CH-17 Flexible Budgets, Overhead Cost Management, and Activity-Based Budgeting – Cost Management: Strategies for Business Decisions : Book Guide

Chapter 17 Flexible Budgets, Overhead Cost Management, and Activity-Based Budgeting ANSWERS TO REVIEW QUESTIONS 17.1 All kinds of organizations use flexible budgets, including manufacturing firms, retail firms, service-industry firms, and nonprofit organizations. For example, a hospital's flexible overhead budget might be based on different levels of activity expressed in terms of patient-days. 17.2 A columnar flexible budget has several columns listing the budgeted levels of cost at different levels of activity. Each column is based on a different activity level. A formula flexible budget is an equation expressed as follows: total cost equals fixed cost plus the product of the activity measure and the variable cost per unit of activity. The formula flexible budget allows for any level of activity, rather than only the activity levels for the various columns used in the columnar flexible budget. 17.3 The interpretation of the variable-overhead spending variance is that a different total amount was spent on variable overhead than should have been spent in accordance with the variable-overhead rate, given the actual level of the cost driver upon which the variable-overhead budget is based. For example, if direct labor hours are used to budget variable overhead, an unfavorable spending variance means that a greater total amount was spent on variable overhead than should have been spent, after adjusting for how much actual direct-labor time was used. The spending variance is the control variance for variable overhead. 17.4 The interpretation of the variable-overhead efficiency variance is related to the efficiency in using the activity upon which variable overhead is budgeted. For example, if the basis for the variable-overhead budget is direct-labor hours, an unfavorable variable-overhead efficiency variance will result when the actual direct-labor hours exceed the standard allowed direct-labor hours. Thus, the variable-overhead efficiency variance will disclose no information about the efficiency with which variable-overhead items are used. Rather, it results from inefficiency or efficiency, relative to the standards, in the usage of the cost driver (such as direct-labor hours). 17.5 The interpretations of the direct-labor and variable-overhead efficiency variances are very different. The direct-labor efficiency variance does convey information about the efficiency with which direct labor was used, relative to the standards. In contrast, the variable-overhead efficiency variance conveys no information about the efficiency with which variable-overhead items were used. 17.6 The fixed overhead budget variance is defined as the difference between actual fixed overhead and budgeted fixed overhead. It is the control variance for fixed overhead. 17.7 Fixed-overhead costs sometimes are called capacity-producing costs because they are the costs incurred in order to generate a place and environment in which production can take place. For example, a common fixed-overhead cost is depreciation, which is the cost of acquiring plant and equipment, allocated across time periods. Thus, depreciation is part of the cost of acquiring and maintaining a place in which production can occur. 17.8 The following graph depicts budgeted and applied fixed overhead and displays a positive volume variance. 17.9 The control purpose of a standard-costing system is to provide benchmarks against which to compare actual costs. Then management by exception is used to follow up on significant variances and take corrective action. The product-costing purpose of the standard-costing system is to determine the cost of producing goods and services. Product costs are needed for a variety of purposes in both managerial and financial accounting. 17.10 Manufacturing overhead is added to Work-in-Process Inventory under standard costing as shown in the following T-accounts: 17.11 Variances are usually “expensed” as a period cost (i.e., charged to Cost of Goods Sold). Variances may also be prorated to accounts according to the standard cost balances in each of the accounts. Hence, a direct-material price variance recorded at the time of purchase would be prorated to Raw-Material Inventory, Direct-Material Quantity Variance, Work-in-Process Inventory, Finished-Goods Inventory and Cost of Goods Sold according to the current-year standard cost balances in each of those accounts. 17.12 In just-in-time manufacturing settings, inventories are minimized. As a result, the accounting system may be simplified by charging all costs directly to Cost of Goods Sold. If inventories exist at the end of the period, a portion of the current-period costs originally charged to Cost of Goods Sold is credited to Cost of Goods Sold and debited back to the respective inventory account(s) as an end-of-period adjustment. 17.13 The sales-volume variance is decomposed into the sales-quantity variance and the sales-mix variance. The sales-quantity variance holds constant the sales-price and sales-mix effects and focuses on the effect of the overall unit sales volume. The sales-mix variance focuses on the effects of changes in the sales mix, while holding constant the effects of the products’ sales prices and the total sales volume. 17.14 Efficiencies can be realized for costs only, not for revenue. 17.15 The market-size variance holds constant the company’s market share at its budgeted level and focuses on changes in total industry volume. 17.16 If a company has two or more products, a mix variance can arise even if the net effect of all variances is zero. It may be useful to learn about the mix variance because if the sales mix is changing, the company may need to change its production or marketing strategies to meet the change in mix. As an example, the U.S. automobile industry was experiencing rising revenue and rising volume but, unfortunately, profits were declining because consumers were purchasing smaller cars that provided lower profit margins to the manufacturers. ANSWERS TO CRITICAL ANALYSIS 17.17 Preparation of the flexible (ex post) budget allows management to compare actual results with the budget that would have been instituted if certain ex ante unknowns had been known. The most significant of these is, typically, volume of activity. By controlling for the difference between ex ante expectations and the ex post volumes, comparisons between actual results and plans is more meaningful. The controllable factors (i.e., costs per unit, efficiency, and so forth) can be isolated and evaluated. 17.18 Flexible overhead budgets are based on an input activity measure, such as machine hours or direct-labor hours, in order to provide a meaningful measure of production activity. An output measure, such as the number of units produced, could be used effectively only in a single-product enterprise. If multiple, heterogeneous products are produced, it would not be meaningful to base the flexible budget on an output measure aggregated across highly different types of products. 