Chap 013

CHAPTE CHAPTER R 13 THE FLEXIB FLEXIBLE LE BUDGE BUDGET T AND STAN STANDAR DARD D COSTING: DIRECT MATERIALS AND DIRECT LABOR QUESTIONS 13-1

The firm earned $5 million while the master budget planned for the firm to earn $7.5 million operating income last year. The member of the operating review committee was correct in concluding that the firm was not effective; it failed to attain the operating income goal set for the period. The committ committee ee member member,, howeve however, r, erred erred in saying saying that the operation operation was ineffici inefficient. ent. The firm earned $5 million million operating income from from 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. The firm was efficient overall in carrying out its operations.

13.2 Yes. A standard cost system can be used with an actual cost system; it compliments

the cost system that a firm uses in tracking costs, including job order costing and process costing. 13-3

Yes. An effective operation attains the goal set for the operation while an efficient operati operation on carries carries out the operation operation withou withoutt wastin wasting g any of the resources. resources. An operation can achieve its goals even though it wasted resources in attaining the goal. goal. An operati operation on can be effic efficien ientt in using using resource resources s in operati operations ons withou withoutt achieving the goal it sets out to attain.

13-4 A standard is the cost a firm expects expects to incur for an operation. operation. The operation can

be an activity or a period. A budget includes planned actions for a period or a project and their expected results. Standard costs are stated on per unit bases and often are the building blocks for budgets. 13-5 A master budget differs from a flexible budget in that a master budget is for a

specific level of operations, while a flexible budget can be prepared for any level of operations within the relevant operation range. A flexible budget can consist of several budgets, one for each specific level of the operations such as sales or other measures of activity. They also can differ in the times of preparations and the the level levels s of deta detailils s of the the budget budget.. A mast master er budget budget is prepa prepared red befo before re the the beginning of a budget period while a flexible budget may be prepared before, during, or after the budget period. The scopes of budgets often also differ. A flexible budget often focuses on selected aspects of the operation and is at a detailed level while a master budget covers all aspects of operation and is less detailed than those of a flexible budget.

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Flexible budgets can reflect changes in factors that have effects on operations including changes in inflation rates and activity levels.

13-7

Prime costs are direct materials and direct labor. These costs are variable variable costs. As the operation level decreases, the amounts of direct materials and direct labor also decrease more or less in proportion to the decrease in output. At the 80 percent level of the budgeted output, the total prime cost should have been $64,000 ($80,000 x .8). Barring changes in other operating factors, the plant manager was not efficient when the manager spent $72,000 to operate at 80% level of the budgeted production.

13-8

Of the three, three, standards s tandards based on the average average of recent recent histo historic rical al performan performance ce 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 and not frustrating to workers. However, world-class firms or firms stressing continuous improvements often choose to use standards based on ideal performance.

13-9

Underlying causes of direct labor rate and efficiency variances may differ, have different implications, and require different corrective actions. Knowing the causes of cost variances facilitates proper assessments of the operation and effective responses.

13-10 Altho Although ugh the total total materia materials ls cost cost varianc variance e is small small and insign insignif ifica icant, nt, the total total

variance variance can be a result of substantial substantial price and efficiency efficiency variances variances in opposite directions. Management needs to know more specifically efficiencies in purchases and in uses of the materials in its operations in order to evaluate the efficiency of the two separate functions relating to materials. 13-11 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 Overtime premium are factory overheads, not direct labor costs. The higher wages

paid paid due to overt overtim ime e premi premium um shou should ld not not have have any any effe effect ct on dire direct ct labor labor varianc variances. es. For firms firms that that includ include e overti overtime me premium premium in the total wages, wages, rate rate variances are likely to be unfavorable.

Blocher, Chen, Cokins, Lin: Cost Managemen, 3e

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©The McGraw-Hill Companies, Inc., 2005

13-13 The performance of a division should should not be considered considered as less than satisfactory satisfactory

simp simply ly becau because se all all varia varianc nces es are unfa unfavo vora rable ble.. A firm firm expe expects cts unfa unfavo vorab rable le variances if it uses an ideal performance standard. As long as the firm is making satisfactory progresses toward the standard, unfavorable variances are measures of progresses needed to attain the goal; they are not measures of unsatisfactory performances. On the othe otherr hand hand,, an unf unfavor avorab able le vari varian ance ce may may sig signal nal that hat the performance of the division is below the expectation if the firm uses a currently attainable attainable standard. Firms with currently attainable attainable standards expect the division division to meet the goals in each and every operation. 13-14 Of the four scenarios, 4 is the best answer. The manufacturing cost of all units

manufactured since the strike should be based on the new labor rates. 13-15 The best answer among the choices is 3. A favorable materials purchase variance

sugges suggests ts that that the the firm firm paid paid a lowe lowerr actua actuall cost cost of mate materia rials ls than than the the price prices s specified in the standard cost sheet for the materials. The firm also used more than the quantity of materials specified in the standard cost sheet for the units manufactured. 13-16 JIT firms emphasize the total cost of operations, not just materials purchase costs.

The The impo importa rtanc nce e of such such facto factors rs as qual qualit ity, y, relia reliabi bilility ty,, and and avai availa labi bilility ty ofte often n outweighs the 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. 13-17 One result of the new technologies is the decreased importance of direct labor

variances. The utmost concerns of firms using the new manufacturing technology are satisfying customers and providing better products than the competitor. A well-managed firm is not the one with the lowest unfavorable variances or the highes highestt favora favorable ble varian variances. ces. Rather, Rather, it is the one with with happy happy custome customers rs and consistently better products. 13-18 Establishin Establishing g a standard standard cost system system and identifying identifying variances from the standard

are steps in gaining a better understanding of the operations and to improve the opera operati tion ons. s. The The focu focus s of a stan standa dard rd cost cost syste system m shou should ld be on infl influe uenc ncin ing g behavior with positive reinforcements and motivations. Standard costing systems should never never be used as the whipping whipping boy. Seldom is long-term success a result of penalties and punishments. A positive perception about the standards and variance identifications by all affected workers are a must for the success of the system. Secrecy in setting standar standards, ds, authori authoritari tarian an contro controll procedure procedures, s, poor poor commun communica icatio tion, n, excessi excessive ve pressure, inflexibility, uneven reward systems, or excessive emphasis on profits can make a good standard cost system a failure. 13-19 The normal year-end treatment of immaterial variances is to close the entire

variance to cost of goods sold of the period. Solutions Manual

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1. The major advantages of using a standard cost accounting system include the following: • Budgeting . Standard Standard costs can be the building building blocks for budget preparations preparations and allow the development of flexible budgets. Performance evaluation evaluation. By compari comparing ng actual actual costs costs to standa standard rd costs, costs, the • Performance performance of the company, a department, or an individual can be evaluated. • Controlling . An analysis analysis of the the variances variances between actual actual costs and standard standard costs can identify problem areas and allow for remedial action. • Pricing . Standar Standard d costs costs based based on careful carefully ly determi determined ned materia materials ls and labor labor usage plus overhead rates based on normal activity levels levels form an acceptable acceptable basis for pricing strategies that provide for full recovery of all costs. • Record keeping cost and effort . Standard costs reduce the effort required to perform cost accounting and, thus, reduce the cost of bookkeeping. 2.

The settin setting g of physica physicall standar standards ds such as materia materials ls quantiti quantities, es, labor labor hours, 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 informatio information n to convert convert the physical standards standards into monetary monetary terms. In addition, a firm’s cost must be separable into cost per unit of production or hour of service, and the production process must be fairly stable and predictable.

3 a. Beca Becaus use e cash cash maxi maximi miza zati tion on is impor importa tant nt for for a prod produc uctt clas classi sifi fied ed as a cash cash cow, efficiency of operations is essential. Standard cost will provide targets for moni monito tori ring ng cost costs s and and iden identi tifi fica cati tion on of inef ineffi fici cien enci cies es so that that they they can 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. 13-21 One of the functions of making journal entries is to provide management timely

information for monitoring operations and controlling activities and costs. These functions can be most effectively attained if entries, including those of variances, are post posted ed to the the ledge ledgers rs as soon soon as they they are know known n and and made made avai availa labl ble e immediately to the operating managers.


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13-22 This question 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 curre current nt cost cost fiel fields. ds. This This allo allows ws us to have have a base base line line (the (the stan standa dard) rd) as a measure measuremen mentt of improv improveme ement. nt. In the finan financia ciall statem statement ents, s, the change changes s are reflected in ‘Methods Change Account’ (bill of material change or routing change), price price varianc variance e (raw (raw materi material al price price change change), ), or overhea overhead d absorpti absorption on varianc variance e (actual direct center spending differs from the annual operating plan overhead rate multiplied by earned hours), along with labor efficiency. If 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.”

