CHAPTER 11
CHAPTER 10
PROFIT AND COST CENTER PERFORMANCE EVALUATION
Questions, Exercises, Problems, and Cases: Answers and
Solutions
10.1See text or glossary at the end of the book.
10.2b.A responsibility centers variances are calculated holding
all other things constant.
10.3a.Marketing.
10.4 It is difficult to evaluate performance without a budget.
Organizations might use nonfinancial performance measures as
discussed in the chapter such as on-time deliveries,
production-cycle efficiency, and percent of errors in products.
Some responsibility centers are responsible only for costs. The
assembly unit of a manufacturing plant would be a good example. On
the other hand, some responsibility centers, such as sales offices,
are responsible for revenues. Other responsibility centers such as
corporate divisions are responsible for both revenues and costs.
Finally, some responsibility centers are responsible for revenues,
costs, and investment in company assets. The designation of
responsibility centers depends on the specific organizational
structure and management system in the organization.
The percentage of positions filled from within the company may
indicate whether or not employees are committed enough to the
company to want to advance and employee perception of advancement
possibilities. It may also indicate employee commitment by the
quality of employee performance. For instance, if positions are not
filled internally it may be because the employees are not
performing well enough to be promoted.
A standard is related to a cost per unit. Budgets focus on
totals.
10.8a.Marketing.
10.9Management must weigh the trade-offs between the costs of an
investigation and the costs of letting the process remain out of
control for at least one more reporting period (i.e., the benefit
of correction).
10.10Responsibility reporting systems identify variances from
budget plans and relate those exceptions to the manager responsible
for them.
10.11The action that management can take in response to
materials price variances is probably quite different than the
action that can be taken in response to efficiency variances. The
latter is generally more subject to management control. Also,
different departments may be responsible for each variance. For
example, purchasing may be responsible for the materials price
variance, and production for the materials efficiency variance.
10.12The fixed cost variances differ from variable cost
variances because fixed costs do not vary with the level of
production activity. Therefore, the fixed costs in the flexible
budget will be the same as in the master budget (within the
relevant range). Additionally, there are no efficiency variances
for fixed costs because there is no input-output relationship that
can be applied.
10.13An efficiency variance for fixed overhead is not calculated
because the figure is meaningless. Efficiency variances require an
input/output relationship such as the number of hours (input) per
unit of output. Fixed costs provide the capacity to generate
output, but there is no input component for fixed costs.
10.14a.AQ X (AP SP).
10.151.Actual overhead is less than budget.
2.Fixed overhead was overapplied, compared to budget, because
actual production volume exceeded the estimated volume.
10.16 By involving the workers in the standard setting process
NUMMI gains the benefit of using the workers practical experience
and knowledge, which can increase the accuracy of the standards.
Also, this involvement creates an atmosphere of employee ownership
in what is occurring in production, which can increase motivation,
efficiency, and quality.
10.17 A coffee shop would use labor variance information to
determine if the scheduling of waitpersons is matching the customer
demand. Materials variances would be used to monitor the efficiency
of cooks and wait persons and control shrinkage.
10.18Under normal circumstances, the purchasing department will
acquire all the raw materials it was requested to purchase during
the period. It would normally be incorrect to calculate and
attribute a materials efficiency variance to the purchasing
department because it is not responsible for the actual quantity
used in production.
10.191.If variable overhead is applied on the basis of output,
there is no measure of efficiency possible. An efficiency variance
measures input-output relations and requires both inputs and
outputs in the measure.
10.19 continued.
2.The cost of dividing the variable overhead variance into its
components might exceed the benefits.
10.20From past cost data and expectations of future prices, the
managers could establish standard prices and quantities for the
period based on mileage. A typical standard price and quantity
could be dollars per mile and miles per period, respectively. A
flexible budget (SP X SQ) could be determined for both wages and
automobile costs. After the period, actual inputs at Standard (SP X
AQ) could be compared to the flexible budget to determine the
efficiency variances. Actual inputs at standard could then be
compared to actual costs (AP X AQ) to determine the price
variances.
