You are on page 1of 33

Chapter 17 - Additional Topics in Variance Analysis

17

Additional Topics in Variance Analysis

Solutions to Review Questions


17-1.
False. Variances simply represent differences between plans and actual outcomes.
Capturing these variances can provide useful information regardless of whether
inventories exist. Knowledge about differences between plans and actual outcomes can
help managers improve planning or take steps to improve operations.
17-2.
Variances are usually expensed as a period cost (e.g., charged to Cost of Goods Sold).
Variances can also be prorated to accounts according to the standard cost balances in
each of the accounts. Hence, a materials price variance recorded at the time of purchase
would be prorated to Materials Inventory, Materials Efficiency Variance (because this
variance is initially recorded at standard cost), Work in Process, Finished Goods and Cost
of Goods Sold according to the current year standard cost balances in those accounts.
17-3.
The industry volume variance measures the impact of differences between actual and
expected industry sales volume on the companys sales activity variance. Use of industrywide data helps explain changes in volume in terms of what is happening to the industry.
17-4.
Efficiencies can be realized for costs only. The sales activity variance captures the effect
on profit resulting from the difference between actual and budgeted sales.
17-5.
Some possible decisions for which the market share variance would be useful include
marketing (advertising) decisions, investment decisions, and product line portfolio
decisions.

17-1

Chapter 17 - Additional Topics in Variance Analysis

17-6.
If a company has two or more products, a mix variance can arise even if the net effect of
all variances is zero. It might be very useful to learn about the mix variance because if the
mix is changing, the company might need to change production and/or marketing
strategies to meet the change in mix. The U.S. automobile industry was facing rising
revenues and rising volumes but, unfortunately, there were falling profits because buyers
were purchasing smaller cars that had lower profit margins for the manufacturers.
17-7.
Examples include:

Steel mills which can process both new steel and recycled scrap

Oil refineries which can process different grades of crude oil

Distilleries producing blended whiskeys

Chemical companies

17-2

Chapter 17 - Additional Topics in Variance Analysis

Solutions to Critical Analysis and Discussion Questions


17-8.
By recognizing the materials price variance at the time of purchase, management captures
any difference between actual materials cost and the standard costs as reflected in the
budget as those costs are incurred. If the price variance is not reflected until the time of
use, the effect of price changes might not be recognized until the materials are removed
from the raw materials inventory and placed into work in process. This could be a
substantial time delay. If decisions need to be made to compensate for the effect of
materials price changes, it would seem that the sooner the information comes to
management's attention, the better the opportunities to react to the information.
17-9.
As with all firms, sports teams budget for revenues from different sources, in this case
ticket sales and concessions. Depending on the event, a different customer mix might lead
to a difference in the proportion of revenues from these two sources.
17-10.
In this situation the company is really selling just one product so a mix variance would not
be meaningful.
17-11.
In a hospital, as in other professional firms, billing rates vary with the level of the
professional person performing services. Hence, a physicians time is billed at a higher
rate than an interns time. Even though the volume of hours billed might be the same, if
the mix of physician to intern time is different there will be differences in revenues (and,
most likely in profits as well).
17-12.
Salary rates vary according to the classification of the service providers (e.g., nurses pay
is higher than nurse practitioners pay), and the hospital will budget a certain amount of
time for each classification. Thus, a labor mix variance can be calculated to show if the
appropriate personnel were used in a particular period or in a particular unit (e.g.,
intensive care). An unfavorable mix variance would suggest that nurses were doing work
that nurse practitioners should have done.
17-13.
Disagree. The purpose of variance analysis is to identify items that are different from what
we expected (budgeted). Therefore, we should be as interested in favorable variances as
in unfavorable variances. Even if there is not a problem (for example, managers hiding
expenses), we would still like to know where things are working well so that we can
implement them in other areas of the organization.

