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# Cost Acct II ACCT 4540

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This 21 page Class Notes was uploaded by Ignacio Gerhold on Wednesday October 28, 2015. The Class Notes belongs to ACCT 4540 at University of Wyoming taught by Staff in Fall. Since its upload, it has received 34 views. For similar materials see /class/230367/acct-4540-university-of-wyoming in Accounting at University of Wyoming.

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Date Created: 10/28/15

CHAPTER 7 FLEXIBLE BUDGETS DIRECT COST VARIANCES AND MANAGEMENT CONTROL 7 1 Management by exception is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected Variance analysis helps managers identify areas not operating as expected The larger the variance the more likely an area is not operating as expected 7 2 Two sources of information about budgeted amounts are a past amounts and b detailed engineering studies 7 3 A favorable varianceidenoted Fiis a variance that has the effect of increasing operating income relative to the budgeted amount An unfavorable varianceidenoted Uiis a variance that has the effect of decreasing operating income relative to the budgeted amount 7 4 The key difference is the output level used to set the budget A static budget is based on the level of output planned at the start of the budget period A exible budget is developed using budgeted revenues or cost amounts based on the actual output level in the budget period The actual level of output is not known until the end of the budget period 7 5 A Level 2 exiblebudget analysis enables a manager to distinguish how much of the difference between an actual result and a budgeted amount is due to a the difference between actual and budgeted output levels and b the difference between actual and budgeted selling prices variable costs and fixed costs 7 6 The steps in developing a exible budget are Step 1 Identify the actual quantity of output Step 2 Calculate the exible budget for revenues based on budgeted selling price and actual quantity of output Step 3 Calculate the exible budget for costs based on budgeted variable cost per output unit actual quantity of output and budgeted fixed costs 7 7 Four reasons for using standard costs are i cost management ii pricing decisions iii budgetary planning and control and iv financial statement preparation 7 8 A manager should subdivide the exiblebudget variance for direct materials into a price variance that re ects the difference between actual and budgeted prices of direct materials and an efficiency variance that re ects the difference between the actual and budgeted quantities of direct materials used to produce actual output The individual causes of these variances can then be investigated recognizing possible interdependencies across these individual causes 7 9 Possible causes of a favorable direct materials price variance are 0 purchasing officer negotiated more skillfully than was planned in the budget 0 purchasing manager bought in larger lot sizes than budgeted thus obtaining quantity discounts materials prices decreased unexpectedly due to say industry oversupply budgeted purchase prices were set without careful analysis of the market and purchasing manager received unfavorable terms on nonpurchase price factors such as lower quality materials 7 10 Some possible reasons for an unfavorable direct manufacturing labor efficiency variance are the hiring and use of underskilled workers inefficient scheduling of work so that the workforce was not optimally occupied poor maintenance of machines resulting in a high proportion of nonvalueadded labor unrealistic time standards Each of these factors would result in actual direct manufacturing laborhours being higher than indicated by the standard work rate 7 11 Variance analysis by providing information about actual performance relative to standards can form the basis of continuous operational improvement The underlying causes of unfavorable variances are identified and corrective action taken where possible Favorable variances can also provide information if the organization can identify why a favorable variance occurred Steps can often be taken to replicate those conditions