Cost Accounting A Managerial Emphasis 2nd Edition Horngren Solutions Manual

Cost Accounting A Managerial
Emphasis 2nd Edition Horngren

Solutions Manual
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Chapter 11
FLEXIBLE BUDGETS, DIRECT-COST VARIANCES
AND MANAGEMENT CONTROL
11-1 Management by exception is the practice of concentrating on areas not operating as
expected and giving less attention to areas operating as expected. Variance analysis helps
managers identify areas not operating as expected. The larger the variance, the more likely
an area is not operating as expected.
11-2 Two sources of information about budgeted amounts are (a) past amounts and (b)
detailed engineering studies.
11-3 Ideal standards may create unrealistic expectations that demotivate employees who
feel they cannot achieve them. If used for planning they may create faulty expectations
about how much raw material and labour needs to be available. On the other hand, ideal
standards can highlight that there is still room for improvement; practical standards can
impose a ‘glass-ceiling’.
11-4 The key difference is the output level used to set the budget. A static budget is
based on the level of output planned at the start of the budget period. A flexible budget is
developed using budgeted revenues or cost amounts based on the actual output level in the
budget period. The actual level of output is not known until the end of the budget period.
11-5 A flexible-budget analysis enables a manager to distinguish how much of the

difference between an actual result and a budgeted amount is due to (a) the difference
between actual and budgeted output levels, and (b) the difference between actual and
budgeted selling prices, variable costs, and fixed costs.
11-6 The steps in developing a flexible budget are:
Step 1: Identify the actual quantity of output.

Step 2: Calculate the flexible budget for revenues based on budgeted selling price and
actual quantity of output.
Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output
unit, actual quantity of output, and budgeted fixed costs.
Copyright © 2014 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 1
– 9781442563377/Horngren/Cost accounting/2e
11-7 Four reasons for using standard costs are:
(i) cost management,
(ii) pricing decisions,
(iii) budgetary planning and control, and
(iv) financial statement preparation
11-8 A manager should subdivide the flexible-budget variance for direct materials into a
price variance (that reflects the difference between actual and budgeted prices of direct
materials) and an efficiency variance (that reflects the difference between the actual and
budgeted quantities of direct materials used to produce actual output). The individual
causes of these variances can then be investigated, recognising possible interdependencies
across these individual causes.
11-9 Possible causes of a favourable direct materials price variance are:

• purchasing officer negotiated more skilfully than was planned in the budget,
• purchasing manager bought in larger lot sizes than budgeted, thus obtaining
quantity discounts,
• materials prices decreased unexpectedly due to, say, industry oversupply, and
• budgeted purchase prices were set without careful analysis of the market.
11-10 Some possible reasons for an unfavourable direct manufacturing labour efficiency
variance are the hiring and use of under skilled workers; inefficient scheduling of work so
that the workforce was not optimally occupied; poor maintenance of machines resulting in a
high proportion of non-value-added labour; unrealistic time standards. Each of these factors
would result in actual direct manufacturing labour-hours being higher than indicated by the
standard work rate.
11-11 Variance analysis, by providing information about actual performance relative to

standards, can form the basis of continuous operational improvement. The underlying
causes of unfavourable variances are identified and corrective action taken where possible.
Favourable variances can also provide information if the organisation can identify why a
favourable variance occurred. Steps can often be taken to replicate those conditions more
often. As the easier changes are made, and perhaps some standards tightened, the harder
issues will be revealed for the organisation to act on—this is continuous improvement.
11-12 An individual business function, such as production, is interdependent with other

business functions. Factors outside of production can explain why variances arise in the
production area. For example:
• Poor design of products or processes can lead to a sizable number of defects,
• Marketing personnel making promises for delivery times that require a large
number of rush orders can create production-scheduling difficulties, and
• Purchase of poor-quality materials by the purchasing manager can result in
defects and waste.
11-13 The plant supervisor likely has good grounds for complaint if the plant accountant
puts excessive emphasis on using variances to pin blame. The key value of variances is to
help understand why actual results differ from budgeted amounts and then to use that
knowledge to promote learning and continuous improvement.
11-14 Many actions that managers may take will have positive and negative effects. For
example, the decision to purchase cheaper raw materials or hire less-skilled employees may
result in favourable price variances. If, however, material usage and labour efficiency
decreases the unfavourable variances may be greater than the favourable, indicating that
the net effect of the decision was negative. The reverse is also possible, where unfavourable
material price or labour rate variances may be more than offset by related favourable
material usage and labour efficiency variances. So the managers should not evaluate
variances in isolation.
11-15 Evidence on the costs of other companies is one input managers can use in setting
the performance measure for next year. However, caution should be taken before choosing
such amount as next year's performance measure. It is important to understand why cost
differences across companies exist and whether these differences can be eliminated. It is
also important to examine when planned changes (in, say, technology) next year make
even the current low-cost producer not a demanding enough hurdle.
11-16 Using the levels approach introduced, the sales-volume variance is a Level 2
variance. By sequencing through Level 3 (sales-mix and sales-quantity variances) and then
Level 4 (market-size and market-share variances), managers can gain insight into the
causes of a specific sales-volume variance caused by changes in the mix and quantity of the
products sold as well as changes in market size and market share.
11-17 The total sales-mix variance arises from differences in the budgeted contribution
margin of the actual and budgeted sales mix. The composite unit concept enables the effect
of individual product changes to be summarised in a single intuitive number by using
weights based on the mix of individual units in the actual and budgeted mix of products
sold.
11-18 A favourable sales-quantity variance arises because the actual units of all products
sold exceed the budgeted units of all products sold.
11-19 The sales-quantity variance can be decomposed into (a) a market-size variance
(because the actual total market size in units is different from the budgeted market size in
units), and (b) a market-share variance (because the actual market share of a company is
different from the budgeted market share of a company). Both variances use the budgeted
average contribution margin per unit.
11-20 The direct materials efficiency variance is a Level 3 variance. Further insight into this
variance can be gained by moving to a Level 4 analysis where the effects of mix and yield
changes are quantified. The mix variance captures the effect of a change in the relative
percentage use of each input relative to that budgeted. The yield variance captures the
effect of a change in the total number of inputs required to obtain a given output relative to
that budgeted.
11-21 Flexible budget
1.
Performance report for Kindle Ltd for August:
Flexible-
Actual Budget Flexible Sales-Volume
Results Variances Budget Variances Static Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Units g g
(speakers) sold 1 800 0 1 800 200 U 2 000
a b c
Revenues A$237 600 A$14 400 U A$252 000 A$28 000 U A$280 000
d e f
Variable costs 160 200 19 800 U 140 400 15 600 F 156 000
Contribution
margin 77 400 34 200 U 111 600 12 400 U 124 000
g g g
Fixed costs 89 000 9 000 F 98 000 0 98 000
Operating profit A$(11 600) A$25 200 U A$13 600 A$ 12 400 U A$26 000
A$25 200 U A$12 400 U
Total flexible-budget variance Total sales-volume variance
A$37 600 U
Total static-budget variance
a
A$132 ×1800 = A$237 600
b
A$140 × 1800 = A$252 000
c
A$140 × 2000 = A$280 000
d
Given. Unit variable cost = A$160 200 ÷ 1800 = A$89.00 per speaker
e
A$78 × 1800 = A$140 400
f
A$78 × 2000 = A$156 000
g
Given
2. The key information items are:
Actual Budgeted
Units 1 800 2 000
Unit selling price A$132 A$ 140
Unit variable cost A$89.00 A$ 78
Fixed costs A$89 000 A$98 000
The total static-budget variance in operating profit is A$37 600 U. There is both an
unfavourable total flexible-budget variance (A$25 200) and an unfavourable sales-volume
variance (A$12 400).
The unfavourable sales-volume variance arises solely because actual units manufactured
and sold were 200 less than the budgeted 2000 units. The unfavourable flexible-budget
variance of A$25 200 is due to the A$11.00 increase in unit variable costs and A$8 decrease
in unit selling price. This is only partially offset by the 200 lesser unit produced and the
A$9000 decrease in fixed costs.
11-22 Flexible budget
The existing performance report is a Level 1 analysis based on a static budget. It makes no
adjustment for changes in output levels. The budgeted output level is 10 000 units—direct
materials of A$650 000 in the static budget ÷ budgeted direct materials cost per jacket case
of A$65.
The following is a Level 2 analysis that presents a flexible-budget variance and a sales-
volume variance of each direct cost category.
Variance Analysis for Nephine Ltd

Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (4) = (3) – (5)
(3) (5)
Output units 7 500 0 7 500 2 500 U 10 000a
Direct materials A$635 500 A$148 000 U A$487 500 A$162 500 F A$650 000
Direct
manufacturing
labour 152 500 17 500 U 135 000 45 000 F 180 000
Direct marketing
labour 105 000 15 000 F 90 000 30 000 F 120 000
Total direct costs A$893 000 A$150 500 U A$712 500 A$237 500 F A$950 000
A$180 500 U A$237 500 F

Flexible-budget variance Sales-volume variance
A$57 000 F
Static-budget variance
Note the static budgeted output can be determined based on the static budget amounts.
a
The Level 1 analysis shows total direct costs have a A$237 500 favourable variance.
However, the Level 2 analysis reveals that this favourable variance is due to the reduction in
output of 2500 units from the budgeted 10 000 units. Once this reduction in output is taken
into account (via a flexible budget) the flexible-budget variance shows each direct materials
and direct manufacturing labour both have an unfavourable variance indicating less efficient
use of each direct cost item than was budgeted or the use of more costly direct cost items
than was budgeted or both. The Direct materials variance is particularly large.
These variances are also reflected in the actual unit variable costs compared with the
budgeted unit costs:
Actual Budgeted
Units 7 500 10 000
Direct materials A$ 84.73 A$ 65.00
Direct manufacturing labour A$ 20.33 A$ 18.00
Direct marketing labour A$ 14.00 A$ 12.00
Analysis of price and efficiency variances for each cost category could assist further in
identifying causes of these more aggregated (Level 2) variances.
11-23 Flexible-budget preparation and analysis
Variance Analysis for StarDates Ltd for September:
1. Level 1 Analysis:
Static-
Budget
Actual Variances Static
Results (2) = (1) – Budget
(1) (3) (3)
Units sold 19 500 4 000 U 25 000
Revenue A$302 250
a
A$ 147 750 U A$450 000
c
Variable costs 185 250

d
77 250 F 262 500
f
Contribution margin 117 000 70 500 U 187 500

Fixed costs 95 000 10 000 F 105 000
Operating profit A$ 22 000 A$ 60 500 U A$ 82 500
A$60 500 U
2. Level 2 Analysis:
Flexible- Sales
Budget Volume
Actual Variances Flexible Variances Static
Results (2) = (1) – Budget (4) = (3) – Budget
(1) (3) (3) (5) (5)
Units sold 19 500 0 19 500 5 500 U 25 000
a b c
Revenue A$302 250 A$48 750 U A$351 000 A$99 000 U A$450 000
Variable
d e f
costs 185 250 19 500 F 204 750 57 750 F 262 500
Contribution
margin 117 000 29 250 U 146 250 41 250U 187 500
Fixed costs 95 000 10 000 F 105 000 0 105 000
Operating
profit A$22 000 A$19 250 U A$41 250 A$41 250 U A$82 500
A$19 250 F A$41 250 U
Total flexible-budget Total sales-volume

variance variance
A$60 500 U
a d
19 500 × A$15.5 = A$302 250 19 500 × A$9.5 = A$185 250
b e
19 500 × A$18 = A$351 000 19 500 × A$10.5 = A$204 750
c f
25 000 × A$18 = A$450 000 25 000 × A$10.5 = A$262 500
3. Level 2 analysis breaks down the static-budget variance into a flexible-budget
variance and a sales-volume variance. The primary reason for the static-budget variance
being unfavourable (A$60 500 U) is the reduction in unit volume from the budgeted 25 000
to an actual 19 500. This is despite the reduction in selling price from a budgeted A$18 to
an actual A$15.50. Operating management was able to reduce variable costs by A$19 500
relative to the flexible budget. This reduction could be a sign of efficient management.
Alternatively, it could be due to using lower quality materials (which in turn adversely
affected unit volume).
11-24 Flexible budget, working backwards
1. Variance analysis for Aspects Ltd for the year ended December 31, 2015
Flexible-
Actual Budget Flexible Sales- Static
Results Variances Budget Volume Budget
(1) (2)=(1)−(3) (3) Variances (5)
(4)=(3)−(5)
Units sold 130 000 0 130 000 5 000 F 125 000
Revenues $715 000 A$278 200 F A$436 800a A$16 800 F A$420 000
Variable costs 515 000 265 400 U 249 600b 9 600 U 240 000
Contribution
margin 200 000 12 800 F 187 200 7 200 F 180 000
Fixed costs 140 000 20 000 U 120 000 0 120 000
Operating profit A$60 000 A$7 200 U A$67 200 A$7 200 F A$60 000
A$7200 U A$7200 F
Total flexible-budget variance Total sales volume variance

