CHAPTER 10

PROFIT AND COST CENTER PERFORMANCE EVALUATION

Questions, Exercises, Problems, and Cases: Answers and Solutions
10.1

See text or glossary at the end of the book.

10.2

b.

A responsibility centers variances are calculated holding all other

things constant.

10.3

a.

Marketing.

10.4

It is difficult to evaluate performance without a budget. Organizations

might use nonfinancial performance measures as discussed in the chapter
such as on-time deliveries, production-cycle efficiency, and percent of
errors in products.
1. Some responsibility centers are responsible only for costs. The
assembly unit of a manufacturing plant would be a good
example. On the other hand, some responsibility centers, such
as sales offices, are responsible for revenues.
Other
responsibility centers such as corporate divisions are
responsible for both revenues and costs.
Finally, some
responsibility centers are responsible for revenues, costs, and
investment in company assets.
The designation of
responsibility centers depends on the specific organizational
structure and management system in the organization.
2. The percentage of positions filled from within the company may
indicate whether or not employees are committed enough to
the company to want to advance and employee perception of
advancement possibilities.
It may also indicate employee
commitment by the quality of employee performance. For
instance, if positions are not filled internally it may be because
the employees are not performing well enough to be promoted.
3. A standard is related to a cost per unit. Budgets focus on totals.

10.8

a.

Marketing.

10.9

Management must weigh the trade-offs between the costs of an

investigation and the costs of letting the process remain out of control for
at least one more reporting period (i.e., the benefit of correction).

10-1

Solutions

10.10

Solutions

Responsibility reporting systems identify variances from budget plans and

relate those exceptions to the manager responsible for them.

10-2

10.11

The action that management can take in response to materials price

variances is probably quite different than the action that can be taken in
response to efficiency variances. The latter is generally more subject to
management control. Also, different departments may be responsible for
each variance. For example, purchasing may be responsible for the
materials price variance, and production for the materials efficiency
variance.

10.12

The fixed cost variances differ from variable cost variances because fixed
costs do not vary with the level of production activity. Therefore, the fixed
costs in the flexible budget will be the same as in the master budget
(within the relevant range). Additionally, there are no efficiency variances
for fixed costs because there is no input-output relationship that can be
applied.

10.13

An efficiency variance for fixed overhead is not calculated because the

figure is meaningless.
Efficiency variances require an input/output
relationship such as the number of hours (input) per unit of output. Fixed
costs provide the capacity to generate output, but there is no input
component for fixed costs.

10.14

a.

AQ X (AP SP).

10.15

1.

Actual overhead is less than budget.

2.

Fixed overhead was overapplied, compared to budget, because actual

production volume exceeded the estimated volume.

10.16

By involving the workers in the standard setting process NUMMI gains the
benefit of using the workers practical experience and knowledge, which
can increase the accuracy of the standards. Also, this involvement
creates an atmosphere of employee ownership in what is occurring in
production, which can increase motivation, efficiency, and quality.

10.17

A coffee shop would use labor variance information to determine if the

scheduling of waitpersons is matching the customer demand. Materials
variances would be used to monitor the efficiency of cooks and wait
persons and control shrinkage.

10.18

Under normal circumstances, the purchasing department will acquire all

the raw materials it was requested to purchase during the period. It
would normally be incorrect to calculate and attribute a materials
efficiency variance to the purchasing department because it is not
responsible for the actual quantity used in production.

10.19

1.

If variable overhead is applied on the basis of output, there is no

measure of efficiency possible. An efficiency variance measures
input-output relations and requires both inputs and outputs in the
measure.

10-3

Solutions

10.19 continued.
2.

The cost of dividing the variable overhead variance into its

components might exceed the benefits.

10.20

From past cost data and expectations of future prices, the managers could
establish standard prices and quantities for the period based on mileage.
A typical standard price and quantity could be dollars per mile and miles
per period, respectively. A flexible budget (SP X SQ) could be determined
for both wages and automobile costs. After the period, actual inputs at
Standard (SP X AQ) could be compared to the flexible budget to determine
the efficiency variances.
Actual inputs at standard could then be
compared to actual costs (AP X AQ) to determine the price variances.

10.21

(Appendix 10.1)
The mix variances could tell if the professionals are using the level of staff
budgeted for the job. For example, are managers doing work budgeted
for junior staff?

10.22

(Profit variance analysis.)

Actual
(14,200
Units)
Sales Revenue........
............168,000d

Cost
Variances

$172,530a

Sales
Price
Variance
$2,130 F

Flexible
Budget
Sales
(14,200 Volume
Units) Variance
$170,400c $2,400 F

Master
Budget
(14,000
Units)
$

Less Variable
Costs...................
Contribution
Margin.................
Less Fixed
Costs...................
Operating
Profit...................

83,780b
$ 88,750
20,000
$ 68,750

$12,780 U
$12,780 U $2,130 F
1,000 F
$11,780 U $ 2,130 F

a$172,530 = 14,200 Units X $12.15.

b$83,780 = 14,200 Units X $5.90.
c$170,400 = 14,200 Units X $12.
d$168,000 = 14,000 Units X $12.

Solutions

10-4

71,000

1,000 U

70,000

$ 99,400

$1,400 F

$ 98,000

21,000
$ 78,400

-$ 1,400 F

21,000
$ 77,000

10.23

(Analyzing period to period change in contribution margin)

In thousands.

Change in
Profits from
Analysis Change in
Year 2
Costs
Sales
$1,500
Variable costs 1,050 $ 33.3Fd
Contribution
margin
$450
$ 33.3Fd

Change in
Profits from
Change in
Sales Price
$166.7Fc
$166.7Fc

Change in
Profits from
Change in
Baseline
Sales Volume Year 1
$266.7Ua
$1,600
216.7Fb
1,300
$50.0U

$300

a $133.33 sales price in Year 1 =.$1,600,000/12,000 units

2,000 unit decrease in volume between years 1 and 2 x $133.33 =
$266,667
b$108.33 variable cost in Year 1 = $1,300,000/12,000
2,000 unit decrease in volume x $108.33 = $216,667
cSolve for the change in profits from change in sales price as follows:
$1,600 sales in Year 1 - $266.7 effect of unfavorable sales volume $1,500 sales in Year 2 = $166.7 favorable change due to sales price.
dSolve for the change in profits from change in costs as follows:
$1,300 variable costs in Year 1 - $216.7 reduction in costs due to
reduce sales volume - $1,050 variable costs in Year 2 = $33.3
favorable change due to change in costs between Years 1 and 2.

