Chapter 13 The Flexible-Budget and Standard Costing: Direct Materials and Direct Labor

CHAPTER 13 THE FLEXIBLE-BUDGET AND STANDARD COSTING: DIRECT MATERIALS AND DIRECT LABOR
QUESTIONS 13-1 The firm earned $5 million while the master budget planned for $7.5 million of operating income last year. Thus, the comment that the firm was not effective is correctthe firm failed to attain the planned operating income for the period. The committee member, however, erred in saying that the operation was inefficient. The firm earned $5 million of operating income on sales of 25,000 units. The operating income for the flexible-budget at 25,000 units is $4.5 million, which is lower than the amount the firm earned. Thus, the firm was efficient in carrying out its operations. 13-2 Yes. Standard costs can be used with either job-order costing or process costing. Note that the use of standard costs in conjunction with a process cost system is particularly attractive since it dramatically reduces the cost of operating the system: the standard costs represent the equivalent-unit costs for labor, materials, and manufacturing overhead. Automotive repair shops represent a good example of how standard costs could be incorporated into a job-cost system. Such shops use published labor-hour times for routine maintenance work. 13-3 The term standard cost is normative in the sense that it refers to the costs that should be incurred if operations are relatively efficient. For financial control purposes, such costs can be compared to actual costs with follow-up analysis of variances (deviations) between the two. A standard cost system is one in which the flow of costs through the accounts is at standard, not actual. Thus, standard cost systems can be used in conjunction with either job-order or process cost systems. Note that standard costs (and associated variance analysis) can be used outside of the formal accounting system. 13-4 Although used interchangeably in the vernacular, we typically represent standard costs as per-unit amounts (e.g., standard direct labor cost per unit produced or standard wage rate per hour worked). Budgets, on the other hand, typically refer to total amounts, such as Budgeted Sales, Budgeted Manufacturing Costs, Budgeted Cost of Goods Manufactured, and Budgeted Operating Income.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
13-1
The McGraw-Hill Companies 2008
13-5 A master budget represents forecasted operating profit based on a single output level (planned sales) for an upcoming period. As such, this budget is also referred to as a static budget. Pro-forma budgets represent budgeted operating income for various output levels (production or sales). Pro-forma budgets can be prepared for any output level within the relevant range. In this text, we reserve the term flexible budget for the control budget prepared after the end of the period. That is, the flexible budget is flexed to the actual output level achieved (e.g., sales volume). The introduction of the flexible budget is key to the process of explaining the total static (master) budget variance for the period. That is, the flexible budget allows us to break down the total static budget variance for a period into a sales volume variance and a total flexible-budget variance. For this reason, some accountants refer to this budget as a control budget. 13-6 The amount of actual direct materials cost incurred could differ from the amount reflected in the master (static) budget for three principal reasons: (1) the actual sales volume for the period differed from the volume envisioned in the master budget (this volume difference would cause the consumption of raw materials to be different from the amount reflected in the master budget); (2) the price paid per unit of raw material differed from the standard price; and (3) the efficiency of raw materials consumption was different than expected. Note that items (2) and (3) are reflected as part of the total flexible-budget variance for the period. Finally, an astute student might mention that a fourth explanation is possible: the amount of materials purchased differed from the amount issued to production (i.e., there was a change in ending inventory). 13-7 By definition, as the level of output (or activity) changes, variable costs will change in totalmore or less in proportion to the change in output (activity). At the 80 percent level of budgeted output, variable costs should have been $64,000 ($80,000 x 0.8). Thus, based solely on this information, we can say that the plant manager was not efficient, having spent $72,000 to operate at the 80% level of budgeted production. 13-8 Of the three, for motivation and control purposes, standards based on the average of recent historical performance are the least desirable. Many firms prefer to use standards based on attainable performance in their standard cost systems in order to have standards that are achievable but not frustrating to workers. However, world-class firms or firms stressing continuous improvement can choose to use standards based on ideal (i.e., maximum efficiency) performance.
13-2
13-9 Any purely variable cost, such as direct manufacturing labor, is a function of two factors: price (P) and quantity (Q). Thus, if a standard cost variance for a variable cost exists for a given period, management might want to know the underlying cause of the variance: how much of the total variance was attributable to wage rates (P) being different from planned rates? How much of the total variance was attributable to operational efficiencies? To answer these questions we must decompose the total flexible-budget variance for a variable cost into its P and Q components. Knowledge of the underlying causes of a given variance is fundamental to taking corrective action. 13-10 Although the total materials cost variance is small and insignificant, this variance might be the result of substantial but offsetting price and efficiency variances. The breakdown of the total materials variance into price and quantity components allows managers to draw conclusions regarding each of the two separate functions regarding materials: their acquisition and their use in production. 13-11 A learning curve is a representation (either mathematical or graphical) of the systematic effect of experience on the time it takes to perform a task (e.g., produce a batch of output). Thus, the variance that is most likely to reflect effects of a learning curve phenomenon is the direct labor efficiency variance. A learning curve phenomenon may also have effects on the uses of direct materials, as the amount of waste or spoilage may decrease with experience. 13-12 The answer depends on how overtime premium is treated by the accounting system. If overtime premium is included as part of factory overhead, then the higher wages paid due to overtime premium should not affect any direct labor variances. However, for firms that include overtime premium in the total wages, rate variances are likely to be unfavorable when overtime premium is paid. 13-13 The performance of a division should not be considered as less than satisfactory simply because all variances are unfavorable. For example, a firm expects unfavorable variances if it uses an ideal performance standard. As long as the firm is making satisfactory progress toward the standard, unfavorable variances can be thought of as a progress report toward meeting the goal; in this context they are not measures of unsatisfactory performance. However, if the firm uses currently attainable standards, an unfavorable variance may signal that the performance of the division is below expectations. Firms with such standards expect the division to meet the goals in each and every operation.
13-3
The more general point is that the terms favorable and unfavorable should not be interpreted to mean good versus bad. Additional spending associated with opportunities not originally envisioned in the master budget may result in unfavorable spending variances, but can be critical in terms of the future prospects of the firm. In short, the labels favorable and unfavorable are defined solely on the basis of the impact of the variance (positive or negative) on short-term operating profit. It is a value judgment as to whether such variances are positive or negative. 13-14 Management time is scarce. According to the philosophy of management by exception, managers give primary attention to things (operations, sales promotions, production, revenue growth, productivity gains, etc.) that are not going according to plan, or at least are departing materially from plan. The corollary is that managers give relatively less attention to areas that are basically proceeding according to plan. Variances can be thought of as information signals, identifying situations where, from a financial standpoint, things are not going according to plan. Thus, when such variances are deemed small or immaterial, no intervention on the part of managers is needed. On the other hand, when a variance is considered abnormal (i.e., an exception) it may trigger the need for an investigation to uncover the underlying cause, which in turn may lead to some type of intervention or change. 13-15 The best answer among the choices is 3. A favorable materials purchase price variance suggests that the actual purchase price of materials was less than the standard price. The firm also used more than the quantity of materials specified in the standard cost sheet for the units manufactured. Answer choice #3 includes the possibility of both price and quantity factors and as such is the preferred answer to the question. 13-16 Just-in-Time (JIT) firms emphasize the total cost of operations, not just materials purchase costs. The importance of such factors as quality, reliability, and availability often outweighs any savings due to purchase cost. Also, firms using JIT systems are likely to have long-term purchase contracts with selected pre-certified suppliers. The negotiated prices are not subject to short-term fluctuations so that, by definition, purchase price variances would be minor if not non-existent. 13-17 One result of new manufacturing technologies (e.g., JIT or flexible manufacturing systems), or strategic imperatives such as TQM, is the decreased importance of direct labor variances. The utmost concern of firms using these technologies is satisfying customers and providing better products than competitors. A wellmanaged firm is not the one with the lowest unfavorable variances or the highest favorable variances. Rather, it is the one with satisfied customers and consistently better products. The main point here is that financial performance is but one consideration in evaluating the performance of organizational subunits.
13-4
13-18 Establishing a standard cost system and identifying variances from the standard are steps in gaining a better understanding of the operations and improving operations. The focus of a standard cost system should be on influencing behavior with positive reinforcements and motivations. Standard costing systems should never be used negatively (e.g., to affix blame). Seldom will long-term success result from the application of penalties and punishments. A positive perception about the standards and variance identifications by all affected workers is critical to the success of a standard cost system. Secrecy in setting standards, authoritarian control procedures, poor communication, excessive pressure, inflexibility, uneven reward systems, or excessive emphasis on short-term financial results (profits) can all compromise the benefits of a standard cost system. 13-19 Direct material price variances can be caused by any of the following factors: purchasing material of a different quality than that envisioned in the standard material cost; inapplicability of the standard cost per unit of raw material (i.e., outdated standardsthe market price may have changed); purchasing was done through a new supplier; delivery terms for purchases were different (and therefore either more or less costly) than the terms envisioned when the standard material costs were set; skill (or lack thereof) of the purchasing manager in negotiating a price for raw materials; purchasing from a distress seller; rush orders were used; and, the quantity of materials purchased differed from normal (e.g., larger lot sizes might yield quantity discounts). Normally, the Purchasing Manager is in the best position to influence the direct materials purchase price variance. Direct materials usage variances can be caused by: poorly supervised employees; inadequately maintained machinery and equipment; inappropriate standard (e.g., standard is out-of-date, or the standard was set incorrectly); or, the use of non-standard raw materials. Normally, the Production Manager is in the best position to influence the direct materials usage (quantity) variance. Note, however, that this variance might also be affected by decisions made by the Purchasing Department. For example, if the Purchasing Department obtains materials of lower quality than envisioned in the standard (perhaps to secure a price savings), excessive spoilage and waste may occur during the production process. Thus, in this case the Purchasing Department (not the Production Department), would be responsible for the variance. 13-20 Direct labor rate (price) variances could be caused by: highly skilled (and paid) labor used in place of lower-skilled labor; standard is out of date (e.g., new labor contract); or, overtime work that is included in direct labor cost (rather than manufacturing overhead). In some cases, the Production Manager is in the best position to influence the direct labor rate (price) variance because this individual relates to how labor is deployed in the organization (e.g., skilled workers who are paid more may be assigned to do tasks meant for lower-paid workers). In other situations, the Personnel Manager or perhaps union negotiator has more influence over this variance.
13-5
Direct labor efficiency (usage) variances could be caused by: using a different mix of labor for the task at hand, as compared to the standard mix of labor; poorly supervised employees; installation of new equipment; machinery and equipment not maintained according to schedule (which could cause excess waste and labor-hour consumption); inappropriate labor-hour standard (e.g., the standard could be out of date; or, the standard could have been improperly set); low employee morale; poor production scheduling (which could lead to excessive idle time); or, the use of newly hired employees (break-in/training period). Normally, the Production Manager is in the best position to influence the direct labor usage (efficiency) variance. However, this variance (as noted in 13-19 above) may be assigned to the Purchasing Manager if the purchase of inferior materials caused excess labor-hour consumption. One particularly interesting situation that students should be aware of is the potential for overemphasizing labor efficiency variances when labor is essentially a short-term fixed cost. In this case, the labor efficiency variance can be largely attributable to lack of orders (i.e., lack of sales demand), not worker efficiency. For this reason, some writers suggest that when labor is essentially a short-term fixed cost, that the labor efficiency variance not be reported for motivation and control purposes. Otherwise, workers (and managers) may be motivated to produce excess inventory which in turn would run counter to the JIT philosophy that the firm may be embracing. 13-21 One of the functions of making journal entries is to provide management with timely information for monitoring operations and controlling activities and costs. These functions can be most effectively attained if entries, including those of variances, are posted to the ledgers as soon as they are known and made available immediately to the operating managers. In particular, this means that it is generally preferable to record the materials price variance at point of purchase. 13-22 This question was posted in Cost Management Update, Institute of Management Accounts (August 2003), p. 4. Two readers responded: Although our manufacturing side would like to change standard costs frequently, we update them every six months. The closest update to year-end is the month prior to year-end. It spreads the workload. Six months later, we do it again. We have found that our processes and costs do not change drastically enough to warrant more frequent changes. At my company, we update standards once a year. Our MRP system lets us track at an item level a standard cost (updated once a year) and a current cost. A change in bill of material, routing, or work center overhead rate will be reflected in current cost fields. This allows us to have a base line (the standard) as a measurement of improvement. In the financial statements, the changes are reflected in Methods Change Account (bill of material change or routing change), price variance (raw material price change), or overhead absorption variance (actual direct center spending differs from the annual operating plan overhead rate multiplied by earned hours), along with labor efficiency.
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If the standard cost were to change midyear, my first step would be to estimate the change in revaluating the inventory at the new standard cost, as it will be a lump sum amount and most likely should be forecasted prior to the change.
