted price of $5.00 per yard, resulting in a $33,350 unfavorable materials price variance. However, we did not use as much materials as expected, which yielded a favorable materials quantity variance of $58,000. It appears that purchasing was able to secure higher quality material that ran smoother than expected during the production process. The overall result of the purchase of this higher quality material was actual material costs that were $24,650 less than expected.

The actual labor rate of $7.80/DLH was less than the standard rate of $8.00/DLH. While this lower rate yielded a favorable labor rate variance of $15,950, it was negated by the $58,000 unfavorable labor efficiency variance. It appears that less experienced workers were used during the year, and these workers were less efficient than expected.

Since the company applies overhead on the basis of direct labor hours, the variable overhead efficiency variance was unfavorable. A favorable variable overhead spending variance mitigated the large efficiency variance, resulting in an overall unfavorable variance of $26,100.

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Problem 6-32

a. Direct Materials

AQ × AP AQ × SP SQ × SP115,000 yds. × $1.45/yd. 115,000 yds. × $1.6/yd. (82,000 shirts × 1.25 yds.) × $1.6/yd.

102,500 yds. × $1.6/yd.$166,750 $184,000 $164,000

$17,250 F $20,000 UDirect material price variance Direct material quantity variance

b. Direct Labor

AQ × AP AQ × SP SQ × SP20,500a DLH × $12.10/DLH 20,500 DLH × $12/DLH (82,000 shirts × 0.25 DLH) × $12/DLH

20,500 DLH × $12/DLH$248,050 $246,000 $246,000

$2,050 U $0Direct labor rate variance Direct labor efficiency variance

a

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c. Variable Overhead

AQ × AP AQ × SP SQ × SP20,500 DLH × $4/DLH (82,000 shirts × 0.25 DLH) × $4/DLH

20,500 DLH × $4/DLH$98,400 $82,000 $82,000

$16,400 U $0Variable Overhead Spending Variance


d. Fixed Overhead Spending Variance

Actual Budget$1,500,000 ÷ 12 months

$143,500 $125,000

$18,500 U

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e. Direct materials – lower quality materials were purchased, costing the company less (F price), but requiring more material per shirt (U quantity).

Direct labor – the same skill-level workers were used as budgeted, but were paid a higher rate, perhaps overtime for some period of time, to achieve the higher production level (U rate); the workers were able to meet the standard time to produce the shirts, so no efficiency variance was recorded.

Variable overhead – indirect labor and equipment power exceeded budget by a substantial amount. It is possible that machines were left running but not productive. The additional production may have caused the company to hire additional workers to meet the production schedule.

Fixed overhead – the unfavorable variance is due to increases in the costs of depreciation, utilities and quality inspection, since these are the only items whose November spending differed from the expected monthly amount (calculated by dividing the annual budget amount by 12). The increase in depreciation must be due to the purchase of new equipment or a change in the life of a depreciable asset; the fixed portion of utilities is set by the utility company and not under the control of Gerald/Brooke; quality inspection costs may be higher due to additional hours needed for the extra production.

f. Direct materials – if the quantity variance is due to the purchase of inferior materials, then Bobby, the operations manager, should not be held responsible.

Direct labor – it is unlikely that Bobby sets the labor rates, though he may be the one who authorized the extra hours for overtime or hiring a higher-paid class of workers.

Variable overhead – Bobby needs to be questioned about the indirect labor and utility usage. He is the one who has direct authority over these areas, though there may be very good reasons for the increases in cost.

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Fixed overhead – depreciation and utilities costs are likely outside Bobby’s control. If the increase in quality inspection is due to it being a step cost (as opposed to truly fixed), then Bobby needs to know what capacity is (how many shirts can be made with existing people and machines) and work with the sales and accounting managers to ensure that capacity is not exceeded.

SOLUTIONS TO C&C RUNNING CASE

Case 6-33

a. The direct material price variance should be close to $0 if C&C Sports returns to its previous vendor and purchases lining of the appropriate quality as specified in the standard.

The direct material quantity variance should be reduced, but will not be $0 if C&C Sports continues to use inexperienced workers to produce the jackets.

The direct labor rate variance is unlikely to be affected since the rate variance was primarily driven by overtime required to meet production demands.