10.21(Appendix 10.1)
The mix variances could tell if the professionals are using the
level of staff budgeted for the job. For example, are managers
doing work budgeted for junior staff?
10.22 (Profit variance analysis.)
SalesFlexible
Master
Actual
PriceBudgetSalesBudget
(14,200CostVari-(14,200Volume(14,000
Units)VariancesanceUnits)VarianceUnits)
Sales Revenue
$172,530a
$2,130 F$170,400c$2,400 F$168,000dLess Variable
Costs
83,780b$12,780 U
71,000
1,000 U
70,000Contribution
Margin
$88,750$12,780 U$2,130 F$99,400$1,400 F$98,000
Less Fixed
Costs
20,000
1,000 F
21,000 --
21,000Operating
Profit
$68,750$11,780 U$2,130 F$ 78,400$1,400 F$77,000a$172,530 =
14,200 Units X $12.15.
b$83,780 = 14,200 Units X $5.90.
c$170,400 = 14,200 Units X $12.
d$168,000 = 14,000 Units X $12.
10.23 (Analyzing period to period change in contribution
margin)
In thousands.Analysis Year 2Change in
Profits from
Change in
CostsChange in
Profits from
Change in
Sales PriceChange in Profits from
Change in
Sales VolumeBaseline
Year 1
Sales$1,500$166.7Fc$266.7Ua$1,600
Variable costs 1,050$ 33.3Fd 216.7Fb 1,300
Contributionmargin $450 $ 33.3Fd$166.7Fc $50.0U $300
a$133.33 sales price in Year 1 =.$1,600,000/12,000 units
2,000 unit decrease in volume between years 1 and 2 x $133.33 =
$266,667b$108.33 variable cost in Year 1 = $1,300,000/12,000
2,000 unit decrease in volume x $108.33 = $216,667
cSolve for the change in profits from change in sales price as
follows:
$1,600 sales in Year 1 - $266.7 effect of unfavorable sales
volume - $1,500 sales in Year 2 = $166.7 favorable change due to
sales price. dSolve for the change in profits from change in costs
as follows:
$1,300 variable costs in Year 1 - $216.7 reduction in costs due
to reduce sales volume - $1,050 variable costs in Year 2 = $33.3
favorable change due to change in costs between Years 1 and 2.
10.24(Profit variance analysis.)
Marketing andSalesFlexibleSalesMaster
ActualManufacturingAdministrativePriceBudgetVolumeBudget
(170 Units)VariancesVariancesVariance(170 Units)Variance(200
Units)
Sales Revenue
$18,400
$1,400 F$17,000$3,000 U$20,000
Variable Costs:
Manufacturing
6,880$250 U
6,630
1,170 F
7,800
Marketing
2,060
$190 U
1,870
330 F
2,200Contribution Margin
$9,460$250 U$190 U$1,400 F$8,500$1,500 U$10,000
Fixed Costs:
Manufacturing
485
15 F
500 --
500
Marketing
1,040
40 U
1,000 --
1,000
Administrative
995
5 F
1,000 --
1,000Operating Profit
$6,940$235 U$225 U$1,400 F$6,000$1,500 U$7,50010.25 (Estimating
flexible selling expense budget and computing variances.)
a.
Fixed Costs= $30,000 [Salaries] + $60,000 [Advertising] + $3,750
[Sales Office]
= $93,750.
Variable Costs
as a Function= (.05 [Commissions] X Revenue) + (.03 [Travel] X
Revenue).
of Revenue
Variable Costs
as a Function = ($.05 [Office] X Units Sold) + ($.10 [Shipping]
X Units Sold).
of Units Sold
Total
Selling= $93,750 + (.08 X Revenues) + ($.15 X Units Sold).