more often As the easier changes are made and perhaps some standards tightened the harder issues will be revealed for the organization to act onithis is continuous improvement 7 12 An individual business function such as production is interdependent with other business functions Factors outside of production can explain why variances arise in the production area For example 0 poor design of products or processes can lead to a sizable number of defects 0 marketing personnel making promises for delivery times that require a large number of rush orders can create productionscheduling difficulties and purchase of poorquality materials by the purchasing manager can result in defects and waste 7 13 The plant supervisor likely has good grounds for complaint if the plant accountant puts excessive emphasis on using variances to pin blame The key value of variances is to help understand why actual results differ from budgeted amounts and then to use that knowledge to promote learning and continuous improvement 7 14 Variances can be calculated at the activity level as well as at the company level For example a price variance and an efficiency variance can be computed for an activity area 7 15 Evidence on the costs of other companies is one input managers can use in setting the performance measure for next year However caution should be taken before choosing such an amount as next year39s performance measure It is important to understand why cost differences across companies exist and whether these differences can be eliminated It is also important to examine when planned changes in say technology next year make even the current lowcost producer not a demanding enough hurdle 72 7 16 20730 min Flexible budget Flexible Actual Budget Flexible SalesVolume Static Results Variances Budget Variances Budget 1 2 1 3 3 4 3 5 5 Units sold 2 800g 0 2 8001 200 U 3 000g Revenues 313600 5600 F 308000 22000 U 330000 Variable costs 229 600 22 400 U 207 200C 14 800 F 222 000 Contribution margin 84000 16800 U 100800 7200 U 108000 Fixed costs 50 000g 4 000 F 54 000g 0 54 000g Operating income 34 Q 12 800 U i 46 800 7 200 U 4 000 l A 12800 U 7200 U A Total exiblebudget variance Total salesvolume variance A 20000 U Total staticbudget variance a 112 X 2800 313600 b 110 X 2800 308000 c 110 X 3000 330000 d Given Unit variable cost 229600 2800 82 per tire 74 x 2800 207200 f74 X 3000 222000 g Given 2 The key information items are Actual lg 1 Units 2800 3000 Unit selling price 112 110 Unit variable cost 82 74 Fixed costs 50000 54000 The total staticbudget variance in operating income is 20000 U There is both an unfavorable total exiblebudget variance 12800 and an unfavorable salesvolume variance 7200 The unfavorable salesvolume variance arises solely because actual units manufactured and sold were 200 less than the budgeted 3000 units The unfavorable exiblebudget variance of 12800 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 4000 decrease in xed costs 73 7 17 15 min Flexible budget 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 10000 unitsidirect materials of 400000 in the static budget budgeted direct materials cost per attache case of 40 The following is a Level 2 analysis that presents a exiblebudget variance and a sales volume variance of each direct cost category Flexible Sales Actual Bud get Flexible Volume Static Results Variances Budget Variances Budget 1 2 1 3 3 4 3 5 5 Output units 8 800 0 8 800 1 200 U 10 000 Direct materials 364000 12000 U 352000 48000 F 400000 Direct manufacturing labor 78000 7600 U 70400 9600 F 80000 Direct marketing labor 110 000 4 400 U 105 600 14 400 F 120 000 Total direct costs 552 000 24 000 U 528 000 72 000 F 600 000 n A 24000 U T 72000 F Flexiblebudget variance Salesvolume variance 48 000 F Staticbudget variance The Level 1 analysis shows total direct costs have a 48000 favorable variance However the Level 2 analysis reveals that this favorable variance is due to the reduction in output of 1200 units from the budgeted 10000 units Once this reduction in output is taken into account via a exible budget the exiblebudget 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 8800 10000 Direct materials 4136 40 Direct manufacturing labor 886 8 Direct