13-7
BRIEF EXERCISES 13-23 Budgeted (Pro-forma) Operating Profit = (cm/unit x #units) - FC a. ($14/unit x 10,000 units) - $34,000 = b. ($14/unit x 15,000 units) - $34,000 = 13-24 $106,000 $176,000
Total static (master) budget variance = actual operating income - static (master) budget operating income = ($180,000 - $54,000 - $50,000) - ($160,000 - $48,000 - $52,000) = $76,000 - $60,000 = $16,000F
13-25
Sales volume variance = cm/unit x (actual sales volume - master budget sales volume) = ($24.00 - $12.00)/unit x (47,000 units - 50,000 units) = $36,000U
13-26
Sales price variance = actual sales volume x (actual - budgeted) selling price/unit = AQ x (AP - SP) = (0.95 x 10,000 units) x ($49.50 - $55.00)/unit = 9,500 units x $5.50/unit = $52,250U
13-27
Total static (master) budget variance in operating profit = actual operating profit - static (master) budget operating profit = ($350,000 - $225,000 - $95,000) - ($400,000 - $250,000 - $100,000) = $30,000 - $50,000 = $20,000U Sales volume variance in operating income = flexible-budget operating income - master budget operating income = $35,000 - $50,000 = $15,000U
Flexible-budget variance = actual operating income - flexible-budget operating income = $30,000 - $35,000 = $5,000U
13-8
13-28
Direct materials usage (quantity) variance for PVC = Standard price/lb. x (actual lbs. used standard quantity of lbs. that should have been used, given the actual output for the period) = = = = SP x (AQ - SQ) $40.00/lb. x (720 lbs. - [780 units x 1lb./unit]) $40.00/lb. x (720 lbs. - 780lbs.) $40.00/lb. x 60lbs. =
$2,400F
13-29 Purchase price variance for PVC = actual pounds purchased (actual standard) price/lb. = AQ x (AP - SP) = 720 lbs. x ($41.00 - $40.00)/lb. = $720U
13-30 Flexible-budget variance for PVC = actual PVC cost for units produced - FB cost = (actual price/lb. x actual lbs. used) - (actual output x standard #lbs./unit of output x standard price/lb.) = ($41.00/lb. x 720lbs.) - (780 units x 1lb./unit x $40/lb.) = $29,520 - $31,200 = $1,680F 13-31 Direct labor efficiency variance = standard wage rate/hr. x (actual standard) direct labor hours = SP x (AQ - SQ) = $8.00/hr. x (980 hrs. - [6,000 units x 1/6 hr./unit]) = $8.00/hr. x (980 hrs. - 1,000 hrs.) = $160.00F 13-32 Direct labor rate (price) variance = actual hours worked x (actual standard) wage rate/hr. = AQ x (AP - SP) = 980 hours x ($8.40/hr. - $8.00/hr.)= $392.00U
13-9
EXERCISES 13-33 Applicability of Standard Cost Systems (30 minutes) 1. The major advantages of using a standard cost accounting system include the following: Budgeting. Standard costs can be the building blocks for budget preparations and allow the development of flexible budgets. Performance evaluation. By comparing actual costs to standard costs, the performance of the company, a department, or an individual can be evaluated. Financial Control. An analysis of the variances between actual costs and standard costs can identify problem areas and allow for remedial action. Pricing. Standard costs based on carefully determined materials and labor usage plus overhead rates based on normal activity levels form an acceptable basis for pricing strategies that provide for full recovery of all costs. Recordkeeping cost and effort. Standard costs reduce recordkeeping costs. For example, subsidiary ledgers under a standard cost system need to be maintained only in terms of physical quantities. As another example, standard costs greatly simplify the operation of a process cost system: the standard costs represent the costs per equivalent unit (i.e., these costs do not have to be calculated separately using FIFO or the weighted-average method). 2. The setting of physical standards such as materials quantities, labor hours, machine time, and set-up time generally requires information about materials, laborers, equipment specifications, production procedures, and work flow; this information is generated from studies conducted by technical personnel and/or from the production expertise of line personnel. There must also be adequate cost and price information to convert the physical standards into monetary terms. In addition, a firms cost must be separable into cost per unit of production or hour of service, and the production process must be fairly stable and predictable.
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13-33 (Continued) 3. a. Because cash-maximization is important for a product classified as a cash cow, efficiency of operations is essential. Standard costs provide targets for monitoring costs and identifying inefficiencies so that such problems can be corrected. Because a cash cow is a slow-growing established product, costs should be fairly predictable and easy to track. b. Because a product classified as a question mark is facing strong competition, the ability to control product costs may be the difference between success and failure. The efficiency gained from the application and monitoring of a standard cost system could give the question mark a longer period of time to gain market acceptance. The cost control afforded by standard cost allows a firm to be more flexible in its pricing including the ability to price its question marks below similar competitive products. 4. In an advanced manufacturing environment, characterized by the increased use of technology in the manufacturing process and the existence of world-class competitors, several important criticisms of standard cost systems have been raised in the literature, including: the use of such standards, as defined and used conventionally, does not motivate continuous improvement (Kaizen), which could put the organization at a competitive disadvantage. conventional standard cost systems focus too much on direct labor, which for some organizations is a minor part of total manufacturing cost. products produced in this environment typically have shorter life cycles, which mean that standard costs quickly become out-of-date. the focus of conventional standard cost systems is primarily if not exclusively on cost-reduction, which may not be strategically important to the organization (e.g., when the organization is pursuing a product-differentiation strategy in which quality of output is of primary importance). traditional standard costs, e.g. those for direct materials, are not comprehensive enough (i.e., do not include the cost of total ownership). many highly-automated manufacturing processes, based on advanced manufacturing technologies, are highly reliable and consistent; in this case, the incremental information to management from standard-cost variances can be small.
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13-34 Flexible Budget and Variances (30 min) 1. Flexible budget for June, at 90% of the master-budget level: Units sold Sales (90% x $800,000) Variable expenses (90% x $450,000) Contribution margin Fixed expenses Budgeted operating income 2. Refer to text Exhibit 13.1 for master-budget data a. Sales volume variance, in terms of operating income = flexible-budget operating income master (static) budget operating income = $165,000 - $200,000 = $35,000U or, budgeted cm/unit x (actual sales volume - master budget sales volume) = $350/unit x (900 - 1,000) units = $35,000U b. Sales volume variance, in terms of contribution margin = flexible-budget contribution margin - master (static) budget contribution margin = $315,000 - $350,000 = $35,000U 900 $720,000 405,000 $315,000 150,000 $165,000
or, budgeted cm/unit x (actual master budget) sales volume = $350/unit x (900 1,000) units = $35,000U 3. Actual Operating Results For the Month of June Sales (900 x $840) Total variable expenses Contribution margin Fixed expenses Operating income $756,000 414,000 $342,000 180,000 $162,000
13-12
13-34 (Continued) a. Total flexible-budget variance = actual operating income - flexible-budget operating income = $162,000 - $165,000 = $3,000U b. Total variable cost flexible-budget variance = actual variable costs flexiblebudget variable costs = $414,000 - $405,000 = $9,000U or, AQ x (AP - SP) = 900 units x ($460 - $450)/unit = $9,000U c. Total fixed cost flexible-budget variance = actual fixed costs flexible-budget fixed costs = $180,000 - $150,000 = $30,000U d. Selling price variance = actual sales revenue flexible-budget sales revenue = $756,000 - $720,000 = $36,000F or, AQ x (AP - SP) = 900 units x ($840 - $800) = $36,000F
NOTE: total flexible-budget variance ($3,000U) = selling price variance ($36,000F) + total variable cost flexible-budget variance ($9,000U) + total fixed cost flexible-budget variance ($30,000U). The following presentation, similar to text Exhibit 13.5, might be useful for in-class presentation purposes: SCHMIDT MACHINERY COMPANY Analysis of Operating Results June 2007 Actual 900 $756,000 414,000 $342,000 180,000 $162,000 Flexible Budget 900 $720,000 405,000 $315,000 150,000 $165,000 $38,00U Flexible-budget Variance $3,000U Sales Volume Variance $35,000U Static (Master) Budget 1,000 $800,000 450,000 $350,000 150,000 $200,000
Unit sales Sales (900 x $840) Total variable expenses Contribution margin Fixed expenses Operating income
Total Master (Static) Budget Variance
13-13
13-35 Flexible Budget and Variances (20 minutes) 1. Budget data: Selling price Variable cost $48,000/12,000 units = $4.00 per unit $18,000/12,000 units = $1.50 per unit $60,000 22,500 $37,500 16,000 $21,500 $40,000 37,500 $ 2,500F $3,500F
a. Flexible budget for 15,000 units Sales 15,000 x $4.00 = Variable costs 15,000 x $1.50 = Contribution margin Fixed costs Operating income b. Contribution margin earned for the period:
$64,000 - $24,000 = Flexible-budget contribution margin (see above) = Contribution margin flexible-budget variance
c. Operating income flexible-budget variance: $25,000 - $21,500 = d. Sales volume variance, in terms of contribution margin: $37,500 - ($48,000 - $18,000) = e. Sales volume variance, in terms of operating income: $21,500 - ($48,000 - $18,000 - $16,000) =
$7,500F
$7,500F
The following summary, similar to text Exhibit 13.5, may be helpful for in-class presentation purposes: Flexible Budget Variance -0$4,000F 1,500U $2,500F 1,000F $3,500F Flexible Budget 15,000 $60,000 22,500 $37,500 16,000 $21,500 Sales Master Volume (Static) Variance Budget 3,000F 12,000 $12,000F $48,000 $4,500U 18,000 $7,500F $30,000 0 16,000 $7,500F $14,000
Unit sales Sales Variable costs Contribution margin Fixed costs Operating income
Actual 15,000 $64,000 24,000 $40,000 15,000 $25,000
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13-35 (Continued) 2. As long as both the budgeted and the actual operations are within the relevant range, the flexible budget for the actual operating level and the master budget will have the same total fixed costs. Since both the flexible budget and the master budget subtracted the same total fixed costs from the contribution margin to arrive at operating income, the sales volume variance determined in terms of contribution margin and in terms of operating income will be identical. 3. The actual fixed costs for a period are likely to differ from the budgeted amount. As a result, the contribution margin flexible-budget variance is likely to differ from the operating income flexible-budget variance. This difference is equal to the total flexible-budget fixed cost variance for the period.
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13-36 1. Units
Flexible Budgets and Variance Analysis (25 minutes) FlexibleBudget Variance -0$3,800U $3,800U 100U $3,900U $7,700U $1,000U 1,000U $2,000U $9,700U Flexible Budget 3,800 $57,000 $15,200 7,600 $22,800 $34,200 $15,000 9,000 $24,000 $10,200
1 2 3
Actual 3,800 $53,200 $19,000 7,700 $26,700 $26,500 $16,000 10,000 $26,000 $ 500
Sales Volume Variance 200U $3,000U $800F 400F 1,200F $1,800U
Master Budget 4,000 $60,000 $16,000 8,000 $24,000 $36,000 $15,000 9,000 $24,000 $12,000
Sales Variable costs: Manufacturing Selling & Admin. Total variable costs Contribution margin Fixed costs: Manufacturing Selling & Admin. Total fixed costs Operating income
1
-0$1,800U
Budgeted selling price per unit x number of units sold = ($60,000/4,000) x 3,800 units = $15 per unit x 3,800 units = $57,000 Standard variable manufacturing cost per unit x number of units sold = ($16,000/4,000) x 3,800 units = $4 variable manufacturing cost per unit x 3,800 units = $15,200 Standard variable selling and administrative expense per unit x number of units = ($8,000/4,000) x 3,800 units = $2 per unit x 3,800 units = $7,600 $34,200 - $36,000 = $10,200 - $12,000 = $26,500 - $34,200 = $500 - $10,200 = $1,800U $1,800U $7,700U $9,700U
Sales volume variances In terms of contribution margin: In term of operating income: Flexible-budget variances Contribution margin: Operating income:
13-16
13-36 (continued) 2. The company reduced its selling price (from $15 per unit to $14 per unit) to compete in the market, suggesting that the firm is pursuing a cost-leadership, not differentiation, competitive strategy for the product. However, the company failed to exercise proper control of its operating costs, as indicated by unfavorable variances for manufacturing and for selling and administrative costs. The excess costs reduced the flexible-budget operating income of the period by 95 percent. Unless the company can get its costs under control, it will likely not be able to compete successfully as a cost leader or lowcost producer. The company has unfavorable selling price and sales-volume variances. Even though the company reduced its selling price, it failed to attain the budgeted sales volume. The strategy of competing through reduced selling prices to gain sales has apparently failed. 3. An Excel spreadsheet solution file is embedded below. You can open this object by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select worksheet object and then select Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document.
13-36: Flexible Budgets and Variance Analysis Input Area Item Units sold Sales revenue Variable manufacturing costs Variable selling & administratuve costs Fixed manufacturing costs Actual Results 3,800 $53,200 $19,000 $7,700 $16,000 Master Budget 4,000 $60,000 $16,000 $8,000 $15,000 Actual Per Unit $14.00 $5.00 $2.03 Budgeted Per Unit $15.00 $4.00 $2.00
13-17
13-37
Direct Materials and Direct Labor Variances (20 minutes)
1. Purchase price varianceAluminum: Total lbs. aluminum purchased = lbs. used + ending inventory beginning inventory = 3,375 + 25 - 50 = 3,350 pounds Purchase price variance = ($30 - $25)/lb. x 3,350 lbs. = $16,750U Usage (quantity) varianceAluminum: Standard lbs. of aluminum allowed for the units manufactured: = 900 units x 4 pounds per unit = 3,600 pounds Usage variance: (3,375 - 3,600) lbs. x $25/lb. = $5,625F The following diagram, similar to text Exhibit 13.11, may be useful for in-class presentation purposes. (1) Actual Purchases at Actual Cost (AQ) x (AP) (3,350 lbs. x $30/lb.) (2) Actual Purchases at Standard Cost (AQ) x (SP) (3,350 lbs. x $25/lb.)
Purchase Price Variance = (1) (2) = $16,750U Actual Usage at Standard Cost (AQ) x (SP) (3,375 lbs. x $25/lb.)
(3) Flexible-Budget Amount (SQ) x (SP) (3,600 lbs. x $25/lb.)