Expensesb. and c.Profit Variance Analysis
SalesFlexible
Master
ActualSellingPriceBudgetSalesBudget
(50,000ExpenseVari-(50,000Volume(65,000
Units)VariancesanceUnits)VarianceUnits)
Sales Revenue
$300,000
$25,000 F$275,000$82,500 U$357,500
Less Variable
Selling Costs
30,000$500 U
29,500a
8,850 F
38,350bContribution
Margin
$270,000$500 U$25,000 F$245,500$73,650 U$319,150Less Fixed
Selling Costs
80,000
13,750F
93,750 --
93,750Profits from
Selling
$190,000$13,250 F$25,000 F$ 151,750$73,650 U$225,400
a$29,500 = (.08 X $275,000) + ($.15 X 50,000) = $22,000 +
$7,500.
b$38,350 = (.08 X $357,500) + ($.15 X 65,000) = $28,600 +
$9,750.10.26 (Materials and labor variances.)
Price Efficiency
VarianceVariance
Materials $105,500 - ($.50 x 200,000 pds) $.50 X [200,000 pds -
(97,810 units X 2 pds)]
= $5,500 U
= $2,190 U
Labor $905,000 - ($9.00 x 99,200 hrs) $9.00 X [99,200 hrs
-(97,810 units X 1 hour)]
= $12,200 U
= $12,510 U10.27(Evaluate cause of materials and labor
variances.)
The unfavorable materials variances resulted from paying more
than anticipated for the materials ($0.53 actual price versus $0.50
standard price), and from using more pounds of material than
anticipated (200,000 actual quantity used versus 195,620 standard
quantity).
The unfavorable labor variances resulted from paying more than
anticipated for labor ($9.12 actual rate versus $9.00 standard
rate), and from using more labor hours than anticipated (99,200
actual hours versus 97,810 standard hours.)
10.28(Materials and labor variances.)
Price Efficiency
VarianceVariance
Materials $127,500 - ($2.50 x 49,000 pds) $2.50 X [49,000 pds -
(48,000 batches x 1 pd)]
= $5,000 U
= $2,500 U
Labor $214,000 - ($3.00 x 70,000 hrs) $3.00 X [70,000 hrs -
(48,000 batches X 1.5 hour)]
= $4,000 U
= $6,000 F10.29(Evaluate cause of materials and labor
variances.)
The $7,500 unfavorable materials variance resulted from paying
more than anticipated for the materials ($2.60 actual price versus
$2.50 standard price), and from using more pounds of material than
anticipated (49,000 actual quantity versus 48,000 standard
quantity).
The $2,000 favorable labor variance resulted from using less
labor hours than anticipated (70,000 actual hours versus 72,000
standard hours). However, the favorable variance resulting from
this efficient use of labor hours was somewhat offset by the higher
rate of pay than anticipated ($3.06 actual hourly rate versus $3.00
standard rate).
10.30(Solving for materials quantities and costs.)
Chemical Aa.Price variance is $.20 F per pound.
Total price variance is $42,000 F.
Pounds Purchased and Used = $42,000/$.20= 210,000.
b.Standard pounds allowed for 100,000 units (pools cleaned) =
200,000.
210,000 pounds 200,000 pounds = 10,000 pounds used over
standard.
Efficiency variance = $40,000 U.
So, $40,000/10,00 pounds = $4.00 = the standard unit price.
Chemical B
a.Pounds Purchased and Used = $25,000/$.10= 250,000.
b.Standard Unit Price = $30,000/(250,000 220,000 pounds) =
$1.00.Chemical C
a.Pounds Purchased and Used = $21,000/$.07 = 300,000.
b.Standard Unit Price = $48,000/(300,000 250,000 pounds) =
$.96.
10.31(Maxums Sales; nonmanufacturing variances.)
Actual
Standard
Cost Price
EfficiencyCost
(AP X AQ) Variance(SP X AQ)aVariance(SP X SQ)bMay
$900,000$60,000 U$840,000$30,000 U$810,000June
1,000,000
40,000 U
960,000
120,000 F
1,080,000July
800,000
20,000 U
780,000
240,000 U
540,000
a$840,000 = $6 X 140,000 sales calls; $960,000 = $6 X 160,000
sales calls; $780,000 = $6 X 130,000 sales calls.b$810,000 = $6 X 9
calls per unit sold X 15,000 units sold; $1,080,000 = $6 X 9 calls
per unit X 20,000 units sold; $540,000 = $6 X 9 calls per unit X
10,000 units sold.10.32(Labor and variable overhead variances.)