17.19 A flexible budget indicates budgeted revenues, costs and profits for virtually all feasible levels of activity. So, managers can use the flexible budget to determine what costs should be assuming different levels of activity. Since changes in volume of production may not be within a particular manager’s control, the flexible budget allows supervisory managers to isolate the effect of changes in volume on the overall costs of a department in question. The flexible budget also separates facility-level (fixed) from unit-level (variable) costs. Generally, fixed costs are less controllable in the short run than variable costs. 17.20 Computer-integrated manufacturing systems have resulted in a shift from variable toward fixed costs. In addition, as automation increases, more and more firms are switching to such measures of activity as machine hours or process time for their flexible overhead budgets. Machine hours and process time are linked more closely than direct-labor hours to the robotic technology and computer-integrated manufacturing systems becoming common in today's manufacturing environment. 17.21 Plausible activity bases for a variety of organizations to use in flexible budgeting are as follows: (a) Insurance company: Insurance policies processed or insurance claims processed. (b) Express delivery service: Number of items of express mail or weight of express mail processed. (c) Restaurant: Number of customers served. (d) State tax-collection agency: Number of tax returns processed. 17.22 Government systems are usually not able to respond to changes in activity levels. For example, an unemployment commission is usually strapped for workers when the unemployment rate rises. By the time the needs are presented to legislators and the needs are met through increased funding, the unemployment rate may well have decreased, leading to over-funding in a subsequent period. In part, this problem is due to the elaborate controls that have been instituted over governmental units. 17.23 An unfavorable variable-overhead spending variance does not imply that the company paid more than the anticipated rate per kilowatt-hour for electricity. An unfavorable spending variance could result from spending more per kilowatt-hour for electricity or from using more electricity than anticipated, or some combination of these two causes. 17.24 A common but misleading interpretation of the fixed-overhead volume variance is that it is a measure of the cost of underutilizing or overutilizing production capacity. For example, when budgeted fixed overhead exceeds applied fixed overhead, the fixed-overhead volume variance is positive. Some people interpret this positive variance to be unfavorable and claim that it is a measure of the cost of not having utilized production capacity to the level that was anticipated. However, this interpretation is misleading, because the real cost of underutilizing capacity lies in the forgone contribution margins from the products that were not produced and sold. 17.25 The fixed-overhead volume variance represents the result of allocating a fixed cost over a different level of activity than was used in computing the allocation rate. Since the cost is fixed, the cash outflows associated with the fixed cost will be unchanged regardless of the amount or direction of the fixed-overhead volume variance. 17.26 The conceptual problem in applying fixed manufacturing overhead as a product cost is that this procedure treats fixed overhead as though it were a variable cost. Fixed overhead is applied as a product cost by multiplying the fixed overhead rate by the standard allowed amount of the cost driver used to apply fixed overhead. For example, fixed overhead might be applied to Work-in-Process Inventory by multiplying the fixed-overhead rate by the standard allowed machine hours. As the number of standard allowed machine hours increases, the amount of fixed overhead applied increases proportionately. This situation is conceptually unappealing, because fixed overhead, although it is a fixed cost, appears variable in the way that it is applied to work in process. 17.27 It is likely that the variance the marketing manager refers to is a revenue variance alone, not a contribution-margin variance. If so, the signal that the marketing manager has received is misleading. Variable costs must be incurred to achieve the higher revenue levels. It would be better to show the budget variance in terms of contribution margins. 17.28 In this situation the company is really selling just one product so a mix variance would not be meaningful. 17.29 In a CPA firm, as in other professional firms, billing rates vary with the level of the professional person performing the services. Hence, a staff accountant’s time is billed at a lower rate than a partner’s time. Even though the volume of hours billed may be the same, if the mix of staff to partner time is different, there will be differences in revenue (and, most likely in profit as well). SOLUTIONS TO EXERCISES 17.30 (15 min) Flexible overhead budget a. Formula flexible budget: Total budgeted monthly electricity cost = ($3.60*  number of patient days) + $1,250 *$3.60 per patient day = 30 kwh per patient day  $.12 per kwh b. Columnar flexible budget: Patient Days 30,000 40,000 50,000 Variable electricity cost $108,000 $144,000 $180,000 Fixed electricity cost 1,250 1,250 1,250 Total electricity cost $109,250 $145,250 $181,250 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 17.31 (45 min) Cost cutting programs Employees are sometimes disinclined to share valuable cost-saving ideas with management. This phenomenon is particularly likely when the employees are suspicious that management will use those ideas to reduce the size of the workforce, to move plants elsewhere, or to train new workers hired in the event of a strike. Management can mitigate against such secretive behavior by demonstrating that the employees can trust them not to use productivity information to act against them. The ethics of this issue are complex. Management has a legal responsibility to shareholders to improve productivity and return on investment, as well as an ethical responsibility to deal in a straightforward manner with employees. Employees have a responsibility to assist management to achieve corporate goals, which implies that they are obliged to be forthcoming with cost-saving ideas. This apparently simple, two-way, ethical relationship is complicated if management does not take seriously its ethical responsibilities to employees. Then, a reasonable employee may argue that he or she is not ethically obliged to divulge some cost-saving idea if it is likely to be used by management to eliminate the employee’s job. 17.32 (20 min) Overhead variances EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 17.33 (40 min) Diagram of overhead variances 17.33 (continued) (b) Fixed-overhead variances: FIXED-OVERHEAD BUDGET AND VOLUME VARIANCES (1) ACTUAL FIXED OVERHEAD (2) BUDGETED FIXED OVERHEAD (3) FIXED OVERHEAD APPLIED TO WORK IN PROCESS Standard Standard Fixed- Allowed  Overhead Hours Rate 40,000 hours  $2.00 per houra $97,000 $100,000 $80,000 $3,000 Favorable $20,000 Unfavorableb Fixed-overhead budget variance Fixed-overhead volume variance aFixed overhead rate = $2.00 per hour = bSome accountants designate a positive volume variance as “unfavorable.” 