Solution manual cost accounting 12e by horngren ch 07

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER FLEXIBLE BUDGETS, DIRECT-COST VARIANCES, AND MANAGEMENT CONTROL 7-1 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 7-2 Two sources of information about budgeted amounts are (a) past amounts and (b) detailed engineering studies 7-3 A favorable variance––denoted F––is a variance that has the effect of increasing operating income relative to the budgeted amount An unfavorable variance––denoted U––is a variance that has the effect of decreasing operating income relative to the budgeted amount 7-4 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 7-5 A Level 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 7-6 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 7-7 Four reasons for using standard costs are: (i) cost management, (ii) pricing decisions, (iii) budgetary planning and control, and (iv) financial statement preparation 7-8 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, recognizing possible interdependencies across these individual causes 7-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-9 Possible causes of a favorable direct materials price variance are: purchasing officer negotiated more skillfully 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, budgeted purchase prices were set without careful analysis of the market, and purchasing manager received unfavorable terms on nonpurchase price factors (such as lower quality materials) 7-10 Some possible reasons for an unfavorable direct manufacturing labor efficiency variance are the hiring and use of underskilled 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 labor; unrealistic time standards Each of these factors would result in actual direct manufacturing labor-hours being higher than indicated by the standard work rate 7-11 Variance analysis, by providing information about actual performance relative to standards, can form the basis of continuous operational improvement The underlying causes of unfavorable variances are identified, and corrective action taken where possible Favorable variances can also provide information if the organization can identify why a favorable 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 organization to act on—this is continuous improvement 7-12 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 7-13 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 7-14 Variances can be calculated at the activity level as well as at the company level For example, a price variance and an efficiency variance can be computed for an activity area 7-15 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 an 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 7-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-16 (20–30 min.) Flexible budget Units sold Revenues Variable costs Contribution margin Fixed costs Operating income Actual Results (1) g 2,800 a $313,600 d 229,600 84,000 g 50,000 FlexibleBudget Variances (2) = (1) – (3) $ 5,600 F 22,400 U 16,800 U 4,000 F Flexible Budget (3) 2,800 b $308,000 e 207,200 100,800 g 54,000 Sales-Volume Variances (4) = (3) – (5) 200 U $22,000 U 14,800 F 7,200 U Static Budget (5) g 3,000 c $330,000 f 222,000 108,000 g 54,000 $ 34,000 $12,800 U $ 46,800 $ 7,200 U $ 54,000 $12,800 U $ 7,200 U Total flexible-budget variance Total sales-volume variance $20,000 U Total static-budget variance a $112 × 2,800 = $313,600 $110 × 2,800 = $308,000 c $110 × 3,000 = $330,000 d Given Unit variable cost = $229,600 ÷ 2,800 = $82 per tire e $74 × 2,800 = $207,200 f $74 × 3,000 = $222,000 g Given b The key information items are: Units Unit selling price Unit variable cost Fixed costs Actual 2,800 $ 112 $ 82 $50,000 Budgeted 3,000 $ 110 $ 74 $54,000 The total static-budget variance in operating income is $20,000 U There is both an unfavorable total flexible-budget variance ($12,800) and an unfavorable sales-volume variance ($7,200) The unfavorable sales-volume variance arises solely because actual units manufactured and sold were 200 less than the budgeted 3,000 units The unfavorable flexible-budget variance of $12,800 in operating income is due primarily to the $8 increase in unit variable costs This increase in unit variable costs is only partially offset by the $2 increase in unit selling price and the $4,000 decrease in fixed costs 7-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-17 (15 min.) Flexible budget The existing performance report is a Level 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 $400,000 in the static budget ÷ budgeted direct materials cost per attaché case of $40 The following is a Level analysis that presents a flexible-budget variance and a salesvolume variance of each direct cost category: Output units Direct materials Direct manufacturing labor Direct marketing labor Total direct costs FlexibleSalesActual Budget Flexible Volume Results Variances Budget Variances (1) (2) = (1) – (3) (3) (4) = (3) – (5) 8,800 8,800 1,200 U $364,000 $12,000 U $352,000 $48,000 F 78,000 7,600 U 70,400 9,600 F 110,000 