Usage Variance = (2) (3) = $5,625F
13-18
13-37 (Continued) 2. Direct labor rate variance: ($42 - $40)/hr. x 4,200 hrs. = $8,400U Direct labor efficiency variance: Standard direct labor hours allowed for the units manufactured: 900 units x 5 hours/unit = 4,500 hours Efficiency variance: (4,200 - 4,500) hrs. x $40/hr. = $12,000F The following diagram, similar to text Exhibit 13.7, may be useful for in-class presentation purposes: (1) Actual Input Cost (AQ) x (AP) (4,200 hrs. x $42/hr.) (2) Actual Input at Standard Cost (AQ) x (SP) (4,200 hrs. x $40/hr.) (3) Flexible-budget Amount (SQ) x (SP) (4,500 hrs. x $40/hr.)
Price (Rate) Variance = (1) - (2) = $8,400U
Quantity (Efficiency) Variance = (2) - (3) = $12,000F
Total Flexible-Budget Variance = (1) - (3) = $176,400 - $180,000 = $3,600F
13-19
13-38 (Appendix): Journal Entries (10 minutes) Oct. 7 Materials Inventory (720 lbs. x $40/lb.) Materials Purchase Price VariancePVC (720 X $1/lb.) Accounts Payable (720 lbs. x $41/lb.) Purchased 720 pounds of PVC at $41/lb.; standard price = $40/lb. Oct. 9 Work-in-Process Inventory (780 units x $40/unit) Materials Usage VariancePVC Materials Inventory (720 lbs. x $40/lb.) $31,200 $2,400 $28,800 $28,800 $720 $29,520
Issued 720 pounds of PVC for the production of 780 units of XV-1. Standard usage is 1 lb. per unit of XV-1, at $40 per pound.
13-20
13-39
Materials VariancesWorking Backwards (10 minutes) Actual Purchases at Actual Cost (AQ) x (AP) 2,000 lbs x AP Actual Purchases at Standard Cost (AQ) x (SP) 2,000 lbs. x $10.00
$400F Purchase Price Variance Actual Usage at Standard Cost (AQ) x (SP) 1,800 lbs. x $10.00/lb. Flexible-Budget Amount (SQ x SP) 1,600 lbs. x $10.00/lb.
Usage Variance = ? 1. Direct materials purchase price variance = (AP - SP) x AQ - $400 - $400/2,000 AP AP 2. Direct materials usage variance = (AP - $10.00) x 2,000 lbs. = AP - $10.00 = $10.00 - $0.20 = $9.80/lb. = (AQ - SQ) x SP = (1,800 - 1,600) lbs. x $10.00/lb. = $2,000U
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13-40 Materials VariancesWorking Backwards (15 minutes) Actual Purchases at Actual Cost (AQ) x (AP) 40,000 lbs. x AP = $120,000 Actual Purchases at Standard Cost (AQ) x (SP) 40,000 lbs. x $3.50/lb. = $140,000
Purchase Price Variance? Actual Usage at Standard Cost (AQ) x (SP) 38,000 lbs. x $3.50/lb. $6,500 U Usage Variance 1. Purchase price per pound for direct materials: $120,000 40,000 lbs. = $3.00 per lb. 2. Total actual cost of direct materials purchased Total direct materials purchased (pounds) Standard cost per pound of direct materials x Total standard cost of direct materials purchased Direct materials purchase price variance 40,000 3.50 140,000 $ 20,000F $120,000 Flexible-Budget Amount (SQ) x (SP) SQ x $3.50/lb.
3. Total direct materials used at standard cost = 38,000 x $3.50 =$133,000 Less: unfavorable direct materials usage variance Standard DM cost for the units manufactured = Standard cost per lb. of direct material Total standard quantity of DM for the units Manufactured = 6,500 $3.50 $126,500 36,143 lbs.
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13-41
Materials VariancesWorking Backwards (15 minutes) Actual Purchases at Actual Cost (AQ) x (AP) AQ x AP = $440,000 Actual Purchases at Standard Cost (AQ) x (SP) (AQ) x (AP) = ?
Purchase Price Variance? Actual Usage at Standard Cost (AQ) x (SP) 120,000 lbs. x (SP) Flexible-Budget Amount (SQ) x (SP) 108,000 lbs. x (SP)
$48,000U Usage Variance 1. Standard cost/lb. of direct materials: (120,000 - 108,000) lbs. x SP = $48,000 SP = $48,000/12,000 lbs. = $4.00/lb. 2. Actual quantity (lbs.) of direct materials purchased during the period: Direct materials (lbs.) used during the period Add: Increase in direct materials inventory (in lbs.) Total lbs. of direct materials purchased 3. Direct materials purchase price variance: $440,000 - ($4.00 x 124,000 lbs.) = $56,000F 120,000 + 4,000 124,000
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13-42 Behavioral Considerations (15-20 minutes) 1. Managerial time can be considered a scare resource. Time spent in terms of securing operational control detracts from time spent dealing with issues of a more strategic (or long-term) nature. For this reason, many managers embrace a managerial philosophy known as management by exception. When variances (e.g., labor cost variances) are considered immaterial, no intervention on the part of management is required: the underlying system is considered to be in control. When the variances are considered large or material, some kind of intervention on the part of management is suggested. In short, therefore, timely reporting of standard cost variances allow managers to take corrective action before costs (and the underlying system) get out of control. A breakdown (decomposition) of variances directs managements attention to the underlying source of any operating problems. Assuming standards are internalized, they may properly motivate employees to work more efficiently, an important element of control. 2. A standard cost system can have a negative impact on worker motivation if the standards are too loose (i.e., too easily attainable) or too tight (i.e., too difficult to attain). In the former case, the standards tend to reduce productivity; in the latter case, in the extreme, employees simply ignore the standardsthat is, they do not internalize the standards as legitimate goals. Some research in management control systems suggests that if standards are set without worker input the standards will not be accepted as realistic by these workers. Finally, standards should not, as in the case of Chen, Inc., be used to assign blame. Rather, they should be used positively to motivate continual operating improvements.
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Direct Materials VariancesJournal Entries (20 minutes)
1. Determination of variances for March: Actual Purchases at Actual Cost (AQ) x (AP) (AQ) x $7.50/lb. =? Purchase Actual Purchases at Standard Cost (AQ) x (SP) (AQ) x $7.25/lb. =? Price Variance = ? Actual Usage at Standard Cost (AQ) x (SP) 2,300 lbs. x $7.25/lb. = $16,675 Flexible-Budget Amount (SQ) x (SP) 2,100 lbs. x $7.25/lb. = $15,225
Usage Variance = ? Pounds of direct materials purchased = pounds used - decrease in ending inventory = 2,300 - 100 = 2,200 lbs. a. Direct materials purchase price variance: ($7.50 - $7.25)/lb. x 2,200 lbs. = $550U b. Direct materials usage variance: (2,300 - 2,100) lbs. x $7.25/lb. = $1,450U 2. Journal entries: Materials Inventory Purchase Price Variance Accounts Payable $15,950 $ 550
$16,500
To record the cost of purchases during the month; standard cost per pound = $7.25; actual cost per pound = $7.50.
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13-43 (Continued) WIP Inventory Materials Usage Variance Materials Inventory $15,225 $1,450
$16,675
To record the standard direct materials cost for this periods production.
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Materials VariancesJournal Entries (20 minutes)
Actual Purchases at Actual Cost (AQ) x (AP) 8,300 lbs. x $/lb. =? Purchase
Actual Purchases at Standard Cost (AQ) x (SP) (AQ) x $5.10/lb. =? Price Variance = ? Actual Usage at Standard Cost (AQ) x (SP) (AQ) x $5.10/lb. =? Flexible-Budget Amount (SQ) x (SP) (SQ) x $5.10/lb. =?
Usage Variance = ? 1. Quantity of materials used = (AQ) = materials purchased - increase in ending inventory of materials = 8,300 - 500 = 7,800 lbs. Standard quantity of direct materials for the units produced this period = (SQ) = 2,000 units produced x 4 lbs. per unit = 8,000 pounds Therefore, the direct materials usage variance = (AQ SQ) x SP = (7,800 lbs. - 8,000 lbs.) x $5.10/lb. = $1,020F The direct materials purchase price variance = Total direct materials variance materials usage variance = $640 U + $1,020 F = $1,660U
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13-44 (Continued)
2. Actual cost of direct materials per pound (AP): direct materials purchase price variance = (AP - SP) x AQ $1,660 = (AP - $5.10)/lb. x 8,300 lbs. AP = $5.10 + $0.20 = $5.30/lb. 3. (Appendix): Journal entries Materials inventory (8,300 lbs. x $5.10/lb.) $42,330 Materials purchase price variance $1,660 Accounts payable (8,300 lbs. x $5.30/lb.)
$43,990
To record purchase of 8,300 lbs. of direct materials: actual cost per pound = $5.30; standard cost per pound = $5.10. WIP Inventory (8,000 lbs. x $5.10/lb.) $40,800 Materials usage variance Materials inventory (7,800 lbs. x $5.10/lb.)
$1,020 $39,780
To record the standard direct materials cost for the 2,000 units produced this period.
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13-45 Determining Standard Direct Materials Cost (10 minutes) Standard direct material cost per bag of Insect-Be-Gone Total direct materials per unit of output = Divided by: Proportion of direct materials inputs remaining in one unit of finished product = (1 - evaporation rate) = Total standard quantity of DM inputs/unit of output Purchase price per pound Total DM cost/bag of output prior to purchase discount Less: Purchase discount = 2% x $200 = Standard direct material cost per bag of output = 75% 80 lbs. x $2.50/lb. $200.00 4.00 $196.00 60 lbs.
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Determining Standard Direct Materials Cost (5 minutes) Total lbs. of Natura per package of SS-2 Standard purchase price per pound Purchase discount (3% x $60.00) Standard direct material cost per package of SS-2 of Natura Total purchase price before purchase discount 12 lbs. x $5.00 $60.00 1.80 $58.20
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13-47 Master (Static) Budget Variance and Components (40 minutes) 1. Actual operating income = actual sales revenue actual variable costs actual fixed costs = $390,000 - $220,000 - $140,000 = $30,000 2. Master (static) budget operating income = budgeted sales budgeted variable costs - budgeted fixed costs = $450,000 - $270,000 $138,000 = $42,000 3. Total master (static) budget variance, in terms of operating income = actual operating income - master budget operating income = $30,000 - $42,000 = $12,000U (because actual income < budgeted income, we label this variance as unfavorable) 4. The first-level decomposition of the total master (static) budget variance in operating income is accomplished through the introduction of a flexible-budget (based on actual sales volume for the period). In this case, the flexible-budget operating income = $400,000 - $240,000 - $138,000 = $22,000. Thus, a) Total flexible-budget variance = actual operating income flexible-budget operating income = $30,000 - $22,000 = $8,000F b) Sales volume variance, in terms of operating income = flexible-budget operating income - master budget operating income = $22,000 - $42,000 = $20,000U. c) Total flexible-budget variance + Sales volume variance = master budget variance = $12,000U
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13-47 (Continued) In tabular form, we have: Actual Results Unit sales Sales Total variable expenses Contribution margin Fixed expenses Operating income 40,000 $390,000 220,000 $170,000 140,000 $30,000 Flexible Budget 40,000 $400,000 240,000 $160,000 138,000 $22,000 Master Budget 45,000 $450,000 270,000 $180,000 138,000 $42,000
Total Master (Static) Budget Variance $12,00U Flexible-Budget Variance $8,000F Sales Volume Variance $20,000U
5. The sales volume variance represents the impact on operating profit of selling a different volume of sales compared to the budgeted volume reflected in the master budget. As such, the calculation of the variance holds three other factors constant: selling price per unit, variable cost per unit, and total fixed costs. Note that this variance can be defined in terms of contribution margin, in which case the calculation looks at the impact on contribution margin of selling an amount different from the sales volume reflected in the master budget for the period. The flexible-budget variance represents the composite effect on operating income of changes in three factors: selling price per unit, variable cost per unit, and total fixed costs. Thus, in calculating the flexible-budget variance we hold constant sales volume.
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13-48 Financial versus Operational Control; Behavioral Considerations in the Standard-Setting Process (20 minutes) As indicated in the text, we use the term management accounting and control system to refer to the entire set of procedures and systems used by an organization to monitor activities and guide actions in support of the overall goals and objectives of the organization. As such, a comprehensive management accounting and control system contains both a planning component (e.g., operational and financial budgets covered in Chapter 8) and a feedback/ assessment component (covered in Part Four of the text). While terminology may differ across textbooks and organizations, one useful way to conceptualize feedback/ performance evaluation systems is to view such systems as consisting of two primary components: a financial control system and an operational control system. The goal of the former system is to monitor financial results to determine whether the organization is on-track in terms of its specified financial goals. The goal of the latter system is to monitor nonfinancial performance indicators associated with the operating factors considered critical to the organization for achieving a competitive advantage. One dimension of a financial control system is the use of flexible-budgets, standard costs, and variance analysiscovered in Chapters 13 and 14 of the text. In essence, such procedures assess both effectiveness (e.g., did we attain budgeted operating profits or budgeted sales volume for the period) and efficiency aspects of financial performance (e.g., whether the purchasing department secured a favorable price for materials purchased for production, or whether the organization used labor resources effectively during the period). As indicated in chapter 13, all purely variable costs can be decomposed into a price variance component and an efficiency (quantity) variance component. No management accounting and control system is good or bad per se. Each is judged, at least conceptually, by comparing costs and benefits. Among the more important considerations are behavioral considerations. For example, one consideration relates to the standard-setting process. Should standards be imposed (authoritative), should employees whose performance will be judged develop the standards (participative), or should the organization use a consultative process in developing such standards?