17-3

Chapter 17 - Additional Topics in Variance Analysis

Solutions to Exercises

17-14. (15 min.)Variable Cost Variances Where Materials Purchased And Used Are
Not Equal: Golden Company.
Flexible
Actual
Budget
Inputs at
(Standard
Actual
Price
Standard
Efficiency
Allowed for
Costs
Variance
Price
Variance
Good Output)
Purchase
$174,474
$172,530
Computations
$1,944 U
7.86 x 14,000
= $110,040

$115,020
Usage
Computations

$4,980 U

17-15. (15 min.) Industry Volume And Market Share Variances: Kays Auto Products.
Flexible Budget
(SCM x AQ)

Market
Share
Variance

Standard Contribution
Margin Times
Budgeted Market
Share Times Actual
Industry Volume

Industry
Volume
Variance

Master Budget
(SCM x SQ)

(SCM x ASQ)
$4 x 45,000

$4 x 20% x 300,000

$4 x 20% x 250,000

= $180,000

= $240,000

= $200,000

$60,000 U

$40,000 F

$20,000 U

17-4

Chapter 17 - Additional Topics in Variance Analysis

17-16. (20 min.)Industry Volume And Market Share VariancesMissing Data.


a. 15,000 fewer units = 52,500 fewer units 37,500 more units.
b. 900,000 units. [1,050,000 (b)] x 25% = 37,500 units.
c. 25% (from industry volume line).
d. 20%. [(d) 25%] x 1,050,000 = 52,500 fewer units.
e. 1,050,000 units (from industry volume line).
17-17. (20 min.)Industry Volume And Market Share VariancesMissing Data.
a. 20,000 fewer units = 100,000 more units activity variance 120,000 more units market
share variance.
b. 3,000,000 units (from market share line).
c. 8% (from market share line).
d. 3,250,000. [3,000,000 d] x 8% = 20,000 fewer units.
e. 12%. (e 8%) x 3,000,000 = 120,000 more units.
17-18. (20 min.)Sales Mix And Quantity Variances: AAA Electronics.
a. and b.
The actual prices are not relevant here. The mix and quantity variances are based on
standard (budgeted) contribution margin per unit.
Flexible Budget
AQ x (SP SV)

Mix
Variance

ASQ x (SP SV)

Quantity
Variance

Master Budget

15,000 x ($109.50 - $50.00)+

25,000 x (20,000/29,000) x ($109.50 - $50.00)

20,000 x ($109.50 - $50.00)

10,000 x ($249.50 - $100.00)

+25,000 x (9,000/29,000) x ($249.50 - $100.00)

+ 9,000 x ($249.50 -

= $2,387,500

=$2,185,776

$100.00)

$201,724 F

= $2,535,500
$349,724 U

$148,000 U
Activity Variance

17-5

Chapter 17 - Additional Topics in Variance Analysis

17-19. (20 min.)Sales Mix And Quantity Variances: Renees Rings.


a. and b.
Mix
Variance

Flexible Budget
AQ x (SP SV)

ASQ x (SP SV)

Quantity
Variance

Master Budget

8,800 x ($500 - $200)

11,200 x (8,000/10,000) x ($500 - $200)

8,000 x ($500 - $200)

+ 2,400 x ($1,200 - $400)

+11,200 x (2,000/10,000) x ($1,200 - $400)

+ 2,000 x ($1,200 - $400)

= $4,560,000

=$4,480,000

= $4,000,000

$80,000 F

$480,000 F

$560,000 F
Activity Variance

17-6

Chapter 17 - Additional Topics in Variance Analysis

17-20. (20 min.)Sales Mix And Quantity Variances: Tapas By Tom.


a. and b.
Flexible Budget
AQ x (SP SV)

Mix
Variance

ASQ x (SP SV)

Quantity
Variance

Master Budget

756 x ($40 - $16)

1,080 x (800/1,200) x ($40 - $16)

800 x ($40 - $16)

+ 324 x ($60 - $20)

+1,080 x (400/1,200) x ($60 - $20)

+ 400 x ($60 - $20)

= $31,104

=$31,680

= $35,200

$576 U

$3,520 U

$4,096 U
Activity Variance

17-7

Chapter 17 - Additional Topics in Variance Analysis

17-21. (35 min.)Materials Mix and Yield Variances: Huron Group.


a. and b.

