Chap 017

2

Chapter 17 - Additional Topics in Variance Analysis

17

Additional Topics in Variance Analysis

Solutions to Review Questions

False. Variances simply represent differences between plans and actual outcomes. Capturing these variances can provide useful information regardless of whether inventories exist. Knowledge about differences between plans and actual outcomes can help managers improve planning or take steps to improve operations.

Variances are usually expensed as a period cost (e.g., charged to Cost of Goods Sold). Variances can also be prorated to accounts according to the standard cost balances in each of the accounts. Hence, a materials price variance recorded at the time of purchase would be prorated to Materials Inventory, Materials Efficiency Variance (because this variance is initially recorded at standard cost), Work in Process, Finished Goods and Cost of Goods Sold according to the current year standard cost balances in those accounts.

The industry volume variance measures the impact of differences between actual and expected industry sales volume on the companys sales activity variance. Use of industry-wide data helps explain changes in volume in terms of what is happening to the industry.

Efficiencies can be realized for costs only. The sales activity variance captures the effect on profit resulting from the difference between actual and budgeted sales.

Some possible decisions for which the market share variance would be useful include marketing (advertising) decisions, investment decisions, and product line portfolio decisions.

If a company has two or more products, a mix variance can arise even if the net effect of all variances is zero. It might be very useful to learn about the mix variance because if the mix is changing, the company might need to change production and/or marketing strategies to meet the change in mix. The U.S. automobile industry was facing rising revenues and rising volumes but, unfortunately, there were falling profits because buyers were purchasing smaller cars that had lower profit margins for the manufacturers.

Examples include:

Steel mills which can process both new steel and recycled scrap

Oil refineries which can process different grades of crude oil

Distilleries producing blended whiskeys

Chemical companies

Solutions to Critical Analysis and Discussion Questions

By recognizing the materials price variance at the time of purchase, management captures any difference between actual materials cost and the standard costs as reflected in the budget as those costs are incurred. If the price variance is not reflected until the time of use, the effect of price changes might not be recognized until the materials are removed from the raw materials inventory and placed into work in process. This could be a substantial time delay. If decisions need to be made to compensate for the effect of materials price changes, it would seem that the sooner the information comes to management's attention, the better the opportunities to react to the information.

As with all firms, sports teams budget for revenues from different sources, in this case ticket sales and concessions. Depending on the event, a different customer mix might lead to a difference in the proportion of revenues from these two sources.

In this situation the company is really selling just one product so a mix variance would not be meaningful.

In a hospital, as in other professional firms, billing rates vary with the level of the professional person performing services. Hence, a physicians time is billed at a higher rate than an interns time. Even though the volume of hours billed might be the same, if the mix of physician to intern time is different there will be differences in revenues (and, most likely in profits as well).

Salary rates vary according to the classification of the service providers (e.g., nurses pay is higher than nurse practitioners pay), and the hospital will budget a certain amount of time for each classification. Thus, a labor mix variance can be calculated to show if the appropriate personnel were used in a particular period or in a particular unit (e.g., intensive care). An unfavorable mix variance would suggest that nurses were doing work that nurse practitioners should have done.

Disagree. The purpose of variance analysis is to identify items that are different from what we expected (budgeted). Therefore, we should be as interested in favorable variances as in unfavorable variances. Even if there is not a problem (for example, managers hiding expenses), we would still like to know where things are working well so that we can implement them in other areas of the organization.

Solutions to Exercises

17-1. (15 min.)Variable Cost Variances Where Materials Purchased And Used Are Not Equal: Golden Company.Actual CostsPrice VarianceActual Inputs at Standard PriceEfficiency VarianceFlexible Budget (Standard Allowed for Good Output)

Purchase Computations$174,474$172,530

$1,944 U

$115,0207.86 x 14,000

= $110,040

Usage Computations$4,980 U

17-2. (15 min.) Industry Volume And Market Share Variances: Kays Auto Products.Flexible Budget(SCM x AQ)Market Share VarianceStandard Contribution Margin Times Budgeted Market Share Times Actual Industry Volume(SCM x ASQ)Industry Volume VarianceMaster Budget (SCM x SQ)

$4 x 45,000

= $180,000$4 x 20% x 300,000

= $240,000$4 x 20% x 250,000

= $200,000

$60,000 U$40,000 F

$20,000 U

17-3. (20 min.)Industry Volume And Market Share VariancesMissing Data.a.15,000 fewer units = 52,500 fewer units 37,500 more units.b.900,000 units. [1,050,000 (b)] x 25% = 37,500 units.c.25% (from industry volume line).d.20%. [(d) 25%] x 1,050,000 = 52,500 fewer units.e.1,050,000 units (from industry volume line).