17.34 (35 min) Graphing overhead variances (a) Graphical analysis of variable-overhead variances*: *The graph is not drawn to scale, in order to make it easier to visualize the overhead variances. 17.34 (continued) (b) Graphical analysis of budgeted versus applied fixed overhead: 17.35 (15 min) Interpretation of variable-overhead efficiency variance Memorandum Date: Today To: I. Makit, Production Supervisor From: I. M. Student, Controller Subject: Variable-overhead efficiency variance The variable-overhead efficiency variance has a misleading name. This variance does not convey any information about the efficiency with which variable overhead items are used, such as electricity, manufacturing supplies, and indirect labor. An unfavorable variable-overhead efficiency variance occurs when there is inefficient usage of the cost driver (or activity base) upon which variable overhead is budgeted. For example, when direct-labor time is the cost driver, the variable-overhead efficiency variance is defined as SR(AH – SH). Thus, the difference between actual direct-labor hours (AH) and standard allowed direct-labor hours (SH) causes the variance. 17.36 (30 min) Non-manufacturing cost variances Incidental office costs comprise the variable costs. Salaries and the fixed office costs are all fixed. Variance analysis for the two classes of overhead is as follows: Variable costs are covered in the first diagram below; fixed costs are covered in the second diagram. Optional: If computed, the fixed-overhead volume variance would be $2,800 (F), as follows: a$3,555 = 79 loans x $45 per loan. b0.5 represents one-half year. 17.37 (25 min) Activity-based flexible budget a. Flexible budgeted amounts, using activity-based flexible budget: (1) Indirect material (thread): $15,000 (2) Utilities (heat): $1,000 (3) Quality assurance: $3,200 [($2,000/10 runs) x 16 runs] (4) Engineering: $4,000 (5) Material handling: $8,000 [($7,200/36,000 sq. meters) x 40,000 sq. meters] (6) Insurance and property taxes: $1,100 b. Variance for setup cost: (1) Using the activity-based flexible budget: $310 F (actual cost minus flexible budget = $4,490 – $4,800*) *$4,800 = [($3,000/10 runs) x 16 runs] (2) Using the conventional flexible budget: $890 U (actual cost minus flexible budget = $4,490 – $3,600) c. Variance for engineering cost: (1) Using the activity-based flexible budget: $540 U (actual cost minus flexible budget = $4,540 - $4,000) (2) Using the conventional flexible budget: $460 F (actual cost minus flexible budget = $4,540 - $5,000) 17.37 (continued) d. Ethical issues: (1) Margrove’s behavior, in trying to pressure the controller into slanting the variance report so that it appears more favorable to Margrove, is unethical. (2) Koala’s controller should resist the pressure from Margrove and use the activity-based flexible budget as the basis for the variance report. The following standards of ethical conduct for practitioners of managerial accounting and financial management are involved. (See the Appendix to Chapter 1.) • Competence: Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information. • Integrity: Communicate unfavorable as well as favorable information and professional judgments or opinions. • Objectivity: Communicate information fairly and objectively. 17.38 (45 min) Governmental budget; activity-based flexible budget; use of internet Students’ answers to this open-ended question will vary widely, depending on the city, state or Canadian province selected. Examples of budgetary items that could be subject to an activity-based costing analysis include the following: • Costs incurred in fire fighting (The cost driver could be number of fires in previous year, number of structures, cubic feet of space in structures, etc.) • Costs incurred in police patrols for traffic-law enforcement (The cost driver could be the miles of road to be patrolled, the number of registered vehicles, etc.) 17.39 (35 min) Standard direct-material costs a. Journal entries and flow of costs through T-accounts: (1) Raw-Material Inventory 65,000 Direct-Material Price Variance 5,000 Accounts Payable 70,000 To record the purchase of raw material at an actual cost of $70,000 and to record the transfer to Raw-Material Inventory at the standard cost of $1.30 per unit. (2) Work-in-Process Inventory 62,400 Raw-Material Inventory 58,500 Direct-Material Quantity Variance 3,900 To record the requisition of 45,000 units of material from Raw-Material Inventory and to charge Work-in-Process Inventory with the standard usage of 48,000 units. (3) Finished-Goods Inventory 49,920 Work-in-Process Inventory 49,920 To record the materials component of the transfer of 80% of the finished units from Work-in-Process to Finished-Goods Inventory. (4) Cost of Goods Sold 29,952 Finished-Goods Inventory 29,952 To record the materials component of the sale of 60% of the finished units. Accounts Payable Raw-Material Inventory Work-in-Process Inventory Finished- Goods Inventory 70,000 –0– 58,500 –0– 49,920 –0– 29,952 65,000 62,400 49,920 6,500 12,480 19,968 Direct-Material Price Variance Direct-Material Quantity Variance Cost of Goods Sold 5,000 3,900 29,952 17-39 (continued) b. Proration of the direct-material price variance: Prorate variances to ending inventories and cost of goods sold: Variances: Material price variance $5,000 U Material quantity variance 3,900 F Prorate variances: Material price variance: Account (1) Cost in Account before Proration (2) Percent of Total Cost (3) Variance to be Prorated (Column 2 x $5,000) Material Inventory $6,500 10 $ 500 U Material Quantity Variance (3,900 )a (6)(300 ) F Work-in-Process Inventory 12,480 19.2 960 U Finished-Goods Inventory 19,968 30.72 1,536 U Cost of Goods Sold 29,952 46.08 2,304 U $65,000 b 100 $5,000 U a$3,900 is a favorable variance. b$65,000 = 50,000 units x $1.30 standard price. Material quantity variance: Account (1) Cost in Account before Proration (2) Percent of Total Cost (3) Variance to be Prorated (Column 2 x $4,200a) Work-in-Process Inventory $13,440 b 20 $ 840 F Finished-Goods Inventory 21,504 c 32 1,344 F Cost of Goods Sold 32,256 d 48 2,016 F $67,200 100 $4,200 F a$4,200 = $3,900 favorable variance before proration plus $300 materials price variance prorated to materials efficiency variance. (The $300 increases the favorable variance). b$13,440 = $12,480 + $960 c$21,504 = $19,968 + $1,536 d$32,256 = $29,952 + $2,304 17.40 (30 min) Standard costing in a just-in-time environment a$65,000 = $1.30 x 50,000 units purchased. (Note: The direct-material price variance is already out of the materials debit to Cost of Goods Sold.) b$6,500 = $1.30 x (50,000 – 45,000) c$3,900 = (48,000 – 45,000) x $1.30 d$5,000 = $70,000 – $65,000 e$12,480 = 20% x (48,000 x $1.30) f$19,968 = 40% x ($62,400 – $12,480) 17.41 (30 min) Standard costing in a just-in-time environment a. See following T-accounts and computations. b. See credit to Standard Cost of Goods Sold for $5,202. 