Solutions Manual

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EXERCISES 13-23 Review Problem: Flexible Budget And Variances (10 min)

1. Flexible budget budget for June at 90 percent percent of the the budget budget level level Units sold Sales Variable expense Contribution margin Fixed expenses Operating income 2.

900 $720,000 405,000 $315,000 150,000 $165,000

a. Operatin ating g in income ome sales les volum lume vari arianc ance: $165,000 - $200,000 = $35,000 U b. Contribution Contribution margin sales volume variance: variance: $315,000 - $350,000 = $35,000 U 3.

Contribution Margin Income Statement For the Month of June

Sales (900 x $840) Total variable expenses Contribution margin Fixed expenses Operating income a.

$756,000 414,000 $342,000 180,000 $162,000

Opera perati tin ng inc income ome fle flexi xibl ble e bud budg get vari varian ance ce:: $162,000 - $165,000 = $3,000 U

b.

Contr ontrib ibut utio ion n marg margin in fle flexi xibl ble e budg budge et vari varia ance nce: $342,000 - $315,000 = $27,000 F c. Selling price variance: variance:

($840 - $800) $800) x 900 = $36,000 $36,000 F Or

$756,000 - $720,000 = $36,000 F


13- 6


13-24 Flexible Flexible budget budget and Variances Variances (10 minut minutes) es)

1.

a.

Budget da data: Selling price Variable cost

$48,000 ) 12,0 12,000 00 = $4.0 4.00 per per uni unitt $18,000 ) 12,0 12,000 00 = $1.50 1.50 per per uni unitt

Flexible budget fo for 15 15,000 units Sales 15,000 x $4.00 = Variable costs 15,000 x $1.50 = Contribution margin Fixed costs Operating income

$60,000 22,500 $37,500 16,000 $21,500

b. Contribution Contribution margin margin earned earned for the the period: $64,000 - $24,000 = Flexible budget contribution margin Contribution margin flexible budget variance

$40,000 37,500 $ 2,500 F

c. Operatin Operating g income income flexible flexible budget budget variance variance:: $25, $25,00 000 0 - $21,5 $21,500 00 =

$3,5 $3,500 00 F

d. Contribution Contribution margin sales volume variance: variance: $37,500 $37,500 – ($48,0 ($48,000 00 - $18,00 $18,000) 0) = e. Operatin Operating g income income sales volume volume varianc variance: e: $21,500 $21,500 – ($48,00 ($48,000 0 - $18,00 $18,000 0 - $16,00 $16,000) 0) =

$7,500 $7,500 F $7,500 $7,500 F

2. As long as both both the budget budgeted ed and the actual actual opera operatio tions ns are with within in the the same same rele relevan vantt rang range, e, the the flexib flexible le budg budget et for for the the actua actuall oper operati ating ng leve levell and and the the maste masterr budg budget et will will have have the the same total fixed costs. Since both flexible budget and master budget subtra tracted ted the same total fixed costs fro from the cont contrib ributi ution on marg margin in to arrive arrive at the the oper operati ating ng incom income, e, the the contribu contribution tion margin margin and the operat operating ing income income sales sales volume volume variance will be identical. 3. The The actual actual fixed fixed cost costs s for for a period period is likel likely y to diffe differr from from the the budg budget eted ed amoun amount. t. As a resul result, t, the the diffe differe renc nce e betw betwee een n the the actual contribution margin and the flexible budget contribution marg margin in of the the peri period od is like likely ly to diff differ er from from the the diff differ eren ence ce between the operating income earned and the flexible budget operating income for the same period. Solutions Manual

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13-25

1.

Sales Volume Variance (10 min)

Flexible Sales Budg Budget et Flex Flexibl ible e Volum Volume e Actual Variance Budget Variance 3,800 -03,800

Units

Sales Variable costs: Manufacturing Selling & Admin. Total variable costs Contribution margin Fixed costs: Manufacturing Selling & Admin. Total fixed costs Operating income

Mast Master er Budget 200 U

4,000

$53,200

$3,800 U $57,000

1

$3,000 U $60,000

$19,000 7,700 $26,700 $26,500

$3,800 U $15,200 100 U 7,600 $3,900 U $22,800 $7,700 U $34,200

2

$800 400 1,200 $1,800

$16,000 10,000 $26,000 $ 500

$1,000 U $15,000 1,000 U 9,000 $2,000 U $24,000 $9,700 U $10,200

3

F $16,000 F 8,000 F $24,000 U $36,000

$15,000 9,000 - 0 - $24,000 $1,800 U $12,000

1

Budget selling price per unit x number of units = ($60,000/4,000) x 3,800 = $15 per unit x 3,800 = $57,000

2

Standard variable manufacturing cost per unit x number of units = ($16,000/4,000) x 3,800 = $4 Variable manufacturing cost per unit x 3,800 = $15,200

3

Stan Standa dard rd variab variable le selli selling ng and and admin administ istrat rative ive expe expens nse e per per unit unit x number of units = ($8,000/4,000) x 3,800 = $2 per unit x 3,800 = $7,600

Sales volume variances Contribution margin: Operatin Operating g income income:: Flexible budget variances Contribution margin: Operatin Operating g income income::

$34,200 - $36,000 = $10,20 $10,200 0 - $12,00 $12,000 0=

$1,800 U $1,800 $1,800 U

$26,500 - $34,200 = $500 $500 - $10,20 $10,200 0=

$7,700 U $9,700 $9,700 U


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13-25 (continued) (continued)

2. The firm reduced its selling price (from $15 per unit to $14 per unit) to compete in the market, suggesting that the firm has cost leadership, not differe differentia ntiation tion,, as its competi competitive tive strate strategy gy for the product product.. Howeve However, r, it failed to exercise proper control of its operating costs, as indicated by unfavorable variances for manufacturing and selling and administrative costs. The excess costs reduced the flexible budget operating income of the period by 95 percent. Unless the firm can have its costs under control, it will not be successful to compete as a cost leader or low cost producer. The firm has unfavorable selling price and sales volume variances. Even Even thou though gh the the firm firm reduc reduced ed its selli selling ng price prices, s, it faile failed d to atta attain in the the budge budgete ted d sales sales volum volume. e. The The stra strateg tegy y of comp compet eting ing thro through ugh reduc reduced ed selling prices to gain sales failed. 3. Spreadsheets should have the following results for 3,800 and 4,100 units: A B C D Master 1 Flexible Budget Budget Equation 2 Un Units 3 Sales

3,800

4,100

4,000

$57,000 $61,500 $60,000 =D3 ÷ D2xB2

or

$15,200 $16,400 $16,000

=D5 ÷ D2xB2

or

8,000 =D6 ÷ D2xB2

or

C2 4 Vari Variab able le costs osts:: 5

Manufacturing

C2 6

Selling & Admin.

7,600

8,200

C2 7 Total variable costs $22,800 $24,600 $24,000 =B5+B6; C5+C6 8 Contribution ion margin rgin $34,200 $36,900 $36,000 =B3-B7; C3-C7 -C7 9 Fixe ixed co costs: ts: 10

Manufacturing

11

Selling & Admin.

$15,000 $15,000 $15,000 = D10 9,000

9,000

9,000 = D11

12 Total fixed costs

$24,000 $24,000 $24,000 =B10+B11;

13 Operating income

$10,200 $12,900 $12,000 =B8-B12;

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C12


13- 10 ©The McGraw-Hill Companies, Inc., 2005

13-26 Review Problem: Problem: Direct Materials And Direct Labor Variances (10 (1 0 min)

1. Price variance – Aluminum: Total Aluminum purchased: 3,375 + 25 – 50 = 3,350 pounds Price variance : ($30 - $25) x 3,350 = $16,750 U Usage variance – Aluminum: Total standard aluminum for the units manufactured: 900 units x 4 pounds per unit = 3,600 pounds Usage variance: (3,375 – 3,600) x $25 = $5,625 F 2. Direct labor labor rate variance variance:: ($42 - $40) x 4,200 4,200 = $8,400 $8,400 U Direct labor efficiency variance: Total standard direct labor hours for the units manufactured: 900 x 5 hours = 4,500 hours Direct labor efficiency variance: (4,200 – 4,500) x $40 = $12,000 F

Solutions Manual

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13-27 Review Problem: Journal Entry (5 min)

Oct. 7 Materials Inventory (720 X $40)

28,800

Materials Purchase Price Variance-PVC (720 X $1)

Accoun Accounts ts Payabl Payable e (720 (720 X $41)

720 29,520 29,520

Purchased 720 pounds PVC from TVC Chemical Inc. at $41 per pound. Standard price: $40 per pound. Oct. 9 Work-in-Process Inventory

31,200

Materials Usage Variance-PVC

2,400

Materials Inventory (720 X $40)

28,800

Issued 720 pounds of PVC to production for the production of 780 units of XV-1. Standard usage is 1 pound per unit of XV-1 at $40 per pound.



