Chap 017
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View Chap 017 as PDF for free.
More details
- Words: 4,888
- Pages: 33
Loading documents preview...
Chapter 17 - Additional Topics in Variance Analysis
17
Additional Topics in Variance Analysis
Solutions to Review Questions 17-1. False. Variances simply represent differences between plans and actual outcomes. Capturing these variances can provide useful information regardless of whether inventories exist. Knowledge about differences between plans and actual outcomes can help managers improve planning or take steps to improve operations. 17-2. Variances are usually “expensed” as a period cost (e.g., charged to Cost of Goods Sold). Variances can also be prorated to accounts according to the standard cost balances in each of the accounts. Hence, a materials price variance recorded at the time of purchase would be prorated to Materials Inventory, Materials Efficiency Variance (because this variance is initially recorded at standard cost), Work in Process, Finished Goods and Cost of Goods Sold according to the current year standard cost balances in those accounts. 17-3. The industry volume variance measures the impact of differences between actual and expected industry sales volume on the company’s sales activity variance. Use of industrywide data helps explain changes in volume in terms of what is happening to the industry. 17-4. Efficiencies can be realized for costs only. The sales activity variance captures the effect on profit resulting from the difference between actual and budgeted sales. 17-5. Some possible decisions for which the market share variance would be useful include marketing (advertising) decisions, investment decisions, and product line portfolio decisions.
17-1
Chapter 17 - Additional Topics in Variance Analysis
17-6. If a company has two or more products, a mix variance can arise even if the net effect of all variances is zero. It might be very useful to learn about the mix variance because if the mix is changing, the company might need to change production and/or marketing strategies to meet the change in mix. The U.S. automobile industry was facing rising revenues and rising volumes but, unfortunately, there were falling profits because buyers were purchasing smaller cars that had lower profit margins for the manufacturers. 17-7. Examples include:
Steel mills which can process both new steel and recycled scrap
Oil refineries which can process different grades of crude oil
Distilleries producing blended whiskeys
Chemical companies
17-2
Chapter 17 - Additional Topics in Variance Analysis
Solutions to Critical Analysis and Discussion Questions 17-8. By recognizing the materials price variance at the time of purchase, management captures any difference between actual materials cost and the standard costs as reflected in the budget as those costs are incurred. If the price variance is not reflected until the time of use, the effect of price changes might not be recognized until the materials are removed from the raw materials inventory and placed into work in process. This could be a substantial time delay. If decisions need to be made to compensate for the effect of materials price changes, it would seem that the sooner the information comes to management's attention, the better the opportunities to react to the information. 17-9. As with all firms, sports teams budget for revenues from different sources, in this case ticket sales and concessions. Depending on the event, a different customer mix might lead to a difference in the proportion of revenues from these two sources. 17-10. In this situation the company is really selling just one product so a mix variance would not be meaningful. 17-11. In a hospital, as in other professional firms, billing rates vary with the level of the professional person performing services. Hence, a physician’s time is billed at a higher rate than an intern’s time. Even though the volume of hours billed might be the same, if the mix of physician to intern time is different there will be differences in revenues (and, most likely in profits as well). 17-12. Salary rates vary according to the classification of the service providers (e.g., nurses’ pay is higher than nurse practitioners’ pay), and the hospital will budget a certain amount of time for each classification. Thus, a labor mix variance can be calculated to show if the appropriate personnel were used in a particular period or in a particular unit (e.g., intensive care). An unfavorable mix variance would suggest that nurses were doing work that nurse practitioners should have done. 17-13. Disagree. The purpose of variance analysis is to identify items that are different from what we expected (budgeted). Therefore, we should be as interested in favorable variances as in unfavorable variances. Even if there is not a problem (for example, managers hiding expenses), we would still like to know where things are working well so that we can implement them in other areas of the organization.
17-3
Chapter 17 - Additional Topics in Variance Analysis
Solutions to Exercises
17-14. (15 min.) Variable Cost Variances Where Materials Purchased And Used Are Not Equal: Golden Company. Flexible Actual Budget Inputs at (Standard Actual Price Standard Efficiency Allowed for Costs Variance Price Variance Good Output) Purchase $174,474 $172,530 Computations $1,944 U 7.86 x 14,000 = $110,040
$115,020 Usage Computations
$4,980 U
17-15. (15 min.) Industry Volume And Market Share Variances: Kay’s Auto Products. Flexible Budget (SCM x AQ)
Market Share Variance
Standard Contribution Margin Times Budgeted Market Share Times Actual Industry Volume
Industry Volume Variance
Master Budget (SCM x SQ)
(SCM x ASQ) $4 x 45,000
$4 x 20% x 300,000
$4 x 20% x 250,000
= $180,000
= $240,000
= $200,000
$60,000 U
$40,000 F
$20,000 U
17-4
Chapter 17 - Additional Topics in Variance Analysis
17-16. (20 min.) Industry Volume And Market Share Variances—Missing Data. a. 15,000 fewer units = 52,500 fewer units – 37,500 more units. b. 900,000 units. [1,050,000 – (b)] x 25% = 37,500 units. c. 25% (from industry volume line). d. 20%. [(d) – 25%] x 1,050,000 = 52,500 fewer units. e. 1,050,000 units (from industry volume line). 17-17. (20 min.) Industry Volume And Market Share Variances—Missing Data. a. 20,000 fewer units = 100,000 more units activity variance – 120,000 more units market share variance. b. 3,000,000 units (from market share line). c. 8% (from market share line). d. 3,250,000. [3,000,000 – d] x 8% = 20,000 fewer units. e. 12%. (e – 8%) x 3,000,000 = 120,000 more units. 17-18. (20 min.) Sales Mix And Quantity Variances: AAA Electronics. a. and b. The actual prices are not relevant here. The mix and quantity variances are based on standard (budgeted) contribution margin per unit. Flexible Budget AQ x (SP – SV)
Mix Variance
ASQ x (SP – SV)
Quantity Variance
Master Budget
15,000 x ($109.50 - $50.00)+
25,000 x (20,000/29,000) x ($109.50 - $50.00)
20,000 x ($109.50 - $50.00)
10,000 x ($249.50 - $100.00)
+25,000 x (9,000/29,000) x ($249.50 - $100.00)
+ 9,000 x ($249.50 -
= $2,387,500
=$2,185,776
$100.00)
$201,724 F
= $2,535,500 $349,724 U
$148,000 U Activity Variance
17-5
Chapter 17 - Additional Topics in Variance Analysis
17-19. (20 min.) Sales Mix And Quantity Variances: Renee’s Rings. a. and b. Mix Variance
Flexible Budget AQ x (SP – SV)
ASQ x (SP – SV)
Quantity Variance
Master Budget
8,800 x ($500 - $200)
11,200 x (8,000/10,000) x ($500 - $200)
8,000 x ($500 - $200)
+ 2,400 x ($1,200 - $400)
+11,200 x (2,000/10,000) x ($1,200 - $400)
+ 2,000 x ($1,200 - $400)
= $4,560,000
=$4,480,000
= $4,000,000
$80,000 F
$480,000 F
$560,000 F Activity Variance
17-6
Chapter 17 - Additional Topics in Variance Analysis
17-20. (20 min.) Sales Mix And Quantity Variances: Tapas By Tom. a. and b. Flexible Budget AQ x (SP – SV)
Mix Variance
ASQ x (SP – SV)
Quantity Variance
Master Budget
756 x ($40 - $16)
1,080 x (800/1,200) x ($40 - $16)
800 x ($40 - $16)
+ 324 x ($60 - $20)
+1,080 x (400/1,200) x ($60 - $20)
+ 400 x ($60 - $20)
= $31,104
=$31,680
= $35,200
$576 U
$3,520 U
$4,096 U Activity Variance
17-7
Chapter 17 - Additional Topics in Variance Analysis
17-21. (35 min.) Materials Mix and Yield Variances: Huron Group. a. and b.
