ACCCOB3

LONG QUIZ 4 COVERAGE

 Definition of Sales Mix
• Sales mix is the relative proportion in which a company’s
products are sold.
• Different products have different selling prices, cost
structures, and contribution margins.
• When a company sells more than one product, break-
even analysis becomes more complex as the following
example illustrates.

• Let’s assume RBC sells bikes and carts and that the sales
mix between the two products remains the same.
 Sales Mix and Break-Even Analysis 1

Bikes comprise 45% of RBC’s total sales revenue, and the

carts comprise the remaining 55%. RBC provides the
following information:

Bicycles Carts Total

Sales $ 250,000 100.0% $ 300,000 100% $ 550,000 100.0%
Less: Variable expenses 150,000 60.0% 135,000 45% 285,000 51.8%
Contribution margin 100,000 40.0% 165,000 55% 265,000 48.2%
Less: Fixed expenses 170,000
Net operating income $ 95,000
Sales mix $250,000 45% $ 300,000 55% $ 550,000 100%

$265, 000
 48.2% (rounded)
$550, 000
 Sales Mix and Break-Even Analysis 2

Fixed expenses
Dollar sales to break even 
CM ratio
$170, 000
Dollar sales to break even   $352, 697
48.2%

Bicycles Carts Total

Sales $ 158,714 100% $ 193,983 100% $ 352,697 100.0%
Less: Variable expenses 95,228 60% 87,293 45% 182,521 51.8%
Contribution margin 63,486 40% 106,690 55% 170,176 48.2%
Less: Fixed expenses 170,000
Net operating income $ 176*
Sales mix $ 158,714 45% $ 193,983 55% $ 352,697 100.0%
 Analyzing Mixed Costs
APPENDIX 5A

Managerial Accounting
Seventeenth edition

• © 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution
permitted without the prior written consent of McGraw Hill.
 Mixed Costs
The total mixed cost line can be expressed as an equation: Y = a + bX
Where: Y = Total mixed cost
a = Total fixed cost (vertical intercept of the line)
b = Variable cost per unit of activity (slope of the line)
X = Level of activity

• Access the text alternative for slide images.

 Mixed Costs – Solution
• If your fixed monthly utility charge is $40, your
variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours,
what is the amount of your utility bill?

• Y = a + bX
• Y = $40 + ($0.03 × 2,000)
• Y = $100
SEPARATION OF THE FIXED & VARIABLE COMPONENTS
of MIXED COSTS
Case: A company Maintenance Units
Month
wants to conduct an Cost Produced
analysis of the March $2,750 450
behavior of the April 2,250 200
maintenance cost of its May 4,000 700
factory equipment in June 3,500 700
relation to the number July 4,000 600
of units produced August 3,250 400
using such equipment. Sept 4,500 800
Historical cost and
Oct 3,000 650
production data were
Nov 2,500 350
gathered for the past
10 months. Dec 3,000 300
HIGH-LOW METHOD
Cost components are computed from two data points
Maintenance Units Activity Level
Month COST DRIVER
Cost Produced
March $2,750 450
April 2,250 200
Highest – Lowest Cost
May 4,000 700 $4,500 - $2,250
June 3,500 700
July 4,000 600
August 3,250 400 Highest – Lowest Units
Sept 4,500 800
800 units – 200 units
Oct 3,000 650
Nov 2,500 350
Dec 3,000 300
Variable Cost per Unit b = Δ y
Δx
Variable Cost per Unit = Difference in costs
Difference in units