4,400 U 105,600 14,400 F $552,000 $24,000 U $528,000 $72,000 F Static Budget (5) 10,000 $400,000 80,000 120,000 $600,000 $24,000 U $72,000 F Flexible-budget variance Sales-volume variance $48,000 F Static-budget variance The Level analysis shows total direct costs have a $48,000 favorable variance However, the Level analysis reveals that this favorable variance is due to the reduction in output of 1,200 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 cost category to have an unfavorable 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 Each direct cost category has an actual unit variable cost that exceeds its budgeted unit cost: Actual Budgeted Units 8,800 10,000 Direct materials $41.36 $ 40 Direct manufacturing labor $ 8.86 $ Direct marketing labor $12.50 $ 12 Analysis of price and efficiency variances for each cost category could assist in further the identifying causes of these more aggregated (Level 2) variances 7-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-18 (25–30 min.) Flexible-budget preparation and analysis Variance Analysis for Bank Management Printers for September 2007 Level Analysis Actual Static-Budget Results Variances (1) (2) = (1) – (3) 12,000 3,000 U a $252,000 $ 48,000 U d 84,000 36,000 F 168,000 12,000 U 150,000 5,000 U $ 18,000 $ 17,000 U Units sold Revenue Variable costs Contribution margin Fixed costs Operating income Static Budget (3) 15,000 c $300,000 f 120,000 180,000 145,000 $ 35,000 $17,000 U Total static-budget variance Level Analysis Units sold Revenue Variable costs Contribution margin Fixed costs Actual Results (1) 12,000 a $252,000 d 84,000 168,000 150,000 FlexibleBudget Variances (2) = (1) – (3) $12,000 F 12,000 F 24,000 F 5,000 U Flexible Budget (3) 12,000 b $240,000 e 96,000 144,000 145,000 Operating income $ 18,000 $19,000 F $ (1,000) Sales Volume Variances Static (4) = (3) – Budget (5) (5) 3,000 U 15,000 c $60,000 U $300,000 f 24,000 F 120,000 36,000 U 180,000 145,000 $36,000 U $ 35,000 $19,000 F $36,000 U Total flexible-budget Total sales-volume variance variance $17,000 U Total static-budget variance a d b e 12,000 × $21 = $252,000 12,000 × $20 = $240,000 c 15,000 × $20 = $300,000 12,000 × $7 = $ 84,000 12,000 × $8 = $ 96,000 f 15,000 × $8 = $120,000 Level analysis provides a breakdown of the static-budget variance into a flexiblebudget variance and a sales-volume variance The primary reason for the static-budget variance being unfavorable ($17,000 U) is the reduction in unit volume from the budgeted 15,000 to an actual 12,000 One explanation for this reduction is the increase in selling price from a budgeted $20 to an actual $21 Operating management was able to reduce variable costs by $12,000 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) 7-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-19 (30 min.) Flexible budget, working backward Units sold Revenues Variable costs Contribution margin Fixed costs Operating income Actual Results (1) 650,000 $3,575,000 2,575,000 1,000,000 700,000 $ 300,000 FlexibleBudget Variances (2)=(1) (3) $1,300,000 F 1,275,000 U 25,000 F 100,000 U $ 75,000 U Flexible Budget (3) 650,000 $2,275,000a 1,300,000b 975,000 600,000 $ 375,000 $75,000 U Total flexible-budget variance Sales-Volume Variances (4)=(3) (5) 50,000 F $175,000 F 100,000 U 75,000 F $ 75,000 F Static Budget (5) 600,000 $2,100,000 1,200,000 900,000 600,000 $ 300,000 $75,000 F Total sales volume variance $0 Total static-budget variance a b 650,000 × $3.50 = $2,275,000; $2,100,000 650,000 × $2.00 = $1,300,000; $1,200,000 600,000 = $3.50 600,000 = $2.00 Actual selling price: Budgeted selling price: Actual variable cost per unit: Budgeted variable cost per unit: $3,575,000 2,100,000 2,575,000 1,200,000 650,000 = ÷ 600,000 = ÷ 650,000 = ÷ 600,000 = $5.50 $3.50 $3.96 $2.00 The CEO’s reaction was inappropriate 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 Total sales-volume variance $75,000 Unfavorable $75,000 Favorable A closer look at the variance components reveals some major deviations from plan Actual variable costs increased from $2.00 to $3.96, causing an unfavorable flexible-budget variable cost variance of $1,275,000 Such an increase could be a result of, for example, a jump in direct material prices Spencer was able to pass most of the increase in costs onto their customers—actual selling price increased by 57% [($5.50 – $3.50) $3.50], bringing about an offsetting favorable flexible-budget revenue variance in the amount of $1,300,000 An increase in the actual number of units sold also contributed to more favorable results The company should examine why the units sold increased despite an increase in direct material prices For example, Spencer’s customers may have stocked up, anticipating future increases in direct material prices Alternatively, Spencer’s selling price increases may have been lower than competitors’ Understanding the reasons why actual results differ from budgeted amounts can help Spencer better manage its costs and pricing decisions in the future The most important lesson learned here is that a superficial