Efficiency Variance

Actual
(AP x AQ)
Material:
Twinkle

Purchase
Price
Variance

$18 x
44,000 =
$792,000

Mix
Variance

(SP x AQ)

Yield
Variance

$20 x (1/3 x 120,000)


= $20 x 40,000
= $800,000

$20 x 44,000
= $880,000
$88,000 F

(SP x ASQ)

$80,000 U

Flexible
Production
Budget
(SP x SQ)

$20 x (20 x 2,000)


= $20 x 40,000
= $800,000

$-0-

Efficiency Variance = $80,000 U


Star

$32 x 76,000
= $2,432,000

$30 x (2/3 x 120,000)


= $30 x 80,000
= $2,400,000

$30 x 76,000
= $2,280,000
$152,000 U

$120,000 F

$30 x (40 x 2,000)


= $30 x 80,000
= $2,400,000
$-0-

Efficiency Variance = $120,000 F

Total

$3,224,000

$3,160,000
$64,000 U

$3,200,000
$40,000 F

= $3,200,000
$-0-

Efficiency Variance = $40,000 F

Production of 2,000 units should require 120,000 units of input (= 2,000 x 20 + 2,000 x
40). Actual usage was 120,000 units (= 44,000 + 76,000), so there was no yield variance.

17-8

Chapter 17 - Additional Topics in Variance Analysis

17-22. (35 min.)Materials Mix and Yield Variances: Johns Weed-B-Gone.


a. and b.
The actual purchase prices were $7.75 (= $51,150 6,600) for Weed-X and $21.00 (=
$110,880 5,280) for Pest-O.

Efficiency Variance

Actual
(AP x AQ)
Material:
Weed-X

Purchase
Price
Variance

$7.75 x
6,600
= $51,150

Mix
Variance

(SP x AQ)

Yield
Variance

$8 x (0.005 x
1,080,000)
= $8 x 5,400
= $43,200

$8 x (1/2 x 11,880)
= $8 x 5,940
= $47,520

$8 x 6,600 =
$52,800
$1,650 F

(SP x ASQ)

$5,280 U

Flexible
Production
Budget
(SP x SQ)

$4,320 U

Efficiency Variance = $9,600 U


Pest-O
$21 x 5,280
= $110,880

$20 x 5,280
= $105,600
$5,280 U

$20 x (1/2 x 11,880)


= $20 x 5,940
= $118,800
$13,200 F

$20 x (0.005 x
1,080,000)
= $20 x 5,400
= $108,000

$10,800 U

Efficiency Variance = $2,400 F

Total

$162,030

$158,400

$166,320

$3,630 U

$7,920 F

= $151,200
$15,120 U

Efficiency Variance = $7,200 U

17-9

Chapter 17 - Additional Topics in Variance Analysis

17-23. (35 min.) Labor Mix and Yield Variance: Matts Eat N Run.
a. and b.

Efficiency Variance
Actual
(AP x
AQ)

Purchase
Price
Variance

Labor:
Skilled

Mix
Variance

(SP x AQ)

$15 x (0.25 x 21,000)


= $15 x 5,250
= $78,750

$15 x 6,000
= $90,000

$92,000
$2,000 U

(SP x
ASQ)

$11,250 U

Flexible
Production
Budget
(SP x SQ)

Yield
Variance

$15 x (2/60 x 180,000)


= $15 x 6,000
= $90,000
$11,250
F

Efficiency Variance = $-0Unskille


d

$7.50 x
15,000 =
$112,500

$180,000

$7.50 x (0.75 x 21,000)


= $7.50 x 15,750
= $118,125

$67,500 U

$5,625 F

$7.50 x (6/60 x
180,000)
= $7.50 x 18,000
= $135,000
$16,875 F

Efficiency Variance = $22,500 F

Total

$272,000

$202,500

$196,875

$69,500 U

$5,625 U

= $225,000
$28,125 F

Efficiency Variance = $22,500 F

17-10

Chapter 17 - Additional Topics in Variance Analysis

17-24. (10 min.) Flexible BudgetingService Organization: Lowe & Rent.

Flexible Budget
(based on
actual of
6,900 hours)
Revenue................................
Costs:
Professional salaries..........
Other variable costs...........
Fixed costs.........................
Total costs......................
Profit......................................
a
b
c
d

$862,500 =
$431,250 =
$117,300 =

6,900 hrs.
6,000 hrs.
6,900 hrs.
6,000 hrs.
6,900 hrs.
6,000 hrs.