The direct labor efficiency variance is likely to be reduced because workers will not have to deal with the lower quality lining; however, it will not be $0 if C&C Sports continues to use inexperienced workers to produce the jackets.

b. If C&C Sports changes vendors and expects the price per yard to be lower than the current standard price, the company will change the standard to reflect the new lower expected price. Therefore, the direct material price variance will be close to $0.

If the training proves to be effective, then the direct materials quantity variance should be close to $0.

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Case 6-33, continued

The direct labor rate variance is unlikely to be affected since the rate variance was primarily driven by overtime required to meet production demands.

If the training proves to be effective, then the direct labor efficiency variance should be close to $0.

c. The direct materials price variance should not be affected.

The direct materials quantity variance may be greater than $0 as the workers gear back up to make award jackets.

The direct labor rate variance should not be affected.

The direct labor efficiency variance may be greater than $0 as the workers gear back up to make award jackets.

SOLUTIONS TO CASES

Case 6-34

a. The performance report does not compare actual performance to the

flexible budget. Therefore, actual results and budgeted amounts are based on two different sales volumes.

The performance report does not indicate which items are controllable by Ken and which items are beyond his control. Ken should be evaluated only on those items under his control.

Selling and administrative expenses are not broken down between variable and fixed costs, and no information is provided to suggest that the company has identified the behavior of these costs.

Using a single plant-wide allocation rate for fixed production costs may not be appropriate. A more appropriate cost driver based on a cause and effect relationship may be available.

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b. Sara’s remarks imply that unfavorable variances are bad without knowing what might have caused those variances. This comment will cause Ken to take actions that produce favorable results in the short-run that could ultimately be bad for the company in the long run.

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c.

Actual Results

Flexible Budget

Variance

Flexible Budgeta


Static Budget

Unit sales 3,000 0 3,000 500 F 2,500Sales revenue $161,000 $4,000 U $165,000 $27,500 F $137,500 Less variable product expenses Direct material 23,100 900 F 24,000 4,000 U 20,000 Direct labor 18,300 300 U 18,000 3,000 U 15,000 Overhead 60,200 1,300 F 61,500 10,250 U 51,250 Total variable expenses 101,600 1,900 F 103,500 17,250 U 86,250 Contribution margin 59,400 2,100 U 61,500 10,250 F 51,250 Less fixed product expenses Indirect labor 9,400 3,400 U 6,000 0 6,000 Depreciation expense 5,500 0 5,500 0 5,500 Taxes 2,400 100 U 2,300 0 2,300 Insurance expense 4,500 0 4,500 0 4,500 Total fixed product expenses 21,800 3,500 U 18,300 0 18,300 Gross margin 37,600 5,600 U 43,200 10,250 F 32,950

aFor sales revenue: × 3,000. Follow same calculations for other variable expenses.

Because a production manager would not typically have any authority over selling and administrative expenses, those expenses should not be included in the performance report for the production manager. Arguments could also be made that the allocated fixed production expenses are also beyond the production manager’s control and should not be included in the performance report.

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d. Ken should be more motivated to manage based on the revised performance report. It clearly shows that the variances for the variable product costs, which are the costs that Ken can control, are much smaller than Sara had thought. In fact, the flexible budget variances are favorable, as opposed to the unfavorable static budget variances Sara reviewed.

The factors that led to the majority of the variances are the indirect labor and administrative expenses. It is likely that the administrative expenses are just an allocation to the product line over which Ken has no control. He may insist on better information from the accounting department to justify why his product line received those charges.

Case 6-35

a. Direct materials quantity variance – Regular material

AQ × SP SQ × SP18,200 lbs. used × $8/lb. (12,000 bottles × 1.5 lbs.) × $8/lb.

18,000 lbs. × $8/lb.$145,600 $144,000

$1,600 U

Direct materials quantity variance – Alternate material

AQ × SP SQ × SP15,800 lbs. used × $8/lb. (8,000 bottles × 1.5 lbs.) × $8/lb.