17-4. (20 min.)Industry Volume And Market Share VariancesMissing Data.a.20,000 fewer units = 100,000 more units activity variance 120,000 more units market share variance.b.3,000,000 units (from market share line).c.8% (from market share line).d.3,250,000. [3,000,000 d] x 8% = 20,000 fewer units.e.12%. (e 8%) x 3,000,000 = 120,000 more units.17-5. (20 min.)Sales Mix And Quantity Variances: AAA Electronics.a. and b.

The actual prices are not relevant here. The mix and quantity variances are based on standard (budgeted) contribution margin per unit.

Flexible Budget AQ x (SP SV)Mix VarianceASQ x (SP SV)Quantity VarianceMaster Budget

15,000 x ($109.50 - $50.00)+ 10,000 x ($249.50 - $100.00)

= $2,387,50025,000 x (20,000/29,000) x ($109.50 - $50.00) +25,000 x (9,000/29,000) x ($249.50 - $100.00)

=$2,185,77620,000 x ($109.50 - $50.00) + 9,000 x ($249.50 - $100.00)

= $2,535,500

$201,724 F$349,724 U

$148,000 U

Activity Variance

17-6. (20 min.)Sales Mix And Quantity Variances: Renees Rings.a. and b.

Flexible Budget AQ x (SP SV)Mix VarianceASQ x (SP SV)Quantity VarianceMaster Budget

8,800 x ($500 - $200) + 2,400 x ($1,200 - $400)= $4,560,00011,200 x (8,000/10,000) x ($500 - $200) +11,200 x (2,000/10,000) x ($1,200 - $400) =$4,480,0008,000 x ($500 - $200) + 2,000 x ($1,200 - $400)

= $4,000,000

$80,000 F$480,000 F

$560,000 F

Activity Variance

17-7. (20 min.)Sales Mix And Quantity Variances: Tapas By Tom.a. and b.

Flexible Budget AQ x (SP SV)Mix VarianceASQ x (SP SV)Quantity VarianceMaster Budget

756 x ($40 - $16) + 324 x ($60 - $20)= $31,1041,080 x (800/1,200) x ($40 - $16) +1,080 x (400/1,200) x ($60 - $20) =$31,680800 x ($40 - $16) + 400 x ($60 - $20)

= $35,200

$576 U$3,520 U

$4,096 U

Activity Variance

17-8. (35 min.)Materials Mix and Yield Variances: Huron Group.a. and b.

Efficiency Variance

Actual (AP x AQ)Purchase Price Variance(SP x AQ)Mix Variance(SP x ASQ)Yield VarianceFlexible Production Budget (SP x SQ)

Material:

Twinkle$18 x 44,000 = $792,000$20 x 44,000 = $880,000 $20 x (1/3 x 120,000) = $20 x 40,000 = $800,000$20 x (20 x 2,000) = $20 x 40,000 = $800,000

$88,000 F$80,000 U$-0-

Efficiency Variance = $80,000 U

Star$32 x 76,000 = $2,432,000$30 x 76,000 = $2,280,000$30 x (2/3 x 120,000) = $30 x 80,000 = $2,400,000$30 x (40 x 2,000) = $30 x 80,000 = $2,400,000

$152,000 U$120,000 F$-0-

Efficiency Variance = $120,000 F

Total$3,224,000$3,160,000$3,200,000= $3,200,000

$64,000 U$40,000 F$-0-

Efficiency Variance = $40,000 F

Production of 2,000 units should require 120,000 units of input (= 2,000 x 20 + 2,000 x 40). Actual usage was 120,000 units (= 44,000 + 76,000), so there was no yield variance.17-9. (35 min.)Materials Mix and Yield Variances: Johns Weed-B-Gone.a. and b.The actual purchase prices were $7.75 (= $51,150 6,600) for Weed-X and $21.00 (= $110,880 5,280) for Pest-O.