marketing labor 1250 12 Analysis of price and efficiency variances for each cost category could assist in further the identifying causes of these more aggregated Level 2 variances 7 18 25730 min Flexible budget preparation and analysis 1 Variance Analysis for Bank Management Printers for September 2007 Level 1 Analysis Actual Static Budget Static Results Variances Bud get 1 2 1 3 3 Units sold 12000 3 000 U 15000 ReVenue 252000a 48000 U 300000c d f Varlable costs 84 000 36 000 F 120 000 Contribution margin 168000 12000 U 180000 Fixed costs 150 000 5 000 U 145 000 Operating income 18 000 17 000 U 35 000 17 000 U Total staticbudget variance 2 Level 2 Analysis Flexible Sales Budget Volume Actual Variances Flexible Variances Static Results 2 1 Budget 4 3 Budget 1 3 3 5 5 Units sold 12 000 0 12 000 3 000 U 15 000 Revenue 252000 12000 F 240000b 60000 U 300000c Variable costs 8400001 12000 F 96000e 24000 F 120000f Contribution margin 168000 24000 F 144000 36000 U 180000 Fixed costs 150000 5000 U 145000 0 145000 Operating income 18000 19000 F 410001 36000 U 35000 19 000F 36 000U Total exiblebudget Total salesvolume variance variance 1 17 000 U Total staticbudget variance 7 12000 X 21 252000 d12000 X 7 84000 b 12000 X 20 240000 6 12000 X 8 96000 0 f 15000 X 20 300000 15000 X 8 120000 3 Level 2 analysis provides a breakdown of the staticbudget variance into a exible budget variance and a salesvolume variance The primary reason for the staticbudget variance being unfavorable 17000 U is the reduction in unit volume from the budgeted 15000 to an actual 12000 One explanation for this reduction is the increase in selling price from a budgeted 20 to an actual 21 Operating management was able to reduce variable costs by 12000 relative to the exible budget This reduction could be a sign of ef cient management Alternatively it could be due to using lower quality materials which in turn adversely affected unit volume 75 7 19 30 min Flexible budget working backward 1 Flexible Actual Budget Flexible Sales Volume Static Results Variances Budget Variances Budget 1 213 3 43 5 Units sold 650000 0 650000 50000 F 600000 Revenues 3575000 1300000 F 2275000 175000 F 2100000 Variable costs 2 575 000 1 275 000 U 1 300 000b 100000 U 1200000 Contribution margin 1000000 25000 F 975000 75000 F 900000 Fixed costs 700 000 100 000 U 600 000 0 600000 Operating income 300000 75000 U 375000 75000 F 300000 75000 U 1 75000 F Total exiblebudget variance Total sales volume variance 0 Total staticbudget variance quot 650000 X 350 2275000 2100000 600000 350 b 650000 X 200 1300000 1200000 600000 200 2 Actual selling price 3575000 650000 550 Budgeted selling price 2100000 600000 350 Actual variable cost per unit 2575000 650000 396 Budgeted variable cost per unit 1200000 600000 200 3 The CEO s reaction was inappropriate A zero total staticbudget variance may be due to offsetting total exiblebudget and total salesvolume variances In this case these two variances exactly offset each other Total exiblebudget variance 75000 Unfavorable Total salesvolume variance 75000 Favorable A closer look at the variance components reveals some major deviations from plan Actual variable costs increased from 200 to 396 causing an unfavorable exiblebudget variable cost variance of 1275000 Such an increase could be a result of for example ajump in direct material prices Spencer was able to pass most of the increase in costs onto their customersiactual selling price increased by 57 550 7 350 350 bringing about an offsetting favorable exiblebudget revenue variance in the amount of 1300000 An increase in the actual number of units sold also contributed to more favorable results The company should examine why the units sold increased despite an increase in direct material prices For example Spencer s customers may have stocked up anticipating future increases in direct material prices Alternatively Spencer s selling price increases may have been lower than competitors price increases Understanding the reasons why actual results differ from budgeted amounts can help Spencer better manage its costs and pricing decisions in the future 4 The most important lesson learned here is that a super cial examination of summary level data Levels 0 and 1 may be