13-28Materials Purchase Price (5 min)

2,000 x AP

2,000 x $5.00

$200 F Price Variance 1,800 x $5.00

1,600 x $5.00

Usage Variance ? 1.

Dire Direct ct mater material ials s price price varian variance ce = (AP (AP - SP) SP) x AQ - $200 = (AP (AP - $5.00) .00) x 2,000 ,000 - $200/2, /2,000

2.

= AP - $5.00

AP

= $5.00 - $0.10

AP

= $4.90

Dire Direct ct mater material ials s usa usage ge varia varianc nce e = (AQ (AQ - SQ) SQ) x SP SP = (1,800 - 1,600) x $5.00 = $1,000 U

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13-29 Materials Price Variance (5 min)

30,000 x AP = $90,000

30,000 x $3.25 = $97,500

Price Variance? 28,000 x $3.25

SQ x $3.25

$6,500 U Usage Variance 1. Price per per pound paid to to purchase purchase direct direct materials: materials: $90,000 ÷ 30,000 units = $3.00 per unit 2. Total actual cost of direct materials purchased

$90,000

Total dire irect mater terial ials purc urchased (pound unds) Stan Standa dard rd cost cost per per poun pound d of dire direct ct mate materia rials ls

30,000 x

3.25 .25

Total standard cost of direct materials purchased Direct materials price variance

97,500 $ 7,500 F

3. Total direct direct materials materials used used at standar standard d cost per per pound 28,000 x $3.25 = Less: unfavorable direct materials usage variance

$91,000 -

Total standard direct materials cost for the units manufactured Standard cost per unit of direct materials Total standard quantity of direct materials for the units its Manufactured


6,500 $84,500

÷

$3.25 26,000


13-30Materials Price Variance (5 min)

AQ X AP

AQ x SP Price Variance = $220,000 60,000 x SP

54,000 x SP

$24,000 U Usage Variance Sales volume variances Contribution margin: Operatin Operating g income income:: 1.

$34,200 - $36,000 = $10,20 $10,200 0 - $12,00 $12,000 0=

$1,800 U $1,800 $1,800 U

Stan Stand dard ard unit unit pric price e of of dire direc ct mat mate erial rials s: (60,000 - 54,000) x SP = $24,000 SP = $24,000/6,000 SP = $4.00 per pound 2. Actual quantity of direct direct materials materials purchased: purchased: Direct materials used during the period Add: Increase in direct materials inventories Total units of direct materials purchased

3.

Dire irect mater terial ials pric rice varian iance: $220,000 - $4.00 x 62,000 = $28,000 Favorable

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60,000 +

2,000 62,000

13-31Materials Price Variance (5 min)

1,400 x $1.10

1,400 x $1.00

Price Variance

AQ x $1.00

1,300 x $1.00

Usage Variance

Direct materials price variance: ($1.10 - $1.00) x 1,400 = $140 Unfavorable Direct materials usage variance: Actual direct materials used: 700 + 1,400 - 600 = 1,500 gallons (1,500 - 1,300) x $1.00 = $200 Unfavorable



13-32Materials Usage Variance (5 min)

AQ x $7.50

AQ x $7.25

Price Variance 2,300 2,300 x $7.25 $7.25

2,100 2,100 x $7.25 $7.25

Usage Variance Units of direct materials purchased: 2,300 - 100 = 2,200 Direct materials purchase price variance: ($7.50 - $7.25) x 2,200 = $550 Unfavorable Direct materials usage variance: (2,300 - 2,100) x $7.25 = $1,450 Unfavorable.

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8,300 x AP

8,300 x $5.10

Price Variance AQ x $5.10

8,000 x $5.10

Usage Variance 1. Quantity of materials used: 8,300 - 500 = 7,800 pounds Total standard quantity of direct materials for the units of finished units produced: 2,000 units produced x 4 pounds per unit = 8,000 pounds Direct materials usage variance: (7,800 pounds - 8,000 pounds) x $5.10 = $1,020 Favorable Direct materials price variance: $640 U + $1,020 F = $1,660 Unfavorable 2. Actual cost of direct materials per pound: (AP - $5.10) x 8,300 = $1,660 AP = $5.10 + $0.2 AP = $5.30 per pound



13-34Standard Direct Materials Cost (5 min)

Standard direct material cost per bag of Inset-Be-Gone Total direct materials in the final product

60 lbs.

Proportion of direct materials input remained in the finished product

) 75%

Total standard qua quantity ity of DM per bag bag of Inset-B t-Be-Go -Gone Purchase price per pound

x

Total purchase price before purchase discount Purchase discount

$2.50 $200.00 4.00

Standard direct material cost per bag

Solutions Manual

80 lbs.

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$196.00

13-35Standard Direct Materials Cost (5 min)

Total direct materials per package of SS-2 Standard purchase price per poundof dof Natura Total pu purchase pr price be before pu purchase di discount Purchase discount (3/15)

x $5.00 $60.00 1.80

Standard dir dire ect ma material co cost pe per pa package of of SS SS-2


12 lbs.

$58.20


13-36Materials Price and Usage Variance (5 min)

22,000 x AP = $26,400

22,000 x $1.25 = $27,500 Price Variance

20 x 1,000 x $1.25 = $25,000 Usage Variance

Direct materials price variance: $26,400 - $27,500 = $1,100 Favorable Or, Actual cost cost per shingle: $26,400 ) 22,000 = $1.20 per shingle (AP – SP) X AQ = Price Variance ($1.20 - $1.25) x 22,000 = $1,100 Favorable Direct materials usage variance: Total Standard quantity allowed for the units completed: SQ = 20 x 1,000 = 20,000 shingles (AQ – SQ) X SP = Usage Variance (22,000 - 20,000) x $1.25 = $2,500 U

Solutions Manual

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Actual direct materials used in production

12,600 sq. ft.

Total standard direct materials for the units manufactured: Number of desks manufactured

1,000

Standard quantity of vinyl per desk

x

Total

12,000

Excess vinyl used in production

sq. ft. 600 sq. ft.

Standard cost of vinyl per sq. ft.

x $ 2.25

Direct Direct materia materials ls (vinyl) (vinyl) usage usage varianc variance e


12

$1,350 $1,350 U


13-38Labor Rate Variance (5 min)

40,000 x $25 = $1,000,000

40,000 x SR

Rate Variance

42,000 x SR

$48,000 F Efficiency Variance

1. Stan Standa dard rd hour hourly ly rat rate: e: Efficiency variance = (40,000 - 42,000) x SR = -$48,000 SR = $48,000 ) 2,000 hours SR = $24.00 per hour 2. Dire Direct ct labo laborr rate rate varia varianc nce: e: Total payroll for direct labor 40,000 x $25 per hour = $1,000,000 $1,000,000 Total actual hours at standard direct labor rate: Actual direct labor hours

40,000

Standard hourly rate

x $2 $24.00

Total

- 960,000

Direct Direct labor labor rate varianc variance e

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$40,00 $40,000 0 U

13-23

13-39Standard Labor Rate and Efficiency Efficiency Variance (5 min)

11,000 x $30.00

11,000 x SR $33,000 F

Rate Variance

12,000 x SR ?

Efficiency Va Variance

1. Total actual direct labor hours

11,000

Actual hourly rate

x

Total actual total direct labor cost

$30.00

$330,000

Favorable direct labor rate variance

+

Total actual direct labor hours at standard hourly rate Total actual direct labor hours in January Standard direct labor rate per hour

33,000 $363,000

÷

11,000 $33.00

2. Direct labor efficiency variance: = (AH – SH) x SR = (11,000 - 12,000) x $33.00 = $33,000 F



13-40Standard Labor Rate and Total Hours Hours (5 min)

200 x AR = $1,000

200 x SR

$100 F

SH x SR

$165 U

Rate Variance

Efficiency Variance

1. Total actual direct labor cost

$1,000

Favo Favora rabl ble e dire direc ct labo laborr rate rate vari varian ance ce

+

Direct Direct labor labor hours hours worked worked at the standa standard rd hourly hourly rate Total direct labor hours worked Standard dire irect labor rate per hour 2. Total Total standard standard direct direct labor hours hours allowed: allowed: Efficiency variance = (200 - SH) x $5.50 = $165 SH = 200 - ($165 ÷ $5.50) = 200 - 30 = 170 hours

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13-25

100 100 $1,100 $1,100

÷

200 $5.50

13-41Labor Efficiency Variance (5 min)

20,000 x AR = $378,000

20,000 x SR

$6,000 U

SH x SR ?

