10a ACCT2112 Week 10 TUTE Chapter 7 Q & S PDF

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ACCT2112 Week 10 TUTE Chapter 7 Q & S 7-21 Flexible budget. Brabham Enterprises manufactures tires for the Formula I motor racing circuit. For August 2017, it budgeted to manufacture and sell 3,000 tires at a variable cost of $74 per tire and total fixed costs of $54,000. The budgeted selling price was $110 per tire. Actual results in August 2017 were 2,800 tires manufactured and sold at a selling price of $112 per tire. The actual total variable costs were $229,600, and the actual total fixed costs were $50,000. Required: 1. Prepare a performance report (akin to Exhibit 7-2, page274) that uses a flexible budget and a static budget. 2. Comment on the results in requirement 1. SOLUTION 1. Flexible budget. Variance Analysis for Brabham Enterprises for August 2017 FlexibleBudget Variances (2) = (1) – (3)

Actual Results (1) Units (tires) sold Revenues Variable costs Contribution margin Fixed costs Operating income

2,800g

0

$313,600a

$ 5,600 F

229,600d

22,400 U

84,000

16,800 U

50,000g

4,000 F

$ 34,000

$12,800 U

Flexible Budget (3) 2,800

SalesVolume Variances (4) = (3) – (5) 200 U

Static Budget (5) 3,000g

$308,000b $22,000 U 14,800 F 207,200e 7,200 U 100,800

222,000f

54,000g $ 46,800

54,000g $ 54,000

0 $ 7,200 U

$330,000c

108,000

$12,800 U $ 7,200 U Total flexible-budget variance $20,000 U Total static-budget variance a

112 × 2,800 = $313,600 $110 × 2,800 = $308,000 c $110 × 3,000 = $330,000 d Given. Unit variable cost = $229,600 ÷ 2,800 = $82 per tire e $74 × 2,800 = $207,200 f $74 × 3,000 = $222,000 g Given b

1

2.

The key information items are: Units Unit selling price Unit variable cost Fixed costs

Actual 2,800 $ 112 $ 82 $50,000

Budgeted 3,000 $ 110 $ 74 $54,000

The total static-budget variance in operating income is $20,000 U. There is both an unfavorable total flexible-budget variance ($12,800) and an unfavorable sales-volume variance ($7,200). The unfavorable sales-volume variance arises solely because actual units manufactured and sold were 200 less than the budgeted 3,000 units. The unfavorable flexible-budget variance of $12,800 in operating income is due primarily to the $8 increase in unit variable costs. This increase in unit variable costs is only partially offset by the $2 increase in unit selling price and the $4,000 decrease in fixed costs.

7-25 Flexible-budget and sales volume variances. Luster, Inc., produces the basic fillings used in many popular frozen desserts and treats—vanilla and chocolate ice creams, puddings, meringues, and fudge. Luster uses standard costing and carries over no inventory from one month to the next. The ice-cream product group’s results for June 2017 were as follows:

Sam Adler, the business manager for ice-cream products, is pleased that more pounds of ice cream were sold than budgeted and that revenues were up. Unfortunately, variable manufacturing costs went up, too. The bottom line is that contribution margin declined by $63,000, which is less than 3% of the budgeted revenues of $1,976,500. Overall, Adler feels that the business is running fine. Required: 1. Calculate the static-budget variance in units, revenues, variable manufacturing costs, and contribution margin. What percentage is each static-budget variance relative to its static-budget amount? 2. Break down each static-budget variance into a flexible-budget variance and a salesvolume variance. 3. Calculate the selling-price variance. 2

4. Assume the role of management accountant at Luster. How would you present the results to Sam Adler? Should he be more concerned? If so, why?

3

SOLUTION Flexible budget and sales volume variances, market-share and market-size variances.