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13-49 (Appendix): Journal Entries Under Standard Costing (20 minutes) 1. Materials Inventory Materials Purchase Price Variance Accounts Payable 2. WIP Inventory Materials Quantity (Usage) Variance Materials Inventory WIP Inventory Direct Labor Efficiency Variance Direct Labor Rate Variance Wages Payable (Accrued Payroll) Finished Goods Inventory WIP Inventory CGS ($32/unit x 900 units) Finished Goods Inventory Accounts Receivable ($50/unit x 900 units) Sales $20,000 200 $10,000
$20,200 250 $9,750
3.
$22,000 $5,500
$2,500 $25,000 $32,000 $28,800 $45,000
4. 5.
$32,000 $28,800 $45,000
Note to Instructor: An Excel file solution is embedded below. You can open this object by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select worksheet object and then select Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document.
13-49: (Appendix): Standard Costing and Journal Entries Inputs Standards Direct materials (lbs.) per unit of output = Direct materials cost per pound = 2 $5.00
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13-50 Standard Labor Rate and Labor Efficiency Variance (10-15 minutes) Actual Inputs at Actual Cost (AQ) x (AP) 11,000 hrs. x $30.00/hr. = $330,000 Actual Inputs at Standard Cost (AQ) x (SP) 11,000 hrs. x (SP) = ? Flexible-Budget Amount (SQ) x (SP) 12,000 hrs. x (SP) = ?
$33,000F
Labor Rate Variance
Labor Efficiency Variance
1.
Total actual direct labor hours worked Actual hourly rate Total actual total direct labor cost Plus: Favorable direct labor rate variance Total actual direct labor hours at standard hourly rate Total actual direct labor hours worked Standard direct labor rate per hour x +
11,000 $30.00 $330,000 33,000 11,000 $33.00 $363,000
2. Direct labor efficiency variance = actual hours at standard cost standard labor cost for units produced = [(AQ) x (SP)] - [(SQ) x (SP)] = [11,000 hrs. x $33/hour] - [12,000 hrs. x $33/hr.] = $33,000F or = (AQ - SQ) x SP = (11,000 - 12,000) hrs. x $33.00/hr. = $33,000F
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Labor VariancesWorking Backwards (10-15 minutes) Actual Inputs at Actual Cost (AQ) x (AP) 200 hrs. x (AP) = $1,000 Actual Inputs at Standard Cost (AQ) x (SP) 200 hrs. x (SP) = ? Flexible-Budget Amount (SQ) x (SP) (SQ) x (SP) = ?
$100F
$165U
Labor Rate Variance 1. Total actual direct labor cost (AQ x AP) Favorable direct labor rate variance
Labor Efficiency Variance $1,000 + 100 $1,100 200 $5.50
Direct labor hours worked at the standard hourly rate Total direct labor hours worked (AQ) Standard direct labor rate per hour (SP) 2. Total standard direct labor hours allowed (SQ): Efficiency variance = [(200 - SQ) hrs. x $5.50/hr.] = $165.00 SQ = 200 hrs. - ($165.00 $5.50/hr.) = 200 hrs. - 30 hrs. = 170 hrs.
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13-52
Labor Variances and Journal Entry (15-20 minutes) Actual Inputs at Actual Cost (AQ) x (AP) 20,000 hrs. x (AP) = $378,000 Actual Inputs at Standard Cost (AQ) x (SP) 20,000 hrs. x (SP) = ? Flexible-budget Amount (SQ) x (SP) (SQ) x (SP) = ?
$6,000U
Labor Rate Variance 1. Standard direct labor hourly rate: Total payroll (AQ x AP)
$378,000 6,000 $372,000 20,000 $18.60 24,000 of output x 8,000 3 6,000 18,000 = $37,200 U
Unfavorable direct labor rate variance Direct labor hours worked @ standard rate/hr. Actual direct labor hours (AQ) Standard direct labor hourly rate (SP) 2. Direct labor efficiency variance: Budgeted total direct hours Budgeted units to manufacture Standard direct labor hours per unit Total units manufactured Total standard hours for units manufactured Direct labor efficiency variance = (AQ - SQ) x SP = (20,000 - 18,000) hrs. x $18.60/hr. 3. (Appendix): Journal Entry for Labor Cost, January WIP Inventory (18,000 hrs. x $18.60) DL rate variance DL efficiency variance Wages payable (20,000 x $18.90/hr.) $334,800 $6,000 $37,200
$378,000
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13-53 Generating a Flexible Budget (40-45 minutes) 1. Flexible Budget, sales volume = 42,000 units Sales (42,000 units) Less: Cost of Goods Sold: Direct materials Direct labor Manufacturing overhead: Variable (40% x $378,000) Fixed [$240,000 - (40% x $450,000)] Gross profit Less: Operating expenses: Selling expenses: Sales commissions [$1,344,000 x ($160,000 $1,600,000)] Rent Insurance General expenses: Salaries Rent Depreciation Operating profit $1,344,000 $126,000 378,000 151,200 60,000 $715,200 $628,800
$134,400 40,000 30,000 92,000 77,000 51,000
$424,400 $204,400
Note to Instructor: An Excel file solution for Part 1 and Part 2 of assignment 13-53 is embedded below. You can open this object by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select worksheet object and then select Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document.
13-53: Preparing a Flexible Budget Inputs Planned sales volume Budgeted Sales Revenue 50,000 units $1,600,000
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13-53 (Continued) 2. Flexible-budget, sales volume = 52,000 units Sales (52,000 units) Less: Cost of Goods Sold: Direct materials Direct labor Manufacturing overhead: Variable (40% x $468,000) Fixed [$240,000 - (40% x $450,000)] Gross profit Less: Operating expenses: Selling expenses: Sales commissions [$1,664,000 x ($160,000 $1,600,000)] Rent Insurance General expenses: Salaries Rent Depreciation Operating profit $1,664,000 $156,000 468,000 187,200 60,000 $871,200 $792,800
$166,400 40,000 30,000 92,000 77,000 51,000
$456,400 $336,400
3. The text uses the term pro-forma budget to refer to a budget prepared for any level of operating activity for a given period. We reserve the term flexible-budget to refer to the control budget prepared after the period based on the actual activity level (e.g., sales volume) achieved. The flexible-budget is key to the financial control process: it allows us to decompose overall variances into more detailed components. Normally, the amount of fixed costs reported in the flexible-budget is exactly the same as the amount of fixed costs contained in the master (static) budget for the period. This assumes, however, that both budgets are based on output levels within the relevant range (i.e., range of output under which the assumed cost functions of the organization hold). If budgeted fixed costs in the flexible-budget and in the master budget are the same, then any difference between these two budgets must be due solely to sales activity. For a single-product company, we refer to this difference as the sales volume variance. For multi-product companies, the sales activity variance can be broken down into finer components, as discussed in Chapter 14.
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13-54 Labor Rate and Efficiency Variances (20 minutes) Actual Inputs at Actual Cost (AQ) x (AP) AQ x $18.00/hr. = $207,000 Actual Inputs at Standard Cost (AQ) x (SP) AQ x $16.00/hr. = ? Flexible-Budget Amount (SQ) x (SP) 10,000 x 1.5) x $16.00 = $240,000
Labor Rate Variance 1.
Direct labor rate variance: Difference in hourly wage rates: Actual direct labor wage rate (AP) Standard direct labor wage rate (SP) Actual direct labor hours worked (AQ): Actual direct labor costs Actual direct labor hourly rate (AP) Actual direct labor hours worked (AQ) Direct labor rate variance Direct labor efficiency variance: Actual direct labor hours worked (AQ) Total standard direct labor hours allowed for the units manufactured (SQ): Number of finished units manufactured Standard direct labor hours per unit ` Difference in direct labor hours (AQ - SQ) Standard direct labor hourly wage rate (SP) Direct labor efficiency variance
$18.00 - 16.00 $207,000 $18.00
$2.00U
x 11,500 $23,000U
2.
11,500 10,000 x 1.5
15,000 3,500F x $16.00 $56,000F
3.
If the unfavorable rate variance is a result of the production managers decision to employ workers with higher skill levels, then the production manager made a right decision to do so. The favorable efficiency variance more than offsets the higher wages paid to these skilled workers. Direct labor rate variance Direct labor efficiency variance Total direct labor variance $23,000U 56,000F $33,000F
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13-55
Ethical Considerations (15-20 minutes)
1. The IMA Statement of Ethical Professional Practice provides a set of four overarching principles designed to guide member behavior. As well, there is an expectation that IMA members encourage others within their organization to adhere to the principles of honesty, fairness, objectivity, and responsibility. In the present case, however, we focus on the ethical standards related to the behavior of the Purchasing Manager: Competence: the reporting of sub-standard purchase prices for raw materials (represented by sub-standard materials) violates the expectation that decisionsupport information should be accurate. (The lower-than-expected purchase costs for materials cannot, in the absence of additional information, be relied upon for clear, accurate decision-making by others in the organization.) Integrity: in general, this standard imposes a responsibility to mitigate actual conflicts of interest and to communicate regularly with business associates to avoid apparent conflicts of interest. As applied to this case, the purchasing manager has a responsibility to advise affected parties about any conflicts associated with the proposed purchase of sub-standard materials at a bargain price. The expected negative results associated with the use of the sub-standard materials is the key issue. Credibility: the purchasing manager, working with the cost accountant, in this case has a responsibility to ensure that information is communicated fairly and objectively. Further, this standard requires the disclosure of all relevant information that could reasonably be expected to influence a users understanding of any resulting reports or analyses, such as the standard cost variance information related to the purchasing transaction. 2. The IMA Standards of Ethical Professional Practice indicate that in resolving ethical conflicts the accountant should first act in accordance with the organizations established policies regarding the resolution of such conflicts. If this step does not resolve the issue, the accountant should then discuss the issue with his/her immediate supervisor, which in this case could be the controller of the organization. If, after such consultation, resolution cannot be reached, the individual should contact the next higher level in the organization, in this case the CFO. Note, however, that this step should be taken only after informing the cost accountants supervisor. (In the absence of any clear violation of law, it is generally not appropriate to bring the matter to the attention of individuals outside of the organization. For example, if safety issues regarding use of the product could be raised, then it might be appropriate at a certain point for the accountant to make contact with an outside authority.)
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13-56 (Appendix): Standard Costing and Journal Entries (20 minutes) Materials Inventory (6,000 gals. x $10.00/gal.) $60,000 Purchase Price Variance $2,700 Accounts Payable (6,000 gals. x $10.45/gal.) $62,700 To record, on open account, direct materials: 6,000 gals. @ standard cost of $10.00/gal. Actual cost per gallon = $10.45. WIP Inventory (2,500 x 2 gals. x $10/gal.) Materials Usage Variance (100 gals. x $10/gal.) Materials Inventory (5,100 gals. x $10/gal.) $50,000 $1,000
$51,000
To record the standard direct materials cost ($20/unit) for the completed production of the period (2,500 units produced). WIP Inventory (2,500 x 2 hrs. x $25/hr.) $125,000 Labor Rate Variance ($5.50/hr. x 4,900 hrs.) $26,950 Labor Efficiency Variance (100 hrs. x $25/hr.) $2,500 Wages Payable (4,900 hrs. x $19.50/hr.) $95,550 To record the standard direct labor cost ($50/unit) of the completed production for the period (2,500 units produced) and the actual labor costs incurred for the period. Finished Goods Inventory ($70 x 2,500 units) $175,000 WIP Inventory $175,000 To record the direct manufacturing cost component of cost of goods manufactured for the period. CGS ($70/unit x 2,000 units) $140,000 Finished Goods Inventory $140,000 To record the direct manufacturing cost component of the cost of goods sold (CGS) for the period. Accounts Receivable ($150/unit x 2,000 units) $300,000 Sales Revenue $300,000 To record sales revenue and associated accounts receivable for the period.
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13-57
Direct Labor Variances (15 minutes) Actual Inputs at Actual Cost (AQ) x (AP) AQ x $22.50/hr. = ? Actual Inputs at Standard Cost (AQ) x (SP) Flexible-Budget Amount (SQ) x (SP)
AQ x $20.00/hr. 2,000 hrs. x $20.00/hr. = ? = $40,000 $4,000 U Labor Efficiency Variance
Labor Rate Variance
Flexible-Budget Variance for Direct Labor 1. Direct labor efficiency variance = (AQ - SQ) x SP $4,000 AQ = (AQ - 2,000) hrs. x $20.00/hr. = 2,000 hrs. + ($4,000/$20.00 per hr.) = (AP - SP) x AQ = ($22.50 - $20.00)/hr. X 2,200 hrs. = 3. Direct labor flexible-budget variance = $5,500 U + $4,000 U = or, = Actual Direct Labor Cost - Flexible-Budget Direct Labor Cost = (2,200 hrs. x $22.50/hr.) - $40,000 = $49,500 - $40,000 = $9,500U $9,500U $5,500U = 2,200 hours
2. Direct labor rate variance
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13-58 Direct Labor Variances (15 minutes) Actual Inputs at Actual Cost (AQ) x (AP) 18,000 hrs. x AP ? Actual Inputs at Standard Cost (AQ) x (SP) 18,000 hrs. x $50.00/hr. $ Flexible-Budget Amount (SQ) x (SP) 16,000 hrs. x $50.00/hr.
Labor Rate Variance
Flexible-Budget Variance for Direct Labor $20,000F 1. Direct Labor Efficiency variance = (AQ - SQ) x SP = (18,000 - 16,000) hrs. x $50/hr. = $100,000U 2. Total Flexible-Budget Variance = Rate variance + Efficiency variance Rate variance = Total variance - Efficiency variance = $20,000F - $100,000U = $120,000F 3. Actual direct labor hours (AQ) Standard direct labor rate per hour (SP) Total actual direct labor hours at the standard rate Direct labor rate varianceFavorable Total direct labor payroll in May (AQ x AP) x 18,000 $50.00 $900,000 120,000 $780,000
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13-59
Behavioral Considerations and Continuous Improvement Standards (20 minutes)
1. Direct labor-hour standards, October 2007January 2008: Month October 2007 November 2007 December 2007 January 2008 Previous Standard N/A 1.0000hr./unit 0.9900hr./unit 0.9801hr./unit Reduction New Standard/Unit 1.0000hr./unit 0.9900hr./unit 0.9801hr./unit 0.9703hr./unit
N/A 0.01 x 1.0000hr. 0.01 x 0.9900hr. 0.01 x 0.9801hr.