Price Efficiency
VarianceVariance
Direct Labor $43,400 ($3.00 x 14,000 hrs) $3.00 X (14,000 hrs
15,000 hrs)
= $1,400 U
= $3,000 F
Variable $22,900 ($1.50 x 14,000 hrs) $1.50 X (14,000 hrs 15,000
hrs)
Overhead= $1,900 U
= $1,500 F10.33(Overhead variances.)
ActualFlexible
CostsBudgetVariance
Variable$13,600 $3,500$3.00 X 3,500 hours $400 F
Overhead= $10,100
= $10,500
Fixed$3,500
$3,300$200 U
Overhead
10.34(Finding purchase price.)
ActualInput at
CostsPriceStandard Prices
(AP X AQ)Variance(SP X AQ)
AP X 1,600$3.60 X 1,600
= $5,760
> $240 F $860 U $0 $10,000 U C:
Where:P = Probability process is out of control;
B = Dollar amount of savings from correcting problem; and
C = Cost of investigation.
.35 X ($45,000 $20,000) = $8,750 > $7,000.
Yes, this process should be investigated since the value of the
expected savings exceeds the cost of investigation.
10.39(Variances from activity-based costs.)
Flexible
Actual
Production
ActualPriceInputs atEfficiencyBudget
CostsVarianceStandard PricesVariance(Standard Allowed)
Quality
$.50 X 42,000 minutes
$.50 X 40,000 minutes
Testing$20,000
= $21,000
= $20,000
> $1,000 F $1,000 U $2,000 U $2,000 F $4,200 F $1,000 U
C:
Where:P = Probability process is out of control;
B = Dollar amount of savings from correcting problem; and
C = Cost of investigation.
.30 X ($40,000 - $10,000)= $9,000
$9,000 > $7,000 cost.
This process should be investigated because the expected value
of the savings is greater than the cost of investigation.
10.41 (Year to year analysis in a service organization.)
Analysis Period
Year 2Change in Operating
Profits due to Change
in Production Costs Change in Operating
Profits due to Change
in Gen. Admin. CostsChange in Operating
Profits due to Change
in Sales PriceChange in Operating
Profits due to Change
in Sales VolumeBaseline Period,
Year 1
Revenue$3,400,000$200,000Ub$600,000Fa$3,000,000
Professional salaries 1,850,000$ 50,000Ue 300,000Uc
1,500,000
Other variable costs 470,000 10,000Ff 80,000Ud 400,000
Contribution margin 1,080,000 $40,000U$200,000U 220,000F
1,100,000
General admin. 680,000$20,000Fg 700,000
Operating profits$ 400,000$40,000U$20,000F$200,000U$ 220,000F $
400,000
a$120 sales price in Year 1 =.$3,000,000/25,000 hours
5,000 unit increase in volume between years 1 and 2 x $120 =
$600,000
bSolve for the change in profits from change in sales price as
follows:
$3,000,000 sales in Year 1 + $600,000 effect of favorable sales
volume - $3,400,000 sales in Year 2 = $200,000 unfavorable change
due to sales price.
c$60 variable cost per hour in Year 1 = $1,500,000/25,000
5,000 unit increase in volume x $60 = $300,000d$16 variable cost
per hour in Year 1 = $400,000/25,000
5,000 unit increase in volume x $16 = $80,000
eSolve for the change in profits from the change in professional
salaries as follows:
$1,500,000 professional salaries in Year 1 + $300,000 increase
in professional salaries due to increased sales volume - $1,850,000
professional salaries in Year 2 = $50,000 unfavorable change due to
change in professional salaries between Years 1 and 2.