10-5

Solutions

10.24 (Profit variance analysis.)

Marketing and
Sales
Flexible
Actual
Manufacturing Administrative
Price
Budget
(170 Units)
Variances
Variances
Variance (170 Units)
Sales Revenue.................... $18,400
$1,400 F
$17,000
Variable Costs:
Manufacturing..................
6,880
$250 U
6,630
Marketing.........................
2,060
$190 U
1,870
Contribution Margin............ $ 9,460
$250 U
$190 U
$1,400 F
$ 8,500
Fixed Costs:
Manufacturing..................
485
15 F
500
Marketing.........................
1,040
40 U
1,000
Administrative..................
995
5F
1,000
Operating Profit.................. $ 6,940
$ 235 U
$225 U
$1,400 F
$ 6,000

Solutions

10-6

Sales
Master
Volume
Budget
Variance(200 Units)
$3,000 U $20,000
1,170 F
330 F
$1,500 U

7,800
2,200
$10,000

---$1,500 U

500
1,000
1,000
$ 7,500

10.25

(Estimating flexible selling expense budget and computing variances.)

a.

Fixed Costs
Office]

= $30,000 [Salaries] + $60,000 [Advertising] + $3,750 [Sales

= $93,750.

Variable Costs
as a Function
of Revenue

= (.05 [Commissions] X Revenue) + (.03 [Travel] X Revenue).

Variable Costs
as a Function
of Units Sold

= ($.05 [Office] X Units Sold) + ($.10 [Shipping] X Units Sold).

Total
Selling
Expenses

= $93,750 + (.08 X Revenues) + ($.15 X Units Sold).

b. and c.
Profit Variance Analysis

Sales Revenue........
..............357,500
Less Variable
Selling Costs.......
Contribution
Margin.................
..............319,150
Less Fixed
Selling Costs.......
Profits from
Selling.................
.............. 225,400

Actual
(50,000
Units)
$300,000

Selling
Expense
Variances

30,000

$ 500 U

$270,000

80,000
$190,000

$ 500 U

Sales
Flexible
Price
Budget
Vari(50,000
ance
Units)
$25,000 F $275,000

Master
Sales
Budget
Volume (65,000
Variance
Units)
$82,500 U $

29,500a
$25,000 F $245,500

13,750F

8,850 F

38,350b

$73,650 U $

93,750

--

93,750

$13,250 F $25,000 F $ 151,750 $73,650 U $

a$29,500 = (.08 X $275,000) + ($.15 X 50,000) = $22,000 + $7,500.

b$38,350 = (.08 X $357,500) + ($.15 X 65,000) = $28,600 + $9,750.

10.26

(Materials and labor variances.)

Price
Variance
Materials
pds)]

Efficiency
Variance

$105,500 - ($.50 x 200,000 pds)

= $5,500 U

Labor
X 1 hour)]

$.50 X [200,000 pds - (97,810 units X 2

= $2,190 U

$905,000 - ($9.00 x 99,200 hrs)

= $12,200 U

$9.00 X [99,200 hrs -(97,810 units

= $12,510 U

10-7

Solutions

10.27

(Evaluate cause of materials and labor variances.)

The unfavorable materials variances resulted from paying more than
anticipated for the materials ($0.53 actual price versus $0.50 standard
price), and from using more pounds of material than anticipated (200,000
actual quantity used versus 195,620 standard quantity).
The unfavorable labor variances resulted from paying more than
anticipated for labor ($9.12 actual rate versus $9.00 standard rate), and
from using more labor hours than anticipated (99,200 actual hours versus
97,810 standard hours.)

10.28

(Materials and labor variances.)

Price
Variance
Materials
pd)]

Efficiency
Variance

$127,500 - ($2.50 x 49,000 pds)

= $5,000 U

Labor
1.5 hour)]

= $2,500 U

$214,000 - ($3.00 x 70,000 hrs)

= $4,000 U

10.29

$2.50 X [49,000 pds - (48,000 batches x 1

$3.00 X [70,000 hrs - (48,000 batches X

= $6,000 F

(Evaluate cause of materials and labor variances.)

The $7,500 unfavorable materials variance resulted from paying more
than anticipated for the materials ($2.60 actual price versus $2.50
standard price), and from using more pounds of material than anticipated
(49,000 actual quantity versus 48,000 standard quantity).
The $2,000 favorable labor variance resulted from using less labor
hours than anticipated (70,000 actual hours versus 72,000 standard
hours). However, the favorable variance resulting from this efficient use
of labor hours was somewhat offset by the higher rate of pay than
anticipated ($3.06 actual hourly rate versus $3.00 standard rate).

Solutions

10-8

10.30

(Solving for materials quantities and costs.)

Chemical A
a.

Price variance is $.20 F per pound.

Total price variance is $42,000 F.
Pounds Purchased and Used = $42,000/$.20= 210,000.

b.

Standard pounds allowed for 100,000 units (pools cleaned) =

200,000.
210,000 pounds 200,000 pounds = 10,000 pounds used over
standard.
Efficiency variance = $40,000 U.
So, $40,000/10,00 pounds = $4.00 = the standard unit price.

Chemical B
a.

Pounds Purchased and Used = $25,000/$.10= 250,000.

b.

Standard Unit Price = $30,000/(250,000 220,000 pounds) = $1.00.

Chemical C

10.31

a.

Pounds Purchased and Used = $21,000/$.07 = 300,000.

b.

Standard Unit Price = $48,000/(300,000 250,000 pounds) = $.96.

(Maxums Sales; nonmanufacturing variances.)

Actual
Cost
May..............................
June..............................
July...............................

