Solution manual introduction to management accounting 14e by horngren ch08

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER COVERAGE OF LEARNING OBJECTIVES LEARNING OBJECTIVE LO1: Distinguish between flexible budgets and static budgets LO2: Use flexible-budget formulas to construct a flexible budget based on the volume of sales LO3: Prepare an activitybased flexible budget LO4: Explain the performance evaluation relationship between static budgets and flexible budgets LO5: Compute activity variances and flexible-budget variances LO6: Compute and interpret price and quantity variances for inputs based on cost-driver activity LO7: Compute variable overhead spending and efficiency variances LO8: Compute the fixed overhead spending variance FUNDAMENTAL ASSIGNMENT MATERIAL A1 CRITICAL THINKING EXERCISES AND EXERCISES PROBLEMS CASES, EXCEL, COLLAB., & INTERNET EXERCISES A1, 24, 25, 26 27 43, 49, 50 52, 53, 55, 57, 58 43 54 B1 20, 21 34, 36, 37 38, 42, 51 54, 56, 57 A1, A2, B1 19, 20, 21, 27 28 52, 53, 54, 55, 56, 57, 58 A3, B2 22, 29, 30 31, 32, 33 34, 35, 36 37, 38, 39 42, 51 40, 41, 44, 45, 46, 47, 48, 51 B3 23 B3 438 40, 41, 44, 45 46, 47, 48, 51 55, 57, 58 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER Flexible Budgets and Variance Analysis 8-A1 (30-45 min.) Amounts are in thousands Revenue Flexible Budget Amounts $7,600 $8,000 $8,400 Fuel Repairs and maintenance Supplies and miscellaneous Variable payroll Total variable costs $ 152 $ 160 $ 168 76 80 84 760 800 840 5,092 5,360 5,628 $6,080 $6,400 $6,720 Supervision Rent Depreciation Other fixed costs Total fixed costs $ 180 160 480 160 $ 980 Total costs Operating income $7,060 $7,380 $7,700 $ 540 $ 620 $ 700 $ 180 160 480 160 $ 980 $ 180 160 480 160 $ 980 Cost = $980,000 per quarter plus 80 of revenue = $980,000 + 80 (Revenue) Variances are defined as deviations of actual results from plans The total variances in the problem can be subdivided to provide answers to two broad questions: (a) What portion is attributable to not attaining a predetermined level of volume or activity? When volume is measured in terms of sales, this variance is called the sales-activity variance 439 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (b) What portion is attributable to nonvolume effects? This variance is often called the flexible-budget variance, which is composed of price and quantity variances (where quantity variances are often called usage or efficiency variances) The existing performance report, which is based solely on a static budget, cannot answer these questions clearly It answers (a) partially, because it compares the revenue achieved with the original targeted revenue But the report fails to answer (b) A more complete analysis follows: Summary of Performance (in thousands) (1) (2) (3) (4) (5) Actual =(1)-(3) Flexible =(3)-(5) Results Budget at Actual Flexible- for Actual Sales Activity Budget Sales Activity Static Level Variances Activity Variances Budget Net revenue $7,600 $ $7,600 $400 U $8,000 Total variable costs 6,230 150U 6,080 320 F 6,400 Contribution margin $1,370 $150U $1,520 $ 80U $1,600 Fixed costs 981 1U 980 980 Operating income $ 389 $151U $ 540 $ 80U $ 620 U = Unfavorable Column (4) focuses on the effects of sales volume It shows that a $400,000 drop in sales activity is expected to cause a $80,000 decrease in contribution margin and hence a $80,000 drop in operating income Column (2) generally focuses on efficiency Without a flexible budget, operating inefficiencies cannot be isolated from the effects of changes in sales activity Cost control performance may be reported in more detail, where the focus is on efficiency (in thousands): 440 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Flexible Flexible Actual Budget Budget Costs Allowance* Variance Variable Costs Fuel $ Repairs and maintenance Supplies and miscellaneous Variable payroll Fixed Costs Supervision Rent Depreciation Other fixed costs Totals U = Unfavorable *For $7,600,000 revenue 441 157 $ 152 $ 5U 85 76 9U 788 760 28U 5,200 5,092 108U 183 160 480 158 $7,211 180 160 480 160 $7,060 3U 2F $151U To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-A2 (20-30 min.) This analysis of flexible budget and static budget variances follows Exhibit 