fSolve for the change in profits from the change in other
variable costs as follows:
$400,000 other variable costs in Year 1 + $80,000 increase in
other variable costs due to increased sales volume - $470,000 other
variable costs in Year 2 = $10,000 favorable change due to change
in other variable costs between Years 1 and 2. gSolve for the
change in profits from the change in general administrative costs
by comparing the Year 1 and Year 2 costs: $700,000 - $680,000 =
$20,000 favorable change.10.42 (Profit variance analysis in a
service organization)
Profit Variance Analysis
(1)(2)(3)(4)(5)(6)(7)
Actual
Flexible
Master
(based on
Budget
Budget
actual
(based on
(based on
activity
GeneralSalesactual activitySalesa prediction
of 20,000ProductionAdministrativePriceof 22,000 Volumeof
20,000
hours)VariancesVariancesVariancehours)Variancehours)
Sales Revenue
$2,300,000 --
--
$100,000 F$2,200,000a$200,000 F$2,000,000
Less:
Professional Salaries
1,550,000$230,000 U --
--
1,320,000a
120,000 U
1,200,000
Other Variable Costs
250,000 30,000 U
220,000a
20,000 U
200,000Contribution Margin
$ 500,000
$260,000 U
$100,000 F$ 660,000$ 60,000 F$ 600,000
Less:
General Administrative
Costs
400,000 --
--
400,000
--
400,000Operating Profits
$100,000$260,000 U$ -0-
$100,000 F$ 260,000$ 60,000 F$ 200,000
aIncrease master budget sales revenue and variable costs by the
10% increase in units, actual over budget
10.43 (Comprehensive problem.)Profit Variance Analysis
(1)(2)(3)(4)(5)(6)(7)
Actual
Flexible
Master
(based on
Budget
Budget
actual
(based on
(based on
activity
Marketing andSalesactual activitySalesa prediction
of 14,000ManufacturingAdministrativePriceof 14,000 Volumeof
16,000
units sold)VariancesVariancesVarianceunits sold)Varianceunits
sold)
Sales Revenue
$308,000a --
--
$28,000F$280,000b$40,000 U$320,000
Less:
Variable Manufacturing
Costs
162,000$8,000 U --
--
154,000b
22,000 F
176,000
Variable Marketing and
Administrative Costs
17,000 --
$3,000 U --
14,000b
2,000 F
16,000Contribution Margin
$129,000$8,000 U$3,000 U$28,000 F$112,000$16,000 U$128,000
Less:
Fixed Manufacturing
Costs
42,000
2,000 U --
--
40,000 --
40,000
Fixed Marketing and
Administrative Costs
68,000 --
2,000 F --
70,000 --
70,000Operating Profits
$19,000$10,000 U$1,000 U$28,000 F$2,000$16,000 U$18,000
a$308,000 = $22 X 14,000 units.
bDecrease master budget sales revenue and variable costs by the
12.5%decrease in actual units from budgeted units.10.44
(Comprehensive problem.)
Profit Variance Analysis
(1)(2)(3)(4)(5)(6)(7)
Actual
Flexible
Master
(based on
Budget
Budget
actual
(based on
(based on
activity
Marketing andSalesactual activitySalesa prediction
of 20,000ManufacturingAdministrativePriceof 20,000 Volumeof
18,000
units sold)VariancesVariancesVarianceunits sold)Varianceunits
sold)
Sales Revenue
$420,000a --
--
$20,000F$400,000$40,000 F$360,000
Less:
Variable Manufacturing
Costs
230,880$30,880 U --
--
200,000b
20,000 U
180,000
Variable Marketing and
Administrative Costs
22,000 --
$2,000 U -- 20,000b
2,000 U
18,000Contribution Margin
$167,120$30,880 U $2,000 U$20,000 F$180,000 $18,000 F $
162,000
Less:
Fixed Manufacturing
Costs
82,000
2,000 U --
--
80,000 --
80,000
Fixed Marketing and
Administrative Costs
18,000 --
2,000 F --
20,000 --
20,000Operating Profits
$67,120$32,880 U $ 0 $20,000 F$80,000$18,000 F$62,000
a$420,000 = $21 X 20,000 units.