Rate Variance

Efficiency Variance

1. Standard direct labor hourly rate: Total payroll

$378,000

Unfavorable direct labor rate variance

-

Direct labor hours worked x Standard hourly rate Actual direct labor hours

6,000 $372,000 20,000

÷

Standard direct labor hourly rate

$18.60

2. Direct labor efficiency efficiency variance: Budgeted total direct hours

24,000

Budgeted units to manufacture

÷

8,000

Standard direct labor hour per unit Total units manufactured

3 x

Total standard hours for units manufactured

6, 6,000 18,000

Direct Direct labor labor effic efficien iency cy varian variance ce = (AH – SH) SH) x SR SR = (20,000 - 18,000) x $18.60 = $37,200 U



13-42Labor Rate and Efficiency Efficiency Variances (5 min)

3,000 x AR = $69,000

3,000 x $20.00 = $60,000

Rate Variance 1. Dire irect lab labor rate ate varian iance:

2 x 1,60 ,600 x $20.00 = 3,200 x $20.00 = $64,000

Efficiency Variance $69,0 9,000 - 3,000 x $20 =

2. Total hours spent to manufacture 1,600 units Total standard direct labor hours for the units manufactured Saving in direct labor hours Standard direct labor hourly wage rate Direct labor efficiency variance

Solutions Manual

13-27

1,600 x 2 =

$9,000 U 3,000 3,200 200 x $2 $20.00 $4,000 F


AH x $18.00 = $207,000

AH x $16.00

Rate ate Vari Varia ance nce

10,000 x 1.5 x $16.00 = $240,000

Effic fficie ien ncy Var Varianc iance e

1. Dire Direct ct labo laborr rate rate varia varianc nce: e: Difference in hourly wage rates: Actual direct labor hourly rate $18.00 Standard direct labor hourly rate - 16.00 Actual direct labor hours spent: Actual direct labor costs $207,000 Actual direct labor hourly rate $18.00 ÷ Total actual direct labor hours spent Direct labor rate variance

$2.00 U

x 11,500 $23,000 U

2. Dire Direct ct labo laborr effici efficien ency cy varia varianc nce: e: Actual direct labor hours 11,500 Total standard direct labor hours for the for the units manufactured: Number of finished units manufactured 10,000 Standard direct labor hour per unit x 1.5 Total - 15,000 Differ Differenc ence e in direct direct labor labor hours hours 3,500 3,500 F Standard direct labor hourly wage rate x $16.00 Direct labor efficiency variance $56,000 F 3. If the the unfavo unfavorab rable le rate varia variance nce is a resu result lt of the produc production tion manager’s decision to employ workers with higher skill levels the production manager made a right decision in doing so. The amount of favorable efficiency variance more than offsets the higher wages paid to these skilled workers. Direct labor rate variance $23,000 Direct labor efficiency variance Total direct labor variance


U 56,000 F $33,000 F



410 x $21.00 = $8,610

410 x $20.00

Rate Variance 1.

SH x $20.00 = $8,440

Efficiency Variance

Dire irect la labor bor rate rate vari varian ance ce:: Total direct labor payroll

$8,610

Actual total direct labor hours at standard hourly rate: 410 hours x $20 =

8,200

Direct labor rate variance

$410 U

2. Dire Direct ct labo laborr effici efficien ency cy varia varianc nce: e: Actual direct labor hours

410 hrs.

Total standard direct labor hours for the output: Total output (gallons)

8,440

Standard output per direct labor hour Difference in labor direct hours Standard direct labor cost per hour Direct labor efficiency variance

Solutions Manual

13-29

÷

20

422 12 F x $ 20 $240 F

13-45Actual Labor Hours (5 min)

1.Direct labor efficiency variance = (AH - SH) x SR $27,000 = (AH - 10,000) x $25.00 AH

= 10,00 0,000 0 + $27,00 7,000 0 / $25.0 25.00 0

AH

= 11,080 hours

2. Dire Direct ct labo laborr rate rate varia varianc nce e = (AR – SR) x AH = ($22 - $25) x 11,080 = $33,240 F



13-46 13-46 Labor Labor Hou Hourr Worke Worked d (5 minu minutes tes))

1. Direct la labor ef efficie icien ncy va variance $4,000 AH AH

= (AH - SH) x SR SR

= (AH - 2,000) x $20.00 = 2,000 + $4,000 / $20.00 = 2,200 hours

2. Dire Direct ct labo laborr rate rate varia varianc nce e =

(AR - SR) x AH

=

($22.50 - $2 $20.00) X 2,200

=

$5,500 U

3. Direct Direct labor labor flexible flexible budget budget varian variance ce =

$5,500 U + $4,000 U

=

$9,500 U

Solutions Manual

13-31

13-47Total Payroll (5 min)

1.

Effi Effici cien ency cy vari varian ance ce = (AH (AH – SH) SH) x SR = (18,000 – 16,000) x $50 = $100,000 U

2.

Tota Totall varia varianc nce e = Rat Rate e vari varian ance ce + Effic Efficien iency cy vari varian ance ce Rate variance variance = Total Total variance (F) + Efficiency Efficiency variance variance (U) = $20 $20,0 ,000 00 + $100 $100,0 ,000 00 = $120,000 F

3.

Actual direct labor hours

18,000

Standard direct labor rate

x

Total actual dire irect labor hours at the standard rate Direct labor rate variance - Favorable Total direct labor payroll in May


$50.00 $900,000

-

120,000 $780,000


13-48Total Payroll (5 min)

Actual direct labor hours

10,500

Standard direct labor rate

x

Total direct labor hours worked at the standard rate Direct Direct labor labor favora favorable ble rate rate varian variance ce Total direct labor payroll for May

Solutions Manual

13-33

$24.00 $252,000

-

8,400 8,400 $243,600

13-49Standard Direct Labor Cost Per Unit (5 min)

Total hours paid per week per employee

40

Hourly wage

x

Weekly wages per employee

$1,200

Employee benefit (40%)

+

Total weekly payroll cost per employee Direct labor cost per productive hour

÷

35

x

3

$48

Numb Number er of stan tandard dard dire direc ct labo laborr hours ours per unit unit


480 $1,680

Weekly productive hours per employee

Standard direct labor cost per unit

$30

$144


13-50 Actual and Standard Labor Rates (5 min)

1.

Actu Actual al dir direc ectt labo laborr hou hourly rly wage wage rat rate: e: Total payroll for direct labor

$675,000

Actual direct labor hours 2.

27,0 27,000 00 hrs. hrs.

÷

Actual direct labor rate

$25.00per hour

Stan Standa dard rd dir direc ectt labo laborr hou hourl rly y rate rate:: Total payroll for direct labor

$675,000

Direct labor rate variance - Favorable

+

Tota Totall actu actual al hour hours s at stan standa dard rd hour hourly ly rate rate Actual direct labor hours

16,200 $691 $691,2 ,200 00 27,000

÷

Standard direct labor hourly rate 3.

$25.60 per hour

Dire Direct ct lab labor or eff effic icie ienc ncy y vari varian ance ce:: Actual direct labor hours

27,000

Tota Totall sta stand ndar ard d dir direc ectt labo laborr for for the the uni units ts manu manufa fact ctur ured ed

30,0 30,000 00

Favorable di direct la labor ef efficiency va variance in in ho hours Standard hourly wage rate

x

Direct labor efficiency variance

Solutions Manual

3,000

13-35

$76,800

$25.60 F

13-51Total Direct Materials Cost in Flexible Budget Budget (5 min)

1.

Flex Flexib ible le bud budge gett direc directt mate materi rial als s cost cost Master budget data: Total direct materials

$273,600

Number of units

÷

144,000

Direct materials cost per unit

$1.90

Number of units manufactured during March

x

Direct materials cost in the flexible budget for March 2.

11,400 $21,660

Dire Direct ct mat materi erials als flex flexibl ible e budg budget et vari varian ance ce:: Actual direct materials cost

$22,000

Flexible budget direct materials cost Direct materials flexible budget variance


- 21,660 $

340 U


13-52 Flexible budget budget and direct direct labor variances variances (5 minutes)

1.

Master budget Total variable cost

$2,700,000

Total number of papers to be processed

1,500,000

)

Total standard variable cost to process one paper Tota Totall num number ber of pape papers rs proce rocess ssed ed dur during ing the yea year

$1.80 x

1,200 ,200,0 ,000 00

Total bu budgeted va variable cost fo for 1, 1,200,000 pa papers

$2,160,000

Fixed costs per year

150,000

Expected total cost to process 1,200,000 papers 2.