A$0
a
130 000 × A$3.36 = A$436 800; A$420 000  125 000 = A$3.36
b
130 000 × A$1.92 = A$249 600; A$240 000  125 000 = A$1.92
2. Actual selling price: A$715 000  130 000= A$5.50

Budgeted selling price: 420 000 ÷ 125 000= A$3.36
Actual variable cost per unit: 515 000 ÷ 130 000= A$3.96
Budgeted variable cost per unit: 240 000 ÷ 125 000= A$1.92
3. A zero total static-budget variance may be due to offsetting total flexible-budget and
total sales-volume variances. In this case, these two variances exactly offset each other:
Total flexible-budget variance A$7200 Unfavourable

Total sales-volume variance A$7200 Favourable
A closer look at the variance components reveals some major deviations from plan. Actual
variable costs increased from A$1.92 to A$3.96, causing an unfavourable flexible-budget
variable cost variance of A$265 400. Such an increase could be a result of, for example, a
jump in direct material prices. Aspects was able to pass most of the increase in costs onto
their customers—actual selling price increased by 63.7% [(A$5.50 – A$3.36)  A$3.36],
bringing about an offsetting favourable flexible-budget revenue variance in the amount of
A$278 200. An increase in the actual number of units sold also contributed to more
favourable results.
The company should examine why the units sold increased despite an increase in direct
material prices. For example, Aspects’ customers may have stocked up, anticipating future
increases in direct material prices. Alternatively, Aspects’ selling price increases may have
been lower than competitors’ price increases. Understanding the reasons why actual results
differ from budgeted amounts can help Aspects better manage its costs and pricing
decisions in the future. The important lesson learned here is that a superficial examination
of summary level data (Levels 0 and 1) may be insufficient. It is imperative to scrutinise
data at a more detailed level (Level 2). Had Aspects not been able to pass costs on to
customers, losses would have been considerable.
11-25 Flexible-budget and sales-volume variance
1. and 2.
Performance Report for Glenwood Pty Ltd June 2015

Actual Flexible Flexible Sales Volume Static
(1) Budget Budget Variances Budget
Variances (3) (4) = (3) – (5) (5)
(2) = (1) – (3)
Units
(kilograms) 525 000 - 525 000 25 000 F 500 000
Revenues A$3 360 000 A$ 52 500 U A$3 412 500a A$162 500 F A$3 250 000
Variable
mfg costs 1 890 000 52 500 U 1 837 500b 87 500 U 1 750 000
Contribution
margin A$1 470 000 A$105 000 U A$1 575 000 A$ 75 000 F A$1 500 000
A$105 000 U A$75 000 F

Flexible-budget Sales-volume
Variance Variance
A$30 000 U
Performance Report for Glenwood Pty Ltd June 2015

Static Static Budget
Budget Variance Variance as
(6) = (1) – (5) % of Static
Budget
(7) = (6)  (5)
Units
(kilograms) 25 000 F 5.0%
Revenues A$110 000 F 3.4%
Variable
mfg costs 140 000 U 8.0%
Contribution
margin A$ 30 000 U 2.0%
a
Budgeted selling price = A$3 250 000  500 000 kgs = A$6.50 per kg.
Flexible-budget revenues = A$6.50 per kg.  525 000 kgs. = A$3 412 500
b
Budgeted variable mfg cost per unit = A$1 750 000  500 000 kgs. = A$3.50
Flexible-budget variable mfg costs = A$3.50 per kg.  525 000 kgs. = A$1 837 500
3. The selling-price variance, caused solely by the difference in actual and budgeted
selling price, is the flexible-budget variance in revenues = A$52 500 U.
4. The flexible-budget variances show that for the actual sales volume of
525 000 kilograms, selling prices were lower and costs per kilogram were higher. The
favourable sales volume variance in revenues (because more kilograms of curd were sold
than budgeted) helped offset the unfavourable variable cost variance and shored up the
results in June 2015. Knox should be more concerned because the small static-budget
variance in contribution margin of A$30 000 U is actually made up of a favourable sales-
volume variance in contribution margin of A$75 000, an unfavourable selling-price variance
of A$52 500 and an unfavourable variable manufacturing costs variance of A$52 500. Knox
should analyse why each of these variances occurred and the relationships among them.
Could the efficiency of variable manufacturing costs be improved? Did the sales volume
increase because of a decrease in selling price or because of growth in the overall market?
Analysis of these questions would help Knox decide what actions he should take.
11-26 Price and efficiency variances
1. The key information items are:

Actual Budgeted
Output units (scones) 49 000 52 000
Input units (kg of pumpkin) 1 900 2 000
Cost per input unit A$1.35 A$0.93
The standard quantity of pumpkin per scone is 0.03846kg (2000 ÷ 52 000)
Flexible- Sales-
Budget Volume
Actual Variance Flexible Variance Static
Results (2) = (1) – Budget (4) = (3) Budget
(1) (3) (3) – (5) (5)
a b c
Pumpkin costs A$2 565 A$812.31 U A$1 752.69 A$107.31 F A$1 860
a
1900 × A$1.35 = A$2565
b
49 000 × 0.0384615 × A$0.93 = A$1752.69
c
52 000 x 0.0384615 × A$0.93 = A$1860
2.
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty Allowed for
(Actual Input Qty Actual Input Qty Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
a b c
A$2 565 A$1 767.00 A$1 752.69
A$798 U A$14.31 U
Price variance Efficiency variance
A$812.31 U
Flexible-budget variance
a
1900 × A$1.35 = A$2565
b
1900 × A$0.93 = A$1767
c
49 000 × 0.038461538 × A$0.93 = A$1752.69
3. The unfavourable flexible-budget variance of A$812.31 has two components:
(a) Unfavourable price variance of A$798—reflects the A$1.35 actual purchase

cost being higher than the A$0.93 budgeted purchase cost per kilogram.
(b) Unfavourable efficiency variance of A$14.31—reflects the actual materials

yield of 25.79 scones per kilogram of pumpkin (49 000 ÷ 19 00 = 25.789)
being less than the budgeted yield of 26.00 (52 000 ÷ 2000 = 26.00). The
company used more pumpkins (materials) to make the scones than was
budgeted.
One explanation may be that the wet month affected the supply of good quality pumpkins.
This may have led to a slightly lower quality of pumpkins with more waste, at a significantly
higher price.
11-27 Materials and manufacturing labour variances
Actual Costs Flexible Budget

Incurred (Budgeted Input
(Actual Input Qty Allowed for
Qty Actual Input Qty Actual Output
× Actual × Budgeted × Budgeted
Price) Price Price)
Direct A$156 000 A$135 000 A$161 000
Materials
A$21 000 U A$26 000 F

A$5000 F
Direct manufacturing labour:
A$72 000 A$81 000 A$69 000

A$9000 F A$12 000 U
A$3000 U
11-28 Direct materials and direct manufacturing labour
1.
Price Actual Efficiency
Actual Variance Quantity  Variance Flexible
Results (2) = Budgeted (4) = Budget
May 2014 (1) (1)–(3) Price (3) (3) – (5) (5)
Units 1 050 1 050
Direct
materials A$42 210.00 A$1 890.00 F A$44 100.00a A$2 756.25 U A$41 343.75b
Direct labour A$25 200.00 A$ 525.00 U A$24 675.00c A$6 168.75 F A$30 843.75d
Total price
variance A$1 365.00 F
Total efficiency
a
2520 metres  A$17.50 per metre = A$44 100
b
1050 wetsuits  2.25 metres per lot  A$17.50 per metre = A$41 343.75
c
1050 hours  A$23.50 per hour = A$24 675
d
1050 wetsuits  1.25 hours per wetsuit  A$23.50 per hour = A$30 843.75
Total flexible-budget variance for both inputs = A$1365.00F + A$3412.50F

= A$4777.50F
Total flexible-budget cost of direct materials and direct labour = A$41 343.75 +
A$30 843.75
= A$72 187.50
Total flexible-budget variance as % of total flexible-budget costs = A$4777.50 

A$72 187.50
= 6.618%
2.
Price Actual Efficiency

Actual Variance Quantity  Variance Flexible
May Results (2) = Budgeted (4) = Budget
2015 (1) (1) – (3) Price (3) (3) – (5) (5)
Units 1050 1050
Direct
materials A$39 297.51a A$3 920.49 F A$43 218b A$1 874.25 U A$41 343.75c
Direct
manuf.
labour A$ 24 696.00d A$ 514.50 U A$24 181.50e A$6 662.25 F A$30 843.75c
Total price
Total
efficiency
variance A$4 788 F
a
Actual dir. mat. Cost, May 2015 = Actual dir. mat. Cost, May 2014  0.98  0.95 =
A$42 210  0.98  0.95 = A$39 297.51
Alternatively, actual dir. mat. Cost, May 2015
= (Actual dir. mat. quantity used in May 2014  0.98)  (Actual dir. mat. price in May 2014  0.95)
= (2520 metres  0.98)  (A$16.75/metre  0.95)
= 2469.60  A$15.9125 = A$39 297.51
b
(2520 metres  0.98)  A$17.50 per metre = A$43 218
c
Unchanged from 2014.
d
Actual dir. labour cost, May 2015 = Actual dir. manuf. cost May 2014  0.98 =
A$25 200.00  0.98 = A$24 696.00
Alternatively, actual dir. labour cost, May 2015
= (Actual dir. manuf. labour quantity used in May 2014  0.98)  Actual dir. labour price in 2014
= (1050 hours  0.98)  A$24.00 per hour
= 1029.00 hours  A$24.00 per hour = A$24 696.00
e
(1050 hours  0.98)  A$23.50 per hour = A$24 181.50
Total flexible-budget variance for both inputs = A$3405.99 F + A$4788 F

= A$8193.99 F
Total flexible-budget cost of direct materials and direct labour = A$41 343.75 +
A$30 843.75
= A$72 187.50
Total flexible-budget variance as % of total flexible-budget costs = A$8193.99 

A$72 187.50
= 11.35%
3. Efficiencies have improved in the direction indicated by the production manager—but

it is unclear whether they are a trend or a one-time occurrence. Overall, variances are
11.35% of flexible input budget. Maroochy should continue to use the new material.
• The new material costs substantially less than budget (A$17.50 in 2014 and
A$15.9125 in 2015 is A$1.5875 per metre). Its price is unlikely to come down
even more within the coming year. Standard material price should be re-
examined and possibly changed.
• Maroochy should continue to work to reduce direct materials and direct
manufacturing labour content. The reductions from May 2014 to May 2015 are a
good development and should be encouraged. Once again, the standards should
be changed to ‘lock-in’ the new efficiencies.
11-29 Price and efficiency variances, journal entries
1. Direct materials and direct manufacturing labour are analysed in turn:
Flexible Budget
Purchases Usage
Direct (35 000 × A$3.10a) (35 000 × A$2.75) (32 760 × A$2.75) (4 550 × 6.5 × A$2.75)
Materials A$108 500 A$96 250 A$90 090 A$81 331.25
A$12 250 U A$8758.75 U

Direct (4 550 × 1.2 × A$25.50)

Manuf. (5 600 × A$27.50b) (5 600 × A$25.50) or
Labour A$154 000 A$142 800 (5 460 × A$25.50)
A$139 230
A$11 200 U A$3570 U

a
A$108 500 ÷ 35 000 = A$3.10
b
A$154 000 ÷ 5600 = A$27.50
2. Direct Materials Control 96 250

Direct Materials Price Variance 12 250
Accounts Payable or Cash Control 108 500
Work-in-Process Control 81 331.25

Direct Materials Efficiency Variance 8 758.75
Direct Materials Control 90 090.00
Work-in-Process Control 139 230

