Chapter 7 Practice Questions
Chapter 7 Practice Questions
Chapter 7 Practice Questions
Required:
1. Prepare a performance report (akin to Exhibit 7-2, page274) that uses a flexible budget and a
static budget.
2. Comment on the results in requirement 1.
SOLUTION
Flexible-
Actual Budget Flexible Sales-Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Units (tires) sold 2,800g 0 2,800 200 U 3,000g
Revenues $313,600a $ 5,600 F $308,000b $22,000 U $330,000c
Variable costs 229,600d 22,400 U 207,200e 14,800 F 222,000f
Contribution margin 84,000 16,800 U 100,800 7,200 U 108,000
Fixed costs 50,000g 4,000 F 54,000g 0 54,000g
Operating income $ 34,000 $12,800 U $ 46,800 $ 7,200 U $ 54,000
$12,800 U $ 7,200 U
Total flexible-budget variance Total sales-volume variance
$20,000 U
Total static-budget variance
a
112 × 2,800 = $313,600
b
$110 × 2,800 = $308,000
c
$110 × 3,000 = $330,000
d
Given. Unit variable cost = $229,600 ÷ 2,800 = $82 per tire
e
$74 × 2,800 = $207,200
f
$74 × 3,000 = $222,000
g
Given
Actual Budgeted
Units 2,800 3,000
Unit selling price $ 112 $ 110
Unit variable cost $ 82 $ 74
Fixed costs $50,000 $54,000
The total static-budget variance in operating income is $20,000 U. There is both an unfavorable
total flexible-budget variance ($12,800) and an unfavorable sales-volume variance ($7,200).
The unfavorable sales-volume variance arises solely because actual units manufactured and
sold were 200 less than the budgeted 3,000 units. The unfavorable flexible-budget variance of
$12,800 in operating income is due primarily to the $8 increase in unit variable costs. This
increase in unit variable costs is only partially offset by the $2 increase in unit selling price and
the $4,000 decrease in fixed costs.
7-22 Flexible budget. Beta Company’s budgeted prices for direct materials, direct manufac-
turing labor, and direct marketing (distribution) labor per luxury wallet are $41, $5, and $11, re-
spectively. The president is pleased with the following performance report:
Required:
1. Actual output was 9,000 luxury wallets. Assume all three direct-cost items shown are
variable costs.
2. Is the president’s pleasure justified? Prepare a revised performance report that uses a
flexible budget and a static budget.
SOLUTION
The existing performance report is a Level 1 analysis, based on a static budget. It makes no
adjustment for changes in output levels. The budgeted output level is 10,000 units––direct
materials of $410,000 in the static budget ÷ budgeted direct materials cost per luxury wallet of
$41.
The following is a Level 2 analysis that presents a flexible-budget variance and a sales-
volume variance of each direct cost category.
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Output units 9,000 0 9,000 1,000 U 10,000
Direct materials $373,500 $4,500 U $369000 $41,000 F $410,000
Direct manufacturing labor 48,600 3,600 U 45000 5,000 F 50,000
Direct marketing labor 103,500 4,500 U 99000 11,000 F 110,000
Total direct costs $525,600 $12,600 U $513000 $57,000 F $570,000
$12,600 U $57,000 F
Flexible-budget variance Sales-volume variance
$44,400 F
Static-budget variance
The Level 1 analysis shows total direct costs have a $44,400 favorable variance.
However, the Level 2 analysis reveals that this favorable variance is due to the reduction in
output of 1,000 units from the budgeted 10,000 units. Once this reduction in output is taken into
account (via a flexible budget), the flexible-budget variance shows each direct cost category to
have an unfavorable variance indicating less efficient use of each direct cost item than was
budgeted, or the use of more costly direct cost items than was budgeted, or both.
Each direct cost category has an actual unit variable cost that exceeds its budgeted unit
cost:
Actual Budgeted
Units 9,000 10,000
Direct materials $ 41.50 $ 41.00
Direct manufacturing labor $ 5.40 $ 5.00
Direct marketing labor $ 11.50 $ 11.00
Analysis of price and efficiency variances for each cost category could assist in further
identifying causes of these more aggregated (Level 2) variances.