Efficiency Variance

Actual (AP x AQ)Purchase Price Variance(SP x AQ)Mix Variance(SP x ASQ)Yield VarianceFlexible Production Budget (SP x SQ)

Material:

Weed-X$7.75 x 6,600

= $51,150$8 x 6,600 = $52,800 $8 x (1/2 x 11,880)= $8 x 5,940

= $47,520$8 x (0.005 x 1,080,000) = $8 x 5,400= $43,200

$1,650 F$5,280 U$4,320 U

Efficiency Variance = $9,600 U

Pest-O$21 x 5,280 = $110,880$20 x 5,280 = $105,600$20 x (1/2 x 11,880)= $20 x 5,940

= $118,800$20 x (0.005 x 1,080,000)= $20 x 5,400

= $108,000

$5,280 U$13,200 F$10,800 U

Efficiency Variance = $2,400 F

Total$162,030$158,400$166,320= $151,200

$3,630 U$7,920 F$15,120 U

Efficiency Variance = $7,200 U

17-10. (35 min.) Labor Mix and Yield Variance: Matts Eat N Run.

a. and b.

Efficiency Variance

Actual (AP x AQ)Purchase Price Variance(SP x AQ)Mix Variance(SP x ASQ)Yield VarianceFlexible Production Budget (SP x SQ)

Labor:

Skilled$92,000$15 x 6,000 = $90,000$15 x (0.25 x 21,000) = $15 x 5,250 = $78,750$15 x (2/60 x 180,000) = $15 x 6,000 = $90,000

$2,000 U$11,250 U$11,250 F

Efficiency Variance = $-0-

Unskilled$180,000$7.50 x 15,000 = $112,500$7.50 x (0.75 x 21,000) = $7.50 x 15,750 = $118,125$7.50 x (6/60 x 180,000) = $7.50 x 18,000 = $135,000

$67,500 U$5,625 F$16,875 F

Efficiency Variance = $22,500 F

Total$272,000$202,500$196,875= $225,000

$69,500 U$5,625 U$28,125 F

Efficiency Variance = $22,500 F

17-11. (10 min.) Flexible BudgetingService Organization: Lowe & Rent.Flexible Budget (based on actual of 6,900 hours)

Revenue

$862,500a

Costs:

Professional salaries

431,250b

Other variable costs

117,300c

Fixed costs

180,000d

Total costs

$728,550

Profit

$133,950

a$862,500 =6,900 hrs.x$750,000

6,000 hrs.

b$431,250 = 6,900 hrs.x$375,000

6,000 hrs.

c$117,300 = 6,900 hrs.x$102,000

6,000 hrs.

d$180,000 =Master budget fixed costs

17-12. (20 min.)Sales Activity VarianceService Organization: Lowe & Rent.Flexible Budget (based on actual of 6,900 hours)Sales Activity VarianceMaster Budget (based on budgeted 6,000 hours)

Revenue

$862,500$112,500F$750,000

Costs:

Professional salaries

431,25056,250U375,000

Other variable costs

117,30015,300U102,000

Fixed costs

180,000

180,000

Total costs

$728,550$71,550U$657,000

Profit

$133,950$ 40,950F$ 93,000

17-13. (30 min.)Profit Variance AnalysisService Organization: Lowe & Rent.(1)(2)(3)(4)(5)(6)

Actual (6,900 hrs.)Cost VariancesPrice VariancesFlexible Budget (6,900 hrs.)Sales Activity VarianceMaster Budget

(6,000 hrs.)

Revenue

$825,000$37,500 U$862,500$112,500 F$750,000

Professional salaries

465,000$33,750 U431,25056,250 U375,000

Other variable costs

108,0009,300 F117,30015,300 U102,000

Fixed costs

174,0006,000 F180,000180,000

Profit

$ 78,000$18,450 U$37,500 U$ 133,95040,950 F$ 93,000

17-14. (20 min.) Sales Price and Activity Variances: Dylan & Father.