Efficiency Variance
Actual (AP x AQ) Material: Twinkle
Purchase Price Variance
$18 x 44,000 = $792,000
Mix Variance
(SP x AQ)
Yield Variance
$20 x (1/3 x 120,000) = $20 x 40,000 = $800,000
$20 x 44,000 = $880,000 $88,000 F
(SP x ASQ)
$80,000 U
Flexible Production Budget (SP x SQ)
$20 x (20 x 2,000) = $20 x 40,000 = $800,000
$-0-
Efficiency Variance = $80,000 U Star
$32 x 76,000 = $2,432,000
$30 x (2/3 x 120,000) = $30 x 80,000 = $2,400,000
$30 x 76,000 = $2,280,000 $152,000 U
$120,000 F
$30 x (40 x 2,000) = $30 x 80,000 = $2,400,000 $-0-
Efficiency Variance = $120,000 F
Total
$3,224,000
$3,160,000 $64,000 U
$3,200,000 $40,000 F
= $3,200,000 $-0-
Efficiency Variance = $40,000 F
Production of 2,000 units should require 120,000 units of input (= 2,000 x 20 + 2,000 x 40). Actual usage was 120,000 units (= 44,000 + 76,000), so there was no yield variance.
17-8
Chapter 17 - Additional Topics in Variance Analysis
17-22. (35 min.) Materials Mix and Yield Variances: John’s Weed-B-Gone. a. and b. The actual purchase prices were $7.75 (= $51,150 ÷ 6,600) for Weed-X and $21.00 (= $110,880 ÷ 5,280) for Pest-O.
Efficiency Variance
Actual (AP x AQ) Material: Weed-X
Purchase Price Variance
$7.75 x 6,600 = $51,150
Mix Variance
(SP x AQ)
Yield Variance
$8 x (0.005 x 1,080,000) = $8 x 5,400 = $43,200
$8 x (1/2 x 11,880) = $8 x 5,940 = $47,520
$8 x 6,600 = $52,800 $1,650 F
(SP x ASQ)
$5,280 U
Flexible Production Budget (SP x SQ)
$4,320 U
Efficiency Variance = $9,600 U Pest-O $21 x 5,280 = $110,880
$20 x 5,280 = $105,600 $5,280 U
$20 x (1/2 x 11,880) = $20 x 5,940 = $118,800 $13,200 F
$20 x (0.005 x 1,080,000) = $20 x 5,400 = $108,000
$10,800 U
Efficiency Variance = $2,400 F
Total
$162,030
$158,400
$166,320
$3,630 U
$7,920 F
= $151,200 $15,120 U
Efficiency Variance = $7,200 U
17-9
Chapter 17 - Additional Topics in Variance Analysis
17-23. (35 min.) Labor Mix and Yield Variance: Matt’s Eat ‘N Run. a. and b.
Efficiency Variance Actual (AP x AQ)
Purchase Price Variance
Labor: Skilled
Mix Variance
(SP x AQ)
$15 x (0.25 x 21,000) = $15 x 5,250 = $78,750
$15 x 6,000 = $90,000
$92,000 $2,000 U
(SP x ASQ)
$11,250 U
Flexible Production Budget (SP x SQ)
Yield Variance
$15 x (2/60 x 180,000) = $15 x 6,000 = $90,000 $11,250 F
Efficiency Variance = $-0Unskille d
$7.50 x 15,000 = $112,500
$180,000
$7.50 x (0.75 x 21,000) = $7.50 x 15,750 = $118,125
$67,500 U
$5,625 F
$7.50 x (6/60 x 180,000) = $7.50 x 18,000 = $135,000 $16,875 F
Efficiency Variance = $22,500 F
Total
$272,000
$202,500
$196,875
$69,500 U
$5,625 U
= $225,000 $28,125 F
Efficiency Variance = $22,500 F
17-10
Chapter 17 - Additional Topics in Variance Analysis
17-24. (10 min.) Flexible Budgeting—Service Organization: Lowe & Rent.
Flexible Budget (based on actual of 6,900 hours) Revenue................................ Costs: Professional salaries.......... Other variable costs........... Fixed costs......................... Total costs...................... Profit...................................... a b c d
$862,500 = $431,250 = $117,300 =
6,900 hrs. 6,000 hrs. 6,900 hrs. 6,000 hrs. 6,900 hrs. 6,000 hrs.
$862,500a 431,250b 117,300c 180,000d $728,550 $ 133,950 x $750,000 x
$375,000
x
$102,000
$180,000 = Master budget fixed costs
17-11
Chapter 17 - Additional Topics in Variance Analysis
17-25. (20 min.) Sales Activity Variance—Service Organization: Lowe & Rent.
Flexible Budget (based on actual of 6,900 hours) Revenue................................ $862,500 Costs: Professional salaries.......... 431,250 Other variable costs........... 117,300 Fixed costs......................... 180,000 Total costs...................... $728,550 Profit...................................... $ 133,950
17-12
Sales Activity Variance
Master Budget (based on budgeted 6,000 hours)
$112,500 F
$750,000
56,250 U 15,300 U ________ $71,550 U $ 40,950 F
375,000 102,000 180,000 $657,000 $ 93,000
Chapter 17 - Additional Topics in Variance Analysis
17-26. (30 min.) Profit Variance Analysis—Service Organization: Lowe & Rent. (1) (2) (3) (4) (5) Flexible Sales Actual Cost Price Budget Activity (6,900 hrs.) Variances Variances (6,900 hrs.) Variance Revenue.............................$825,000 $37,500 U $862,500 $112,500 F Professional salaries.......... 465,000 $33,750 U 431,250 56,250 U Other variable costs........... 108,000 9,300 F 117,300 15,300 U Fixed costs......................... 174,000 6,000 F 180,000 Profit...................................$ 78,000 $18,450 U $37,500 U $ 133,950 40,950 F
17-13
(6) Master Budget (6,000 hrs.) $750,000 375,000 102,000 180,000 $ 93,000
Chapter 17 - Additional Topics in Variance Analysis
17-27. (20 min.) Sales Price and Activity Variances: Dylan & Father. Actual (AP x SQ) Partner
Price Variance
Flexible Budget (SP – SV) x SQ $770 x 4,800 hours
$3,612,000
= $3,696,000
$84,000 U
Staff
$182 x 20,400 hours
$3,738,000
= $3,712,800
$25,200 F Flexible Budget AQ x (SP – SV)
Master Budget
Mix Variance
4,800 x ($770 - $364) + 20,400 x ($182 - $98)
= $3,662,400
(SP – SV) x ASQ a
[$406 x (5,100 ÷ 25,890) x 25,200] + b [($84 x (20,790 ÷ 25,890) x 25,200]
= $3,715,233
$52,833 U
$101,727 U
$154,560 U Activity Variance
a
$406 = $770 – $364.
b
$84 = $182 – $98.
Quantity Variance
17-14
SQ x (SP – SV) 5,100 x $406 + 20,790 x $84
= $3,816,960
Chapter 17 - Additional Topics in Variance Analysis
17-28. (15 min.) Variable Cost Variances: Harry’s Hotel.
Actual Costs
Price Variance
Actual Inputs at Standard Price
Efficiency Variance
$12 x 3,000 = $36,000
$45,240 $9,240 U
$12 x (14,000 ÷ 4) = $42,000 $6,000 F
17-15
Flexible Budget (Standard Allowed)
Chapter 17 - Additional Topics in Variance Analysis
Solutions to Problems
17-29. (20 min.) Sales Mix And Quantity Variances: Mattie’s Vineyards. a. Price Variance = (Actual Price − Budgeted Price) x Actual Quantity: Price = (Actual Price − Budgeted Price) x Actual Quantity Variety: Variance Sauvignon $2,000 F = ($7.25 − $7.00) x 8,000 Blanc Chardonnay 900 U = ($8.10 − $8.25) x 6,000 Riesling 3,850 F = ($7.10 − $6.75) x 11,000 $4,950 F b. and c. The actual prices are not relevant here. The mix and quantity variances are based on standard (budgeted) contribution margin per unit.
Mix Variance
Flexible Budget AQ x (SP – SV)
ASQ x (SP – SV)
Quantity Variance
Master Budget
8,000 x ($7.00 - $5.00)
25,000 x (10,400/26,000) x ($7.00 - $5.00)
10,400 x ($7.00 - $5.00)
+ 6,000 x ($8.25 - $6.00)
+25,000 x (3,900/26,000) x ($8.25 - $6.00)
+ 3,900 x ($8.25 - $6.00)
+ 11,000 x ($6.75 - $4.75)
+25,000 x (11,700/26,000) x ($6.75 - $4.75)
+ 11,700 x ($6.75 - $4.75)
= $51,500.00
=$50,937.50
= $52,975.00
$562.50 F
$2,037.50 U
$1,475 U Activity Variance
17-16
Chapter 17 - Additional Topics in Variance Analysis
17-30. (40 min.) Analyze Performance for a Restaurant: Doug’s Diner. Hint for working the problem: Use sales revenue as the basis for measuring volume.
