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7-30

1.

(30 min.) Flexible budget, direct materials and direct manufacturing labor variances.
Variance Analysis for Tuscany Statuary for 2011

Units sold
Direct materials

Flexible
Actual
Budget
Results
Variances
(1)
(2) = (1) (3)
5,500a
0
$

668,800

Sales
Flexible
Volume
Budget
Variances
(3)
(4) = (3) (5)
5,500
500 U

$ 8,800 U

Direct manufacturing labor 952,750a


1,050,000e
Fixed costs
Total costs

1,180,000a
$2,801,550

Static
Budget
(5)
6,000a

660,000 b $ 60,000 F

9,750 F

20,000 F 1,200,000a
0
$20,950 F $2,822,500 $147,500 F

1,200,000a
$2,970,000

Static-budget variance
a

Given
b
$120/unit 5,500 units = $660,000
c
$120/unit 6,000 units = $720,000
d
$175/unit 5,500 units = $962,500
e
$175/unit 6,000 units = $1,050,000

2.

Direct materials

Actual Input
Quantity
Budgeted Price
$704,000b

720,000c

962,500d

$20,950 F
$147,500 F
Flexible-budget variance
Sales-volume variance
$168,450 F

Actual Incurred
(Actual Input
Quantity
Actual Price)
$668,800a

Flexible Budget
(Budgeted Input
Quantity Allowed for
Actual Output
Budgeted Price)
$660,000c

87,500 F

$35,200 F

$44,000 U

Price variance

Efficiency variance
$8,800 U
Flexible-budget variance

Direct manufacturing labor

$952,750d

$925,000e
$27,750 U

$962,500f
$37,500 F

Price variance
$9,750 F
Flexible-budget variance
a

70,400 pounds $9.5/pound = $668,800


70,400 pounds $10/pound = $704,000
c
5,500 statues 12 pounds/statue $10/pound = 66,000 pounds $10/pound = $660,000
d
18,500 hours $51.50/hour = $952,750
e
18,500 hours $50/hour = $925,000
f
5,500 statues 3.5 hours/statue $50/hour = 19,250 hours $50/hour = $962,500
b

Efficiency variance

7-32

(60 min.) Comprehensive variance analysis, responsibility issues.

1a.

Actual selling price = $82.00


Budgeted selling price = $80.00
Actual sales volume = 7,275 units
Selling price variance = (Actual sales price Budgeted sales price) Actual sales volume
= ($82 $80) 7,275 = $14,550 Favorable

1b.

Development of Flexible Budget


Budgeted Unit
Amounts
$80.00

Revenues
Variable costs
DMFrames
DMLenses

$2.20/oz. 3.00 oz.


$3.10/oz. 6.00 oz.
Direct manuf. labor
$15.00/hr. 1.20 hrs.
Total variable manufacturing costs
Fixed manufacturing costs
Total manufacturing costs

6.60a
18.60b
18.00c

Actual
Volume
7,275

Flexible Budget
Amount
$582,000

7,275
7,275
7,275

48,015
135,315
130,950
314,280
112,500
426,780

Gross margin

$155,220

a$49,500 7,500 units; b$139,500 7,500 units; c$135,000 7,500 units

Units sold
Revenues
Variable costs
DMFrames
DMLenses
Direct manuf. labor
Total variable costs
Fixed manuf. costs
Total costs
Gross margin
Level 2
Level 1

Actual
Results
(1)
7,275

FlexibleBudget
Variances
(2)=(1)-(3)

Sales Volume
Variance
(4)=(3)-(5)

Flexible
Budget
(3)
7,275

Static
Budget
(5)
7,500

$596,550

$14,550F

$582,000

$18,000 U

$600,000

55,872
150,738
145,355
351,965
108,398
460,363
$136,187

7,857U
15,423U
14,405U
37,685U
4,102F
33,583U
$19,033U

48,015
135,315
130,950
314,280
112,500
426,780
$155,220

1,485 F
4,185 F
4,050 F
9,720 F
0
9,720 F
$ 8,280 U

49,500
139,500
135,000
324,000
112,500
436,500
$163,500

$19,033 U
Flexible-budget variance

$ 8,280 U
Sales-volume variance

$27,313 U

Static-budget

variance1c.