$862,500a
431,250b
117,300c
180,000d
$728,550
$133,950
x $750,000
x

$375,000

$102,000

$180,000 = Master budget fixed costs

17-11

Chapter 17 - Additional Topics in Variance Analysis

17-25. (20 min.)Sales Activity VarianceService Organization: Lowe & Rent.

Flexible Budget
(based on
actual of
6,900 hours)
Revenue................................ $862,500
Costs:
Professional salaries..........
431,250
Other variable costs...........
117,300
Fixed costs.........................
180,000
Total costs...................... $728,550
Profit...................................... $133,950

17-12

Sales
Activity
Variance

Master Budget
(based on
budgeted 6,000
hours)

$112,500 F

$750,000

56,250 U
15,300 U
________
$71,550 U
$ 40,950 F

375,000
102,000
180,000
$657,000
$ 93,000

Chapter 17 - Additional Topics in Variance Analysis

17-26. (30 min.)Profit Variance AnalysisService Organization: Lowe & Rent.


(1)
(2)
(3)
(4)
(5)
Flexible
Sales
Actual
Cost
Price
Budget
Activity
(6,900 hrs.)
Variances
Variances
(6,900 hrs.)
Variance
Revenue.............................$825,000
$37,500 U
$862,500
$112,500 F
Professional salaries.......... 465,000
$33,750 U
431,250
56,250 U
Other variable costs........... 108,000
9,300 F
117,300
15,300 U
Fixed costs......................... 174,000
6,000 F
180,000
Profit...................................$ 78,000
$18,450 U $37,500 U
$ 133,950
40,950 F

17-13

(6)
Master
Budget
(6,000 hrs.)
$750,000
375,000
102,000
180,000
$ 93,000

Chapter 17 - Additional Topics in Variance Analysis

17-27. (20 min.) Sales Price and Activity Variances: Dylan & Father.
Actual
(AP x SQ)
Partner

Price Variance

Flexible Budget
(SP SV) x SQ
$770 x 4,800 hours

$3,612,000

= $3,696,000

$84,000 U

Staff

$182 x 20,400 hours

$3,738,000

= $3,712,800

$25,200 F
Flexible
Budget
AQ x (SP SV)

Master Budget

Mix Variance

4,800 x ($770 - $364) +


20,400 x ($182 - $98)

= $3,662,400

(SP SV) x ASQ


a

[$406 x (5,100 25,890) x 25,200] +


b
[($84 x (20,790 25,890) x 25,200]

= $3,715,233

$52,833 U

$101,727 U

$154,560 U
Activity Variance

$406 = $770 $364.

$84 = $182 $98.

Quantity
Variance

17-14

SQ x (SP SV)
5,100 x $406 +
20,790 x $84

= $3,816,960

Chapter 17 - Additional Topics in Variance Analysis

17-28. (15 min.)Variable Cost Variances: Harrys Hotel.

Actual Costs

Price
Variance

Actual Inputs at
Standard Price

Efficiency
Variance

$12 x 3,000 =
$36,000

$45,240
$9,240 U

$12 x (14,000 4)
= $42,000
$6,000 F

17-15

Flexible Budget
(Standard
Allowed)

Chapter 17 - Additional Topics in Variance Analysis

Solutions to Problems

17-29. (20 min.)Sales Mix And Quantity Variances: Matties Vineyards.


a. Price Variance = (Actual Price Budgeted Price) x Actual Quantity:
Price
= (Actual Price Budgeted Price) x Actual Quantity
Variety:
Variance
Sauvignon
$2,000 F =
($7.25 $7.00)
x
8,000
Blanc
Chardonnay
900 U =
($8.10 $8.25)
x
6,000
Riesling
3,850 F =
($7.10 $6.75)
x
11,000
$4,950 F
b. and c.
The actual prices are not relevant here. The mix and quantity variances are based on
standard (budgeted) contribution margin per unit.

Mix
Variance

Flexible Budget
AQ x (SP SV)

ASQ x (SP SV)

Quantity
Variance

Master Budget

8,000 x ($7.00 - $5.00)

25,000 x (10,400/26,000) x ($7.00 - $5.00)

10,400 x ($7.00 - $5.00)

+ 6,000 x ($8.25 - $6.00)

+25,000 x (3,900/26,000) x ($8.25 - $6.00)

+ 3,900 x ($8.25 - $6.00)

+ 11,000 x ($6.75 - $4.75)

+25,000 x (11,700/26,000) x ($6.75 - $4.75)

+ 11,700 x ($6.75 - $4.75)

= $51,500.00

=$50,937.50

= $52,975.00

$562.50 F

$2,037.50 U

$1,475 U
Activity Variance

17-16

Chapter 17 - Additional Topics in Variance Analysis

17-30. (40 min.)Analyze Performance for a Restaurant: Dougs Diner.