Purchases Actual Variances Sales revenuea.................................................... $1,200 Variable costs: Purchases........................................................ 780 $60 U Hourly wages................................................... 60 Franchise fee................................................... 36 Utilities............................................................. 76 Total variable costs............................................. $952 $60 U Contribution margin............................................. $248 $60 U Fixed costs: ........................................................ Advertising....................................................... 100 Depreciation..................................................... 50 Lease............................................................... 30 Salaries............................................................ 30 Total fixed costs.................................................. $210 Operating profit.................................................... $ 38 $60 U
($000) Marketing & Administrative Variances
$8 F $8 F $8 F
$8 F
Notes on the following page.
17-17
Flexible Budget $1,200 720 b 60 c 36 d 84 e $900 $300 100 50 30 30 $ 210 $ 90
Activity Variance $200 F
Master Budget $1,000
120 U 10 U 6U 14 U $ 150 U $ 50 F
600 50 30 70 $750 $250
$ 50 F
100 50 30 30 $ 210 $ 40
Chapter 17 - Additional Topics in Variance Analysis
17-30. (continued) a Sales revenue is used as the basis of volume measurement because there are no price changes. b $600 x $1,200 $1,000 c $50 x $1,200 $1,000 d $30 x $1,200 $1,000 e $70 x $1,200 $1,000
17-18
Chapter 17 - Additional Topics in Variance Analysis
17-31. (30 min.) Nonmanufacturing Cost Variances: Springfield Bank. Incidental office costs comprise the variable costs. Salaries and the fixed office costs are all fixed. Variance analysis for the two classes of overhead is as follows:
Correspondence, Supplies, etc.
Actual Costs $10,800 x 1.12 = $12,096
Combined Price and Efficiency Variance
Flexible Budget (Standard Allowed for Actual Output) $45 x 240 = $10,800
$1,296 U Loan processor and other costs
a
0.5 x ($60,000 + $50,000 + $130,000) = $120,000
$55,000 + $63,000 = $118,000 $2,000 F
Optional: If computed, the production volume variance would be: Budget $120,000
a 0.5
$8,000 F
represents one-half year.
17-19
Applied $120,000 x (240 ÷ 225) = $128,000
Chapter 17 - Additional Topics in Variance Analysis
17-32. (30 min.) Performance Evaluation In Service Industries: Bay Area Bank.
Actual Costs
Price Variance
Actual Inputs at Standard Price
Efficiency Variance
New Accounts
$572,250
Flexible Budget $30 x 19,200 accounts = $576,000
(Ignored) $3,750 F
Account Maintenanc e
$18,000
Master Budget $30 x 20,000 accounts = $600,000
$24,000 F
$0.45 x 45,000 = $20,250
$17,700 $300 U
Activity Variance
$2,550 F
17-20
$0.45 x 43,200 = $19,440 $810 U
Chapter 17 - Additional Topics in Variance Analysis
17-33. Revenue Analysis Using Industry Data and Multiple Product Lines: Peninsula Candy Co. a. Sales price and activity variances.
(AP – SV) x AQ
Flexible budget (SP – SV) x AQ
Master budget (SP – SV) x SQ
$1,162 – $915b = $247
(1,600 x $.03a) + (2,000 x $.04) + (4,200 x $.035) = $275
$1,200 – $920 = $280
a Unit
$28 U
$5 U
Sales price variance
Sales activity variance
contribution margins calculated from master budget panel as follows:
Unit margin = Contribution margin ÷ Sales units. b
$915 = [1,600 x ($140 ÷ 2,000) + 2,000 x ($320 ÷ 2,000) + 4,200 x ($460 ÷ 4,000)].
b. Two solutions are possible when calculating the market share variance, depending upon the figure used for the left column. The examples in the text use the flexible budget amount. However, those examples involve only one product, whereas this problem has three products, and therefore a mix issue is present. In this situation, another way to solve the problem would be to use the standard price times the actual quantities at the standard mix. Both alternatives are given on the following page.
17-21
Chapter 17 - Additional Topics in Variance Analysis
17-33b. (continued) Contribution margin variance Actual Quantities at Standard Mix and Standard Prices
Industry Effect $280 x (76,000 ÷ 80,000) = $266
$273a
Master Budget $280
$7 F
$14 U
Market Share Variance
Industry Variance
Flexible Budget $275
$7 U Quantity Variance Industry Effect $266
$9 F
$5 U
Master Budget $280 $14 U
Activity Variance The $2 difference in the market share variance is explained by the difference in the mix. a $273 = [7,800 x (2,000 ÷ 8,000) x ($60 ÷ 2,000) + 7,800 x (2,000 ÷ 8,000) x ($80 ÷ 2,000) + 7,800 x (4,000 ÷ 8,000) x ($140 ÷ 4,000)]. A shortcut is to multiply the actual number of bars by the average contribution margin per bar in the master budget: 7,800 bars x ($280 ÷ 8,000 bars) = $273.
17-22
Chapter 17 - Additional Topics in Variance Analysis
17-34. (20 min.) Sales Mix And Quantity Variances: Peninsula Candy Co. Mix Quantity Flexible Budget Variance Variance (SP – SV) x AQ (SP – SV) x ASQ (1,600 x $.03) 2,000 (7,800 x x $.03) 8,000 + (2,000 x $.04) + 2,000 (7,800 x x $.04) 8,000 + (4,200 x $.035) + 4,000 (7,800 x x $.035) 8,000 = $275 = $273
$2 F
$7 U
$5 U Activity Variance
17-23
Master Budget (SP – SV) x SQ (2,000 x $.03) + (2,000 x $.04) + (4,000 x $.035) = $280
Chapter 17 - Additional Topics in Variance Analysis
17-35. (45 min.) Materials Mix And Yield Variances: Houston Corporation. a. and b.
Material
Efficiency Variance Actual
Purchase
(AP x
Price
AQ)
Variance
Flexible Mix (SP x AQ)
Variance
Z-Alpha
(SP x ASQ) a
Yield
Production
Variance
Budget
$9 x (.48 x
$423,360
$9 x
104,400) =
50,400 =
$9 x 50,112
$9 x (600 x 80)
$453,600
= $451,008
= $432,000
$30,240 F
$2,592 U
$19,008 U
$21,600 U
a
Z-Beta
$12 x (.36 x
$400,464
$12 x
104,400) =
37,040 =
$12 x 37,584
$12 x (450 x
$444,480
= $451,008
80) = $432,000
$44,016 F
$6,528 F
$19,008 U
$12,480 U
Z-Gamma
$417,216 $10,176 U
a
$24 x
$24 x (.16 x
16,960
104,400) =
=
$24 x 16,704
$24 x (200 x
$407,040
= $400,896
80) = $384,000
$6,144 U
$16,896 U
$23,040 U
a
Standard mix: .48 = 600 ÷ 1,250; .36 = 450 ÷ 1,250; .16 = 200 ÷ 1,250;
17-24
Chapter 17 - Additional Topics in Variance Analysis
17-35. (continued)
Efficiency Variance Purchase
Flexible
Price Actual Total
Variance
Mix (SP x AQ)
Variance
(SP x ASQ)
Yield
Production
Variance
Budget
$1,241,04 0
$1,305,120 $64,080 F
$1,302,912 $2,208 U
$54,912 U
$57,120 U
17-25
$1,248,000
Chapter 17 - Additional Topics in Variance Analysis
17-36. (30 min.) Labor Mix and Yield Variances: Davenport Construction Associates a. and b.