Price

(AP X AQ) Variance (SP X AQ)a

$ 900,000 $ 60,000 U $ 840,000
1,000,000
40,000 U
960,000
800,000
20,000 U
780,000

Efficiency

Standard
Cost
(SP X SQ)b

Variance
$ 30,000 U $ 810,000
120,000 F 1,080,000
240,000 U
540,000

a$840,000 = $6 X 140,000 sales calls; $960,000 = $6 X 160,000 sales calls; $780,000 =

$6 X 130,000 sales calls.
b$810,000 = $6 X 9 calls per unit sold X 15,000 units sold; $1,080,000 = $6 X 9 calls per
unit X 20,000 units sold; $540,000 = $6 X 9 calls per unit X 10,000 units sold.

10-9

Solutions

10.32

(Labor and variable overhead variances.)

Price
Variance

10.33

Direct Labor

$43,400 ($3.00 x 14,000 hrs)

= $1,400 U

$3.00 X (14,000 hrs 15,000 hrs)

= $3,000 F

Variable
Overhead

$22,900 ($1.50 x 14,000 hrs)

= $1,900 U

$1.50 X (14,000 hrs 15,000 hrs)

= $1,500 F

(Overhead variances.)

Variable
Overhead

Actual
Costs
$13,600 $3,500
= $10,100

Flexible
Budget
$3.00 X 3,500 hours
= $10,500

$3,500

$3,300

Fixed
Overhead
10.34

Efficiency
Variance

$200 U

(Finding purchase price.)

Actual
Costs
(AP X AQ)
AP X 1,600
= $5,760

Price
Variance

> $240 F <

1,600 X AP = $5,760 $240
AP = $5,520/1,600
AP = $3.45.

Solutions

Variance
$400 F

10-10

Input at
Standard Prices
(SP X AQ)
$3.60 X 1,600

10.35

(Solving for labor hours.)

Inputs at
Standard Prices
(SP X AQ)
$15 X AQ
= $24,000

Efficiency
Variance

Flexible
Production
Budget
(SP X SQ)
$15 X 1,600 hours

> $860 U <

$15 X AQ = $24,000 + $860
AQ = $24,860/15
AQ = 1,657 hours.
10.36

(Overhead variances.)
a.

$300,000/60,000 units = $5.00 per Unit

$5.00 + $2.50 = $7.50 per Unit.

b.

Fixed Overhead Applied

= $5.00 per Unit X 65,000 Units

= $325,000.

Variable Overhead Applied

= $2.50 per Unit X 65,000 Units

= $162,500.

Total Applied Overhead

= $325,000 + $162,500
= $487,500

or $7.50 X 65,000 units = $487,500.

c.

$487,500 Applied $400,000 Actual = $87,500 Overapplied.

10-11

Solutions

10.37

(Overhead variances.)
a.

Budgeted Fixed Costs = $2.00 per Unit X 45,000 Units = $90,000.

b.

Applied Overhead = Variable of ($1.00 X 40,000)

+ Fixed of ($2.00 X 40,000)
= $120,000 in total.
$140,000 Actual $120,000 Applied = $20,000 Underapplied.

c.

Fixed Overhead Variance Analysis:

Actual
$90,000

Price
Variance

Budget
$90,000

> $0 <

10.38

Production
Volume
Variance

Applied
$80,000

> $10,000 U <

(variance investigation.)
Investigate if P X B > C:
Where:
P = Probability process is out of control;
B = Dollar amount of savings from correcting problem; and
C = Cost of investigation.
.35 X ($45,000 $20,000) = $8,750 > $7,000.
Yes, this process should be investigated since the value of the expected
savings exceeds the cost of investigation.

Solutions

10-12

10.39

(Variances from activity-based costs.)

Actual
Costs
Quality
Testing

Price
Variance

$20,000

Actual
Inputs at
Standard Prices
$.50 X 42,000 minutes
= $21,000

> $1,000 F <

Energy

> $1,000 U <

$1.00 X 38,000 hrs.
= $38,000

$40,000
> $2,000 U <

Indirect
Labor

$1.00 X 40,000 hrs.

= $40,000
> $2,000 F <

$1.00 X 61,000 hrs.

= $61,000

$56,800
> $4,200 F <

10-13

Efficiency
Variance

Flexible
Production
Budget
(Standard Allowed)
$.50 X 40,000 minutes
= $20,000

$1.00 X 60,000 hrs.

= $60,000
> $1,000 U <

Solutions

10.40

(Variance investigation.)
Investigate if P X B > C:
Where:
P = Probability process is out of control;
B = Dollar amount of savings from correcting problem; and
C = Cost of investigation.
.30 X ($40,000 - $10,000)= $9,000
$9,000 > $7,000 cost.
This process should be investigated because the expected value of the
savings is greater than the cost of investigation.

Solutions

10-14

10.41

(Year to year analysis in a service organization.)

Analysis Period
Year 2
Revenue

$3,400,000

Professional salaries

1,850,000

Other variable costs

470,000

Contribution margin
General admin.

1,080,000
680,000

Operating profits

$ 400,000

Change in Operating Change in Operating Change in Operating

Profits due to Change Profits due to Change Profits due to Change
in Production Costs
in Gen. Admin. Costs in Sales Price
$200,000Ub
$ 50,000Ue
10,000Ff
$40,000U

Change in Operating
Profits due to Change Baseline Period,
in Sales Volume
Year 1
a
$3,000,000
$600,000F
300,000Uc
80,000Ud

1,500,000

$200,000U

220,000F

1,100,000
700,000

$200,000U

$ 220,000F

$ 400,000

$20,000Fg
$40,000U

$20,000F

400,000

a $120 sales price in Year 1 =.$3,000,000/25,000 hours

5,000 unit increase in volume between years 1 and 2 x $120 = $600,000
bSolve for the change in profits from change in sales price as follows:
$3,000,000 sales in Year 1 + $600,000 effect of favorable sales volume - $3,400,000 sales in Year 2 = $200,000 unfavorable change due to sales price.
c$60 variable cost per hour in Year 1 = $1,500,000/25,000
5,000 unit increase in volume x $60 = $300,000
d$16 variable cost per hour in Year 1 = $400,000/25,000
5,000 unit increase in volume x $16 = $80,000
eSolve for the change in profits from the change in professional salaries as follows:
$1,500,000 professional salaries in Year 1 + $300,000 increase in professional salaries due to increased sales volume - $1,850,000 professional salaries in Year 2
= $50,000 unfavorable change due to change in professional salaries between Years 1 and 2.
fSolve for the change in profits from the change in other variable costs as follows:
$400,000 other variable costs in Year 1 + $80,000 increase in other variable costs due to increased sales volume - $470,000 other variable costs in Year 2 =
$10,000 favorable change due to change in other variable costs between Years 1 and 2.
gSolve for the change in profits from the change in general administrative costs by comparing the Year 1 and Year 2 costs: $700,000 - $680,000 = $20,000
favorable change.