8-5 Static Budget Flexible Budget Standard Inputs Based on Allowed for Actual Overhead Actual Outputs x Planned Outputs x Costs Incurred Standard Prices Standard Prices (1) (3) (5) Systems 90 requests x $500 (75 requests x $500) consulting, $40,000 = $45,000 = $37,500 variable Flexible-budget Sales-Activity variance variance (1) – (3) (3)-(5) $40,000 - $45,000 = $45,000 - $37,500 = $5,000 F $7,500 U Static budget variance (1)-(5) $40,000 -$37,500 = $2,500 U Systems consulting, fixed $76,000 (given) $65,000 $65,000 Flexible-budget Sales-Activity variance variance (1) – (3) (3)-(5) $76,000 - $65,000 = $65,000 - $65,000 = $11,000 U -0Static budget variance (1)-(5) $76,000 - $65,000 = $11,000 U Note that the activity-level variance for fixed costs is always zero because flexible and static budget fixed costs are always the same 442 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-A3 (20 - 30 min.) Direct materials:5 lb x $10.00 =$ 50.00 Direct labor:10 hrs x $25.00 = 250.00 Total $300.00 The standard costs expected are based on actual output achieved, not scheduled or budgeted output In general: A B Actual Cost Incurred: Actual Inputs x Actual Prices $xxx Flexible Budget Based on Actual Inputs x Standard Prices $yyy C Flexible Budget Based on Expected Inputs for Actual Outputs Achieved x Standard Prices $zzz Price variance Quantity variance (A - B) (B - C) Flexible-budget variance (A - C) Direct Materials 2,700 lbs x $8.50 = 2,700 lbs x $10.00 = 525 units x x $22,950 $27,000 $10.00 = $26,250 Price variance Quantity variance (A - B) = (B - C) $22,950 - $27,000 = $27,000 - $26,250 = $4,050 F $750 U Flexible-budget variance (A - C) $22,950 - $26,250 = $3,300 F 443 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com A Direct Labor B C 5,700 hrs x $26.00 = 5,700 hrs x $25.00 = 525 units x 10 hrs x $148,200 $142,500 $25.00 = $131,250 Price variance Quantity variance (A - B) = (B - C) = $148,200 - $142,500 $142,500 - $131,250 = $5,700 U = $11,250 U Flexible-budget variance (A - C) $148,200 - $131,250 = $16,950 U Among the possible explanations for the performance are: (a) Were substandard materials used because they were cheaper, resulting in higher waste than usual? (Note that the tradeoff resulted in a net favorable materials variance.) (b) Net savings in material costs may be undesirable if they are due to purchase of substandard materials that cause inefficient use of direct labor, too (c) Direct labor is expensive A wage rate that is just 4% above the standard rate can be significant in total dollar amount 444 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-B1 (15-20 min.) TAX PREPARATION SERVICES, INC Summary Performance Report Actual Flexible Results Budget at Actual Flexible for Actual Sales Activity Budget Activity Activity Static Level Variances Level Variances Budget Physical units (clients) Sales Variable costs 625,000 Contribution margin Fixed costs Operating income 3,100 3,100 600F 2,500 $1,116,000$31,000F $1,085,000$210,000F $875,000 800,000 25,000U 775,000 150,000U $ 316,000 $250,000 159,500 $ 156,500 $100,000 $6,000 F $ 310,000 $ 60,000F 9,500U 150,000 150,000 $3,500U $ 160,000 $ 60,000F Static budget operating income Variances: Sales activity variances Flexible-budget variances Actual operating income 445 $100,000 $60,000F 3,500U 56,500F $156,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-B2 (20-30 min.) Direct Materials C Flexible Budget Actual Cost Flexible Budget Standard Inputs Incurred: Based on for Actual Actual Inputs x Actual Inputs x Outputs Achieved Actual Prices Standard Prices x Standard Prices 115,000 lb x $7.80 115,000 lb x $7 = 14,400 units x 10 x = $897,000 $805,000 $7 = $1,008,000 Price variance Usage variance (A - B) = (B - C) $897,000 - $805,000 = $805,000 - $1,008,000 = $92,000 U $203,000 F Flexible-budget variance (A - C) = $897,000 - $1,008,000 = $111,000F Direct Labor 30,000 hr x $12 = $360,000 A B 30,000 hr x $12.75 = 14,400 units x hr $382,500 x $12.75 = $367,200 Price variance Usage variance (A - B) = (B - C) $360,000 - $382,500 $382,500 - $367,200 = $22,500 F = $15,300 U Flexible-budget variance (A - C) $360,000 - $367,200 = $7,200 F Tradeoffs may have been made in each category More expensive materials may have been acquired