Hint for working the problem: Use sales revenue as the basis for measuring volume.

Purchases
Actual
Variances
Sales revenuea....................................................
$1,200
Variable costs:
Purchases........................................................
780
$60 U
Hourly wages...................................................
60
Franchise fee...................................................
36
Utilities.............................................................
76
Total variable costs.............................................
$952
$60 U
Contribution margin.............................................
$248
$60 U
Fixed costs: ........................................................
Advertising.......................................................
100
Depreciation.....................................................
50
Lease...............................................................
30
Salaries............................................................
30
Total fixed costs..................................................
$210
Operating profit....................................................
$ 38
$60 U

($000)
Marketing &
Administrative
Variances

$8 F
$8 F
$8 F

$8 F

Notes on the following page.

17-17

Flexible
Budget
$1,200
720 b
60 c
36 d
84 e
$900
$300
100
50
30
30
$ 210
$90

Activity
Variance
$200 F

Master
Budget
$1,000

120 U
10 U
6U
14 U
$ 150 U
$ 50 F

600
50
30
70
$750
$250

$50 F

100
50
30
30
$ 210
$ 40

Chapter 17 - Additional Topics in Variance Analysis

17-30. (continued)
a Sales revenue is used as the basis of volume measurement because there are no price changes.
b
$600
x $1,200
$1,000
c
$50
x $1,200
$1,000
d
$30
x $1,200
$1,000
e
$70
x $1,200
$1,000

17-18

Chapter 17 - Additional Topics in Variance Analysis

17-31. (30 min.)Nonmanufacturing Cost Variances: Springfield Bank.


Incidental office costs comprise the variable costs. Salaries and the fixed office costs are
all fixed. Variance analysis for the two classes of overhead is as follows:

Correspondence,
Supplies, etc.

Actual Costs
$10,800 x 1.12
= $12,096

Combined
Price and
Efficiency
Variance

Flexible Budget
(Standard Allowed
for Actual Output)
$45 x 240
= $10,800

$1,296 U
Loan processor and
other costs

0.5 x ($60,000 +
$50,000 + $130,000)
= $120,000

$55,000 + $63,000
= $118,000
$2,000 F

Optional:
If computed, the production volume variance would be:
Budget
$120,000

a 0.5

$8,000 F

represents one-half year.

17-19

Applied
$120,000 x (240
225) = $128,000

Chapter 17 - Additional Topics in Variance Analysis

17-32. (30 min.)Performance Evaluation In Service Industries: Bay Area Bank.

Actual
Costs

Price
Variance

Actual
Inputs at
Standard
Price

Efficiency
Variance

New
Accounts

$572,250

Flexible
Budget
$30 x
19,200
accounts
=
$576,000

(Ignored)
$3,750 F

Account
Maintenanc
e

$18,000

Master
Budget
$30 x
20,000
accounts
=
$600,000

$24,000 F

$0.45 x
45,000
=
$20,250

$17,700
$300 U

Activity
Variance

$2,550 F

17-20

$0.45 x
43,200
= $19,440
$810 U

Chapter 17 - Additional Topics in Variance Analysis

17-33. Revenue Analysis Using Industry Data and Multiple Product Lines: Peninsula
Candy Co.
a. Sales price and activity variances.

(AP SV) x AQ

Flexible
budget
(SP SV) x AQ

Master
budget
(SP SV) x SQ

$1,162 $915b
= $247

(1,600 x $.03a)
+ (2,000 x $.04)
+ (4,200 x $.035)
= $275

$1,200 $920
= $280

a Unit

$28 U

$5 U

Sales price
variance

Sales activity
variance

contribution margins calculated from master budget panel as follows:

Unit margin = Contribution margin Sales units.


b

$915 = [1,600 x ($140 2,000) + 2,000 x ($320 2,000) + 4,200 x ($460 4,000)].

b. Two solutions are possible when calculating the market share variance, depending
upon the figure used for the left column. The examples in the text use the flexible
budget amount. However, those examples involve only one product, whereas this
problem has three products, and therefore a mix issue is present. In this situation,
another way to solve the problem would be to use the standard price times the actual
quantities at the standard mix. Both alternatives are given on the following page.