10-15

Solutions

10.42 (Profit variance analysis in a service organization)

Profit Variance Analysis
(1)
Actual
(based on
actual
activity
of 20,000
hours)
Sales Revenue.................... $2,300,000
Less:
Professional Salaries........ 1,550,000
Other Variable Costs........ 250,000
Contribution Margin............ $ 500,000
Less:
General Administrative
Costs.............................. 400,000
Operating Profits................ $100,000

(2)

Production
Variances
--

(3)

(4)

(5)
(6)
(7)
Flexible
Master
Budget
Budget
(based on
(based on
General
Sales
actual activity Sales
a prediction
Administrative
Price
of 22,000
Volume
of 20,000
Variances
Variance
hours)
Variance
hours)
a
-$100,000 F
$2,200,000 $200,000 F $2,000,000
--

--

$230,000 U
30,000 U
$

260,000 U

1,320,000a 120,000 U 1,200,000

220,000a
20,000 U
200,000
$100,000 F $ 660,000 $ 60,000 F

-$260,000 U

-$ -0-

400,000
$ 260,000

$100,000 F

-400,000
$ 60,000 F $ 200,000

aIncrease master budget sales revenue and variable costs by the 10% increase in units, actual over budget

Solutions

10-16

10-17

Solutions

10.43 (Comprehensive problem.)

Profit Variance Analysis

(1)
(2)
(3)
(4)
(5)
(6)
(7)
Actual
Flexible
Master
(based on
Budget
Budget
actual
(based on
(based on
activity
Marketing and
Sales
actual activity Sales
a prediction
of 14,000 Manufacturing Administrative
Price
of 14,000
Volume
of 16,000
units sold)
Variances
Variances
Variance
units sold) Variance units sold)
Sales Revenue.................... $308,000a
--$28,000F
$280,000b $40,000 U $320,000
Less:
Variable Manufacturing
Costs.............................. 162,000
$ 8,000 U
--154,000b
22,000 F
176,000
Variable Marketing and
Administrative Costs...... 17,000
-$3,000 U
-14,000b
2,000 F
16,000
Contribution Margin............ $129,000
$ 8,000 U
$3,000 U
$28,000 F
$112,000
$16,000 U $128,000
Less:
Fixed Manufacturing
Costs.............................. 42,000
2,000 U
--40,000
-40,000
Fixed Marketing and
Administrative Costs...... 68,000
-2,000 F
-70,000
-70,000
Operating Profits................ $ 19,000
$10,000 U
$1,000 U
$28,000 F
$ 2,000
$16,000 U $ 18,000

Total Variance from

Flexible Budget = $17,000 F
Total Variance from
Master Budget = $1,000 F
a$308,000 = $22 X 14,000 units.
bDecrease master budget sales revenue and variable costs by the 12.5%decrease in actual units from budgeted units.

Solutions

10-18

10.44 (Comprehensive problem.)

Profit Variance Analysis

(1)
(2)
(3)
(4)
(5)
(6)
(7)
Actual
Flexible
Master
(based on
Budget
Budget
actual
(based on
(based on
activity
Marketing and
Sales
actual activity Sales
a prediction
of 20,000 Manufacturing Administrative
Price
of 20,000
Volume
of 18,000
units sold)
Variances
Variances
Variance
units sold) Variance units sold)
a
Sales Revenue.................... $420,000
--$20,000F
$400,000
$40,000 F $360,000
Less:
Variable Manufacturing
Costs.............................. 230,880
$30,880 U
--200,000b
20,000 U
180,000
Variable Marketing and
Administrative Costs...... 22,000
-$2,000 U
-20,000b 2,000 U
18,000
Contribution Margin............ $167,120
$30,880 U
$2,000 U $20,000 F
$180,000
$18,000 F
$ 162,000
Less:
Fixed Manufacturing
Costs.............................. 82,000
2,000 U
--80,000
-80,000
Fixed Marketing and
Administrative Costs...... 18,000
-2,000 F
-20,000
-20,000
Operating Profits................ $ 67,120
$32,880 U
$
0
$
20,000 F$
80,000$
18,000 F$ 62,000

Total Variance from

Flexible Budget = $4,880 U
Total Variance from
Master Budget = $5,120 F
a$420,000 = $21 X 20,000 units.

10-19

Solutions

10.45 (Finding missing data.)

a.

750 Units.

b.

$65U.

c.

$135U =
budget).

d.

$2,160 (= $2,025/750 units) X 800 units

e.

$570 (= X 750 units).

f.

$510 (= $570 $60).

g.

$608 (= X 800 units).

h.

$200 (= $1,960 $510 $1,250).

i.

$202.5 (= X 750 units).

j.

$2.5F (= $202.5 $200).

k.

$13.5F (= $216 $202.5).

l.

$60F.

50 units (= 800 in master budget 750 in flexible

m. $2.5F.
n.

$65U.

o.

$1,252.5 (= $2,025 $570 $202.5).

p.

$83.5U (= $135U $38F $13.5F).

q.

$1,336 (= $2,160 $608 $216).

10.46 (Finding missing data.)

a.

Solutions

12,000 (= 10,000 units in master budget + 2,000 units favorable

sales volume).

10-20

b.

12,000.

c.

$20,000 (= $150,000 $80,000 $50,000).

d.

$25,000 (= $60,000 $15,000 $20,000).

e.

$25,000.

f.

$15,000.

g.

$10,000 (= $50,000 $25,000 $15,000).

h.