examination of summary level data (Levels and 1) may be insufficient It is imperative to scrutinize data at a more detailed level (Level 2) Had Spencer not been able to pass costs on to customers, losses would have been considerable 7-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Formatted: Section start: New page 7-20 and Performance Report, June 2007 Units (pounds) Revenues Variable mfg costs Contribution margin Actual (1) 525,000 $3,360,000 1,890,000 $1,470,000 Flexible Budget Variances (2) = (1) – (3) $ 52,500 U 52,500 U $105,000 U Flexible Budget (3) 525,000 $3,412,500a 1,837,500b $1,575,000 $105,000 U Flexible-budget variance Sales Volume Variances (4) = (3) – (5) 25,000 F $162,500 F 87,500 U $ 75,000 F $ 75,000 F Sales-volume variance $30,000 U Static-budget variance a Budgeted selling price = $3,250,000 500,000 lbs = $6.50 per lb Flexible-budget revenues = $6.50 per lb 525,000 lbs = $3,412,500 b Budgeted variable mfg cost per unit = $1,750,000 Flexible-budget variable mfg costs = $3.50 per lb Static Budget (5) 500,000 $3,250,000 1,750,000 $1,500,000 500,000 lbs = $3.50 525,000 lbs = $1,837,500 7-7 Static Budget Variance (6) = (1) – (5) 25,000 F $110,000 F 140,000 U $ 30,000 U Static Budget Variance as % of Static Budget (7) = (6) (5) 5.0% 3.4% 8.0% 2.0% To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The selling price variance, caused solely by the difference in actual and budgeted selling price, is the flexible-budget variance in revenues = $52,500 U The flexible-budget variances show that for the actual sales volume of 525,000 pounds, selling prices were lower and costs per pound were higher The favorable sales volume variance in revenues (because more pounds of ice cream were sold than budgeted) helped offset the unfavorable variable cost variance and shored up the results in June 2007 Levine should be more concerned because the small static-budget variance in contribution margin of $30,000 U is actually made up of a favorable sales-volume variance in contribution margin of $75,000, an unfavorable selling-price variance of $52,500 and an unfavorable variable manufacturing costs variance of $52,500 Levine should analyze 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 Levine decide what actions he should take 7-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-21 (20–30 min.) Price and efficiency variances The key information items are: Output units (scones) Input units (pounds of pumpkin) Cost per input unit Actual 60,800 16,000 $ 0.82 Budgeted 60,000 15,000 $ 0.89 Peterson budgets to obtain pumpkin scones from each pound of pumpkin The flexible-budget variance is $408 F Pumpkin costs FlexibleActual Budget Results Variance (1) (2) = (1) – (3) a $13,120 $408 F Flexible Budget (3) b $13,528 Sales-Volume Static Variance Budget (4) = (3) – (5) (5) c $178 U $13,350 a 16,000 × $0.82 = $13,120 60,800 × 0.25 × $0.89 = $13,528 60,000 × 0.25 × $0.89 = $13,350 b c Actual Costs Incurred (Actual Input Qty × Actual Price) a $13,120 Actual Input Qty × Budgeted Price b $14,240 Flexible Budget (Budgeted Input Qty Allowed for Actual Output × Budgeted Price) c $13,528 $1,120 F $712 U Price variance Efficiency variance $408 F Flexible-budget variance a 16,000 × $0.82 = $13,120 16,000 × $0.89 = $14,240 60,800 × 0.25 × $0.89 = $13,528 b c The favorable flexible-budget variance of $408 has two offsetting components: (a) favorable price variance of $1,120––reflects the $0.82 actual purchase cost being lower than the $0.89 budgeted purchase cost per pound (b) unfavorable efficiency variance of $712–reflects the actual materials yield of 3.80 scones per pound of pumpkin (60,800 ÷ 16,000 = 3.80) being less than the budgeted yield of 4.00 (60,000 ÷ 15,000 = 4.00) The company used more pumpkins (materials) to make the scones than was budgeted One explanation may be that Peterson purchased lower quality pumpkins at a lower cost per pound 7-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-22 (15 min.) Materials and manufacturing labor variances Direct Materials Actual Costs Incurred (Actual Input Qty × Actual Price) $200,000 Actual Input Qty × Budgeted Price $214,000 Flexible Budget (Budgeted Input Qty Allowed for Actual Output × Budgeted Price) $225,000 $14,000 F $11,000 F Price variance Efficiency variance $25,000 F Flexible-budget variance Direct Mfg Labor 7-23 $90,000 $86,000 $80,000 $4,000 U $6,000 U Price variance Efficiency variance $10,000 U Flexible-budget variance (30 min.) Price and efficiency variances Direct materials Direct labor Actual Results (1) $429,000 99,200 Flexible Budget Variances (2) = (1) – (3) $57,750 U 9,200 U Flexible Budget (3) $371,250 90,000 Actual Results Direct materials: 8,580,000a minutes × $0.05 per minute= $429,000 Direct labor: 1,600 hours × $62 per minute = $99,200 a 7,800,000 minutes × 110% purchase = 8,580,000 CellOne commits to purchase 110% of the budgeted amount of time Due to the forward commitment of time purchase, the actual time purchased will be the same as the budgeted amount of time to be purchased Flexible Budget Direct materials: 