Direct Manuf. Labour Price Variance 11 200
Direct Manuf. Labour Efficiency Variance 3 570
Wages Payable Control 154 000
3. The direct labour price variance is unfavourable, as is the labour efficiency variance;
the combined effect is A$14 770 U. The material price and efficiency variances are also
unfavourable (A$12 250 and A$8758.75. respectively for a total of A$21 008.75).
4. The purchasing point is where responsibility for price variances is most often found.
The production point is where responsibility for efficiency variances is most often found.
Wangaratta Ltd may calculate variances at different points in time to tie in with these
different responsibility areas. Furthermore, determining the price variance based on
purchase quantity identifies the variance more quickly so that it can be tracked to specific
purchase decisions.
11-30 Materials and manufacturing labour variances, standard costs
1. Direct materials:
Flexible Budget
= (1 800 × 2 × A$10.00)
(3 780 kg × = (3 780 kg × A$10.00) = (3 600 kg × A$10.00)
A$10.35) = A$37 800 = A$36 000
A$39 123
A$1323 U A$1800 U
A$3123 U
The unfavourable materials price variance may be unrelated to the unfavourable materials
efficiency variance. For example, (a) the purchasing officer may be less skilful than assumed
in the budget, or (b) there was an unexpected increase in materials price per metre due to
reduced competition. Similarly, the unfavourable materials efficiency variance may be
unrelated to the unfavourable materials price variance. For example, (a) the production
manager may have employed less-skilled workers, or (b) the budgeted materials standards
were set too difficult. It is also possible that the two variances are interrelated. A new
supplier may be more expensive and provide materials of lower quality.
Direct Manufacturing Labour:
Flexible Budget
(1 800 × 0.5 × A$15.00)
(810 hrs. × A$16.50) (810 hrs. × A$15.00) (900 hrs. × A$15.00)
A$13 365 A$12 150 A$13 500
A$1215 U A$1350 F
A$135 F
The unfavourable labour price variance may be due to, say, (a) an increase in labour rates
or (b) the standard being set without detailed analysis of labour compensation, or an
increase in overtime during the period. The favourable labour efficiency variance may be
due to, say, (a) more efficient workers being employed, (b) a redesign in the plant enabling
labour to be more productive, or (c) the use of higher quality materials (although the
unfavourable material usage variance is inconsistent with higher quality). A possible
explanation for both unfavourable material usage and the favourable labour efficiency
variances is that employees are working more quickly, with less regard to using materials
efficiently. The net effect (A$1350 F – 1800 U) would suggest that employees would be
better to spend more time and use materials more efficiently.
2.
Flexible
Budget
(Budgeted
Input
Qty Allowed
Actual Costs for
Incurred Actual Output
Control (Actual Input Qty Actual Input Qty × Budgeted
Point × Actual Price) × Budgeted Price Price)
Purchasing (6 000 kgs× A$10.35) (6 000 kgs × A$10.00)
= A$62 100 = A$60 000
A$2100 U
Price variance
Production (3780 kg.× A$10.00) (1800 × 2 ×

= A$37 800 A$10.00)
= A$36 000
A$1800 F
Efficiency variance
Direct manufacturing labour variances are the same as in requirement 1.
11-31 Journal entries and T-accounts (continuation of 11-30)
For requirement 1 from Exercise 11-30:
a. Direct Materials Control 37 800

Accounts Payable Control 39 123
To record purchase of direct materials.
b. Work-in-Process Control 36 000

Direct Materials Efficiency Variance 1 800
Direct Materials Control 37 800
To record direct materials used.
c. Work-in-Process Control 13 500

Direct Manufacturing Labour Price Variance 1 215
Direct Manufacturing Labour Efficiency Variance 1 350
Wages Payable Control 13 365
To record liability for and allocation of direct labour costs
Direct Direct Materials Direct Materials

Materials Control Price Variance Efficiency Variance
(a) 37 800 (b) 37 800 (a) 1 323 (b) 1 800
Direct Manufacturing Direct Manuf. Labour
Work-in-Process Control Labour Price Variance Efficiency Variance
(b) 36 000 (c) 1 215 (c) 1 350
(c) 13 500
Wages Payable Control Accounts Payable Control

(c) 13 365 (a) 39 123
For requirement 2 from Exercise 11-30:
The following journal entries pertain to the measurement of price and efficiency variances
when 6000 kgs of direct materials are purchased:
a1. Direct Materials Control 60 000

Accounts Payable Control 62 100
To record direct materials purchased.
a2. Work-in-Process Control 36 000

Direct Materials Control 37 800
Direct Materials Efficiency Variance 1 800
To record direct materials used.
Direct Materials
Direct Price Variance
Materials Control
(a1) 60 000 (a2) 36 000 (a1) 2 100
Accounts Payable Control Work-in-Process Control

(a1) 62 100 (a2) 37 000
Direct Materials
Efficiency Variance
(a2) 1 000
The T-account entries related to direct manufacturing labour are the same as in
requirement1. The difference between standard costing and normal costing for direct cost
items is:
Standard Costs Normal Costs

Direct Costs Standard price(s) Actual price(s)
× Standard input × Actual input
allowed for actual
outputs achieved
These journal entries differ from the normal costing entries because work-in-process control
is no longer carried at ‘actual’ costs. Furthermore, direct materials control is carried at
standard unit prices rather than actual unit prices. Finally, variances appear for direct
materials and direct manufacturing labour under standard costing but not under normal
costing.
11-32 (45–50 min.) Activity-based costing, flexible-budget variances for finance-
function activities1
1. Receivables: Receivable is an output unit level activity. Its flexible-budget variance can
be calculated as follows:
Flexible-budget Actual Flexible-budget

= –
variance costs costs
= (A$0.659 × 375 000) – (A$0.529 × 375 000)
= A$247 125 – A$198 375
= A$48 750 U
Payables: Payable is a batch level activity.
Static-budget Actual
Amounts Amounts
a. Number of deliveries 500 000 375 000
b. Batch size (units per batch) 10 8
c. Number of batches (a ÷ b) 50 000 46 875
d. Cost per batch A$3.65 A$3.75
e. Total payables activity cost (c × d) A$182 500 A$175 781.25
Step 1: The number of batches in which payables should have been processed
= 375 000 actual units ÷ 10 budgeted units per batch
= 37 500 batches
Step 2: The flexible-budget amount for payables

= 37 500 batches × A$3.65 budgeted cost per batch
= A$136 875
The flexible-budget variance can be computed as follows:
Flexible-budget variance = Actual costs – Flexible-budget costs

= (46 875 × A$3.75) – (37 500 × A$3.65)
= A$175 781.25 – A$136 875 = A$38 906.25 U
Travel expenses: Travel expense is a batch level activity.
Static-Budget Actual
Amounts Amounts
a. Number of deliveries 500 000 375 000
b. Batch size (units per batch) 400 410.65
c. Number of batches (a ÷ b) 1 250 913.1864
d. Cost per batch A$7.15 A$7.65
e. Total travel expenses activity cost (c × d) A$8 937.50 A$6 985.88
1
Subject to rounding-off error, the total of the price and efficiency variances for each activity in (2) should be
equal to the corresponding flexible-budget variances as calculated in (1).
Step 1: The number of batches in which the travel expense should have been processed
= 375 000 actual units ÷ 400 budgeted units per batch
= 937.5 batches
Step 2: The flexible-budget amount for travel expenses

= 937.5 batches × A$7.15 budgeted cost per batch
= A$6703.13
The flexible budget variance can be calculated as follows:

Flexible budget variance = Actual costs – Flexible-budget costs
= (913.1864 × A$7.65) – (937.5 × A$7.15)
= A$6985.88 – A$6703.125
= A$282.75 U
2. The flexible budget variances can be subdivided into price and efficiency variances.
Actual price Budgeted price Actual quantity

Price variance = – ×
of input of input of input
Actual quantity
Budgeted quantity of Budgeted price
Efficiency variance = – input allowed for ×
of input used of input
actual output
Receivables:
Price Variance = (A$0.659 – A$0.529) × 375 000
= A$48 750 U
Efficiency variance = (375 000 – 375 000) × A$0.529
= A$0
Payables:
Price variance = (A$3.75 – A$3.65) × 46 875
= A$4687.5 U
Efficiency variance = (46 875 – 50 000) × A$3.65
= A$11 406.25 F
Travel expenses:
Price variance = (A$7.65 – A$7.15) × 913.1864
= A$456.59 U
Efficiency variance = (913.1864-1250) × A$7.15
= A$2408.22 F
11-33 Variance analysis, multiple products
Sales-volume  Actual sales − Budgeted sales   Budgeted contributi on

1.
variance
=  quantity in units quantity in units 
 margin per ticket
Lower-tier tickets = (3 300 – 4 000)  A$20 = A$14 000 U

Upper-tier tickets = (7 700 – 6 000)  A$5 = 8 500 F
All tickets A$ 5 500 U
Budgeted average (4 000 × A$20) + (6 000 × A$5)
2. =
contribution margin per unit 10 000
A$80 000 + A$30 000 A$110 000
= =
10 000 10 000
= A$11 per unit (seat sold)
Sales-mix percentages:
Budgeted Actual
4 000 3 300
Lower-tier = 0.40 = 0.30
10 000 11 000
6 000 7 700
Upper-tier = 0.60 = 0.70
10 000 11 000
Solution Exhibit 11-33 (on the following page) presents the sales-volume, sales-quantity,
and sales-mix variances for lower-tier tickets, upper-tier tickets and in total for Vikings in
2015.
The sales-quantity variances can also be computed as:
 Actual units Budgeted units  Budgeted Budgeted

Sales-quantity  
=  of all tickets − of all tickets sales - mix  cont. margin
variance  
 sold sold  percentage per ticket
The sales-quantity variances are:
Lower-tier tickets = (11 000 – 10 000) × 0.40 × A$20 = A$ 8 000 F

Upper-tier tickets = (11 000 – 10 000) × 0.60 × A$ 5 = 3 000 F
All tickets A$11 000 F
The sales-mix variance can also be computed as:
Sales-mix
Actual units  Actual Budgeted  Budgeted
variance
= of all tickets ×  sales-mix − sales-mix   contribution margin
 percentage percentage 
sold   per ticket
The sales-mix variances are
Lower-tier tickets = 11 000 × (0.30 – 0.40) × A$20 = A$22 000 U

Upper-tier tickets = 11 000 × (0.70 – 0.60) × A$ 5 = 5 500 F
All tickets A$16 500 U
3. The Vikings increased average attendance by 10% per game. However, there was a
sizable shift from lower-tier seats (budgeted contribution margin of A$20 per seat) to the
upper-tier seats (budgeted contribution margin of A$5 per seat). The net result: the actual
contribution margin was A$5500 below the budgeted contribution margin.
SOLUTION EXHIBIT 11-33
Columnar presentation of sales-volume, sales-quantity and sales-mix variances for Vikings:
Flexible Budget: Static Budget:

Actual Units of Actual Units of Budgeted Units of
All Products Sold All Products Sold All Products Sold
× Actual Sales Mix × Budgeted Sales × Budgeted Sales Mix
× Budgeted Mix × Budgeted
Contribution × Budgeted Contribution
Margin per Unit Contribution Margin Margin per Unit
(1) per Unit (3)
(2)
Panel A:
a b b
Lower-tier (11 000 × 0.30 ) × (11 000 × 0.40 ) × (10 000 × 0.40 ) × A$20
A$20 A$20 4 000 × A$20
3 300 × A$20 4 400 × A$20
A$66 000 A$88 000 A$80 000
A$22 000 U A$8000 F
Sales-mix variance Sales-quantity variance
A$14 000 U
Sales-volume variance
Panel B:
c d
Upper-tier (11 000 × 0.70 ) × (11 000 × 0.60 ) × d
(10 000 × 0.60 ) × A$5
A$5 A$5 6 000 × A$5
7 700 × A$5 6 600 × A$5
A$38 500 A$33 000 A$30 000
A$5500 F A$3000 F
A$8500 F
Panel C: A$104 500
e
A$121 000
f
A$110 000
g
All Tickets A$16 500 U A$11 000 F

(Sum of Lower- Total sales-mix variance Total sales-quantity variance
tier and Upper- A$5500 U
tier tickets) Total sales-volume variance
F = favourable effect on Operating profit; U = unfavourable effect on Operating profit.