2. Computation of direct-labor efficiency variance, December 2007: Actual Inputs at Standard Cost (AQ) x (SP) 9,980 hrs. x $40.00/hr. Flexible-Budget Amount (SQ) x (SP) (10,000 x 0.9801) hrs. x $40.00/hr.
Labor Efficiency Variance Direct-labor efficiency variance = $399,200 - $392,040 = $7,160U 3. The basic trade-off is a problem similar to the situation with Kaizen: pushing employees too hard for improvements, month after month. In response, workers may perceive that the performance goal is simply not achievable, in which case the standard itself loses its motivational value. In many processes, significant improvements can occur initially. However, it becomes successively more difficult to achieve efficiency improvements over time. For this reason, the use of a constant % decrease in the standard over time may have unintended behavioral consequences. On the positive side, the use of continuous-improvement standards, in whatever form, signals to all employees the importance of constantly seeking ways to cut costs and improve operational efficiency.
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13-60 Standard Direct Labor Cost Per Unit (10 minutes) Total hours paid per week per employee Hourly wage rate Weekly wages per employee Employee benefits (40%) Total weekly payroll cost per employee Weekly productive hours per employee Direct labor cost per productive hour Number of standard direct labor hours per unit Standard direct labor cost per unit of output x + x 40 $30 $1,200 480 $1,680 35 $48 3 $144
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13-61 Financial versus Nonfinancial Performance Indicators for Operational Control (15 minutes) Repetitive operations, such as consumption of power (or direct materials) in an automated manufacturing facility, require constant feedback and data to ensure that the underlying process is in control. That is, the managers of such operations cannot wait for financial reports in order to correct (put back into control) a malfunctioning process. In this context, real-time nonfinancial performance indicators (supplemented perhaps, by personal observation) help the manager to control operations. Thus, non-financial performance indicators, such as defect rates, % of first-pass yields, process time, etc., can all be provided to decisionmakers on a real-time basis. Further, the use of nonfinancial performance indicators is generally preferable to operating personnel since they relate to factors under their control or jurisdictionthat is, the performance indicators relate to factors that operating personnel are familiar with. ` the other hand, managers are likely to be more interested in financial operating On results, for several reasons. One, the performance of managers is often judged on the basis of financial results. Two, financial metrics provide decision-makers with a common unit that can be used to evaluate the economic effects of different courses of action (e.g., changes in sources of supply, product mix, etc.). Operating personnel might also be interested in financial performance indicators. For example, such measures communicate to such individuals the bottom-line impact of their decisions and operating efficiencies.
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13-62 Standard Costs and Ethics (15 Minutes) As controller of the company, Marys behavior is not ethical. Under the Credibility standard, Mary has an obligation to communicate information fairly and objectively. Further, under the Credibility standard she has a responsibility to prepare complete and clear reports and recommendations. That is, she must disclose the price information since this information could reasonably be expected to influence the owners decisionmaking. By intentionally misrepresenting the acquisition cost of apple juice, Mary hopes to support her friends business, but at the expense of her employer, OAO, Inc. Under the Integrity standard, Mary should avoid this conflict of interest (personal loyalty versus loyalty to the company for which she works) by: (1) not being the person who sets the standard cost for the apple juice, and (2) not restricting source of supply (e.g., by mandating that apple juice must be purchased from her friends business).
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13-63 Flexible-budgets and direct labor variances (25 minutes) 1. Flexible-budget1,200,000 papers Master Budget: Total variable cost Master Budget: Number of papers processed Master Budget: Standard variable cost/paper processed Actual number of papers processed during the year Total budgeted variable cost for 1,200,000 papers Budgeted Fixed costs per year Flexible-budget: cost to process 1,200,000 papers 2. Total actual labor cost Actual total labor hours Standard labor rate/hour ($1,200 150) Total labor hours worked at the standard hourly rate Direct labor rate variance 3. Actual total labor hours Total standard labor hours for 1,200,000 papers processed: (1,200,000 1,000) x 150 hrs./thousand papers = Excess labor hours worked (AQ - SQ) Standard labor rate per hour (SP) Direct labor efficiency variance 180,000 10,000 x $8.00 $80,000U x $2,700,000 1,500,000 $1.80 1,200,000 $2,160,000 150,000 $2,310,000 $1,710,000 190,000 x $8.00 - $1,520,000 $190,000U 190,000
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13-63 (Continued) Note to Instructor: An Excel file solution for this assignment is embedded below. You can open this object by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select worksheet object and then select Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document.
Ex. 13-63--Flexible Budget and Direct Labor Variances Data Input Processing standards for clerical employees:
Diagrammatic Representation for Parts 2 and 3: Actual Labor Cost (AQ) x (AP) Actual Hrs. Worked x Actual Wage Rate/Hr. 190,000 hrs. x $9/hr. = $1,710,000 Actual Quantity at Standard Price (AQ) x (SP) Actual Hrs. Worked x Std. Wage Rate/Hr. 190,000 hrs. x $8/hr. = $1,520,000 Flexible Budget (FB) Based on Outputs (SQ) x (SP) Std. Hrs. Allowed x Std. Wage Rate/Hr. 180,000 hrs. x $8/hr. = $1,440,000
Labor Rate Variance $190,000U
Labor Efficiency Variance $80,000U
Another way of looking at this situation is: Budgeted labor cost per paper processed = $1,440,000/1,200,000 = Actual labor cost per paper processed = $1,710,000/1,200,000 = Labor cost variance, per paper processed = $1.200 $1.425 $0.225
This total labor cost variance per paper processed can be explained by calculating the rate and efficiency variance components for labor cost for the year, as indicated above.
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PROBLEMS 13-64 Standard Cost SystemsBehavioral Considerations (30 minutes)
1. a. The major advantages of using a standard cost system include: Budgeting. Standard costs can be the building blocks for budget preparation and allow the development of flexible-budgets. Performance evaluation. Comparisons of actual costs to standard costs facilitate evaluation of the performance at the company, department, cost center, or individual level. Standards also allow employees to more clearly understand what is expected of them. Motivation. If internalized (i.e., accepted) by operating personnel, the standards can motivate actions that help the organization achieve its strategic objectives. Recordkeeping. A standard cost system reduces recordkeeping costs and facilities inventory control (i.e., items need be maintained in physical quantities only). b. The disadvantages/challenges that can result from using a standard cost system include the following: Cost standards that are too tight can cause the employees to ignore the standards, or worse, have negative behavioral implications leading to undesirable actions. Standards may ignore qualitative characteristics and jeopardize product quality. Changing manufacturing environment. The cost structure of many manufacturing firms has changed dramatically (compared to the past). As a consequence, standards and associated variances for controlling labor costs are less important today. Focus on cost-drivers. As a corollary to the above comment, many strategic cost management systems today are focusing on the identification of the factors that drive production costs (e.g., batch-level and customer-level costs).
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13-64 (Continued) 2. A standard cost system must be supported by top management to be successful. However, the parties that should participate in the standard-setting processes include all levels of the organization, (i.e., purchasing, engineering, production, and cost accounting). The value of their participation is that they are more likely to accept the standards as an evaluation criterion. 3. The general features and characteristics associated with the introduction and operation of a standard cost system that make it an effective tool for cost control include the following. Standard-setting can be a participative process with those individuals most familiar with the variables associated with standard-setting available to provide the most accurate information. This sense of participation will help establish the legitimacy of the standards and give the participants a greater feeling of being part of the operation. Standards that are set for routine activities, which can be identifiable and measurable, can be associated with specific cost factors of uniform products in long production runs. Standards promote cost control through the use of variance analysis and performance reports, similar to those discussed in Chapters 13 and 14. 4. The consequences of having the standards set by an outside consulting firm are the following: There could be negative employee reaction as the employees did not participate in the standard-setting process. There could be dissatisfaction if the standards contain cost elements that are not controllable by the production groups who would be held responsible for unfavorable variances. The outside firm may not fully understand the manufacturing process; this could result in poor management decisions based on faulty information.
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13-65 Standard Cost Sheet (30 minutes) 1. Standard direct manufacturing cost per unit of output: Direct material: 1 Lumber (1.50 bd. ft. x $10.00/bd.ft.) Pads (4 pads x $0.50/pad) Direct labor: 2 Prepare/cut (14.4/60 hrs. x $18.00/hr.) Assemble/finish (15/60 hrs. x $18.00/hr.) Total standard direct manufacturing cost per unit
1 2
$15.00 2.00 4.32 4.50
$17.00 8.82 $25.82
[1.25 board feet x (5+1)] 5 = 1.50 board feet per unit of output [12 minutes/unit x (5+1)] 5 = 14.4 minutes per unit of output
2. The advantages of implementing a standard cost system include the following: Standard costs are incorporated into the accounting system, making recordkeeping easier and facilitating cost analysis. Standard costs provide the basis for building a companys budgets. Standard costs serve as goals; they encourage cooperation and coordination among all elements of the organization. The variance analysis associated with standard costs provides a feedback system to those responsible for controlling costs. 3. a. The role of the purchasing manager in the development of standards includes establishing the standard cost for material specified in the bill of materials for the product in question, determining whether the company should take advantage of price reductions available through economic order size, and obtaining data regarding the availability of materials. b. The role of the industrial engineer in the development of standards includes preparing the bill of materials that specifies the types and quantities of material required, establishing, in conjunction with the manufacturing supervisor, any allowances for scrap, shrinkage and waste, and participating in time-studies and test-runs to facilitate the establishment of time standards. c. The role of the cost accountant in the development of standards includes reviewing all information regarding material and labor standards received from other departments, establishing the labor rate standards based on the type of labor required, determining application rates for indirect manufacturing costs such as material handling and manufacturing overhead (covered in Chapter 14), and converting physical standards (such as hours and quantities) to monetary equivalents..
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13-66 Standard Cost Sheet and Use of Variance Data (30-40 minutes) 1. Standard cost for each ten-gallon batch of raspberry sherbet: (a) Standard Quantity (7.5 qts.* (10 gal. (3 min. x 6 qts.)/60 (12 min./ 60) (40 qts.** x x x x x (b) Standard Rate $4.00) = $30.00 $2.25) = $15.00 = $15.00 = $0.50) = 22.50 4.50 3.00 7.50 20.00 $80.00 $52.50
Direct materials: Raspberries Other ingredients Direct labor: Sorting Blending Packaging
c. Standard cost per ten-gallon batch
*[6 quarts/batch x (4+1)]/4 = 7.5 quarts of inputs required to obtain 6 acceptable quarts. **4 quarts per gallon x 10 gallons = 40 quarts. 2. a. In general, the purchasing manager is held responsible for unfavorable materials purchase price variances. Causes of these variances include the following: Failure to correctly forecast price increases. Purchasing nonstandard materials or in uneconomical lots. Outdated (i.e., inappropriate) standard. Transport of materials other than method (e.g., second-day delivery) embodied in the standard price. Not purchasing from suppliers offering the most favorable terms. General macro-economic factors affecting prices. In some situations, however, someone other than the Purchasing Manager may be responsible for the price variance. For example, an expedited shipment of materials, with associated higher shipping cost, could be the result of a rush order accepted by the Sales Department and as such not assigned to the Purchasing Manager.
Blocher, Stout, Cokins: Cost Management, 4e
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The McGraw-Hill Companies, Inc., 2008
13-66 (Continued) As a small producer, ColdKings competitive strategy is likely to be differentiation through brand recognition, just as the firm has apparently been doing. The success of the competitive strategy requires that the firm maintains high quality and good cost control. Unfavorable price variances decrease the profit of the firm and, unless corrected in the short run, may compromise the firms competitive position and the survival of the firm in the long-run. b. In general, the production manager or foreman is held responsible for unfavorable labor efficiency variances. Causes of these variances include the following: Poorly trained labor Substandard, inefficient, or improperly set equipment Inadequate supervision Use of sub-standard material inputs Outdated standard Unfavorable efficiency variances increase costs, decrease profits, and may affect the quality of the firms products. Continuous unfavorable efficiency variances jeopardize the competitive position of the firm and threaten the success of the firms strategy. Note: one issue to raise with students at this point is the danger of too much focus on the labor efficiency variance. For example, in many cases today, labor is a short-term fixed cost. Thus, a principal cause of an unfavorable labor efficiency variance is lack of sales orders/production demand, not worker efficiency! The only way a manager in this situation can avoid an unfavorable labor efficiency variance is to produce excess inventory, which would be counter to the JIT philosophy that many organizations are pursuing today. The moral here is that when the workforce is basically fixed in the short run, labor efficiency variances have to be interpreted with caution. For this reason, some writers have advocated doing away with the reporting of labor efficiency variances for control purposes when the labor force is essentially fixed in the short run.