Actual (AP x SQ)Price VarianceFlexible Budget (SP SV) x SQ

Partner$3,612,000$770 x 4,800 hours = $3,696,000

$84,000 U

Staff$3,738,000$182 x 20,400 hours = $3,712,800

$25,200 F

Flexible BudgetMaster Budget

AQ x (SP SV)Mix Variance(SP SV) x ASQQuantity VarianceSQ x (SP SV)

4,800 x ($770 - $364) + 20,400 x ($182 - $98) = $3,662,400 [$406a x (5,100 25,890) x 25,200] + [($84b x (20,790 25,890) x 25,200] = $3,715,233 5,100 x $406 + 20,790 x $84 = $3,816,960

$52,833 U$101,727 U

$154,560 U

Activity Variance

a $406 = $770 $364.

b $84 = $182 $98.

17-15. (15 min.)Variable Cost Variances: Harrys Hotel.

Actual CostsPrice VarianceActual Inputs at Standard PriceEfficiency VarianceFlexible Budget (Standard Allowed)

$45,240$12 x 3,000 = $36,000$12 x (14,000 4) = $42,000

$9,240 U$6,000 F

Solutions to Problems

17-16. (20 min.)Sales Mix And Quantity Variances: Matties Vineyards.a. Price Variance = (Actual Price Budgeted Price) x Actual Quantity:

Variety:Price Variance=(Actual Price Budgeted Price)xActual Quantity

Sauvignon Blanc$2,000 F=($7.25 $7.00)x8,000

Chardonnay900 U=($8.10 $8.25)x6,000

Riesling3,850 F=($7.10 $6.75)x11,000

$4,950 F

b. and c.

The actual prices are not relevant here. The mix and quantity variances are based on standard (budgeted) contribution margin per unit.Flexible Budget AQ x (SP SV)Mix VarianceASQ x (SP SV)Quantity VarianceMaster Budget

8,000 x ($7.00 - $5.00) + 6,000 x ($8.25 - $6.00)+ 11,000 x ($6.75 - $4.75)= $51,500.0025,000 x (10,400/26,000) x ($7.00 - $5.00) +25,000 x (3,900/26,000) x ($8.25 - $6.00)+25,000 x (11,700/26,000) x ($6.75 - $4.75) =$50,937.5010,400 x ($7.00 - $5.00) + 3,900 x ($8.25 - $6.00)+ 11,700 x ($6.75 - $4.75)

= $52,975.00

$562.50 F$2,037.50 U

$1,475 U

Activity Variance

17-17. (40 min.)Analyze Performance for a Restaurant: Dougs Diner.Hint for working the problem: Use sales revenue as the basis for measuring volume.

($000)

ActualPurchases VariancesMarketing & Administrative VariancesFlexible BudgetActivity VarianceMaster Budget

Sales revenuea

$1,200$1,200$200 F$1,000

Variable costs:

Purchases

780$60 U720b120 U600

Hourly wages

6060c10 U50

Franchise fee

3636d6 U30

Utilities

76$8 F84e14 U70

Total variable costs

$952$60 U$8 F$900$ 150 U$750

Contribution margin

$248$60 U$8 F$300$ 50 F$250

Fixed costs:

Advertising

100100100

Depreciation

505050

Lease

303030

Salaries

303030

Total fixed costs

$210$ 210$ 210

Operating profit

$ 38$60 U$8 F$90$50 F$ 40

Notes on the following page.

17-30. (continued)a Sales revenue is used as the basis of volume measurement because there are no price changes.

b$600x$1,200

$1,000

c$50x$1,200

$1,000

d$30x$1,200

$1,000

e$70x$1,200

$1,000

17-18. (30 min.)Nonmanufacturing Cost Variances: Springfield Bank.Incidental office costs comprise the variable costs. Salaries and the fixed office costs are all fixed. Variance analysis for the two classes of overhead is as follows:

Actual CostsCombined Price and Efficiency VarianceFlexible Budget (Standard Allowed for Actual Output)

Correspondence, Supplies, etc.$10,800 x 1.12

= $12,096$45 x 240

= $10,800

$1,296 U

Loan processor and other costs$55,000 + $63,000 = $118,0000.5a x ($60,000 + $50,000 + $130,000) = $120,000

$2,000 F

Optional:

If computed, the production volume variance would be:

BudgetApplied

$120,000$120,000 x (240 225) = $128,000

$8,000 F

a 0.5 represents one-half year.