$2,310,000

Total actual labor cost

$855,000

Actual total labor hours

19,000

Standard labor rate per hour ($600 ) 15)

x

40.00

Total labor hours worked at the standard hourly rate

- 760,000

Direct labor rate variance 3.

$95,000 U

Actual total labor hours

19,000

Total standard labor hours for 1,200,000 paper: (1,200,000 ) 1,000) x 15 =

18,000

Excess labor hour

1,000

Standard labor rate per hour

x

Direct labor efficiency variance

Solutions Manual

13-37

40.00 $40,000 U

Problem 13-53 13-53 Stand Standard ard costi costing ng syst system em (10 minut minutes) es)

1. a. The major major advanta advantages ges of of using using a stand standard ard cost cost syste system m include 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. b. The disadvant disadvantages ages that that can result result from using a standard standard cost cost system 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. 2. A standard cost system must be supported by top management to be successful. The parties who 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 general features features and characteristics characteristics associat associated ed with the introduct introduction ion 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. 4. The consequen consequences ces of having having the standards standards set by an outside outside consulting 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 but they are 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.

Solutions Manual

13-39

13-54 Standard cost sheet (10 minutes)

1. Standa Standard rd unit unit cost cost per cutti cutting ng board board:: Direct material Lumber (1.50 bd. ft. 1 x $3.00/bd.ft.) $4.50 Pads Pads (4 pads pads x $0.0 $0.05/ 5/pa pad) d) .20 .20 Direct labor Prepare/cut (14.4/60 hrs. 2 x $8.00/hr.) 1.92 Assemble/ le/ finish (15/6 15/60 0 hrs. x $8.00/hr.) 2.00 Total standard unit cost 1 1.25 board feet x (5+1) ) 5 = 1.50 board feet. 2 12 minutes/board x (5+1) ) 5 = 14.4 minutes.

$4.7 $4.70 0 3.92 $8.62

2. The advantages of implementing a standard cost cost system include the following. accounting system making • Standard costs are incorporated into the accounting record keeping easier and facilitating cost analysis. • Standard costs provide the basis for building a company’s budget. • Standard costs serve as goals; they encourage cooperation and coordination among all elements of the corporation. The variance analysis associated with standard costs provides a feedback system to those responsible for controlling costs. 3. a. The role role of purchasing purchasing manager manager in the the development development of of standards standards includes establishing the standard cost for material required by the bill of materials, determining if the company should take advantage of price reductions available through economic order size, and obtaining data regarding the availability of materials. b. The role role of industrial industrial engineer engineer in the developme development nt of standards 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 role of cost cost accountant accountant in the the development development of standa standards rds includes 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 costs such as material handling and manufacturing overhead, and converting physical standards such as hours and quantities to monetary equivalents.

Blocher, Chen, Cokins, Lin: Cost Management, 3e

13- 40


13-55Standard Cost Sheet (20 min)

1.

Standa Standard rd cost cost for ten-gal ten-gallon lon batch batch of raspber raspberry ry sherb sherbet et a. b. Standard Standard Quantity Rate Direct materials Raspberries (7.5 qts.* x $.80) = $6.00 Other ingredients

(10 gal. x

$.45) =

4.50 $10.50

(3 min. x 6 qts.)/60 x

$9.00 =

2.70

(12 min./ 60) x

$9.00 =

1.80

(40 qts.** x

$.38) =

Direct labor Sorting Blending Packaging c.

Standard cost per ten-gallon batch

4.50 15.20 $30.20

0 *6 quar quartts x (4 + 1)/4 1)/4 = 7.5 7.5 qu quarts re require uired d to ob obtain 6 ac acceptabl table e quarts. **4 quarts per gallon x 10 gallons = 40 quarts. 2.

a. In gene general ral,, the the purc purcha hasin sing g man manage agerr is held held resp respon onsi sible ble for for unfa unfavo vorab rable le mate materia rials ls price price varia varianc nces es.. Caus Causes es of thes these e variances include the following: • Failure to correctly forecast price increases • Purchasing nonstandard or uneconomical lots • Not purchasing from suppliers offering the most favorable terms As a small producer, ColdKing’s competitive strategy is likely to be differentiation through brand recognition as the firm has done. The succ succes ess s of the the comp ompetit etitiv ive e strat trateg egy y requ requir ires es that that the the firm 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 compromise the firm’s competitive position and the survival of the firm in the long run.

Solutions Manual

13- 41


b. In general, the produ roduc ctio tion mana anager or foreman is held responsible responsible for unfavorable unfavorable labor efficiency efficiency variances. variances. Causes of these variances include the following: • Poorly trained labor • Substandard or inefficient equipment • Inadequate supervision Unfavorable efficiency variances increase costs, decrease profits, and and may may affe affect ct the the quali quality ty of the the firm’s firm’s prod product ucts. s. Cont Continu inuou ous s unfa unfavo vora rable ble effic efficien iency cy varian variance ces s jeop jeopard ardize ize the the comp competi etitiv tive e position of the firm and threaten the success of the firm’s strategy.


13- 42


13-56Fill in Missing Data (20 min) Operating Result

Units

Flexible Budget Variance

9 00

S ale s re venue

Flexible Budget

0

Sales Volume Variance

9 00

Master Budget

1 00 F

800 80 0

$ 9,5 00

($400) U

$ 9 ,9 0 0

$ 1,1 00 F

$8,800

$4,800

$600 F

$5,400

$600 U

$4,800

2,300

(500) U

1 ,8 0 0

(200) U

1,600

$ 2,4 00

($300) U

$ 2 ,7 0 0

$30 0 F

$2 ,4 0 0

1,200

(200) U

1 ,0 0 0

$0

1 ,0 0 0 1,

$ 1,2 00

($500) U

$ 1 ,7 0 0

Variable cost Manufacturing Selling and administrative C o ntrib utio n margin Fixed Fixed cost O pe ra ting inco me

$30 0 F

$1,400

a. -0b. Flexible budget unit (Same as the actual units sold):

900

c. Sales volume variance (unit):

900 - 800 =

100 F

d. Budget se sellin lling g pri pric ce pe per un unit: it:

$8,800/800 un units = $11

Flexible budget Sales revenues:

900 x $11 =

$9,900

e. Selling price flexible budget variance:

$9,500 - 9,900 =

$400 U

revenue sa sales vo volume va variance: f. Sales re

$9,900 - 8,800 =

$1,100 F

g. Standard variable manufacturing cost per unit: $600/(900 - 800) = $6 Vari Variab able le manuf anufac actu turi ring ng cost cost-M -Mas aste terr budg udget: et:

800 800 x $6 =

$4,8 $4,800 00

h. Vari Variab able le manu manufa fact ctur urin ing g cos cost-F t-Fle lexi xibl ble e budg budget et:: 900 900 x $6 =

$5,4 $5,400 00

Variable ble manu manufac factur turing ing costcost-Ac Actua tual: l: i. Varia

$4,80 $4,800 0

$5,40 $5,400 0 - 600 600 =

Variable selling and administrative expense: j. Actual:

$9,500 - 4,800 - 2,400 =

$2,300

k. Standard selling and administrative cost: $1,600/800 units = $2 per

unit unit Flexi lexibl ble e budg budge et:

900 900 x $2 =

l . Flexible budget variance:

$2,300 - $1,800 =

m. Sales volume variance: $1,800 - $1,600 = Solutions Manual

13- 43

$200

$1,8 $1,800 00 $500 U U

n. Contribution margin Flexible budget variance:

$400 U - $600 F + $500 U = lexibl ble e budg budge et con contr trib ibut utio ion n marg margin in:: p. Flexi or

$300 U

$2,40 2,400 0 + $300 U =

$2,7 2,700

$9,900 - $5,400 - $1,800 =

$2,700

q. Master budget contribution margin:

$8,800 - $4,80 ,800 - $1,60 ,600 =

$2,400

Contrib ributi ution on marg margin in sale sales s volum volume e varia varianc nce: e: $2,7 $2,700 00 - $2, $2,400 400 = $300 $300 F r . Cont or

$1,100 F - $600 U - $200 U =

Fixed d cost cost - Actu Actual al:: s. Fixe

$2,4 $2,400 00 - $1,2 $1,200 00 =

$1,2 $1,200 00

t. Fixe Fixed d cost cost - Mast Master er budg budget et::

$2,4 $2,400 00 - $1,4 $1,400 00 =

$1,0 $1,000 00

u. Fixed cost - Flexible budget:

$300 F

$1,000

v. Fixed cost sales volume variance:

$1,000 - 1,000 =

0

w. Fixed cost flexible budget variance:

$1,200 - $1,000 =

$200 U

Flexible le budge budgett Oper Operati ating ng inco income me:: x. Flexib

$2,7 $2,700 00 - $1,0 $1,000 00 =

$1,7 $1,700 00

y. Operatin Operating g income income flex flexible ible budget budget varia variance nce:: $1,20 $1,200 0 - $1,7 $1,700 00 = $500 $500 U

or

(n) $300 U + ( w ) $200 U =

z. Opera Operatin ting g inc incom ome e sale sales s vol volume ume varia varianc nce: e: $1,70 $1,700 0 - $1,40 $1,400 0=

or


(r ) $300 F - ( u) $0 =

13- 44

$500 U $300 $300 F $300 F


13-57 Fill in Missing Data (15 min) Operating Result

Units


Flexible Budget

1,600

Sales revenue


Master Budget

100

1,600

F

1,500

$38,400

$1,600 U

$40,000

$2,500 F

$37,500

$27,200

1,600 U

$25,600

(1,600) U

24,000

4,000

(800) U

3,200

(200) U

3,000

$7,200

($4,000) U

$11,200

Variable cost: Manufacturing Selling & administrative Contribution margin Fixed cost

6,200

Operating income 1.