insufficient It is imperative to scrutinize data at a more detailed level Level 2 Had Spencer not been able to pass costs on to customers losses would have been considerable 76 7 20 1 and 2 Performance Report June 2007 Static Budget Flexible Static Variance as Budget Flexible Sales Volume Static Budget of Static Actual Variances Budget Variances Budget Variance Budget 1 213 3 43 5 5 6 1 5 7 Units pounds 525 000 525 000 25 000 F 500 000 25 000 F 50 Revenues 3360000 52500 U 3412500a 162500 F 3250000 110000 F 34 Variable mfg costs 1 890 000 52 500 U 1 837 500b 87 500 U 1 750 000 140 000 U 80 Contribution margin 1 470 000 105 000 U 1 575 000 75 000 F 19 500 000 30 000 U 20 T 105000 U T 75000 F T Flexiblebudget variance Salesvolume variance 30000 U Staticbudget variance aBudgeted selling price 3250000 500000 lbs 650 per lb Flexiblebudget revenues 650 per lb gtlt 525000 lbs 3412500 bBudgeted variable mfg cost per unit 1750000 500000 lbs 350 Flexiblebudget variable mfg costs 350 per lb gtlt 525000 lbs 1837500 3 The selling price variance caused solely by the difference in actual and budgeted selling price is the exiblebudget variance in revenues 52500 U 4 The exiblebudget variances show that for the actual sales volume of 525000 pounds selling prices were lower and costs per pound were higher The favorable sales volume variance in revenues because more pounds of ice cream were sold than budgeted helped offset the unfavorable variable cost variance and shored up the results in June 2007 Levine should be more concerned because the small staticbudget variance in contribution margin of 30000 U is actually made up of a favorable salesvolume variance in contribution margin of 75000 an unfavorable sellingprice variance of 52500 and an unfavorable variable manufacturing costs variance of 52500 Levine should analyze why each of these variances occurred and the relationships among them Could the efficiency of variable manufacturing costs be improved Did the sales volume increase because of a decrease in selling price or because of growth in the overall market Analysis of these questions would help Levine decide what actions he should take 78 7 21 20730 min Price and ef ciency variances 1 The key information items are Actual Budgeted Output units scones 60800 60000 Input units pounds of pumpkin 16000 15000 Cost per input unit 082 089 Peterson budgets to obtain 4 pumpkin scones from each pound of pumpkin The exiblebudget variance is 408 F Flexible Actual Budget Flexible Sales Volume Static Results Variance Budget Variance Budget 1 a 2 1 3 3 b 4 3 EL 5 c Pumpkin costs 13120 408 F 13528 178 U 13350 7 16000 X 082 13120 160800 X 025 X 089 13528 c60000 X 025 X 089 13350 2 Flexible Budget Actual Costs Budgeted Input Incurred Qty Allowed for Actual Input Qty Actual Input Qty Actual Output X Actual Price X Budgeted lPrice X Budgeted Price 1312021 14240 13528c T 1120 F T 712U T Price variance Efficiency variance T 08 F T Flexiblebudget variance 7 16000 X 082 13120 116000 X 089 14240 060800 X 025 X 089 13528 3 The favorable exiblebudget variance of 408 has two offsetting components a favorable price variance of 11207re ects the 082 actual purchase cost being lower than the 089 budgeted purchase cost per pound b unfavorable efficiency variance of 7127re ects the actual materials yield of 380 scones per pound of pumpkin 60800 16000 380 being less than the budgeted yield of 400 60000 15000 400 The company used more pumpkins materials to make the scones than was budgeted One explanation may be that Peterson purchased lower quality pumpkins at a lower cost per pound 7 22 15 min Materials and manufacturing labor variances Flexible Budget Actual Costs Budgeted Input Incurred Qty Allowed for Actual Input Qty Actual Input Qty Actual Output X Actual Price X Budgeted Price X Budgeted Price Direct 200000 214000 225000 Materials T 14 000F T 11000F T Price variance Efficiency variance 25000 F T Flexiblebudget variance Direct 90 000 86000 80000 A A Mfg Labor 4000 U 6000 U A Price variance Efficiency variance A 10 000 U Flexiblebudget variance 7 23 30 min Price and efficiency variances 1 Flexible Actual Bud get Flexible Results Variances Bud get 1 2 1 3 3 Direct materials 429000 57750 U 371250 Direct labor 