Efficiency Variance Purchase
Flexible
Price Actual
Variance
Mix (SP x AQ)
($26 x 660) +
($24 x 660) +
($23 x 780) + ($15 x 432) = $41,580 $2,880 U
Variance
(SP x ASQ)
Yield
Production
Variance
Budget
($24 x 1/3 x 1,872)
($24 x 600) +
($21 x 780) +
+ ($21 x 1/3 x
($21 x 600) +
($15 x 432)
1,872) + ($15 x 1/3
($15 x 600) =
= $38,700
x 1,872) = $37,440
$36,000
$1,260 U
$1,440 U
$2,700 U
17-26
Chapter 17 - Additional Topics in Variance Analysis
17-37. (20 min.) Derive Amounts for Profit Variance Analysis: Aqua Clean, Inc. Hint: Use last month’s actual as master budget. Actual (based on actual Variable activity of Cost 161 Variance cleanings) Sales revenue..................................................... $22,800 Less: Variable costs.................................................. 5,220 $93 F Contribution margin............................................. $17,580 $93 F aLast month price =
$22,680 140 cleanings
Sales Price Variance $3,282 U
$3,282 U
Flexible Budget (based on actual activity of 161 cleanings) $26,082 a 5,313 b $20,679
Sales Activity Variance
Master Budget (based on a prediction of 140 cleanings)
$3,402 F
$22,680
693 U $2,709 F
4,620 $18,060
= $162
$26,082 = $162 x 161 cleanings bLast month unit variable cost = $4,620 ÷ 140 cleanings =
$33; $5,313 = $33 x 161 cleanings.
Although the two months’ contribution margins are similar, there are significant variances. This illustrates the need to consider variance analysis even if bottom-line dollar amounts are similar to budget. Activity levels, prices, and other factors might offset each other, but individually be significant. The number of cleanings increased by 21, which increased profit by $2,709. However, the actual average price was $141.61 (= $22,800 ÷ 161 cleanings) so the average price per cleaning decreased by $20.39 ($162.00 – $141.61). As a result, profit decreased by $480.
17-27
Chapter 17 - Additional Topics in Variance Analysis
17-38. (20 min.) Flexible budget: Oak Hill Township. Flexible budget is based on actual activity of 94,500 miles for costs that vary per mile. a. $8,505; $10 over budget. $6,750 x (94,500 miles ÷ 75,000 miles) = $8,505 b. $756; $4 over budget. $600 x (94,500 miles ÷ 75,000 miles) = $756 c. $5,000; equal to budget. The assumption is that, within the relevant range, this is a fixed cost. d. Decreased unit fixed costs. Assuming that insurance, salaries and benefits, and depreciation are fixed costs, the budgeted amount is $0.1387 per mile [($1,000 + $5,000 + $4,400) ÷ 75,000 miles]. The actual amount is $0.1129 per mile for 94,500 actual miles, which is a drop of $0.0258. This is 84.3% of the total decrease from $0.2427 to $0.2121.
17-28
Chapter 17 - Additional Topics in Variance Analysis
Solutions to Case
17-39. Comprehensive Overview of Budgets and Variances Racketeer, Inc. The following solution is based on a report by Tom Terpstra. Elmo's problem is that he thinks that the graph and the income statement measure the same thing. Otto should have told him that they do not. The income statement presents actual costs in a full-absorption costing format, while the profit graph is based on standard costs in a variable costing format. These differences account for the difference in the profit measurement. Because the profit graph is based on standard costs, the profit it shows will be the actual profit only in those very rare cases when the variances net out to zero. Racketeer has some significant variances listed on the income statement, so Elmo should expect that the actual profit would differ from the profit on the graph. These variances are: Material................................................................ $490 U Labor................................................................... 392 U Overhead............................................................. 190 U Selling and administrative................................... 300 F Total..................................................................... $772 U The overhead amount differs from the figure on the income statement, because the income statement overhead variance includes a production volume variance of $470 (= $.47 x 1,000). But that variance does not reflect a difference between actual and budget or standard costs when fixed manufacturing costs are not unitized. The other part of the difference between the two profit figures is explained by the difference in accounting methods. Variable costing expenses fixed costs when they are incurred. With full-absorption, the fixed costs are assigned to the units produced, and then expensed in the period in which the units are sold. Racketeer treats each racket as having a fixed cost of $.47. For the 10,000 rackets sold, the fixed cost expense is $4,700 under full-absorption costing. Additionally, the production volume variance of $470 is also expensed during this period. Thus, $5,170 in fixed costs (aside from price variances) was deducted from income on the income statement. Under variable costing, the only fixed cost to be expensed is the standard cost for the period of $3,760 (also aside from price variances). So, the use of different accounting methods results in a profit difference of $1,410. (Before Elmo starts to complain about the accountants' use of full-absorption, one should remind him that, in those months when production exceeds sales, the full-absorption method would expense less fixed costs than variable costing, so it evens out in the long run.)
17-29
Chapter 17 - Additional Topics in Variance Analysis
17-39. (continued)
Now the two results can be reconciled: Profit per chart..................................................... $20,940 Less: Cost variances................................................. 772 Additional fixed costs in full-absorption........... 1,410 Profit per Income Statement............................... $18,758 Besides failing to explain the profit graph, Otto also failed to set up a format to take advantage of the standards he developed. The company should set up a chart showing the actual results, the flexible budget, and the master budget. This would provide information concerning the profit changes in relation to the change in sales volume. Additionally, the manufacturing variances could be analyzed in greater detail, as shown in Exhibits A and B on the following pages.
17-30
Chapter 17 - Additional Topics in Variance Analysis
17-39. (continued) Exhibit A Comparison of Master Budget to Actual Results. Actual Sales......................................... $90,000 Less Variable Costs: Materials................................ 37,990 Labor..................................... 19,392 Overhead............................... 1,440 Contribution Margin................... $31,178 Less Fixed Costs: Manufacturing........................ 3,810 Selling and Administrative..... 7,200 Operating Profit......................... $20,168
Manufacturing Variance
Selling and Administrativ e Variance –0–
$ 490 U 392 U 140 U $1,022 U 50 U $1,072 U
–0–
$300 $300
17-31
F F
Sales Price Flexible Activity Variance Budget Variance –0– $90,000 $18,000 F 7,500 3,800 260 $6,440
Master Budget $72,000
–0–
37,500 19,000 1,300 $32,200
U U U F
30,000 15,200 1,040 $25,760
–0–
3,760 7,500 $20,940 $ 6,440 F
3,760 7,500 $14,500
Chapter 17 - Additional Topics in Variance Analysis
17-39. (continued)
Exhibit B Manufacturing Cost Variances.
String
Actual Costs $.025 x 175,000 = $4,375
Price Variance
Actual Inputs at Standard Price $.03 x 175,000 = $5,250
$875 F Frames
$3.15 x 7,100 = $22,365
$3.15 x 7,100 = $22,365
$9.80 x 900 = $8,820
$9.60 x 900 = $8,640
$5.80 x 840 = $4,872
$9.60 x .125 x 7,000 = $8,400 240 U
$5.60 x 840 = $4,704 $168 U
Variable Overhead
$3.15 x 7,000 = $22,050 315 U
$180 U Unskilled Labor
$5.60 x .125 x 7,000 = $4,900 196 F
Total Variable Overhead Variance
$1,050
Flexible Budget $.03 x 20 x 7,000 = $4,200
1,050 U
$-0Skilled Labor
Efficiency Variance
($.10 + $.03) x 7,000 = $910
$140 U
Fixed Overhead
Actual Costs
Price Variance
$3,810
Budget $.47 x 8,000 = $3,760
$50 U
Production Volume Variance
470 U
17-32
Applied ($.47 x 7,000) = $3,290
Chapter 17 - Additional Topics in Variance Analysis
17-39. (continued)
The variance breakdown in Exhibits A and B highlights the areas that Elmo and Otto should research. One area involves the strings. Is the combination of a favorable price variance and unfavorable efficiency variance an indicator that low quality string was purchased? Another point for investigation is the apparent waste of 100 racket frames. Is there something in the production process that causes frames to break? Or are the standards unrealistic? A third area is the labor efficiency variances. Why are the skilled workers spending more time than budgeted, while the unskilled are spending less? Finally, the relationship between labor efficiency and materials efficiency variances is worth investigating, because use of substandard materials might result in an unfavorable labor efficiency variance. These are the types of questions that should be raised as a result of this variance analysis.