8,250,000a × $0.045 = $371,250 Direct labor: 1,500 × $60 = $90,000 a b 7,500,000 minutes × 110% to be purchased = 8,250,000 minutes 7,500,000 minutes sold 5,000 minutes per hour = 1,500 hours 7-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-35 (20 min.) Service sector, solve for unknowns This problem is best done by using a columnar format for the analysis of direct labor variance, as shown below Start by inserting the four items of data provided in the problem (actual labor hours, direct labor flexible-budget variance, standard labor price and labor price variance) into the columnar presentation, as indicated by footnote a below Then, proceed to calculate and fill in the other values in the columnar presentation in this order: (i) (ii) Actual Quantity Budgeted Price = 1,000 hrs $30 per hr = $30,000 Actual Labor Cost = $30,000 + unfavorable labor price variance = $30,000 + $1,000U = $31,000 (iii) Actual Labor Price = Actual Labor Cost actual labor hrs = $31,000 1,000 = $31 per hr (Requirement 1) (iv) Flexible Budget Labor Cost = Actual Labor Cost + favorable flexible-budget variance = $31,000 + $3,500F = $34,500 (v) Standard labor hours for actual output = Flexible-budget Labor Cost Standard labor price = $34,500 $30 per hr = 1,150 hrs (Requirement 2) Actual Labor Cost Actual Actual Quantity Price 1,000 $31 (iii) Direct hoursa per hour Labor $31,000 (ii) Actual Budgeted Quantity Price 1,000 $30 hoursa per houra $30,000 (i) 1,000 Ua Price variance Flexible Budget Labor Cost Budgeted Qty Allowed for Budgeted Actual Output Price (v) 1,150 $30 assembly-hours per houra $34,500 (iv) 4,500 F Efficiency variance $3,500 Fa Flexible-budget variance a Data provided in problem The actual labor price is $31 per hour, as calculated in step (iii) above The standard labor quantity for actual output is 1,150 hours, as calculated in step (v) above 7-30 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-36 (30 min.) Level variance analysis, solve for unknowns Budgeted selling price = $4,800 ,000 = $ 8.00 per cap 600 ,000 Actual selling price = $5,000 ,000 = $10.00 per cap 500 ,000 = $1,800 ,000 = $3.00 per unit 600 ,000 = $1,400 ,000 = $2.80 per unit 500 ,000 Budgeted variable cost per unit Actual variable cost per unit Level Flexible-budget-based Variance Analysis for Homerun Headgear for Year Ended December 2006 Units sold Revenues (sales) Variable costs Contribution margin Fixed costs Operating income FlexibleBudget Variances (2)=(1) (3) Flexible Budget (3) 500,000 Sales Volume Variance (4)=(3) (5) 100,000 U Static Budget (5) 600,000 $5,000,000 $1,000,000 F $4,000,000 $800,000 U $4,800,000 1,400,000 100,000 F 1,500,000 300,000 F 1,800,000 3,600,000 1,100,000 F 2,500,000 500,000 U 3,000,000 Actual Results (1) 500,000 1,150,000 150,000 U 1,000,000 $2,450,000 $ 950,000 F $1,500,000 $950, 000 F Total flexible-budget variance $500,000 U $500, 000 U Total sales-volume variance $450, 000 F Total static-budget variance Flexible-budget operating income = $1,500,000 Flexible-budget variance for operating income = $950,000 F Sales-volume variance for operating income = $500,000 U Static-budget variance for operating income = $450,000 F 7-31 1,000,000 $2,000,000 Formatted: Font: 11 pt Formatted: Font: 11 pt Formatted: Font: 11 pt To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-37 (30 min.) Direct labor and direct materials variances, missing data Actual Costs Incurred (Actual Input Qty.× Actual Price) Direct manufacturing labor $368,000a Flexible Budget (Budgeted Input Qty Allowed for Actual Input Qty Actual Output × Budgeted Price × Budgeted Price) $384,000b $360,000c $16,000 F Price variance $24,000 U Efficiency variance $8,000 U Flexible-budget variance a Given (or 32,000 hours × $11.50/hour) 32,000 hours × $12/hour = $384,000 c 6,000 units × hours/unit × $12/hour = $360,000 b Unfavorable direct materials efficiency variance of $12,500 indicates that more pounds of direct materials were actually used than the budgeted quantity allowed for actual output Pounds used in excess,of flexible budget = $12,500 efficiency variance $2 per pound budgeted price = 6,250 pounds Budgeted pounds allowed for the output achieved = 6,000 × 20 = 120,000 pounds Actual pounds of direct materials used = 120,000 + 6,250 = 126,250 pounds $292,500 150,000 = $1.95 per pound Actual price paid per pound = Actual Costs Incurred (Actual Input × Actual Price) $292,500a $7,500 F Price variance a b Given 150,000 pounds × $2/pound = $300,000 7-32 Actual Input × Budgeted Price $300,000b To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-38 (20–30 min.) Direct materials and manufacturing labor variances, solving unknowns All given items are designated by an asterisk Direct Manufacturing Labor Actual Costs Incurred (Actual Input Qty × Actual Price) Actual Input Qty × Budgeted Price Flexible Budget (Budgeted Input Qty Allowed for Actual Output × Budgeted Price) (1,900 × $21) $39,900 (1,900 × $20*) $38,000 (4,000* × 0.5* × $20*) $40,000 $1,900 U* Price variance Direct Materials (13,000 × $5.25) $68,250* $2,000 F* Efficiency