17–41 (continued) Variance calculations: a$39,960 = 14,800 units x 2 units of material x $1.35 b$68,672 = $69,600 x 14,800 actual units/15,000 budgeted units c$148,000 = $10 x 14,800 actual units d$70,472 = $68,672 + $1,800 eAdjustment from Cost of Goods Sold to Finished-Goods Inventory for remaining 300 units: $5,202 = (300 units/14,800 units) x ($39,960 + $68,672 + $148,000) 17.42 (20 min) Sales variances (1) Revenue budget variance: Applying the formula yields the following results: Revenue budget variance = ($8.75)(190,000)($9.00)(200,000) = $137,500 U (2) Sales-price variance: Using this formula, the sales price variance is computed as follows: Sales-price variance = ($8.75$9.00)  190,000 = $47,500 U (3) Revenue sales-volume variance: Applying the formula yields the following results: Revenue sales-volume variance = (190,000200,000)  $9.00 = $90,000 U EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 17.43 (25 min) Sales-mix and sales-quantity variances 17.43 (continued) 17.44 (continued) (3) Contribution-margin market-share variance: Applying the formula yields the following calculation: Contribution-margin market-share variance = 3 real  (.15.20)  120,000 = 18,000 real U 17.45 (30 min) Market-share analysis; internet search Students’ answers to this internet search exercise will vary according to their choice of manufacturer and vehicle type and the year during which the analysis is done. 17.46 (20 min) Sales variance analysis a. (1) Sales price variance: Using this formula, the sales price variance is computed as follows: Sales-price variance = ($47.50$48.00)  125,000 = $62,500 U (2) Revenue sales-volume variance: Applying the formula yields the following results: Revenue sales-volume variance = (125,000150,000)  $48 = $1,200,000 U 17.46 (continued) b. Notice that since there is only a single product, there is no revenue sales-mix variance and the revenue sales-quantity variance then is equal to the revenue sales-volume variance. (Review Exhibit 17-19 in the text.) The exercise asks for the revenue market-size and revenue market-share variances, which are computed next. (1) Revenue market-size variance: Revenue market-size variance = $48  (1,000,0001,500,000) .10 = $2,400,000 U *The weighted-average budgeted unit sales price is equal to the single product’s budgeted unit sales price. (2) Revenue market-share variance: Using this formula, the revenue market-share variance is computed as follows: Revenue market-share variance = $48  (.125.10)  1,000,000 = $1,200,000 F SOLUTIONS TO PROBLEMS 17.47 (40 min) Overhead cost and variance relationships a. Variable-overhead variances: b. Fixed-overhead variances: EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE a$3 = $32,100 flexible budget ÷ 10,700 hours b$22,450 = $54,350 – $31,900 c$22,000 = $22,450 – $450 U budget variance. d$2 = $22,000 ÷ 11,000 hours 17.48 (40 min) Manufacturing variances (£ denotes British pounds sterling) 17.49 (30 min) Overhead variances; journal entries a. Variances: (1) Variable-overhead spending variance = Actual variable overhead – (AH  SVR) = $1,700,000 – (764,000  $2) = $172,000 Unfavorable (2) Variable-overhead efficiency variance = (AH  SVR) – (SH  SVR) = (764,000  $2) – (750,000*  $2) = $28,000 Unfavorable *Standard hours = 250,000 units  3 hours per unit = 750,000 hours, where 3 hours per unit = $6 per unit  $2 per hour (3) Fixed-overhead budget variance = Actual fixed overhead – budgeted fixed overhead = $401,500 – $400,000* = $1,500 Unfavorable *Budgeted fixed overhead = budgeted overhead – budgeted variable overhead = $2,000,000 – (800,000  $2) = $400,000 (4) Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead = $400,000 – (750,000*  $.50†) = $25,000 (positive)** *Standard allowed hours = 250,000 units  3 hours per unit †Predetermined fixed overhead rate = $400,000  800,000 budgeted machine hours = $.50 per machine hour **Consistent with the discussion in the text, some accountants would designate a positive volume variance as "unfavorable" and a negative volume variance as "favorable." 17.49 (continued) b. Manufacturing Overhead 2,101,500* Various Accounts 2,101,500 To record actual manufacturing overhead. *$2,101,500 = $1,700,000 + $401,500 Work-in-Process Inventory 1,875,000† Manufacturing Overhead 1,875,000 To add manufacturing overhead to work in process. †750,000 standard allowed hours  $2.50 per hour = $1,875,000, where $2.50 per hour is the sum of the variable and fixed predetermined overhead rates. Cost of Goods Sold 226,500** Manufacturing Overhead 226,500 To close underapplied overhead into Cost of Goods Sold. **$226,500 = $2,101,500 – $1,875,000 (Also, $226,500 = sum of the four overhead variances.) 17.50 (20 min) Overhead variances b. Interpretation of variances: The interpretation of the variable-overhead spending variance is that a different total amount was spent on variable overhead than should have been spent in accordance with the variable-overhead rate, given the actual level of the cost driver upon which the variable-overhead budget is based. For example, if direct labor hours are used to budget variable overhead, a favorable spending variance means that a smaller total amount was spent on variable overhead than expected, after adjusting for how much actual direct-labor time was used. The spending variance is the control variance for variable overhead. The interpretation of the variable-overhead efficiency variance is related to the efficiency in using the activity upon which variable overhead is budgeted. For example, if the basis for the variable-overhead budget is direct-labor hours, a favorable variable-overhead efficiency variance will result when the standard allowed direct-labor hours exceed the actual direct-labor hours. Thus, the variable-overhead efficiency variance will disclose no information about the efficiency with which variable-overhead items are used. Rather, it results from inefficiency or efficiency, relative to the standards, in the usage of the cost driver (such as direct-labor hours). The fixed overhead budget variance is defined as the difference between actual fixed overhead and budgeted fixed overhead. It is the control variance for fixed overhead. An unfavorable variance means that spending on fixed-overhead was greater than the amount allowed in the budget. 