Price and Efficiency Variances


DMFramesActual ounces used = 3.20 per unit 7,275 units = 23,280 oz.
Price per oz. = $55,872 23,280 = $2.40
DMLensesActual ounces used = 7.00 per unit 7,275 units = 50,925 oz.
Price per oz. = $150,738 50,925 = $2.96
Direct LaborActual labor hours = $145,355 14.80 = 9,821.3 hours
Labor hours per unit = 9,821.3 7,275 units = 1.35 hours per unit

ct
erials:
mes

Actual Costs
Incurred
(Actual Input
Quantity
Actual Price)
(1)
(7,275 3.2 $2.40)
$55,872

Actual Input
Quantity
Budgeted Price
(2)
(7,275 3.2 $2.20)
$51,216

$4,656 U
Price variance

ct
erials:
ses

(7,275 7.0 $2.96)


$150,738

ct
uf.
or

(7,275 1.35 $14.80)


$145,355

(7,275 6.00 $3.10)


$135,315

$22,553 U
Efficiency variance

(7,275 1.35 $15.00)


$147,319

$1,964 F
Price variance

2.

$3,201 U
Efficiency variance

(7,275 7.0 $3.10)


$157,868

$7,130 F
Price variance

Flexible Budget
(Budgeted Input
Quantity Allowed
for Actual Output
Budgeted Price)
(3)
(7,275 3.00 $2.20)
$48,015

(7,275 1.20 $15.00)


$130,950

$16,369 U
Efficiency variance

Possibleexplanationsforthepricevariancesare:
(a) Unexpected outcomes from purchasing and labor negotiations during the year.
(b) Higher quality of frames and/or lower quality of lenses purchased.
(c) Standards set incorrectly at the start of the year.
Possible explanations for the uniformly unfavorable efficiency variances are:
(a) Substantially higher usage of lenses due to poor quality lenses purchased at lower price.
(b) Lesser trained workers hired at lower rates result in higher materials usage (for both frames and lenses), as well as
lower levels of labor efficiency.
(c) Standards set incorrectly at the start of the year.

7-35

(30 min.) Direct manufacturing labor and direct materials variances, missing data.

1.
Actual Costs
Incurred
(Actual Input

Actual Input
Quantity

Flexible Budget
(Budgeted Input
Quantity Allowed

Quantity
Actual Price)
$739,900a

Direct mfg. labor

for Actual Output


Budgeted Price)
$742,500c

Budgeted Price
$735,000b

$4,900 U

$7,500 F

Price variance

Efficiency variance

$2,600 F
Flexible-budget variance
a

Given (or 49,000 hours $15.10/hour)


49,000 hours $15/hour = $735,000
c
5,500 units 9 hours/unit $15/hour = $742,500
b

2.
Unfavorable direct materials efficiency variance of $1,500 indicates that fewer pounds of direct materials were actually
used than the budgeted quantity allowed for actual output.
$1,500efficiencyvariance
= $3perpoundbudgetedprice

= 500 pounds

Budgeted pounds allowed for the output achieved = 5,500 30 = 165,000 pounds

Actual pounds of direct materials used = 165,000 500 = 164,500 pounds


3. Actual price paid per pound = 579,500/190,000
= $3.05 per pound
4.

Actual Costs Incurred


(Actual Input Actual Price)
$579,500a
$9,500 U

Price variance
a
b

Given
190,000 pounds $3/pound = $570,000

Actual Input
Budgeted Price
$570,000b

7-39

(60 min.)

Comprehensive variance analysis review.