$180,000 (= $60,000 + $24,000 + $96,000).

i.

$198,000 (= $180,000 + $18,000).

j.

$30,000F (= $180,000 $150,000).

k.

$16,000U (= $96,000 $80,000).

l.

$10,000F (= $60,000 $50,000).

m. $10,000F.
n.

$105,000 (= $96,000 + $9,000).

o.

$2,400F (= $24,000 $21,600).

p.

$71,400 (= $198,000 $105,000 $21,600).

q.

$23,000 (= $25,000 $2,000).

r.

$11,400F (= $18,000 $9,000 + $2,400).

s.

$30,400 (= $71,400 $23,000 $18,000).

t.

$3,000U (= $18,000 $15,000).

u.

$10,400F (= $30,400 $20,000).

10-21

Solutions

10.47 (Assigning responsibility.)

a.

The raw materials variance appears to be the result of poor

quality inputs.
In assigning responsibility, therefore,
management must discern the reason why poor quality
inputs were used. The poor quality raw materials could be
the responsibility of any one of a number of areas. It may
have been due to poor performance in the purchasing
department, or to poor production planning by the
production supervisor.
Possibly, management was
responsible by placing demands on the Assembly Division
that required an emergency purchase of materials that did
not meet normal quality standards. Finally, the poor input
quality may have been the result of factors outside the
control of any responsibility center in the firm, such as a
general decline in the quality of a particular raw material.

b.

The idle time in the Finishing Division was the result of fewer
units than expected being transferred out of the Assembling
Division, which in turn was the result of poor quality raw
materials input.
In such a case ultimate responsibility
should be placed on the center responsible for the poor
quality raw materials. Management may, however, feel that
the idle labor hours could have been used productively in
other areas. In such a case, responsibility would be placed
on the supervisor of the Finishing Division.

10.48 (Controls over planning function.)

It is virtually impossible to design a quantitative measure that captures
the relevant aspects of performing the planning activity. Alternative
performance evaluation procedures must therefore be used.
One approach is to have either the external or internal auditors
conduct a management audit of the planning activity. Standards might be
set relative to the use of appropriate statistical planning tools, the
participation of line and staff personnel in generating inputs for the
planning models, and the effective communication of budgeted amounts
to the employees affected by the budgets. Statistical consultants could
be used to evaluate the appropriateness of the statistical tools used. Line
and staff personnel could be interviewed to determine the extent they
participated in the planning process and their reaction to the activity of
the planning department. The management audit would also evaluate the
qualifications of the personnel in the planning department and the quality
of continued training and supervision they receive. Given the cost of such
a management audit, it would probably be conducted every two or three
years rather than annually.

Solutions

10-22

10.49

(Computing variances for marketing costs.)

Sales Commissionsc.........
Cost of Sales....................
Telephone Time................
Delivery Services.............
Uncollectible Accounts.....
Other Variable Costs........
Fixed Costs.......................
Total Costs....................

Actual
$2,700,000
Sales
$ 270,000
810,000
32,200
161,100
121,500
112,700
409,000
$1,916,500

Cost
Variancea
$ -0-05,200 U
900 F
-018,200 U
2,500 F
$20,000 U

Flexible
Budget
$2,700,000
Sales
$ 270,000
810,000d
27,000d
162,000d
121,500d
94,500d
411,500
$1,896,500

Sales
Volume
Variance
$ 54,000 F
162,000 F
5,400 F
32,400 F
24,300 F
18,900 F
-0$297,000 F

Master
Budget
$3,240,000b
Sales
$ 324,000
972,000
32,400
194,400
145,800
113,400
411,500
$2,193,500

aDifference between actual and flexible budget.

b$450 X 180 hours X 40 callers = $3,240,000.
c10% of the sales figure.
dThe remaining variable costscost of sales through other variable costsequal the master budget amount $2,700,000/$3,240,000.
For example, $810,000 = $972,000 $2,700,000/$3,240,000.
.

10-23

Solutions

10.50

(Analysis of cost reports [CMA adapted].)

Three possible changes that could make the cost information more
meaningful are:

10.51

1.

Use a flexible budget, rather than a static budget, for measuring

performance. This would enable the reporting process to recognize
changed conditions, such as volume changes, and fixed versus
variable costs.

2.

Separate variable costs from fixed costs.

Also, identify those
elements of the report for which the production manager is directly
responsible.

3.

Separate excess cost into price and efficiency variances for variable
costs.

(Change of policy to improve productivity [CMA adapted].)

Improved profit margins will not be achieved. The production manager
fails to understand that by tightening the standards (all else equal)
variances will be negative. Simply lowering the standard time allowed per
operation does not reduce the cost of manufacturing the product, unless
an actual reduction in the processing time occurs. The tightening of the
standards will probably decrease morale and motivation resulting in
increased processing time. This will decrease productivity and increase
the costs of production.
Currently the assembly personnel rarely complete the operations in
less time than the standard allows.
Assuming that the assembly
department is working efficiently, it is not likely that the tightening of the
standards (reducing the allowed time per operation) will result in
increased productivity. More likely, the assembly personnel will resent
having the standards tightened without their input. They currently view
the standards as achievable, since they do achieve them occasionally.
Tightening the standards will result in decreased motivation and morale,
as they will be striving for what they will view as an unrealistic standard.

10.52

(Ethics and standard costs [CMA adapted].)

Joes behavior is unethical. The unofficial CMA answer to this question
cites violations in the areas of competence, integrity, and objectivity with
regard to the Standards of Ethical Conduct for Management
Accountants.
Basically, Joe has an obligation to communicate
information fairly and objectively. He must prepare complete and clear
reports and recommendations. By misrepresenting the costs of the
strawberries, he is hoping to benefit his friends strawberry farm at the
expense of Western Farms. Joe should avoid such conflicts of interest and
advise all parties of potential conflicts. He should not be setting the
standards and mandating from whom Western should purchase
strawberries.

Solutions

10-24

10-25

Solutions

10.53

(Hospital variances.)