17.51 (20 min) Standard hours allowed; flexible budget; multiple products a. Policy Type Standard Hours per Application Actual Activity Standard Hours Allowed Automobile 1.5 280 420 Renter's 1.0 190 190 Homeowner's 2.0 100 200 Health 2.0 400 800 Life 5.0 200 1,000 Total 2,610 b. The different types of applications require different amounts of clerical time, and variable overhead cost is related to the use of clerical time. Therefore, basing the flexible budget on the number of applications would give a misleading estimate of overhead costs. For example, processing 100 life insurance applications will entail much more overhead cost than processing 100 automobile insurance applications. c. Formula flexible budget: Total budgeted monthly overhead cost = + budgeted fixed- overhead cost per month Total budgeted monthly overhead cost = ($4.00  X) + $2,150 where X denotes total clerical time in hours. d. Budgeted overhead cost for July = ($4.00  2,610) + $2,150 = $12,590 17.52 (30 min) Graphs of budgeted and applied overhead a. The graphs are shown on the next page. On the variable overhead graph, the slope of the line is $8.00 per hour of production time ($8.00 = $80,000  10,000 hours). On the fixed overhead graph, the slope of the applied fixed overhead line is $9.00 per hour of production time ($9.00 = $90,000  10,000 hours). b. Memorandum Date: Today To: C. D. Tune, General Manager of Country time Studios From: I. M. Student Subject: Overhead graphs The variable-overhead graph shows that the flexible-budgeted variable-overhead line and the applied variable-overhead line are the same line. Since this cost really is variable, it is budgeted (for planning and control purposes) and applied (for product costing purposes) at the rate of $8.00 per hour of production time. The fixed-overhead graph shows that the flexible-budgeted fixed-overhead line and the applied fixed-overhead line are two different lines. The flexible-budgeted overhead graph recognizes that fixed overhead does not vary across activity levels measured in production hours. Budgeted fixed overhead is used for planning and control purposes. The applied fixed-overhead graph is used for product costing purposes. Each recording done in the studio is assigned production costs, including fixed overhead at the rate of $9.00 per hour of production time. The $9.00 rate is determined at the budgeted level of activity ($90,000  10,000 hours). The difference between the budgeted and applied fixed-overhead line, at any level of production activity, is called the volume variance. 17.52 (continued) 17.53 (40 min) Variance computations with missing data a. The calculation of the fixed overhead budget amount makes this a challenging problem. aAll footnotes on next page. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 17.53 (continued) a$1.85 = $188,700 102,000 pounds b$13.084 = $140,000 10,700 hours cThere are 20,000 units in the master production budget, computed by dividing total master budget costs by standard unit cost as follows: Direct material: $165,000  ($1.65 x 5 pounds) = $165,000  $8.25 = 20,000 units. Direct labor: $140,000  ($14.00 x .5 hours) = $140,000  $7 = 20,000 units. This means that the master budget variable-overhead amount is $119,000 = $11.90 x .5 hours x 20,000 units. So the fixed-overhead budget is $80,000 = $199,000 – $119,000. d$4 = $80,000 budget / 20,000 units 17.54 (20 min) Analysis of cost reports Three possible changes that could make the cost information more meaningful are: (1) Use a flexible budget rather than a static master budget for measuring performance so that changed conditions, volume changes, and fixed versus variable costs are recognized in the reporting process. (2) Use standard costs. (3) Identify those elements of the report for which the production manager is directly responsible. 17.55 (40 min) Flexible budget; performance report a. Susan Porter recommended that Scholastic Software, Inc. use flexible budgeting in this situation because a flexible budget would allow Mark Fletcher to compare actual selling expenses with budgeted selling expenses (based on current month's actual activity, as reflected in the flexible budget). In general, flexible budgets: • Provide management with the tools to evaluate the effects of varying levels of activity on costs, revenues, and profits. • Enable management to improve planning and decision making. • Improve the analysis of actual results. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 17.55 (continued) b. EDUSOFT, INC. REVISED MONTHLY SELLING EXPENSE REPORT FOR SEPTEMBER Flexible Budget Actual Variance Advertising $1,650,000 $1,660,000 $10,000 (U) Staff salaries 125,000 125,000 Sales salariesa 115,200 115,400 200 (U) Commissionsb 496,000 496,000 Per diem expensec 158,400 162,600 4,200 (U) Office expensesd 366,000 358,400 7,600 (F) Shipping expensese 992,500 976,500 16,000 (F) Total expenses $3,903,100 $3,893,900 $ 9,200 (F) Supporting calculations: aMonthly salary for salesperson $108,000  90 = $1,200. Budgeted amount $1,200  96 = $115,200. bCommission rate $448,000  $11,200,000 = .04. Budgeted amount $12,400,000  .04 = $496,000. c($148,500  90)  15 days = $110 per day. ($110  15)  96 = $158,400. d($4,080,000 – 3,000,000)  54,000 = $20 per order. ($3,000,000  12) + ($20  5,800) = $366,000. e[$6,750,000 – ($3  2,000,000)]  12 = $62,500 monthly fixed expense. $62,500 + ($3  310,000) = $992,500. 17.56 (40 min) Comprehensive variance analysis (1) Calculation of variances:  a$3.75/hour = $20 standard overhead per unit divided by 4 direct labor hours per unit multiplied by 3/4 (proportion of total standard overhead rate, $20, that is variable) b5.00/unit = $20 standard overhead per unit divided by 4 direct labor hours per unit c$1.25/hour = $20 standard overhead per unit divided by 4 direct labor hours per unit multiplied by 1/4 (proportion of total standard overhead rate, $20, that is fixed) 17.56 (continued) (2) Three–way analysis of overhead variances: Although not mentioned in the problem’s requirements, a three-way analysis of overhead variances may be prepared as follows: (3) A good additional question to this problem is: "What additional information would you need to compute all overhead variances?" (Answer: a breakdown of actual overhead into fixed and variable components.) 17.57 (40 min) Overhead variances a. (1) Units produced during May 66,000 Overhead application rate per unit (budgeted overhead per unit at expected level of output)  $6 Applied overhead costs $396,000 (2) Variable-overhead spending variance $ 150 U* (3) Fixed-overhead budget variance 6,000 U (4) Variable-overhead efficiency variance 8,850 F (5) Fixed-overhead volume variance 18,300 F† *U denotes unfavorable; F denotes favorable. †Negative sign. Consistent with the discussion in the chapter, some accountants would designate a negative volume variance as "favorable." Supporting calculations are presented in the following schedule: Variable Overhead Actual Overhead Spending Variance Budgeted Overhead at Actual Hours Efficiency Variance Flexible Budget (Applied Overhead) Indirect material $109,800 $.34 $.34 Indirect labor 76,200 .25 .25 $.59 $.59 Machine hours  315,000  330,000† $186,000 $150 U $185,850 $8,850 F $194,700 Fixed Overhead Actual Overhead Budget Variance Flexible Budget Volume Variance Applied Overhead Supervision $50,100 $54,000 $.18 Utilities 54,400 45,000 .15 Depreciation 84,500 84,000 .28 $.61 Machine hours  330,000 $189,000 $6,000 U $183,000 $18,300* $201,300 *Negative sign (favorable). †330,000 = 5 standard machine hours x 66,000, where 5 = 3,600,000/720,000 17.57 (continued) b. A graphical analysis of the variable-overhead variances appears on the next page. c. The graph differs from the exhibit in the text, because in this case, the efficiency variance is favorable. The example in the text included an unfavorable efficiency variance. 