$1,000

1,400 F ($2,600) U

$700 F

$10,500

7,600

0

7,600

$3,600

$700 F

$2,900

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 revenue sales volume variance: d. Sales revenue revenue - flexible flexible budget: budget:

100 x $25 = $2,500 F 1,600 x $25 = $40,000 $40,000

e. Sales revenue - actual: $4 $40,000 - 1,600 U =

$38,400

Variable manufacturing cost: f. Standard cost per unit: $24,000 ) 1,500 = $16

Total flexible budget amount:

1,600 x $16 = $25,600

g. Sales volume variance: $25,600 - 24,000 =

$1,600

U

(Or, 100 units x $16 = 1,600 U) h. Actual amount incurred:

$25,600 + 1,600 U = $27,200

Variable selling and administrative expense: i. Flexible budget variance:

$4,000 - 3,200 =

$800

($3,200/1,600) x 1,500 =

$3,000

U master bu budget am amount: j. Total ma Solutions Manual

13- 45

k. Sales volume variance: $3,200 - 3,000 =

$200

U

( e) $38, $38,40 400 0 – (h) (h) 27, 27,20 200 0 - 4,0 4,000 00 =

$7,2 $7,200 00

Contribution margin: l. Actual amount:

lexib ble budget va varian iance: $1,60 ,600 U + 1,600 U + (i) 800 U =$ =$4,00 ,000 m. Flexi budget am amount: n. Flexible bu

U

(d ) $40,000 - (f ) 25,6 25,600 00 - 3,2 3,200 00 = $11,2 $11,200 00

or

(l) $7,200 + (m) 4,000 U = $11,200

p. Sales volume variance: $2,500 F - 1,600 U - 200 U = q. Master budget amount:

$700

F

) 3,000 $37,500 - 24,000 - (j ) 000 = $10, $10,5 500

[Or, (n ) $11,200 - ( p) p) 700 F= $10,500] r. Fixed cost - Actual: s. Fixed cost - Flexible budget: t. Fixed cost - Master budget:

u. Fixe ixed co cost flflexible bu budget va variance:

( l ) $7,200 - 1,0 1,00 00 =

$6,20 ,200

( n) $1 $11,2 1,200 - 3, 3,600 =

$7,600

Same as (s)

$7,600

(r) $6 $6,200 - (s) 7, 7,600 =

v. Fixed cost sales volume variance:

(s) 7,600 - (t) 7,600 =

w. Operating Operating income flexible budget budget variance: variance: $1,000 - 3,600 3,600 =

$1,400 F - 0$2,600 $2,600

U x. Operatin Operating g income income - Master Master budget budget::

(q) $10,500 $10,500 - (t) 7,600 7,600 = $2,90 $2,900 0

y. Operating in income sales volume variance:

$3,600 - 2,900 =

$700 F

(Or, $700 - 0 = $700 F) 2.

Actual selling price per unit: unit: (e) $38,400 ÷ (b) 1,600 = $24


13- 46


Operating Result

Units


90 0

0

Flexible Budget


Master Budget

900

75 F

8255 82

S ales revenue

$ 5 2 ,6 0 0

$ 1 ,3 0 0 F

$ 5 1,3 00

$4 ,27 5 F

Variable cost

2 0 ,0 7 5

5 ,12 5 F

25 ,20 0

(2, 2,10 100) 0) U

F ixed co st

1 0 ,3 5 0

1 ,07 5 F

11 ,42 5

0

11,425

Operat Operatiing in inco com me $22 $22,1 ,175 75

$ 7 ,5 0 0 F

$ 1 4,6 75

$2 ,17 5

$12,500

$ 47 ,0 25

13-58Fill in Missing Data (15 min) a. Flexible budget variance b. Sales volume variance c. Sales unit flexible budget variance:

-0-

d. Units sold - flexible budget:

900

e. Sales volume variance in units:

900 - 825 =

75

F f. Total sales in flexible budget: g.

$52,600 - $1,300 = $51,300

Budgeted selling price per unit = $51,300 ) 900 units = $57 Sales les re revenue sales les vo volum lume va varian iance:

$57 x 75 75 un units its =

$4,275 275

F h. Sale Sales s reve revenue nue - mast master er budge budget: t:

825 825 x $57 = $47, $47,02 025 5

Or, (f ) $51,300 - ( g ) $4 $4,725 = $47,025 i. Variable Variable costs costs:: j.

$52,60 $52,600 0 - $10,350 $10,350 - $22,175 $22,175 = $20,07 $20,075 5

Standard (budgeted) variable cost per unit = $23,100 ) 825 = $28 Total variable cost - Flexible budget:

900 x $28 = $25,200

Variable cost cost flexi flexible ble budget budget varia variance nce:: $20, $20,075 075 - $25,200 $25,200 = k. Variable Solutions Manual

13- 47

5,125 5,125

23,100

F l. Variable Variable cost cost sale sales s volum volume e varian variance ce:: $25, $25,200 200 - $23, $23,100 100 =

$2,100 $2,100

U Or, 75 x $28 =

$2,100

U m. Fixed cost - flexible budget:

$11,425

Fixed d cos costt fle flexi xibl ble e budg budget et vari varian ance ce:: $10, $10,35 350 0 - $11, $11,42 425 5= n. Fixe

$1,0 $1,075 75

F p. Fixed cost sales volume variance:

-0-

q. Operating income flexible budget variance:

$1,300 F + ( k ) $5,125 F + ( n) $1,075 F =

$7,500

F 4,675 r. Flexible budget operating income:$22,175 - ( q) 7,500 F = $14,6 Or, (f ) $51,300 - ( j ) $25,200 - ( m) $11,425 =

$14,675

s. Operating income sales volume variance:

(r ) $14,675 - $12,500 =

$2,175

F or (g ) $4,275 - ( l ) $2,100 =

$2,175

F


13- 48


Operatin Result

U n i ts s o l d R ev en ues Variable cost: Contribution Fixed costs

ex e Budget Variance

1 ,2 0 0

0

a es Flexible Volume Budget Varianc

1 ,2 0 0

200 F

Master Budget

1,00

$2,400) 400) U $72,000 $12,000 F $60,00 $ 6 9 ,6 0 0 ( $2, 56,800

( 8, 8,80 800) 0) U

48,000 (8 (8,, 00 000) 0) U

$12,800 $11,200 U $ 24 24 , 0 00 00 $ 4, 4 ,0 00 00 F 7,000

( 2, 2,00 000) 0) U

5,000

0

Opera Ope ratt i ng inc income ome $5,800 $5,800($13,200)U $ 19 19 , 0 00 00 $ 4, 4 ,0 00 00 F

40,00 $ 2 0, 0, 0 00 00

5,00 $ 1 5, 5, 0 00 00

13-59Fill in Missing Data (15 min) a. – 0 b. 1,200 c. 1,200 – 1,000 = 200 F d. Budgeted selling price per unit: $60,000 ) 1,000 = $60

Flexible budget revenues: 1,200 x $60 = $72,000 e. $69,6 $69,600 00 - $72,00 $72,000 0 = $2,400 $2,400 U f. $72,000 - $60,000 = $12,000 F g. Standard (budgeted) variable cost per unit: $40,000 ) 1,000 = $40

Flexible budget variable cost: 1,200 x $40 = $48,000 h. $48,00 $48,000 0 - $40,0 $40,000 00 = $8,000 $8,000 U i. $11,200 U - (e) $2,400 U = $8,800 U j. (g) $48,000 + (i) $8,800 = $56,800 k. $69,600 - (j) $56,800 = $12,800 l. $12,800 + $11,200 = $24,000

Or, $72,000 - $48,000 = $24,000 Solutions Manual

13- 49

m. $12,000 F - $8,000 U = $4,000 F

Or, Or,

Budg Budgete eted d cont contrib ributi ution on marg margin in per per unit: unit: $60 $60 - $40 $40 = $20 $20 200 x $20 = $4,000 F

n. $60,000 - $40,000 = $20,000

Or,

1,000 x $20 = $20,000

p. $12,800 - $5,800 = $7,000 q. - 0 r. $5,000 s. $7,000 - $5,000 = $2,000 U t. $20,000 - $5,000 = $15,000 u. $4,000 F v. $15,000 + $4,000 = $19,000

Or, Or,

$24,0 24,000 00 - $5 $5,00 ,000 = $19, $19,0 000

w. $5,800 - $19,000 = $13,200 U

Or,

$11,200 U + $2,000 U = $13,200 U


13- 50


13-60Basic Analysis of Direct Labor Variances (10 min)

1.