Material X

Actual
Costs
(AP X AQ)
$40 X 8,000 units
= $320,000

Price
Variance

Inputs at
Standard Prices
(SP X AQ)
$50 X 8,000 units
= $400,000

> $80,000 F <

Material Y

$76 X 14,000 units

= $1,064,000

Total Variances

Solutions

10-26

Efficiency
Variance

Flexible
Production
Budget
(SP X SQ)
$50 X (5 X 1,500 units)
= $375,000

> $25,000 U <

$75 X 14,000 units
= $1,050,000

$75 X (10 X 1,500 units)

= $1,125,000

> $14,000 U <

> $75,000 F <

$66,000 F

$50,000 F

10.54

(Labor variances.)
Actual
Costs
(AP X AQ)
Skilled
Labor

Actual
Inputs at
Standard Prices
(SP X AQ)
$10 X 900 hours
= $9,000

Price
Variance

$9,600
> $600 U <

Unskilled
Labor

> $1,000 F <

$6 X 2,500 hoursb
= $15,000

$6 X 2,300 hours
= $13,800

$14,000

Total Variances

Efficiency
Variance

Flexible
Production
Budget
(SP X SQ)
$10 X 1,000 hoursa
= $10,000

> $200 U <

> $1,200 F <

$800U

$2,200 F

a1,000 hours = 6 minutes per equivalent meals X 10,000 equivalent meals = 60,000 minutes or 1,000 hours.
An alternative method of calculation is to determine the cost per equivalent meal:
)

X $10 per hour = $1 per equivalent meal

$1 X 10,000 meals = $10,000.

b2,500 hours = 15 minutes per equivalent meal X 10,000 equivalent meals = 150,000 minutes = 2,500 hours.
The alternative method:
() X

$6 = $1.50 per equivalent meal

$1.50 X 10,000 equivalent meals = $15,000.

10-27

Solutions

10.55 (Appendix 10.1; hospital supply variances.)

Item X

AP X AQ
$40 X 8,000 pieces
= $320,000

Price
Variance

SP X AQ
$50 X 8,000 pieces
= $400,000

> $80,000 F <

Item Y

$76 X 14,000 pieces

= $1,064,000

$75 X 14,000 pieces

= $1,050,000

$1,384,000

SP X ASQ
$50 X X 22,000 piecesa
= $366,667

> $33,333 U <

> $14,000 U <

Total

Mix
Variance

> $50,000 F <

10-28

$75 X 10 X 1,500 surgeries

= $1,125,000

> $25,000 F <

$1,466,667

> $16,667 F <

$1,500,000
> $33,333 F <

a22,000 = 8,000 + 14,000; 5/15 and 10/15 are the standard ratios of X and Y pieces, respectively, to total pieces.

Solutions

SP X SQ
$50 X 5 X 1,500 surgeries
= $375,000

> $8,333 F <

$75 X X 22,000 pieces

= $1,100,000

$1,450,000
> $66,000 F <

Yield
Variance

10.56 (Appendix 10.1) (Labor variances.)

AP X AQ
Skilled

Price
Variance

$9,600

SP X AQ
$10 X 900 hours
= $9,000

> 600 U <

Unskilled

$6 X 2,300 hours
= $13,800

$14,000

$23,600

$6 X X 3,200 hours
= $13,714

$22,800

Solutions

SP X SQ
$10 X X 10,000 meals
= $10,000

$6 X X 10,000 meals
= $15,000
> 1,286 F <

$22,857
> 57 F <

a3,200 hours = 900 hours + 2,300 hours; = .

Yield
Variance

> 857 F <

> 86 U <

> 800 U <

10-29

SP X ASQ
$10 X X 3,200 hoursa
= $9,143

> $143 F <

> 200 U <

Total

Mix
Variance

$25,000
> 2,143 F <

10.57 (Comprehensive cost variances.)

a.

Direct
Materials

Actual
Costs
(AP X AQ)
$1.05 X 1,525 lbs.
= $1,601

Price
Variance

Actual
Inputs at
Standard Prices
(SP X AQ)
$1 X 1,525 lbs.
= $1,525

> $76 U <

Direct
Labor

$10 X 800 hrs.

= $8,000

Flexible
Budget
(SP X SQ)
$1 X 1,500a lbs.
= $1,500

> $25 U <

$10 X 750b hrs.

= $7,500

$10 X 800 hrs.

= $8,000
> 0<

Variable
Overhead

Efficiency
Variance

> $500 U <

$0.50 X 3,000 lasagnas
= $1,500

$1,750
> $250 U <

a1,500 lbs. = .5 lb. per lasagna X 3,000 lasagnas.

b750 hrs. = .25 hr. per lasagna X 3,000 lasagnas.
Fixed Costs:
Marketing and
Administrative

Actual

Budget

$3,250

$2,500
> $750 U <

Manufacturing

$5,500

$5,000
> $500 U <

Solutions

10-30

10.57 continued.
b.

Re: Variable Cost Variances for the Month of July

Direct materials, pasta, had unfavorable variances for both price and
efficiency. The price variance might be lessened by taking purchase
discounts, investigating to be sure youre getting the best price in the
market. If not, increasing order size may provide a quantity discount.
The efficiency variance may be lessened by examining the amount of
pasta being used per lasagna and the amount of waste from the
production. (Also, check into how much food is eaten by employees.)
Direct labor had an unfavorable efficiency variance. This might be
reduced by providing training for production employees.
Also,
schedule employees to decrease labor in low volume times, if there is
unused labor capacity.
Variable overhead had an unfavorable variance. Examine how the
overhead is applied to determine if the cost driver is appropriate, and
what the appropriate rate should be. Then, with this additional data,
determine price and efficiency variances for particular variable
overhead items, such as energy costs, to establish what can be done
to minimize the costs.

10-31

Solutions

10.58

(Performance evaluation in a service industry.)

Item
New
Policies

Actual
Costs

Variance

$495,000

Flexible
Production
Budget

Variance between
Master
Master and Flexible Budget Budget
$100 X 4,800 policies
$100 X 5,000 policies
= $480,000
= $500,000

$15,000 U
Policy
Maintenance

$14,000,000 X ($5/$1,500)
= $46,667

$55,000
$8,333 U

Solutions

$20,000 F

10-32

$12,000,000 X ($5/$1,500)
= $40,000
$6,667 U

10.59

(Solving for materials and labor.)

a.