17.58 (45 min) Sales variance analysis EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 17.58 (continued) 17.59 (45 min) Sales variance analysis 17.59 (continued) 17.59 (continued) 17.60 (50 min) Sales variance analysis Big Sky Airlines has only one product, which is passenger miles of air transportation services. That simplifies the sales variance analysis considerably. (1) Contribution-margin budget variance: Applying the formula yields the following results: Contribution-margin budget variance = ($.22)(43,000,000)($.20)(40,000,000) = $1,460,000 F (2) Contribution-margin variance: Applying the formula: Contribution-margin variance = ($.22.20)  43,000,000 = $860,000 F 17.60 (continued) (3) Contribution-margin sales-volume variance: Applying the formula yields the following calculation: Contribution-margin sales-volume variance = (43,000,00040,000,000)  $.20 = $600,000 F (4) Sales-mix and sales-quantity variances: Since the company provides only a single product, there is no sales-mix variance, and the sales-quantity variance is the same as the sales-volume variance, $600,000 F. (5) Contribution-margin market-size variance: Applying the formula: Contribution-margin market-size variance = $.20*  (107,000,000100,000,000)  .40 = $560,000 F *Since there is only one product, the budgeted weighted-average unit contribution margin is equal to the budgeted unit contribution margin. (6) Contribution-margin market-share variance: Applying the formula yields the following calculation: Contribution-margin market-share variance = $.20  [(43/107).40]  107,000,000 = $40,000 F 17.60 (continued) 17.61 (40 min) Sales variance analysis 17.61 (continued) 17.61 (continued) 17.61 (continued) Another way to compute the budgeted weighted-average unit sales price is to weight the three products’ budgeted sales prices by their budgeted sales proportions, as follows: ($1,000)(.25) + ($2,000)(.25) + ($1,500)(.50) = $1,500 Applying the formula yield’s the following result: Revenue market-size variance = $1,500  (38,00040,000)  .10 = $300,000 U (2) Revenue market-share variance: Using this formula, the revenue market-share variance is computed as follows: Revenue market-share variance = $1,500  [(3,900 / 38,000).10]  38,000 = $150,000 F 17.62 (30 min) Commentary on sales variance analysis Memorandum Date: Today To: President, Carolina Carpet Company From: I. M. Student Subject: Sales Variance Analysis I have completed the sales variance analysis as requested, using a revenue perspective for the analysis. A summary of the analysis follows. During March, the company’s actual sales revenue fell short of budgeted sales revenue by $101,000. Of this total revenue shortfall, $51,000 (unfavorable sales-price variance) was due to actual sales prices being different than budgeted sales prices, and $50,000 (unfavorable sales-volume variance) was due to selling a lower quantity than expected. The $50,000 revenue sales-volume variance resulted from two factors: (1) the company sold a lower quantity than expected ($150,000 unfavorable revenue sales-quantity variance), but (2) the sales mix changed in a favorable manner ($100,000 favorable revenue sales-mix variance). We may gain additional insight into the $150,000 unfavorable revenue sales-quantity variance by decomposing it into (1) the revenue market size variance, which was $300,000 unfavorable, and (2) the revenue market-share variance, which was $150,000 favorable. These variances mean that the size of the overall carpet market was smaller in March than anticipated, but our company’s share of that decreased market size was larger than expected. 17.63 (15 min) Sales variance analysis 17.64 (90 MIN) COMPREHENSIVE VARIANCE ANALYSIS FLORIZYL a. Variable costs: 17.64 (continued) REXIDE 17.64 (continued) c. Two-way, three-way and four-way analysis of overhead variances: FLORIZYL 17.64 (continued) FLORIZYL (continued) (3) Four-way variance analysis: REXIDE (1) Two-way variance analysis: (2) Three-way variance analysis: VOH Spending variance = $50,785 – ($25,900 + $26,520) = $1,635 F VOH Efficiency variance = $700 U FOH Volume variance = $2,040 U. (3) Four-way variance analysis:* VOH Spending variance = $1,015 F VOH Efficiency variance = $700 U FOH Budget variance = $620 F FOH Volume variance = $2,040 U *The spending variance in the three-way analysis is split into the VOH spending variance and the FOH budget variance. 17.65 (60 min) Using a flexible budget a. Standard machine hours per unit = = = 5 hours per unit b. Actual cost of direct material per unit = = $57 per unit c. Standard direct-material cost per machine hour = = $11 per machine hour d. Standard direct-labor cost per unit = e. Standard variable-overhead rate per machine hour = = $10.10 per machine hour f. First, continue using the high-low method to determine total budgeted fixed overhead as follows: Total budgeted overhead at 30,000 hours $627,000 Total budgeted variable overhead at 30,000 hours (30,000  $10.10) 303,000 Total budgeted fixed overhead $324,000 The key here is to realize that fixed overhead includes not only insurance and depreciation but also the fixed component of the semivariable-overhead costs (including maintenance, supplies, supervision, and inspection). Now, we can compute the standard fixed-overhead rate per machine hour, as follows: Standard fixed-overhead rate per machine hour = = $10.80 per hour 17.65 (continued) g. First, compute actual variable overhead as follows: Total actual overhead $633,000 Total fixed overhead (given) 330,000 Total variable overhead $303,000 Variable-overhead spending variance = Actual variable overhead – (AH  SVR) = $303,000 – (32,000  $10.10) = $20,200 Favorable h. Variable-overhead efficiency variance = (AH  SVR) – (SH  SVR) = (32,000  $10.10) – (31,000*  $10.10) = $10,100 Unfavorable *Standard allowed machine hours = 6,200 units  5 hours per unit i. Fixed-overhead budget variance = actual fixed overhead – budgeted fixed overhead = $330,000 – $324,000 = $6,000 U j. Fixed-overhead volume variance = budgeted fixed overhead – applied fixed overhead = $324,000 – (31,000  $10.80) = $10,800 (negative sign)* *Consistent with the discussion in the text, some accountants would designate a positive volume variance as "unfavorable" and a negative volume variance as "favorable." k. Flexible budget formula, using the high-low method of cost estimation: Variable cost per machine hour = Total budgeted cost at 30,000 hours $1,464,000 Total variable cost at 30,000 hours (30,000  $38) 1,140,000 Fixed overhead cost $ 324,000 17.65 (continued) Thus, the flexible budget formula is as follows: Total production cost = $38X + $324,000 where X = number of machine hours allowed. Therefore, the total budgeted production cost for 6,050 