99200 9200 U 90000 Actual Results Direct materials 8580000a minutes X 005 per minute 429000 Direct labor 1600 hours X 62 per minute 99200 a7800000 minutes X 110 purchase 8580000 CellOne commits to purchase 110 of the budgeted amount of time Due to the forward commitment of time purchase the actual time purchased will be the same as the budgeted amount of time to be purchased Flexible Budget Direct materials 8250000a X 0045 371250 Direct labor 1500 X 60 90000 3 7500000 minutes X 110 to be purchased 8250000 minutes b 7500000 minutes sold 5000 minutes per hour 1500 hours 710 Flexible Budget Actual Budgeted Input Incurred Qty Allowed for Actual Input Qty Actual Input Qty Actual Output X Actual Price X Budgeted Price X Budgeted Price 1 2 3 8580000 X 005 8580000 X 0045 8250000 X 0045 Direct materials 429000 386100 371250 T 42 900U T 14 850U T Price variance Ef ciency variance T 57750 U T Flexiblebudget variance Direct 1600 X 62 1600 X 60 1500 X 60 Labor 99200 96000 90000 T 3 200 U T 6 000 U T Price variance Ef ciency variance T 9200 U T Flexiblebudget variance Students may question why the exible budget is 8250000 minutes Had the actual output of 7500000 minutes been used in the static budget CellOne would have planned to purchase 8250000 7500000 X 110 minutes 724 30 Direct materials and direct manufacturing labor variances 1 Actual Quantity gtlt Actual Price Budgeted Ef ciency Flexible June 2007 Results Variance Price Variance Budget 1 2 13 3 4 3 5 5 Units 550 550 Direct materials 1270500 181500 U 1089000 99000 U 990000b Direct manuf labor 846450 10450 U 836000c 44000 F 880000d Total price variance 191950 U Total ef ciency variance 55000 U a 7260 meters gtlt 150 per meter 10890 1550 lots X 12 meters per lot gtlt 150 per meter 9900 1045 hours gtlt 800 per hour 8360 d 550 lots X 2 hours per lot gtlt 8 per hour 8800 Total exiblebudget variance for both inputs 191950U 550U 246950U Total exiblebudget cost of direct materials and direct manuf labor 9900 8 800 18700 Total exiblebudget variance as oftotal exiblebudget costs 246950 18700 1321 2 Actual Quantity gtlt June Actual Price Budgeted Ef ciency Flexible 2008 Results Variance Price Variance Budget 1 213 3 43 2 5 Units 550 550 Direct materials 1182836 115616 U 1067220b 77220 U 990000c Direct manuf labor 829521d 10241 U 819280e 60720 F 880000c Total price variance 125857 U Total ef ciency variance 16500 U aActual dir mat cost June 2008 Actual dir mat cost June 2007 X 098 X 095 12705 X 098 X 095 1182836 Alternatively actual dir mat cost June 2008 Actual dir mat quantity used in June 2007 X 098 X Actual dir mat price in June 2007 X 095 7260 meters X 098 X 175meter X 095 711480 gtlt 16625 1182836 b 7260 meters X 098 X 150 per meter 1067220 cUnchanged from 2007 d Actual dir manuf labor cost June 2008 Actual dir manuf cost June 2007 X 098 846450 X 098 829521 Alternatively actual dir manuf labor cost June 2 08 Actual dir manuf labor quantity used in June 2007 X 098 X Actual dir manuf labor price in 2007 1045 hours X 098 X 810 per hour 102410 hours gtlt 810 per hour 829521 61045 hours X 098 X 800 per hour 819280 Total exiblebudget variance for both inputs 125857U 165U 142357U Total exiblebudget cost of direct materials and direct labor 9900 8800 18700 Total exiblebudget variance as oftotal exiblebudget costs 142357 18700 761 3 Efficiencies have improved in the direction indicated by the production manageribut it is unclear whether they are a trend or a onetime occurrence Also overall variances are still 76 of exible input budget GloriaDee should continue to use the new material especially in light of its superior quality and feel but it may want to keep the following points in mind 0 The new material costs substantially more than the old 175 in 2007 and 16625 in 2008 vs 150 per meter Its price is unlikely to come down even more within the coming year Standard material price should be reexamined and possibly changed GloriaDee should continue to work to reduce direct materials and direct manufacturing labor content The reductions from June 2007 to June 2008 are a good development and should be encouraged 7 25 30 min Price and efficiency variances journal entries 1 Direct materials and direct manufacturing labor are analyzed in turn Flexible