Actual Results
Units sold (95% 1,500,000)
Selling price per unit

1,425,000
$
6.10

Revenues (1,425,000 $6.10)


Direct materials purchased and used:

$8,692,500

Direct materials per unit


Total direct materials cost (1,425,000 $1.60)
Direct manufacturing labor:
Actual manufacturing rate per hour
Labor productivity per hour in units
Manufacturing labor-hours of input (1,425,000 250)
Total direct manufacturing labor costs (5,700 $12.20)
Direct marketing costs:
Direct marketing cost per unit
Total direct marketing costs (1,425,000 $0.25)
Fixed overhead costs ($800,000 + $10,000)

1.60
$2,280,000

12.20
250
5,700
69,540

$
0.25
$ 356,250
$ 810,000

Static Budgeted Amounts


Units sold
Selling price per unit
Revenues (1,500,000 $6.00)
Direct materials purchased and used:

1,500,000
$
6.00
$9,000,000

Direct materials per unit


Total direct materials costs (1,500,000 $1.50)
Direct manufacturing labor:

1.50
$2,250,000

Direct manufacturing rate per hour


Labor productivity per hour in units
Manufacturing labor-hours of input (1,500,000 300)
Total direct manufacturing labor cost (5,000 $12.00)
Direct marketing costs:
Direct marketing cost per unit
Total direct marketing cost (1,500,000 $0.30)

12.00
300
5,000
$
60,000

Fixed overhead costs

1.

$
0.30
$ 450,000
$

Actual

800,000

Static-Budget

Revenues

Results
$8,692,500

Amounts
$9,000,000

Variable costs
Direct materials
Direct manufacturing labor
Direct marketing costs
Total variable costs
Contribution margin
Fixed costs
Operating income
2. Actual operating income
Static-budget operating income
Total static-budget variance

2,280,000 2,250,000
69,540
60,000
356,250
450,000
2,705,790
2,760,000
5,986,710
6,240,000
810,000
800,000
$5,176,710
$5,440,000
$5,176,710
5,440,000
$ 263,290 U

Flexible-budget-based variance analysis for Sonnet, Inc. for March 2011


Actual
Results
Units (diskettes) sold

Flexible-Budget
Variances

1,425,000

Flexible
Budget

Sales-Volume
Variances

1,425,000

75,000

Static
Budget
1,500,000

Revenues
Variable costs
Direct materials
Direct manuf. labor
Direct marketing costs
Total variable costs
Contribution margin
Fixed costs

$8,692,500

$142,500 F

$8,550,000

$450,000 U

$9,000,000

2,280,000
69,540
356,250
2,705,790
5,986,710
810,000

142,500 U
12,540 U
71,250 F
83,790 U
58,710 F
10,000 U

2,137,500
57,000
427,500
2,622,000
5,928,000
800,000

112,500 F
3,000 F
22,500 F
138,000 F
312,000 U
0

2,250,000
60,000
450,000
2,760,000
6,240,000
800,000

Operating income

$5,176,710

$ 48,710 F

$5,128,000

$312,000 U

$5,440,000

$263,290 U
Total static-budget variance
$48,710 F
Total flexible-budget
variance

$312,000 U
Total sales-volume
variance

3.

Flexible-budget operating income = $5,128,000.

4.

Flexible-budget variance for operating income = $48,710 F.

5.

Sales-volume variance for operating income = $312,000 U.

6.

Budgeted market share = 1,500,000 7,500,000 = 20%


Actual market share = 1,425,000 8,906,250 = 16%
Budgeted contribution margin per unit = $6,240,000 1,500,000 = $4.16 per unit
Actual Market Size
Actual Market Share
Budgeted Contribution
Margin per Unit
(8,906,250 16% $4.16)
$5,928,000

Static Budget:
Actual Market Size
Budgeted Market Size
Budgeted Market Share Budgeted Market Share
Budgeted Contribution Budgeted Contribution
Margin per Unit
Margin per Unit
(8,906,250 20% $4.16) (7,500,000 20% $4.16)
$7,410,000
$6,240,000

$1,482,000 U
Market-share variance

$1,170,000 F
Market-size variance

$312,000 U
Sales-volume variance

Analysis of direct mfg. labor flexible-budget variance for Sonnet, Inc. for March 2011

Direct.
Mfg. Labor

Actual Costs
Incurred
(Actual Input
Quantity
Actual Price)
(5,700 $12.20)
$69,540

Actual Input
Quantity
Budgeted Price
(5,700 $12.00)
$68,400

$1,140 U
Price variance

Flexible Budget
(Budgeted Input
Quantity Allowed
for Actual Output
Budgeted Price)
(*4,750 $12.00)
$57,000

$11,400 U
Efficiency variance

$12,540 U
Flexible-budget variance
* 1,425,000 units 300 direct manufacturing labor standard productivity rate per hour.