12,000 lbs. × $8/lb.$126,400 $96,000

$30,400 U

It is apparent that more alternate materials per bottle had to be used than regular materials per bottle. The unfavorable quantity variance for the alternate materials represents an excess use of 31.7% from

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the standard ( ). This is consistent with using lower quality materials; however, it could also be a result of labor issues.

b. Direct labor rate variance – Class III

AQ × AP AQ × SP(8,600 DLH + 6,600 DLH) × $14/DLH

$216,600 $212,800

$3,800 U

Direct labor rate variance – Class II

AQ × AP AQ × SP(5,900 DLH + 4,400 DLH) × $14/DLH

$163,770 $144,200

$19,570 U

c. Direct labor efficiency variance – Class III Regular material

AQ × SP SQ × SP8,600 DLH × $14/DLH (7,200 bottles × 1.2 DLH) × $14/DLH

8,640 DLH × $14/DLH$120,400 $120,960

$560 F

Direct labor efficiency variance – Class III Alternative material


5,760 DLH × $14/DLH$92,400 $80,640

$11,760 U

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Direct labor efficiency variance – Class II Regular material


5,760 DLH × $14/DLH$82,600 $80,640

$1,960 U

Direct labor efficiency variance – Class II Alternative material


3,840 DLH × $14/DLH$61,600 $53,760

$7,840 U

Average DLH per bottleRegular Material Alternative Material

Class III

= 1.19 DLH = 1.375 DLH

Class II

= 1.23 DLH = 1.375 DLH

While the Class III workers were slightly more efficient using the regular materials, Charles’s assertion that both classes of workers experienced similar efficiency problems with the alternative materials is correct.

d. The sales department should be held responsible for the following variances that arose from having to meet the promised delivery date for the Harrington order.

Direct material quantity variance: alternative material $30,400 UDirect labor rate variance: Class II workers 19,570 U

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Direct labor efficiency variances: Class III workers using alternative materials 11,760 U Class II workers using regular materials 1,960 U Class II workers using alternative materials 7,840 U

$71,530 U

e. Taylor Jenkins did not act ethically when he promised a May 20th delivery date for Harrington’s order. His motivation was to meet the sales level necessary to receive a bonus, and he knowingly violated company policies. Further, he anticipated that the order would be problematic for the company, but he accepted the order anyway.

Pat Melton did act ethically by trying to find materials to meet the company’s obligation to Harrington. She did not knowingly cause the company financial harm, as she relied on the supplier’s promise to deliver standard quality material.

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Case 6-36

a.

Actual Results

Flexible Budget

Variance

Flexible Budget

Sales Volume

Variance

Static Budget

Unit sales 450,000 0 450,000 50,000 F 400,000Sales revenue $3,555,000 $45,000 U $3,600,000 a $400,000 F $3,200,000 Less variable product expenses Direct materials 865,000 212,500 U 652,500b 72,500 U 580,000 Direct labor 348,000 30,000 F 378,000c 42,000 U 336,000 Variable overhead 750,000 21,000 U 729,000 d 81,000 U 648,000 Total variable expenses 1,963,000 203,500 U 1,759,500 195,500 U 1,564,000 Contribution margin $1,592,000 $248,500 U $1,840,500 $204,500 F $1,636,000

afrom static budget: $3,200,000 ÷ 400,000 units = $8/unit; 450,000 units × $8/unit = $3,600,000b450,000 pounds of cookies × $1.45c450,000 pounds of cookies × $0.84d450,000 pounds of cookies × $1.62

b. The results are worse than first thought. Variable expenses were not controlled well, particularly direct materials. If the company had not sold so many more units than expected, creating the favorable sales volume variance, the results would have been much worse.

c. Mama Fran’s did not sell its cookies at the budgeted sales price, as indicated by the unfavorable sales price variance. However, the company was able to sell 50,000 pounds above the budgeted sales volume, which generated a favorable sales volume variance of $400,000. Therefore, reducing the sales price to generate additional sales volume seems to have been a good trade-off in the short run.

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d. Cookie mix

AQ × AP AQ × SP SQ × SP4,650,000 oz. × $0.02/oz. (450,000 units × 10 oz. per unit) × $0.02/oz.

4,500,000 oz. × $0.02/oz.$93,000 $93,000 $90,000

$0 3,000 UDirect material price variance Direct material quantity variance

$3,000 UDirect materials flexible budget variance

Milk chocolate

AQ × AP AQ × SP SQ × SP2,660,000 oz. × $0.15/oz. (450,000 units × 5 oz. per unit) × $0.15/oz.