with the hope of achieving less waste Less expensive labor may have been used that required more hours to the job The overall effects on costs as measured by these variances were favorable Management also should be concerned with effects of these tradeoffs on quality, on-time delivery, customer satisfaction, and so on that are not measured in the variances 446 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-B3 (20-30 min.) If the total overhead incurred is $203,600, of which $135,900 is fixed, then variable overhead was $203,600 $135,900 = $67,700 The following analysis should be helpful All given items are designated by an asterisk (*) A Orderprocessing departmentvariable overhead B Actual Overhead Costs Incurred $67,700 C Flexible Budget Flexible Budget Standard Inputs Based on Actual Allowed for Inputs x Standard Outputs Achieved x Prices Standard Prices $67,700 + $2,500* = $70,200 - $8,100 = $70,200; $62,100 117,000 hr x 10* x 103,500 hr x 10* x $.06* = $70,200 $.06* = 62,100 Spending variance Efficiency variance $2,500* F $8,100 U Flexible-budget variance (A - C) $5,600* U $8,100U The efficiency variance is computed by subtracting the spending variance from the flexible-budget variance, $5,600 U – ($2,500 F) 117,000 hours The actual hours can be computed by adding the variable overhead spending variance to the actual variable overhead and then dividing the result by $.60: ($67,700 + $2,500) ÷ $.60 = 117,000 hours Alternatively, this answer could be obtained by taking the answer in part (3) and adding 13,500 hours because the unfavorable efficiency variance represents 13,500 hours of work ($8,100 ÷ $.60) 447 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Direct Materials Cost Incurred Actual Inputs x Actual Prices Flexible Budget Based on Actual Inputs x Expected Prices Flexible Budget Based on Standard Inputs Allowed for Actual Output Achieved x Expected Prices 42,000 lbs x $1.86 = $78,120 42,000 lbs x $2.00 = $84,000 (8,000 units x 5) x $2.00 = $80,000 42,000 x ($1.86-$2.00) (42,000 - 40,000) x $2.00 = Price variance, = Quantity variance, $5,880F $4,000U Flexible-budget variance, $1,880F Direct Labor 4,140 hrs x $16.40 = $67,896 4,140 hrs x $16.00 = $66,240 (8,000 units x hrs x $16.00) or (4,000 hrs x $16) = $64,000 4,140 x ($16.40-$16.00) (4,140 - 4,000) x $16.00 = Price variance, = Quantity variance, $1,656U $2,240U Flexible-budget variance, $3,896U 485 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The purchasing manager for Dominion apparently purchased material for $.14 per pound less than the standard, saving the company $5,880 However, the company used more of the material, perhaps because poor quality of the materials caused excessive waste The cost of the extra material was $4,000, leaving a net saving of $1,880 But this is not necessarily the end of the analysis Both price and quantity variances for labor were unfavorable Possibly scrapping of the materials came after they had been partly processed, entailing a wasting of labor as well If the quality of materials caused the entire extra usage of 140 hours of labor, $2,240 should be compared to the net saving of $1,880, making the material-purchase decision a poor economic decision In addition, the labor price variance may be related, also If the extra usage of labor caused the use of overtime and the overtime premium caused the increase in average labor rates, the $1,656 unfavorable price variance might also be caused by the materials If all of these causation links apply, the total effect of purchasing the cheaper materials is: Material price variance $5,880 F Material usage variance 4,000 U Labor usage variance 2,240 U Labor rate variance 1,656 U Total variance $2,016 U 8-51 (30 min.) The solution is given in the textbook after the problem itself 486 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-52 (15-20 min.) Variable costs, 2007: $114, 750 + $204,000 + $153,000 + 21% x ($204,000 + $153,000) + ($194,250 - $181,500) = $559,470 Therefore, variable cost per visit are $559,470 ÷ 17,000 = $32.91 Fixed costs are $181,500 + [$676,200 - 20 x (204,000 + $153,000)] = $786,300 Cost Function: $32.91 per visit variable and $786,300 per year fixed Revenues ($76 per visit; 18,000 visits) Variable costs: Supplies Physician salaries Nurse salaries Overhead Administrative Total variable cost Fixed costs: Overhead Administrative Expenses Total fixed costs Net Loss $1,368,000 $ 121,500 216,000 162,000 79,380 13,500 592,380 604,800 181,500 786,300 $ (10,680) Variance to explain: Budgeted loss – Actual loss = $10,680 - $15,500 = $4,820 U Sales Volume variance = 400 visits x ($76 - $32.91) = $17,236 F Flexible Budget Variance = $4,820 U - $17,236 F = $22,056 U a) The extra 400 units generated $17,236 additional profit b) Actual costs were higher than the flexible budget for 18,400 visits by $22,056 The total effect was a larger loss than budgeted, caused by spending $22,056 more than budgeted for this level of volume but offset partly by the $17,236 benefit of the additional 400 visits 487 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-53 (35-45 min.) Printing department costs for the first month: A B C Flexible Budget Based Actual Cost on Standard Inputs Incurred: Allowed for Actual Actual Inputs x Outputs Achieved x Actual Prices Standard Prices Static Budget Printing $51,000 40,000 pages x 35,000 pages x $1.00 = $40,000 $1.00 = $35,000 Flexible-budget variance (A - B) = $51,000 - $40,000 = $11,000 U Printing activity variance (B - C) = $40,000 - $35,000 = $5,000 U Static budget variance (A - C) $51,000 - $35,000 = $16,000 U The static budget was inaccurate for the reasons given in the problem: all types of jobs requested more printing, and both government and internal jobs used more four-color and graphics printing Printing activity was higher, and the mix of types of jobs differed from what was expected Likely explanations are that (1) the $1.00 charge per page is an average printing cost, but costs per page can differ greatly with relative complexity, (2) the printing department has not identified the appropriate cost drivers to enable it to charge for the costs the department incurs All the users recognize that four-color, graphic printing is a bargain, and single-color printing is too expensive As a result, everyone wishes to use more of the low-price, high complexity printing 488 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com a The ABC analysis is an attempt to measure the costs of printing complexity If the analysis is accurate, then four-color printing jobs will cost at least $1.35 per page ($.35 + $1.00) plus pre-press costs Simple, black-and-white jobs will cost only $.35 per page Costs charged for the various jobs will reflect their complexity and should result in more efficient use of printing services Since the costs of different types of jobs will vary under this new system, it is critical that the ABC estimates are accurate b These cost estimates are themselves averages per type of cost because some portions of the printing department costs are fixed in the short run There is some controversy over whether these fixed costs should be spread over normal or expected levels of cost driver activity Not "unitizing" these costs preserves the distinction between fixed and variable cost behavior Under this approach, fixed costs would be recovered by an annual or monthly charge based on expected usage An objection is that this merely passes the fixed cost problem along to the line units who are selling products or services to external customers An alternative approach is to unitize these costs over expected or normal cost driver activity and charge users as if all costs were variable If cost driver activity expectations are accurate, there should not be significant static budget variances Large errors in forecasting, however, will lead to large budgeting errors because total fixed costs charged will not equal total fixed costs incurred c Costs of commercial jobs: 27,500 pages 27,500 use color Total cost Old System @$1/page = $27,500 -$27,500 489 ABC System @$.35/page =$9,625 @ $1.00/color page = $27,500 $37,125 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-54 (40-50 min.) Before proceeding to answer the questions asked, it is helpful to get a good understanding of the cost behavior The costs of the outpatient clinic can be broken down into budgeted fixed and variable costs as follows: Cost Physicians Nurses and technicians Supplies Overhead Total Fixed Total $240,000 