7-26 Price and efficiency variances. Modern Tiles Ltd. manufactures ceramic tiles. For Janu-
ary 2017, it budgeted to purchase and use 10,000 pounds of clay at $0.70 a pound. Actual pur-
chases and usage for January 2017 were 11,000 pounds at $0.65 a pound. Modern Tiles Ltd. bud-
geted for 40,000 ceramic tiles. Actual output was 43,000 ceramic tiles.
Required:
1. Compute the flexible-budget variance.
2. Compute the price and efficiency variances.
3. Comment on the results for requirements 1 and 2 and provide a possible explanation for
them.
SOLUTION
Modern tiles budgets to obtain four tiles from each pound of clay.
The flexible-budget variance is $ 375 F.
Flexible-
Actual Budget Flexible Sales-Volume Static
Results Variance Budget Variance Budget
(1) (2) = (1) – (3) (3) (4) = (3) – (5) (5)
Clay costs $7,150a $375 F $7,525b $525 U $7,000c
a
11,000 × $0.65 = $7,150
b
43,000 × 0.25 × $0.70 = $7,525
c
40,000 × 0.25 × $0.70 = $7,000
2. Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
$7,150a $7,700b $7,525c
$550 F $175 U
Price variance Efficiency variance
$375 F
Flexible-budget variance
a
11,000 × $0.65 = $7,150
b
11,000 × $0.70 = $7,700
c
43,000 × 0.25 × $0.70 = $7,525
A possible explanation may be that Modern tiles purchased lower quality clay at a lower cost per
pound.
7-27 Materials and manufacturing labor variances. Consider the following data collected
for Theta Homes, Inc.:
Direct Materi- Direct Manufac-
als turing Labor
Cost incurred: Actual inputs × actual prices $ 150,000 $100,000
Actual inputs × standard prices 162,000 95,000
Standard inputs allowed for actual output × standard 168,000 90,000
prices
Required:
Compute the price, efficiency, and flexible-budget variances for direct materials and direct manu-
facturing labor.
SOLUTION
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Direct $150,000 $162,000 $168,000
Materials
$12,000 F $6,000 F
Price variance Efficiency variance
$18,000 F
Flexible-budget variance
$10,000 U
Flexible-budget variance
7-34 Flexible budget, direct materials, and direct manufacturing labor variances. Milan
Statuary manufactures bust statues of famous historical figures. All statues are the same size.
Each unit requires the same amount of resources. The following information is from the static
budget for 2017:
Expected production and sales 6,100 units
Expected selling price per unit $ 700
Total fixed costs $1,350,000
Standard quantities, standard prices, and standard unit costs follow for direct materials and direct
manufacturing labor:
Required:
1. Calculate the sales-volume variance and flexible-budget variance for operating income.
2. Compute price and efficiency variances for direct materials and direct manufacturing labor.
SOLUTION
(30 min.) Flexible budget, direct materials and direct manufacturing labor variances.
1. Variance Analysis for Milan Statuary for 2014
Flexible- Sales-
Actual Budget Flexible Volume Static
Results Variances Budget Variances Budget
$304,500 F $362,000 U
$169,400 U $162,400 F
$62,900 U $71,400 F
7-38 Material-cost variances, use of variances for performance evaluation. Katharine John-
son is the owner of Best Bikes, a company that produces high-quality cross-country bicycles. Best
Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite
bicycle shops. For several years Best Bikes has purchased titanium from suppliers in the supply
chain. Best Bikes uses titanium for the bicycle frames because it is stronger and lighter than other
metals and therefore increases the quality of the bicycle. Earlier this year, Best Bikes hired Michael
Bentfield, a recent graduate from State University, as purchasing manager. Michael believed that he
could reduce costs if he purchased titanium from an online marketplace at a lower price.
Best Bikes established the following standards based upon the company’s experience with
previous suppliers. The standards are as follows:
Actual results for the first month using the online supplier of titanium are as follows:
Required:
1. Compute the direct materials price and efficiency variances.
2. What factors can explain the variances identified in requirement 1? Could any other variances
be affected?
3. Was switching suppliers a good idea for Best Bikes? Explain why or why not.
4. the production manager’s evaluation be based solely on efficiency variances? Why is it im-
portant for Katharine Johnson to understand the causes of a variance before she evaluates
performance?
5. Other than performance evaluation, what reasons are there for calculating variances?
6. What future problems could result from Best Bikes’ decision to buy a lower quality of tita-
nium from the online marketplace?