variance Purchases (13,000 × $5*) $65,000 $3,250 U* Price variance Usage (12,500 × $5*) $62,500 (4,000* × 3* × $5*) $60,000 $2,500 U* Efficiency variance 4,000 units × 0.5 hours/unit = 2,000 hours Flexible budget – Efficiency variance = $40,000 – $2,000 = $38,000 Actual dir manuf labor hours = $38,000 ÷ Budgeted price of $20/hour = 1,900 hours $38,000 + Price variance, $1,900 = $39,900, the actual direct manuf labor cost Actual rate = Actual cost ÷ Actual hours = $39,000 ÷ 1,900 hours = $21/hour (rounded) Standard qty of direct materials = 4,000 units × pounds/unit = 12,000 pounds Flexible budget + Dir matls effcy var = $60,000 + $2,500 = $62,500 Actual quantity of dir matls used = $62,500 ÷ Budgeted price per lb = $62,500 ÷ $5/lb = 12,500 lbs Actual cost of direct materials, $68,250 – Price variance, $3,250 = $65,000 Actual qty of direct materials purchased = $65,000 ÷ Budgeted price, $5/lb = 13,000 lbs Actual direct materials price = $68,250 ÷ 13,000 lbs = $5.25 per lb 7-33 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-39 (20 min.) Responsibility for variances Cases Direct materials Direct manuf labor Actual Results (1) 10,000 Price Variance (2) = (1) – (3) Actual Quantity Budgeted Price (3) $127,800a $14,200 F $142,000b $22,000 U $120,000 c $13,000 F d $21,000 U $ 70,000 e $ 78,000 $ 91,000 Efficiency Variance (4) = (3) – (5) Flexible Budget (5) 10,000 a 71,000 lbs $1.80 per lb = $127,800 71,000 lbs $2 per lb = $142,000 c 10,000 cases lbs per case $2 per lb = $120,000 d 6,500 dir manuf labor-hours $14 per dir manuf labor-hour = $91,000 e 10,000 cases 0.5 hrs per case $14 per hr = $70,000 b 2.a If the favorable price and unfavorable efficiency variance for direct materials were due to purchase of poor-quality materials, the purchase manager is responsible for both variances The favorable direct material price variance of $14,200 is more than offset by the unfavorable direct materials efficiency variance of $22,000, resulting in an overall flexible-budget direct materials variance of $7,800 unfavorable If the poor quality of the direct materials caused workers to be inefficient, the supervisor may also want to assign the unfavorable direct manufacturing labor efficiency variance of $21,000 to the purchasing manager The goal is not to allocate blame but rather to assign variances to managers most responsible for them In this way, the purchasing manager can fully understand the consequences of purchasing poor-quality materials and the benefits of taking actions to present such events from recurring The production manager and the human resource manager should be assigned the favorable direct manufacturing labor price variance to make them aware of the beneficial actions they took and to see if these actions can be repeated 2.b If the favorable price and unfavorable efficiency variance for direct manufacturing labor was due to the use of less-skilled workers, the production manager is responsible for both variances The favorable direct manufacturing labor price variance of $13,000 is more than offset by the unfavorable direct manufacturing labor efficiency variance of $21,000, resulting in an overall flexible-budget direct manufacturing labor variance of $8,000 unfavorable Furthermore, if the less-skilled workers caused the direct materials to be used inefficiently, the supervisor may also want to assign the unfavorable direct materials efficiency variance of $22,000 to the production manager Holding the production manager accountable for these variances makes that manager aware of the full consequences of hiring less-skilled workers, as well as the benefits of remedial actions The purchasing manager should be assigned the favorable direct materials price variance to encourage her to continue to achieve lower direct material prices 7-34 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-40 (60 min.) Comprehensive variance analysis review Actual Results Units sold (80% × 1,500,000) Selling price per unit Revenues (1,200,000 × $3.70) Direct materials purchased and used: Direct materials per unit Total direct materials cost (1,200,000 × $0.80) Direct manufacturing labor: Actual manufacturing rate per hour Labor productivity per hour in units Manufacturing labor-hours of input (1,200,000 ÷ 250) Total direct manufacturing labor costs (4,800 × $15) Direct marketing costs: Direct marketing cost per unit Total direct marketing costs (1,200,000 × $0.30) Fixed costs ($900,000 $30,000) Static Budgeted Amounts Units sold Selling price per un Revenues (1,500,000 × $4.00) Direct materials purchased and used: Direct materials per unit Total direct materials costs (1,500,000 × $0.85) Direct manufacturing labor: Direct manufacturing rate per hour Labor productivity per hour in units Manufacturing labor-hours of input (1,500,000 ÷ 300) Total direct manufacturing labor cost (5,000 × $15.00) Direct marketing costs: Direct marketing cost per unit Total direct marketing cost (1,500,000 × $0.30) Fixed costs Revenues Variable costs Direct materials Direct manufacturing labor Direct marketing costs Total