10.45 (Finding missing data.)
a.750 Units.
b.$65U.
c.$135U = EQ \f($2\,025,750 units) X 50 units (= 800 in master
budget 750 in flexible budget).
d.$2,160 (= $2,025/750 units) X 800 unitse.$570 (= EQ \f($38,50
units) X 750 units).
f.$510 (= $570 $60).
g.$608 (= EQ \f($38,50 units) X 800 units).
h.$200 (= $1,960 $510 $1,250).
i.$202.5 (= EQ \f($216,800 units) X 750 units).
j.$2.5F (= $202.5 $200).
k.$13.5F (= $216 $202.5).
l.$60F.
m.$2.5F.
n.$65U.
o.$1,252.5 (= $2,025 $570 $202.5).
p.$83.5U (= $135U $38F $13.5F).
q. $1,336 (= $2,160 $608 $216).
10.46 (Finding missing data.)
a.12,000 (= 10,000 units in master budget + 2,000 units
favorable sales volume).
b.12,000.
c.$20,000 (= $150,000 $80,000 $50,000).
d.$25,000 (= $60,000 $15,000 $20,000).
e.$25,000.
f.$15,000.
g.$10,000 (= $50,000 $25,000 $15,000).
h.$180,000 (= $60,000 + $24,000 + $96,000).
i.$198,000 (= $180,000 + $18,000).
j.$30,000F (= $180,000 $150,000).
k.$16,000U (= $96,000 $80,000).
l.$10,000F (= $60,000 $50,000).
m.$10,000F.
n.$105,000 (= $96,000 + $9,000).
o.$2,400F (= $24,000 $21,600).
p.$71,400 (= $198,000 $105,000 $21,600).
q.$23,000 (= $25,000 $2,000).
r.$11,400F (= $18,000 $9,000 + $2,400).
s.$30,400 (= $71,400 $23,000 $18,000).
t.$3,000U (= $18,000 $15,000).
u.$10,400F (= $30,400 $20,000).
10.47 (Assigning responsibility.)
a. The raw materials variance appears to be the result of poor
quality inputs. In assigning responsibility, therefore, management
must discern the reason why poor quality inputs were used. The poor
quality raw materials could be the responsibility of any one of a
number of areas. It may have been due to poor performance in the
purchasing department, or to poor production planning by the
production supervisor. Possibly, management was responsible by
placing demands on the Assembly Division that required an emergency
purchase of materials that did not meet normal quality standards.
Finally, the poor input quality may have been the result of factors
outside the control of any responsibility center in the firm, such
as a general decline in the quality of a particular raw
material.
b. The idle time in the Finishing Division was the result of
fewer units than expected being transferred out of the Assembling
Division, which in turn was the result of poor quality raw
materials input. In such a case ultimate responsibility should be
placed on the center responsible for the poor quality raw
materials. Management may, however, feel that the idle labor hours
could have been used productively in other areas. In such a case,
responsibility would be placed on the supervisor of the Finishing
Division.
10.48 (Controls over planning function.)
It is virtually impossible to design a quantitative measure that
captures the relevant aspects of performing the planning activity.
Alternative performance evaluation procedures must therefore be
used.
One approach is to have either the external or internal auditors
conduct a management audit of the planning activity. Standards
might be set relative to the use of appropriate statistical
planning tools, the participation of line and staff personnel in
generating inputs for the planning models, and the effective
communication of budgeted amounts to the employees affected by the
budgets. Statistical consultants could be used to evaluate the
appropriateness of the statistical tools used. Line and staff
personnel could be interviewed to determine the extent they
participated in the planning process and their reaction to the
activity of the planning department. The management audit would
also evaluate the qualifications of the personnel in the planning
department and the quality of continued training and supervision
they receive. Given the cost of such a management audit, it would
probably be conducted every two or three years rather than
annually.
