Exercises for the Course Cost and Management Accounting II

1. Tana’s Fish House is a family owned restaurant that specializes in Ethiopian style seafood. Budgeted data
concerning the restaurant’s monthly revenues and costs appear below:
Revenue $16.50 per food sold
Cost of ingredients $6.25 per food sold
Wages and Salaries $10,400
Utilities $800 + $0.20 per food sold
Rent $2,200
Miscellaneous $600 + $0.80 per food sold

The actual results for April appear below:

Revenue $27,920
Cost of ingredients $11,110
Wages and Salaries $10,130
Utilities $1,080
Rent $2,200
Miscellaneous $2,240
Required:
i. Prepare the restaurant’s static budget for April assuming that 1,800 foods are expected to be sold.
ii. Assume that 1,700 foods were actual sold in April. Prepare a flexible budget for this level of activity.
iii. Prepare a flexible budget and sales volume variances report for the restaurant for April.

2. Brabham Enterprises manufactures tires for the Formula I motor racing circuit. For August 2012, it
budgeted to manufacture and sell 3,000 tires at a variable cost of $74 per tire and total fixed costs of
$54,000. The budgeted selling price was $110 per tire. Actual results in August 2012 were 2,800 tires
manufactured and sold at a selling price of $112 per tire. The actual total variable costs were $229,600, and
the actual total fixed costs were $50,000.

Required:
i. Prepare a flexible budget and sales volume variances report.
ii. Comment on the results in requirement i.

3. O’Shea Company manufactures ceramic vases. It uses its standard costing system when developing its
flexible-budget amounts. In April 2012, 2,000 finished units were produced. The following information
relates to its two direct manufacturing cost categories: direct materials and direct manufacturing labor.

Direct materials used were 4,400 kilograms (kg). The standard direct materials input allowed for one output unit is
2 kilograms at $15 per kilogram. O’Shea purchased 5,000 kilograms of materials at $16.50 per kilogram, a total of
$82,500.

Actual direct manufacturing labor hours were 3,250, at a total cost of $66,300. Standard manufacturing labor time
allowed is 1.5 hours per output unit, and the standard direct manufacturing labor cost is $20 per hour.

Required:

i. Calculate the direct materials price variance and efficiency variance.

ii. Calculate the direct manufacturing labor price variance and efficiency variance.
iii. Calculate the flexible budget variance for direct materials and direct manufacturing labor.

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 4. Tuscany Statuary manufactures bust statues of famous historical figures. All statues are the same size. Each
unit requires the same amount of resources. The following information is from the static budget for 2011:
Expected production and sales………………..6,000 units
Direct materials………………………………..72,000 pounds
Direct manufacturing labor……………………21,000 hours
Total fixed costs………………………………$1,200,000

Standard quantities, standard prices, and standard unit costs follow for direct materials and direct manufacturing
labor:

Standard Quantity Standard Price Standard Unit Cost

Direct materials 12 pounds $10 per pound $120
Direct manufacturing labor 3.5 hours $50 per hour $175

During 2011, actual number of units produced and sold was 5,500. Actual cost of direct materials used was
$668,800, based on 70,400 pounds purchased at $9.50 per pound. Direct manufacturing labor hours actually used
were 18,500, at the rate of $51.50 per hour. As a result, actual direct manufacturing labor costs were $952,750.
Actual fixed costs were $1,180,000. There were no beginning or ending inventories.

Required:
i. Compute price and efficiency variances for direct materials and direct manufacturing labor.

5. Morro Bay Surfboards manufactures fiberglass surfboards. The standard cost of direct materials and direct
manufacturing labor is $225 per board. This includes 30 pounds of direct materials, at the budgeted price
of $3 per pound, and 9 hours of direct manufacturing labor, at the budgeted rate of $15 per hour. Following
are additional data for the month of July:
Units completed…………………... 5,500 units
Direct material purchases……………………. 190,000 pounds
Cost of direct material purchases...................... $579,500
Actual direct manufacturing labor-hours……... 49,000 hours
Actual direct labor cost………………………. $739,900
Direct materials efficiency variance………….. $ 1,500F

There were no beginning inventories.