17-33
17
Additional Topics in Variance Analysis
Solutions to Review Questions 17-1. False. Variances simply represent differences between plans and actual outcomes. Capturing these variances can provide useful information regardless of whether inventories exist. Knowledge about differences between plans and actual outcomes can help managers improve planning or take steps to improve operations. 17-2. Variances are usually “expensed” as a period cost (e.g., charged to Cost of Goods Sold). Variances can also be prorated to accounts according to the standard cost balances in each of the accounts. Hence, a materials price variance recorded at the time of purchase would be prorated to Materials Inventory, Materials Efficiency Variance (because this variance is initially recorded at standard cost), Work in Process, Finished Goods and Cost of Goods Sold according to the current year standard cost balances in those accounts. 17-3. The industry volume variance measures the impact of differences between actual and expected industry sales volume on the company’s sales activity variance. Use of industrywide data helps explain changes in volume in terms of what is happening to the industry. 17-4. Efficiencies can be realized for costs only. The sales activity variance captures the effect on profit resulting from the difference between actual and budgeted sales. 17-5. Some possible decisions for which the market share variance would be useful include marketing (advertising) decisions, investment decisions, and product line portfolio decisions.
17-1
Chapter 17 - Additional Topics in Variance Analysis
17-6. If a company has two or more products, a mix variance can arise even if the net effect of all variances is zero. It might be very useful to learn about the mix variance because if the mix is changing, the company might need to change production and/or marketing strategies to meet the change in mix. The U.S. automobile industry was facing rising revenues and rising volumes but, unfortunately, there were falling profits because buyers were purchasing smaller cars that had lower profit margins for the manufacturers. 17-7. Examples include:
Steel mills which can process both new steel and recycled scrap
Oil refineries which can process different grades of crude oil
Distilleries producing blended whiskeys
Chemical companies
17-2
Chapter 17 - Additional Topics in Variance Analysis
Solutions to Critical Analysis and Discussion Questions 17-8. By recognizing the materials price variance at the time of purchase, management captures any difference between actual materials cost and the standard costs as reflected in the budget as those costs are incurred. If the price variance is not reflected until the time of use, the effect of price changes might not be recognized until the materials are removed from the raw materials inventory and placed into work in process. This could be a substantial time delay. If decisions need to be made to compensate for the effect of materials price changes, it would seem that the sooner the information comes to management's attention, the better the opportunities to react to the information. 17-9. As with all firms, sports teams budget for revenues from different sources, in this case ticket sales and concessions. Depending on the event, a different customer mix might lead to a difference in the proportion of revenues from these two sources. 17-10. In this situation the company is really selling just one product so a mix variance would not be meaningful. 17-11. In a hospital, as in other professional firms, billing rates vary with the level of the professional person performing services. Hence, a physician’s time is billed at a higher rate than an intern’s time. Even though the volume of hours billed might be the same, if the mix of physician to intern time is different there will be differences in revenues (and, most likely in profits as well). 17-12. Salary rates vary according to the classification of the service providers (e.g., nurses’ pay is higher than nurse practitioners’ pay), and the hospital will budget a certain amount of time for each classification. Thus, a labor mix variance can be calculated to show if the appropriate personnel were used in a particular period or in a particular unit (e.g., intensive care). An unfavorable mix variance would suggest that nurses were doing work that nurse practitioners should have done. 17-13. Disagree. The purpose of variance analysis is to identify items that are different from what we expected (budgeted). Therefore, we should be as interested in favorable variances as in unfavorable variances. Even if there is not a problem (for example, managers hiding expenses), we would still like to know where things are working well so that we can implement them in other areas of the organization.
17-3
Chapter 17 - Additional Topics in Variance Analysis
Solutions to Exercises
17-14. (15 min.) Variable Cost Variances Where Materials Purchased And Used Are Not Equal: Golden Company. Flexible Actual Budget Inputs at (Standard Actual Price Standard Efficiency Allowed for Costs Variance Price Variance Good Output) Purchase $174,474 $172,530 Computations $1,944 U 7.86 x 14,000 = $110,040
$115,020 Usage Computations
$4,980 U
17-15. (15 min.) Industry Volume And Market Share Variances: Kay’s Auto Products. Flexible Budget (SCM x AQ)
Market Share Variance
Standard Contribution Margin Times Budgeted Market Share Times Actual Industry Volume
Industry Volume Variance
Master Budget (SCM x SQ)
(SCM x ASQ) $4 x 45,000
$4 x 20% x 300,000
$4 x 20% x 250,000
= $180,000
= $240,000
= $200,000
$60,000 U
$40,000 F
$20,000 U
17-4
Chapter 17 - Additional Topics in Variance Analysis
17-16. (20 min.) Industry Volume And Market Share Variances—Missing Data. a. 15,000 fewer units = 52,500 fewer units – 37,500 more units. b. 900,000 units. [1,050,000 – (b)] x 25% = 37,500 units. c. 25% (from industry volume line). d. 20%. [(d) – 25%] x 1,050,000 = 52,500 fewer units. e. 1,050,000 units (from industry volume line). 17-17. (20 min.) Industry Volume And Market Share Variances—Missing Data. a. 20,000 fewer units = 100,000 more units activity variance – 120,000 more units market share variance. b. 3,000,000 units (from market share line). c. 8% (from market share line). d. 3,250,000. [3,000,000 – d] x 8% = 20,000 fewer units. e. 12%. (e – 8%) x 3,000,000 = 120,000 more units. 17-18. (20 min.) Sales Mix And Quantity Variances: AAA Electronics. a. and b. The actual prices are not relevant here. The mix and quantity variances are based on standard (budgeted) contribution margin per unit. Flexible Budget AQ x (SP – SV)
Mix Variance
ASQ x (SP – SV)
Quantity Variance
Master Budget
15,000 x ($109.50 - $50.00)+
25,000 x (20,000/29,000) x ($109.50 - $50.00)
20,000 x ($109.50 - $50.00)
10,000 x ($249.50 - $100.00)
+25,000 x (9,000/29,000) x ($249.50 - $100.00)
+ 9,000 x ($249.50 -
= $2,387,500
=$2,185,776
$100.00)
$201,724 F
= $2,535,500 $349,724 U
$148,000 U Activity Variance
17-5
Chapter 17 - Additional Topics in Variance Analysis
17-19. (20 min.) Sales Mix And Quantity Variances: Renee’s Rings. a. and b. Mix Variance
Flexible Budget AQ x (SP – SV)
ASQ x (SP – SV)
Quantity Variance
Master Budget
8,800 x ($500 - $200)
11,200 x (8,000/10,000) x ($500 - $200)
8,000 x ($500 - $200)
+ 2,400 x ($1,200 - $400)
+11,200 x (2,000/10,000) x ($1,200 - $400)
+ 2,000 x ($1,200 - $400)
= $4,560,000
=$4,480,000
= $4,000,000
$80,000 F
$480,000 F
$560,000 F Activity Variance
17-6
Chapter 17 - Additional Topics in Variance Analysis
17-20. (20 min.) Sales Mix And Quantity Variances: Tapas By Tom. a. and b. Flexible Budget AQ x (SP – SV)
Mix Variance
ASQ x (SP – SV)
Quantity Variance
Master Budget
756 x ($40 - $16)
1,080 x (800/1,200) x ($40 - $16)
800 x ($40 - $16)
+ 324 x ($60 - $20)
+1,080 x (400/1,200) x ($60 - $20)
+ 400 x ($60 - $20)
= $31,104
=$31,680
= $35,200
$576 U
$3,520 U
$4,096 U Activity Variance
17-7
Chapter 17 - Additional Topics in Variance Analysis
17-21. (35 min.) Materials Mix and Yield Variances: Huron Group. a. and b.
Efficiency Variance
Actual (AP x AQ) Material: Twinkle
Purchase Price Variance
$18 x 44,000 = $792,000
Mix Variance
(SP x AQ)
Yield Variance
$20 x (1/3 x 120,000) = $20 x 40,000 = $800,000
$20 x 44,000 = $880,000 $88,000 F
(SP x ASQ)
$80,000 U
Flexible Production Budget (SP x SQ)
$20 x (20 x 2,000) = $20 x 40,000 = $800,000
$-0-
Efficiency Variance = $80,000 U Star
$32 x 76,000 = $2,432,000
$30 x (2/3 x 120,000) = $30 x 80,000 = $2,400,000
$30 x 76,000 = $2,280,000 $152,000 U
$120,000 F
$30 x (40 x 2,000) = $30 x 80,000 = $2,400,000 $-0-
Efficiency Variance = $120,000 F
Total
$3,224,000
$3,160,000 $64,000 U
$3,200,000 $40,000 F
= $3,200,000 $-0-
Efficiency Variance = $40,000 F
Production of 2,000 units should require 120,000 units of input (= 2,000 x 20 + 2,000 x 40). Actual usage was 120,000 units (= 44,000 + 76,000), so there was no yield variance.