Variable Cost per Unit = $4,500 – $2,250

800 – 200
= $ 2,250
600
Variable Cost per Unit, b = $ 3.75
Mixed Cost= Fixed Cost + (VC per unit x cost driver)
Y = a + bx
Variable Cost per Unit, b = $ 3.75 (constant)
September : $4,500 at 800 units
Mixed Cost= Fixed Cost + (VC per unit x cost driver)
Y = a + bx
Variable Cost per Unit, b = $ 3.75 (constant)
September : $4,500 at 800 units
Y = a + bx
$4,500 = a + ($3.75)(800 units)
$4,500 = a + $3,000
a = $4,500 - $3,000
Fixed Cost, a = $1,500
COST FUNCTION: Y = a + bx
COST FUNCTION: Y= $1,500 + $3.75x
 Total HIGH-LOW METHOD
Cost A line is drawn from Highest to Lowest Cost points
$6,000
5,500 May
5,000 800 units at $4,500 total maintenance cost
4,500 September
July
4,000
August
3,500 December June
3,000 200 units at $2,250
2,500 maintenance cost March October
November
2,000
April Total Fixed Cost=$1,500
1,500
1,000
500
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800
Units Produced
 SCATTERGRAPH METHOD
Total
Cost
A regression line is drawn through all the points
$6,000 Visual Inspection (Subjective)
5,500 May
5,000 Point B: 800 units, $4,750 total maintenance cost
4,500
September
4,000
3,500 August July
December June
3,000
April October
2,500 March
Point A: 400 units, $3,000 total maintenance cost
November
2,000
1,500 Total Fixed Cost=$1,500
1,000
500
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800
Units Produced
 Point A: 400 units, $3,000 cost
Point B: 800 units, $4,750 cost
Difference in costs
Variable Cost per Unit =
Difference in units
Variable Cost per Unit = $4,750 – $3,000
800 – 400
Variable Cost per Unit, b = $4.375 or $4.38
Y = a + bx
$4,750 = a + ($4.38)(800 units)
$4,750 = a + $3,504
a = $4,750 - $3,504
Fixed Cost, a = $1,246 COST FUNCTION: Y = a + bx
COST FUNCTION: Y= $1,246 + $4.38x
 LEAST SQUARES REGRESSION METHOD
Units
produced Maintenance
x costs, y xy x2
Mar 450 $2,750 $1,237,500 $202,500
Apr 200 2,250 450,000 40,000
May 700 5,000 3,500,000 490,000
Jun 700 3,500 2,450,000 490,000
Jul 600 4,000 2,400,000 360,000
Aug 400 3,250 1,300,000 160,000
Sep 800 4,500 3,600,000 640,000
Nov 350 2,500 875,000 122,500
Dec 300 3,000 900,000 90,000
Ʃx=4,500 Ʃy=$30,750 Ʃxy=$16,712,500 Ʃx2=$2,595,000
*Assuming that data for 9 months (March to Dec.) are used.
LEAST SQUARES REGRESSION METHOD
Variable Cost per Unit, b = n(Ʃxy)
2
–Ʃx Ʃy
2
nƩx – (Ʃx)
Total Fixed Cost, a = Ʃy – bƩx
n
b = 9(16,712,000) – [4,500 (30,750)] = 3.88
2
9(2,595,000) – (4,500)
a = 30,750 – 3.88 (4,500) = 1,477
9
COST FUNCTION: Y = a + bx
COST FUNCTION: Y= $1,477 + $3.88x
 Standard Costs and
Variances
CHAPTER 10

Managerial Accounting
Seventeenth edition

• © 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution
permitted without the prior written consent of McGraw Hill.
 Basic Definitions and Concepts
• Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
two types of standards are commonly used.

• Price standards • Quantity standards

specify how
much specify how much of an
should be paid input should be used to
for make a product or
each unit of the
input. provide a service.

• Examples: Firestone, Sears, McDonald’s, hospitals,

construction, and manufacturing companies.
Setting Direct Materials Standards
• Standard Price per Unit • Standard Quantity per Unit

• Final, delivered cost • Summarized in a bill

of materials, net of of materials.
discounts.
 Setting Direct Labor Standards
• Standard Rate per Hour • Standard Hours per Unit

• Often a single • Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor operation.
Setting Variable Manufacturing
Overhead Standards
• Price Standard • Quantity Standard

• The rate is the • The quantity is the

variable portion of the activity in the
allocation base for
predetermined predetermined
overhead rate. overhead.
Using Standards in Flexible Budgets
• Standard costs per unit for direct materials, direct
labor, and variable manufacturing overhead can be
used to compute activity and spending variances.

• Spending variances become more useful by breaking

them down into price and quantity variances.
 General Model for Variance Analysis
Variance Analysis
• Price Variance:
• Difference between actual price and standard
price
• Quantity Variance:
• Difference between actual quantity and standard
quantity
 Price and Quantity Standards
• Price and quantity standards are determined
separately for two reasons:

• The purchasing manager is responsible for raw

material purchase prices, and the production manager is
responsible for the quantity of raw material used.

• The buying and using activities occur at different times.

Raw material purchases may be held in inventory for a
period of time before being used in production.
 Variance Analysis
Variance Analysis
• Price Variance:
• Materials price variance
• Labor rate variance
• VOH rate variance
• Quantity Variance:
• Materials quantity variance
• Labor efficiency variance
• VOH efficiency variance
 Learning Objective 1
Compute the direct materials price and
quantity variances and explain their
significance.
 Quick Check 1
Hanson Inc. has the following direct materials
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were
purchased and used to make 1,000 Zippies. The
materials cost a total of $6,630.
 Quick Check 1a
How many pounds of materials should Hanson
have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
 Quick Check 1b
• How many pounds of materials should Hanson
have used to make 1,000 Zippies?
• a. 1,700 pounds.
• b. Answer: 1,500 pounds.
• c. 1,200 pounds.
• d. 1,000 pounds.

• The standard quantity is: 1,000 × 1.5 pounds per Zippy.

 Quick Check 1c
Hanson’s materials quantity variance (MQV) for
the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
 Quick Check 1d
• Hanson’s materials quantity variance (MQV) for
the week was:
• a. $170 unfavorable.
• b. $170 favorable.
• c. Answer: $800 unfavorable.
• d. $800 favorable.