Required:

i. Compute direct manufacturing labor variances for July.

ii. Compute the actual pounds of direct materials used in production in July.
iii. Calculate the actual price per pound of direct materials purchased.
iv. Calculate the direct materials price variance.

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 6. On May 1, 2012, Bovar Company began the manufacture of a new paging machine known as Dandy. The
company installed a standard costing system to account for manufacturing costs. The standard costs for a
unit of Dandy follow:
Direct materials (3 pound at $5 per pound)…………………………….. $15.00
Direct manufacturing labor (1/2 hour at $20 per hour)………………….. 10.00
Manufacturing overhead (75% of direct manufacturing labor costs)……. 7.50
$32.50

The following data were obtained from Bovar’s records for the month of May:
Debit Credit
Revenues $125,000
Accounts payable control (for May’s purchases of direct materials) 68,250
Direct materials price variance $3,250U
Direct materials efficiency variance 2,500U
Direct manufacturing labor price variance 1,900U
Direct manufacturing labor efficiency variance 2,000F

Actual production in May was 4,000 units of Dandy, and actual sales in May were 2,500 units. The amount shown
for direct materials price variance applies to materials purchased during May.
There was no beginning inventory of materials on May 1, 2012.

Required:
Compute each of the following items for Bovar for the month of May. Show your computations.
i. Standard direct manufacturing labor-hours allowed for actual output produced
ii. Actual direct manufacturing labor-hours worked
iii. Actual direct manufacturing labor wage rate
iv. Standard quantity of direct materials allowed (in pounds)
v. Actual quantity of direct materials used (in pounds)
vi. Actual quantity of direct materials purchased (in pounds)
vii. Actual direct materials price per pound

7. Mitchell Company uses a flexible budget for overhead based on direct labor hours (DLH). Master budget
figures, based on 900,000 direct labor hours, and actual overhead for March, when 80,000 labor hours
were worked, are as follows:

Master Budget March Actual

Variable:
Indirect Labor $ 225,000 $ 20,700
Indirect materials 1,350,000 119,000
Other 900,000 81,000
Fixed
Supervision 420,000 34,000
Depreciation 750,000 62,500
Other 600,000 52,000
Required: Prepare a flexible budget performance report for March.

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 8. Marron, Inc. produces the basic fillings used in many popular frozen desserts and treats—vanilla and
chocolate ice creams, puddings, meringues, and fudge. The ice cream product group’s results for June 2009
were:

Performance report, June 2009

Actual Static Budget
Results
Units 525,000 500,000
Revenue $ 3,360,000 $ 3,250,000
Variable manufacturing $ 1,890,000 $ 1,750,000
costs
Contribution margin $ 1,470,000 $ 1,500,000

Mr. Abera, the business manager for ice-cream products, is pleases that more units of ice cream were sold than
budgeted and that revenues were up. Unfortunately variable manufacturing costs went up too. The bottom line is
that contribution margin declined by $30,000, which is less than 1% of the budgeted revenues of $3,250,000.
Overall, Mr. Abera feels that the business is running fine.
Required:
i. Calculate the static-budget variance in units, revenues, variable manufacturing costs, and contribution
margin?
ii. Break down each static budget variance into a flexible-budget variance and a sales-volume variance.
iii. Calculate the selling price variance.

9. Peterson Food manufactures pumpkin scones. For January 2009, it budgeted to purchase and use 15,000
pounds of pumpkin at $0.89 a pound. Actual purchases and usage for January 2009 were 16,000 pounds at
$0.82 a pound. It budgets for 60,000 pumpkin scones. Actual output was 60,800 pumpkin scones.
Required:
i. Compute the flexible budget variance
ii. Compute the price and efficiency variances
iii. Comment on the above results and provide a possible explanation for them.