= 100,000 pounds [from price variance = (SP AP)AQ].

b.

= 5,000 pounds [from efficiency variance = SP(AQ SQ)].

c.

Standard Hourly Wage Rate = $450,000/75,000 hours =

$6.00 per hour.

d.

Standard Variable Overhead Rate

= $75,000/75,000 hours

= $1.00 per Direct Labor Hour.

$20,000 V.O.H. Efficieny Variance/$1.00 = 20,000 hours worked in
excess of standard.
$400,000 $6.50 = 61,538 actual direct labor hours.
61,538 hrs. 20,000 hrs. = 41,538 standard direct labor hours
allowed.

10-33

Solutions

10.60

(Controlling labor costs.)

a.

The variances arose because the guaranteed minimum wage was

treated as a fixed cost, when it was really a mixed cost. This error led
to a budget formula for direct labor of $200,000 per month plus
$14.00 per hour:
Fixed Portion: $2,400,000 12 months = $200,000
Variable Portion: ($8 million - $2.4 million)/400,000 hrs.
= $14.00
This is erroneous because the monthly cost behavior pattern assumed
is:

}
}

V = $14.00 per hour

Dollars of
Direct
Labor Cost

F = $200,000

Direct Labor Hours

while the correct cost pattern is:

}
}

V = $20.00 per hour

Dollars of
Direct
Labor Cost
10,000
Direct Labor
Hours

F = $200,000 which operates

only under a strict set
of low-volume conditions

The erroneous formula provides a budget allowance that is too

generous when volume is less than 33,333 hours per month and too
tight when volume is higher.
b.

Solutions

No, this budget does not reflect actual cost behavior and, thus, does
not provide a basis for controlling direct labor cost. To facilitate cost
control and performance evaluation, a budget must be realistic. This
budget is not realistic because it reflects cost behavior at only one
level of activity, 33,333 direct labor hours per month. The budget
formula which should be used to reflect monthly direct labor cost for
all possible activity levels is: $200,000 + $20.00 (direct labor hours
worked 10,000). A simplified alternative would be to use a rate of
$20.00 per hour for budgeting purposes for all volumes. In this case,
no variance would appear when direct labor hours worked were

10-34

10,000 or more per month. Such a budget would apparently justify or

support the production manager's belief that control was good;
however, for performance evaluation he also needs an output
standard to determine whether his labor inputs were used efficiently.
The use of the $20.00 rate at levels at which the guarantee would be
effective would help focus upon the amount of unutilized labor and
would produce a variance that would measure the cost of such idle
time. For example, suppose only 5,000 hours were utilized in a
month:
Budget, 5,000 Hours at $20.00.................. $ 100,000
Actual, Guaranteed 10,000 Hours at
$20.00....................................................
200,000
Unfavorable Variance................................. $ 100,000
The cost of the guaranteed minimum clause would be $100,000 for
the month.
If periods of low volume could be anticipated, there could be a
planned discrepancy (a budgeted variance) between the control
budget and the budget used for cash planning purposes:
Budget for Control Purposes...................... $ 100,000
Expected Variance.....................................
100,000
Budget for Cash Planning Purposes........... $ 200,000

10-35

Solutions

10.61

(Evaluating nonmanufacturing performance.)

Actual
Results
New
Policies

Variance

Flexible
Budget

Variance between
Master and Flexible Budgets

6,200 policies X $80

= $496,000

$430,000
$66,000 F

Policy
Maintenance

$1,000 U
a0.002 = $2 per $1,000 face amount of insurance.

Solutions

10-36

6,000 policies X $80

= $480,000
$16,000 U

$13,000,000 X 0.002a
= $26,000

$27,000

Master
Budget

$12,000,000 X 0.002a
= $24,000
$2,000 U

10.62

(Behavioral
adapted].)

impact

of

implementing

standard

cost

system

[CMA

a.

Standard costing allows for management by exception.

Timely
reporting of variances allows management to take corrective action
before costs get out of control. The breakdown of variances into price
and efficiency components helps management trace the source of
potential cost problems.
Standard costing may also motivate
employees to operate more efficiently if they are allowed to
participate in setting the standards.

b.

The standard cost system can have a negative impact on the

motivation of employees if the standards are too easily attained or too
difficult to reach. If the standards are too easy, then employees tend
to reduce productivity. If they are too difficult, then production
workers become frustrated and ignore the standards. Also, standards
that are set without production employee input may not be accepted
by employees as legitimate.

10.63

(Comprehensive problem.)
Variances
Actual
1,000
$ 940,000

Production

Manufacturing......................
Marketing & Administra-

312,550

$ 12,550 U

tive....................................
Contribution Margin................
Fixed Costs:
Manufacturing......................
Marketing & Administrative....................................
Operating Profit......................

60,000
$ 567,450

$ 12,550 U

205,000

5,000 U

320,000
42,450

$ 17,550 U

Units.......................................
Revenue..................................
Variable Costs:

Marketing &
Administrative

Sales
Price
$60,000 U

$ 10,000 U
$ 10,000 U

$60,000 U

30,000 F
$ 20,000 F

$60,000 U

Sales
Volume
Variance

Flexible
Budget
1,000
$ 1,000,000

$ 100,000 F

300,000

30,000 U

50,000b
650,000

5,000 U
$ 65,000 F

200,000

--

350,000
100,000

-$ 65,000 F

Master
Budget
900
$ 900,000
270,000 a
45,000
$ 585,000
200,000
$

350,000
35,000

a$270,000 = 900 X ($200 + $60 + $40).

b$50,000 = $50 X 1,000.

Cost Variance Analysis:

Actual
Inputs at

Actual

Direct
Materials

Costs
(AP X AQ)
$19 X 11,000 lbs.
= $209,000

Price
Variance

Standard Prices
(SP X AQ)
$20 X 11,000 lbs.
= $220,000

> $11,000 F <

Direct
Labor

Flexible
Production

$31 X 2,050 hrs.