17-8
Chapter 17 - Additional Topics in Variance Analysis
17-22. (35 min.) Materials Mix and Yield Variances: John’s Weed-B-Gone. a. and b. The actual purchase prices were $7.75 (= $51,150 ÷ 6,600) for Weed-X and $21.00 (= $110,880 ÷ 5,280) for Pest-O.
Efficiency Variance
Actual (AP x AQ) Material: Weed-X
Purchase Price Variance
$7.75 x 6,600 = $51,150
Mix Variance
(SP x AQ)
Yield Variance
$8 x (0.005 x 1,080,000) = $8 x 5,400 = $43,200
$8 x (1/2 x 11,880) = $8 x 5,940 = $47,520
$8 x 6,600 = $52,800 $1,650 F
(SP x ASQ)
$5,280 U
Flexible Production Budget (SP x SQ)
$4,320 U
Efficiency Variance = $9,600 U Pest-O $21 x 5,280 = $110,880
$20 x 5,280 = $105,600 $5,280 U
$20 x (1/2 x 11,880) = $20 x 5,940 = $118,800 $13,200 F
$20 x (0.005 x 1,080,000) = $20 x 5,400 = $108,000
$10,800 U
Efficiency Variance = $2,400 F
Total
$162,030
$158,400
$166,320
$3,630 U
$7,920 F
= $151,200 $15,120 U
Efficiency Variance = $7,200 U
17-9
Chapter 17 - Additional Topics in Variance Analysis
17-23. (35 min.) Labor Mix and Yield Variance: Matt’s Eat ‘N Run. a. and b.
Efficiency Variance Actual (AP x AQ)
Purchase Price Variance
Labor: Skilled
Mix Variance
(SP x AQ)
$15 x (0.25 x 21,000) = $15 x 5,250 = $78,750
$15 x 6,000 = $90,000
$92,000 $2,000 U
(SP x ASQ)
$11,250 U
Flexible Production Budget (SP x SQ)
Yield Variance
$15 x (2/60 x 180,000) = $15 x 6,000 = $90,000 $11,250 F
Efficiency Variance = $-0Unskille d
$7.50 x 15,000 = $112,500
$180,000
$7.50 x (0.75 x 21,000) = $7.50 x 15,750 = $118,125
$67,500 U
$5,625 F
$7.50 x (6/60 x 180,000) = $7.50 x 18,000 = $135,000 $16,875 F
Efficiency Variance = $22,500 F
Total
$272,000
$202,500
$196,875
$69,500 U
$5,625 U
= $225,000 $28,125 F
Efficiency Variance = $22,500 F
17-10
Chapter 17 - Additional Topics in Variance Analysis
17-24. (10 min.) Flexible Budgeting—Service Organization: Lowe & Rent.
Flexible Budget (based on actual of 6,900 hours) Revenue................................ Costs: Professional salaries.......... Other variable costs........... Fixed costs......................... Total costs...................... Profit...................................... a b c d
$862,500 = $431,250 = $117,300 =
6,900 hrs. 6,000 hrs. 6,900 hrs. 6,000 hrs. 6,900 hrs. 6,000 hrs.
$862,500a 431,250b 117,300c 180,000d $728,550 $ 133,950 x $750,000 x
$375,000
x
$102,000
$180,000 = Master budget fixed costs
17-11
Chapter 17 - Additional Topics in Variance Analysis
17-25. (20 min.) Sales Activity Variance—Service Organization: Lowe & Rent.
Flexible Budget (based on actual of 6,900 hours) Revenue................................ $862,500 Costs: Professional salaries.......... 431,250 Other variable costs........... 117,300 Fixed costs......................... 180,000 Total costs...................... $728,550 Profit...................................... $ 133,950
17-12
Sales Activity Variance
Master Budget (based on budgeted 6,000 hours)
$112,500 F
$750,000
56,250 U 15,300 U ________ $71,550 U $ 40,950 F
375,000 102,000 180,000 $657,000 $ 93,000
Chapter 17 - Additional Topics in Variance Analysis
17-26. (30 min.) Profit Variance Analysis—Service Organization: Lowe & Rent. (1) (2) (3) (4) (5) Flexible Sales Actual Cost Price Budget Activity (6,900 hrs.) Variances Variances (6,900 hrs.) Variance Revenue.............................$825,000 $37,500 U $862,500 $112,500 F Professional salaries.......... 465,000 $33,750 U 431,250 56,250 U Other variable costs........... 108,000 9,300 F 117,300 15,300 U Fixed costs......................... 174,000 6,000 F 180,000 Profit...................................$ 78,000 $18,450 U $37,500 U $ 133,950 40,950 F
17-13
(6) Master Budget (6,000 hrs.) $750,000 375,000 102,000 180,000 $ 93,000
Chapter 17 - Additional Topics in Variance Analysis
17-27. (20 min.) Sales Price and Activity Variances: Dylan & Father. Actual (AP x SQ) Partner
Price Variance
Flexible Budget (SP – SV) x SQ $770 x 4,800 hours
$3,612,000
= $3,696,000
$84,000 U
Staff
$182 x 20,400 hours
$3,738,000
= $3,712,800
$25,200 F Flexible Budget AQ x (SP – SV)
Master Budget
Mix Variance
4,800 x ($770 - $364) + 20,400 x ($182 - $98)
= $3,662,400
(SP – SV) x ASQ a
[$406 x (5,100 ÷ 25,890) x 25,200] + b [($84 x (20,790 ÷ 25,890) x 25,200]
= $3,715,233
$52,833 U
$101,727 U
$154,560 U Activity Variance
a
$406 = $770 – $364.
b
$84 = $182 – $98.
Quantity Variance
17-14
SQ x (SP – SV) 5,100 x $406 + 20,790 x $84
= $3,816,960
Chapter 17 - Additional Topics in Variance Analysis
17-28. (15 min.) Variable Cost Variances: Harry’s Hotel.
Actual Costs
Price Variance
Actual Inputs at Standard Price
Efficiency Variance
$12 x 3,000 = $36,000
$45,240 $9,240 U
$12 x (14,000 ÷ 4) = $42,000 $6,000 F
17-15
Flexible Budget (Standard Allowed)
Chapter 17 - Additional Topics in Variance Analysis
Solutions to Problems
17-29. (20 min.) Sales Mix And Quantity Variances: Mattie’s Vineyards. a. Price Variance = (Actual Price − Budgeted Price) x Actual Quantity: Price = (Actual Price − Budgeted Price) x Actual Quantity Variety: Variance Sauvignon $2,000 F = ($7.25 − $7.00) x 8,000 Blanc Chardonnay 900 U = ($8.10 − $8.25) x 6,000 Riesling 3,850 F = ($7.10 − $6.75) x 11,000 $4,950 F b. and c. The actual prices are not relevant here. The mix and quantity variances are based on standard (budgeted) contribution margin per unit.
Mix Variance
Flexible Budget AQ x (SP – SV)
ASQ x (SP – SV)
Quantity Variance
Master Budget
8,000 x ($7.00 - $5.00)
25,000 x (10,400/26,000) x ($7.00 - $5.00)
10,400 x ($7.00 - $5.00)
+ 6,000 x ($8.25 - $6.00)
+25,000 x (3,900/26,000) x ($8.25 - $6.00)
+ 3,900 x ($8.25 - $6.00)
+ 11,000 x ($6.75 - $4.75)
+25,000 x (11,700/26,000) x ($6.75 - $4.75)
+ 11,700 x ($6.75 - $4.75)
= $51,500.00
=$50,937.50
= $52,975.00
$562.50 F
$2,037.50 U
$1,475 U Activity Variance
17-16
Chapter 17 - Additional Topics in Variance Analysis
17-30. (40 min.) Analyze Performance for a Restaurant: Doug’s Diner. Hint for working the problem: Use sales revenue as the basis for measuring volume.