Actual Sales Mix: Budgeted Sales Mix:
a b
Lower-tier = 3300 ÷ 11 000 = 30% Lower-tier = 4000 ÷ 10 000 = 40%
c d
Upper-tier = 7700 ÷ 11 000 = 70% Upper-tier = 6000 ÷ 10 000 = 60%
e f
A$66 000 + A$38 500 = A$104 500 A$88 000 + A$33 000 = A$121 000
g
A$80 000 + A$30 000 = A$110 000
11-34 (30 min.) Variance analysis, working backwards
1. and 2. Solution Exhibit 11-34 (shown at the end of this solution) presents the sales-
volume, sales-quantity, and sales-mix variances for the sunglasses and reading glasses and
in total for KanC Ltd in June 2015. The steps to fill in the numbers in Solution Exhibit 11-34
follow:
Step 1
Consider the static budget column (Column 3):
Static budget total contribution margin A$8 800

Budgeted units of all glasses to be sold 2 000
Budgeted contribution margin per unit of Sunglasses A$2.5
Budgeted contribution margin per unit of Reading Glasses A$7.5
Suppose that the budgeted sales-mix percentage of Sunglasses is y. Then the budgeted
sales-mix percentage of Reading Glasses is (1 – y). Therefore,
(2000y  A$2.5) + (2 000  (1 – y)  A$7.5) = A$8800

A$5000y + A$15 000 – A$15 000y = A$8800
A$10 000y = A$6200
y = 0.62 or 62%
1–y = 38%
KanC’s budgeted sales mix is 62% of Sunglasses and 38% Reading Glasses. We can then fill
in all the numbers in Column 3.
Step 2
Next, consider Column 2 of Solution Exhibit 11-34.
The total of Column 2 in Panel C is A$7400 (the static budget total contribution margin of
A$8800 – the total sales-quantity variance of A$1400 U which was given in the problem).
We need to find the actual units sold of all glasses, which we denote by q. From Column 2,
we know that
(q  0.62  A$2.5) + (q  0.38  A$7.5) = A$7400

A$1.55q + A$2.85q = A$7400
A$4.4q = A$7400
q = 1681.82 units (rounded)
So, the total quantity of all glasses sold is 1682 units. This computation allows us to fill in all
the numbers in Column 2.
Step 3
Next, consider Column 1 of Solution Exhibit 11-34. We know actual units sold of all glasses
(1682 units), the actual sales-mix percentage (given in the problem information as
sunglasses, 62%; reading glasses, 38%), and the budgeted unit contribution margin of each
product (sunglasses, A$2.5; reading glasses, A$7.5). We can therefore determine all the
numbers in Column 1.
Solution Exhibit 11-34 displays the following sales-quantity, sales-mix, and sales-volume
variances:
Sales-Volume Variance
Sunglasses A$577.27 U
Reading Glasses 654.52 U
All Glasses A$ 1231.80a U
Sales-Mix Variances Sales-Quantity Variances

Sunglasses A$84.10 U Sunglasses A$ 493.17 U
Reading Glasses 252.3 F Reading Glasses 906.82 U
All Glasses A$168.20 F All Glasses A$1400a U
a
rounded
3. KanC Ltd shows an unfavourable sales-quantity variance because it sold fewer pairs
of glasses in total than was budgeted. This unfavourable sales-quantity variance is partially
offset by a favourable sales-mix variance because the actual mix of glasses sold has shifted
in favour of the higher contribution margin Reading glasses. The problem illustrates how
failure to achieve the budgeted market penetration can have negative effects on operating
profit.
Columnar presentation of sales-volume, sales-quantity and sales-mix variances for KanC

Ltd:

Actual Units Actual Units Budgeted Units
of All Glasses Sold of All Glasses Sold of All Glasses Sold
 Actual Sales Mix  Budgeted Sales  Budgeted Sales Mix
 Budgeted Mix  Budgeted
Contribution  Budgeted Contribution
Margin per Unit Contribution Margin per Unit
Margin per Unit
Panel A: (1681.82  0.6) (1681.82  0.62) (2000  0.62)

Sunglasses  A$2.5  A$2.5  A$2.5
1009.09  A$2.5 1042.73  A$2.5 1240  A$2.5
= A$2522.73 = A$2606.83 = A$3100
A$84.10 U A$493.17 U
A$577.27 U
Panel B: (1681.82  0.4) (1681.82  0.38) (2000  0.38)

Reading  A$7.5  A$7.5  A$7.5
glasses 672.73  A$7.5 639.09  A$7.5 760  A$7.5
= A$5045.48 = A$4793.18 = A$5700
A$252.3 F A$906.82 U
A$654.52U
Panel C: A$7568.20 A$7400 A$8800

All Glasses
A$168.20 F A$1400 U
Total sales-mix variance Total sales-quantity variance
A$1231.8 U
Total sales-volume variance
F = favourable effect on operating profit; U = unfavourable effect on operating profit.
11-35 (60 min.) Variance analysis, multiple products
1.
Budget for 2015
Variable Contri.
Selling Cost Margin Units Sales Contribution
Price per Unit per Unit Sold Mix Margin
(1) (2) (3) = (1) – (2) (4) (5) (6) = (3) × (4)
Berry A$7.00 A$4.50 A$2.50 500 000 20% A$ 1 250 000
Lemon 5.00 3.00 2.00 900 000 36 1 800 000
Orange 8.00 5.00 3.00 1 100 000 44 3 300 000
Total 2 500 000 100% A$6 350 000
Actual for 2015:
Variable Contrib.
Selling Cost Margin Units Sales Contribution
Price per Unit per Unit Sold Mix Margin
(1) (2) (3) = (1) – (2) (4) (5) (6) = (3) × (4)
Berry A$7.25 A$4.60 A$2.65 450 000 18% A$1 192 500
Lemon 5.35 3.10 2.25 1 000 000 40 2 250 000
Orange 8.50 5.25 3.25 1 050 000 42 3 412 500
Total 2 500 000 100% A$6 855 000
Solution Exhibit 11-35 (on the following page) presents the sales-volume, sales-quantity,
and sales-mix variances for each product and in total for 2015.
 Actual Budgeted  Budgeted

Sales-volume =  quantity of − quantity of   contribution margin
variance  units sold units sold 
  per unit
Berry = (450 000 – 500 000) × A$2.50 = A$125 000 U

Lemon = (1 000 000 – 900 000) × A$2.00 = 200 000 F
Orange = (1 050 000 – 1 100 000) × A$3.00 = 150 000 U
Total A$75 000 U

Sales-quantity =  of all products − of all products   sales-mix  contribution margin
variance  
 sold sold  percentage per unit
Berry = (2 500 000 – 2 500 000) × 0.20 × A$2.50 = A$ 0

Lemon = (2 500 000 – 2 500 000) × 0.36 × A$2.00 = 0
Orange = (2 500 000 – 2 500 000) × 0.44 × A$3.00 = 0
Total A$ 0
Actual units Actual Budgeted Budgeted
Sales-mix = of all products × sales-mix – sales-mix × contrib. margin
variance sold percentage percentage per unit
Berry = 2 500 000 × (0.18 – 0.20) × A$2.50 = A$125 000 U

Lemon = 2 500 000 × (0.40 – 0.36) × A$2.00 = 200 000 F
Orange = 2 500 000 × (0.42 – 0.44) × A$3.00 = 150 000 U
Total A$75 000 U
2. The breakdown of the unfavourable sales-volume variance of A$75 000 shows that,
although the total boxes sold is the same as budget, the gain in sales is for units of Lemon
which have a lower budgeted contribution margin than the Orange which has a reduction in
sales.
Sales-Mix and Sales-Quantity Variance Analysis of Mountain Spring for 2015

All Products Sold All Products Sold All Products Sold
 Actual Sales Mix  Budgeted Sales Mix  Budgeted Sales Mix
 Budgeted Contribution  Budgeted Contribution  Budgeted Contribution
Margin Per Unit Margin Per Unit Margin Per Unit
Berry 2 500 000  0.18  2 500 000  0.20  2 500 000  0.20 
A$2.50 = A$1 125 000 A$2.50 = A$1 250 000 A$2.50 =A$1 250 000
Lemon 2 500 000  0.40  2 500 000  0.36  2 500 000  0.36 
A$2.00 =2 000 000 A$2.00 =1 800 000 A$2.00 = 1 800 000
Orange 2 500 000  0.42  2 500 000  0.44  2 500 000  0.44 
A$3.00 = 3 150 000 A$3.00 = 3 300 000 A$3.00 = 3 300 000
A$6 275 000 A$6 350 000 A$6 350 000
A$75 000 U A$0

A$75 000 U
F = favourable effect on operating profit; U= unfavourable effect on operating profit
11-36 (20 min.) Market-share and market-size variances (continuation of 11-35)
Actual Budgeted
Total Region 20 million 25 million
Mountain Spring 2.5 million 2.5 million
Market share 12.5% 10%
Average budgeted contribution margin per unit = A$2.54 (A$6 350 000 ÷ 2 500 000)
Solution Exhibit 11-36 (on the following page) presents the sales-quantity variance, market-
size variance, and market-share variance for 2015.
Actual Actual Budgeted Budgeted contribution

Market-share = market size × market – market × margin per composite
variance in units share share unit for budgeted mix
= 20 000 000 × (0.125 – 0.10) × A$2.54

= 20 000 000 × .025 × A$2.54
= A$1 270 000 F
Actual Budgeted Budgeted Budgeted contribution

Market-size = market size – market size × market × margin per composite
variance in units in units share unit for budgeted mix
= (20 000 000 – 25 000 000) × 0.10 × A$2.54

= – 5 000 000 × 0.10 × A$2.54
= A$1 270 000 U
The market share variance is favourable because the actual 12.5% market share was higher
than the budgeted 10% market share. The market size variance is unfavourable because
the market size decreased 20% [(25 000 000 – 20 000 000) ÷ 25 000 000].
While the overall total market size declined (from 25 million to 20 million) however
Mountain Spring was able to maintain their total sales (in absolute terms), and thereby
increase their market share.
Sales-Quantity Variance
A$0
Market-share variance Market-size variance

A$1 270 000 F A$1 270 000 U
Market-share and market-size variance analysis of Mountain Spring for 2015:

Static Budget:
Actual Market Size  Actual Market Size  Budgeted Market Size 
Actual Market Share Budgeted Market Share Budgeted Market Share
 Budgeted Average  Budgeted Average  Budgeted Average
Contribution Margin Contribution Margin Contribution Margin
Per Unit Per Unit Per Unit
20 000 000  0.125a 20 000 000  0.10c 25 000 000  0.10c
 A$2.54 b
 A$2.54 b
 A$2.54b
= A$6 350 000 = A$5 080 000 = A$6 350 000
A$1 270 000 F A$1 270 000 U

A$0
Sales-quantity variance
F = favourable effect on operating profit; U = unfavourable effect on operating profit
a
Actual market share: 2 500 000 units ÷ 20 000 000 units = 0.125, or 12.5%
b
Budgeted average contribution margin per unit A$6 350 000 ÷ 2 500 000 units = A$2.54 per unit
c
Budgeted market share: 2 500 000 units ÷ 25 000 000 units = 0.10, or 10%
11-37 (30 min.) Flexible budget, direct materials and direct manufacturing labour
variances
1. Variance analysis for Terrigal Pots for 2015:
Flexible- Sales-
(1) (2) = (3) (4) = (5)
(1) – (3) (3) – (5)
Units sold 35 000a 0 35 000 3 000 F 32 000a

Direct materials A$141 487.50a A$10 237.50U A$131 250b A$11 250 U A$120 000c
Direct manufacturing
labour 451 500.00a 14 000.00 U 437 500d 37 500 U 400 000e
Fixed costs 85 000.00 a
10 000.00 U 75 000 a
0 75 000a
Total costs A$677 987.50 A$34 237.50 U A$643 750 A$48 750 U A$595 000
A$34 237.50 U A$48 750 U

A$82 987.50 U
a
Given
b
A$3.75 × 35 000 = A$131 250
c
A$3.75 × 32 000 = A$120 000
d
A$12.50 × 35 000 = A$437 500
e
A$12.50 × 32 000 = A$400 000
2. Flexible Budget
(Budgeted Input
Actual Incurred Qty Allowed for
(Actual Input Qty Actual Input Qty Actual Output ×
× Actual Price) × Budgeted Price Budgeted Price)
Direct materials A$141 487.50a A$144 375b A$131 250c
A$2887.50 F A$13 125 U

A$10 237.50 U
Direct manufacturing labour A$451 500d A$525 000e A$437 500f
A$73 500 F A$87 500 U