180,000 $420,000 Variable Total Per Unit $180,000 60,000 72,000 $312,000 $45 15 18 $78 Whether Hopkins Community Hospital would save money by closing its outpatient clinic depends on what fixed costs it might avoid if the clinic were closed The budgeted contribution margin is $180 - $78 = $102 per patient, giving a total contribution from 4,000 patients of 4,000 x $102 = $408,000 If the hospital can avoid more than $408,000 of the $420,000 of fixed costs, it would be financially better off without the clinic It is likely that the $240,000 of physician cost would be saved; the hospital would not need to employ any physicians for the clinic It is hard to tell how much of the $180,000 of fixed overhead would be saved, but it is unlikely that Hopkins would save the $30,000 of the fixed overhead that is an allocation of hospital-wide administrative costs nor the $37,500 that is depreciation on equipment Thus, a reasonable guess is that by closing the clinic, the hospital would lose $408,000 of contribution margin and reduce fixed costs by about $240,000 + $112,500 = $352,500 If this is correct, the only way the hospital would gain a financial advantage by closing the clinic is if the closure frees up resources that are valuable to the hospital 490 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The difference between the static budget loss of $12,000 and the actual loss of $20,200 can first be divided into a sales-activity variance and a flexible-budget variance: A Actual Profit (Loss) $(20,200) B Flexible Budget Profit (Loss) $102 x 3,800 $420,000 = $(32,400) Flexible-budget variance (A - B) = $(20,200) - $(32,400) = $12,200 F C Static Budget Profit (Loss) $102 x 4,000 $420,000 = $(12,000) Sales activity variance (B - C) = $(32,400) - $(12,000) = $20,400 U Static budget variance (A - C) $(20,200) - $(12,000) = $8,200 U Therefore, the main explanation of the additional loss is the decrease in volume In fact, the loss of volume cost Hopkins $20,400, and cost savings of $12,200 reduces the overall shortfall to only $8,200 The $12,200 flexible-budget variance can be further analyzed by cost category First, consider the physician cost Since physician costs are fixed, we can only compute a total physician cost variance: $240,000 - $231,000 = $9,000 F Nurse and technician costs are variable and have a standard rate of $30 per hour and an actual rate of $182,700 ÷ 5,800 = $31.50 A total of 5,800 hours was used; standard hours allowed for 3,800 patients is 1.5 hrs./patient x 3,800 patients = 5,700 Price (rate) and quantity (usage) variances are as follows: 491 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Price (rate) variance = ($30 - $31.50) x 5,800 = $8,700 U Quantity variance = (5,800 – 5,700) x $30 = $3,000 U Supplies cost is variable, but we have no measure of amount used Therefore, we can compute only a total supplies variance: $15 x 3,800 - $58,500 = 1,500 U From the information given, the overhead variance cannot be computed in any more detail than a total overhead variance: [($18 x 3,800) + $180,000] - $232,000 = $248,400 - $232,000 = $16,400 F Therefore, the total flexible-budget variance can be explained as follows: Physician variance $ 9,000 F Nurse & technician rate variance 8,700 U Nurse & technician usage variance 3,000 U Supplies variance 1,500 U Overhead variance 16,400 F Total flexible-budget variance $12,200 F One possible explanation for this pattern of variances is that nurses have been covering some time that physicians usually cover The physician may not be spending full time in the clinic Nurses and technicians are spending more time per patient than is budgeted, and that may be causing overtime premiums, which might explain the unfavorable rate variance The large favorable overhead variance is more difficult to explain from the information given It might be possible (though this is just speculation) that some expensive equipment was not fully utilized at the clinic and was moved to the hospital This might explain why the volume was down (i.e., those who needed that equipment went to the hospital rather than the clinic) and why the fixed charges to the clinic were reduced 492 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-55 (45 – 60 min.) Revenue (2,000x$200) Variable costs (2,000 x $139) Contribution margin (2,000 x $61) Fixed costs Operating income $400,000 278,000 $122,000 60,000* $62,000 * Fixed costs = ($18 + $12) x 2,000 = $60,000 Static budget variance = $62,000 - $47,740 = $14,260 U Sales volume variance = 200 x ($200 - $139) = $12,200 F Flexible bud var = $392,260 – ($139x2,200 + $60,000) = $26,460 U Static budget variance $14,260 U Material variances: Housing variance = $44,000 – 2,200 x $20 PCB variances: PCB price variance = ($16 - $15) x 4,700 PCB usage variance = (4,700 – 4,400) x $15 Total PCB variance = $75,200 – 2,200 x $30 Reading heads variances: RH price variance = ($11 - $10) x 9,200 RH usage variance = (9,200 – 8,800) x $10 Total RH variance Total material variances 493 $ $ 4,700 U 4,500 U $ 9,200 U $ 9,200 U 4,000 U $13,200 U $22,400 U To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Labor variances: Assembly variances: Assembly rate variance = ($8 - $8) x 3,900 Assembly usage var = ($4,400 – 3,900) x $8 $4,000 F Total assembly variances $4,000 F PCB variances: PCB rate variance = ($9.90 - $9) x 2,400 $2,160 U PCB usage variance = (2,400 – 2,200) x $9 1,800 U Total PCB variances $3,960 U Reading heads variances: RH rate variance = ($11 - $10) x 3,500 $3,500 U RH usage variance = ($3,500 – 3,300) x $10 2,000 U Total RH variances $5,500 U Total labor variances $5,460 U Overhead variances: Variable OH efficiency var = (9,800 – 9,900) x $2 Variable OH spending var = $18,800 – (9,800 x $2) Fixed OH spending variance = $37,600 - $36,000 Total overhead variances Selling & administrative var = $22,000 - $12 x 2,000 Total flexible-budget variances 200 F 800 F 1,600 U $ 600 U $2,000 F $26,460 U From these variances we learn that operations were not very efficient The extra 200 units of sales increased income before taxes by $12,200, but this was more than offset by operating inefficiencies that cost Gates $26,460, leaving the company short of budget by $26,460 - $12,200 = $14,260 The material variances and the RH and PCB labor variances were all unfavorable and quite large, explaining much of the shortfall in income The bright spots were assembly labor, variable overhead, and selling and admin costs which had small favorable variances Still, the performance was significantly below expectations 494 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-56 (30-40 min.) (Monetary amounts in $ millions) 2005 $13,739.7 7,624.3 6,115.4 4,221.7 $ 1,893.7 Net sales Variable cost (cost of sales) Contribution margin Fixed costs Income before income taxes The actual results for 2006 are: Net Sales Variable cost (cost of sales) Contribution Margin Selling and Admin Expense Income before income taxes Budget 2006 $15,113.7 8,386.7 6,727.0 4,221.7 $ 2,505.3 $14,954.9 8,367.9 6,587.0 4,477.8 $ 2,109.2 Actual FlexibleResults FlexibleBudget Sales at Actual Budget for Actual Activity Static Activity Level Variances Sales Activity Variances Budget Sales $14,954.9 $ 0.0 Variable costs 8,367.9 (69.3) Contribution margin 6,587.0 (69.3) Fixed costs 4,477.8 (256.1) Operating income $ 2,109.2 $(325.4) $14,954.9 $(158.8) 8,298.6 88.1 6,656.3 (70.7) 4,221.7 0.0 $ 2,434.6 $ (70.7) $15,113.7 8,386.7 6,727.0 4,221.7 $ 2,505.3 *Unfavorable variances denoted by parentheses The variances show that actual income was $396 less than in the static budget that assumed 10% growth for three main reasons: 1) Actual growth was less than 10%, yielding a $70.7 U sales-activity variance 2) Variable costs increased at a greater rate than sales, yielding a $69.3 U flexible budget variance 3)Spending for fixed costs was $256.1 more than budgeted 495 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-57 (20-30 min.) For the solution, see the Prentice Hall Web site, www.prenhall.com/ 8-58 (60 or more) The purpose of this exercise is to understand the difficulty of setting standard costs for even simple products or services For many products or services, identifying the direct material and direct labor inputs may not be hard, but even identifying the overhead support can be a challenge Students are likely to make various assumptions, which can lead to very different standard costs in all cost categories Requirements and also lead to consideration (albeit