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13-67 Master Budgets, Flexible-budgets, and Variances (45 minutes) 1. Actual Results 50,000 $450,000 375,000 $75,000 65,000 $10,000 Flexible Budget Variance 0 $50,000U 25,000U $75,000U 10,000F $65,000U Sales Flexible Volume Budget Variance 50,000 10,000F $500,000 $100,000F 350,000 70,000U $150,000 $30,000F 75,000 0 $75,000 $30,000F Master (Static) Budget 40,000 $400,000 280,000 $120,000 75,000 $45,000
Unit sales Sales Variable costs Contribution margin Fixed costs Operating income
Total Master (Static) Budget Variance $35,00U Flexible-Budget Variance $65,000U 2. Profit variances for December: a. Total Master (Static) Budget Variance = actual operating income - flexible-budget operating income = $10,000 - $45,000 = $35,000U b. Total Flexible-Budget Variance = actual operating income - flexible-budget operating income = $10,000 - $75,000 = $65,000U c. Sales Volume Variance, in terms of operating income = flexible-budget operating income - master budget operating income = $75,000 - $45,000 = $30,000F or, under the assumption that actual sales volume and master budget sales volume are both in the relevant range, we can define the sales volume variance as budgeted cm/unit x (actual - budgeted) unit sales = ($10.00 $7.00)/unit x (50,000 - 40,000) units = $3.00/unit x 10,000 units = $30,000F Sales Volume Variance $30,000F
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13-67 (Continued) d. Sales Volume Variance, in terms of contribution margin = flexible-budget contribution margin - master budget contribution margin = $150,000 - $120,000 = $30,000F e. Selling Price Variance = actual sales revenue - flexible-budget sales revenue = $450,000 - $500,000 = $50,000U or, selling price variance = AQ x (AP - SP) = 50,000 units x ($9.00 - $10.00)/unit = $50,000U 3. The labels favorable or unfavorable in the context of the type of profit-variance report prepared above have a very narrow meaning: impact of the variance in question on the short-run operating profit of the organization. Whether individual variances represent good news or bad news is largely a function of the specific context and circumstances. 4. The total flexible-budget variance contains the net (or composite) effect of selling price per unit being different from planned, variable cost per unit being different from planned, and total fixed cost being different from planned. In the calculation of both the total flexible-budget variance and the three component variances (viz., selling price variance, total variable cost variance, and total fixed cost variance), we are holding constant the volume factor and analyzing the effect on short-run operating profit of letting each of the other three factors vary from budget/standard amounts. The total flexible-budget fixed cost variance can be further broken down by line item. The total flexible-budget variable cost variance can be broken down into individual costs (e.g., direct materials, direct labor, or, as we show in Chapter 14, variable manufacturing overhead). In turn, these variances can be broken down into price (rate) and efficiency (quantity) components.
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13-68 Fill-in Missing Data: Profit-Variance Reports (30 Minutes) Actual Results 1,600 $38,400 $27,200 $4,000 $7,200 $6,200 $1,000 Flexible Budget Variance N/A $1,600U $1,600U $800U $4,000U $1,400F $2,600U Flexible Budget 1,600 $40,000 $25,600 $3,200 $11,200 $7,600 $3,600 Sales Volume Variance 100F $2,500F $1,600U $200U $700F -0$700F Master (Static) Budget 1,500 $37,500 $24,000 $3,000 $10,500 $7,600 $2,900
Unit sales Sales Variable costs: Manufacturing Selling & Admin. Contribution margin Fixed costs Operating income
1. a & b Actual units sold = Master budget units + Favorable sales volume variance = 1,500 + 100 F = 1,600 units c. Budgeted selling price per unit: $37,500 1,500 = $25 per unit Sales volume variance, in terms of sales revenue: d. Sales revenue, flexible-budget: e. Sales revenue, actual: Variable manufacturing cost: f. Standard cost per unit: $24,000 1,500 units = $16 per unit Total flexible-budget amount: g. Sales volume variance: (or, 100 units x $16/unit = $1,600U) h. Actual amount incurred: Variable selling and administrative expense: i. j. Flexible-budget variance: Master-budget amount: $4,000 - $3,200 = ($3,200/1,600 units) x 1,500 units = $800U $3,000 $25,600 + $1,600 U = $27,200 1,600 units x $16 = $25,600 - 24,000 = $25,600 $1,600U 100 x $25 = 1,600 x $25/unit = $40,000 - $1,600 U = $2,500F $40,000 $38,400
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13-68 (Continued) k. Sales volume variance, in terms of S&A: Contribution margin: l. Actual amount: (e) $38,400 - (h) $27,200 - $4,000 = $1,600 U + $1,600 U + (i) $800 U = (d) $40,000 - (f) $25,600 - $3,200 = (l) $7,200 + (m) $4,000 U = $2,500 F - $1,600 U - $200 U = $37,500 - 24,000 - (j) 3,000 = or, (n) $11,200 - (p) $700 F = r. Fixed cost, actual: s. Fixed cost, flexible budget: t. Fixed cost, master (static) budget: u. Fixed cost flexible-budget variance: v. Fixed cost sales volume variance: w. Operating income flexible-budget variance: x. Operating income, master budget: (l) $7,200 - $1,000 = (n) $11,200 -$3,600 = Same as (s) (r) $6,200 - (s) $7,600 = (s) $7,600 - (t) $7,600 = $1,000 - $3,600 = (q) $10,500 - (t) $7,600 = $7,200 $4,000U $11,200 $11,200 $700F $10,500 $10,500 $6,200 $7,600 $7,600 $1,400F -0$2,600U $2,900 m. Flexible-budget variance: n. Flexible-budget amount: or, p. Sales volume variance: q. Master-budget amount: $3,200 - $3,000 = $200U
y. Sales volume variance, in terms of operating income = $3,600 - $2,900 = $700F or, $700 - $0 = $700F 2. Actual selling price per unit: (e) $38,400 (b) 1,600 units = $24.00
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13-69 Master Budgets, Flexible Budgets, and Variance Analysis (50 Minutes) 1. Unit sales Sales Variable costs Fixed costs Operating income Actual Results 205,000 $2,255,000 $682,500 $170,000 $1,402,500 Flexible Sales Master Budget Flexible Volume (Static) Variance Budget Variance Budget 0 205,000 5,000F 200,000 $51,250F $2,203,750 $53,750F $2,150,000 6,000U $676,500 $16,500U 660,000 $10,000F $180,000 $-0$180,000 $55,250F $1,347,250 $37,250F $1,310,000
Notes: (A) Title (Flexible-Budget Variance) (B) Title (Sales Volume Variance) (C) 0, by definition (D) Actual units sold (205,000) (E) 5,000F (205,000 - 200,000) (F) $2,255,000 - $2,203,750 = $51,250F (G) Budgeted selling price/unit = $2,203,750/205,000units = $10.75; $10.75/unit x 5,000 units = $53,750 (H) $2,203,750 - $53,750 = $2,150,000 (I) 205,000 units x ($660,000/200,000 units) = 205,000 x $3.30/unit = $676,500 (J) $676,500 + $6,000 = $682,500 (K) $676,500 - $660,000 = $16,500U (L) $170,000 - $180,000 = $10,000F (M) $0 (by definition, as long as both actual sales volume and master budget sales volume are in the relevant range) (N) $180,000 (same as flexible-budget amount) (O) $2,255,000 - ($682,500 + $170,000) = $1,402,500 (P) $51,250F + $6,000U + $10,000F = $55,250F (Q) $1,402,500 - $55,250 = $1,347,250, or, $2,203,750 - ($676,500 + $180,000) = $1,347,250 (R) $53,750F + $16,500U = $37,250F, or, 5,000 units x budgeted cm/unit = 5,000 units x ($10.75 - $3.30)/unit = $37,250F (S) $1,347,250 - $37,250 = $1,310,000, or, $2,150,000 - ($660,000 + $180,000) = $1,310,000
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13-69 (Continued) 2. Total master (static) budget variance = actual operating income - master budget operating income = $1,402,500 - $1,310,000 = $92,500F Sales volume variance, in terms of operating profit = flexible-budget operating income - master-budget operating income = $1,347,250 - $1,310,000 = $37,250F; this variance is the pure effect of sales volume being different than planned that is, it is calculated holding selling price per unit, variable cost per unit, and total fixed costs constant (they are all at budgeted/standard prices). Flexible-budget variance = actual operating income - flexible-budget operating income = $1,402,500 - $1,347,250 = $55,250F. This variance is the net (composite) effect of selling price per unit, variable cost per unit, and total fixed costs being different than planned. 3. The $6,000 is probably considered immaterial when taken as a whole. However, this net variance includes three variable cost items. As such, a first-level breakdown of this variance would calculate the variance for each of the three variable costs. Then, since each variable cost is a function of two factors, price (rate) and quantity (efficiency), each flexible-budget variable cost variance could be broken down into a price variance component and a quantity variance component. 4. A comprehensive operational control system will likely have a combination of financial and nonfinancial performance indicators. Financial performance indicators could include the standard cost variance data referred to above. Nonfinancial performance indicators should be derived from (or linked to) critical success factorsthings at which the organization must succeed in order to achieve competitive advantage. Thus, a variety of answers are possible here, including quality indicators, yield, safety factors (level of contaminants in the fish that are harvested), etc.
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13-70 Fill in Missing Data (25 minutes) 1. Unit sales Sales Variable costs Contribution margin Fixed costs Operating income a. - 0 b. 1,200 (by definition) c. 1,200 - 1,000 = 200F d. Budgeted selling price per unit: $60,000 1,000 units = $60/unit Flexible-budget revenues = 1,200 units x $60/unit = $72,000 e. $69,600 - $72,000 = $2,400U f. $72,000 - $60,000 = $12,000F g. Standard (budgeted) variable cost per unit: $40,000 1,000 units = $40/unit Flexible-budget variable cost: 1,200 units x $40 = $48,000 h. $48,000 - $40,000 = $8,000U i. j. l. $11,200U - (e) $2,400U = $8,800U (g) $48,000 + (i) $8,800 = $56,800 $12,800 + $11,200 = $24,000 or, $72,000 - $48,000 = $24,000 $60/unit - $40/unit = $20/unit; 200 units x $20/unit = $4,000F n. $60,000 - $40,000 = $20,000 or, 1,000 units x $20/unit = $20,000 p. $12,800 $5,800 = $7,000 q. - 0 - (by definition, as long as both output levels are within the relevant range) r. $5,000 (= master budget amount, as long as both output levels are within the relevant range) FlexibleBudget Variance -0$2,400U $8,800U $11,200U $2,000U $13,200U Sales Volume Variance 200F $12,000F $8,000U $4,000F -0$4,000F Master (Static) Budget 1,000 $60,000 $40,000 $20,000 $5,000 $15,000
Actual Results 1,200 $69,600 $56,800 $12,800 $7,000 $5,800
Flexible Budget 1,200 $72,000 $48,000 $24,000 $5,000 $19,000
k. $69,600 - (j) $56,800 = $12,800 m. $12,000F - $8,000U = $4,000F, or, Budgeted contribution margin per unit:
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13-70 (Continued) s. $7,000 (p) - $5,000 (r) = $2,000U t. $20,000 (n) - $5,000 = $15,000 u. $4,000F (m) -$0 (q) = $4,000F v. $15,000 (t) + $4,000 (u) = $19,000, or, $24,000 (l) - $5,000 (r) = $19,000 w. $5,800 - $19,000 (v) = $13,200U, or, $11,200U + $2,000U (s) = $13,200U
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13-71 Basic Analysis of Direct Labor Variances (20 minutes) 1. Actual Quantity at Standard Price (AQ) x (SP) Actual Hrs. Worked x Std. Wage Rate/Hr. 5,800 hrs. x $25/hr. = $145,000 Flexible Budget (FB) Based on Outputs (SQ) x (SP) Std. Hrs. Allowed x Std. Wage Rate/Hr. (1,200 x 5) hrs. x $25/hr. = $150,000
Actual Labor Cost (AQ) x (AP) Actual Hrs. Worked x Actual Wage Rate/Hr. 5,800 hrs. x $27.50/hr. = $159,500
Labor Efficiency Variance $5,000F
Recap: Labor rate variance = AQ x (AP - SP) = 5,800 hrs. x ($27.50 - $25.00)/hr. = $14,500U Labor efficiency variance = SP x (AQ - SQ) = $25.00/hr. x (5,800 hrs. - 6,000 hrs.) = $5,000F 2. The unfavorable rate variance arises because the actual labor rate per hour, $159,500 5,800 hrs. = $27.50/hr., exceeds the budgeted rate of $25.00/hr. by 10%. The reasons for this unfavorable variance could include the hiring of more skilled workers than planned, an unexpected labor rate increase negotiated with a trade union, or the initial $25 standard being set without a careful analysis. The $5,000 favorable labor efficiency variance could be due to the hiring of more skilled workers, above-expected productivity by existing workers due to a plant layout change, or the initial standard of 5 hours per dinette being set without conducting a careful analysis.
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13-72 Direct Labor Variances: Working Backwards (20 minutes) Actual Quantity at Standard Price (AQ) x (SP) Actual Hrs. Worked x Std. Wage Rate/Hr. (1.16 x SQ) x $30/hr. =? Flexible Budget (FB) Based on Outputs (SQ) x (SP) Std. Hrs. Allowed x Std. Wage Rate/Hr. (SQ) x $30/hr. =?
Actual Labor Cost (AQ) x (AP) Actual Hrs. Worked x Actual Wage Rate/Hr. (1.16 x SQ) x (AP) =?
Labor Rate Variance $11,600F 1. Efficiency variance = (AQ - SQ) x SP $24,000 = (1.16 SQ - SQ) x $30/hr. 0.16 SQ = 800 SQ = 5,000 hours 2. 3.
Labor Efficiency Variance $24,000U
AQ = 1.16 SQ = 1.16 x 5,000 hrs. = 5,800 hours Labor rate variance = (AP - SP) x AQ - $11,600 = (AP - $30.00)/hr. x 5,800 hrs. AP - $30.00 = - $2.00 AP = $28.00/hr.