A$14 000 U
a
57 750 kilograms × A$2.45/kilogram = A$141 487.50
b
57 750 kilograms × A$2.50/kilogram = A$144 375
c
35 000 pots × 1.50 kilograms/pot × A$2.50/kilogram =
52 500 kilograms × A$2.50/kilogram = A$131 250
d
21 000 hours × A$21.50/hour = A$451 500
e
21 000 hours × A$25/hour = A$525 000
f
35 000 pots × 0.5 hours/pot × A$25/hour = 17 500 hours × A$25/hour = A$437 500
11-38 (30 min.) Variance analysis, non-manufacturing setting
1.
Canberra Cleaners
Income Statement Variances
For the month ended June 30, 2015
Budget Actual Static budget

variance
Offices cleaned 200 225 25 F
Revenue A$30 000 A$39 375 A$9 375 F
Variable costs:
Cost of supplies 1 500 2 250 750 U
Labour 5 600 6 000 400 U
Total variable costs 7 100 8 250 1 150 U
Contribution margin 22 900 31 125 8 225 F
Fixed costs 9 500 9 500 -
Operating profit A$13 400 A$21 625 A$ 8 225 F
2. To compute flexible budget variances for revenues and the variable costs, first
calculate the budgeted cost or revenue per office, and then multiply that by the actual
number of offices detailed. Subtract the actual revenue or cost and the result is the flexible
budget variance.
FBV(Revenue)= Actual Revenue – Actual number of offices  (Budgeted revenue/budgeted
# offices)
= A$39 375 – (225  (A$30 000/200))
= A$39 375 - A$33 750
= A$5 625 Favourable
FBV(Supplies) = Actual Supplies expense – Actual number of offices  (Budgeted cost of

supplies/budgeted # offices)
= A$2 250 – (225  (A$1 500/200))
= A$2 250 - A$1 687.50
= A$562.50 Unfavourable
FBV(Labour) = Actual Labour expense – Actual number of offices  (Budgeted cost of

labour/budgeted # offices)
= A $6 000 – (225  (A$5 600/200))
= A$6 000 - A$6 300
= A$300 Favourable
The flexible budget variance for fixed costs is the same as the static budget variance, and
equals $0 in this case. Therefore, the overall flexible budget variance in income is given by
aggregating the variances computed earlier, adjusting for whether they are favourable or
unfavourable. This yield:
FBV(Operating profit) = A$5 625F (-) A$562.50U (+) A$300F = A$5 362.50.
3. In addition to understanding the variances computed above, Monam should attempt

to keep track of the number of offices worked on by each employee, as well as the number
of hours actually spent on each office. In addition, Monam should look at the prices charged
for cleaning, in relation to the hours spent on each job.
4. This is just a simple problem of two equations and two unknowns. The two equations
relate to the number of offices cleaned and the labour costs (the wages paid to the
employees).
X = number of offices cleaned by long-term employee

Y = number of offices cleaned by both short-term employees (combined)
Budget: X+Y = 200 Actual: X+Y = 225

40X + 20Y = 5 600 40X + 20Y = 6 000
Substitution: Substitution:
40X + 20(200-X) = 5 600 40X + 20(225-X) = 6 000
20X = 1 600 20X = 1 500
X=80 X = 75
Y=120 Y=150
Therefore the long term employee is budgeted to clean 80 offices and the new employees
are budgeted to clean 60 offices each.
Actually the long term employee details 75 offices (and grosses A$3000 for the month), and
the other two clean 75 each and gross A$1500 for the month.
5. The two short-term employees are each budgeted to earn gross wages of A$14 400
(60 offices/month  2 hours  A$10/hour  12 months) per year (if June is typical, and less
if it is a high volume month). If this is a part-time job for them, then that is fine. If it is full-
time, and they only get paid for what they clean, the excess capacity may be causing
motivation problems. Monam needs to determine a better way to compensate employees to
encourage retention.
This should increase customer satisfaction, and potentially revenue, because longer-term
employees do a more thorough job. In addition, rather than paying the same wage per
office, Monam might consider setting quality standards and improvement goals for all of the
employees.
11-39 (60 min.) Comprehensive variance analysis responsibility issues
1a. Actual selling price = A$77.00

Budgeted selling price = A$77.67647059
Actual sales volume = 7 750 units
Selling price variance = (Actual sales price − Budgeted sales price)×Actual sales
volume
= (A$77 − A$77.67647059) × 7 750 = A$5 242.65
Unfavourable
1b. Development of flexible budget

Budgeted Unit Actual Flexible Budget
Amounts Volume Amount
Revenues A$77.67647059 7 750 A$601 992a
Variable costs
A$3.50/m. × 5.00
b
DM−Flannelette m. 17.50 7 750 135 625
Direct manuf. A$25.961/hr. ×
c
labour 0.912 hrs. 23.6765 7 750 183 493
Total variable manufacturing costs 319 118
Fixed manufacturing costs 132 750
Total manufacturing costs 451 868
Gross margin A$150 124
rounded; A$148 750 ÷ 8 500 units; A$201 250 ÷ 8 500 units (rounded)
a b c
Flexible- Sales -
Results Variances Budget Variance Budget
(1) (2)=(1)-(3) (3) (4)=(3)-(5) (5)
Units sold 7 750 7 750 8 500
Revenues A$596 750 A$ 5 242 U A$601 992 A$ 57 375 U A$660 250
Variable costs
DM−Flannelette 157 750 22 125 U 135 625 13 125 F 148 750
Direct manuf. 227 500 44 007 U 183 493 17 757 F 201 250
Labour
Total variable 385 250 66 132 U 319 118 30 882 F 350 000
costs
Fixed manuf. 115 500 17 250 F 132 750 0 132 750
costs
Total costs 500 750 48 882 U 451 868 30 882 F 482 750
Gross margin A$ 96 000 A$54 124 U A$150 124 A$27 376 U A$177 500
Level 2 A$54 124 U A$ 27 376 U

Level 1 A$81 500 U

1c. Price and Efficiency Variances

DM−Flannelette−Actual metres used = 4.9 per unit × 7750 units = 37 975 m.
Price per metre. = A$157 750  37 975 = A$4.1540487
Direct Labour−Actual labour hours = A$227 500  23.75 = 9 578.947368 hours
Labour hours per unit = 9 578.947  7750 units = 1.236 hours per unit
Flexible Budget
(1) (2) (3)
Direct (7 750 × 4.9 × (7 750 × 4.9 × A$3.50) (7 750 × 5.00 × A$3.50)
Materials: A$4.154048) A$132 912.50 A$135 625
Flannelette A$157 750
A$24 837.5 U A$2712.5 F

Direct (7 750 × 1.2359932 × (7 750 × 1.235993 × (7 750 × 0.912 × A$25.96104)

Manuf. A$23.75) A$25.961) A$183 493
Labour A$227 500 A$248 679
A$22 179 F A$65 186 U

Differences due to rounding
2. Possible explanations for the price variances are:
(a) Unexpected outcomes from purchasing and labour negotiations during the year.
(b) Higher quality of flannelette and less experienced employees.
(c) Less overtime because production levels were lower than expected
(d) Standards set incorrectly at the start of the year.
Possible explanations for the favourable material usage variance and the unfavourable
labour efficiency variance are:
(a) Lower usage of flannelette higher quality flannelette purchased at higher price.
Note that the labour efficiency variance (which would also be influenced by higher
quality) is unfavourable. Furthermore the net effect of the favourable material
usage variance and the unfavourable material price variance is significantly
negative.
(b) Lesser trained workers hired at lower rates result in lower levels of labour
efficiency. Once again the net effect is negative even if the favourable material
usage variance is taken into account.
(c) Standards set incorrectly at the start of the year.
11-40 (20 min.) Possible causes for price and efficiency variances
1.
Flexible Budget
(1) (2) (3)
Direct
Materials: (650 000 × 0.35) (450 000 × 1.5 ×0.35)
Bottles A$255 000 = A$227 500 = A$236 250
A$27 500 U A$8750 F

Direct (450 000 × (2/60)

Manuf. (13 500 × 19.30) ×19.30)
Labour A$290 250 = A$260 550 = A$289 500
A$29 700 U A$28 950 F

2. The unfavourable material and labour price variances may be explained by more
expensive materials and either higher paid employees or overtime. Overtime seems
consistent with the implementation of a new production process. The favourable efficiency
variances, particularly the higher labour efficiency variance (which almost offsets the
unfavourable labour price variance) seem to indicate that the process is partially successful,
although the net effect is still unfavourable. Unless the favourable labour variance can be
maintained, and the unfavourable price variances reduced, the new process does not seem
to be successful.
Particular concern is raised, however, by the favourable material efficiency variance,
650 000 litres of detergent were used to produce 450 000 bottles. That is an average of
1.44 litres per bottle. Each bottle should be 1.5 litres. It may be that the machines are not
correctly calibrated and the bottles are not being filled. This could severely damage the
company’s reputation and may also lead to legal problems.
11-41 (35 min.) Material cost variances, use of variances for performance
evaluation
1. Materials variances
Flexible Budget
Incurred Qty Allowed
(Actual Input for Actual Output
Qty Actual Input Qty × Budgeted
× Actual Price) × Budgeted Price Price)
Purchases Usage
Direct (6 000 × A$18a) (6 000 × A$20) (5 000 × A$20) (500 × 8 × A$20)
Materials = A$108 000 = A$120 000 = A$100 000 = (4 000 × A$20)
= A$80 000
A$12 000 F A$20 000 U

a
A$108 000 ÷ 6000 = A$18
2. The favourable price variance is due to the A$2 difference (A$20 – A$18) between
the standard price based on the previous suppliers and the actual price paid through the on-
line marketplace. The unfavourable efficiency variance could be due to several factors
including inexperienced workers and machine malfunctions. But the likely cause here is that
the lower-priced carbon fibre was lower quality or less refined, which led to more waste. The
labour efficiency variance could be affected if the lower quality carbon fibre caused the
workers to use more time.
3. Switching suppliers was not a good idea. The A$12 000 savings in the cost of carbon
fibre was outweighed by the A$20 000 extra material usage. In addition, the A$20 000 U
efficiency variance does not recognise the total impact of the lower quality carbon fibre
because, of the 6000 kilograms purchased; only 5000 kilograms were used. If the quantity
of materials used in production is relatively the same, Slalom Skis could expect the
remaining 1000 kgs to produce 100 more units. At standard, 100 more units should take
100 × 8 = 800 kgs. There could be an additional unfavourable efficiency variance of
(1 000  A$20) (100 × 8 × A$20)

A$20 000 A$16 000
A$4000 U
4. The purchasing manager’s performance evaluation should not be based solely on the
price variance. The short-run reduction in purchase costs was more than offset by higher
usage rates. Her evaluation should also be based on the total costs of the company as a
whole. In addition, the production manager’s performance evaluation should not be based
solely on the efficiency variances.
In this case, the production manager was not responsible for the purchase of the lower-
quality carbon fibre, which led to the unfavourable efficiency scores. In general, it is
important for Bruce to understand that not all favourable material price variances are ‘good
news,’ because of the negative effects that can arise in the production process from the
purchase of inferior inputs. They can lead to unfavourable efficiency variances for both
materials and labour. Bruce should also that understand efficiency variances may arise for
many different reasons and he needs to know these reasons before evaluating performance.
5. Variances should be used to help Slalom Skis understand what led to the current set of
financial results, as well as how to perform better in the future. They are a way to facilitate
the continuous improvement efforts of the company. Rather than focusing solely on the
price of carbon fibre, Kristen can balance price and quality in future purchase decisions.
6. Future problems can arise in the supply chain. Kristen may need to go back to the
previous suppliers. But Slalom Skis’ relationship with them may have been damaged and
they may now be selling all their available carbon fibre to other manufacturers. Lower
quality skis could also affect Slalom Skis’ reputation with the distributors, the bike shops
and customers, leading to higher warranty claims and customer dissatisfaction, and
decreased sales in the future.
11-42 (30 min.) Direct manufacturing labour and direct materials variances,
missing data
1.
Flexible Budget
(Budgeted Input
Actual Costs Qty Allowed for
Incurred (Actual Actual Input Qty Actual Output
Input Qty× Actual Price) × Budgeted Price × Budgeted Price)
Direct mfg
labour A$763 125a A $752 812.50b A$821 250c
A$10 312.50 U A$68 437.50 F

A$58 125 F
a
Given (or 41 250 hours × A$18.50/hour)
b
41 250 hours × A$18.25/hour = A$752 812.50
c
9000 units × 5 hours/unit × A$18.25/hour = A$821 250
2. Unfavourable direct materials efficiency variance of A$12 500 indicates that more
kilograms of direct materials were actually used than the budgeted quantity allowed for
actual output.
A$12 500 efficiency variance
=
A$2 per kg. budgeted price
= 6250 kilograms
Budgeted kilograms allowed for the output achieved = 9000 × 20 = 180 000 kilograms
Actual kilograms of direct materials used = 180 000 + 6250 = 186 250 kilograms
A$435 000
3. Actual price paid per kilogram =
225 000
= A$1.933 per kilogram
4. Actual Costs Incurred Actual Input ×

(Actual Input × Actual Price) Budgeted Price
A$435 000a A$450 000b
A$15 000 F
Price variance
a
Given
b
225 000 kilograms × A$2/kilogram = A$450 000
11-43 (20–30 min.) Direct materials and manufacturing labour variances, solving
unknowns
All given items are designated by an asterisk.