17-19. (30 min.)Performance Evaluation In Service Industries: Bay Area Bank.

Actual CostsPrice VarianceActual Inputs at Standard PriceEfficiency VarianceFlexible BudgetActivity VarianceMaster Budget

New Accounts$572,250(Ignored)$30 x 19,200 accounts = $576,000$30 x 20,000 accounts = $600,000

$3,750 F$24,000 F

Account Maintenance$18,000$17,700$0.45 x 45,000 = $20,250$0.45 x 43,200 = $19,440

$300 U$2,550 F$810 U

17-20. Revenue Analysis Using Industry Data and Multiple Product Lines: Peninsula Candy Co.

a. Sales price and activity variances.

FlexibleMaster

budgetbudget

(AP SV) x AQ(SP SV) x AQ(SP SV) x SQ

(1,600 x $.03a)

+ (2,000 x $.04)

$1,162 $915b+ (4,200 x $.035)$1,200 $920

= $247= $275= $280

$28 U$5 U

Sales priceSales activity

variancevariance

a Unit contribution margins calculated from master budget panel as follows:

Unit margin = Contribution margin Sales units.

b $915 = [1,600 x ($140 2,000) + 2,000 x ($320 2,000) + 4,200 x ($460 4,000)].

b.Two solutions are possible when calculating the market share variance, depending upon the figure used for the left column. The examples in the text use the flexible budget amount. However, those examples involve only one product, whereas this problem has three products, and therefore a mix issue is present. In this situation, another way to solve the problem would be to use the standard price times the actual quantities at the standard mix. Both alternatives are given on the following page.

17-33b.(continued) Contribution margin variance

Actual Quantities at

Standard Mix andIndustryMaster

Standard PricesEffectBudget

$280 x (76,000 80,000)

$273a= $266$280

$7 F$14 U

Market Share VarianceIndustry Variance

$7 U

Quantity

Variance

Flexible BudgetIndustry EffectMaster Budget

$275$266$280

$9 F$14 U

$5 U

Activity Variance

The $2 difference in the market share variance is explained by the difference in the mix.

a $273 = [7,800 x (2,000 8,000) x ($60 2,000) + 7,800 x (2,000 8,000) x ($80 2,000) + 7,800 x (4,000 8,000) x ($140 4,000)].

A shortcut is to multiply the actual number of bars by the average contribution margin per bar in the master budget: 7,800 bars x ($280 8,000 bars) = $273.

17-21. (20 min.)Sales Mix And Quantity Variances: Peninsula Candy Co.

Flexible BudgetMix VarianceQuantity VarianceMaster Budget

(SP SV) x AQ(SP SV) x ASQ(SP SV) x SQ

(1,600 x $.03)(7,800 x2,000x $.03)(2,000 x $.03)

8,000

+ (2,000 x $.04)+(7,800 x2,000x $.04)+ (2,000 x $.04)

8,000

+ (4,200 x $.035)+(7,800 x4,000x $.035)+ (4,000 x $.035)

8,000

= $275= $273= $280

$2 F$7 U

$5 U

Activity Variance

17-22. (45 min.) Materials Mix And Yield Variances: Houston Corporation.a. and b.

Efficiency Variance

MaterialActual (AP x AQ)Purchase Price Variance(SP x AQ)Mix Variance(SP x ASQ)Yield VarianceFlexible Production Budget

Z-Alpha$423,360$9 x 50,400 = $453,600$9 x (.48a x 104,400) = $9 x 50,112 = $451,008$9 x (600 x 80) = $432,000

$30,240 F$2,592 U$19,008 U

$21,600 U

Z-Beta$400,464$12 x 37,040 = $444,480$12 x (.36a x 104,400) = $12 x 37,584 = $451,008$12 x (450 x 80) = $432,000

$44,016 F$6,528 F$19,008 U

$12,480 U

Z-Gamma$417,216$24 x 16,960 = $407,040$24 x (.16a x 104,400) = $24 x 16,704 = $400,896$24 x (200 x 80) = $384,000

$10,176 U$6,144 U$16,896 U

$23,040 U

a Standard mix: .48 = 600 1,250; .36 = 450 1,250; .16 = 200 1,250;

17-35. (continued)Efficiency Variance

Actual Purchase Price Variance(SP x AQ)Mix Variance(SP x ASQ)Yield VarianceFlexible Production Budget

Total$1,241,040$1,305,120$1,302,912$1,248,000

$64,080 F$2,208 U$54,912 U

$57,120 U

17-23. (30 min.) Labor Mix and Yield Variances: Davenport Construction Associates

a. and b.