17-21

Chapter 17 - Additional Topics in Variance Analysis

17-33b.
(continued)
Contribution margin variance
Actual Quantities at
Standard Mix and
Standard Prices

Industry
Effect
$280 x (76,000 80,000)
= $266

$273a

Master
Budget
$280

$7 F

$14 U

Market Share
Variance

Industry Variance

Flexible Budget
$275

$7 U
Quantity
Variance
Industry Effect
$266

$9 F

$5 U

Master Budget
$280
$14 U

Activity Variance
The $2 difference in the market share variance is explained by the difference in the mix.
a $273 = [7,800 x (2,000 8,000) x ($60 2,000) + 7,800 x (2,000 8,000) x ($80 2,000) + 7,800 x (4,000 8,000) x
($140 4,000)].
A shortcut is to multiply the actual number of bars by the average contribution margin per bar in the master
budget: 7,800 bars x ($280 8,000 bars) = $273.

17-22

Chapter 17 - Additional Topics in Variance Analysis

17-34. (20 min.)Sales Mix And Quantity Variances: Peninsula Candy Co.
Mix
Quantity
Flexible Budget
Variance
Variance
(SP SV) x AQ
(SP SV) x ASQ
(1,600 x $.03)
2,000
(7,800 x
x $.03)
8,000
+ (2,000 x $.04)
+
2,000
(7,800 x
x $.04)
8,000
+ (4,200 x $.035)
+
4,000
(7,800 x
x $.035)
8,000
= $275
= $273

$2 F

$7 U

$5 U
Activity Variance

17-23

Master Budget
(SP SV) x SQ
(2,000 x $.03)
+ (2,000 x $.04)
+ (4,000 x $.035)
= $280

Chapter 17 - Additional Topics in Variance Analysis

17-35. (45 min.) Materials Mix And Yield Variances: Houston Corporation.
a. and b.

Material

Efficiency Variance
Actual

Purchase

(AP x

Price

AQ)

Variance

Flexible
Mix
(SP x AQ)

Variance

Z-Alpha

(SP x ASQ)
a

Yield

Production

Variance

Budget

$9 x (.48 x

$423,360

$9 x

104,400) =

50,400 =

$9 x 50,112

$9 x (600 x 80)

$453,600

= $451,008

= $432,000

$30,240 F

$2,592 U

$19,008 U

$21,600 U

Z-Beta

$12 x (.36 x

$400,464

$12 x

104,400) =

37,040 =

$12 x 37,584

$12 x (450 x

$444,480

= $451,008

80) = $432,000

$44,016 F

$6,528 F

$19,008 U

$12,480 U

Z-Gamma

$417,216
$10,176 U

$24 x

$24 x (.16 x

16,960

104,400) =

$24 x 16,704

$24 x (200 x

$407,040

= $400,896

80) = $384,000

$6,144 U

$16,896 U

$23,040 U

Standard mix: .48 = 600 1,250; .36 = 450 1,250; .16 = 200 1,250;

17-24

Chapter 17 - Additional Topics in Variance Analysis

17-35. (continued)

Efficiency Variance
Purchase

Flexible

Price
Actual
Total

Variance

Mix
(SP x AQ)

Variance

(SP x ASQ)

Yield

Production

Variance

Budget

$1,241,04
0

$1,305,120
$64,080 F

$1,302,912
$2,208 U

$54,912 U

$57,120 U

17-25

$1,248,000

Chapter 17 - Additional Topics in Variance Analysis

17-36. (30 min.) Labor Mix and Yield Variances: Davenport Construction Associates
a. and b.