units is: ($38  30,250*) + $324,000 = $1,473,500 *Standard allowed machine hours = 6,050 units  5 hours per unit 17.66 (75 min) Comprehensive sales variance analysis a. Information for AccuTime’s sales-variance analysis: 17.66 (continued) b. Complete sales-variance analysis from a revenue perspective: (1) Revenue budget variance: Applying the formula yields the following results: B revenue budget variance = ($29)(6,000)  ($30)(4,000) = $54,000 F S revenue budget variance = ($51)(5,400)  ($50)(5,000) = 25,400 F D revenue budget variance = ($88)( 600)  ($90)(1,000) = 37,200 U Revenue budget variance $42,200 F (2) Sales-price variance: Using this formula, the sales price variance is computed as follows: B sales price variance = ($29$30)  6,000 = $6,000 U S sales price variance = ($51$50)  5,400 = 5,400 F D sales price variance = ($88$90)  600 = 1,200 U Sales price variance $1,800 U 17.66 (continued) (3) Revenue sales-volume variance: Applying the formula yields the following results: B revenue sales-volume variance = (6,0004,000)  $30 = $60,000 F S revenue sales-volume variance = (5,4005,000)  $50 = 20,000 F D revenue sales-volume variance = ( 6001,000)  $90 = 36,000 U Revenue sales-volume variance $44,000 F 17.66 (continued) (4) Revenue sales-mix variance: Using this formula, the revenue sales-mix variance is computed as follows: B revenue sales-mix variance = $30  (.50.40)  12,000 = $36,000 F S revenue sales-mix variance = $50  (.45.50)  12,000 = 30,000 U D revenue sales-mix variance = $90  (.05.10)  12,000 = 54,000 U Revenue sales-mix variance $48,000 U (5) Revenue sales-quantity variance: The formula yields the following calculation of the revenue sales-quantity variance. B revenue sales-quantity variance = $30  (12,00010,000)  .40 = $24,000 F S revenue sales-quantity variance = $50  (12,00010,000)  .50 = 50,000 F D revenue sales-quantity variance = $90  (12,00010,000)  .10 = 18,000 F Revenue sales-quantity variance $92,000 F 17.66 (continued) (6) Revenue market-size variance: To apply the formula, we first need to compute the budgeted weighted-average unit sales price. B: ($30)(4,000) = $120,000 S: ($50)(5,000) = 250,000 D: ($90)(1,000) = 90,000 Total budgeted revenue $460,000 Budgeted weighted-average unit sales price = $460,000  10,000 units = $46 Another way to compute the budgeted weighted-average unit sales price is to weight the three products’ budgeted sales prices by their budgeted sales proportions, as follows: ($30)(.40) + ($50)(.50) + ($90)(.10) = $46 Applying the variance formula yields the following result: Revenue market-size variance = $46  (250,000200,000)  .05 = $115,000 F (7) Revenue market-share variance: Using this formula, the revenue market-share variance is computed as follows: Revenue market-share variance = $46  (.048.050)  250,000 = $23,000 U 17.66 (continued) Summary of variance analysis (not required): 17.66 (continued) c. Complete sales variance analysis from a contribution-margin perspective: (1) Contribution-margin budget variance: Applying the variance formula yields the following results: B contribution-margin budget variance = ($15)(6,000)  ($10)(4,000) = $50,000 F S contribution-margin budget variance = ($25)(5,400)  ($20)(5,000) = 35,000 F D contribution-margin budget variance = ($35)( 600)  ($40)(1,000) = 19,000 U Contribution-margin budget variance ………$66,000 F (2) Contribution-margin variance: The formula yields the following results: B contribution-margin variance = ($15$10)  6,000 = $30,000 F S contribution-margin variance = ($25$20)  5,400 = 27,000 F D contribution-margin variance = ($35$40)  600 = 3,000 U Contribution-margin variance $54,000 F 17.66 (continued) (3) Contribution margin sales-volume variance: Using the formula, the contribution-margin sales-volume variance is computed as follows: B contribution-margin sales-volume variance = (6,0004,000)  $10 = $20,000 F S contribution-margin sales-volume variance = (5,4005,000)  $20 = 8,000 F D contribution-margin sales-volume variance = ( 6001,000)  $40 = 16,000 U Contribution-margin sales-volume variance ……….$12,000 F (4) Contribution-margin sales-mix variance: We have the following calculation: B contribution-margin sales-mix variance = $10  (.50.40)  12,000 = $12,000 F S contribution-margin sales-mix variance = $20  (.45.50)  12,000 = 12,000 U D contribution-margin sales-mix variance = $40  (.05.10)  12,000 = 24,000 U Contribution-margin sales-mix variance $24,000 U 17.66 (continued) (5) Contribution-margin sales-quantity variance: The contribution-margin sales-quantity variance is computed as follows: B contribution-margin sales-quantity variance = $10  (12,00010,000)  .40 = $ 8,000 F S contribution-margin sales-quantity variance = $20  (12,00010,000)  .50 = 20,000 F D contribution-margin sales-quantity variance = $40  (12,00010,000)  .10 = 8,000 F Contribution-margin sales-quantity variance $36,000 F (6) Contribution-margin market-size variance: To apply the formula, we first need to compute the budgeted weighted-average unit contribution margin: B: ($10)(4,000) = $ 40,000 S: ($20)(5,000) = 100,000 D: ($40)(1,000) = 40,000 Budgeted total contribution margin $180,000 Budgeted weighted-average unit contribution margin = $180,000  10,000 units = $18 Another way to compute the budgeted weighted-average unit contribution margin is to weight the three products’ budgeted unit contribution margins by their budgeted sales proportions, as follows: ($10)(.40) + ($20)(.50) + ($40)(.10) = $18 17.66 (continued) Using the formula, the contribution-margin market-size variance is calculated as follows: Contribution-margin market-size variance = $18  (250,000200,000)  .05 = $45,000 F (7) Contribution-margin market-share variance: Applying the formula yields the following calculation: Contribution-margin market-share variance = $18  (.048.050)  250,000 = $9,000 U 17.66 (continued) Summary of variance analysis (not required): CONTRIBUTION-MARGIN SALES VARIANCE ANALYSIS: AccuTime SOLUTIONS TO CASES 17.67 (60 min) Comprehensive review of variances; behavioral effects a. (1) Direct-labor rate variance = (AH  AR) – (AH  SR) Labor Type (AH  AR) – (AH  SR) Rate Variance Assembly $30,810 – (3,900  $8) $ 390 F PCB 24,240 – (2,400  $9) 2,640 U RH 36,750 – (3,500  $10) 1,750 U Total direct-labor rate variance $4,000 U (2) Direct-labor efficiency variance = SR(AH – SH) Labor Type SR  (AH – SH)* Rate Variance Assembly $8  (3,900 – 4,400) $4,000 F PCB $9  (2,400 – 2,200) 1,800 U RH $10  (3,500 – 3,300) 2,000 U Total direct-labor efficiency variance $ 200 F *SH = standard hours per output unit  actual output of 2,200 units. 