Flexible Budget
Direct (1 900 × A$21) (1 900 × A$20*) (4 000* × 0.5* ×
Manufacturing = A$39 900 = A$38 000 A$20*)
Labour = A$40 000
A$1900 U* A$2000 F*
Purchases Usage
Direct (13 000 × A$5.25) (13 000 × A$5*) (12 500 × A$5*) (4 000* × 3* × A$5*)
Materials A$68 250* A$65 000 A$62 500 A$60 000
A$3250 U* A$2500 U*
1. 4000 units × 0.5 hours/unit = 2000 hours
2. Flexible budget – Efficiency variance = A$40 000 – A$2000

= A$38 000
Actual dir. manuf. labour hours = A$38 000 ÷ Budgeted price of A$20/hour
= 1900 hours
3. A$38 000 + Price variance, A$1900 = A$39 900, the actual direct manuf. labour cost
Actual rate = Actual cost ÷ Actual hours

= A$39 900 ÷ 1900 hours
= A$21/hour
4. Standard qty of direct materials = 4000 units × 3 kilograms/unit

= 12 000 kilograms
5. Flexible budget + Dir. matls effcy var. = A$60 000 + A$2500
= A$62 500
Actual quantity of direct material used = A$62 500 ÷ Budgeted price per kg
= A$62 500 ÷ A$5/kg
= 12 500 kgs
6. Actual cost of direct materials, A$68 250 – Price variance, A$3250 = A$65 000
Actual qty of direct materials purchased = A$65 000 ÷ Budgeted price, A$5/kg
= 13 000 kgs.
7. Actual direct materials price = A$68 250 ÷ 13 000 kgs

= A$5.25 per kg.
11-44 Direct materials and manufacturing labour variances, journal entries (JIT)
1.
Direct materials:
Flexible Budget
(Actual Input Actual Input Qty Actual Output
Qty × Budgeted Price × Budgeted
× Actual Price) Price)
Eggs (given) 79 x 12  A$0.30 230  4  A$.30
A$304.15 A$284.40 A$276.00
A$19.75 U A$8.40 U
A$28.15 U
Flexible Budget
× Actual Price) × Budgeted Price × Budgeted
(given) Price)
375  A$15.50 230  1.5 

A$6 093.75 = A$5 812.50 A$15.50
= A$5 347.50
A$281.25 U A$465.00 U
A$746.25 U
2.
Direct Materials Price Variance (time of purchase = time of use)
Direct Materials Control 284.40
Direct Materials Price Variance 19.75
Accounts Payable Control or Cash 304.15
Direct Materials Efficiency Variance

Work in Process Control 276.00
Direct Materials Efficiency Variance 8.40
Direct Materials Control 284.40
Direct Manufacturing Labour Variances

Work in Process Control 5347.50
Direct Mfg Labour Efficiency Variance 465.00
Direct Mfg Labour Price Variance 281.25
Wages Payable or Cash 6093.75
3. Plausible explanations for the above variances include:

a) Nathan paid a little bit extra for the eggs and more (28 eggs more) than budget.
Either the quality of eggs from the supplier was a problem, or eggs are being lost in
the production process. Although the variances seem small, they are material to
Nathan who is on a very tight, student budget, and so all waste needs to be
managed very carefully. Of greater concern than the materials variances, however,
are the unfavourable labour efficiency variances.
b) Nathan may have used more inexperienced workers in May than he usually does.
This resulted in less efficiency. The labour rate variance is also unfavourable,
however, perhaps due to overtime.
11-45 (30 min.) Use of materials and manufacturing labour variances for
benchmarking
1. Unit variable cost (dollars) and component percentages for each firm:
Firm A Firm B Firm C Firm D

DM A$10.00 35.7% A$10.73 25.2% A$10.75 36.4% A$11.25 32.3%
DL 11.25 40.2% 17.05 40.0% 12.80 43.3% 14.03 40.3%
VOH 6.75 24.1% 14.85 34.8% 6.00 20.3% 9.56 27.4%
Total A$28.00 100.0% A$42.63 100.0% A$29.55 100.0% A$34.84 100.0%
2. Variances and percentage over/under standard for each firm relative to Firm A:
Firm B Firm C Firm D

% over % over % over
Variance standard Variance standard Variance standard
DM Price Variance 0.98 U 10.0% - 0.0% 1.25 F -10.0%
DM Efficiency Variance 0.25 F -2.5% 0.75 U 7.5% 2.50 U 25.0%
DL Price Variance 0.55 U 3.3% 0.80 U 6.7% 1.28 U 10.0%
DL Efficiency Variance 5.25 U 46.7% 0.75 U 6.7% 1.50 U 13.3%
To illustrate these calculations, consider the DM Price Variance for Firm B. This is computed
as:
= Actual Input Quantity × (Actual Input Price – Price paid by Firm A)

= 1.95 grams × (A$5.50 - A$5.00)
= A$0.98 U
The % over standard is just the percentage difference in prices relative to Firm A. Again
using the DM Price Variance calculation for Firm B, the % over standard is given by:
= (Actual Input Price – Price paid by Firm A)/Price paid by Firm A

= (A$5.50 - A$5.00)/A$5.00
= 10% over standard.
3.
To: Boss
From: Junior Accountant
Re: Benchmarking and productivity improvements
Date: October 15, 2015
Benchmarking advantages:
– We can see how productive we are relative to our competition.
– We can see the specific areas in which there may be opportunities for us to reduce
costs.
Benchmarking disadvantages:
– Some of our competitors are targeting the market for high-end and custom-made
lenses. I'm not sure that looking at their costs helps with understanding ours better.
– We may focus too much on cost differentials and not enough on differentiating
ourselves, maintaining our competitive advantages, and growing our margins.
Areas to discuss:
– We may want to find out whether we can get the same lower price for glass as Firm
D
– can we use Firm B’s materials efficiency and Firm C’s variable overhead consumption
levels as our standards for the coming year?
11-46 (60 min.) Comprehensive variance analysis review:
Actual Results
Units sold (75% × 2 500 000) 1 875 000
Selling price per unit A$4.25
Revenues (1 875 000 × A$4.25) A$7 968 750
Direct materials purchased and used:
Direct materials per unit A$0.95
Total direct materials cost (1 875 000 × A$0.95) A$1 781 250
Actual manufacturing rate per hour A$31.50
Labour productivity per hour in units 250
Manufacturing labour-hours of input (1 875 000 ÷ 250) 7 500
Total direct manufacturing labour costs (7 500 × A$31.50) A$236 250
Direct marketing costs:
Direct marketing cost per unit A$0.30
Total direct marketing costs (1 875 000 × A$0.30) A$562 500
Fixed costs (A$725 000 − A$30 000) A$695 000
Static Budgeted Amounts

Units sold 2 500 000
Selling price per unit A$4.50
Revenues (2 500 000 × A$4.50) A$11 250 000
Direct materials purchased and used:
Direct materials per unit A$1.25
Total direct materials costs (2 500 000 × A$1.25) A$3 125 000
Direct manufacturing rate per hour A$29.50
Labour productivity per hour in units 200
Manufacturing labour-hours of input (2 500 000 ÷ 200) 12 500
Total direct manufacturing labour cost
(12 500 × A$29.50) A$368 750
Direct marketing costs:
Direct marketing cost per unit A$0.35
Total direct marketing cost (2 500 000 × A$0.35) A$875 000
Fixed costs A$725 000
1. Actual Static-Budget
Results Amounts
Revenues A$7 968 750 A$11 250 000
Variable costs
Direct materials 1 781 250 3 125 000
Direct manufacturing labour 236 250 368 750
Direct marketing costs 562 500 875 000
Total variable costs 2 580 000 4 368 750
Contribution margin 5 388 750 6 881 250
Fixed costs 695 000 725 000
Operating profit A$4 693 750 A$6 156 250
2. Actual operating profit A$4 693 750

Static-budget operating profit 6 156 250
Total static-budget variance A$1 462 500 U
Flexible-budget-based variance analysis for ThumbDrive Ltd for March 2015:
Flexible-
Actual Budget Flexible Sales-Volume Static
Units (drive)
sold 1 875 000 0 1 875 000 625 000 2 500 000
Revenues A$7 968 750 A$468 750 U A$8 437 500 A$2 812 500 U A$11 250 000
Variable costs:
Direct
materials 1 781 250 562 500 F 2 343 750 781 250 F 3 125 000
Direct manuf.
labour 236 250 40 312.5 F 276 562.5 92 187.5 F 368 750
Direct
marketing
costs 562 500 93 750 F 656 250 218 750 F 875 000
Total variable
costs 2 580 000 696 562.5 F 3 276 562.5 1 092 187.5 F 4 368 750
Contribution
margin 5 388 750 227 812.5 F 5 160 937.5 1 720 312.5 U 6 881 250
Fixed costs 695 000 30 000 F 725 000 0 725 000

Operating
profit A$4 693 750 A$257 812.5 F A$4 435 937.5 A$1 720 312.5 U A$6 156 250
A$1 462 500 U
A$257 812.50 F A$1 720 312.50 U
Total flexible-budget Total sales-volume

variance variance
3. Flexible-budget operating profit = A$4 435 937.50.
4. Flexible-budget variance for operating profit = A$257 812.50 F.
5. Sales-volume variance for operating profit = A$1 720 312.50 U.
Analysis of direct mfg labour flexible-budget variance for ThumbDrive Ltd for March 2015
Flexible Budget
(Budgeted Input
Actual Costs Qty Allowed for
Incurred Actual Output
(Actual Input Qty Actual Input Qty × Budgeted
× Actual Price) × Budgeted Price)
Price
Direct. (7 500 × A$31.50) (7 500 × A$29.50) (9 375a × A$29.50)
Mfg Labour A$236 250 A$221 250 A$276 562.50
A$15 000 U A$55 312.50 F

A$40 312.50 F
1 875 000 units ÷ 200 direct manufacturing labour standard productivity rate per hour.
a
6. DML price variance = A$15 000 U; DML efficiency variance = A$55 312.50 F
7. DML flexible-budget variance = A$40 312.50 F
11-47 (25 min.) Comprehensive variance analysis
1. Variance analysis for Sol Electronics for the second quarter of 2015
Second- Flexible
Quarter Flexible Budget for Sales
2011 Budget Second Volume Static
Actuals Variance Quarter Variance Budget
(2) = (4) =
(1) (1) – (3) (3) (3) – (5) (5)
Units 4 800 0 4 800 800 F 4 000
Selling
price A$71.50 A$70.00 A$70.00
Sales A$343 200 A$7 200 F A$336 000 A$56 000 F A$280 000
Variable
costs
Direct
materials 57 600 2 592 F 60 192 a
10 032 U 50 160
Direct
manuf.
labour 30 240 1 440 U 28 800 b
4 800 U 24 000
Other
variable
costs 47 280 720 F 48 000 c
8 000 U 40 000
Total
variable
costs 135 120 1 872 F 136 992 22 832 U 114 160
Contribution
margin 208 080 9 072 F 199 008 33 168 F 165 840
Fixed costs 68 400 400 U 68 000 0 68 000
Operating
profit A$139 680 A$8 672 F A$131 008 A$33 168 F A$97 840
a
4800 units  2.2 kg per unit  A$5.70 per kg. = A$60 192
b
4800 units  0.5 hrs. per unit  A$12 per hr. = A$28 800
c
4800 units  A$10 per unit = A$48 000
Actual Flexible
Second- Input Qty Budget
Quarter  for
2011 Price Budgeted Efficiency Second
Actual Variance Price Variance Quarter
Direct
materials A$57 600 A$2 880 U A$54 720a A$5 472 F A$60 192
Direct
manuf.
labour (DML) 30 240 4 320 U 25 920b 2 880 F 28 800
4800 units
a
 2 kg per unit  A$5.70 per kg. = A$54 720
4800 units
b
 0.45 DML hours per unit  A$12 per DML hour = A$25 920
2. The following details, revealed in the variance analysis, should be used to rebut the
union if it focuses on the favourable operating profit variance:
• Most of the static budget operating profit variance of A$41 840F (A$139 680 –
A$97 840) comes from a favourable sales volume variance, which only arose
because Sol sold more units than planned.
• Of the A$8672 F flexible-budget variance in operating profit, most of it comes

from the A$7200 F flexible-budget variance in sales.
• The net flexible-budget variance in total variable costs of A$1872 F is small, and
it arises from direct materials and other variable costs, not from labour. Direct
manufacturing labour flexible-budget variance is A$1440 U.
• The direct manufacturing labour price variance, A$4320 U, which is large and
unfavourable, is indeed offset by direct manufacturing labour’s favourable
efficiency variance—but the efficiency variance is driven by the fact that Sol is
using new, more expensive materials. Shaw may have to ‘prove’ this to the
union which will insist that it’s because workers are working smarter. Even if
workers are working smarter, the favourable direct manufacturing labour
efficiency variance of A$2880 does not offset the unfavourable direct
manufacturing labour price variance of A$4320.
3. Changing the standards may make them more realistic, making it easier to negotiate
with the union. But the union will resist any tightening of labour standards, and it may be
too early (is one quarter’s experience enough to change on?); a change of standards at this
point may be viewed as opportunistic by the union. Perhaps a continuous improvement pro-
gram to change the standards will be more palatable to the union and will achieve the same
result over a somewhat longer period of time.
11-48 (30 min.) Comprehensive variance analysis
1.
Computing unit selling prices and unit costs of inputs:
Actual selling price = A$1 777 500 ÷ 225 000
= A$7.90
Budgeting selling price = A$1 600 000 ÷ 200 000
= A$8.00
Selling-price Actual Budgeted  Actual