Efficiency Variance
Purchase

Flexible

Price
Actual

Variance

Mix
(SP x AQ)

($26 x 660) +

($24 x 660) +

($23 x 780) +
($15 x 432)
= $41,580
$2,880 U

Variance

(SP x ASQ)

Yield

Production

Variance

Budget

($24 x 1/3 x 1,872)

($24 x 600) +

($21 x 780) +

+ ($21 x 1/3 x

($21 x 600) +

($15 x 432)

1,872) + ($15 x 1/3

($15 x 600) =

= $38,700

x 1,872) = $37,440

$36,000

$1,260 U

$1,440 U

$2,700 U

17-26

Chapter 17 - Additional Topics in Variance Analysis

17-37. (20 min.)Derive Amounts for Profit Variance Analysis: Aqua Clean, Inc.
Hint: Use last months actual as master budget.
Actual (based
on actual
Variable
activity of
Cost
161
Variance
cleanings)
Sales revenue.....................................................
$22,800
Less:
Variable costs..................................................
5,220
$93 F
Contribution margin.............................................
$17,580
$93 F
aLast month price =

$22,680
140 cleanings

Sales
Price
Variance
$3,282 U

$3,282 U

Flexible Budget
(based on
actual activity
of 161
cleanings)
$26,082 a
5,313 b
$20,679

Sales
Activity
Variance

Master Budget
(based on a
prediction of
140 cleanings)

$3,402 F

$22,680

693 U
$2,709 F

4,620
$18,060

= $162

$26,082 = $162 x 161 cleanings


bLast month unit variable cost = $4,620 140 cleanings =

$33; $5,313 = $33 x 161 cleanings.

Although the two months contribution margins are similar, there are significant variances. This illustrates the need to
consider variance analysis even if bottom-line dollar amounts are similar to budget. Activity levels, prices, and other factors
might offset each other, but individually be significant.
The number of cleanings increased by 21, which increased profit by $2,709. However, the actual average price was $141.61
(= $22,800 161 cleanings) so the average price per cleaning decreased by $20.39 ($162.00 $141.61). As a result, profit
decreased by $480.

17-27

Chapter 17 - Additional Topics in Variance Analysis

17-38. (20 min.)Flexible budget: Oak Hill Township.


Flexible budget is based on actual activity of 94,500 miles for costs that vary per mile.
a. $8,505;$10 over budget.
$6,750 x (94,500 miles 75,000 miles) = $8,505
b. $756;$4 over budget.
$600 x (94,500 miles 75,000 miles) = $756
c. $5,000; equal to budget.
The assumption is that, within the relevant range, this is a fixed cost.
d. Decreased unit fixed costs.
Assuming that insurance, salaries and benefits, and depreciation are fixed costs, the
budgeted amount is $0.1387 per mile [($1,000 + $5,000 + $4,400) 75,000 miles].
The actual amount is $0.1129 per mile for 94,500 actual miles, which is a drop of
$0.0258. This is 84.3% of the total decrease from $0.2427 to $0.2121.

17-28

Chapter 17 - Additional Topics in Variance Analysis

Solutions to Case

17-39. Comprehensive Overview of Budgets and Variances Racketeer, Inc.


The following solution is based on a report by Tom Terpstra.
Elmo's problem is that he thinks that the graph and the income statement measure the
same thing. Otto should have told him that they do not. The income statement presents
actual costs in a full-absorption costing format, while the profit graph is based on standard
costs in a variable costing format. These differences account for the difference in the profit
measurement.
Because the profit graph is based on standard costs, the profit it shows will be the actual
profit only in those very rare cases when the variances net out to zero. Racketeer has
some significant variances listed on the income statement, so Elmo should expect that the
actual profit would differ from the profit on the graph. These variances are:
Material................................................................
$490 U
Labor...................................................................
392 U
Overhead.............................................................
190 U
Selling and administrative...................................
300 F
Total.....................................................................
$772 U
The overhead amount differs from the figure on the income statement, because the
income statement overhead variance includes a production volume variance of $470
(= $.47 x 1,000). But that variance does not reflect a difference between actual and budget
or standard costs when fixed manufacturing costs are not unitized.
The other part of the difference between the two profit figures is explained by the
difference in accounting methods. Variable costing expenses fixed costs when they are
incurred. With full-absorption, the fixed costs are assigned to the units produced, and then
expensed in the period in which the units are sold. Racketeer treats each racket as having
a fixed cost of $.47. For the 10,000 rackets sold, the fixed cost expense is $4,700 under
full-absorption costing. Additionally, the production volume variance of $470 is also
expensed during this period. Thus, $5,170 in fixed costs (aside from price variances) was
deducted from income on the income statement. Under variable costing, the only fixed
cost to be expensed is the standard cost for the period of $3,760 (also aside from price
variances). So, the use of different accounting methods results in a profit difference of
$1,410.
(Before Elmo starts to complain about the accountants' use of full-absorption, one should
remind him that, in those months when production exceeds sales, the full-absorption
method would expense less fixed costs than variable costing, so it evens out in the long
run.)