Budget Actual Costs Budgeted Input Incurred Qty Allowed for Actual Input Qty Actual Input Qty Actual Output gtlt Actual Price gtlt Budgeted Price gtlt Budgeted Price Purchases Usage Direct 100000 X 310 100000 X 300 98073 X 300 9810 X 10 X 300 Materials 310000 300000 294219 294300 I 10000 U I I 81 F I Price variance Ef ciency variance Direct 9810 X 05 X 20 or Manufacturing 4900 X 21b 4900 X 20 4905 X 20 Labor 102900 98000 98100 I 4 900 U I 100 F I Price variance Ef ciency variance 3 310000 100000 310 b 102900 4900 21 2 Direct Materials Control 300000 Direct Materials Price Variance 10000 Accounts Payable or Cash Control 310000 WorkinProcess Control 294300 Direct Materials Control 294219 Direct Materials Ef ciency Variance 81 WorkinProcess Control 98100 Direct Manuf Labor Price Variance 4900 Wages Payable Control 102900 Direct Manuf Labor Ef ciency Variance 100 3 Some students comments will be immersed in conjecture about higher prices for materials better quality materials higher grade labor better efficiency in use of materials and so forth A possibility is that approximately the same labor force paid somewhat more is taking slightly less time with better materials and causing less waste and spoilage A key point in this problem is that all of these efficiency variances are likely to be insignificant They are so small as to be nearly meaningless Fluctuations about standards are bound to occur in a random fashion Practically from a control Viewpoint a standard is a band or range of acceptable performance rather than a singlefigure measure 4 The purchasing point is where responsibility for price variances is found most often The production point is where responsibility for efficiency variances is found most often Chemical Inc may calculate variances at different points in time to tie in with these different responsibility areas 7 26 20 min Continuous improvement continuation of 7 25 1 Standard quantity input amounts per output unit are Direct Direct Materials Manufacturing Labor p0unds hours January 100000 05000 February Jan X 0997 99700 04985 March Feb X 0997 99401 04970 2 The answer to requirement 1 of Question 725 is identical except for the exible budget amount Actual Costs Flexible Budget Incurred Budgeted Input Qty Allowed Actual Input Qty Actual Input Qty for Actual Output X Actual Price X Budgeted Price X Budgeted Price Purchases Usage Direct 100000 X 310 100000 X 300 98073 X 300 9810 X 9940 X 300 Materials 310000 300000 294219 292534 I 10000U I l 1685U I Price variance Efficiency variance Direct Manuf 4900 X 21b 4900 X 20 9810 X 0497 X 20 Labor 102900 98000 97511 T 4 900 U T 489 U T Price variance Efficiency variance 3 310000 100000 310 b 102900 4900 21 Using continuous improvement standards sets a tougher benchmark The efficiency variances for January from Exercise 725 and March from Exercise 726 are January March Direct materials 81 F 1685 U Direct manufacturing labor 100 F 489 U Note that the question assumes the continuous improvement applies only to quantity inputs An alternative approach is to have continuous improvement apply to budgeted 715 input cost per output unit 30 for direct materials in January and 10 for direct manufacturing labor in January This approach is more difficult to incorporate in a Level 2 variance analysis because Level 2 requires separate amounts for quantity inputs and the cost per input 7 30 45750 min Activity based costing exible budget variances for nance function activities Receivables Receivables is an output unit level activity Its exiblebudget variance can be calculated as follows Flexiblebudget iActual Flexiblebudget variance 7 costs 7 costs 075 X 948000 7 0639 X 948000 711000 7 605772 105228 U Payables Payables is a batch level activity Static budget Actual Amounts Amounts a Number of deliveries 1000000 948000 b Batch size units per batch 5 4468 c Number ofbatches a b 200000 212175 d Cost per batch 290 2 80 e Total payables activity cost c X d 580000 594090 Step 1 The number of batches in which payables should have been processed 948000 actual units 5 budgeted units per batch 189600 batches Step 2 The exiblebudget amount for payables 189600 batches X 290 budgeted cost per batch 549840 The exiblebudget variance can be