implicitly) of many of the behavioral issues organizations may have in setting standards Different managers have different objectives and different levels of knowledge These must be combined into a single standard cost estimate If class time allows, it may be useful to have one or more groups present their standard costs to the class and describe how they were determined The class may have suggestions that the group failed to consider possibly some implicit assumptions that would not necessarily hold true 496 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-59 (30-50 min.) NOTE TO INSTRUCTOR This solution is based on the web site in early 2007 Be sure to examine the current web site before assigning this problem, as the information there may have changed In particular, a newer annual report for use in part may be available Hershey’s Web site seems primarily directed to customers It is part of the company’s advertising effort In 2007, Hershey was showing Reese’s Crispy Crunchy Bar, Cacao Reserve by Hershey’s, York Mints, Bubble Yum Chocolate, Hershey’s and Reese’s Sandwich Cookies, Hershey’s and Reese’s Brownies,, Jolly Rancher Sourbolt and Double Bolt Blasts, Hershey’s Sweet and Salty Granola Bars, Hershey’s Snacksters, Hershey’s Kisses brand Mini Cookies, and Hershey’s Kisses filled with Chocolate Truffle as new products When you click on the product, you get more detailed information promoting the product Hershey has more than $4 billion of revenue and 13,000 employees worldwide Because Hershey produces so many different products, a flexible budget would be much more useful than a static budget for planning purposes Consumers don’t always buy the same items in the same quantities from year to year A flexible budget would be much more useful in planning for changes in the quantity and mix of products The static budget would show a 5% increase in net sales and variable costs but no increase in fixed costs Based on actual 2006 results, the assumed 2007 static budget would project income before income taxes of $984,454: 497 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2006 Net sales Variable cost (cost of sales) 3,230,554 Contribution margin 2007 $4,944,230 $5,191,442 3,076,718 1,867,512 1,960,888 976,434 976,434 $ 891,078 $ 984,454 Fixed costs Income before income taxes If actual results showed an increase in sales of 8%, one would expect income before income taxes to increase by 8% of the contribution margin, or 8% x $1,867,512 = $149,401 If actual income before income taxes increased by 10% x $891,078 = $89,108, to $980,186, this would be less than expected from the 8% sales growth (note that income is expected to grow more than sales due to the presence of fixed costs) Specifically, the shortfall would be the difference between the expected increase and the actual increase, 149,401 – 89,108 = 60,293 The static budget (based on 5% growth) variance would be $980,186 – $984,454 = $4,268 U, indicating that despite an 8% rather than 5% increase in sales, income fell short of the static budget by $4,268 The sales-activity variance, the contribution margin on the added 3% of sales (an 8% rather than 5% increase), would be 3% x $1,867,512= $56,025 F Because the sales-activity variance and the flexible budget variance must add to the static budget variance, the flexible budget variance must have been $4,268 + $56,025 = $60,293 U (which is, of course, the amount of the shortfall calculated earlier) The large flexible-budget variance indicates there 498 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com were some inefficiencies or perhaps many of the costs assumed to be fixed were actually variable 499 ... of actual results from plans The total variances in the problem can be subdivided to provide answers to two broad questions: (a) What portion is attributable to not attaining a predetermined... hours to the job The overall effects on costs as measured by these variances were favorable Management also should be concerned with effects of these tradeoffs on quality, on-time delivery, customer... functions to predict what costs should be at different levels of cost driver activity It is essential to understand cost behavior to develop these flexible-budget cost formulas 448 To download