Efficiency Variance

Actual Purchase Price Variance(SP x AQ)Mix Variance(SP x ASQ)Yield VarianceFlexible Production Budget

($26 x 660) + ($23 x 780) + ($15 x 432) = $41,580($24 x 660) + ($21 x 780) + ($15 x 432) = $38,700 ($24 x 1/3 x 1,872) + ($21 x 1/3 x 1,872) + ($15 x 1/3 x 1,872) = $37,440($24 x 600) + ($21 x 600) + ($15 x 600) = $36,000

$2,880 U$1,260 U$1,440 U

$2,700 U

17-24. (20 min.)Derive Amounts for Profit Variance Analysis: Aqua Clean, Inc.

Hint: Use last months actual as master budget.

Actual (based on actual activity of 161 cleanings)Variable Cost VarianceSales Price VarianceFlexible Budget (based on actual activity of 161 cleanings)Sales Activity VarianceMaster Budget (based on a prediction of 140 cleanings)

Sales revenue

$22,800$3,282 U$26,082a$3,402 F$22,680

Less:

Variable costs

5,220$93 F5,313b693 U4,620

Contribution margin

$17,580$93 F$3,282 U$20,679$2,709 F$18,060

aLast month price = $22,680 = $162

140 cleanings

$26,082 = $162 x 161 cleanings

bLast month unit variable cost = $4,620 140 cleanings = $33; $5,313 = $33 x 161 cleanings.

Although the two months contribution margins are similar, there are significant variances. This illustrates the need to consider variance analysis even if bottom-line dollar amounts are similar to budget. Activity levels, prices, and other factors might offset each other, but individually be significant.

The number of cleanings increased by 21, which increased profit by $2,709. However, the actual average price was $141.61 (= $22,800 161 cleanings) so the average price per cleaning decreased by $20.39 ($162.00 $141.61). As a result, profit decreased by $480.

17-25. (20 min.)Flexible budget: Oak Hill Township.Flexible budget is based on actual activity of 94,500 miles for costs that vary per mile.

a.$8,505;$10 over budget.

$6,750 x (94,500 miles 75,000 miles) = $8,505

b.$756;$4 over budget.

$600 x (94,500 miles 75,000 miles) = $756

c.$5,000; equal to budget.

The assumption is that, within the relevant range, this is a fixed cost.

d.Decreased unit fixed costs.

Assuming that insurance, salaries and benefits, and depreciation are fixed costs, the budgeted amount is $0.1387 per mile [($1,000 + $5,000 + $4,400) 75,000 miles]. The actual amount is $0.1129 per mile for 94,500 actual miles, which is a drop of $0.0258. This is 84.3% of the total decrease from $0.2427 to $0.2121.

Solutions to Case

17-26. Comprehensive Overview of Budgets and Variances Racketeer, Inc.

The following solution is based on a report by Tom Terpstra.

Elmo's problem is that he thinks that the graph and the income statement measure the same thing. Otto should have told him that they do not. The income statement presents actual costs in a full-absorption costing format, while the profit graph is based on standard costs in a variable costing format. These differences account for the difference in the profit measurement.

Because the profit graph is based on standard costs, the profit it shows will be the actual profit only in those very rare cases when the variances net out to zero. Racketeer has some significant variances listed on the income statement, so Elmo should expect that the actual profit would differ from the profit on the graph. These variances are:

Material

$490U

Labor

392U

Overhead

190U

Selling and administrative

300F

Total

$772U

The overhead amount differs from the figure on the income statement, because the income statement overhead variance includes a production volume variance of $470 (= $.47 x 1,000). But that variance does not reflect a difference between actual and budget or standard costs when fixed manufacturing costs are not unitized.