Actual Cost

Actual Input x Budget Price

Flexible Budget

5,800 x AR

5,800 x $ 20

1,200 x 5 x $20

= $127,600

= $116,000

=$120,000

Rate Variance

Efficiency Variance

$127,600 - $116,000

$116,000 - $120,000

= $11,600 U

= $4,000 F

2. The unfavor unfavorable able rate variance variance arises arises becaus because e the actual actual labor rate per hour, $127,600 ÷ 5,800 = $22, exceeds the budgeted rate of $20 by 10%. The The reas reason ons s for for this this unfa unfavor vorab able le varia varianc nce e could could includ include e the the hiring of more skilled workers than planned, an unexpected labor rate increase negotiated with a trade union, or the initial $20 standard being set without a careful analysis. The $4,000 favorable efficiency variance could be due to the hiri hiring ng of more more skil skille led d work worker ers, s, abov abovee-ex expe pect cted ed prod produc ucti tivi vity ty 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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13-61Working backward (10 minutes)

AH x AR

AH x SR

Rate Variance $11,600 F

SH X SR

Efficiency Variance $24,000 U

SR = $30 AH = 1.16 SH 1.

EV = (AH – SH) X SR $24,000 = (1.16 SH – SH) x $30 .16 SH = 800 SH = 5,000 hours

2.

AH = 1.16 .16 SH AH = 1.16 x 5,000 = 5,800 hours

3. RV = (AR (AR – SR) SR) x AH - $11,600 = (AR - $30) x 5,800 AR - $30 = - $2 AR = $28 4. SH = Number of units units manufactured manufactured x Stand Standard ard hours hours per unit 5,000 = Number of units manufactured x 2 Number of units manufactured = 2,500


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13-62 All varian variances ces (60 minut minutes) es)

1. a. Dire Direct ct mate materia riall price price varia varianc nce. e. Formula: la: Actua Actuall quan quantit tity y x (Act (Actual ual pric price e - Sta Stand ndar ard d pric price) e) • Formu Calculation tion of actual actual prices: prices: Actual Actual cost cost ) Actual quantity • Calcula Housing units $44,000 ) 2,20 2,200 0= $20 $20 per per unit unit Printed circuit boards $75,200 ) 4,700 = $16 per unit Reading heads $101,200 ) 9,200 = $11 per unit • Calculation of variance:

Housing units 2,200 x ($20 - $20) = $0 Printed Printed circuit circuit boards boards 4,700 4,700 x ($16 ($16 - $15) $15) = 4,700 4,700 U Reading Reading heads heads 9,200 9,200 x ($11 ($11 - $10) $10) = 9,200 9,200 U Total Total direct direct material material price price varianc variance e $13,90 $13,900 0 U b

Dire Direct ct mate materi rial al usag usage e var varia ianc nce e • Formula: Standard price x (Actual quantity - Standard quantity) • Calculation of standard quantities: Actual units x Standard quantity per unit Housing units 2,200 x 1 = 2,200 parts Printed circuit boards 2,200 x 2 = 4,400 parts par ts Reading heads 2,200 x 4 = 8,800 parts • Calculation of variance:

Housing Housing units units Printed circuit boards

$20 $20 x (2,200 (2,200 - 2,200) 2,200) = $ 0 $15 x (4,700 - 4,400) = 4,500

U Reading Reading heads heads

$10 x (9,200 (9,200 - 8,800) 8,800) =

4,000 4,000

U Total direct material quantity variance U

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$8,500

13-62 (Continued-1) (Continued-1)

1. c. Dire Direct ct labo laborr eff effic icie ienc ncy y var varia ianc nce. e. Formula: Standard rate x (Actual hours - Standard hours) Calculation of standard hours: • Actual units x Standard hours per unit Assembly Group 2,200 x 2 = 4,400 hours PCB Group2,20 Group2,200 0 x 1 = 2,200hours RH Group 2,200 x 1.5 = 3,300 hours •

• Calculation of variance:

Assembly Group

$10 x (3,900 - 4,400) = PCB Group $2,200 $12 x (3,500 - 3,300) =

(2,400 - 2,200) = RH Group U Total direct labor efficiency variance

$5,000 F $11 x U $2,400 $ 400 F

d. Direct Direct labo laborr rate rate varian variance. ce. • Formula: Total wage paid - Actual hours x Standard rate Calculation of variance: • Ass Assembly Group $31,2 1,200 – (3,900 900 x $10) = $7,800 800 F PCB Group$31,060 – (2,400 x $11) = $4,660 U RH Group $50,000 – (3,500 x $12) = $8,000 U Total direct labor rate variance $4,860 U e. Selling Selling price price varia variance nce.. Formul ula: a: Unit Units s so sold x (Ac (Actu tual al pri price ce – Budg udgeted ted pri price ce)) • Form • Calculate budgeted unit price: Total budgeted sales ) Budgeted units $400,000 ) 2,000 = $200 per unit • Actual price: Actual revenue ) Actual units $396,000 ) 2,200 = $180 per unit Variance: 2,200 x ($180 - $200) = $44,000 U Blocher, Chen, Cokins, Lin: Cost Managemen, 3e

13- 54


13-62 (Continued-2) f. Cont Contrib ribut ution ion margi margin n sales sales volum volume e varia varianc nce. e. rmula a: Budgeted ted unit unit co contrib tribu utio tion mar marg gin • Formul x (Actual units - Budgeted units) Calculate budgeted unit contribution margin: • Total budgeted contribution ) Budgeted units $122,000 ) 2,000 = $61 per unit Calculate varianc variance: e: $61 $61 x (2,200 (2,200 - 2,000) 2,000) = $12,20 $12,200 0 F • Calculate 2. The unfavorable unfavorable variance variance of $58,660 $58,660 between between budgeted budgeted and and actual contribution margin for Funtime Inc. during May 2001 can be explained as the reconciliation of contribution margin variance shown below: Direct material price variances $ 13,900 U Direct material price variances 8,500 U Direct labor efficiency variances 400 F Direct labor rate variances 4,860 U Selling price variance 44,000 U Contribution margin volume variance 12,200 F Total co contrib ributi ution mar margi gin n va varian iances $58,660 U 3. Behavioral Behavioral factors factors that that may promote promote friction friction among the the production 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 the input of the other production department. 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. 4. An evaluation evaluation of Jack Jack Rath's Rath's report leads leads to conclusion conclusion that that it is incomplete as 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 resent the report as being unfair.

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13-63 Comprehensive Comprehensive Variance Analysis (20 minutes)

1. a. Revisin Revising g the stan standar dards ds immediat immediately ely would would facili facilitate tate their 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 cost-volume-profit cost-volume-profi t 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. b. Standard Standard costs costs are carried carried through through the accounting accounting system system in a standard cost system. Retaining the current standards and expanding expanding the analysis of variances would eliminate the need to make changes in the accounting system. 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. Changing standards could have an adverse psychological 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. Variances are often computed and ignored. 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.