= $63,550

Efficiency
Variance

> $20,000 U <

$30 X 2,050 hrs.
= $61,500

$30 X (2 hrs. X 1,000 units)

= $60,000

> $2,050 U <

Variable
Manufacturing
Overhead
Total

> $1,500 U <

$80 X 550 hrs.
= $44,000

$245,000 total $205,000 fixed

= $40,000

Budget
(SP X SQ)
$20 X (10 lbs. X 1,000 units)
= $200,000

$80 X (.5 hrs. X 1,000 units)

= $40,000

> $4,000 F <

> $4,000 U <

12,950 F

25,500 U
> 12,550 U <

10.64

(Comprehensive problem.)
Variances

Units............................................
Solutions

Actual
10,000

10-38

Production

Marketing &
Administrative

Sales
Price

Flexible
Budget
10,000

Sales
Volume
Variance

Master
Budget
11,000

Revenue.......................................
Variable Costs:
Manufacturing..........................
Marketing & Administrative........................................
Contribution Margin.....................
Fixed Costs:
Manufacturing..........................
Marketing & Administrative........................................
Operating Profit...........................

620,000

$ 20,000 F

304,100
$

55,000
260,900

$ 4,100 U
$

81,000
$

45,000
134,900

4,100 U

5,100 U

300,000
$
$

5,000 U
5,000 U

$ 20,000 F

1,000 U
$

600,000

50,000
250,000

60,000 U

5,000 F
25,000 U

5,000 F
-0-

$ 20,000 F

50,000
120,000

-$

-25,000 U

660,000
330,000a

30,000 F

80,000
$

55,000
275,000
80,000

50,000
145,000

a$330,000 = 11,000 units X ($20 + $6 + $4).

Direct
Materials

Actual
Costs
(AP X AQ)
$19 X 10,100 kits
= $191,900

Price
Variance

Cost Variance Analysis:

Actual
Inputs at
Standard Prices
(SP X AQ)
$20 X 10,100 kits
= $202,000

> $10,100 F <

Direct
Labor

> $2,000 U <

$31 X 2,200 hrs.

= $68,200

$30 X 2,200 hrs.

= $66,000
> $2,200 U <

Variable
Manufacturing
Overhead

$20 X 2,200 hrs.

= $44,000

$20 X (0.2 hrs. X 10,000 units)

= $40,000

> -0- <

> $4,000 U <

7,900 F

12,000 U
> 4,100 U <

10-39

$30 X (0.2 hrs. X 10,000 units)

= $60,000
> $6,000 U <

$125,000 total $81,000 fixed

= $44,000

Total

Efficiency
Variance

Flexible
Production
Budget
(SP X SQ)
$20 X (1 kit X 10,000 units)
= $200,000

Solutions

10.65

(Safety Auto Accessories; cost data for multiple purposes.)

We present the following comparison to provide more information about the difference between the original budget and actual results.
First Six Months
Flexible Budget

Actual

Sales Units.........................
Sales Revenue...................
Manufacturing Costs:
Variable Materials............
Variable Labor.................
Variable Overhead...........
Fixed Overhead...............
Total...................................
Nonmanufacturing Costs:
Variable...........................
Fixed................................
Total...................................
Operating Profits................

Master Budget

Actual Prices
Planned Prices
Planned Prices
and
and
and
Actual Costs
Planned Costs
Planned Costs
Total
Unit*
Total
Unit*
Total
Unit*
108,000
108,000
90,000
$7,020,000 $65.00 $7,560,000 $70.00
$6,300,000 $70.00
$2,160,000 $20.00
1,134,000
10.50
324,000
3.00
1,026,000
9.50
$4,644,000

$2,160,000 $20.00
1,080,000
10.00
216,000
2.00
1,081,200
10.01
$4,537,200

$1,800,000 $20.00
900,000
10.00
180,000
2.00
1,081,200
12.01
$3,961,200

$ 648,000 $ 6.00
650,000
6.02
$1,298,000
$1,078,000

$ 540,000
630,000
$1,170,000
$1,852,800

$ 450,000
630,000
$1,080,000
$1,258,800

$ 5.00
5.83

$ 5.00
7.00

*(Unit amounts rounded to the nearest cent.)

Even without considering manufacturing cost variances, profits will be lower than expected because the revenue increase of $720,000 is nearly offset
by the expected increase in variable costs of $666,000 ($576,000 manufacturing plus $90,000 nonmanufacturing). The excess of actual over expected
costs amount to another $234,800 ($106,800 manufacturing plus $128,000 nonmanufacturing), which gives the net unfavorable profit variance of
$180,800 (= $666,000 + $234,800 $720,000).
Sales apparently cut prices from $70 to $65 per unit and increased marketing costs in order to sell more units. (The sales department's
performance is probably evaluated on the basis of sales revenue.) In response to the increased sales demand, production appears to have incurred
increased unit labor and variable overhead costs. In order to control costs, the production manager could have trimmed total fixed costs, since
production is probably evaluated as a cost center. The president should coordinate the sales and production activities better so that individual
departments' actions are not detrimental to the firm as a whole.
In discussing the case, we emphasize that variable costs are best managed on a unit cost basis while fixed costs are best managed on a total cost
basis.

10.66 (River Beverages; Performance evaluation)

1.

Solutions

Answers will vary. The performance evaluation process at River Beverages appears to be effective in that managers are proactive in reviewing variance reports several times
a month. Over-budget variances are investigated by management monthly, and plant managers are required to submit written reports in response to over-budget problems.
The fact that specialists are dispatched to plants that are having particularly significant problems is further evidence that management takes this evaluation process seriously.

10-40

2.

Is this behavior in the best interest of the organization?

Rather than reviewing all over-budget amounts, management should review over-budget amounts greater than a specific percentage of the total budget (for example, all
overages greater than 5 percent), or greater than a certain dollar amount (for example, all overages over $20,000). This would eliminate having to address insignificant overbudget amounts.

Management should consider reviewing all over- and under-budget amounts greater than a specific percentage of the total budget, or greater than a certain dollar amount. It is
possible that standards are too tight in certain areas, or that operations have become more efficient. Management should be aware of the reasons for all significant variances
from budgetboth over and under.

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Solutions

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Solutions

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