2,250,000 oz. × $0.15/oz.$532,000 $399,000 $337,500

$133,000 U $61,500 UDirect material price variance Direct material quantity variance


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Almonds

AQ × AP AQ × SP SQ × SP480,000 oz. × $0.50/oz. (450,000 units × 1 oz. per unit) × $0.50/oz.

450,000 oz. × $0.50/oz.$240,000 $240,000 $225,000

$0 $15,000 UDirect material price variance Direct material quantity variance


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e. Direct Labor - Mixing

AQ × AP AQ × SP SQ × SP

× $14.40/DLH (450,000 units × DLH per unit) × $14.40/DLH9,000 DLH × $14.40/DLH 7,500 DLH × $14.40/DLH

$108,000 $129,600 $108,000

$21,600 F $21,600 UDirect labor rate variance Direct labor efficiency variance

$0Direct labor flexible budget variance

Direct Labor - Baking


× $18.00/DLH (450,000 units × DLH per unit) × $18.00/DLH15,000 DLH × $18.00/DLH

$240,000 $240,000 $270,000

$0 $30,000 FDirect labor rate variance Direct labor efficiency variance

$30,000 FDirect labor flexible budget variance

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f. Variable Overhead


× $32.40/DLH (450,000 units × DLH per unit) × $32.40/DLH22,500 DLH × $32.40/DLH

$750,000 $723,600 $729,000

$26,400 U $5,400 FVariable Overhead Spending Variance


$21,000 UVariable overhead flexible budget variance

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g. It appears that chocolate prices increased dramatically, as Nathan Porter reported. If this price increase is expected to be permanent, Mama Fran’s needs to revise the price standard.

Workers may have been careless in their measurements of ingredients, since all ingredients exhibited unfavorable direct materials quantity variances. Other possible explanations for the unfavorable variances include contamination of some chocolate shipments and spoilage of some batches of cookie dough. At $0.15 per ounce, the unfavorable quantity variance indicates that 410,000 more ounces of chocolate were used than the standard allowed. The cause of this variance warrants additional investigation.

Requiring workers to slice the whole almonds that were purchased by mistake would explain part of the unfavorable direct labor efficiency variance in the mixing department, as this extra time was not factored into the standard. The use of untrained workers, paid a lower wage rate, could also explain the favorable rate variance and unfavorable efficiency variance. The favorable efficiency variance in the baking department is difficult to explain. Perhaps fewer employees were used to oversee the baking process. Fewer employees watching the baking process could also have resulted in cookies being over-baked, which could also explain a portion of the unfavorable direct materials quantity variances.

Without detailed information about specific variable overhead items, it is difficult to predict what might have caused such a large unfavorable spending variance. As for the favorable variable overhead efficiency variance, it is possible that direct labor hours may not be the activity that drives variable overhead usage, and thus, is an inappropriate application base for variable overhead.

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h.

TO: Leslie SmithFROM: Ashley CorleyDATE: May 3, 20XXRE: April Operating Results

During April, we lowered the sales price of our cookies to stimulate demand. This change appears to have been successful, as we sold 50,000 pounds more than budgeted and generated $355,000 in additional sales revenue. Unfortunately, this additional revenue didn’t lead to increased operating income as one might expect.

There were some problems with direct materials. Chocolate prices rose dramatically during the month, resulting in a $133,000 unfavorable price variance. All other materials prices were as expected. It appears that workers in the mixing department may have been careless in their measurements; all ingredients showed unfavorable quantity variances. The unfavorable quantity variance for milk chocolate, however, deserves additional investigation.

Labor rates in the mixing department were lower than expected, due to new inexperienced workers that were hired during the month. These workers’ inexperience contributed to the unfavorable direct labor efficiency variance. Workers also had to spend time slicing whole almonds that were purchased by mistake. However, the rate and efficiency variances offset each other. The worker’s lack of experience likely contributed to the improper measurements and the resulting direct materials unfavorable quantity variances. It also appears that sufficient personnel were not used in the baking department, resulting in a favorable direct labor efficiency variance. However, this lack of oversight of the baking process resulted in over-baked cookies that also contributed to the unfavorable direct materials quantity variances.

Variable overhead costs were higher than expected; however, the $26,400 unfavorable spending variance is not large enough to warrant investigation at this time. We will continue to monitor this variance in future months.

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Documents

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