17.67 (continued) (3) Direct-material price variance = (PQ  AP) – (PQ  SP) Since all raw material purchased in May was entered into production in May, in this case PQ is equal to AQ, the actual quantity of material used. Material Type (PQ  AP) – (PQ  SP) Price Variance Housing units $ 44,000 – (2,200  $20) -0- PCBs 75,200 – (4,700  $15) $ 4,700 U RHs 101,200 – (9,200  $10) 9,200 U Total direct-material price variance $13,900 U (4) Direct-material quantity variance = SP(AQ – SQ) Material Type SP  (AQ – SQ) Quantity Variance Housing units $20  (2,200 – 2,200) -0- PCBs 15  (4,700 – 4,400) $4,500 U RHs 10  (9,200 – 8,800) 4,000 U Total direct-material price variance $8,500 U (5) Variable-overhead spending variance = actual variable overhead – (AH  SVR) = $20,460 – (9,800  $2) = $860 U (6) Variable-overhead efficiency variance = SVR (AH – SH) = $2 (9,800 – 9,900) = $200 F (7) Sales-price variance = (actual sales price – expected sales price)  actual sales volume = ($200 — $200)  2,200 = 0 17.67 (continued) 17.67 (continued) b. (1) 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 because equipment downtime has caused them to incur additional overtime costs. • The Assembly Group is dependent on the input of the other production departments. In order 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 used. (2) Jack Rath's report is incomplete since he has not identified the real causes of the unfavorable results and has left management to draw its own conclusions. In addition, Rath 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 view the report as incomplete and unfair. 17.68 (75 min) Comprehensive overview of budgets and variances Note: The following solution is based on a report by former student, Tom Terpstra. Elmo's problem is that he thinks that the graph and the income statement measure the same thing. Otto should have told him that they do not. The income statement presents actual costs in an absorption costing format, while the profit graph is based on standard costs in a variable costing format. These differences account for the difference in the profit measurement. Because the profit graph is based on standard costs, the profit it shows will be the actual profit only in those very rare cases when the variances net out to zero. Racketeer has some significant variances listed on the income statement, so Elmo should expect that the actual profit would differ from the profit on the graph. These variances are: Direct material $490 U Direct labor 392 U Overhead 190 U Selling and administrative 300 F Total $772 U The overhead amount differs from the figure on the income statement, because the income statement overhead variance includes a production volume variance of $470 ($.47 x 1,000). However, that variance does not reflect a difference between actual and budget or standard costs when fixed manufacturing costs are not unitized. The other part of the difference between the two profit figures is explained by the difference in accounting methods. Variable costing expenses fixed costs when they are incurred. With absorption costing, the fixed costs are assigned to the units produced, and then expensed in the period in which the units are sold. Racketeer treats each racket as having a fixed cost of $.47. For the 10,000 rackets sold, the fixed cost expense is $4,700 under absorption costing. Additionally, the production volume variance of $470 is also expensed during this period. Thus, $5,170 in fixed costs (aside from price variances) was deducted from income on the income statement. Under variable costing, the only fixed cost to be expensed is the standard cost for the period of $3,760 (also aside from price variances). So, the use of different accounting methods results in a profit difference of $1,410. (Before Elmo starts to complain about the accountants' use of absorption costing, one should remind him that, in those months when production exceeds sales, the absorption method would expense less fixed costs than variable costing, so it evens out in the long run.) 17.68 (continued) Now the two results can be reconciled: *Elmo stated that he would have expected a profit of nearly $21,000. This exact amount can be deduced as follows: $20,940 = $18,758 + $772 + $1,410 (i.e., actual profit plus the two unfavorable variances). In addition to failing to explain the profit graph, Otto also failed to set up a format to take advantage of the standards he developed. The company should set up a chart showing the actual results, the flexible budget, and the master budget. This would provide information concerning the profit changes in relation to the change in sales volume. Additionally, the manufacturing variances could be analyzed in greater detail, as shown in Exhibits A and B on the following pages. The variance breakdown in Exhibits A and B highlights the areas that Elmo and Otto should research. One area involves the strings. Is the combination of a favorable direct-material price variance and an unfavorable direct-material quantity variance an indicator that low quality string was purchased? Another point for investigation is the apparent waste of 100 racket frames. Is there something in the production process that causes frames to break? Or are the standards unrealistic? A third area is the direct-labor efficiency variances. Why are the skilled workers spending more time than budgeted, while the unskilled are spending less? Finally, the relationship between the direct-labor efficiency and the direct-material quantity variances is worth investigating, because use of substandard materials may result in an unfavorable direct-labor efficiency variance. These are the types of questions that should be raised as a result of this variance analysis. 17.68 (continued) Exhibit A:Comparison of Master Budget to Actual Results Actual Manufacturing Variances Selling and Administrative Cost Variances Sales Price Variance Flexible Budget Volume Variance Master Budget Sales $90,000 –0– –0– $90,000 $18,000 F $72,000 Less: Variable costs: Direct material 37,990 $ 490 U 37,500 7,500 U 30,000 Direct labor 19,392 392 U 19,000 3,800 U 15,200 Overhead 1,440 140 U 1,300 260 U 1,040 Contribution margin 31,178 1,022 U –0– –0– 32,200 6,440 F 25,760 Less: Fixed costs: Manufacturing 3,810 50 U 3,760 3,760 Selling and administrative 7,200 $300 F 7,500 7,500 Operating profit $20,168 $1,072 U $300 F –0– $20,940 $6,440 F $14,500 Notice that the difference between the variable-costing profit of $20,168 (left-most column in table above) and the absorption-costing profit of $18,758 (see Exhibit C in the case) is $1,410. This $1,410 amount may also be explained as follows: $1,410 = 3,000 units x $.47 per unit, where 3,000 units is the decrease in inventory during March (sales of 10,000 units minus production of 7,000 units), and $.47 per unit is the fixed overhead per unit ($.12 + $.20 + $.15 as shown in Exhibit B in the case). 17.68 (continued) Exhibit B:Manufacturing Cost Variances Note: In the following display, the term price variance is used generically to refer to the direct-material price variance, direct-labor rate variance, or fixed-overhead budget variance. Also, the term efficiency variance is used generically to refer to the direct-material quantity variance or direct-labor efficiency variance. Solution Manual for Cost Management: Strategies for Business Decisions Ronald W. Hilton, Michael W. Maher, Frank H. Selto 9780073526805, 9780072430332, 9780072830088, 9780072299021, 9780072881820, 9780072882551, 9780070874664, 9780072388404, 9780072343533