1. and 2. Performance Report for Luster, Inc., June 2017

Units (pounds) Revenues Variable mfg. costs Contribution margin

Actual (1) 350,000 $2,012,500 1,137,500 $875,000

Flexible Budget Variances (2) = (1) – (3) 0 $ 52,500 U 52,500 U $ 105,000 U

Flexible Budget (3) 350,000 $2,065,000a 1,085,000b $ 980,000

$105,000 U Flexible-budget variance

Sales Volume Variances (4) = (3) – (5) 15,000 F $88,500 F 46,500 U $ 42,000 F

$ 42,000 F Sales-volume variance

$63,000 U Static-budget variance a

Budgeted selling price = $1,976,500 ÷ 335,000 lbs = $5.90 per lb. Flexible-budget revenues = $5.90 per lb. × 350,000 lbs. = $2,065,000

b

Static Budget (5) 335,000 $1,976,500 1,038,500 $938,000

Budgeted variable mfg. cost per unit = $1,038,500 ÷ 335,000 lbs. = $3.10 Flexible-budget variable mfg. costs = $3.10 per lb. × 350,000 lbs. = $1,085,000

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Static Budget Variance (6) = (1) – (5) 15,000 F $36,000 F 99,000 U $ 63,000 U

Static Budget Variance as % of Static Budget (7) = (6) (5) 4.48% 1.82% 9.53% 6.72%

3. The selling price variance, caused solely by the difference in actual and budgeted selling price, is the flexible-budget variance in revenues = $52,500 U. 4. The flexible-budget variances show that for the actual sales volume of 350,000 pounds, selling prices were lower and costs per pound were higher. The favorable sales volume variance in revenues (because more pounds of ice cream were sold than budgeted) helped offset the unfavorable variable cost variance and shored up the results in June 2014.Adler should be more concerned because the static-budget variance in contribution margin of $63,000 U is actually made up of a favorable sales-volume variance in contribution margin of $42,000, an unfavorable selling-price variance of $52,500 and an unfavorable variable manufacturing costs variance of $52,500. Adler should analyze why each of these variances occurred and the relationships among them. Could the efficiency of variable manufacturing costs be improved? The sales volume appears to have increased due to the lower average selling price per pound.

7-34 Flexible budget, direct materials, and direct manufacturing labor variances. Milan Statuary manufactures bust statues of famous historical figures. All statues are the same size. Each unit requires the same amount of resources. The following information is from the static budget for 2017: Expected production and sales 6,100 units Expected selling price per unit $ 700 Total fixed costs $1,350,000 Standard quantities, standard prices, and standard unit costs follow for direct materials and direct manufacturing labor: Standard Quantity Standard Price Direct materials 16 pounds $14 per pound Direct manufacturing labor 3.8 hours $ 30 per hour

Standard Unit Cost $224 $114

During 2017, actual number of units produced and sold was 5,100, at an average selling price of $730. Actual cost of direct materials used was $1,149,400, based on 70,000 pounds purchased at $16.42 per pound. Direct manufacturing labor-hours actually used were 17,000, at the rate of $33.70 per hour. As a result, actual direct manufacturing labor costs were $572,900. Actual fixed costs were $1,200,000. There were no beginning or ending inventories. Required: 1. Calculate the sales-volume variance and flexible-budget variance for operating income. 2. Compute price and efficiency variances for direct materials and direct manufacturing labor.

5

SOLUTION Flexible budget, direct materials and direct manufacturing labor variances. 1. Variance Analysis for Milan Statuary for 2014 FlexibleSalesActual Budget Flexible Volume Results Variances Budget Variances

Units sold Revenues Direct materials Direct manufacturing labor Fixed costs 1,350,000a Total costs $3,411,800 Operating income 858,200

(1) (2) = (1) – (3) (3) 5,100a 0 5,100 $3,723,000b $153,000 F $3,570,000c $1,149,400 $ 7,000 U $1,142,400e 572,900a 8,500 F 581,400g 1,200,000a 150,000 F 1,350,000a

(4) = (3) – (5) (5) 1,000 U 6,100a $700,000 U $4,270,000d $224,000 F $1,366,400f 114,000 F 695,400h 0