• M Q V = SP(AQ − SQ)
M Q V = $4.00(1,700 lbs. − 1,500 lbs.)
M Q V = $800 unfavorable
 Quick Check 1e
Hanson’s materials price variance (MPV) for the
week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
 Quick Check 1f
• Hanson’s materials price variance (MPV) for the
week was:
• a. $170 unfavorable.
• b. Answer: $170 favorable.
• c. $800 unfavorable.
• d. $800 favorable.
• M P V = AQ(AP − SP)
M P V = 1,700 lbs. × ($3.90 − $4.00)
M P V = $170 favorable
 Learning Objective 2
Compute the direct labor rate and
efficiency variances and explain
their significance.
 Responsibility for Materials Variances
• Who is responsible for • Who is responsible for the
the materials price materials quantity
variance? variance?
• Purchasing Manager • Production Manager

• The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing manager’s performance.
Controllability of Materials Variances
• The materials variances are not always entirely
controllable by one person or department. For example:

• The production manager may schedule

production in such a way that it requires express
delivery of raw materials resulting in an unfavorable
materials price variance.

• The purchasing manager may purchase lower-quality

raw materials resulting in an unfavorable materials
quantity variance for the production manager.
 Quick Check 2
Hanson Inc. has the following direct labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00 per direct labor-hour
Last week, 1,550 direct labor-hours were
worked at a total labor cost of $18,910
to make 1,000 Zippies.
 Quick Check 2a
Hanson’s labor rate variance (LRV) for the week
was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
 Quick Check 2b
• Hanson’s labor rate variance (LRV) for the week
was:
• a. Answer: $310 unfavorable.
• b. $310 favorable.
• c. $300 unfavorable.
• d. $300 favorable.
• LRV = AH(AR − SR)
LRV = 1,550 hrs.($12.20 − $12.00)
LRV = $310 unfavorable
 Quick Check 2c
Hanson’s labor efficiency variance (LEV) for the
week was:
a. $590 unfavorable.
b. $590 favorable.
c. $600 unfavorable.
d. $600 favorable.
 Quick Check 2d
• Hanson’s labor efficiency variance (LEV) for the
week was:
• a. $590 unfavorable.
• b. $590 favorable.
• c. Answer: $600 unfavorable.
• d. $600 favorable.
• LEV = SR(AH − SH)
LEV = $12.00(1,550 hrs. − 1,500 hrs.)
LEV = $600 unfavorable
 Learning Objective 3
Compute the variable manufacturing
overhead rate and efficiency variances
and explain their significance.
Responsibility for Labor Variances
Production managers are usually held accountable for
labor variances because they can influence key factors.
• Mix of skill levels assigned to work tasks
• Level of employee motivation
• Quality of production supervision
• Quality of training provided to employees
Controllability of Labor Variances
• The labor variances are not always entirely controllable by
one person or department. For example:

• The Maintenance Department manager may do a poor job

of maintaining production equipment. This may increase
the processing time required per unit, thereby causing an
unfavorable labor efficiency variance.

• The Purchasing manager may purchase lower-quality raw

materials resulting in an unfavorable labor efficiency
variance for the production manager.
 Quick Check 3
Hanson Inc. has the following variable
manufacturing overhead standard to
manufacture one Zippy:
1.5 standard labor-hours per Zippy at
$3.00 per direct labor-hour
Last week, 1,550 labor-hours were worked to
make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
 Quick Check 3a
Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
 Quick Check 3b
• Hanson’s rate variance (VMRV) for variable
manufacturing overhead for the week was:
• a. Answer: $465 unfavorable.
• b. $400 favorable.
• c. $335 unfavorable.
• d. $300 favorable.
• VMRV = AH(AR − SR)
VMRV = 1,550 hrs.($3.30 − $3.00)
VMRV = $465 unfavorable
 Quick Check 3c
Hanson’s efficiency variance (VMEV) for variable
manufacturing overhead for the week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
 Quick Check 3d
• Hanson’s efficiency variance (VMEV) for variable
manufacturing overhead for the week was:
• a. $435 unfavorable.
• b. $435 favorable.
• c. Answer: $150 unfavorable.
• d. $150 favorable.
• 1,000 units × 1.5 hrs. per unit
• V M E V = SR(AH − SH)
V M E V = $3.00(1,550 hrs. − 1,500 hrs.)
V M E V = $150 unfavorable
 Advantages of Standard Costs
• Standards can
• Standard costs
provide
are a key
benchmarks
element of the
that promote
management by
economy and
exception
efficiency.
approach.
Advantages
• Standards can
support
• Standards can responsibility
greatly simplify accounting
bookkeeping. systems.
 Potential Problems with Standard Costs

• Standard cost • If variances are

variance reports misused as a club
Potential to negatively
are usually Problems
prepared on a reinforce
monthly basis and employees, morale
may suffer, and
may contain
employees may
information that is make dysfunctional
outdated. decisions.
• Labor variances assume that the production process is
labor-paced and that labor is a variable cost. These
assumptions are often invalid in today’s automated
manufacturing environment where employees are
essentially a fixed cost.
 Potential Problems with Standard Costs

• Just meeting standards • In some cases, a

may not be sufficient; “favorable”
continuous Potential variance
improvement Problems can be as bad or
worse than an
may be necessary to unfavorable
survive in a competitive variance.
environment.
• Excessive emphasis on meeting the standards may
overshadow other important objectives such as maintaining
and improving quality, on-time delivery, and customer
satisfaction.