variable costs Contribution margin Fixed costs Operating income Actual operating income Static-budget operating income Total static-budget variance $0.80 $960,000 $15 250 4,800 $72,000 $0.30 $360,000 $870,000 1,500,000 $4.00 $6,000,000 $0.85 $1,275,000 $15.00 300 5,000 $75,000 $0.30 $450,000 $900,000 Actual Results $4,440,000 Static-Budget Amounts $6,000,000 $ 960,000 72,000 360,000 1,392,000 3,048,000 870,000 $2,178,000 $1,275,000 75,000 450,000 1,800,000 4,200,000 900,000 $3,300,000 $2,178,000 3,300,000 $1,122,000 U 7-35 1,200,000 $3.70 $4,440,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Level Flexible-budget-based Variance Analysis Actual Results Units sold Flexible-Budget Variances 1,200,000 Flexible Budget SalesVolume Variances 1,200,000 300,000 Static Budget 1,500,000 Revenues Variable costs Direct materials Direct manuf labor Direct marketing costs Total variable costs Contribution margin Fixed costs $4,440,000 $360,000 U $4,800,000 $1,200,000 U $6,000,000 960,000 72,000 360,000 1,392,000 3,048,000 870,000 60,000 F 12,000 U 48,000 F 312,000 U 30,000 F 1,020,000 60,000 360,000 1,440,000 3,360,000 900,000 255,000 F 15,000 F 90,000 F 360,000 F 840,000 U 1,275,000 75,000 450,000 1,800,000 4,200,000 900,000 Operating income $2,178,000 $282,000 U $2,460,000 $ 840,000 U $3,300,000 $840, 000 U Total sales-volume variance $282, 000 U Total flexible-budget variance $1,122,000 U Total static-budget variance Flexible-budget operating income = $2,460,000 Flexible-budget variance for operating income = $282,000U Sales-volume variance for operating income = $840,000U Formatted: Font: 11 pt Formatted: Font: 11 pt Formatted: Font: 11 pt Level Analysis of Direct Manufacturing Labor flexible-budget variance Direct Mfg Labor Actual Costs Incurred (Actual Input Qty × Actual Price) (4,800 × $15.00) $72,000 Actual Input Qty × Budgeted Price (4,800 × $15.00) $72,000 $0 Price variance Flexible Budget (Budgeted Input Qty Allowed for Actual Output × Budgeted Price) (*4,000 × $15.00) $60,000 $12,000 U Efficiency variance $12,000 U Flexible-budget variance * 1,200,000 units ÷ 300 direct manufacturing labor standard productivity rate per hour DML price variance = $0; DML efficiency variance = $12,000U DML flexible-budget variance = $12,000U 7-36 Formatted: Font: 11 pt To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-41 (20 min.) Comprehensive variance analysis Units Selling price Sales Variable costs Direct materials Direct manuf labor Other variable costs Total variable costs Contribution margin Fixed costs Operating income a 12,000 units 12,000 units 12,000 units b c b 12,000 units 12,000 units 144,000 75,600 118,200 337,800 520,200 171,000 $349,200 $18,000 F Flexible Budget for 2nd Qtr Results (3) 12,000 $ 70.00 $840,000 6,480 3,600 1,800 4,680 22,680 1,000 $21,680 F U F F F U F 150,480a 72,000b 120,000c 342,480 497,520 170,000 $327,520 Flexible Budget Variance (2) = (1) – (3) Sales Volume Variance (4) = (3) – (5) 2,000 F $140,000 F Static Budget (5) 10,000 $ 70.00 $700,000 25,080 12,000 20,000 57,080 82,920 $82,920 125,400 60,000 100,000 285,400 414,600 170,000 $244,600 U U U U F F 2.2 lbs per unit $5.70 per lb = $150,480 0.5 hrs per unit $12 per hr = $72,000 $10 per unit = $120,000 Direct materials Direct manuf labor a Secondquarter 2007 actuals (1) 12,000 $ 71.50 $858,000 Secondquarter 2007 actuals $144,000 75,600 Actual Input Qty Price Variance $ 7,200 U 10,800 U Budgeted Price $136,800a 64,800 b lbs per unit $5.70 per lb = $136,800 0.45 DML hours per unit $12 per DML hour = $64,800 7-37 Flexible Budget Efficiency for 2nd Variance Quarter $13,680 F $150,480 7,200 F 72,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The following details, revealed in the variance analysis, should be used to rebut the union if it focuses on the favorable operating income variance: Most of the static budget operating income variance of $104,600F ($349,200 – $244,600) comes from a favorable sales volume variance, which only arose because ESS sold more units than planned Of the $21,680 F flexible-budget variance in operating income, most of it comes from the $18,000F flexible-budget variance in sales The net flexible-budget variance in total variable costs of $4,680 F is small, and it arises from direct materials and other variable costs, not from labor Direct manufacturing labor flexible-budget variance is $3,600 U The direct manufacturing labor price variance ($10,800U), which is large and unfavorable, is indeed offset by direct manufacturing labor’s favorable efficiency variance—but the efficiency variance is driven by the fact that ESS is using new, more expensive materials Noonan and 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 favorable direct manufacturing labor efficiency variance of $7,200 does not offset the unfavorable direct manufacturing labor price variance of $10,800 Changing the standards may make them more realistic, making it easier to negotiate with the union But the union will resist any tightening of labor 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 program to change