computed as follows Flexiblebudget variance Actual costs 7 Flexiblebudget costs 212175 X 280 7 189600 X 290 594090 7 549840 44250 U Travel expenses Travel expenses is a batch level activity Static Budget Actual Amounts Amounts 716 rap96x Number of deliveries 1000000 Batch size units per batch 500 Number ofbatches a b 2000 Cost per batch 760 Total travel expenses activity cost c X d 15200 717 948000 501587 1890 740 13986 Step 1 The number of batches in which the travel expense should have been processed 948000 actual units 500 budgeted units per batch 1896 batches Step 2 The exiblebudget amount for travel expenses 1896 batches X 7 60 budgeted cost per batch 14410 The exible budget variance can be calculated as follows Flexible budget variance Actual costs 7 Flexiblebudget costs 1890 X 740 7 1896 X 760 13986 7 14410 424 F 2 The exible budget variances can be subdivided into price and ef ciency variances Actual price Budgeted price X Actual quantity Pnce var1ance of input Ofinput of input Budgeted quantity of input allowed for actual output Actual quantity Budgeted price gtlt of input used Efficiency variance 0 input Receivables Price Variance 0750 7 0639 X 948000 105228 U Ef ciency variance 948000 7 948000 X 0639 0 Payables Price variance 280 7 290 X 212175 21218 F Ef ciency variance 212175 7 189600 X 290 65468 U Travel expenses Price variance 740 7 760 X 1890 378 F Ef ciency variance 1890 7 1896 X 760 7 34 60 min Comprehensive variance analysis responsibility issues 1a Actual selling price 8200 Budgeted selling price 8000 Actual sales volume 4850 units 718 Selling price variance Actual sales price Budgeted sales price X Actual sales volume 82 80 X 4850 9700 Favorable lb Development of Flexible Budget Budgeted Unit Actual Flexible Budget Amounts Volume Amount Revenues 8000 4850 388000 Variable costs DMiFrames 220oz X 300 oz 6601 4850 32010 b DMiLenses 310oz X 600 oz 1860 4850 90210 Direct manuf labor 1500hr X 120 hrs 1800c 4850 87300 Total variable manufacturing costs 209520 Fixed manufacturing costs 75000 Total manufacturing costs 284520 Gross margin 103480 a33000 5000 units 193000 5000 units c90000 5000 units Flexible Sales Actual Budget Flexible Volume Static Results Variances Budget Variance Budget 1 213 3 43 2 52 Units sold 4 850 4 850 5 000 Revenues 397700 9700 F 388000 12 000 U 400000 Variable costs DM frames 37248 5238 U 32010 990 F 33000 DM lens 100492 10282 U 90210 2790 F 93000 Direct labor 96 903 9 603 U 87 300 2 700 F 90 000 Total variable costs 234643 25123 U 209520 6480 F 216000 Fixed manuf costs 72 265 2 735 F 75 000 0 75 000 Total costs 306 908 22 388 U 284 520 6 480 F 291 000 Gross margin 90 792 12 688 U 103 480 5 520 U 109 000 Level 2 T 12688 U T 5520 U T Flexiblebudget variance Salesvolume variance Level 1 T 18 208 U T Staticbudget variance 719 Direct Materials Frames Direct Materials Lenses Direct Manuf Labor Price and Ef ciency Variances DM Frames Actual ounces used 320 per unit X 4850 units 15520 oz Price per oz 37248 15520 240 DM Lenses Actual ounces used 700 per unit X 4850 units 33950 oz Price per oz 100492 33950 296 Direct Labor Actual labor hours 96903 1480 65475 hours Labor hours per unit 65475 4850 units 135 hours per unit Flexible Budget Actual Costs Budgeted Input Incurred Qty Allowed for Actual Input Qty Actual Input Qty Actual Output X Actual Price X Budgeted Price X Budgeted Price 2 3 4850 X 32 X 240 4850 X 32 X 220 4850 X 300 X 220 37248 34144 32010 T 3 104 U T 2 134 U T Price variance Ef ciency variance 4850 x 70 x 296 4850 x 70 x 310 100492 105245 T 4753 F T Price variance 4850 x 600 x 310 90210 1503 5 U T Ef ciency variance 4850 X 135 X 1480 4850 X 135 X 1500 96903 9821250 T 1 30950 F T Price variance 4850 X 120 X 1500 87300 10 91250 U T Ef ciency variance Possible explanations for price variances are a Purchasing and labor negotiations b Quality of frames and lenses purchased c Standards set incorrectly Possible explanations for efficiency variance are a Higher materials usage due to lower quality frames and lenses purchased at lower price b Lesser trained workers hired at lower rates result in higher materials usage and lower labor efficiency 720 0 Standards set incorrectly 721

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