The other part of the difference between the two profit figures is explained by the difference in accounting methods. Variable costing expenses fixed costs when they are incurred. With full-absorption, the fixed costs are assigned to the units produced, and then expensed in the period in which the units are sold. Racketeer treats each racket as having a fixed cost of $.47. For the 10,000 rackets sold, the fixed cost expense is $4,700 under full-absorption costing. Additionally, the production volume variance of $470 is also expensed during this period. Thus, $5,170 in fixed costs (aside from price variances) was deducted from income on the income statement. Under variable costing, the only fixed cost to be expensed is the standard cost for the period of $3,760 (also aside from price variances). So, the use of different accounting methods results in a profit difference of $1,410.

(Before Elmo starts to complain about the accountants' use of full-absorption, one should remind him that, in those months when production exceeds sales, the full-absorption method would expense less fixed costs than variable costing, so it evens out in the long run.)

17-39. (continued)

Now the two results can be reconciled:

Profit per chart

$20,940

Less:

Cost variances

772

Additional fixed costs in full-absorption

1,410

Profit per Income Statement

$18,758

Besides failing to explain the profit graph, Otto also failed to set up a format to take advantage of the standards he developed. The company should set up a chart showing the actual results, the flexible budget, and the master budget. This would provide information concerning the profit changes in relation to the change in sales volume. Additionally, the manufacturing variances could be analyzed in greater detail, as shown in Exhibits A and B on the following pages.

17-39. (continued)

Exhibit AComparison of Master Budget to Actual Results.

ActualManufacturing VarianceSelling and Administrative VarianceSales Price VarianceFlexible BudgetActivity VarianceMaster Budget

Sales

$90,00000$90,000$18,000F$72,000

Less Variable Costs:

Materials

37,990$ 490U37,5007,500U30,000

Labor

19,392392 U19,0003,800U15,200

Overhead

1,440140 U1,300260U1,040

Contribution Margin

$31,178$1,022 U00$32,200$6,440F$25,760

Less Fixed Costs:

Manufacturing

3,81050 U3,7603,760

Selling and Administrative

7,200$300F7,5007,500

Operating Profit

$20,168$1,072 U$300F0$20,940$6,440F$14,500

17-39. (continued)

Exhibit BManufacturing Cost Variances.

Actual CostsPrice VarianceActual Inputs at Standard PriceEfficiency VarianceFlexible Budget

String$.025 x 175,000 = $4,375$.03 x 175,000 = $5,250$.03 x 20 x 7,000 = $4,200

$875 F1,050 U

Frames$3.15 x 7,100 = $22,365$3.15 x 7,100 = $22,365$3.15 x 7,000 = $22,050

$-0-315 U

Skilled Labor$9.80 x 900 = $8,820$9.60 x 900 = $8,640$9.60 x .125 x 7,000 = $8,400

$180 U240 U

Unskilled Labor$5.80 x 840 = $4,872$5.60 x 840 = $4,704$5.60 x .125 x 7,000 = $4,900

$168 U196 F

Variable Overhead$1,050Total Variable Overhead Variance($.10 + $.03) x 7,000 = $910

$140 U

Actual CostsPrice VarianceBudgetProduction Volume VarianceApplied

Fixed Overhead$3,810$.47 x 8,000 = $3,760($.47 x 7,000) = $3,290

$50 U470 U

17-39. (continued)

The variance breakdown in Exhibits A and B highlights the areas that Elmo and Otto should research. One area involves the strings. Is the combination of a favorable price variance and unfavorable efficiency variance an indicator that low quality string was purchased? Another point for investigation is the apparent waste of 100 racket frames. Is there something in the production process that causes frames to break? Or are the standards unrealistic? A third area is the labor efficiency variances. Why are the skilled workers spending more time than budgeted, while the unskilled are spending less? Finally, the relationship between labor efficiency and materials efficiency variances is worth investigating, because use of substandard materials might result in an unfavorable labor efficiency variance. These are the types of questions that should be raised as a result of this variance analysis.

The McGraw-Hill Companies, Inc., 2011

626Fundamentals of Cost Accounting62617-31