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©The McGraw-Hill Companies, Inc Inc., 2005

13-63 (Continued) (Continued)

2. a. Change Changes s in prime prime costs costs per unit unit due to to the use of of new new direct direct materia materials: ls: • Changes due to direct materials price (New materials price - Old materials price) x (New materials quantity) ($7.77 - $7.00) x 1 pound = $.77 U • Changes due to the effect of direct materials quality on direct materials usage (Old materials quantity - New materials quantity) x (Old materials price) (1.25 pounds - 1.00) x $7.00 = $1.75 F • Changes on direct labor usage due to the effect of direct materials quality (Old labor time - New labor time) x (Old labor rate) (24/60 - 22/60) x $12.60 = .42 F Total changes in prime costs per unit due to uses of new direct materials $1.40 F b. Changes Changes in prime costs per per unit due to the the new labor labor contract: contract: (New wage rate - Old wage rate) x New labor time ($14.40 ($14.40 - $12.60 $12.60)) x 22/60 22/60 = 0.66 0.66 U Total change in prime cost per unit

Solutions Manual

$0.74 F

13- 57

1

13-64 Standard Cost in Process Costing; Variances, &Journal Entries (20 min)

1. Equivalent Equivalent units units of production production in November: November: Units completed

Direct Materials 5,600

Work done for in-process ending inventory

+

800

Equivalent units of production

Direct Labor 5,600 +

6,400

Standard quantity per unit

x

Total standard quantity for production in November

8 51,200

600 6,200

x

6 37,200

a. Labor Labor efficie efficiency ncy varian variance ce:: (36,500 (36,500 - 37,200) 37,200) x $8.2 $8.20 0 = $5,740 $5,740 F b. Labor Labor rate rate varianc variance e = $300, $300,760 760 - 36,50 36,500 0 x $8.20 $8.20 = $1,46 $1,460 0U c. Actual Actual kilog kilograms rams of materia materials ls used used in Novemb November: er: 51,200 + $1,500 ÷ $5 = 51,500 kg. d. Materi Material al price price varianc variance e = $750 $750 - $1,500 $1,500 = $750 $750 Favora Favorable ble Actual price per kilogram = $5 - $750 ÷ 50,000 = $4.985 e. Total Total amount amount of prime prime costs transf transferre erred d to the finish finished ed goods goods accoun accountt in November: ($40.00 + $49.20) x 5,600 units = $499,520 f.

Materials

Labor

800

600

x $40. $40.0 00

x $49.2 49.20 0

$32,00 2,000 0

$29,520 ,520

Equivalent units of ending in-process inventory Stan Stand dard ard cost cost per per unit unit Endin ding inve inven ntory tory at stan stand dard ard cost cost


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Total

$61,5 61,520 20



2. Materials inventory

250,000

Materials purchase price variance

750

Accounts payable

249,250

Purchase 50,000 kilograms of materials for $249,250 Work in Process inventory

256,000

Materials usage variance

1,500

Materials inventory

257,500

Issued 51,500 kilograms of materials to production Work in Process inventory

305,040

Labo Laborr rate rate varia varianc nce e

1,46 1,460 0

Labor efficiency variance

5,740

Accrued Payroll

300,760

Direct labor wages incurred for the manufacturing

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1

13-65Joint Direct Materials Variances (5 min)

25,000 x $12 = $300,000

25,000 x $10.00 = $250,000

Price Variance

5,000 x 4.5 x $10 = $225,000

Usage (Efficiency) Variance

1. Dire irect mate materi rial als s price rice varia arian nce: ce:

($12 ($12 - 10) 10) x 25,0 25,000 00 =

$50, $50,00 000 0 U

2. Standard Standard direct direct raw materials materials for for the units units manufactured: manufactured: 5,000 units produced x 4.5 tons per unit =

22,500 tons

Direct materials usage variance: (25, (25,00 000 0 to tons use used - 22, 22,5 500) 00) x $10 $10 = $25,0 25,00 00 U 3. “Pure” “Pure” direct direct mate materials rials price price varian variance: ce: ($12 ($12 - 10) 10) x 22,50 22,500 0 =$45,00 =$45,000 0 U Direct materials joint variance: ($12 - 10) x (25,00 ,000 - 22,500 ,500)) = Total direct materials price variance


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5,000 000 U $50,000 U


13-66Flexible Budget Budget and Variances (15 min)

U n i ts s ol d R even ues P ro f es s i o n a l l a b o r C re d i t c h e c k Contribution Fi x ed cos ts Operating income 1.

Result 90 $3 6 ,00 0 9 ,5 0 0 1 4,8 50 $ 11 11,,65 650 0 3 ,6 0 0 $ 8, 8,0 050

Flexible Budget Variance 0 $ 4, 4 ,5 0 0 (1, 1,40 400) 0) (1, 1,35 350) 0) $ 1,75 1,750 0 (6 0 0 ) $ 1,150

F U U F U F

Flexible Budget 90 $ 3 1 ,5 0 0 8 ,1 0 0 1 3 ,5 0 0 $ 9,90 9,900 0 3,000 $ 6, 6,90 900 0

Sales Volume Variance -1 0 $ (3 (3,5 ,500 00)) 9 00 1 ,5 0 0 $ (1 (1,1 ,100 00)) 0 $ (1 (1,1 ,100 00))

Master Budget U 100 U $35,000 F 9 ,0 0 0 F 1 5 ,0 0 0 U $11,000 3,000 U $ 8,000

Master budget Number of apartments rented 100 Revenue per apartment rented $700 ÷ 2 = $ 350 Total revenue $35,000 Variable costs: Professional labor 1.5 x $20 x 300 = $ 9,000 Credit check $50 x 300 = 15,000 24,000 Contribution margin $11,000 Other expenses 3,000 Operating income $8,000 Flexible budget Total revenue 90 x $350 = $31,500 Variable costs: Professional labor 1.5 x $20 x 270 = $ 8,100 Credit check $50 x 270 = 13,500 Total variable costs - 21,600 Contribution margin $ 9,900 Other expenses - 3,000 Operating income $6,900

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1


Operating result Total revenue Variable costs: Professional labor Credit check Total variable costs Contribution margin Other expenses Operating income

90 x $800 x 0.5 = $36,000 $55 x 270 =

$ 9,500 14,850 - 24,350 $11,650 - 3,600 $8,050

Operating income flexible budget variance: $8,050 - $6,900 = $1,150 F Operating income sales volume variance: $6,900 - $8,000 = $1,100 U 2. 400 x AR = $9,500400 x $20 = $8,000 Rate variance = $9,500 - $8,000 = $1,500 U

270 x 1.5 x $20 = $8,100 Efficiency variance = $8,000 - $8,100 = $100 F

3. Among Among fact factors ors to be cons conside idere red d in evalu evaluat ating ing the the effe effect ctive ivene ness ss 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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13-67Acquisition Costs (5 min)

1. The firm firm will enjoy enjoy favorab favorable le price variance variances s if it purchase purchases s from from either of the new suppliers. 2. Among Among ethical ethical issue issues s of conce concern rn are a. Use of of prisone prisoners rs in manufac manufacturin turing g b. Purposes, Purposes, uses, and and control control of the the “scholarsh “scholarship” ip” account account Addi Additio tiona nall issues issues that that can can grea greatly tly affe affect ct the the oper operati ating ng resu result lt include: c. Quality d. Relia Reliabi bilility ty

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1


13- 64


13-68 Price Variance (20 min) min) 1.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year

Operating Results Ac Actual tual Purch urchas ase e Stan tandard dard Pric Price e Quantity Price Total Cost Price Variance 4,000 $68 $ 272,000 $60 $ 32,000 4,000 69 276,000 60 36,000 4,000 73 292,000 60 52,000 *** ** 24,000 40 960,000 60 480,000 * 36,000 $1,800,000 $360,000

U U U F F

* Total actual purchases 36,000 x $50 = $1,800,000 ** $1,800,000 - ($272,000 + $276,000 + $292,000) = $960,000 *** $960,000 ) 24,000 = $40 Further analysis of the 4 th Quarter’s price variance Price variance due to increase in the negotiated price ($76 - $60) x 24,000 = Price variance due to changes in exchange rate ($40 - $76) x 24,000 = Net Price Variance 2.

$384,000 U $864,000 F $480,000 F

The favorable purchase price variance for the 4 th quarter and for the year is a result of fluctuations in foreign currency exchange rates. The firm gained $864,000 from the favorable changes in currency exchange rates. Without the favorable exchange rate in the fourth quarte quarter, r, the the firm firm would would have have a tota totall unfa unfavo vorab rable le purch purchase ase price 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.

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1

13-69 Direct materials and direct direct labor labor variances, solving solving unknowns unknowns (30 min.)

DM

AQ x AP = $136,500

AQ x $5 = ? Price variance $6,500 U AQ x $5 = ?

(4,500 x 6 x $5) = $135,000 Usage variance $5,000 U

DLAH x AR =?

AH x $30 = ? Rate variance $4,200 U

(4,500 x 2/3 x $30) = $90,000 Efficiency variance $6,000 F

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: Total hours worked at standard rate = $90,000 - $6,000 = $84,000 Total direct labor hours worked = $84,000 ) $30 = 2,800 hours 3. Actual direct labor hourly wage rate: ($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. Per panel = 27,000 lbs. 5. Total direct materials used: (27,000 x $5 + $5,000) ) $5 = 28,000 lbs. 6. Total direct materials purchased: ($136,500 - $6,500) ) $5 = 26,000 lbs. 7. Actual direct materials price per pound: $136,500 ) 26,000 = $5.25 per pound


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Chap 013

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