the standards will be more palatable to the union and will achieve the same result over a somewhat longer period of time 7-38 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-42 (30 min.) Comprehensive variance analysis Computing unit selling prices and unit costs of inputs: Actual selling price = $3,555,000 ÷ 450,000 = $7.90 Budgeting selling price = $3,200,000 ÷ 400,000 = $8.00 Selling-price,variance = (Actual,selling price – Budgeted,selling price) × Actual,units sold = ($7.90/unit – $8.00/unit) × 450,000 units = $45,000 U 2., 3., and The actual and budgeted unit costs are: Actual Direct materials Cookie mix Milk chocolate Almonds Direct manuf labor Mixing Baking Budgeted $0.02 ($93,000 ÷ 4,650,000) 0.20 ($532,000 ÷ 2,660,000) 0.50 ($240,000 ÷ 480,000) $0.02 0.15 0.50 14.40 ($108,000 ÷ 450,000 × 60) 18.00 ($240,000 ÷ 800,000 × 60) 14.40 18.00 The actual output achieved is 450,000 pounds of chocolate nut supreme 7-39 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The direct cost price and efficiency variances are: Actual Costs Incurred (Actual Input Qty × Actual Price) (1) Direct materials Cookie mix Milk chocolate Almonds Direct manuf labor costs Mixing Baking Actual Input Qty × Budgeted Price (3) Price Variance (2)=(1)–(3) $ 93,000 532,000 240,000 $865,000 $ $108,000 240,000 $348,000 $ 133,000 U $133,000 U $ a $ 93,000 b 399,000 c 240,000 $732,000 d 0 $108,000 $ e 240,000 $348,000 a f b g $0.02 × 4,650,000 = $93,000 $0.15 × 2,660,000 = $399,000 c $0.50 × 480,000 = $240,000 d $14.40/hr × (450,000 ÷ 60 min./hr.) = $108,000 e $18.00/hr × (800,000 ÷ 60 min./hr.) = $240,000 Efficiency Variance (4)=(3)–(5) Flex Budget (Budgeted Input Qty Allowed for Actual Output × Budgeted Price) (5) f $ 3,000 U 61,500 U 15,000 U $79,500 U $ 90,000 g 337,500 h 225,000 $652,500 30,000 F $30,000 F $108,000 j 270,000 $378,000 $0.02 × 10 × 450,000 = $90,000 $0.15 × × 450,000 = $337,500 h $0.50 × × 450,000 = $225,000 i $14.40 × (450,000 60) = $108,000 j $18.00 × (450,000 30) = $270,000 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 $0.05 increase in the price per ounce of milk chocolate could arise from uncontrollable market factors or from poor contract negotiations by Aunt Molly’s 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 mixing and baking equipment not being maintained in a fully operational mode The higher price per ounce of milk chocolate (and perhaps higher quality of milk chocolate) did not reduce the quantity of milk chocolate used to produce actual output Labor efficiency variance The favorable efficiency variance for baking could be due to workers eliminating nonvalue-added steps in production 7-40 i To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-43 (30 min.) Flexible budgeting, activity-based costing, variance analysis a b c d e f g Static-budget Amounts 30,000 250 120 360 $14 $5,040 Units of TGC produced and sold Batch size (units per batch) Number of batches (a ÷ b) Cleaning labor-hours per batch Total cleaning labor-hours (c × d) Cost per cleaning labor-hour Total cleaning labor cost (e × f) Actual Amounts 22,500 225 100 3.5 350 $12.50 $4,375 Step 1: The number of batches in which the actual output units should have been produced: 22,500 actual units ÷ 250 budgeted batch size = 90 batches Step 2: The number of cleaning labor-hours that should have been used: budgeted hours per batch × 90 batches = 270 cleaning labor-hours Step 3: The flexible-budget amount for cleaning labor-hours: 270 cleaning labor-hours × budgeted cost per cleaning labor-hours, $14 = $3,780 Flexible-budget variance = Actual costs – Flexible-budget costs = (350 × $12.50) – (270 × $14) = $4,375 – $3,780 = $595 U Price variance = Actual quantity Actual price Budgeted price × of input of input of input = ($14.00 – $12.50) × 350 = $525 F Budgeted quantity Budgeted price of input allowed × of input for actual output = (350 – 270) × $14 = $1,120 U Efficiency variance = Actual quantity of input used The unfavorable flexible-budget variance of $595 is composed of two offsetting amounts: Price variance of $525 F due to the actual cost of $12.50 per hour being fewer than the budgeted $14.00 per hour Efficiency variance of $1,120 U due to the (1) actual batch size of 225 units being below the budgeted size of 250 units and (2) higher actual cleaning labor-hours per batch of 3.5 hours instead of budgeted cleaning labor-hours per batch of hours Toymaster should investigate various explanations as to why this occurred The favorable price variance could be the result of skillful negotiations, abundance of labor, or poor quality of labor Small actual batch sizes could be the result of quality problems Higher actual cleaning laborhours per batch could result from unmotivated or underskilled workers or very tight standards for cleaning time 7-41 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7-44 (30 min.) Price and efficiency variances, problems in standard setting, benchmarking Budgeted direct materials input per shirt = 400 rolls ÷ 4,000 shirts= 0.10 roll of cloth Budgeted direct manufacturing labor-hours