SOLUTION
(35 min.) Material cost variances, use of variances for performance evaluation
1. Materials Variances
$5,200 F $27,000 U
Price variance Efficiency variance
a
$88,400 ÷5,200 = $17
2. The favorable price variance is due to the $1 difference ($18 - $17) between the standard
price based on the previous suppliers and the actual price paid through the on-line
marketplace. The unfavorable efficiency variance could be due to several factors
including inexperienced workers and machine malfunctions. But the likely cause here is
that the lower-priced titanium was lower quality or less refined, which led to more waste.
The labor efficiency variance could be affected if the lower quality titanium caused the
workers to use more time.
3. Switching suppliers was not a good idea. The $5,200 savings in the cost of titanium was
outweighed by the $27,000 extra material usage. In addition, the $27,000 U efficiency
variance does not recognize the total impact of the lower quality titanium because, of the
5,200 pounds purchased, only 4,700 pounds were used. If the quantity of materials used
in production is relatively the same, Best Bikes could expect the remaining 500 lbs to
produce approximately 40 more units. At standard, 40 more units should take 40 × 8 =
320 lbs. There could be an additional unfavorable efficiency variance of
$3,240U
4. The purchasing manager’s performance evaluation should not be based solely on the
price variance. The short-run reduction in purchase costs was more than offset by higher
usage rates. His evaluation should be based on the total costs of the company as a whole.
In addition, the production manager’s performance evaluation should not be based solely
on the efficiency variances. In this case, the production manager was not responsible for
the purchase of the lower-quality titanium, which led to the unfavorable efficiency scores.
In general, it is important for Johnson to understand that not all favorable material price
variances are “good news,” because of the negative effects that can arise in the
production process from the purchase of inferior inputs. They can lead to unfavorable
efficiency variances for both materials and labor. Johnson should also that understand
efficiency variances may arise for many different reasons and she needs to know these
reasons before evaluating performance.
5. Variances should be used to help Best Bikes understand what led to the current set of
financial results, as well as how to perform better in the future. They are a way to
facilitate the continuous improvement efforts of the company. Rather than focusing solely
on the price of titanium, Scott can balance price and quality in future purchase decisions.
6. Future problems can arise in the supply chain. Bentfield may need to go back to the
previous suppliers. But Best Bikes’ relationship with them may have been damaged and
they may now be selling all their available titanium to other manufacturers. Lower quality
bicycles could also affect Best Bikes’ reputation with the distributors, the bike shops and
customers, leading to higher warranty claims and customer dissatisfaction, and decreased
sales in the future.
7-41 Direct materials and manufacturing labor variances, solving unknowns. (CPA,
adapted) On May 1, 2017, Lowell Company began the manufacture of a new paging machine known
as Dandy. The company installed a standard costing system to account for manufacturing costs.
Actual production in May was 4,700 units of Dandy, and actual sales in May were 3,000 units.
The amount shown for direct materials price variance applies to materials purchased during
May. There was no beginning inventory of materials on May 1, 2017. Compute each of the fol-
lowing items for Lowell for the month of May. Show your computations.
Required:
1. Standard direct manufacturing labor-hours allowed for actual output produced
2. Actual direct manufacturing labor-hours worked
3. Actual direct manufacturing labor wage rate
4. Standard quantity of direct materials allowed (in pounds)
5. Actual quantity of direct materials used (in pounds)
6. Actual quantity of direct materials purchased (in pounds)
7. Actual direct materials price per pound
SOLUTION
(20–30 min.) Direct materials and manufacturing labor variances, solving unknowns.
Flexible Budget
Actual Costs (Budgeted Input
Incurred Qty. Allowed for
(Actual Input Qty. Actual Input Qty. Actual Output
× Actual Price) × Budgeted Price × Budgeted Price)
Direct
Manufacturing (2,350 × $15.87) (2,350 × $16*) (4,700* × 0.5* × $16*)
Labor $37,300 $35,600 $37,600
$1,700 U* $2,000 F*
Price variance Efficiency variance
Purchases Usage
Direct (10,600 × $3.42) (10,600 × $3*) (10,367 × $3*) (4,700* × 2* × $3*)
Materials $36,300* $31,800 $31,100 $28,200
$4,500 U* $2,900 U*
Price variance Efficiency variance
3. $35,600 + Price variance, $1,700 = $37,300, the actual direct manuf. labor cost
Actual rate = Actual cost ÷ Actual hours = $37,300 ÷ 2,225 hours = $17/hour (rounded)