17-29

Chapter 17 - Additional Topics in Variance Analysis

17-39. (continued)

Now the two results can be reconciled:


Profit per chart.....................................................
$20,940
Less:
Cost variances................................................. 772
Additional fixed costs in full-absorption........... 1,410
Profit per Income Statement...............................
$18,758
Besides failing to explain the profit graph, Otto also failed to set up a format to take
advantage of the standards he developed. The company should set up a chart showing
the actual results, the flexible budget, and the master budget. This would provide
information concerning the profit changes in relation to the change in sales volume.
Additionally, the manufacturing variances could be analyzed in greater detail, as shown in
Exhibits A and B on the following pages.

17-30

Chapter 17 - Additional Topics in Variance Analysis

17-39. (continued)
Exhibit AComparison of Master Budget to Actual Results.
Actual
Sales......................................... $90,000
Less Variable Costs:
Materials................................ 37,990
Labor..................................... 19,392
Overhead...............................
1,440
Contribution Margin................... $31,178
Less Fixed Costs:
Manufacturing........................
3,810
Selling and Administrative.....
7,200
Operating Profit......................... $20,168

Manufacturing
Variance

Selling and
Administrativ
e Variance
0

$ 490 U
392 U
140 U
$1,022 U
50 U
$1,072 U

$300
$300

17-31

F
F

Sales Price Flexible Activity


Variance Budget Variance
0
$90,000 $18,000 F
7,500
3,800
260
$6,440

Master
Budget
$72,000

37,500
19,000
1,300
$32,200

U
U
U
F

30,000
15,200
1,040
$25,760

3,760
7,500
$20,940 $6,440 F

3,760
7,500
$14,500

Chapter 17 - Additional Topics in Variance Analysis

17-39. (continued)

Exhibit BManufacturing Cost Variances.

String

Actual Costs
$.025 x 175,000
= $4,375

Price
Variance

Actual Inputs
at Standard
Price
$.03 x 175,000
= $5,250

$875 F
Frames

$3.15 x 7,100 =
$22,365

$3.15 x 7,100 =
$22,365

$9.80 x 900
= $8,820

$9.60 x 900 =
$8,640

$5.80 x 840 =
$4,872

$9.60 x .125 x
7,000 = $8,400
240 U

$5.60 x 840 =
$4,704
$168 U

Variable
Overhead

$3.15 x 7,000 =
$22,050
315 U

$180 U
Unskilled
Labor

$5.60 x .125 x
7,000 = $4,900
196 F

Total Variable
Overhead
Variance

$1,050

Flexible Budget
$.03 x 20 x 7,000
= $4,200

1,050 U

$-0Skilled
Labor

Efficiency
Variance

($.10 + $.03)
x 7,000 = $910

$140 U

Fixed
Overhead

Actual Costs

Price
Variance

$3,810

Budget
$.47 x 8,000 =
$3,760

$50 U

Production
Volume
Variance

470 U

17-32

Applied
($.47 x 7,000)
= $3,290

Chapter 17 - Additional Topics in Variance Analysis

17-39. (continued)

The variance breakdown in Exhibits A and B highlights the areas that Elmo and Otto
should research. One area involves the strings. Is the combination of a favorable price
variance and unfavorable efficiency variance an indicator that low quality string was
purchased? Another point for investigation is the apparent waste of 100 racket frames. Is
there something in the production process that causes frames to break? Or are the
standards unrealistic? A third area is the labor efficiency variances. Why are the skilled
workers spending more time than budgeted, while the unskilled are spending less?
Finally, the relationship between labor efficiency and materials efficiency variances is
worth investigating, because use of substandard materials might result in an unfavorable
labor efficiency variance. These are the types of questions that should be raised as a
result of this variance analysis.

17-33