4. SQ = Number of units manufactured x Standard labor hours per unit 5,000 = Number of units manufactured x 2 hrs./unit Number of units manufactured = 5,000hrs./2hrs. per unit = 2,500 units
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13-73 Summary Problem: All variances (60 minutes) 1. a. Direct materials price variance (calculated at point of production): Formula: AQ x (AP - SP), where AQ = units of raw material used in production during the period Calculation of actual prices per unit of raw material = Actual cost AQ Housing units $44,000 2,200 = $20 per unit Printed circuit boards $75,200 4,700 = $16 per unit Reading heads $101,200 9,200 = $11 per unit Calculation of price variance: Housing units 2,200 x ($20 $20) = $0 Printed circuit boards 4,700 x ($16 $15) = 4,700U Reading heads 9,200 x ($11 $10) = 9,200U Total direct materials price variance $13,900U b. Direct material usage variance: Formula: SP x (AQ - SQ) Calculation of standard quantities (SQ) = Units Produced x Standard quantity of raw material inputs per unit of output: Housing units 2,200 x 1 = 2,200 parts Printed circuit boards 2,200 x 2 = 4,400 parts Reading heads 2,200 x 4 = 8,800 parts Calculation of variance: Housing units $20 x (2,200 - 2,200) = $ 0 Printed circuit boards $15 x (4,700 - 4,400) = 4,500U Reading heads $10 x (9,200 - 8,800) = 4,000U Total direct materials quantity variance $8,500U 1. c. Direct labor efficiency variance: Formula: SP x (AQ - SQ) Calculation of standard hours allowed for output achieved (SQ) = Actual units of output x Standard labor hours per unit of output: Assembly Group 2,200 x 2.0 = 4,400 hours PCB Group 2,200 x 1.0 = 2,200 hours RH Group 2,200 x 1.5 = 3,300 hours Calculation of labor efficiency variance: Assembly Group $10/hr. x (3,900 - 4,400) = $5,000F PCB Group $11/hr. x (2,400 - 2,200) = $2,200U RH Group $12/hr. x (3,500 - 3,300) = $2,400U Total direct labor efficiency variance $ 400F
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13-73 (Continued-1) d. Direct labor rate variance: Formula: Total wages paid - (AQ x SP) Calculation of labor rate variance: Assembly Group $31,200 - (3,900 x $10) = PCB Group $31,060 - (2,400 x $11) = RH Group $50,000 - (3,500 x $12) = Total direct labor rate variance e. Selling price variance: Formula: Units sold x (AP - SP) Calculate budgeted selling price per unit, SP: Total budgeted sales Budgeted unit sales volume $400,000 2,000 units = $200 per unit Actual selling price per unit, AP: Actual sales revenue Actual units sold = $396,000 2,200 = $180 per unit Selling Price Variance = 2,200 units x ($180 - $200)/unit = $44,000U f. Sales volume variance, in terms of contribution margin: Formula: Budgeted cm/unit x (Actual Sales Budgeted Sales) Calculate budgeted unit contribution margin: Total budgeted contribution margin Budgeted units $122,000 2,000 = $61 per unit Sales volume variance: $61/unit x (2,200 - 2,000) units = $12,200F 2. The unfavorable variance of $58,660 between budgeted and actual contribution margin for Funtime, Inc. during May 2007 can be explained by aggregating the variances calculated above in part (1): Direct materials price variance Direct materials usage variance Direct labor efficiency variances Direct labor rate variances Selling price variance Sales volume variance Total contribution margin variance $ 13,900U 8,500U 400F 4,860U 44,000U 12,200F $58,660U
$7,800F $4,660U $8,000U $4,860U
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13-73 (Continued-2) 3. Behavioral factors that may promote friction among the production managers and between the production managers and the maintenance manager include the following: The managers of the PCB and RH groups will be dissatisfied with the maintenance manager as equipment downtime has caused them to incur additional overtime costs. The Assembly Group is dependent on input from the other production departments. To increase production, the managers of the Assembly Group are likely to pressure the other managers. This type of pressure is most probably the reason why the PCB and RH groups began rejecting parts that would normally have been modified and then used. 4. An evaluation of Constance Brown' report leads to the conclusion that it is incomplete s as she has not identified the real causes of the unfavorable results and has left management to draw its own conclusions. In addition, Brown has only addressed the labor issues and has failed to account for the material variances or mention the maintenance problems that resulted in downtime for some departments. The department managers are likely to resent the report as being unfair. Note to Instructor: An Excel file solution covering parts (1) and (2) of this assignment is embedded below. You can open this object by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select worksheet object and then select Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document.
13-73--Summary Problem: All Variances Data Input Standards for Direct Manufacturing Costs: Standards/Unit of Output Quantity Std. Cost Direct Materials:
Total
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13-74 Revision of Standards (30 minutes) 1. a. Revising the standards immediately would facilitate their use in a master budget. Use of revised standards would minimize production coordination problems and facilitate cash planning. Revised standards would facilitate more meaningful costvolume-profit analysis and result in simpler, more meaningful variance analysis. Standards are often used in decision analysis such as make-or-buy, product pricing, or product discontinuance. The use of obsolete standards would impair the analysis. Variances are often computed and then ignored by decision-makers/ managers. Retaining the current standards and expanding the analysis of variances would force a diagnosis of the costs and would increase the likelihood that significant variances would be investigated. b. Standard costs are carried through the accounting system in a standard cost system. Retaining the current standards and expanding the analysis of variances would eliminate the need to make changes in the accounting system. However, changing standards could have an adverse motivational impact on the persons using them. Retaining the current standards would preserve the well-known benchmark and allow for consistency in reporting variances throughout the year. 2. a. Change in cost/unit due to the use of new direct materials: Change due to price = (New materials price Old materials price) x (New materials quantity) = ($7.77 - $7.00)/lb. x 1 lb./unit = $0.77U Change due to the effect of direct materials quality on direct materials usage = (Old materials quantity - New materials quantity) x (Old materials price) = (1.25 - 1.00) lb./unit x $7.00/lb. = $1.75F Change in labor usage due to the effect of materials quality = (Old labor time - New labor time) x (Old labor rate) = (24/60 - 22/60) x $12.60/hr. = $0.42F Total changes in per unit cost due to use of new materials = $1.40F b. Changes in per unit cost due to the new labor contract= (New wage rate Old wage rate) x New labor time = ($14.40 - $12.60)/hr. x (22/60) hrs. = $0.66U c. Total change in direct manufacturing cost per unit = (a) + (b) = $0.74F
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13-75 Standard Cost in Process Costing; Variances, and Journal Entries (40-45 minutes) 1. Equivalent units of production in November: Units completed Equivalent units in ending WIP inventory Equivalent units of production Standard quantity of input per unit of output Total standard quantity for production in November a. b. c. d. Labor efficiency variance = SP x (AQ - SQ) = $18.20/hr. x (36,500 - 37,200) hrs. = $12,740F Labor rate variance = (AP x AQ) - (SP x AQ) $600,000 - ($18.20/hr. x 36,500 hrs.) = $64,300F Actual kgs. of material used in November = standard quantity allowed +/ efficiency variance = 51,200 kg. + ($1,500 $5/kg.) = - $1,500U = $750F Actual price per kilogram (AP) = Standard price per kg. (SP) - Per unit favorable price variance = $5.00/kg. - ($750 50,000 kgs.) = e. $4.985 51,500 kg. Material price variance = Total materials variance - Materials usage variance = $750U x Direct Materials 5,600 + 800 6,400 8 51,200 x + Direct Labor 5,600 600 6,200 6 37,200
Total amount of prime costs transferred to the finished goods account in November = Standard manufacturing cost/unit x #units manufactured in November = ($40.00 + $109.20) x 5,600 units = $835,520 Materials Equivalent units in ending WIP inventory Standard cost per unit Ending inventory at standard cost 800 x $40.00 $32,000 Labor 600 x $109.20 $65,520 $97,520 Total
f.
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13-75 (Continued)
2. Materials inventory ($5 x 50,000 kg.) Materials purchase price variance (see (d) above) Accounts payable (plug)
$250,000 $750 $249,250
Purchase of 50,000 kilograms of materials for $249,250 ($4.985/kg.) Work-in-Process inventory (6,400 eq. units x $40) Materials usage variance (plug) Materials inventory (51,500 kg. x $5/kg.) Issued 51,500 kilograms of material to produce 6,400 equivalent units. $256,000 $1,500 $257,500
Work-in-Process Inventory (6,200 eq. units x $109.20/unit) Labor rate variance (see 1b above) Labor efficiency variance (see 1a above) Accrued Payroll (given)
$677,040 $64,300 $12,740 $600,000
Direct labor wages incurred to manufacture 6,200 equivalent units; actual wage rate = $16.438/hr.
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13-76 Direct Materials: Joint Price-Quantity Variance (25 minutes) 1. Direct materials price variance = AQ x (AP - SP) = 25,000 tons x ($12 - $10)/ton 2. Standard direct materials allowed for the units manufactured, SQ: 5,000 units x 4.5 tons per unit = 22,500 tons Direct materials usage variance = SP x (AQ - SQ) = $10/ton x (25,000 tons - 22,500 tons) = 3. Pure direct materials price variance = SQ x (AP - SP) = ($12 - $10)/ton x 22,500 tons = Direct materials joint price-quantity variance = (AP - SP) x (AQ SQ) = ($12 - $10)/ton x (25,000 - 22,500) tons = Total direct materials price variance (as determined in practice) = AQ x (AP SP) = $50,000U + $5,000U $45,000U $25,000U $50,000U
The preceding calculations are illustrated graphically on the next page:
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13-76 (continued)
SQ x (AP - SP)
[(AP - SP) x (AQ - SQ)]
AP SP SP x (AQ - SQ)
SQ Legend: AP = actual price per ton of raw material SP = standard price per ton of raw material AQ = actual tons of raw material used in production SQ = standard # of tons allowed for the output achieved SQ x (AP - SP) = pure price variance SP x (AQ - SP) = pure quantity variance (AP - SP) x (AQ SQ) = joint price-quantity variance
AQ
Note that in practice the joint price-quantity variance is usually included as part of the price variance under the assumption that price paid is less controllable than quantity consumed in the production process. That is, there is a desire to keep the efficiency variance as pure as possible.
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13-77 Flexible Budget and Variances (50 minutes) 1. Units sold Revenues Professional labor Credit check Contribution margin Fixed costs Operating income Actual Results 90 $36,000 $9,500 $14,850 $11,650 $3,600 $8,050 Flexible Budget Variances -0$4,500F $1,400U $1,350U $1,750F $600U $1,150F Flexible Budget 90 $31,500 $8,100 $13,500 $9,900 $3,000 $6,900 Sales Volume Variance 10U $3,500U $900F $1,500F $1,100U -0$1,100U Master (Static) Budget 100 $35,000 $9,000 $15,000 $11,000 $3,000 $8,000
Total Master (Static) Budget Variance $50F Flexible-Budget Variance Detailed Calculations: $1,150F Sales Volume Variance $1,100U
Master budget: Number of apartments rented Revenue per apartment rented $700 2 = Total revenue Less: Variable costs: Professional labor: (1.5 hr./application x $20/hr.) x 300 applicants = $ 9,000 Credit check: $50/appl. x 300 applicants = 15,000 Contribution margin Less: Other expenses (lease, secretarial help, utilities) Operating income Flexible-budget Total revenue 90 rentals x $350/rental = Less: Variable costs: Professional labor (1.5 x $20) x 270 application = $ 8,100 Credit check $50/applicant x 270 application = 13,500 Contribution margin Less: Other expenses Operating income
100 $ 350 $35,000
24,000 $11,000 3,000 $8,000 $31,500 21,600 $ 9,900 3,000 $6,900
13-74
13-77 (continued) Operating results Total revenue 90 rentals x $800/rental x 0.5 = Less: Variable costs: Professional labor $ 9,500 Credit check $55/application x 270 apps. = 14,850 Contribution margin Less: Other expenses Operating income 2. Actual Labor Cost (AQ) x (AP) Actual Hrs. Worked x Actual Wage Rate/Hr. 400 hrs. x AP = $9,500 Actual Quantity at Standard Price (AQ) x (SP) Actual Hrs. Worked x Std. Wage Rate/Hr. 400 hrs. x $20/hr. = $8,000 $36,000 24,350 $11,650 3,600 $8,050
Flexible Budget (FB) Based on Outputs (SQ) x (SP) Std. Hrs. Allowed x Std. Wage Rate/Hr. (270 x 1.5hrs.) x $20/hr. = $8,100
Labor Efficiency Variance $100F
Total Flexible-Budget Variance for Professional Labor $1,400U 3. Among factors to be considered in evaluating the effectiveness of professional labor are: Number of units successfully rented Number of applicants Demand for apartments in the area Total number of apartments for rent in the area Quality (credit worthiness of applicant)
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13-78 Profit-Variance Analysis (60-75 minutes) 1. Actual Results 4,000 $390,000 $241,000 $39,000 $280,000 $50,000 $40,000 $90,000 $20,000 Flexible Budget Variances 0 $10,000U $41,000U $1,000F $40,000U $0 $4,000U $4,000U $54,000U Sales Flexible Volume Budget Variance 4,000 100F $400,000 $10,000F $200,000 $40,000 $240,000 $50,000 $36,000 $86,000 $74,000 $5,000U $1,000U $6,000U $0 $0 $0 $4,000F Master (Static) Budget 3,900 $390,000 $195,000 $39,000 $234,000 $50,000 $36,000 $86,000 $70,000
Unit sales Sales Variable Costs: Manufacturing Marketing Total Variable Costs Fixed Costs: Manufacturing Marketing Total Fixed Costs Operating Income
Total Master (Static) Budget Variance Flexible-Budget Variance $54,000U 2. Profit-variance components: a. total master (static) budget variance = actual operating income - master budget operating income = $20,000 - $70,000 = $50,000U b. total flexible-budget variance = actual operating income - flexible-budget operating income = $20,000 - $74,000 = $54,000U c. total variable cost flexible-budget variance = actual total variable costs flexiblebudget total variable costs = $280,000 - $240,000 = $40,000U 1. flexible-budget variance for variable manufacturing costs = actual variable manufacturing costs - flexible budget for variable manufacturing costs = $241,000 - $200,000 = $41,000U $50,000U Sales Volume Variance $4,000F
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13-78 (Continued-1) 2. flexible-budget variance for variable nonmanufacturing costs = actual variable nonmanufacturing costs - flexible-budget variable nonmanufacturing costs = $39,000 - $40,000 = $1,000U d. total fixed cost flexible-budget variance = actual total fixed costs - flexible-budget total fixed costs = $90,000 - $86,000 = $4,000U 1. flexible-budget variance for fixed manufacturing costs = actual fixed manufacturing costs - flexible-budget for fixed manufacturing costs = $50,000 - $50,000 = $0 2. flexible-budget variance for fixed nonmanufacturing costs = actual fixed nonmanufacturing costs - flexible-budget for fixed nonmanufacturing costs = $40,000 - $36,000 = $4,000U 3. Interpretation of profit variances: a. total master (static) budget variance: this is the total operating profit variance for the period, i.e., the difference between actual operating profit and operating profit as stated in the master (static) budget. Notice that this variance is a function of five factors: selling price per unit, sales mix, sales volume, variable cost per unit, and total fixed costs. We abstract in Chapter 13 from the multi-product case and deal only with a single-output context. Thus, we should be able to decompose any profit variance into variances related to the other four factors, as explained below. b. total flexible-budget variance: this variance explains the portion of the total profit variance for the period related to a combination of three factors: selling price per unit, variable cost per unit, and total fixed costs. These variances, and the total flexible-budget variance by extension, are determined by holding constant sales volume. That is, actual operating results are compared to budgeted results flexed to the actual output level. c. flexible-budget variance for total variable cost: this variance represents one component of the total flexible-budget variance. That is, it represents the effect on operating profit of the variable cost per unit being different from planned. The variance can be broken be calculating a flexible-budget variance for each variable cost (e.g., by functional category). 1. flexible-budget variance for total variable manufacturing costs: this variance represents the portion of the flexible-budget variance that is attributable to variable manufacturing cost per unit being different from budgeted amount. As such, it can be further decomposed into a total variance for direct materials, a total variance for direct labor, and a total variance for variable overhead (chapter 14).