=  – ×
variance selling price selling price units sold
= (A$7.90/unit – A$8.00/unit) × 225 000 units
= A$22 500 U
2, 3 and 4.
The actual and budgeted unit costs are:

Actual Budgeted
Direct materials:
Cream A$0.02 (A$46 500 ÷ 2 325 000) A$0.02
Vanilla Extract 0.20 (A$266 000 ÷ 1 330 000) 0.15
Cherry 0.50 (A$120 000 ÷ 240 000) 0.50
Preparing 14.40 (A$54 000 ÷ 225 000) × 60 14.40
Stirring 18.00 (A$120 000 ÷ 400 000) × 60 18.00
The actual output achieved is 225 000 kilograms of Cherry Star.
The direct cost price and efficiency variances are:

Flex. Budget
Incurred Actual Qty Allowed for
(Actual Input Input Qty × Actual Output
Qty Price Budgeted Efficiency × Budgeted
× Actual Price) Variance Price Variance Price)
(1) (2)=(1)–(3) (3) (4)=(3)–(5) (5)
Direct materials:
f
Cream A$46 500 A$0 A$46 500a A$1 500 U A$45 000
b g
Vanilla Extract 266 000 66 500 U 199 500 30 750 U 168 750
c h
Cherry 120 000 0 120 000 7 500 U 112 500
A$432 500 A$66 500 U A$366 000 A$39 750 U A$326 250
Direct manuf.
labour costs
d i
Preparing A$54 000 A$0 A$54 000 A$0 A$54 000
e j
Stirring 120 000 0 120 000 15 000 F 135 000
A$174 000 A$0 A$174 000 A$15 000 F A$189 000
a f
A$0.02 × 2 325 000 = A$46 500 A$0.02 × 10 × 225 000 = A$45 000
b g
A$0.15 × 1 330 000 = A$199 500 A$0.15 × 5 × 225 000 = A$168 750
c h
A$0.50 × 240 000 = A$120 000 A$0.50 × 1 × 225 000 = A$112 500
d
A$14.40/hr. × (225 000 min. ÷ 60 min./hr.)
i
= A$54 000 A$14.40 × (225 000  60) = A$54 000
e
A$18.00/hr. × (400 000 min. ÷ 60 min./hr.)
j
= A$120 000 A$18.00 × (225 000  30) = A$135 000
Comments on the variances include:
• Selling price variance. This may arise from a proactive decision to reduce price
to expand market share or from a reaction to a price reduction by a competitor.
It could also arise from unplanned price discounting by salespeople.
• Material price variance. The A$0.05 increase in the price per gram of vanilla
extract could arise from uncontrollable market factors or from poor contract
negotiations by Iceland.
• Material efficiency variance. For all three material inputs, usage is greater than
budgeted. Possible reasons include lower quality inputs, use of lower quality
workers, and the preparing and stirring equipment not being maintained in a
fully operational mode. The higher price per gram of vanilla extract (and perhaps
higher quality of vanilla extract) did not reduce the quantity of vanilla extract
used to produce actual output.
• Labour efficiency variance. The favourable efficiency variance for stirring could
be due to workers eliminating non-value-added steps in production.
11-49 Variance analysis with activity-based costing and batch-level direct costs
1. Flexible budget variances for batch activities:

Flexible Budget
× Actual Price) × Budgeted × Budgeted Price)
Price
Set-up ((19 000/75) x 7 x ((19 000/75) x 7 x ((19 000/100) x 8 x

12.00) 10.75) 10.75)
A$21 280 A$19 063.33 A$16 340
A$2216.67 U A$2723.33 U
A$4940 U
Flexible Budget
× Actual Price) × Budgeted × Budgeted
Price Price)
Quality
inspection ((19 000/100 x 9 x ((19 000/100) x 9 ((19 000/120) x 10
15.50) x 17.50) x 17.50)
A$26 505 A$29 925 A$27 708.33
A$3 420F A$2 216.67 U

A$1203.33 F
2. Explanation of variances:
Below I explain the implications of the variances that I calculated. I would enjoy meeting
with you to discuss whether we are following the most efficient policies given these
calculations. Please let me know if there is any way to improve my work or my presentation
to you.
1. Our batch sizes for both set-ups and quality inspection were smaller than planned.
Even though we were able to reduce the set-up and quality inspection time needed
for each batch (because of the smaller batch sizes) these gains were more than
offset by the increased number of batches. Overall we ended up substantially below
the level of efficiency at which we wished to operate.
2. The hourly wage for the set-up workers went over budget due to the tight labour
market in our area for such employees. However we saved a considerable amount of
money because we were able to negotiate reduced wage rates for the quality
inspection labour after the expiration of their previous contract.
Overall given our output level of 19 000 calendars we had a moderately favourable variance
for quality inspection costs and a significant unfavourable variance on set-ups for the
reasons outlined above.
11-50 (60 min.) Variance analysis, sales-mix and sales-quantity variances
1. Actual contribution margins:
Actual Actual Actual

Actual Variable Contribution Sales Actual Actual
Selling Cost per Margin per Volume in Contribution Contribution
Product Price Unit Unit Units In Dollars Percent
DocPro A$349 A$178 A$171 11 000 A$ 1 881 000 16%
FinPro 285 92 193 44 000 8 492 000 71%
ArtsPro 102 73 29 55 000 1 595 000 13%
110 000 A$11 968 000 100%
The actual average contribution margin per unit is A$108.80 (A$11 968 000  110 000
units).
Budgeted contribution margins:
Budgeted Budgeted Budgeted

Budgeted Variable Contribution Sales Budgeted Budgeted
Selling Cost per Margin per Volume in Contribution Contribution
Product Price Unit Unit Units Dollars Percent
DocPro A$379 A$182 A$197 12 500 A$2 462 500 19%
FinPro 269 98 171 37 500 6 412 500 49%
ArtsPro 149 65 84 50 000 4 200 000 32%
100 000 A$13 075 000 100%
The budgeted average contribution margin per unit is A$130.75 (A$13 075 000  100 000
units).
2. Actual sales mix:
Actual
Sales
Volume Actual Sales Mix
Product in Units
DocPro 11 000 10.0% (11 000 ÷ 110 000)
FinPro 44 000 40.0% (44 000 ÷ 110 000)
ArtsPro 55 000 50.0% (55 000 ÷ 110 000)
110 000 100.0%
Budgeted sales mix:
Budgeted
Sales
Volume in Budgeted
Product Units Sales Mix
DocPro 12 500 12.5% (12 500 ÷ 100 000)
FinPro 37 500 37.5% (37 500 ÷ 100 000)
ArtsPro 50 000 50.0% (50 000 ÷ 100 000)
100 000 100.0%

3. Sales-volume variance: =  quantity of − quantity of   contribution margin
 units sold units sold 
  per unit
DocPro = (11 000 − 12 500) × A$197 = A$295 500 U

FinPro = (44 000 − 37 500) × A$171 = 1 111 500 F
ArtsPro = (55 000 − 50 000) × A$84 = 420 000 F
Total sales-volume variance A$1 236 000 F
Actual units  Actual Budgeted  Budgeted

Sales-mix variance: = of all ×  sales mix − sales mix  × contrib. margin
 percentage percentage 
products sold   per unit
DocPro = 110 000 × (0.10 − 0.125) × A$197 = A$541 750 U

FinPro = 110 000 × (0.40 − 0.375) × A$171 = 470 250 F
ArtsPro = 110 000 × (0.50 − 0.50) × A$84 = 0F
Total sales-mix variance A$71 500 U

Sales-quantity variance: =  of all − of all  × sales mix × contrib. margin
 products sold products sold  percentage
  per unit
DocPro = (110 000 − 100 000) × 0.125 × A$197 = A$ 246 250 F

FinPro = (110 000 − 100 000) × 0.375 × A$171 = 6 41 250 F
ArtsPro = (110 000 − 100 000) × 0.50 × A$84 = 420 000 F
Total sales-quantity variance A$1 307 500 F
Solution Exhibit 11-50 (on the following page) presents the sales-volume variance, the
sales-mix variance and the sales-quantity variance for DocPro, FinPro and ArtsPro and in
total for the third quarter 2015.
Sales-mix and sales-quantity variance analysis of Aussie Infonautics for the third
quarter 2015:

all Products Sold All Products Sold All Products Sold
 Actual Sales Mix  Budgeted Sales Mix  Budgeted Sales Mix
 Budgeted  Budgeted  Budgeted
Contribution Contribution Contribution
Margin per Unit Margin per Unit Margin per Unit
DocPro 110 000  0.10  A$197 110 000  0.125  A$197 100 000  0.125  A$197
= A$2 167 000 = A$2 708 750 = A$2 462 500
FinPro 110 000  0.40  A$171 110 000  0.375  A$171 100 000  0.375  A$171
= 7 524 000 = 7 053 750 = 6 412 500
ArtsPro 110 000  0.50  A$84 110 000  0.50  A$84 100 000  0.50  A$84
= 4 620 000 = 4 620 000 = 4 200 000
A$14 311 000 A$14 382 500 A$13 075 000
A$71 500 U A$1 307 500 F
A$1 236 000 F
F = favourable effect on operating profit; U= unfavourable effect on operating profit
4. The following factors help us understand the differences between actual and budgeted
amounts:
• The difference in actual versus budgeted contribution margins was A$1 107 000
unfavourable (A$11 968 000 − A$13 075 000). However, the contribution margin
from the FinPro exceeded budget by A$2 079 500 (A$8 492 000 − A$6 412 500)
while the contributions from the DocPro and the ArtsPro were lower than
expected and offset this gain. This is attributable to lower unit sales in the case
of DocPro and lower contribution margins in the case of ArtsPro.
• In percentage terms, the FinPro accounted for 71% of actual contribution margin
versus a planned 49% contribution margin. However, the DocPro accounted for
16% versus planned 19% and the ArtsPro accounted for only 13% versus a
planned 32%.
• In unit terms (rather than in contribution terms), the ArtsPro accounted for 50%
of the sales mix as planned. However, the DocPro accounted for only 10% versus
a budgeted 12.5% and the FinPro accounted for 40% versus a planned 37.5%.
• Variance analysis for the DocPro shows an unfavourable sales-mix variance

outweighing a favourable sales-quantity variance and producing an unfavourable
sales-volume variance. The drop in sales-mix share was far larger than the gain
from an overall greater quantity sold.
• The FinPro gained both from an increase in share of the sales mix as well as
from the increase in the overall number of units sold.
• The ArtsPro maintained sales-mix share at 50%—as a result, the sales-mix
variance is zero. However, ArtsPro sales gained from the overall increase in units
sold.
• Overall, there was a favourable total sales-volume variance. However, the large
drop in ArtPro’s contribution margin per unit combined with a decrease in the
actual number of DocPro units sold as well as a drop in the actual contribution
margin per unit below budget, led to the total contribution margin being much
lower than budgeted.
Other factors could be discussed here—for example, it seems that the ArtsPro did not
achieve much success with a three digit price point—selling price was budgeted at A$149
but dropped to A$102. At the same time, variable costs increased. This could have been due
to a marketing push that did not succeed.
11-51 Market-share and market-size variances (continuation of 11-50)
1.
Actual Budgeted
Worldwide 550 000 400 000
Aussie Info. 110 000 100 000
Market share 20% 25%
Average contribution margin per unit:

Actual = A$108.80 (A$11 968 000  110 000)
Budgeted = A$130.75 (A$13 075 000  100 000)
Budgeted
Actual  Actual Budgeted  contribution margin
Market-share = market size   market − market  
variance  share share  per composite unit
in units  for budgeted mix
= 550 000  (0.20 – 0.25)  A$130.75
= 550 000  (–0.05)  A$130.75
= A$3 595 625 U
Budgeted
contribution margin
Market-size  market size − market size   market 
= 
in units 
variance per composite unit
 in units share for budgeted mix
= (550 000 – 400 000)  0.25  A$130.75
= 150 000  0.25  A$130.75
= A$4 903 125 F
Solution Exhibit 11-51 (on the following page) presents the market-share variance, the
market-size variance, and the sales-quantity variance for the third quarter 2015.
Market-share and market-size variance analysis of Aussie Infonautics for the third
quarter 2015:
Static Budget:
Actual Market Size Actual Market Size Budgeted Market Size
 Actual Market Share  Budgeted Market Share  Budgeted Market Share
 Budgeted Average  Budgeted Average  Budgeted Average
Contribution Margin Contribution Margin Contribution Margin
Per Unit Per Unit Per Unit
550 000  0.20a  A$130.75b 550 000  0.25c  A$130.75 b 400 000  0.25c  A$130.75b
A$14 382 500 A$17 978 125 A$13 075 000
A$3 595 625 U A$4 903 125 F
A$1 307 500 F
Sales-quantity variance
a
Actual market share: 110 000 units ÷ 550 000 units = 0.2, or 20%
b
Budgeted average contribution margin per unit A$13 075 000 ÷ 100 000 units = A$130.75 per unit
c
Budgeted market share: 100 000 units ÷ 400 000 units = 0.25, or 25%
2. While the market share declined (from 25% to 20%), the overall increase in the total
market size meant a favourable sales-quantity variance:
Sales-Quantity Variance
A$1 307 500 F
Market-Share Variance Market Size Variance

A$3 595 625 U A$4 903 125 F
3. The required actual market size is the budgeted market size, i.e., 400 000 units. This
can easily be seen by setting up the following equation:
Budgeted
Market - size =  market size − market size   market  contributi on margin
variance  in units
 in units  share per composite unit
for budgeted mix
= (M – 400 000) × 0.25 × A$130.75
When M = 400 000, the market-size variance is A$0.
Actual Market-Share Calculation
Again, the answer is the budgeted market share, 25%. By definition, this will hold
irrespective of the actual market size. This can be seen by setting up the appropriate
equation:
Budgeted
Market-share Actual  Actual Budgeted  contribution margin
variance = market size   market − market  
in units  share
 share  per composite unit
for budgeted mix
= Actual market size × (M – 25%) × A$130.75
When M = 25%, the market-share variance is A$0.
11-52 Materials variances: price, efficiency, mix and yield

1.
Oak (A$6 × 8 lm.) A$ 48
Pine (A$2 × 12 lm.) 24
Cost per dresser A$ 72
Number of dressers × 3 000 units
Total budgeted cost A$216 000
2. Solution Exhibit 11-52A (on the following page) presents the total price variance
(A$5246 F), the total efficiency variance (A$1280 F), and the total flexible-budget variance
(A$6526 F).
Total direct materials price variance can also be computed as:
( )
Direct materials
Actual Actual quantity
price variance = − Budgeted ×
of input
for each input price of input price of input
Oak = (A$6.10 – A$6.00) × 23 180 = A$2318 U

Pine = (A$1.80 – A$2.00) × 37 820 = 7564 F
Total direct materials price variance A$5246 F
Total direct materials efficiency variance can also be computed as:
( Actualof input allowed for actual output )

Direct materials
efficiency variance = quantity − Budgeted quantity of input Budgeted
×
price of input
for each input
Oak = (23 180 – 24 000) × A$6.00 = A$4920 F
Pine = (37 820 – 36 000) × A$2.00 = 3640 U
Total direct materials efficiency variance = A$1280 F
SOLUTION EXHIBIT 11-52A
Columnar presentation of direct materials price and efficiency variances for PDS
Manufacturing:
Actual Costs Flexible Budget

Incurred (Budgeted Input Quantity
(Actual Input Quantity Actual Input Quantity Allowed for Actual Output
(1) (2) (3)
Oak 23 180 × A$6.10 = A$141 398 23 180 × A$6.00 = A$139 080 24 000 × A$6.00 = A$144 000
Pine 37 820 × A$1.80 = 68 076 37 820 × A$2.00 = 75 640 36 000 × A$2.00 = 72 000
A$209 474 A$214 720 A$216 000
A$5246 F A$1280 F
Total price variance Total efficiency variance
A$6526 F
Total flexible-budget variance
3.
Actual
Quantity Actual Budgeted Quantity Budgeted
of Input Mix of Input for Actual Output Mix
Oak 23 180 lm. 38% 8 lm. × 3 000 units = 24 000 lm. 40%
Pine 37 820 lm. 62% 12 lm. × 3 000 units = 36 000 lm. 60%
Total 61 000 lm. 100% 60 000 lm. 100%
4. Solution Exhibit 11-52B (on the following page) presents the total direct materials
yield and mix variances for PDS Manufacturing.
The total direct materials yield variance can also be computed as the sum of the direct
materials yield variances for each input:
Direct  Actual total Budgeted total quantity  Budgeted Budgeted

materials
=  quantity of all − of all direct materials  ×
direct materials
×
price of
yield variance  direct materials inputsallowed for 

input mix direct materials
for each input  inputs used actual output  percentage inputs
Oak = (61 000 – 60 000) × 0.40 × A$6.00 = 1000 × 0.40 × A$6.00 = A$2400 U
Pine = (61 000 – 60 000) × 0.60 × A$2.00 = 1000 × 0.60 × A$2.00 = 1200 U
Total direct materials yield variance = A$3600 U
The total direct materials mix variance can also be computed as the sum of the direct
materials mix variances for each input:
Direct  Actual Budgeted  Actual total Budgeted

materials
=
 direct materials − direct materials  × quantity of all × price of
mix variance  input mix input mix  direct materials direct materials
 percentage percentage 
for each input  inputs used inputs
Oak = (0.38 – 0.40) × 61 000 × A$6.00 = 0.02 × 61 000 × A$6.00 = A$7320 F
Pine = (0.62 – 0.60) × 61 000 × A$2.00 = – 0.02 × 61 000 × A$2.00 = 2440 U
Total direct materials mix variance A$4880 F
The sums of the direct materials mix variance and the direct materials yield variance equals
the direct materials efficiency variance. The favourable mix variance arises from using more
of the cheaper pine (and less oak) than the budgeted mix. The yield variance indicates that
the dressers required more total inputs (61 000 lm) than expected (60 000 lm) for the
production of 3000 dressers. Both variances are relatively small and probably within
tolerable limits. PDS should investigate whether substituting the cheaper pine for the more
expensive oak caused the unfavourable yield variance. It should also be careful that using
more of the cheaper pine does not reduce the quality of the dresser or how customers
perceive it.
SOLUTION EXHIBIT 11-52B
Columnar presentation of direct materials yield and mix variances for PDS
Manufacturing
Flexible Budget:
Budgeted Total
Actual Total Quantity Actual Total Quantity Quantity of
of All Inputs Used of All Inputs Used All Inputs Allowed for
× Actual Input Mix × Budgeted Input Mix Actual Output ×
× Budgeted Price × Budgeted Price Budgeted Input Mix
(1) (2) × Budgeted Price
(3)
Oak 61 000 × 0.38 × A$6.00 61 000 × 0.40 × A$6.00 60 000 × 0.40 × A$6.00
= A$139 080 = A$146 400 = A$144 000
Pine 61 000 × 0.62 × A$2.00 61 000 × 0.60 × A$2.00 60 000 × 0.60 × A$2.00
= 75 640 = 73 200 = 72 000
= A$214 720 = A$219 600 = A$216 000
A4880 F A$3600 U
Total mix variance Total yield variance
A$1280 F
Total efficiency variance
F = favourable effect on operating profit; U = unfavourable effect on operating profit.
11-53 Price and efficiency variances, problems in standard-setting, benchmarking
1. Budgeted direct materials input per shirt = 600 rolls ÷ 6000 shirts= 0.10 roll of cloth
Budgeted direct manufacturing labour-hours per shirt (1500 hours ÷ 6000 shirts) = 0.25
hours
Budgeted direct materials cost (A$30 000 ÷ 600) = A$50 per roll
Budgeted direct manufacturing labour cost per hour (A$27 000 ÷ 1500) = A$18 per hour
Actual output achieved = 6732 shirts
Flexible Budget
Direct (612 × A$50) (6732 × 0.10 × A$50)
Materials A$30 294 A$30 600 A$33 660
A$306 F A$3060 F
Direct
Manufacturing (1530 × A$18) (6732 × 0.25 × A$18)
Labour A$27 693 A$27 540 A$30 294
A$153 U A$2754 F
2. Actions employees may have taken include:

(a) Adding steps that are not necessary in working on a shirt.
(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 shirts 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 behaviour is unethical if it is deliberately designed to undermine the credibility of the

standards used at New Fashions.
3. If Jorgenson does nothing about standard costs, his behaviour 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
organisation’s 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 organisational
change is not forthcoming, Jorgenson should be prepared to resign rather than compromise
his professional ethics.
5. Main pros of using Benchmarking Clearing House information to compute variances

are:
(a) Highlights to New Fashions in a direct way how it may or may not be cost-
competitive.
(b) Provides a ‘reality check’ to many internal positions about efficiency or
effectiveness.
Main cons are:
(a) New Fashions 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.

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Cost Accounting A Managerial Emphasis 2nd Edition Horngren Solutions Manual

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Cost Accounting A Managerial

Emphasis 2nd Edition Horngren

11-5 A flexible-budget analysis enables a manager to distinguish how much of the

11-6 The steps in developing a flexible budget are:

Step 1: Identify the actual quantity of output.

11-9 Possible causes of a favourable direct materials price variance are:

11-11 Variance analysis, by providing information about actual performance relative to

11-12 An individual business function, such as production, is interdependent with other

A$25 200 U A$12 400 U

Total flexible-budget variance Total sales-volume variance

2. The key information items are:

Variance Analysis for Nephine Ltd

A$180 500 U A$237 500 F

Variance Analysis for StarDates Ltd for September:

Variable costs 185 250

Contribution margin 117 000 70 500 U 187 500

Total flexible-budget Total sales-volume

11-24 Flexible budget, working backwards

Total flexible-budget variance Total sales volume variance

2. Actual selling price: A$715 000  130 000= A$5.50

Total flexible-budget variance A$7200 Unfavourable

11-25 Flexible-budget and sales-volume variance

Performance Report for Glenwood Pty Ltd June 2015

A$105 000 U A$75 000 F

Performance Report for Glenwood Pty Ltd June 2015

11-26 Price and efficiency variances

1. The key information items are:

The standard quantity of pumpkin per scone is 0.03846kg (2000 ÷ 52 000)

(a) Unfavourable price variance of A$798—reflects the A$1.35 actual purchase

(b) Unfavourable efficiency variance of A$14.31—reflects the actual materials

11-27 Materials and manufacturing labour variances

Actual Costs Flexible Budget

A$21 000 U A$26 000 F

Direct manufacturing labour:

A$72 000 A$81 000 A$69 000

Total flexible-budget variance for both inputs = A$1365.00F + A$3412.50F

Total flexible-budget variance as % of total flexible-budget costs = A$4777.50 

Price Actual Efficiency

Total flexible-budget variance for both inputs = A$3405.99 F + A$4788 F

Total flexible-budget variance as % of total flexible-budget costs = A$8193.99 

3. Efficiencies have improved in the direction indicated by the production manager—but

1. Direct materials and direct manufacturing labour are analysed in turn:

A$12 250 U A$8758.75 U

Direct (4 550 × 1.2 × A$25.50)

A$11 200 U A$3570 U

2. Direct Materials Control 96 250

Work-in-Process Control 81 331.25

Work-in-Process Control 139 230

Direct Manufacturing Labour:

Production (3780 kg.× A$10.00) (1800 × 2 ×

Direct manufacturing labour variances are the same as in requirement 1.

11-31 Journal entries and T-accounts (continuation of 11-30)

For requirement 1 from Exercise 11-30:

a. Direct Materials Control 37 800

b. Work-in-Process Control 36 000

c. Work-in-Process Control 13 500

Direct Direct Materials Direct Materials

Wages Payable Control Accounts Payable Control

For requirement 2 from Exercise 11-30:

a1. Direct Materials Control 60 000

a2. Work-in-Process Control 36 000

Accounts Payable Control Work-in-Process Control

Standard Costs Normal Costs