10.49(Computing variances for marketing costs.)
Flexible
Master
Actual
BudgetSalesBudget
$2,700,000Cost$2,700,000Volume$3,240,000b
SalesVarianceaSalesVarianceSales
Sales Commissionsc
$270,000$ -0-
$270,000$54,000 F$324,000
Cost of Sales
810,000 -0-
810,000d
162,000 F
972,000
Telephone Time
32,200
5,200 U
27,000d
5,400 F
32,400
Delivery Services
161,100
900 F
162,000d
32,400 F
194,400
Uncollectible Accounts
121,500 -0-
121,500d
24,300 F
145,800
Other Variable Costs
112,700
18,200 U
94,500d
18,900 F
113,400
Fixed Costs
409,000
2,500 F
411,500 -0-
411,500
Total Costs
$1,916,500$20,000 U$1,896,500$297,000 F$2,193,500
aDifference between actual and flexible budget.
b$450 X 180 hours X 40 callers = $3,240,000.
c10% of the sales figure.
dThe remaining variable costscost of sales through other
variable costsequal the master budget amount
$2,700,000/$3,240,000.
For example, $810,000 = $972,000 $2,700,000/$3,240,000.
.
10.50(Analysis of cost reports [CMA adapted].)
Three possible changes that could make the cost information more
meaningful are:
1.Use a flexible budget, rather than a static budget, for
measuring performance. This would enable the reporting process to
recognize changed conditions, such as volume changes, and fixed
versus variable costs.
2.Separate variable costs from fixed costs. Also, identify those
elements of the report for which the production manager is directly
responsible.
3.Separate excess cost into price and efficiency variances for
variable costs.
10.51(Change of policy to improve productivity [CMA
adapted].)
Improved profit margins will not be achieved. The production
manager fails to understand that by tightening the standards (all
else equal) variances will be negative. Simply lowering the
standard time allowed per operation does not reduce the cost of
manufacturing the product, unless an actual reduction in the
processing time occurs. The tightening of the standards will
probably decrease morale and motivation resulting in increased
processing time. This will decrease productivity and increase the
costs of production.
Currently the assembly personnel rarely complete the operations
in less time than the standard allows. Assuming that the assembly
department is working efficiently, it is not likely that the
tightening of the standards (reducing the allowed time per
operation) will result in increased productivity. More likely, the
assembly personnel will resent having the standards tightened
without their input. They currently view the standards as
achievable, since they do achieve them occasionally. Tightening the
standards will result in decreased motivation and morale, as they
will be striving for what they will view as an unrealistic
standard.
10.52(Ethics and standard costs [CMA adapted].)
Joes behavior is unethical. The unofficial CMA answer to this
question cites violations in the areas of competence, integrity,
and objectivity with regard to the Standards of Ethical Conduct for
Management Accountants. Basically, Joe has an obligation to
communicate information fairly and objectively. He must prepare
complete and clear reports and recommendations. By misrepresenting
the costs of the strawberries, he is hoping to benefit his friends
strawberry farm at the expense of Western Farms. Joe should avoid
such conflicts of interest and advise all parties of potential
conflicts. He should not be setting the standards and mandating
from whom Western should purchase strawberries.
10.53(Hospital variances.)
Flexible
Actual
Inputs at
Production
CostsPriceStandard PricesEfficiencyBudget
(AP X AQ)Variance(SP X AQ)Variance(SP X SQ)
Material X$40 X 8,000 units
$50 X 8,000 units
$50 X (5 X 1,500 units)
= $320,000
= $400,000
= $375,000
> $80,000 F $25,000 U $14,000 U $75,000 F $600 U $1,000 F
$200 U $1,200 F $80,000 F $33,333 U $8,333 F $14,000 U $50,000 F
$25,000 F $66,000 F $16,667 F $33,333 F 600 U $143 F 857 F 200 U 86
U 1,286 F 800 U 57 F 2,143 F $76 U $25 U 0 $500 U $250 U $750 U
$500 U