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13-78 (Continued-2) 1. flexible-budget variance for total variable manufacturing costs: this variance represents the portion of the flexible-budget variance that is attributable to variable manufacturing cost per unit being different from budgeted amount. As such, it can be further decomposed into a total variance for direct materials, a total variance for direct labor, and a total variance for variable overhead (Chapter 14). 2. flexible-budget variance for total variable nonmanufacturing costs: this variance represents the portion of the flexible-budget variance that is attributable to nonmanufacturing cost per unit being different from budgeted amount. As such, it can be further decomposed into a total variance for each nonmanufacturing cost element (e.g., selling expenses). d. flexible-budget variance for total fixed costs: this variance is also referred to as a spending variance, since it represents the difference between actual fixed costs and budgeted fixed costs. As such, the variance can be further broken down into functional categories, as explained below. 1. flexible-budget variance for total fixed manufacturing costs: this is the portion of the flexible-budget variance for total fixed costs that is attributable to spending on fixed manufacturing costs being different from budgeted spending. As such, this variance can be further broken down on a line-item basis (property taxes, depreciation, supervisory salaries, etc.). 2. flexible-budget variance for total fixed nonmanufacturing costs: this is the portion of the flexible-budget variance for total fixed costs that is attributable to spending on nonmanufacturing fixed costs being different from budgeted spending. As such, this variance can be further broken down on a line-item basis (i.e., sales salaries, depreciation, etc.).
13-78
13-78 (Continued-3) Ortiz & Co. Master (Static) Budget Variance (Actual Operating Profit - Master Budget Operating Profit) $50,000U
FB-Variance $54,000U ($20,000 - $74,000)
Sales Volume Variance $4,000F ($40/unit x 100 units)
SP Variance $10,000U
Variable Cost Variances $40,000U
Fixed Cost Variances $4,000U
Manufacturing $41,000U
Marketing $1,000F
Manufacturing $0
Marketing $4,000U
13-79
13-78 (Continued-4) Note to Instructor: An Excel file solution covering parts (1) and (2) of this assignment is embedded below. You can open this object by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select worksheet object and then select Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document.
13-78: Master Budget and Profit Variance Analysis Input Area Master Budget Data: Sales volume (units) = Selling price per unit = Variable manufacturing costs/unit = Variable selling cost (% of sales) = Fixed manufacturing costs = 3,900 $100.00 $50.00 0.10 $50,000
13-80
13-79 Purchase Price Variance and Foreign Exchange Rates (20 minutes) 1. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
**
Actual Quantity 4,000 4,000 4,000 24,000 36,000
Actual Results Purchase Price Total Cost $68 $ 272,000 69 276,000 73 292,000 40*** 960,000** * $1,800,000
Standard Price $60 60 60 60
Price Variance $ 32,000U 36,000U 52,000U 480,000F $360,000F
*Total actual purchases = 36,000 kg. x $50 avg. price/kg. = $1,800,000 $1,800,000 - ($272,000 + $276,000 + $292,000) = $960,000 *** $960,000 24,000 = $40
th Further analysis of the 4 Quarters purchase price variance:
Price variance due to increase in the negotiated price: 24,000 kg. x ($76 - $60)/kg. = Price variance due to changes in exchange rate: 24,000 kg. x ($40 - $76)/kg. = Net Purchase Price Variance = AQ x (AP - SP) = 24,000 kg. x ($40 - $60)/kg. =
$384,000U $864,000F $480,000F
2. The favorable purchase price variance for the 4th quarter and for the year is due to fluctuations in foreign currency exchange rates. The firm gained $864,000 from the favorable changes in currency exchange rates. Without the th favorable exchange rate in the 4 quarter, the firm would have had a total unfavorable purchase price variance of $384,000 for the quarter. Nevertheless, the purchasing department should be credited for negotiating the term of purchases in local currencies, rather than in U.S. dollars.
13-81
13-80 DM and DM variances, solving unknowns (40 minutes) Direct Materials AQ x AP = $136,500 AQ x SP AQ x $5 =? Purchase Price variance $6,500 U AQ x SP AQ x $5 = ? SQ x SP ([4,500 x 6] x $5) = $135,000 Usage variance $5,000 U AQ x SP AQ x $30 = ? SQ x SP ([4,500 x 2/3] x $30) = ? Efficiency variance $6,000 F
Direct Labor AQ x AP =?
Rate variance $4,200 U
1. Total standard direct labor cost for the panels manufactured: 4,500 units x 2/3 hour per unit x $30 per hour = $90,000 2. Total direct labor hours worked, AQ: Total hours worked at standard rate = $90,000 - $6,000 = $84,000 = AQ x SP AQ = $84,000 $30/hr. = 2,800 hours 3. Actual direct labor hourly wage rate, AP = actual labor cost labor hours worked = ($84,000 + $4,200) 2,800 hours worked = $31.50 per hour 4. Total standard quantity of direct materials for the panels manufactured: 4,500 panels manufactured x 6 lbs./panel = 27,000 lbs. 5. Total pounds of direct materials used, AQ = total pounds used, at standard cost standard cost per pound = [(27,000 lbs. x $5) + $5,000] $5/lb. = $140,000 $5/lb. = 28,000 lbs. 6. Total pounds of direct materials purchased, AQ = total pounds purchased, at std. cost standard cost/lb. = ($136,500 - $6,500) $5/lb. = 26,000 lbs. 7. Actual direct materials price per pound = actual cost of purchases number of pounds purchased = $136,500 26,000 = $5.25/lb.
13-82
13-81 Variance Analysis and Accountability (75 Minutes) 1. Sanchez was correct in his analysis of direct materials usage. Both the regular and alternative materials had an unfavorable usage variance, but the alternative materials had significantly more variance, as follows: Regular Materials Output (units produced) Materials requirements, lbs. per unit Total standard materials requirements Actual materials used in production Usage variance in pounds Standard cost per pound of material Material usage variances % Variance from Standard 12,000 1.5 18,000 18,200 200 $10.00 $2,000U 1.1% Alternative Materials 8,000 1.5 12,000 15,800 3,800 $10.00 $38,000U 31.7% 30,000 34,000 4,000 $10.00 $40,000U
Total 20,000
2. The components of the total direct labor variance are as follows: Class III Labor Actual labor cost Flexible-budget labor cost: Units produced x Std. Labor cost/unit Flexible-budget labor cost Total labor cost variance 12,000 $21.60 $259,200 $22,000U 8,000 $21.60 $172,800 $32,170U 20,000 $21.60 $432,000 $54,170U $281,200 Class II Labor $204,970 Total Labor $486,170
13-83
13-81 (Continued-1) Breakdown of total variance, by labor class: Class III Labor a. Labor rate variance: Standard wage rate/hour (SP) Actual wage rate/hour (AP) Rate variance per hour Actual hours worked (AQ) Labor rate variance Actual hours at standard wage rate b. Labor substitution variance: Class III standard wage rate Class II standard wage rate Substitution rate variance/hour x Actual hours worked (AQ) Labor substitution variance Actual hours at Class III std. rate Units producedalternative materials Standard labor hours/unit Standard labor hours allowed Actual hours worked Hours saved (excess hours) Class III labor rate/hour Variance from use of non-std mat.: Actual hours at std. wage rate, after factoring out effect of non-std. material usage $258,480 $175,320 $433,800 $273,600 4,800 1.2 5,760 6,600 (840) $18.00 $15,120U c. Labor variance from use of nonstandard materials: 3,200 1.2 3,840 4,400 (560) $18.00 $10,080U $25,200U $18.00 $20.00 $2.00 10,300 $20,600U $185,400 $20,600U $459,000 $18.00 $18.50 $0.50 15,200 $7,600U $273,600 $20.00 $19.90 $0.10 10,300 $1,030F $206,000 $6,570U $479,600 Class II Labor Total Labor
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13-81 (Continued-2) d. Labor efficiency variance, based on regular materials: Units producedregular materials Standard labor hours/unit Standard hours allowed Actual hours worked Saved (excess) hours Class III std. wage rate/hour Efficiency variance, based on use of regular materials Summary: Labor rate variance Labor substitution variance Variance from using sub-standard materials Efficiency variancebased on use of regular materials Total $7,600U N/A $15,120U $720F $22,000U $1,030F $20,600U $10,080U $2,520U $32,170U $6,570U $20,600U $25,200U $1,800U $54,170U $720F $2,520U $1,800U 7,200 1.2 8,640 8,600 40 $18.00 4,800 1.2 5,760 5,900 (140) $18.00
3. a. The following variances from parts 1 and 2 could be associated with the rush order: Direct materials usage (efficiency) variance from the use of sub-standard (i.e., the alternate) materials, $38,000 U. If the Sales Department had accepted the order under normal circumstances, then the Purchasing Department could have used its regular supplier and not have to deal with a new supplier on short notice. The material proved to be substandard and resulted in materials consumption that was much higher than the variance associated with the use of regular materials. Direct labor substitution variance, $20,600 U. The Production Department was forced to redeploy Class II labor from another job. If there had not been a rush order, the Production Department may have been able to spread the production of this order over a longer time period and therefore could have used the normal Class III labor.
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13-81 (Continued-3) Total direct labor variance from using substandard materials, $25,200U. The rush order forced the Purchasing Department to seek an alternative source of materials when the regular supplier was unable to provide the materials under short notice. The Purchasing Department thought that the material was comparable, but it proved to be substandard, a situation not uncovered until the increase in spoilage was observed. Labor hours were wasted by working on material that proved to be sub-standard. 3. b. Sanchez is justified in stating that the variances related to the rush order should be charged, for performance evaluation purposes, to the Sales Department. Under the notion of responsibility accounting, a unit should be held accountable for its decisions and the consequences of those decisions. The Sales Department should not have accepted the rush order without first consulting with the Production Department to determine if the order could be filled within the time frame demanded by the customer. The Production Department is responsible for producing the product, but the Sales Departments actions caused production costs to increase above standard. Under the circumstances, there were insufficient materials and labor, and the Sales Department did not leave many alternatives for the Production Department. The Sales Department should, therefore, be held accountable for the additional costs of this decision.
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Chapter 13 The Flexible-Budget and Standard Costing: Direct Materials and Direct Labor

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Chapter 13 The Flexible-Budget and Standard Costing: Direct Materials and Direct Labor

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CHAPTER 13 THE FLEXIBLE-BUDGET AND STANDARD COSTING: DIRECT MATERIALS AND DIRECT LABOR

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Total Master (Static) Budget Variance

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Actual 15,000 $64,000 24,000 $40,000 15,000 $25,000

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Sales Volume Variance 200U $3,000U $800F 400F 1,200F $1,800U

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Direct Materials and Direct Labor Variances (20 minutes)

(3) Flexible-Budget Amount (SQ) x (SP) (3,600 lbs. x $25/lb.)

Usage Variance = (2) (3) = $5,625F

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Price (Rate) Variance = (1) - (2) = $8,400U

Quantity (Efficiency) Variance = (2) - (3) = $12,000F

Total Flexible-Budget Variance = (1) - (3) = $176,400 - $180,000 = $3,600F

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Direct Materials VariancesJournal Entries (20 minutes)

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e