$2,922,300

$151,500 F $3,073,800

$338,000 F

$ 800,700

$304,500 F $ 496,200

$362,000 U

$304,500 F

$362,000 U

Flexible-budget variance Sales-volume variance $57,500 U Static-budget variance a

Given $730/unit × 5,100 units = $3,723,000 c $700/unit × 5,100 units = $3,570,000 d $700/unit × 6,100 units = $4,270,000 e $224/unit × 5,100 units = $1,142,400 f $224/unit × 6,100 units = $1,366,400 g $114/unit × 5,100 units = $581,400 h $114/unit × 6,100 units = $695,400 b

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Static Budget

$

2. Actual Incurred (Actual Input Qty × Actual Price) $1,149,400a

Direct materials

Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) $1,142,400c

Actual Input Qty. × Budgeted Price $980,000b

$169,400 U

$162,400 F

Price variance

Efficiency variance $7,000 U Flexible-budget variance

Direct manufacturing labor

$572,900d

$510,000e $62,900 U

$581,400f $71,400 F

Price variance

Efficiency variance $8,500 F Flexible-budget variance

a

70,000 pounds × $16.42/pound = $1,149,400 70,000 pounds × $14/pound = $980,000 c 5,100 statues × 16 pounds/statue × $14/pound = 81,600 pounds × $14/pound = $1,142,400 d 17,000 hours × $33.70/hour = $572,900 e 17,000 hours × $30/hour = $510,000 f 5,100 statues × 3.8 hours/statue × $30/hour = 19,380 hours × $30/hour = $581,400 b

7-37 Possible causes for price and efficiency variances. You have been invited to interview for an internship with an international food manufacturing company. When you arrive for the interview, you are given the following information related to a fictitious Belgian chocolatier for the month of June. The chocolatier manufactures truffles in 12-piece boxes. The production is labor intensive, and the delicate nature of the chocolate requires a high degree of skill. Actual Boxes produced Direct materials used in production Actual direct material cost Actual direct manufacturing labor-hours Actual direct manufacturing labor cost Standards Purchase price of direct materials Materials per box Wage rate Boxes per hour

12000 2,640,00 g 0 72,500 euro 1300 15,360 euro

0.029 euro/g 200 g 13 Euro/hr. 10

Please respond to the following questions as if you were in an interview situation: 7

Required: 1. Calculate the materials efficiency and price variance and the wage and labor efficiency variances for the month of June. 2. Discuss some possible causes of the variances you have calculated. Can you make any possible connection between the material and labor variances? What recommendations do you have for future improvement? SOLUTION Possible causes for price and efficiency variances 1. Actual Costs Incurred (Actual Input Qty. × Actual Price) (1) Direct Materials

€ 72,500

Actual Input Qty. × Budgeted Price (2) (2,640,000 × € 0.029) € 76,560

€ 4,060 F Price variance Direct Manufacturing Labor

€ 6,960 U Efficiency variance (1,300 × € 13) € 16,900

€ 15,360

€ 1540 F Price variance

2.

Flexible Budget (Budgeted Input Qty. Allowed for Actual Output × Budgeted Price) (3) (12,000 × 200 × € .029) € 69,600

(12,000 × (1/10) × € 13) € 15,600

€ 1,300 U Efficiency variance

The favorable materials price variance, paired with the unfavorable materials efficiency variance could be an indication that the company purchased less expensive ingredients, but at the cost of lower quality. Lower quality ingredients may have resulted in a higher than standard number of rejected units. That theory is supported by the unfavorable labor efficiency variance, as rejects cause both an unfavorable materials efficiency and unfavorable labor efficiency variance. The favorable labor price variance suggests that less experienced workers may have worked more hours than more experienced workers. Those workers would have probably worked slower, and their lack of experience may have caused higher than normal rejects or waste. The company should look at the number of rejected units, and if they are indeed abnormal, determine the cause of the rejects. Is it because of faulty materials, underskilled workers, or a combination of both? Perhaps additional training will help. If rejects are not the problem, employees may be wasting both time and materials.

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