10. A piano teacher has budgeted fixed costs of $1,250 per month, and budgeted variable costs of $1,200 per
month, where variable costs are a linear function of the number of one-hour piano lessons. The piano
teacher expected to give 120 one-hour piano lessons in April, but actually gave 150 one-hour piano lessons
in April. Actual fixed costs were $1,000 and actual variable costs were $1,500. What is the flexible budget
variance for April? Is it favorable or unfavorable?

11. Using a flexible budget to accommodate market uncertainty According to its original plan, Katta Consulting
Services Company would charge its customers for service at $200 per hour in 2006. The company
president expects consulting services provided to customers to reach 40,000 hours at that rate. The
marketing manager, however, argues that actual results may range from 35,000 hours to 45,000 hours
because of market uncertainty. Katta’s standard variable cost is $90 per hour, and its standard fixed cost is
$3,000,000.Develop flexible budgets based on the assumptions of service levels at 35,000 hours, 40,000
hours, and 45,000 hours.

12. Dominic Company has budgeted fixed overhead of $150,000 based on budgeted production of 5,000 units.
During October, 4,800 units were produced and $157,600 was spent on fixed overhead.
i. What was the fixed overhead spending variance?
ii. What was the fixed overhead production volume variance?

13. A company's static budget estimate of total overhead costs was $400,000 based on the assumption that
20,000 units would be produced and sold. The company estimates that 30% of its overhead is variable and
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 the remainder is fixed. What would be the total overhead cost according to the flexible budget if 24,000
units were produced and sold?

14. Assume the following information for the Chestnut Ridge Dog Kennel for 2004

Budgeted Actual
Number of dogs cared 50 60
for
Fixed Costs $40,000 $45,000
Variable Cost
Food $20,000 $21,000
Supplies $10,000 $13,200
Total Cost $70,000 $79,200
Required:
i. Calculate a flexible budget for 2004.
ii. Calculate the flexible budget variance for each of the three expense line-items for 2004, and indicate
whether the variance is favorable or unfavorable.

15. Nina Garcia is the newly appointed president of Laser Products. She is examining the May 2012 results for
the Aerospace Products Division. This division manufactures wing parts for satellites. Garcia’s current
concern is with manufacturing overhead costs at the Aerospace Products Division. Both variable and fixed
overhead costs are allocated to the wing parts on the basis of laser-cutting-hours. The following budget
information is available:
Budgeted variable overhead rate…………………………………… $200 per hour
Budgeted fixed overhead rate………………………………………… $240 per hour
Budgeted laser-cutting time per wing part……………………… 1.5 hours
Budgeted production and sales for May 2012…………………. 5,000 wing parts
Budgeted fixed overhead costs for May 2012………………….. $1,800,000
Actual results for May 2012 are as follows:
Wing parts produced and sold…………………………………………. 4,800 units
Laser-cutting-hours used………………………………………………… 8,400 hours
Variable overhead costs…………………………………………………... $1,478,400
Fixed overhead costs………………………………………………………... $1,832,200
i. Compute the spending variance and the efficiency variance for variable overhead.
ii. Compute the spending variance and the production-volume variance for fixed overhead.
iii. Give two explanations for each of the variances calculated in requirements i and ii.

16. Louisville Corporation produces baseball bats for kids that it sells for $32 each. At capacity, the company
can produce 50,000 bats a year. The costs of producing and selling 50,000 bats are as follows:
Cost per Bat Total Costs
Direct materials $12 $ 600,000
Direct manufacturing labor 3 150,000
Variable manufacturing overhead 1 50,000
Fixed manufacturing overhead 5 250,000
Variable selling expenses 2 100,000
Fixed selling expenses 4 200,000
Total costs $27 $1,350,000
Required: Suppose Louisville is currently producing and selling 40,000 bats. At this level of production and sales,
its fixed costs are the same as given in the preceding table. Ripkin Corporation wants to place a one-time special
order for 10,000 bats at $25 each. Louisville will incur no variable selling costs for this special order. Should
Louisville accept this one-time special order? Show your calculations.