7.

DML price variance = $1,140 U; DML efficiency variance = $11,400 U

8.

DML flexible-budget variance = $12,540U

7-41

(30 min.)

Price and efficiency variances, problems in standard-setting, benchmarking.

1. Actual cost of aluminum per sq ft = $283,023 95,940 sq ft = $2.95 per sq ft


Actual aluminum per drum = 95,940 sq ft 4,920 drums= 19.50 sq ft
Actual cost of plastic per sq ft = $50,184 33,456 sq ft = $1.50 per sq ft
Actual plastic per lid = 33,456 sq ft 4,920 drums= 6.80 sq ft
Actual direct labor rate = $118,572 9,840 hours = $12.05 per hour
Actual labor hours per unit = 9,840 hours 4,920 = 2 hours per unit

Actual Costs Incurred


(Actual Input Quantity
Actual Price)
Direct
Materials
Aluminum

$283,023

Actual Input Quantity


Budgeted Price
(95,940 $3)
$287,820

$4,797 F
Price variance

Actual Costs Incurred


(Actual Input Quantity
Actual Price)
Direct
Materials
Plastic

$50,184

Direct
Manufacturing
Labor

$7,380 F
Efficiency variance

Actual Input Quantity


Budgeted Price
(33,456 $1.50)
$50,184

$ -Price variance

(9,840 $12)
$118,080

$118,572
$492 U
Price variance

Flexible Budget
(Budgeted Input
Quantity Allowed
for Actual Output
Budgeted Price)
(4,920 20 $3)
$295,200

Flexible Budget
(Budgeted Input
Quantity Allowed
for Actual Output
Budgeted Price)
(4,920 7 $1.5)
$51,660

$1,476 F
Efficiency variance

(4,920 2.30 $12)


$135,792
$17,712 F
Efficiency variance

2. Actions employees may have taken include:


(a) Adding steps that are not necessary in working on a drum or lid.
(b) Taking more time on each step than is necessary.
(c) Creating problem situations so that the budgeted amount of average downtime
will
be overstated.
(d) Creating defects in drums and/or lids so that the budgeted amount of average
rework will be overstated.

Employees may take these actions for several possible reasons.

(a)They may be paid on a piece-rate basis with incentives for production levels above
budget.
(b) They may want to create a relaxed work atmosphere, and a less demanding
standard can reduce stress.
(c) They have a them vs. us mentality rather than a partnership perspective.
(d) They may want to gain all the benefits that ensue from superior performance
(job security, wage rate increases) without putting in the extra effort required.
This behavior is unethical if it is deliberately designed to undermine the credibility of the
standards used at Stuckey.
3.

If Jorgenson does nothing about standard costs, his behavior will violate the
Standards of Ethical Conduct for Practitioners of Management Accounting. In
particular, he would violate the
(a) standards of competence, by not performing professional duties in accordance
with relevant standards;
(b) standards of integrity, by passively subverting the attainment of the organizations
objective to control costs; and
(c) standards of credibility, by not communicating information fairly and not
disclosing all relevant cost information.

4.

Jorgenson should discuss the situation with Fenton and point out that the standards are
lax and that this practice is unethical. If Fenton does not agree to change, Jorgenson
should escalate the issue up the hierarchy in order to effect change. If organizational
change is not forthcoming, Jorgenson should be prepared to resign rather than
compromise his professional ethics.

5.
are:

Main pros of using Benchmarking Clearing House information to compute variances


(a)
(b)

Highlights to Stuckey in a direct way how it may or may not be costcompetitive.


Provides a reality check to many internal positions about efficiency or
effectiveness.

Main cons are:


(a) Stuckey may not be comparable to companies in the database.
(b) Cost data about other companies may not be reliable.
(c) Cost of Benchmarking Clearing House reports.
Stuckey should be able to offset con #1 with a careful self-analysis of their firm to
other firms. They can talk to the source to determine how reliable the information is.