Purchases Actual Variances Sales revenuea.................................................... $1,200 Variable costs: Purchases........................................................ 780 $60 U Hourly wages................................................... 60 Franchise fee................................................... 36 Utilities............................................................. 76 Total variable costs............................................. $952 $60 U Contribution margin............................................. $248 $60 U Fixed costs: ........................................................ Advertising....................................................... 100 Depreciation..................................................... 50 Lease............................................................... 30 Salaries............................................................ 30 Total fixed costs.................................................. $210 Operating profit.................................................... $ 38 $60 U
($000) Marketing & Administrative Variances
$8 F $8 F $8 F
$8 F
Notes on the following page.
17-17
Flexible Budget $1,200 720 b 60 c 36 d 84 e $900 $300 100 50 30 30 $ 210 $ 90
Activity Variance $200 F
Master Budget $1,000
120 U 10 U 6U 14 U $ 150 U $ 50 F
600 50 30 70 $750 $250
$ 50 F
100 50 30 30 $ 210 $ 40
Chapter 17 - Additional Topics in Variance Analysis
17-30. (continued) a Sales revenue is used as the basis of volume measurement because there are no price changes. b $600 x $1,200 $1,000 c $50 x $1,200 $1,000 d $30 x $1,200 $1,000 e $70 x $1,200 $1,000
17-18
Chapter 17 - Additional Topics in Variance Analysis
17-31. (30 min.) Nonmanufacturing Cost Variances: Springfield Bank. Incidental office costs comprise the variable costs. Salaries and the fixed office costs are all fixed. Variance analysis for the two classes of overhead is as follows:
Correspondence, Supplies, etc.
Actual Costs $10,800 x 1.12 = $12,096
Combined Price and Efficiency Variance
Flexible Budget (Standard Allowed for Actual Output) $45 x 240 = $10,800
$1,296 U Loan processor and other costs
a
0.5 x ($60,000 + $50,000 + $130,000) = $120,000
$55,000 + $63,000 = $118,000 $2,000 F
Optional: If computed, the production volume variance would be: Budget $120,000
a 0.5
$8,000 F
represents one-half year.
17-19
Applied $120,000 x (240 ÷ 225) = $128,000
Chapter 17 - Additional Topics in Variance Analysis
17-32. (30 min.) Performance Evaluation In Service Industries: Bay Area Bank.
Actual Costs
Price Variance
Actual Inputs at Standard Price
Efficiency Variance
New Accounts
$572,250
Flexible Budget $30 x 19,200 accounts = $576,000
(Ignored) $3,750 F
Account Maintenanc e
$18,000
Master Budget $30 x 20,000 accounts = $600,000
$24,000 F
$0.45 x 45,000 = $20,250
$17,700 $300 U
Activity Variance
$2,550 F
17-20
$0.45 x 43,200 = $19,440 $810 U
Chapter 17 - Additional Topics in Variance Analysis
17-33. Revenue Analysis Using Industry Data and Multiple Product Lines: Peninsula Candy Co. a. Sales price and activity variances.
(AP – SV) x AQ
Flexible budget (SP – SV) x AQ
Master budget (SP – SV) x SQ
$1,162 – $915b = $247
(1,600 x $.03a) + (2,000 x $.04) + (4,200 x $.035) = $275
$1,200 – $920 = $280
a Unit
$28 U
$5 U
Sales price variance
Sales activity variance
contribution margins calculated from master budget panel as follows:
Unit margin = Contribution margin ÷ Sales units. b
$915 = [1,600 x ($140 ÷ 2,000) + 2,000 x ($320 ÷ 2,000) + 4,200 x ($460 ÷ 4,000)].
b. Two solutions are possible when calculating the market share variance, depending upon the figure used for the left column. The examples in the text use the flexible budget amount. However, those examples involve only one product, whereas this problem has three products, and therefore a mix issue is present. In this situation, another way to solve the problem would be to use the standard price times the actual quantities at the standard mix. Both alternatives are given on the following page.
17-21
Chapter 17 - Additional Topics in Variance Analysis
17-33b. (continued) Contribution margin variance Actual Quantities at Standard Mix and Standard Prices
Industry Effect $280 x (76,000 ÷ 80,000) = $266
$273a
Master Budget $280
$7 F
$14 U
Market Share Variance
Industry Variance
Flexible Budget $275
$7 U Quantity Variance Industry Effect $266
$9 F
$5 U
Master Budget $280 $14 U
Activity Variance The $2 difference in the market share variance is explained by the difference in the mix. a $273 = [7,800 x (2,000 ÷ 8,000) x ($60 ÷ 2,000) + 7,800 x (2,000 ÷ 8,000) x ($80 ÷ 2,000) + 7,800 x (4,000 ÷ 8,000) x ($140 ÷ 4,000)]. A shortcut is to multiply the actual number of bars by the average contribution margin per bar in the master budget: 7,800 bars x ($280 ÷ 8,000 bars) = $273.
17-22
Chapter 17 - Additional Topics in Variance Analysis
17-34. (20 min.) Sales Mix And Quantity Variances: Peninsula Candy Co. Mix Quantity Flexible Budget Variance Variance (SP – SV) x AQ (SP – SV) x ASQ (1,600 x $.03) 2,000 (7,800 x x $.03) 8,000 + (2,000 x $.04) + 2,000 (7,800 x x $.04) 8,000 + (4,200 x $.035) + 4,000 (7,800 x x $.035) 8,000 = $275 = $273
$2 F
$7 U
$5 U Activity Variance
17-23
Master Budget (SP – SV) x SQ (2,000 x $.03) + (2,000 x $.04) + (4,000 x $.035) = $280
Chapter 17 - Additional Topics in Variance Analysis
17-35. (45 min.) Materials Mix And Yield Variances: Houston Corporation. a. and b.
Material
Efficiency Variance Actual
Purchase
(AP x
Price
AQ)
Variance
Flexible Mix (SP x AQ)
Variance
Z-Alpha
(SP x ASQ) a
Yield
Production
Variance
Budget
$9 x (.48 x
$423,360
$9 x
104,400) =
50,400 =
$9 x 50,112
$9 x (600 x 80)
$453,600
= $451,008
= $432,000
$30,240 F
$2,592 U
$19,008 U
$21,600 U
a
Z-Beta
$12 x (.36 x
$400,464
$12 x
104,400) =
37,040 =
$12 x 37,584
$12 x (450 x
$444,480
= $451,008
80) = $432,000
$44,016 F
$6,528 F
$19,008 U
$12,480 U
Z-Gamma
$417,216 $10,176 U
a
$24 x
$24 x (.16 x
16,960
104,400) =
=
$24 x 16,704
$24 x (200 x
$407,040
= $400,896
80) = $384,000
$6,144 U
$16,896 U
$23,040 U
a
Standard mix: .48 = 600 ÷ 1,250; .36 = 450 ÷ 1,250; .16 = 200 ÷ 1,250;
17-24
Chapter 17 - Additional Topics in Variance Analysis
17-35. (continued)
Efficiency Variance Purchase
Flexible
Price Actual Total
Variance
Mix (SP x AQ)
Variance
(SP x ASQ)
Yield
Production
Variance
Budget
$1,241,04 0
$1,305,120 $64,080 F
$1,302,912 $2,208 U
$54,912 U
$57,120 U
17-25
$1,248,000
Chapter 17 - Additional Topics in Variance Analysis
17-36. (30 min.) Labor Mix and Yield Variances: Davenport Construction Associates a. and b.