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 17. Benjamin Company produces products C, J, and R from a joint production process. Each product may be
sold at the split-off point or processed further. Joint production costs of $95,000 per year are allocated to
the products based on the relative number of units produced. Data for Benjamin's operations for last year
follow:
Additional sales values and costs if
processed further
Product Units Sales values at
Produced split-off Sales values Added costs
C 6,000 $75,000 $100,000 $20,000
J 9,000 $70,000 $115,000 $36,000
R 4,000 $46,500 $55,000 $10,000
Required: Which products should be processed beyond the split-off point?

18. Soda-King manufactures and sells three soft drinks: Kola, Limor, and Orlem. Budgeted and actual results for
2011 are as follows:
Budget for 2011 Actual for 2011
Product Selling Variable Cost Cartons Selling Variable Cost Cartons
Price per Carton Sold Price per Carton Sold
Kola $8.00 $5.00 480,000 $8.20 $5.50 467,500
Limor $6.00 $3.80 720,000 $5.75 $3.75 852,500
Orlem $7.50 $5.50 1,200,000 $7.80 $5.60 1,430,000
Required:
i. Compute the total sales-volume variance, the total sales-mix variance, and the total sales-quantity
variance. (Calculate all variances in terms of contribution margin.) Show results for each product in
your computations.
ii. What inferences can you draw from the variances computed in requirement i?

19. Market-share and market-size variances (continuation of question 18).Soda-King prepared the budget for
2011 assuming a 12% market share based on total sales in the western region of the United States. The
total soft drinks market was estimated to reach sales of 20 million cartons in the region. However, actual
total sales volume in the western region was 27.5 million cartons.

Required: Calculate the market-share and market-size variances for Soda-King in 2011. (Calculate all variances in
terms of contribution margin.) Comment on the results.

20. Awash Co. manufactures and sells trophies for winners of athletic and other events. Its manufacturing plant has
the capacity to produce 16,000 trophies each month; current monthly production is 12,800 trophies. The company
normally charges $115 per trophy. Cost data for the current level of production are shown below:
Variable costs:
Direct materials .......................... $614,400
Direct labor ................................. $256,000
Selling and administrative .......... $35,840
Fixed costs:
Manufacturing ............................ $294,400
Selling and administrative .......... $94,720

The company has just received a special one-time order for 1,200 trophies at $61 each. For this particular order, no
variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.

Required: Should the company accept this special order?

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 21. Nature’s Best Nuts produces specialty nut products for the gourmet and natural foods market. Its most popular
product is Zesty Zingers, a mixture of roasted nuts that are seasoned with a secret spice mixture, and sold in one
pound tins. The direct materials used in Zesty Zingers are almonds, cashews, pistachios, and seasoning. For each
batch of 100 tins, the budgeted quantities and budgeted prices of direct materials are as follows:

Quantity for One Batch Price of Input

Almonds $1 per cup
180 cups
Cashews
300 cups $2 per cup
Pistachios
90 cups $3 per cup
Seasoning
30 cups $6 per cup

Changing the standard mix of direct material quantities slightly does not significantly affect the overall end product,
particularly for the nuts. In addition, not all nuts added to production end up in the finished product, as some are rejected
during inspection.

In the current period, Nature’s Best made 2,500 tins of Zesty Zingers in 25 batches with the following actual quantity, cost
and mix of inputs:

Actual Quantity Actual Cost Actual Mix

Almonds $ 5,280 33%
5,280 cups
Cashews
7,520 cups 15,040 47%
Pistachios
2,720 cups 8,160 17%
Seasoning
480 cups 2,880 3%
Total Actual
16,000cups $31,360 100%

Required:
i. What is the budgeted cost of direct materials for the 2,500 tins?
ii. Calculate the total direct materials efficiency variance.
iii. Why is the total direct materials price variance zero?
iv. Calculate the total direct materials mix and yield variances. What are these variances telling you about the
2,500 tins produced this period?

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