per shirt (1,000 hours ÷ 4,000 shirts) = 0.25 hours Budgeted direct materials cost ($20,000 ÷ 400) = $50 per roll Budgeted direct manufacturing labor cost per hour ($18,000 ÷ 1,000) = $18 per hour Actual output achieved = 4,488 shirts Actual Costs Incurred (Actual Input Qty × Actual Price) Direct Materials $20,196 Actual Input Qty × Budgeted Price (408 × $50) $20,400 $204 F Price variance Direct Manufacturing Labor $2,040 F Efficiency variance (1,020 × $18) $18,360 $18,462 Flexible Budget (Budgeted Input Qty Allowed for Actual Output × Budgeted Price) (4,488 × 0.10 × $50) $22,440 $102 U Price variance (4,488 × 0.25 × $18) $20,196 $1,836 F Efficiency variance 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 above-budgeted production (b) They may want to create a relaxed work atmosphere, and a less demanding standard can reduce stress (c) They have a ―them vs us‖ mentality rather than a partnership perspective (d) They may want to gain all the benefits that ensue from superior performance (job security, wage rate increases) without putting in the extra effort required This behavior is unethical if it is deliberately designed to undermine the credibility of the standards used at Savannah Fashions 7-42 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com If Anderson does nothing about standard costs, his behavior will violate the ―Standards of Ethical Conduct for Management Accountants.‖ In particular, he would be violating the (a) standards of competence, by not performing technical duties in accordance with relevant standards; (b) standards of integrity, by passively subverting the attainment of the organization’s objective to control costs; and (c) standards of objectivity, by not communicating information fairly and not disclosing all relevant cost information Anderson 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, Anderson should escalate the issue up the hierarchy in order to effect change If organizational change is not forthcoming, Anderson should be prepared to resign rather than compromise his professional ethics Main pros of using Benchmarking Clearing House information to compute variances are (a) Highlights to Savannah 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) Savannah 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 7-43 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Case The Starbucks case in this chapter may only be discussed using the textbook write-up The case questions challenge students to apply the concepts learned in the chapter to a specific business situation MANAGEMENT CONTROL AT STARBUCKS The efficiency variance is $30 U ((1,000 actual units $0.70 budgeted cost per unit) – $730 actual total costs) The manager has no control over the price paid by the store for the coffee from Starbucks corporate This price is the budgeted price and hence the variance on account of direct materials is totally an efficiency variance Trying to hold the manager accountable for a price variance would violate the concept of controllability (discussed in chapter 6), because the manager cannot influence the price charged by the corporate supply function The manager does, however, have control over how well labor uses coffee to prepare drinks The unfavorable efficiency variance is most likely a result of using too much coffee to make the 1,000 drinks, due to waste or inefficiency (or too much coffee in each drink) Keep in mind that this is one variance for one drink’s coffee ingredient, for a one-week time period Similar variances can be calculated for the remaining direct materials items and aggregated for periods of a month, quarter, or year Some examples of nonfinancial measures include employee commitment and satisfaction; employee turnover; number of drinks sold by category and by hour; customer waiting times in queues; product waste levels; customer satisfaction; labor hours worked; raw ingredient quantities; and market share Nonfinancial measures matter because they draw attention to areas that may be problems and require action Often, nonfinancial measures are leading indicators of future financial performance For example, consistently low scores on customer waiting times may indicate that, as competition increases (that is, other premium coffee shops open nearby), customers will go elsewhere for their coffee fix, thereby reducing revenues in future periods Nonfinancial measures also are relevant when evaluating the performance of store managers 7-44 ... between standard costing and normal costing for direct cost items is: Direct Costs Standard Costs Standard price(s) × Standard input allowed for actual outputs achieved Normal Costs Actual price(s)... $10,672.20 c Unchanged from 2 007 d Actual dir manuf labor cost, June 2008 = Actual dir manuf cost June 2 007 0.98 = $8,464.50 0.98 = $8,295.21 Alternatively, actual dir manuf labor cost, June 2008... variance shows each direct cost category to have an unfavorable variance indicating less efficient use of each direct cost item than was budgeted, or the use of more costly direct cost items than