Efficiency Variance Purchase
Flexible
Price Actual
Variance
Mix (SP x AQ)
($26 x 660) +
($24 x 660) +
($23 x 780) + ($15 x 432) = $41,580 $2,880 U
Variance
(SP x ASQ)
Yield
Production
Variance
Budget
($24 x 1/3 x 1,872)
($24 x 600) +
($21 x 780) +
+ ($21 x 1/3 x
($21 x 600) +
($15 x 432)
1,872) + ($15 x 1/3
($15 x 600) =
= $38,700
x 1,872) = $37,440
$36,000
$1,260 U
$1,440 U
$2,700 U
17-26
Chapter 17 - Additional Topics in Variance Analysis
17-37. (20 min.) Derive Amounts for Profit Variance Analysis: Aqua Clean, Inc. Hint: Use last month’s actual as master budget. Actual (based on actual Variable activity of Cost 161 Variance cleanings) Sales revenue..................................................... $22,800 Less: Variable costs.................................................. 5,220 $93 F Contribution margin............................................. $17,580 $93 F aLast month price =
$22,680 140 cleanings
Sales Price Variance $3,282 U
$3,282 U
Flexible Budget (based on actual activity of 161 cleanings) $26,082 a 5,313 b $20,679
Sales Activity Variance
Master Budget (based on a prediction of 140 cleanings)
$3,402 F
$22,680
693 U $2,709 F
4,620 $18,060
= $162
$26,082 = $162 x 161 cleanings bLast month unit variable cost = $4,620 ÷ 140 cleanings =
$33; $5,313 = $33 x 161 cleanings.
Although the two months’ contribution margins are similar, there are significant variances. This illustrates the need to consider variance analysis even if bottom-line dollar amounts are similar to budget. Activity levels, prices, and other factors might offset each other, but individually be significant. The number of cleanings increased by 21, which increased profit by $2,709. However, the actual average price was $141.61 (= $22,800 ÷ 161 cleanings) so the average price per cleaning decreased by $20.39 ($162.00 – $141.61). As a result, profit decreased by $480.
17-27
Chapter 17 - Additional Topics in Variance Analysis
17-38. (20 min.) Flexible budget: Oak Hill Township. Flexible budget is based on actual activity of 94,500 miles for costs that vary per mile. a. $8,505; $10 over budget. $6,750 x (94,500 miles ÷ 75,000 miles) = $8,505 b. $756; $4 over budget. $600 x (94,500 miles ÷ 75,000 miles) = $756 c. $5,000; equal to budget. The assumption is that, within the relevant range, this is a fixed cost. d. Decreased unit fixed costs. Assuming that insurance, salaries and benefits, and depreciation are fixed costs, the budgeted amount is $0.1387 per mile [($1,000 + $5,000 + $4,400) ÷ 75,000 miles]. The actual amount is $0.1129 per mile for 94,500 actual miles, which is a drop of $0.0258. This is 84.3% of the total decrease from $0.2427 to $0.2121.
17-28
Chapter 17 - Additional Topics in Variance Analysis
Solutions to Case
17-39. Comprehensive Overview of Budgets and Variances Racketeer, Inc. The following solution is based on a report by Tom Terpstra. Elmo's problem is that he thinks that the graph and the income statement measure the same thing. Otto should have told him that they do not. The income statement presents actual costs in a full-absorption costing format, while the profit graph is based on standard costs in a variable costing format. These differences account for the difference in the profit measurement. Because the profit graph is based on standard costs, the profit it shows will be the actual profit only in those very rare cases when the variances net out to zero. Racketeer has some significant variances listed on the income statement, so Elmo should expect that the actual profit would differ from the profit on the graph. These variances are: Material................................................................ $490 U Labor................................................................... 392 U Overhead............................................................. 190 U Selling and administrative................................... 300 F Total..................................................................... $772 U The overhead amount differs from the figure on the income statement, because the income statement overhead variance includes a production volume variance of $470 (= $.47 x 1,000). But that variance does not reflect a difference between actual and budget or standard costs when fixed manufacturing costs are not unitized. The other part of the difference between the two profit figures is explained by the difference in accounting methods. Variable costing expenses fixed costs when they are incurred. With full-absorption, the fixed costs are assigned to the units produced, and then expensed in the period in which the units are sold. Racketeer treats each racket as having a fixed cost of $.47. For the 10,000 rackets sold, the fixed cost expense is $4,700 under full-absorption costing. Additionally, the production volume variance of $470 is also expensed during this period. Thus, $5,170 in fixed costs (aside from price variances) was deducted from income on the income statement. Under variable costing, the only fixed cost to be expensed is the standard cost for the period of $3,760 (also aside from price variances). So, the use of different accounting methods results in a profit difference of $1,410. (Before Elmo starts to complain about the accountants' use of full-absorption, one should remind him that, in those months when production exceeds sales, the full-absorption method would expense less fixed costs than variable costing, so it evens out in the long run.)
17-29
Chapter 17 - Additional Topics in Variance Analysis
17-39. (continued)
Now the two results can be reconciled: Profit per chart..................................................... $20,940 Less: Cost variances................................................. 772 Additional fixed costs in full-absorption........... 1,410 Profit per Income Statement............................... $18,758 Besides failing to explain the profit graph, Otto also failed to set up a format to take advantage of the standards he developed. The company should set up a chart showing the actual results, the flexible budget, and the master budget. This would provide information concerning the profit changes in relation to the change in sales volume. Additionally, the manufacturing variances could be analyzed in greater detail, as shown in Exhibits A and B on the following pages.
17-30
Chapter 17 - Additional Topics in Variance Analysis
17-39. (continued) Exhibit A Comparison of Master Budget to Actual Results. Actual Sales......................................... $90,000 Less Variable Costs: Materials................................ 37,990 Labor..................................... 19,392 Overhead............................... 1,440 Contribution Margin................... $31,178 Less Fixed Costs: Manufacturing........................ 3,810 Selling and Administrative..... 7,200 Operating Profit......................... $20,168
Manufacturing Variance
Selling and Administrativ e Variance –0–
$ 490 U 392 U 140 U $1,022 U 50 U $1,072 U
–0–
$300 $300
17-31
F F
Sales Price Flexible Activity Variance Budget Variance –0– $90,000 $18,000 F 7,500 3,800 260 $6,440
Master Budget $72,000
–0–
37,500 19,000 1,300 $32,200
U U U F
30,000 15,200 1,040 $25,760
–0–
3,760 7,500 $20,940 $ 6,440 F
3,760 7,500 $14,500
Chapter 17 - Additional Topics in Variance Analysis
17-39. (continued)
Exhibit B Manufacturing Cost Variances.
String
Actual Costs $.025 x 175,000 = $4,375
Price Variance
Actual Inputs at Standard Price $.03 x 175,000 = $5,250
$875 F Frames
$3.15 x 7,100 = $22,365
$3.15 x 7,100 = $22,365
$9.80 x 900 = $8,820
$9.60 x 900 = $8,640
$5.80 x 840 = $4,872
$9.60 x .125 x 7,000 = $8,400 240 U
$5.60 x 840 = $4,704 $168 U
Variable Overhead
$3.15 x 7,000 = $22,050 315 U
$180 U Unskilled Labor
$5.60 x .125 x 7,000 = $4,900 196 F
Total Variable Overhead Variance
$1,050
Flexible Budget $.03 x 20 x 7,000 = $4,200
1,050 U
$-0Skilled Labor
Efficiency Variance
($.10 + $.03) x 7,000 = $910
$140 U
Fixed Overhead
Actual Costs
Price Variance
$3,810
Budget $.47 x 8,000 = $3,760
$50 U
Production Volume Variance
470 U
17-32
Applied ($.47 x 7,000) = $3,290
Chapter 17 - Additional Topics in Variance Analysis
17-39. (continued)
The variance breakdown in Exhibits A and B highlights the areas that Elmo and Otto should research. One area involves the strings. Is the combination of a favorable price variance and unfavorable efficiency variance an indicator that low quality string was purchased? Another point for investigation is the apparent waste of 100 racket frames. Is there something in the production process that causes frames to break? Or are the standards unrealistic? A third area is the labor efficiency variances. Why are the skilled workers spending more time than budgeted, while the unskilled are spending less? Finally, the relationship between labor efficiency and materials efficiency variances is worth investigating, because use of substandard materials might result in an unfavorable labor efficiency variance. These are the types of questions that should be raised as a result of this variance analysis.
17-33
Related Documents
Chap 017
March 2021 0
Chap 012
March 2021 0
Chap 008
March 2021 0
Chap 17
January 2021 2
Chap 013
March 2021 0
20130222-male-017
February 2021 0More Documents from "Indonesian Girls Only"
Chap 013
March 2021 0
Chap 012
March 2021 0
Chap 017
March 2021 0
Domestic Discipline Contract
January 2021 1
